Author - Maitreyee Vaishampayan

  • Maitreyee Vaishampayan
17 Apr

This week in a nutshell (11th – 13th April)

Technical talks

NIFTY opened the truncated week at 17,741 on 11th April. The index closed 1.5% lower at 17,476 on 13th April. RSI (14) of 53 is trending downwards and MACD is trending upwards. On the upside, 18,191 could act as resistance while 20DMA of 17,296 could act as support.

FMCG (+1.7%), and Metal (+0.1%) were the only sectoral indices to close the week with gains. IT (-3.0%), Realty (-2.1%), and Auto (-1.1%) led the laggards.

Weekly highlights

  • IT heavyweights TCS, and Infosys released 4QFY22 and FY22 earnings this week. While the numbers were largely in line with the street estimates, attrition continues to be a problem. While demand continues to be robust, there are headwinds of hiring, salary increments, and return of travel spending.
  • US markets ended the week in the red on Thursday. Bond rates spiked as investors worried about the prospect of aggressive policy tightening in the United States. Oher central banks around the world have started increasing interest rates. Following the release of US economic data for retail sales and jobless claims, the benchmark US government yield increased.
  • Fuel costs rose during the first full month of the Russia-Ukraine war, causing inflation in the United States to reach a 40-year high. While prices began to rise last year as the economy recovered from the Covid-19 outbreak, the most recent monthly report showed expenses for numerous items reaching record highs. According to the report, the increase may be leveling out.
  • The European Central Bank confirmed its asset purchase program will end in the third quarter. Once the bond-buying program is completed, the ECB is expected to begin interest rate hikes, following the Bank of England and the US Federal Reserve.
  • A substantial rise in automobile output in March bolstered US industrial activity for the third straight month, possibly indicating that the worst of the industry’s production woes from 2021 were passed.
  • Oil prices retreated after the release of a larger-than-expected build in the US oil stocks. Brent oil closed at USD 111/barrel while Crude oil WTI closed at USD 107/barrel on Thursday.
  • FII (Foreign Institutional Investors) continued to be sellers this week and sold shares worth Rs 63,342mn while DII (Domestic Institutional Investors) continued to be buyers and bought shares worth Rs 27,674 mn.

Things to watch out for next week

  • The markets are likely to take cues from corporate earnings, and geopolitical tensions between Russia and Ukraine amid rising inflation globally.
  • The Indian markets would react to earnings from IT companies such as Mindtree, Larsen & Toubro Infotech (LTI), and HCL Technologies. While the market leaders have alluded to higher attrition, amidst a robust demand environment, the impact of attrition on smaller companies would be something to watch for.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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04 Apr

CitiBank acquisition provides access to an affluent client base: Axis Bank

Update on the Indian Equity Market:

On Monday, NIFTY crossed the 18,000 mark to settle at 18,053 (+2.2%) aided by the surge in HDFC twins post the announcement of the merger of HDFC Ltd into HDFC Bank. HDFCBANK (+9.8%), HDFC (+9.1%), and ADANIPORTS (+4.1%) led the stock gainers. INFY (-1.1%), TATACONSUM (-0.4%), and TITAN (-0.2%) led the laggards. Among the sectoral indices, FINANCIAL SERVICES (+4.6%), BANK (+4%), and PRIVATE BANK (+3.9%) led the gainers and there were no sectoral losers.

Excerpts of an interview with Mr. Amitabh Chaudhary, MD & CEO, Axis Bank published in Economic Times on 1st April 2022:

  • Axis bank acquired Enam Financials, which was renamed Axis Capital. It is the number one player in the equity capital markets in India and is expanding business in the brokerage and M&A segments. Axis Capital will also benefit from the One Axis strategy.
  • Axis bank was distributing Max Financials’ products for over 10 years, so its acquisition provided an opportunity to sign up for a long-term deal and strengthened the partnership with Max.
  • Citi bank’s retail portfolio acquisition was in line with Axis bank’s strategy of granularizing retail business and premiumisation of the portfolio. The acquisition will create opportunities and synergies that will accelerate the journey to creating a franchise across the country.
  • The acquisition provides access to one of the best affluent consumer franchises in India and Axis bank will get access to salary accounts, 1600 plus corporate accounts, and Suvidha corporates. Axis bank will also gain 3,600 Citibank employees. There are a lot of interesting parts which will strengthen Axis Bank’s franchise.
  • The CEO believes they have structured a transaction where the Bank is protected from customer attrition.
  • The price paid for the transaction was approved by the Board. The transaction took slightly longer because it was a complex one. As it was a purchase of a portfolio, he believes it was better that some of the complications were discovered upfront rather than during the transition process.
  • It will take about nine to twelve months to get all the regulatory approvals. It will take time to get customer consent, which depends on the agreement customers have with Citibank. From there, it will take 18 months to transition every Citi customer to Axis’ platform.
  • Right now, wholesale banking has been muted due to muted credit growth. Axis bank wants to be careful about giving loans at prices where the NIMs doesn’t make any sense. Overall, he believes there is a lot of work that can be done on the wholesale banking franchise.
  • Axis bank’s balance sheet gives it the flexibility to fund Citi India’s consumer purchase through balance sheet liquidity, external capital, or a combination of both. The impact will be 230bps on the CET ratio. Though the resultant CT-1 ratio will be above regulatory requirements, the Bank may consider raising capital in the future.
  • A very important part of any merger of this size is how to execute that merger. The integration management committee has already been formed and some of the important considerations in that plan would be around customer attrition, staff attrition, technology transition, and also getting benefits in terms of ensuring that Axis bank can cross-sell more to the Citibank customers.

