Author - Neha Kshirsagar

13 Jul

Corporate rejig plan will take care of long-term requirements – Motherson Sumi

Update on the Indian Equity Market:
On Friday, Nifty ended -0.4% lower at 10,768. The top gainers for Nifty 50 were Reliance (+3.1%),
HUL (+2.5%), and Sun Pharma (+2.3%) while the losing stocks were Axis Bank (-3.2%), GAIL (-2.8%)
and ICICI Bank (-2.8%). Sectoral gainers for the day were Pharma (+0.9%), Realty (+0.7%) and FMCG
(+0.5%) while the losers were PSU Bank (-2.7%), Pvt Bank (-2.4%) and Bank (-2.2%).

Edited excerpts of an interview with Mr GN Guaba, CFO, Motherson Sumi Systems Ltd (MSSL); dated 07th July 2020 from Economic Times:

  • The Motherson Group last week announced a major rejig in its corporate structure, deciding to demerge its domestic wiring business into a separate listed entity.
  • As per the scheme, MSSL will first demerge the domestic wiring harness business and will get it listed separately. The second stage of the restructuring involves merging the principal holding company Samvardhana Motherson International Ltd (SAMIL) into the MSSL.
  • From the shareholders perspective, for every one share held by them of the MSSL pre-demerger, they will be allotted one new share of the demerged entity.
  • The proposed reorganisation will simplify the Group structure and protect the interest of all shareholders. It will give a fillip to the company’s M&A strategy.
  • MSSL’s partner Sumitomo had been for long keen to have a shareholding in the business which is purely focussed on Indian customers. MSSL was also looking to simplify the structure for the last eight years. They had looked at various alternatives, but could not pursue it on account of changing laws and regulations. 
  • On January 30 2020, the Company decided to have two separate listed companies as they thought this was the best way to protect the interest of all stakeholders including the minority shareholders.  
  • The contribution from the wiring harness business was at Rs 39 billion in FY20 and Rs 44.8 billion in FY19. The business constitutes 5-6 % of the total turnover.
  • MSSL is a leading manufacturer, supplying wiring harness to almost every OEM, including in all categories, CVs, bikes, trucks, passenger cars, etc. They are not chasing market share, since that proposition may compromise the bottom line. Sumitomo’s technical assistance and strategic guidance auger well for the wiring harness business in future. The idea is to clearly focus on the growing trends in the domestic market.
  • MSSL sees this restructuring to be EPS accretive in the first year of the merger’s scheme itself which is FY22E. From the semi-merger point of view, the substantial part of valuation is derived from MSSL itself; this ensures that they have protected the interests of the minority shareholders. This would be as a win-win situation for all.
  • The rejig process is likely to take 12 months or so. Based on the feedback from the Company’s bankers, restructuring will be completed by June 2021; the listing and trading of both the demerged entity as well as the SAMIL are likely to take place from July 2021.
  • The proposed restructuring scheme is a big step taken by MSSL Group. Thus, it will take care of their future long-term requirements.

Consensus Estimate: (Source: market screener website)

  • The closing price of Motherson Sumi System Ltd was ₹ 96/- as of 10-July-2020. It is trading at 41x/17x the consensus EPS estimate of ₹ 2.4/5.7 for FY21E/FY22E respectively.
  • The consensus target price of ₹ 111/- implies a PE multiple of 19.5x on FY22E EPS of ₹ 5.7/-.

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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02 Jul

Steel consumption up in sectors linked to rural economy – Tata Steel

Update on the Indian Equity Market:

On Wednesday, Nifty ended 1.2% higher at 10,430. The top gainers for Nifty 50 were Axis Bank (+6.3%), UPL (+5.3%), and Bajaj Finserv (+5.2%) while the losing stocks were NTPC (-2.1%), Nestle (-2.1%) and LT (-2.0%). Sectoral gainers for the day were PSU Bank (+3.6%), Bank (+2.8%) and Financial Services (+2.7%) while the losers were Pharma (-1.0%), Realty (-0.7%) and IT (-0.2%).

