Author - Abhishek Salunke

Dated 19th September 2019

Updates on the market: The stock market traded higher to close the day 0.2% higher at 10,840. This was largely on the back of 5% fall in the price of crude oil, after the historic spike in oil prices following the drone attacks on Aramco’s oil supply. Saudi’s Energy Minister Prince Abdulaziz bin Salman said that 50% of production has already been restored, the Kingdom expects to be at full capacity by the end of September. There is speculation that the Indian government is ready with the 4^th fiscal package to boost the economy. This coupled with the fall in crude prices helped the market stay in the positive territory. Among the sectoral indices, Realty (1.5%), Metals (1.1%) and PSU banks (1%) led the index higher. Media (-0.4%), Pharma (-0.1%) and Auto (-0.1%) were the laggards. Within the Nifty stocks, Tata steel (3.7%), BPCL (3.6%) and Vedanta (3.2%) carried the index higher whereas Britannia (-2.9%), Indiabulls Hsg (-2.8%) and Coal India (-2.6%) declined.

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Growth decelerating to 5% a surprise, reviving the economy is the top priority- RBI Governor

Excerpts from an interview with Mr Shaktikanta Das, Governor of the Reserve Bank of India (RBI), printed in Mint dated 17^th September 2019

·        Saudi oil production represents roughly about 10% of the world oil production and supply. Roughly 50% of that, which means around 5% of the total global output, is affected because of the drone strikes on the Aramco oil installations. This has impacted the crude prices, which in turn impacted the Indian currency. Depending on how it persists, it will have some impact on the Current Account Deficit. If it lasts longer, it will also have implications on the Fiscal deficit.

·        About the current inflation numbers, he mentioned that food prices are cyclical within a year. There are months when the food prices, particularly the vegetable prices or fruit prices, tend to be higher and then they soften.

·        He was asked about the reasons for having high inflation in urban areas compared to rural areas. He said that urban price inflation is mostly because of the prices of egg, milk, etc. have increased. In rural sector, not much of milk purchase happens. Milk purchase is mostly in the urban sector. Milk prices have gone up across states and in a few more states it is yet to go up. So it is things such as the prices of eggs, milk are impacting urban inflation.

·        In August, RBI worked on the GDP (Gross Domestic Product) number of 6.9% with the downside risk. Especially in the first quarter, they had projected a 5.8% growth in GDP. The actual number of 5% came as a surprise to the apex bank.

·        To revive the economy, he added that all stakeholders, all policymakers, including the private sector players have to play their part. Just monetary policy cannot play its role. However, so far as monetary policy is concerned, they have already articulated growth is a matter of priority.

·        The RBI has given 35 bps rate cut in the last policy. Since then, the 10-year yield is standing at 6.7%. He was asked why the yields have not fallen in line with a rate cut. He answered that this has happened due to international factors. The benchmark yield has gone up 8-9 bps because of the airstrike on Saudi oil facilities.  Especially in last one month, every round of increase in yield by few basis points is linked to an international event. Domestically, nothing different has happened to expect the first-quarter numbers came some time ago.

·        The RBI does not have any specific target for the Rupee. The bank’s role is to manage the volatility of the exchange rate.

·        There is speculation that the owners of Paytm bank may take a stake in Yes bank. He said that under universal banking, anybody can apply for a banking license. RBI has certain criteria. Whoever it is, if he passes the criteria he will get a banking licence.

·        About the weakness in the private sector banks, he mentioned that there are strengths and weaknesses in both public and private sector bank and as the regulator and as the supervisor of the banking sector, they are aware of what is going on in various banks and it is very closely monitored by RBI.

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Dated: 29th August 2019
Market update:
With no big catalyst today, the markets continued to fall for third straight day as Nifty dropped -0.9% to 10,948. Today was also the monthly F&O (Futures and Options) expiry day which led to volatile trading session. It is important to note that the FIIs have continued to sell their positions in spite of rollback of additional surcharge. This highlights that the focus is on the economy and corporate earnings growth.