 Asset Multiplier Comments

  • We believe the deal will add to Axis Banks’ competitive positioning across the credit cards and wealth management segments.
  • The value accretion from Citibank’s portfolio in the long term depends on Axis Bank’s ability to retain and continually add customers as well as employees and its ability to up-sell and cross-sell. The deal is fairly small compared to the size of Axis Bank’s balance sheet.

Consensus Estimate: (Source: market screener and investing. in websites)

  • The closing price of Axis Bank was ₹ 784/- as of 04-April-2022. It traded at 1.9x/ 1.7x the consensus book value per share estimate of ₹ 417/ 474/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 943/- implies a P/BV Multiple of 2x on the FY24E book value per share estimate of ₹ 474/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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22 Mar

Acquisitions to lower EBIT by 45-50bps in 1st year – PERSISTENT

Update on the Indian Equity Market:

After a volatile session on Tuesday, NIFTY settled at 17316 (+1.2%) near the day’s high of 17,334. IT (+2.0%), OIL & GAS (+1.9%), and AUTO (+1.2%) were the top sectoral gainers. REALTY (-1.0%), CONSUMER DURABLES (-0.7%), and PHARMA (-0.3%) led the sectoral losers. Among the NIFTY50 components, TECHM (+4.2%), BPCL (+3.0%), and TATAMOTORS (+3.0%) led the gainers. HINDUNILVR (-2.9%), NESTLEIND (-2.7%), and BRITANNIA (-2.2%) led the losers.

Excerpts of an interview with Mr. Sandeep Kalra, CEO and ED, Persistent Systems (PERSISTENT) with The Economic Times on 21st March 2022:

  • PERSISTENT recently acquired MediaAgility, which is recognised as a Google premier partner which is the highest level of partnership in the Google ecosystem. MediaAgility comes with seven different Google cloud specialisations, ranging from migration cloud, NetApp development, modernisation, security, etc. In terms of the industry verticals, MediaAgility has a presence in BFSI, healthcare, life sciences, media entertainment, and gaming.
  • Explaining the rationale behind the recently concluded acquisitions, the CEO suggested the enterprises had already started their digital transformation journey before the pandemic. These transformation journeys sped dramatically during COVID, and hyperscalers have taken notice. They’ve been releasing more services, including vertical-specific offers, at an increased rate nearly every month.
  • The hyperscalers – IBM, Google, AWS – are expected to play an incrementally bigger role in the enterprise journey. PERSISTENT is already present in these segments, with revenues over USD 100mn. The recent acquisition of Data Glove added to PERSISTENT’s capabilities on the Microsoft Azure cloud technology.
  • With the MediaAgility acquisition, the Company intends to increase its presence on the Google Cloud Platform. Each of the platforms has their own niches and own customer base and PERSISTENT is trying to be the Uber of the cloud services for its customers.
  • Whenever an acquisition is done, there is a cost of doing it, and the Company expects a 45-50bps hit on the EBIT in the first year. The Company is confident of the acquisition being margin accretive once the integration process is complete.
  • PERSISTENT has established its footprint in BFSI, and healthcare life sciences and has 35plus enterprise customers across the US, India, and the UK. MediaAgility has a delivery centre in Mexico which complements PERSISTENT’s footprint in Guadalajara, Mexico. The acquisition will add over 500 cloud engineers with significant Google-certified capabilities.
  • The Company is following a strategy of bolt-on or tuck-in acquisitions and these would be in areas where it wants to expand its capabilities or expand its geographical footprint.
  • The overall demand environment is continuing to be healthy and over the last 12 months, PERSISTENT has announced deal wins in terms of an ACV of USD 882 mn and in excess of USD 1.1 bn in TCV terms. This Is a fairly healthy run rate in terms of the order book. The overall demand environment is good and PERSISTENT is building a capability that will last irrespective of the demand environment.
  • The revenue growth is expected to be healthy due to strong order bookings. The EBITDA margin is expected to be in the 16-17% range. The Company is looking to grow its capabilities and acquire market share.
  • In terms of long-term aspirations, the Company intends to improve its margin by about 2-3 percent over the next two to three years.
  • Attrition is one of the headwinds to the Indian IT sector. The Russia-Ukraine crisis is expected to increase the pressure on Indian talent.
  • In terms of tailwinds, IT services have a better pricing power compared to commoditised services. PERSISTENT being a specialised technology services company has a little better pricing power.
  • The Company has done multiple acquisitions in the last 12 months, with a capital commitment of over USD 220mn over the next few years. For now, it will take a little pause and focus on integrating the acquired companies. Should there be an opportunity in Eastern Europe, the Company would pursue it over the next 9 – 12 months.