Edited excerpts of an interview with Mr TV Narendran, CEO & MD, Tata Steel Ltd; dated 30th June 2020 from Economic Times:

  • The Company had tough six-seven months of the financial year starting from April last year till maybe October or November. Things started looking up after November. The demand started picking up. January to June is a peak season for steel consumption in India. So the steel demand was picking up. Apart from the auto industry, other industries were looking better and the steel prices were moving up. The Company started sensing things were going wrong because of the pandemic. It impacted them in Europe in February and they knew it was going to come to India as well. Tata Steel started taking some precautions by the end of February in India.
  • Prices in India were static because there were no sales but the fact that inventories were building up meant that all Indian producers were trying to export. So the export markets were crowded with Indian suppliers towards the end of March and early April.
  • By the end of April, China started pulling in quite strongly so a lot of steel exports started going to China. The Company saw a recovery of the international markets starting in April.
  • Between April, May, and June, steel prices have gone up by about $50 a tonne. The fact that Indian steel producers could export and had an export option, kept the domestic prices quite stable.
  • There was some pricing pressure because the prices have been trending upwards till March. There were some price corrections in May when the transaction started but the international prices were quite strong.
  • Consumption growth was seen in sectors which are linked to the rural economy.
  • In the automotive business, the tractors business has been reasonably strong. Motorcycles have been stronger than scooters because they are both dependent on the rural economy.
  • Rural infrastructure spending by the government has been positive. Tata Steel sells a lot of steel i.e., about 20% of their revenues, to the rural economy. The roofing sheets and reinforcing steel for the individual house builders segments are panning out strong.
  • The non-tractor and non-motorcycle automotive commercial vehicle, passenger vehicles are still quite a weak sector. There is some sign of improvement. Any improvement is only going to get them back to where they were last year and not where they were a year before last. So, it is a long haul back for them, according to Mr Narendran.
  • Tata Steel saw an EBITDA improvement in Kalinganagar and Jamshedpur of about Rs 2,000-2,500 a tonne Quarter on Quarter (QoQ) which was on the back of cost takeout and price hikes. Tata Steel would have sold at least half a billion tonnes more had there been no lockdown. This would have helped them in cost as well as realisations. They have lost half a billion tonne of March sales which was at the highest price.

Consensus Estimate: (Source: market screener website)

  • The closing price of Tata Steel Ltd was ₹ 324/- as of 01-July-2020. It traded at 6.8x the consensus EPS estimate of ₹ 47.8 for FY22E.
  • The consensus target price of ₹ 376/- implies a PE multiple of 7.9x on FY22E EPS of ₹ 47.8/-.

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 Jun

Hospital industry will see normalisation by the end of 2QFY21: Fortis Healthcare

Update on the Indian Equity Market:

On Friday, Nifty ended 1.5% higher at 10,244. The top gainers for Nifty 50 were Bajaj Finserv (+9.2%), Bajaj Finance (+6.6%) and Reliance Ind (+6.5%) while the losing stocks for the IndusInd bank (-2.2%), M&M (-1.3%) and Vedanta (-1.3%). Sectoral gainers for the day were Realty (+6.4%), PSU Bank (+2.2%) and Media (2.0%) while the losers were IT (-0.4%) and Metal (-0.1%).

Edited excerpts of an interview with Dr Ashutosh Raghuvanshi, CEO, Fortis Healthcare Ltd; dated 18th June 2020 from Economic Times:

  • The pandemic has affected the routine work of the hospitals and surgeries in a big way. The impact started somewhere in the month of February 20. Thus, the impact can be seen in 4QFY20 as well as 1QFY21E.
  • Volumes got reduced to the emergency work but a gradual resumption of activities on the side of chronic illnesses. Fortis believes that this is a short term blip but there is going to be a sustained and pent up demand of elective work especially for chronic ailments which are going to last for at least 6 months following the normal resumption of activities.
  • Industry sees an upward swing in COVID cases in cities other than Delhi and Mumbai.
  • Fundamentals for the healthcare industry continue to remain strong in the medium term.
  • In April-20 the occupancy levels were 25% which went up to 35% in May-20. In this month the recovery in the average occupancy levels stands at 48%. With this kind of recovery, 60% occupancy expected in July and then normalcy by the end of 2QFY21.
  • Fortis expects FY21 earnings to take a slight hit but expects 3Q and 4Q FY21 to be at normal levels in terms of both revenues and profits.
  • Initiatives in terms of cost and restructuring for Fortis are on-going. Lockdown gave them the opportunity to focus more on these elements. They are in a comfortable position in terms of cash flows even after the fall in revenues in 4QFY20.
  • Fortis is continuously evaluating its portfolio to see which units need to shape up or not performing well to rationalise the portfolio.
  • Staff cost is being relooked at, especially the senior staff members in order to be aligned with the Company’s interest. So conversations are going on. Establishment cost and advertisement cost are been rationalised. Expenses are needed to be prioritised.
  • Some of the CAPEX are been deferred in FY21, for example, land up-gradation of clinical infrastructure.
  • When asked about the price capping that is happening in this industry which will hurt the private players, he said that the margins are expected to be lower as compared to the current ones but the price capping will boost the volumes for the private players. So going forward, volumes are expected to compensate for the lower margins

Consensus Estimate: (Source: market screener website)

  • The closing price of Fortis Healthcare Ltd was ₹ 122/- as of 19-June-2020. It traded at 27.5x the consensus EPS estimate of ₹ 4.4 for FY22E.
  • The consensus target price of ₹ 165/- implies a PE multiple of 37x on FY22E EPS of ₹ 4.4/-.

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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12 Jun

We are committed to reaching normalcy by 4QFY21: Titan MD

Update on the Indian Equity Market:

On Thursday, Nifty ended 2.1% lower at 9,902. The top gainers for Nifty 50 were IndusInd bank (+4.3%), Hero Motocorp (+0.8%) and Nestle India (+0.8%) while the losing stocks for the Infratel (-8.9%), ZEEL (-6.7%) and SBI (-5.6%). All the sectors ended in the red zone. The top losing sectors were PSU Bank (-3.9%), Metal (-2.8%) and Bank (-2.7%).

Edited excerpts of an interview with Mr CK Venkataraman, MD, Titan Company Ltd; dated 10th June 2020 from Retail Economic Times:

  • Titan stores have started opening from the first week of May and as of 9th June 2020 nearly 80% of their stores have opened and some of them had seen a four-week run. Titan is trying to get a sense of the trend and it seems that the trend is currently varying across different formats perhaps because there are underlying reasons for people to buy those products.
  • The company had started on a cost erosion programme at the end of CY19, without any idea that COVID is going to come the way and therefore it was a very good thing that Titan had reached a certain momentum and some of that showed up in quarter four of FY20 performance and that momentum will continue to carry that effort into FY21 as well.
  • The sales levels of FY21E are very uncertain. At the moment, Titan is not seeing any major impact on the gross margins of the various product categories despite pressures. The operating margin or the profit margin for the business will be determined by the final sale level the Company will reach for the year which is very difficult to determine.
  • Titan needs to work on creating a desire for products in the customers’ mind even when they are sitting at home. It would involve either getting them to come to the stores or enabling them to buy from home.
  • Marriages are now going to be less grand and the families are going to have more money in their hands which they have not spent on five-star hotels or catering for 2,000 people at lunch and dinner and so on. The industry as well Titan can influence them to flow into jewellery purchase. Thus, Titan bets there to be a higher demand for jewellery.
  • Demand is going to be sluggish but the basic need of people to socialise is not going to go. He is sure that in three-four months from now, people will start doing that and their products will become part of that socialising.
  • Innovation will help the Company in CY2021E.

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

  • The closing price of Titan Company Ltd was ₹ 951/- as of 11-June-2020. It traded at 74.9x/ 44.0x the consensus EPS estimate of ₹ 12.7/21.6 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 1036/- implies a PE multiple of 48.0x on FY22E EPS of ₹ 21.6/-.

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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03 Jun

We have a very healthy cash surplus of over Rs 3,800 crores: Dabur

Update on the Indian Equity Market:

On Tuesday, Nifty ended 1.6% higher at 9,979. The top gainers for Nifty 50 were Bajaj Finserv (+9.5%), Zee Entertainment (+9.1%) and Bajaj Finance (+8.2%) while the losing stocks for the day Coal India (-3.3%), Maruti (-1.9%) and BPCL (-1.4%). The gaining sectors for the day were Realty (+4.9%), Media (+3.3%) and Pvt Bank (+3.2%). FMCG (-0.7%) was the only losing sector for the day.