Among the sectoral indices, Pharma was an outlier with the index rising 2.3%. 7 out of 11 major indices were in the red zone with Financial services (-1.9%) and Banks (-1.8%) led the drop. Within the stocks, Sun pharma (+5.2%) bharti infratel (+3.5%), JSW steel (+3.0%) were the best performers while SBI (-3.7%), Yes bank (-3.5%) and HDFC (-2.68%) were the worst performers.

Lupin Ltd: complex generics and specialty to drive US revenues

Following are the excerpts from the interview given by Mr Nilesh Gupta, Managing Director of Lupin, published in Livemint.

• The industry is going through a major transformation at this point of time. He mentioned that the industry had 10 years of strong growth where the Indian generics markets were doing well.
• In the last 2-3 years, the generics industry is under pressure in the US. He attributed two reasons for this slowdown. First, in the beginning, the industry used to have at least 10 customers controlling about 90% of the market. In the current markets, only three customers control the 90% of the market. This shift happened 2 years ago. The second reason is hyper competition among the players for market share which led to pricing pressure.
• Lupin was a late entrant in the generics market. The other companies were already present in the generics market 15 year ago. In spite of that, the company was able to execute the story well for 10 years. In the last 2-3 years, things have started to go down.
• On the generics front, currently the company is facing single digit price erosion. During the times when the consolidation of customers took place, the price erosion was in the range of 12-15%. He mentioned that price increases were very permissible in the past. In the present market, nobody would take any rational price increase.
• Gupta was bullish about Indian market. Lupin is number five in the Indian market. The market is growing in the range of 8-10%, which is above most of the markets. The company has more market share in US than in India. He was of the opinion that as the affordability of India increases, with that increases the ability to get diagnosed and then get treated as well. This will be a great long term opportunity for Indian market.
• About the lawsuit against Indian pharma companies including Lupin in US, the company has done internal investigation. He is confident about the company’s position and merits of the case.
• Biosimilars is a great opportunity for the company. Lupin is expanding heavily in this segment. The company has six products in the pipeline. Three of them are more later stage and the remaining three are in the early stage of development.
• According to Gupta, the big growth drivers for the companies, especially in the US, are going to be from complex generics and specialty in the next five years.

Consensus Estimate (Source: marketscreener website)

• The closing price of Lupin was Rs 734/- as of 29^th August 2019. It traded at a price to Earnings Multiple (P/E) multiple of 19x/16x the consensus EPS estimates for FY20/21E of Rs 38.2/45.8 respectively.
• Consensus target price of Rs 794/- implies a P/E multiple of 17x on EPS of Rs 45.8 for the year ending Mar-21E.

Dated: 26th August 2019

Update on the Indian market:

Indian markets rallied on Monday amid weak global macros. Nifty 50 closed 2.1% higher.  The rally was driven by various announcements made by the Finance Minister on Friday evening. The details about the announcements are discussed in today’s update.  Among the sectoral indices, Financial services (4.0%), Banks (3.9%) and Media (3.6%) were the best performers while only Metal (-0.9%) ended in the negative zone.

Here comes the relief package from FM, more to follow

The Finance Minister Ms Nirmala Sitharaman, in her press conference on 23^rd August 2019, announced a relief package for Indian economy. Following are the key announcements from the Finance Minister:

• Roll-back of higher surcharge on capital gains tax for FPIs (Foreign Portfolio Investors).
• Immediate recapitalisation of PSB (Public Sector Banks) of Rs 700bn. This can facilitate additional lending and liquidity to the tune of Rs 5000bn by providing upfront capital to PSB.
• Additional liquidity to HFCs (Housing Finance Companies) worth Rs 200 bn by NHB (National Housing Bank)
• Withdrawal of angel tax provisions for start-ups.
• Repayment of pending GST refunds to MSMEs within 30 days and future refunds in 60 days.
• Repayment of 75% of funds in contractual disputes between government/ CPSEs and private entities.
• Launch of repo/external benchmark-linked interest rate products. The government would take further action on the development of Credit Default Swap markets soon, in consultation with RBI and SEBI.

In our view, the roll-back of higher surcharge on FPIs is a positive development for the equities market. Since the announcement of budget on 5^th July 2019, the FIIs sold total Rs 292,360 mn till 23^rd August 2019. We expect the selling pressure from FIIs to slow down with the announcement.