Asset Multiplier Comments

  • PERSISTENT has completed 4 acquisitions in FY22 to strengthen domain capabilities in IBM Cloud, Microsoft Azure, Google Cloud. These acquisitions have helped increase the Company’s presence in verticals like High Tech, BFSI, and Healthcare and bolster near-shore and on-shore presence in North America.
  • IBM has been PERSISTENT’s partner for over 25 years, contributing over 25% to the total revenues in FY21. Alongside addition in domain capabilities, these acquisitions have helped reduce the concentration risk.

Consensus Estimate: (Source: market screener website)

  • The closing price of PERSISTENT was ₹ 4,532/- as of 22-March-2022. It traded at 41x/ 34x the consensus earnings estimate of ₹ 110/ 132/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,682/- implies a P/E Multiple of 35x on FY24E EPS estimate of ₹ 132/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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10 Mar

‘Experience of the Future’ stores next big thing – Westlife Development

Update on the Indian Equity Market:

On Thursday, NIFTY50 ended in the green for the 3rd straight session at 16,595 (+1.5%). The trends for five state assembly elections may have aided the sentiment as the ruling BJP led in the majority of the seats in India’s largest state of Uttar Pradesh.

Among the sectoral indices, FMCG (+3.0%), PSU BANK (+2.3%), and METAL (+2.3%) led the gainers while IT (-0.1%) was the only sectoral index that closed in the red. Among the NIFTY50 stocks, HINDUNILVR (+5.2%), TATASTEEL (+4.3%), and GRASIM (+4.1%) led the gainers while COALINDIA (-3.8%), TECHM (-1.5%), and DRREDDY (-1.2%) led the losers.

Excerpts of an interview with Mr. Amit Jatia, Vice Chairman, Westlife Development published in Financial Express on 10th March 2022:

  • India has an inflationary tendency, so cutting costs is a part of the Company’s DNA. Vice-Chairman believes sales growth should be accompanied by a 100-250bps cost reduction YoY to survive.
  • If a certain cost increased, the company finds a reduction in some other avenue to maintain the balance. He doesn’t believe this policy will change in the next three to five years.
  • He believes inflation is here to stay. The company takes a 3-5% price hike every year and CY22 will not be any different.
  • Currently, there are a total of 316 McDonald’s outlets out of which 248 have McCafe inside them, which are proper coffee shops.
  • The company is working on accelerating the expansion of its network and plans to have over 500 stores in the next 3-5 years. This will require an investment of over Rs 8bn.
  • The expansion strategy will also be aligned to the company’s omnichannel strategy with a robust portfolio of ‘experience of the future’ (EOTF) stores, drive-throughs, and stores with separate take-out windows. The company will be doubling its drive-throughs within India. Menu innovation, omnichannel presence, and network expansion will continue to be the key levers for Westlife.
  • The EOTF stores are a big thing now, as the company is trying to change the way the QSR industry will operate in the future.
  • There are no favorites when one talks about the McDonald’s brand. Offerings like McAloo Tikki, McChicken, McSpicy, McVeggie are all consumer favourites, and the company is not dependent on one product.
  • The eating behaviour of customers has changed tremendously. Earlier, consumers were focused on snacking when eating out at a QSR, now they are looking at a complete meal. As a result, the Company’s focus has shifted towards larger opportunities which are meals.
  • In the last 2 years, the company has pivoted to become an omnichannel brand wherein the digital channels are accelerated at a phenomenal rate for McDonald’s. Its drive-through, contact-less take-away, on-the-go service ensured continuity of operations. Also, as stores were reopened delivery continued to grow. So, both in-store dining and delivery have provided an impetus to revenue and profitability growth. In 3QFY22, as most of the dine-in restrictions were eased, revenue from convenience channels grew 55% YoY with McDelivery reporting its highest ever revenue so far.
  • The new range of burgers along with the Fried Chicken platform and McCafe helped accelerate the average unit volume growth by 30% without any significant capex investment.