Edited excerpts of an interview with Mr Lalit Malik, CFO, Dabur India Ltd; dated 29th May 2020 from Retail Economic Times:

 

  • Volume growth has seen a decline of 14.6% in 4QFY20 for Dabur which was the lowest growth in 11 quarters. The growth was on track till February and the Company was ahead of other FMCG companies. However, in March, due to the sudden lockdown, there was a supply chain blockage and Dabur was not able to invoice which was due even in case of seasonal goods like juices, glucose etc. This caused a decline of 14.6% in the India FMCG business.
  • For the juice and glucose categories, it was the peak season for the Company, given the summer setting in. If things were normal, Dabur’s growth would have been on track.
  • The healthcare segment of Dabur saw a slow opening in the middle of April. With the launch of the sanitizer during this period, Dabur has gained momentum and things may have been much better.
  • At present, though all manufacturing units are open, Dabur is working at 60-70% capacity. As far as the supply side is concerned with regard to the C&F as well as to the distributors, barring a few areas which are in the red zone and where there are restrictions with regard to supply, other categories including rural have returned to normal.
  • Mr Malik added, E-commerce has been growing at the rate of more than 100%. There are different channels which are giving promising returns in the new normal. However, there are still some pockets which are in the red zone where there are some restrictions and Dabur is waiting for that to get normal so that they will be back to 100%.
  • Dabur has a very healthy cash surplus which is more than Rs 3,800 crores. They don’t see any stress to their balance sheet or liquidity. The Company is being careful with regards to their working capital management as well as its operating cash flow.
  • With 60-70% running capacity, the Company sees no major deviation with regard to their inventory pile-up or shortage because they are monitoring the demand and supply side very carefully. For example, their healthcare category is moving at a faster pace. In the case of Chyawanprash, the growth rate is almost 400%. Thus, Dabur has accelerated production and therefore they are able to meet the increase in demand. There are different pockets where the demand is increasing and therefore they have increased their production and supply.
  • At present, the discretionary item demand is slow and this is where the Company is going slowly with regard to production so that they are able to manage the inventory and there is no loss of sale in case demand comes back.
  • Dabur has extended its village coverage by 52,000 though the target was to reach 65,000 villages because of the lockdown, they were not able to expand.
  • In the current scenario, there are two very important things according to Mr Malik:
  1. It is very important to have healthcare products that they manufacture to be made available to people at large because that is a need in the country right now. Therefore, their focus is to have all their products like Chyawanprash, Tulsi drop, Haldi drop, Giloy etc., made available to the people as these are all immunity boosters.
  2. On the hygiene and sanitiser front, their focus is to reach out. When volumes are affected, there would certainly be pressure on the margins. For that, they have undertaken a cost savings initiative under project Samridhi, where they are focussing on zero-base budgeting and questioning every line item of expenditure and addressing what is essential for them in the new normal scenario.

 

Consensus Estimate: (Source: market screener website)

  • The closing price of Dabur India Ltd was ₹ 461/- as of 02-June-2020. It traded at 51.5x/ 44.8x the consensus EPS estimate of ₹ 8.9/10.3 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 463/- implies a PE multiple of 45.0x on FY22E EPS of ₹ 10.3/-.

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 May

We are deriving far more value by being together than being separate: ITC

Update on the Indian Equity Market:

On Thursday, Nifty ended 0.4% higher at 9,098. The top gainers among the Nifty 50 were ITC (+7.1%), Hindalco (+5.8%) and Asian Paints (+5.1%) while the losing stocks for the day Bajaj Finserv (-3.6%), Bajaj Finance (-2.9%) and NTPC (-2.9%). The gaining sectors for the day were Auto (+2.6%), FMCG (+2.2%) and Metal (+1.8%). The worst performing sectors were Pvt Bank (-0.7%), Financial services (-0.7%) and Bank (-0.6%).