The companies from the Auto industry were demanding a GST rate cut to revive demand. The government has provided some relief like deferring the revision of one-time registration fees till June 2020, higher depreciation on purchases made during FY20, BS-IV vehicles purchased before 31st March 2020 to remain operational for the entire period of registration.

The Finance Minister has mentioned that she will announce more measures to boost the economy in the coming days. The timeline for this is not yet known. While the relief package announcement made by the government is welcome, we hope it does not get overshadowed by increasing bitterness in tariff wars between the US and China.

Dated:- 21st August 2019

Updates on the Indian market:

With the completion of result season and no major economic news today, the markets continued the downward journey. Most of this decline came during the closing hours. The Nifty fell by 98 points (-0.9%). Some of the biggest losers in NSE 50 were Tata Motors (-9.5%), Indiabulls Housing (-8.9%) and Yes Bank (-8.6%). All the NIFTY sectorial indexes fell.  With a 3% decline, PSU Bank and Metal sectors were the worst performers.

REPCO Home Finance: Confident of recovering 90% of its non-performing assets

Following are the excerpts from the interview given by Mr Yashpal Gupta, MD & CEO of Repco Home Finance published in Livemint.

·       The loan loss of guarantee given by the government to non-banks may not help the company. He was optimistic about the announcement on priority sector lending through Non-Banking Financial Companies (NBFC).

·       All the Non-Performing Assets (NPA) are from the retail segment as 100% of the loan book is to the retail segment. According to him, the first quarter slightly lags in recoveries and it is a yearly phenomenon for the company. The second part is that because the customers are retail, even after they become NPA, they continue to pay, unlike corporate or builder loans.

·       Out of the NPAs as of June 2019, more than 50% of the accounts are paid with a gap of 2-3 months. It is the technical issue which keeps them as NPA; otherwise, the company does not see any problem as all other numbers are very good according to Mr Gupta.

·       Most of the NPAs are coming from non-salaried class. Earlier, these customers used to pay and the payments used to be in cash. It was affected because they are integrating into the formal economy. The salaried segment is not affected that much. Within product-wise, LAP and home loan are equally distributed.

·       The loan book growth during the quarter was at 13% and the company has given guidance of 12-15% YoY loan book growth for the year. The salaried segment percentage has increased from 45% to 48% during the quarter. The company is confident that the lower prepayment rates along with muted disbursements will lead to loan book growth.

Consensus Estimate (Source: market screener website)

·       The closing price of Repco was Rs 315/- as of 21^st August 2019. It traded at a price to Book Value (P/BV) multiple of 1.09x/0.96x the consensus Book Value estimates for FY20/21E of Rs 290/330 respectively.

·       Consensus target price of Rs 447/- implies a P/BV of 1.35x on EPS of Rs 330 for the year ending Mar-21E.

• The total revenues grew 6% YoY to Rs 113,614 mn for the quarter. The revenues from cigarettes business were reported at Rs 54,334 mn, YoY growth of 6% in 1QFY20. The FMCG/ Hotels/ Agri/ Paperboards business grew 8%/ 15%/ 15%/ 13% respectively in 1QFY20.
• The total EBIT was reported at Rs 48,270 mn, YoY growth of 12%. The Cigarette business, which contributed 86% of the total EBIT of the company, reported EBIT margins at 70.8%, YoY growth of 140 bps. Hotels and Agri business margins were under pressure with a decline of 130 bps/ 60 bps at 2.6% and 5.6% respectively.
• The net profit for the quarter was Rs 31,739 mn, YoY growth of 13% as compared to Rs 28,187 mn in 1QFY19. The calculated tax rate was at 34% for the quarter.