Asset Multiplier Comments

  • With increased focus on hygiene due to the pandemic, customers’ preference has shifted towards branded products. We believe McDonald’s (Westlife Development) is well-placed to benefit from this opportunity due to its brand recall, strong network, and variety of products.
  • With the new launches such as Fried chicken, the company is evolving from being just a burger company and providing tough competition to its peers.
  • With the entry into adjacent spaces such as Gourmet burgers and Fried chicken without incremental capex, the company will be able to improve its margins and provide better returns to shareholders.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of Westlife Development was ₹ 478 /- as of 10-March-2022. It traded at 76x/ 52x the consensus earnings estimate of ₹ 6.3/9.2 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 629/- implies a P/E multiple of 68x on FY24E EPS estimate of ₹ 9.2/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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05 Mar

This Week in a Nutshell (28Feb-4 March)

Technical talks

NIFTY opened the truncated week on 28th February at 16,482 and ended at 16,245 on 4th March. Amid the geopolitical tensions, the Indian benchmark index extended in the red for a fourth consecutive week. The index lost 1.4% during the week. The next support and resistance levels for the index would be 16,134 and 16,937 respectively. The RSI (14) of 35 indicates the index is in the oversold zone.

Among the sectoral indices, METAL (+7.0%), and IT (+2.1%) were the only gainers during the week. AUTO (-9.2%), FINANCIAL SERVICES (-5.6%), and BANK (-5.6%) led the losers.

Weekly highlights

  • Investors’ appetite was rattled by the intensifying Russia-Ukraine conflict, which obscured a much better-than-expected monthly jobs data in the USA. After Russia seized a Ukrainian nuclear plant and expanded its attack on numerous cities on Friday, all three major US indices — the Nasdaq 100, Dow Jones, and S&P 500 – closed the week in the red. As a result, investors shifted their portfolios away from risky assets and toward bonds and gold.
  • Oil prices soared to multi-year highs as Russia’s invasion of Ukraine escalated and buyers shied away from supplies from the world’s second-largest crude exporter. Brent Crude and West Texas Intermediate finished the week at USD 118 and 115 a barrel, up 20.5 percent and 25.6 percent, respectively.
  • For the month of February-22, the auto OEMs reported monthly volumes. With the easing of supply chain limitations and fresh launches, the demand for passenger vehicles (PVs) has remained strong. The market for 2Ws was muted, but premium 2Ws are seeing increased demand as chip availability improves. A modest increase in CV demand is being aided by robust demand from the infrastructure and construction sectors. Due to a high base and an extended rain that damaged the Kharif crop, tractor sales were hurt. In the medium term, the auto sector may benefit from improved rural sentiment and a healthy Rabi season.
  • Chairman of the Federal Reserve, Jerome Powell, informed the US Congress on Wednesday that he intends to propose a quarter-point interest rate rise at the Fed meeting on 16th He hinted that, depending on the effects of the Ukraine war and other circumstances, the Fed may be willing to raise rates even further.
  • The Indian manufacturing sector’s Purchasing Managers’ Index (PMI) rose to 54.9 in February from 54 in January. A reading above 50 is indicative of expansion in activities. Though there has been an improvement in manufacturing activity in February, input cost pressures remain a concern. Indians are facing the prospect of higher petrol and diesel prices once voting for the state election concludes.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 225,630 mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 167,430

Things to watch out for next week

  • The report on US inflation, which is due on Thursday, will be closely watched by investors. Consumer prices increased at the quickest rate in over four decades from January to February. The future for US markets is clouded by geopolitical tensions, as Russia’s invasion of Ukraine has moderated expectations for how swiftly the Federal Reserve will tighten monetary policy in the months ahead.
  • Continuing FII selling, increasing prices of oil, food grains, and metals, and declining Rupee are leading Indian equity markets down. On Monday evening, polls for five states will close. We expect retail prices of petrol to increase substantially immediately. Exit polls on state elections may drive the sentiments in the markets before the results are announced on 10th March.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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16 Feb

Deal closures in the USD 700mn- 1bn band expected to continue – Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY50 ended the volatile session in the red at 17,322 (-0.2%). Among the sectoral indices, REALTY (+1.1%), CONSUMER DURABLES (+0.8%), and PHARMA (+0.5%) were the few gainers. PSU BANK (-1.2%), MEDIA (-0.6%), and METAL (-0.6%) led the laggards.