Edited excerpts of an interview with Mr Sanjiv Puri, Chairman & Managing Director, ITC Ltd; dated 21st May 2020 from Retail Economic Times:

 

  • His understanding of the new normal: This current problem is not going away soon and will have to run the businesses and carry on with life and economic activity, taking safety precautions.
  • There are challenges in this current situation because of the impact on economic activity and certain sectors are very sharply impacted. ITC sees a fair amount of opportunities for them, particularly in their FMCG businesses. There is a lot of opportunity in the health, wellness, and nutrition and hygiene space. Consumers trust in the brands will add to the opportunities as well as the current geopolitical situation. There are going to be opportunities for sure, according to him and it is for the Company to be watchful and agile and make the best of the opportunities that fit into their capabilities and strategies.
  • In terms of the government package that is required, he added, one needs to reach out to the most vulnerable section of the society. The largest stimulus that can happen is actually getting back to work and how to adjust to the new normal. The longer one takes to adjust to the new normal, the bigger is the stress and the more resources will be required to pull it out. In order to get back to the new normal and get back economic activity in the new normal, first, the government has to tackle the issues of liquidity.
  • Going forward, India will see some measures to boost consumption. The reforms for the agriculture sector can have a transformative impact over a period of time. But at the same time, those measures are not going to give impact immediately but the medium term, these augur well for the economy.
  • FMCG the sector is slowly getting back to the normal demand levels. The demand varies across the categories. ITC is seeing good demand for staples.
  • The Company is seeing some stress but at an aggregate level for foods and personal care. Mr Puri believes over time, as the capacities scale-up and the distribution and logistics improves further, the opportunities in this category will go up further.
  • There are segments like education and stationery which have been severely impacted for the moment because the sessions of the schools have changed and the business is heavily indexed to the school sessions. But ultimately, children will have to go back to school and students will have to go through education.  So, it is more a timing issue than anything else.
  • ITC Hotels are adversely impacted. ITC hotels are supporting quarantine facilities/ dealing with helping some stranded guests. Most of the hotels are not operational as of now which is in line with the guidelines of the government.
  • The agriculture business of ITC is slowly getting back to normal and is indexed to food consumption, paper and paper board consumption. There is a little bit of lagging but once the economy fully opens up, ITC is hopeful to see more demand for paper boards and packaging.
  • Outlook for ITC 5 years down the line: 10 years back, it was 60% tobacco and 40% non-tobacco. Today, it is actually the other way around; about 60% is the non-tobacco. 80% of the capital employed is in non-tobacco business. 90% of employees are in the non-tobacco business which reflects the kind of investment ITC is making in the non-tobacco segments. This gives headroom for these segments to grow. Given the positioning of the Company, they are confident of expanding their footprints quite a lot in these segments.
  • Outlook for Tobacco Business: The biggest challenge that the tobacco segment faces in India is the threat of the illegal segment. As taxes have been rising, the illicit industry has been rising. Over a period of five-six years, the taxes on cigarettes tripled and at a CAGR level, the tax rate grew at about over 15% whereas the revenue growth was between 4% and 5%. ITC will see some improvement in the business once there is stability in the tax regime.
  • Dividing the two business- FMCG and Tobacco: There are a few things that are advantageous when they are combined as an organisation. ITC is able to leverage a large and robust distribution and logistics highway which are high-cost elements in any company’s operations. Splitting these two segments will mean duplication of resources. At some point of time in future, when each of these businesses is mature, the splitting thing will be revisited. But in today’s context, ITC is creating a lot of value through synergy.
  • The non-tobacco businesses are expected to grow at a much higher rate in the next 3-5 years. There will also be the base effect that must be factored in. But the rate of growth in the non-tobacco the segment will certainly be much faster, according to Mr Puri.

 

Consensus Estimate: (Source: market screener website)

  • The closing price of ITC Ltd was ₹ 188/- as of 21-May-2020. It traded at 15.5x/ 13.5x the consensus EPS estimate of ₹ 12.1/13.9 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 241/- implies a PE multiple of 17.3x on FY22E EPS of ₹ 13.9/-.

