Author - Neha Kshirsagar

27 Mar

COVID-19 impact: Have requested RBI that moratorium sought by consumers should be given, says M&M Fin Services

Update on the Indian Equity Market:

On Thursday, NIFTY continued gains for the 3rd day and ended at 8,641 (+3.9%). Among the sectoral indices, Pvt Bank gained the most while no sector index ended negatively. Pvt bank (+8.3%), Realty (+7.3%) and BANK (+6.4%) were the top gainers. Out of the NIFTY50 stocks, IndusInd bank (+46.0%), L&T (+10.0%) and Bajaj Finance (+9.3%) rallied the most, while GAIL (-3.3%), HCL Tech (-2.6%) and Sun Pharma (-2.5%) were the worst performers for the day.

Edited excerpts of an interview with Mr Ramesh Iyer, Vice Chairman & Managing Director of Mahindra & Mahindra Financial Services Ltd; dated 25th March 2020. The interview aired on CNBC-TV18.

  • Original equipment manufacturers (OEMs) have shut down production due to COVID-19, which obviously have an impact on vehicle financiers.
  • For OEMs at the beginning of 4Q FY20, the volumes started to shrink because everybody was preparing for BS-VI transition and therefore the inventory levels started to come down. Now with the COVID-19 scare – even the little possible sales that were likely to happen have come to an end, according to him.
  • He added the month of January-February was average; March has been absolute no-number kind of a month, so he thinks that it would be a low single-digit growth in loan book or for some it may not even be that.
  • The Company has told the RBI about consumers asking them for a moratorium and has requested RBI to provide the same.
  • They have also told RBI that these are the times where maybe the non-performing assets (NPAs) norms itself will have to be rewritten to say it is not 90-days delinquent but 180-days kind of a delinquent and it is more to protect the good customers who have been paying so far.
  • There is uncertainty about tomorrow. So people had started becoming cautious but even more important is that the overall activities have started to reduce and therefore people’s earnings will start to reduce but these are times where instead of worrying about what is going to happen to the growth and things like that – the Company will be looking at ‘how do they help out the consumers’.
  • The current situation is still not as impactful in the rural market as seen in urban according to him. People will have to figure out after things get normal. They will start relooking at what else to do, how else to do. So the real impact will be known only three months down the line.
  • If consumers need some kind of temporary short-term loan after things get to some normal then the Company will look at what could be that short-term small-ticket loans to the existing consumers whom they may want to support and partner them to come out of this situation as things start to improve.

Consensus Estimate: (Source: market screener, investing.com websites)

  • The closing price of M&M Financial Services Ltd was Rs 169/- as of 26-March-2020. It traded at 0.9x / 0.8x/ 0.7x the consensus book value estimate of Rs 190/ 211/ 238 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of Rs 394/- implies a PB multiple of 1.7x on the FY22E book value of Rs 238/-
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18 Mar

SBI Cards will see rebound once the market settles: Hardayal Prasad, MD & CEO, SBI Cards

Update on the Indian Equity Market:

On Tuesday, NIFTY50 closed 2.5% lower at 8,967. All sectoral indices closed in the red except FMCG (+0.9%) and Pharma (+0.3%). Media (-5.9%), Financial Services (-4.6%) and Bank (-4.1%) were the top losing sectors. The Nifty 50 top gaining stocks for the day were Yes Bank (+59.3%), Hindustan Unilever (+3.1%) and Eicher Motors (+2.8%) while the losers were Zee Entertainment (-20.0%), IndusInd Bank (-9.2%) and ICICI Bank (-8.9%).