Among the NIFTY50 constituents, DIVISLAB (+3.1%), ONGC (+2.7%), and ADANIPORTS (+2.3%) led the gainers. SBIN (-1.9%), ICICIBANK (-1.7%), and NTPC (-1.7%) led the laggards.

Edited excerpts of an interview with Mr. Milind Kulkarni, CFO, Tech Mahindra (Tech M) published in Financial Express on 16th February 2022:

  • Due to furloughs, Q3 was a slow quarter. In 3QFY22 the communication, media, and entertainment (CME) vertical grew faster than the enterprise vertical for Tech M.
  • There are supply-side pressures for which the company has various offset actions. It has increased its presence in tier-II and tier-III cities. The company expects to mitigate the supply side pressure over the next few months and be on the path articulated in the past.
  • Attrition has been reduced by 300bps in 3QFY22 on the LTM (last 12 months) basis. This is a reversion of the trend witnessed in previous quarters.
  • The new deals were worth USD 704mn in 3QFY22. This was an increase from the average order book of USD 400mn. The deal pipeline in the last 8 quarters has gone up. The deal closures in the USD 700mn- 1bn range are expected to continue.
  • The company has hired 10,000 freshers in 9MFY22 and plans to hire 15,000 freshers in FY23. The intention is to get freshers, train them, put them on the right project early, and benefit from the structural change. This is the opposite of doing just lateral hiring.
  • Tech M will continue to hire in the business process services segment, and IT as there is a continuous demand for transformation projects- artificial intelligence, metaverse, etc.
  • Tech M is getting into more tier-II cities such as Coimbatore, Vijayawada, Nagpur, Indore, Bhubaneshwar, and Chandigarh to get access to talent and help in containing attrition. It is also expanding existing centers such as Pune, Bengaluru, and Hyderabad. The company is developing virtual centers in Mexico, Costa Rica, Romania, and Latvia.
  • The BFSI vertical was separated into two separate revenue streams as insurance is a prominent vertical that requires different skill sets. This followed the recent acquisition of European IT solutions provider Com Tec Co. As the company has another large insurance company as a customer, it has made a separate vertical for insurance.
  • The M&A strategy is to fill up niche capability gaps, and certain verticals it wants to scale up. The specific verticals are manufacturing, digital engineering, and BFSI. The focus is on areas such as cloud capability, where it will grow organically.
  • On the 5G front, IT firms will be providing support to service providers and for Tech M, it will boost the CME vertical. It will be playing a bigger role to boost demand for services and application in the telecom sector.

Asset Multiplier Comments

  • The entire IT sector faced supply-side pressures in FY22 due to a sudden spurt in demand. With WFH (work-from-home) settling down, in FY23 the focus is likely to be on reducing attrition and improving utilization levels.
  • Tech M has been investing in the areas of 5G, customer experience, data analytics, AI, IoT, and Cloud capabilities through organic or inorganic routes over the past few years. These investments are yielding results in terms of higher deal TCVs.
  • 5G has been a focus area for Tech M for the past few years. With 5G activity gradually picking up among the Indian telecom companies, Tech M’s investments into this vertical will start yielding results in terms of higher revenue growth.

Consensus Estimate (Source: market screener website)

  •  The closing price of Tech Mahindra was ₹ 1,440/- as of 16-February-2022. It traded at 23x/ 20x/ 18x the consensus earnings estimates of ₹ 63/ 72/ 82/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,791/- implies a P/E Multiple of 22x on FY24E EPS estimate of ₹ 82/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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07 Feb

Expect to launch Spiriva in 2HCY22 in the US – Lupin

Update on the Indian Equity Market:

On Monday, NIFTY50 ended in the red amid a broad-based sell-off, ahead of the RBI monetary policy meeting during the week. NIFTY50 ended at 17,214 (-1.7%), dragged by TATACONSUM (-3.9%), LT (-3.6%), and HDFCBANK (-3.5%). POWERGRID (+1.9%), ONGC (+1.3%), and TATASTEEL (+0.7%) led the gainers.

Among the sectoral indices, PSU BANK (+0.9%) was the only one to close in the green. FINANCIAL SERVICES (-2.6%), FINANCIAL SERVICES 25/50 (-2.5%), and PRIVATE BANK (-2.3%) led the laggards.