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 May

Maruti Suzuki to resume production with 50% workforce at Manesar plant: RC Bhargava

Update on the Indian Equity Market:

On Tuesday, Nifty ended 0.5% lower at 9,196. The top gainers for Nifty 50 were Vedanta (+12.4%), NTPC (+5.9%) and ITC (+4.5%) while the losing stocks for the day Reliance (-5.7%), GAIL (-3.7%) and Asian Paints (-3.0%). The gaining sectors for the day were Media (+1.7%), Metal (+1.2%) and Realty (+0.8%). The worst performing sectors were Pvt Bank (-0.7%), Pharma (-0.6%) and Bank (-0.5%).

Edited excerpts of an interview with Mr RC Bhargava, Chairman, Maruti Suzuki India; dated 12th May 2020 from CNBCTV18:

  • The carmaker will resume partial operations at their Manesar plant in Haryana with a 50% workforce. Manpower permission is around 75% with one shift only.
  • The Company is allowed to start operations with one shift now and it will focus on a limited number of models.
  • The Company will be able to assess the demand-side situation only after a few weeks. He added that it is difficult to predict the demand side as it is too early. The dealerships have started functioning, but not all of them are functioning. The level of inquiries is also respectable but at this moment there is some supply-side constraint.
  • The overall volumes are bound to be impacted because of the ongoing restrictions and reduced manpower capacity. Normally the workings hours for the Company are 8 hours in one shift but with the various restrictions, the working hours are expected to come down to 6.5 hours in a shift. This reduces the capacity according to him. At the same time, the Company will be operating in only one shift with all other restrictions impacting the production quantity.
  • For a clear demand side pictures, dealers should at least work for 2-3 weeks.
  • Some of the suppliers for Maruti are in the containment zones. Therefore, the suppliers cannot produce in those areas. Maruti had to look for some alternative supplier for some components. Some models of the Company cannot be produced because those components cannot be found. Thus, the Company has to adjust the production volumes and models in accordance with the supply chain.
  • There is no certainty as to which supplier will remain a supplier and that he will not come under a containment zone in the next 10 days according to Mr Bhargava.
  • The Company may also face issues because the temporary workers at their Manesar plant have gone back to their villages.
  • Maruti has given cash advance against supplies to many of its vendors.
  • Overall, the auto industry could end up with 20-25% less sales compared to last year.
  • The cars are taxed very heavily in India, making the affordability of cars an issue. He expressed hope that the government will keep taxes on cars at a reasonable level.

 Consensus Estimate: (Source: market screener website)

  • The closing price of Maruti Suzuki India Ltd was ₹ 4,955/- as of 12-May-2020. It traded at 24.9x/ 19.0x the consensus EPS estimate of ₹ 199/260 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 6,308/- implies a PE multiple of 24.3x on FY22E EPS of ₹ 260/-.

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 May

We are dipping our toes into the health and hygiene segment: Marico CEO

Update on the Indian Equity Market:

On Thursday, Nifty ended April higher at 9,860 (+3.2%). The top gainers for Nifty 50 were Tata Motors (+19.9%), UPL (+14.5%) and ONGC (+13.1%) while the losing stocks for the day were Sun Pharma (-2.4%), HUL (-1.2%) and Cipla (-1.0%). Sectoral gainers were Metal (+7.9%), Auto (+6.4%) and IT (+5.1%). The worst performing sectors were Pharma (-0.6%) and Media (-0.5%).

Edited excerpts of an interview with Mr Saugata Gupta, MD & CEO of Marico Ltd.; dated 28th April 2020. The interview was published in Retail ET.com.