Key highlights from the press release:

• Cigarettes: A punitive and discriminatory taxation and regulatory regime, together with a sharp increase in illegal trade in recent years, continues to pose significant operating challenges to the legal cigarette industry in the country. Performance during the quarter was also impacted by weakness in the overall demand environment. Excessive taxation has made legal, duty-paid cigarettes in India amongst the costliest in the world in terms of per capita affordability.
• FMCG: Amidst the market slowdown across urban and rural markets, the FMCG business reported a YoY growth of 8% led by Atta, Potato Chips, Premium Cream Biscuits and Noodles in the Branded Packaged Foods Business, Liquids (Handwash & Bodywash) in the Personal Care Products Businesses and Notebooks in the Education & Stationery Products Business. The segment EBITDA reported YoY growth of 41% despite stepped-up investments in brand building, gestation and start-up costs of new categories.
• Hotels: Revenues grew 15% on the back of new properties, amidst relatively soft demand conditions. In spite of reporting 18% YoY growth in EBITDA, the segmental EBIT declined 21% as the additional depreciation pertaining to new properties weighed on segment results. The Business made steady progress during the quarter in the construction of an ITC Hotel in Ahmedabad and WelcomHotels in Amritsar, Guntur & Bhubaneswar.
• Agri Business: The company has recently forayed into Frozen snacks segment under ‘ITC Master Chef’ brand and it continues to be scaled up. However, lack of trading opportunities in Oilseeds and Pulses, subdued demand for leaf tobacco in international markets, relatively steeper depreciation in currencies of competing origins in recent years and adverse business mix weighed on Segment Results.
• Paperboards business: The company strengthened the business on the back of strong volume growth in value-added paperboard segment and product mix enrichment. The growth in the Packaging & Printing Business was impacted due to sluggish demand conditions in the FMCG industry and exports. Capacity utilisation of the recently commissioned facilities, viz., Value Added Paperboard machine, Bleached Chemical Thermo Mechanical Pulp mill and Decor machine, was further ramped up during the quarter.

Consensus Estimate (Source: marketscreener website)

• The closing price of ITC Ltd is Rs 260/- as on 6^th August 2019. It traded at 23x / 21x the consensus EPS for FY 20E / FY 21E of Rs 11.2 / 12.5 respectively.
• Consensus target price of Rs 332/- implies a PE of 27x on FY21E EPS of Rs 12.5/-.

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Dated: 29th July 2019

Result Update

• Apcotex reported a YoY decline of 2% in the revenues at Rs 1,467 mn. The Gross Margins (Revenues minus cost of goods sold) were reported at 33.4% for 1QFY20, a YoY improvement of 330 bps from 30.1% in 1QFY19.
• Despite the sharp jump in gross margins, EBITDA margins improved by a muted 40 bps YoY to 12.3% as compared to 11.9% in 1QFY19. This is due to a sharp increase in other expenses by 16% YoY to Rs 211 mn. The absolute EBITDA for the quarter was reported at Rs 181 mn, a meagre 1% YoY increase from Rs 179 mn in 1QFY19.
• The PAT for the quarter grew YoY 1% at Rs 114 million as compared to Rs 112 mn in 1QFY19.

Conference Call highlights:

• Mark to Market (MTM) losses for the quarter have been reported in Other Comprehensive Income (OCI) instead of Operating Income (OI). Total MTM loss for the quarter was reported at Rs 6.9 mn as compared to Rs 0.74 mn in 1QFY19.
• The company has spent Rs 600 mn of the planned Rs 900 mn of CapEx till 1QFY20. Remaining Rs 300 mn will be spent in the next 3 quarters of FY20E. The company incurs maintenance CapEx of Rs 60-70 mn every year.
• The auto ancillary business contributed 30% whereas the contribution from construction business for the quarter was in the range of 12-14%. Both the industries are facing slowdown and the company expects the slowdown to remain in the economy in the coming quarters as well.
• The debottlenecking of Nitrile Butadiene Rubber (NBR) plant is expected to be operational by January 20E. 80% of the work is complete and the company is in the final stages of completion of the debottlenecking plan.
• The launch of the solar power plant expansion project is further delayed until October 2019. The initial deadline was July 2019. The company is facing some issues regarding civil construction and environmental problems. The management was confident in launching the power plant before the new deadline.

Consensus Estimate (Source: Reuters website)

• The closing price of Apcotex is Rs 188/- on 29-Jul-19. It traded at 18x / 15x the consensus EPS for FY 20E / FY 21E EPS of Rs 10.6 / 12.8 respectively.