Lupin announced 3QFY22 results, which were lower than the street estimates. Ms. Vinita Gupta, the CEO, outlined the reasons for the lower revenue growth in Business Standard on 7th February 2022:

  • Respiratory products have become a major growth driver for Lupin in the US. Albuterol has ramped up well over the last few quarters and has a market share of over 20 percent. In Brovana, Lupin has about 45 percent market share. The rest of the business in the US has been stable.
  • In 2HCY22 the company expects to launch a few products such as Spiriva in the US. It also expects to launch the first biosimilar, Pegfilgrastim in the US for which US FDA inspection of the Pune plant is required.
  • The company has shifted production to India for some of its products such as nasal sprays. For some other first-to-file (FTF) products in the US, Lupin is transferring production to some contract manufacturers in India and the US.
  • In 3QFY22, the India business was up 12% YoY due to significant growth in the respiratory products portfolio in 3QFY21. The company launched molnupiravir in the Covid products portfolio. Practicing physicians see molnupiravir as an important part of the regimen.
  • The CEO foresees increasing contribution to the Indian business from the diagnostic business. Lupin has established a national laboratory and has seven centers (clinics) in place- four owned and three are partnered. In FY23, she expects a rapid expansion in both owned and partnered clinics. However, the diagnostic business will be small in the near term in terms of total India business.
  • It has recently announced a partnership with Fancoo for CNS products in China. Lupin is looking forward to getting those products approved and launched in China. It is also working on the respiratory and inhalation pipeline (products developed for the US) which provides an opportunity in China.
  • Apart from the US, Lupin is present in the UK, Canada, Australia. It has a presence in Japan through its partner and is working on more partnerships to have a pipeline of complex generics and biosimilars.
  • In Europe, Lupin is focusing on Germany, the UK, and France and has a big respiratory pipeline in Europe.
  • In Australia, it has acquired Southern Cross Pharma which will make Lupin among the top three generic players in the market.
  • About 25% of the raw materials are imported. The company is self-sufficient in terms of APIs and other materials. The company is trying to reduce the dependence on China by increasing suppliers in India. The CEO believes the PLI scheme will help to develop a more self-reliant supply chain.

 Asset Multiplier comments:

  • The entire pharmaceutical industry is impacted due to supply chain bottlenecks which are impacting margins. Reduced dependency on China, and building domestic capabilities are likely to aid margin recovery in the medium term.
  • Lupin’s 3QFY22 performance was impacted by higher price erosion in the US and raw material cost. While this is expected to impact the performance in the near term, the early launch of key products such as Spiriva is likely to provide some relief to investors.

Consensus Estimate: (Source: Market Screener website)

  • The closing price of LUPIN was ₹ 804/- as of 7-February-2022.  It traded at 21x/ 16x the consensus EPS estimate of ₹ 38.6/ 50.2/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 977/- which implies a PE multiple of 19x on FY24E EPS of 50.2/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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25 Jan

The upward trajectory in VNB margin to continue – HDFC Life

Update on the Indian Equity Market:

On Tuesday, NIFTY50 snapped its five-day losing streak amid a volatile session. The index closed at 17,278 (+0.8%) as investors await more financial results in India and the outcome of the Fed Reserve meeting scheduled on Wednesday.

Among the sectoral indices, PSU BANK (+4.2%), AUTO (+2.3%), and MEDIA (+2.2%) led the gainers. IT (-0.3%) was the only sector which ended in the red. Among the stocks, MARUTI (+7.4%), AXISBANK (+6.5%), and SBIN (+3.9%) led the gainers while WIPRO (-1.6%), BAJAJFINSV (-1.4%), and TITAN (-1.2%) led the laggards.

Excerpts from an interview of Ms. Vibha Padalkar, MD& CEO, HDFC Life with Economic Times dated 24th January 2022:

  • HDFC Life reported 3QFY22 earnings, and all channels reported growth. In terms of the product mix, after 2 quarters’ lull, the individual protection grew by 20% YoY. Annuity continues to do well and reported 39% YoY growth.
  • On a standalone basis, the VNB margin (a profitability measure) has increased from 26.4% to 26.8% due to higher volumes and a balanced product mix. The CEO believes the upward margin trajectory will continue.
  • COVID-19 claims have reduced significantly in 3QFY22. From the peak of Rs 3,000mn claims in 2QFY22, the claims were reduced to Rs 170mn in 3QFY22. Due to the ongoing Omicron wave, the company has strengthened its mortality reserves and is carrying Rs 1,550mn of extra reserves.
  • The company has hiked its prices by 15-25%, which it believes was necessary. While the retention amount has increased, there was no impact on the solvency as reserves were carried at higher levels. Ms. Padalkar believes that price hikes for life insurance products and health insurance products are bound to happen due to inflation.
  • The solvency ratio was 190% before the cash payout for the Exide Life acquisition. The solvency was over 200% in 3QFY21, which was more of an aberration. The company maintains solvency in the 190-195% zone. She expects profits generated in 4QFY22 will add to the solvency of the company. Second, they have raised Rs 6,000mn as subordinated debt. If the need be, they can increase the subordinated debt levels.
  • The first step of the Exide Life merger with HDFC Life is complete. The next step is about 9months to a year away when the full integration happens and HDFC Life will be able to enjoy synergies. It will add 30-35% to the company’s agency channel and deepen its presence in South India and tier two and three towns.
  • The CEO believes the third wave has peaked in several parts of India indicating demand and all the macro indicators are robust. People’s attitude towards insurance has changed.
  • A lot of people reaching retirement age are thinking about getting annuity plans as they realise they will outlive their retirement age by ~20 years or more. The company’s retirement focus campaigns are also enlightening people.
  • The company is very close to its ideal product construct which is about a third unit-linked, about third participating products, and the balance non-participating savings products.

Asset Multiplier comments:

  • The insurance sector is a multi-decadal opportunity in India due to the under penetration and protection gap.
  • We believe the Company has maintained significant provisions to provide for claims expected due to the third wave. This coupled with a dynamic and balanced business mix, protection business strategy, and the expected pickup in agency business augurs well for the growth of the company.

Consensus Estimate: (Source: Market screener website)

  • The closing price of HDFC Life was ₹ 630/- as of 25-January-2022.  It traded at 94x/ 72x/ 62x the consensus EPS estimate of ₹ 6.7/ 8.7/ 10.2/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 787/- which implies a PE multiple of 77x on FY24E EPS of 10.2/-.
  • In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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13 Jan

EBIT margin of 17-17.5% sustainable – Wipro

 

 

 

 

 

 

 

 

 

 

 

Update on the Indian Equity Market:

On Thursday, after a volatile session the benchmark index NIFTY50 ended at 18,258 (+0.3%). Among the sectoral indices, METAL (+3.5%), PHARMA (+1.6%), and PSU BANK (+0.6%) led the gainers while REALTY (-0.7%), BANK (-0.7%), and PRIVATE BANK (-0.6%) led the laggards.

Among the NIFTY50 components, TATASTEEL (+6.3%), JSWSTEEL (+4.3%), and SUNPHARMA (+3.6%) led the gainers. WIPRO (-6.0%), ASIANPAINT (-2.4%), and HCLTECH (-1.9%) were the top losers.

Wipro recently announced 3QFY22 earnings, which were lower than street estimates. But the fourth-quarter guidance seems to provide some relief to investors.

The top management, MD & CEO Mr. Thierry Delaporte, CFO Mr. Jatin Dalal, and President and CHRO, Mr. Saurabh Govil discussed the highlights of 3QFY22 and their outlook for the upcoming quarters with CNBC-TV 18 on 13th January 2021. Following are the excerpts:

  • Wipro had guided for 2-4% sequential revenue growth in constant currency term for 3Q. The company delivered 3% QoQ revenue growth. There weren’t any one-offs or client loss or massive delivery issues. This is the normal volume of business.
  • The 3% sequential revenue growth is 28% YoY growth. The 3QFY22 revenue growth is the continuation of the growth seen over the last 5 quarters.
  • The CEO does not expect a significant contribution to revenues from the recently concluded acquisitions of Edgile and LeanSwift.
  • The reported EBIT margin was 17.6%, ahead of the guidance of 17-17.5%. The margin delivery has been despite 2 months of salary increment to 80% of its employees. The utilisation is such that there is some headroom for subsequent quarters.
  • The EBIT margin band of 17-17.5% is sustainable for the company in the long term.
  • The attrition for LTM was 22.7% in 3QFY22 and remains a concern industry-wide. It has taken certain measures to cope with higher levels of attrition. First, the company onboarded 10,000 plus employees every quarter and continues to onboard new people. Wipro has increased campus hiring by 70% in FY22. The company is looking at 30,000plus hiring in FY23E. Second, the company continues to laterally hire all skill sets across the globe based on demand. Some of the high-demand areas are cyber security, data, cloud, and newer areas like Salesforce. The company believes the attrition has peaked and expects to see moderate attrition going forward.
  • The company closed the biggest quarter in terms of bookings in 3QFY22. It reflects Wipro’s ability to win in the market. It has the biggest pipeline it ever had as it begins 4QFY22. It has a better win rate compared to previous quarters.
  • The CEO believes the clients’ budgets across industries will continue to increase. The win rate has improved by 300bps over the previous two years.
  • Improvement in price realisation is seen due to the move to high-value services such as cyber security, cloud, and digital. Wipro had made investments in certain skill sets and improved visibility, for which clients are willing to invest.