 

  • Significant changes in terms of shopping and consumption habits expected in next financial year according to Mr Saugata Gupta.
  • He said things have started improving. With a lot of permissions, advisories and clarifications from the Central Government and Ministry of Home Affairs, things have started to streamline.
  • Most of the factories are operational for the Company but with the reduction in labour force, the supply chain is still to be settled.
  • In sum of the parts (SOTP) breakdown, there is enough demand for the food part as per the Company but there are supply-chain issues.
  • The premium category of the portfolio, which is discretionary in nature, forms a significantly smaller part of Marico’s portfolio which hardly makes a difference to the Company in terms of demand and supply.
  • The Company has started to explore opportunities in the health and hygiene products. Recently the Company has launched sanitizers in this category. They might also look for opportunities in some new areas in foods as well.
  • In a post Crisis world, Mr Gupta sees a significant change in the consumption basket. A certain part of the Company’s portfolio will be challenged; at the same time there are opportunities to be tapped in some other part of the portfolio.
  • Post crisis, there will be a significant movement into staples, health and hygiene, immunity and items of daily consumption. There will also be a shift to safety into known brands. Therefore leader brands will have to take pole position and gain market share, especially those with strong distribution and equity.
  • There will be a significant shift from out-of-home consumption to in-home consumption. Therefore, even things like ready-to-eat, ready-to-cook products are likely to be consumed far more. One of the things that happened during the crisis outbreak was that people with comorbidities or conditions like diabetes were more affected by the infection. So, people are likely to take health and hygiene far more seriously, as per Mr. Gupta.
  • Consumption is likely to get impacted in sectors like eating out, entertainment, travel, home improvement and autos as people will spend less on them.
  • There will be a significant opportunity at the bottom of the pyramid and down trading will be more prevalent as people could have less disposable income in the immediate quarters post the crisis. So, pricing and providing value to the consumer will be extremely important for the Companies.
  • Marico have been extremely aggressive in terms of cutting extra cost like travel. Company has cut down on out-of-home advertising and some part of A&P. The Company has enough opportunities for cost rationalisation. There will be no loss of jobs and will support the third party ecosystem in terms of payment on time to protect their cash situation and working capital.
  • To get back into a 100% business, it will take some time after the lockdown gets relaxed. So, the ramp up will be gradual because it is not just raw material, it is a question of supply chain trucks as well. Raw materials and logistics availability both go hand in hand. In any case, the Company will continue to maintain social distancing and strict controls in their factory and therefore will have to work with a lower percentage of people and rotating those people as and when things open up fully.
  • FMCG is the category which is based on economic growth. It is based on increasing penetration and there could be some short term hiccups. But he doesn’t think there is anything to concern in this industry. Market leaders with distribution networks, strong brands and who have shown fragility and resilience in these times will emerge stronger.
  • The fringe players who have immediate working capital concerns, weaker brand equity, inability to invest in automation and digital and new ways of doing work, might suffer in the short term.
  • There are huge opportunities and therefore in a lot of categories, one will see a V-shape recovery.

 

Consensus Estimate: (Source: market screener website)

  • The closing price of Marico Ltd was ₹ 287/- as of 30-April-2020. It traded at 35.0x/ 32.3x/ 28.8x the consensus EPS estimate of ₹ 8.2/ 8.9/ 9.9 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of ₹ 342/- implies a PE multiple of 34.3x on FY22E EPS of ₹ 9.9/-.

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 Apr

Expect demand to pick up strongly by festive season: Vinod Dasari

Update on the Indian Equity Market:

On Tuesday, Nifty closed 3% lower at 8,981 after crude futures prices fell into the negative territory for the first time. The top gainers for Nifty 50 were Dr Reddy (+4.4%), Infratel (+2.9%) and Bharti Airtel (+2.2%) while the losing stocks for the day were IndusInd Bank (-12.3%), Bajaj Finance (-9.1%) and ICICI Bank (-8.7%). Pharma (+2.5%) was the only gainer among the sectoral indices for the day. The worst performing sectors were Pvt Bank (-5.9%), Bank (-5.4%) and Auto (-5.3%).

Edited excerpts of an interview with Mr Vinod Dasari, CEO of Royal Enfield.; dated 16th April 2020. The interview was published in The Economic Times.

  • Starting OEM factories are much easier. But there will be some deal of confusion as to which industries can start. Now there are companies in which they might have two or three plants but sometimes the plants are interrelated. So if one area cannot start but the other area is allowed to start, it could be a concern. For example, Tamil Nadu opens up but Maharashtra does not open up, the company will face supply issue which is from Pune.
  • There would be a little bit of a stuttered start but think within 10-15-day time, this will come to normal once the lockdowns are lifted.
  • According to him, the demand side will actually come back stronger for two reasons – Pent up demand and a likelihood that people will not want to travel in public transport increasing demand for cars and motorcycles.
  • April is a washout for the auto industry, May could see a good recovery month but at a slow pace. This quarter will have some impact because of the lockdown but after that, the recovery will be sharper than what people are saying.
  • For dealers, all the money that the company had with them as advance, has been returned by the company. The company has given all the warranty claims, keeping very little stocks with the dealers. Dealers carry less than 10 days’ worth of stock.
  • The company is not doing any retrenchment and pay cuts whether it is the temporary or permanent workforce. Thus, company is paying 100%.
  • The company has more than doubled its network in the last year to reach outside urban areas. This has given them good results. Thus, a combination of both the accessibility of the product and network as well as the aspirational aspect of Royal Enfield bikes will bode well for them.
  • Even in a downturn last year in their category, the company actually gained market share. For overall motorcycle, they still retained their market share despite a 15-20% downturn in the overall motorcycle market.

 

Consensus Estimate: (Source: market screener website)

  • The closing price of Eicher Motors Ltd was ₹ 13,502/- as of 21-April-2020. It traded at 18.1x/ 18.4x/ 14.8x the consensus EPS estimate of ₹ 745/ 735/ 914 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of ₹ 18,679/- implies a PE multiple of 20.4x on FY22E EPS of ₹ 914/-.

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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09 Apr

Hospitality industry will see strong recovery after crisis ends: Indian Hotels

Update on the Indian Equity Market:

On Wednesday, Nifty closed -0.5% lower at 8,749.  The top gainers for Nifty 50 were Vedanta (+3.7), Sun Pharma (+4.8%) and Cipla (+4.6%) while the losing stocks for the day were Shree Cement (-3.8%), TCS (-3.8%) and Titan (-3.7%). The sectoral gainers were NIFTY Pharma (+3.5%), NIFTY Auto (+1.9%) and NIFTY Media (+1.8%). The losing sectors were NIFTY Realty (-1.4%), NIFTY IT (-0.8%) and NIFTY Bank (-0.6%).

Edited excerpts of an interview with Mr Puneet Chhatwal, MD and CEO of The Indian Hotels Company Ltd.; dated 7th April 2020. The interview aired on CNBC-TV18.

  • The travel, tourism and hospitality sector has been hit hard across the world in early March.
  • In India, occupancy levels at hotels are close to zero due to the nationwide lockdown. Indian Hotels reveals that the average occupancy rate at the group’s hotels has fallen by 90%. Hotels are more or less empty, with some islands of excellence in extended stays at Indian Hotel apartments in Mumbai, which are always occupied.
  • The Indian hospitality and tourism business has another equally important component and that is the food and beverage business. With all the restaurants, bars, gym, salon and spas shut, the revenue drop is significant for the industry, according to Mr Chhatwal.
  • According to Mr Chhatwal, the international business would recover completely only by January 2021. If Indian Hotels get recovery, the recovery could be very strong especially on the domestic front. The international front will take a long time, but the Indian market is very much influenced by the domestic side of the business and that is the key at least in FY21E.
  • According to him, it is too early to calculate the economic damage due to this crisis. The hospitality business slowed down 10 days prior to the imposition of the restrictions. Within a week or 10 days, the industry will have clear visibility about the damage.
  • Mr Chhatwal says Indian Hotels would not reduce tariffs to attract customers to post the crisis ends. The reduction in prices or tariff is not a long term strategy but is a tactic to survive maybe for a few months. Ultimately if pricing is a strategy, then in Indian Hotel, it is the beginning of the end, according to him. So, at the moment their key priority will be the safety and security of their guests, and medical staff that is staying with them in different properties in Mumbai.

Consensus Estimate: (Source: market screener website)

  • The closing price of The Indian Hotels Company Ltd was ₹ 75/- as of 8-April-2020. It traded at 26.8x/ 23.4x/ 16.7x the consensus EPS estimate of ₹ 2.8/ 3.2/ 4.2 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of ₹ 154/- implies a PE multiple of 34.2x on FY22E EPS of ₹ 13.
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