Asset Multiplier Comments

  • We believe revenue growth will be driven by strong demand, strong pipeline, and order book. The company’s order pipeline has a mix of small, medium, and large deals with the company seeing expansion in mid-sized deals.
  • There is a massive opportunity in the cloud business over the next five years. The Company has been making investments in cloud technology. Cloud opportunity, higher offshoring, and synergies from acquired business are expected to drive profitability for Wipro in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of Wipro was ₹ 650/- as of 13-January-2022. It traded at 30x/ 25x/ 22x the consensus earnings estimates of ₹ 22/ 26/ 29/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 703/- implies a P/E Multiple of 24x on FY24E EPS estimate of ₹ 29/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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08 Jan

This week in a nutshell (3-7th Jan)

Technical talks

NIFTY opened the week on Monday at  17,387 and closed on Friday at 17,813. The index made a weekly gain of 2.5%. On the upside, 17,945 could act as resistance while the 50DMA of 17,477 could act as a support. RSI (14) of 61 indicates the index is in an overbought zone.

Among the indices, BANK (+6.4%), PRIVATE BANK (+5.9%), and PSU BANK (+5.7%) led the weekly gainers while PHARMA (-2.6%), and IT (-1.5%) were the only losers.

Weekly highlights

  • The S&P 500 had one of the worst starts to the year since 2016 amid pressure from tech stocks as Treasury yields continued to rally on rate hike expectations despite mixed monthly jobs data. The S&P 500 made a weekly loss of 1.9% while the NASDAQ lost 4.5%.
  • Auto companies reported monthly volume data for December-21. The CV segment continued its uptrend aided by improvement in fleet utilization levels and improvement in fleet operators’ profitability. The demand recovery might come under pressure due to rising cases of the Omicron variant of the virus. Other segments such as Passenger Vehicles (PV), 2-Wheelers (2W), and tractors witnessed muted volumes, due to supply issues, a high base of Dec-20, and heavy rainfall in certain geographies.
  • The yield on the 10-year Government of India bond rose to a 2-year high of 6.52% on Tuesday. This was the biggest one-day rise in bond yields in the last 4 months as India’s fiscal deficit is increasing and high inflation persists. The bond yield has been on an upward trend for many months due to a rise in bank credit-to-deposit ratio, higher inflation, and a rise in bond yields in the US. Higher yields are also likely to translate into higher interest rates on corporate borrowing and retail loans that could impact the economic recovery.
  • The global benchmark, Brent crude jumped to USD 80 a barrel, as OPEC+ decided to raise its output target by 400,000 barrels per day from next month. The coalition believes the Omicron variant would have only a mild impact on demand. In a volatile week, Brent closed at USD 81.8 per barrel while the West Texas Intermediate settled at USD 78.9 a barrel on Friday.
  • The US Labor Department released data that indicates over 4.5mn people left their jobs voluntarily in November-21. This number was 4.2mn in October-21 and was the most in two decades. The data indicates a persistent churn in the US labor market.
  • The minutes from the US Fed’s Dec. 14-15 policy meeting offered insight into the central bank’s shift towards a tighter monetary policy to curb inflation. A very tight job market and unabated inflation showed Fed officials uniformly concerned about the pace of price increases along with global supply bottlenecks in 2022. The global markets took this stance as hawkish and led to a massive sell-off.
  • With the new Omicron variant of coronavirus spreading in the country, ICRA Ltd expects that India’s GDP growth for 4QFY22 would be 40 basis points (bps) below its earlier projection of 5-5.5%.
  • Foreign institutional investors (FII) turned buyers this week and bought shares worth Rs 10,828mn. Domestic Institutional Investors (DII) continued to be buyers and bought shares worth Rs 32,933mn.

Things to watch out for next week

  • The bond market is likely to set the course for the week ahead as rising interest rates gave stocks a choppy start to the new year.
  • The US markets will be influenced by key inflation. The next week marks the start of fourth-quarter earnings with banks such as JPMorgan Chase, Citigroup, and Wells Fargo reporting earnings.
  • In India, as people revert to Work from Home due to rising omicron cases, and expectations of lockdown restrictions will be on investors’ minds. The third-quarter earnings season starts next week with IT biggies such as TCS, Infosys and Wipro set to announce earnings on January 12th.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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