Excerpts from an interview with Mr Hardayal Prasad, MD & CEO, SBI Cards Ltd. (SBICARD) with CNBC -TV18 dated 16th March 2020:

  • About the share price bounce back: Mr. Hardayal said that in terms of return on equity (ROE), revenue and growth, when these minor blips of the market are overcome going forward, the company’s strength will come to the fore and they should see a strong rebound.
  • One of the biggest things is that the penetration of the credit card in India is very low, this gives SBI Cards a huge opportunity to grow.
  • According to him, the aspirations of tier II and III cities have still not been met. People want to spend, they have money. They want good things in life and they did not have the opportunities till a few years back. Now with the PoS infrastructure, with the e-commerce and so many other things happening, there is a big potential sitting over there. Thus, SBICARD feels the growth story in India will continue and the Company will continue to show robust growth.
  • He thinks other countries have seen massive penetration of credit cards into smaller towns. Thus, in India, if we leverage ourselves properly if we continue to have our policies right and have a good model, the Indian credit cards market will continue to see similar growth stories.
  • About the NPA concerns with credit card businesses, he said: In the last 10 years, since the last cycle has seen high NPAs and delinquencies, there has been a major shift in the way the business:
  1. India now has an absolutely robust and strong credit bureau which is very important for any country to manage delinquencies.
  2. IT infrastructure, which has been created all across.
  3. The overall modeling that is been done.
  4. The business is spread out. Earlier it was only in the metros; now it is spread out to Tier II and III cities. As many as 58% of the business is now coming from Tier-II cities. Now the leveraging that is there in tier II & III cities is pretty low.
  • So, he doesn’t think the kind of phenomenon one saw in post-Lehman times is there anymore. One can calibrate risks, control NPAs and can ensure good profitability.
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09 Mar

Godrej Consumer confident of ramping up production when required says CEO Gambhir

Update on the Indian Equity Market:

On Friday, NIFTY closed 2.6% lower at 10980 because of the coronavirus scare and the Yes Bank crisis. RBI’s action of seizing control of Yes Bank and the possible consequences on the financial system weakened the market sentiments. The top losers for the day were Yes Bank (-54.9%), Tata Motors (-9.5%) and Zee (-7.3%). The few gaining stocks included Bajaj Auto (1.5%), GAIL (0.8%) and Maruti (0.4%).  All the sectors were in the red. The top losing sectors were Nifty PSU bank (-5.3%), Nifty Media (-4.8%) and Nifty Metal (-4.4%).

Excerpts from an interview of Mr. Vivek Gambhir, Managing Director and CEO, Godrej Consumer Products Ltd published in Live Mint dated 06th March 2020:

  • The surge in demand for hand sanitizers and soaps in the wake of fears of the COVID-19 epidemic will not have any significant impact on earnings for GCPL since it constitutes a small business segment.
  • The rabi harvest has been good and the demand from the rural market is expected to start picking up in the next one or two quarters.
  • The market is seeing a temporary demand in hand soaps, hand sanitizers, small soaps, and handwashes as well. GCPL has enough production capacity and will be ramping up the same to fulfill the demand.
  • According to Mr. Gambhir, the Company will definitely see some temporary spikes in demand mainly in April- May timeframe.
  • GCPL is rolling out some new digital campaigns to educate consumers about the coronavirus and what they can do to protect themselves.
  • The hand sanitizers and Rs 10 soaps are around 30% of the entire soap segment for the company. The company will see an uptick in demand but will not be material enough at this stage.
  • In regard to ramping up the production capacity, Mr. Gambhir said that they have enough production capacity to meet the increased demand and don’t see any challenges in meeting those demands. GCPL is also seeing some request for export orders from other parts of the world but these are relatively small numbers and won’t be material.
  • For the soap business in India, GCPL has seen strong volume growth in Q3 and has continued to gain market share in both their brands Godrej No 1 and Cinthol. There has been some value degrowth in this particular segment but the imbalance between volumes and value is expected to be corrected over the next couple of quarters. GCPL has taken a 5% hike in soap prices given some of the increases in palm oil derivatives. The Company will evaluate if there is a need for further increase in prices. With some price increases, the Company will be able to drive a better balance between volume growth and value growth. At the same time GCPL is intensifying some of its cost reduction programs and is hoping to maintain the margins. However, if it is required to take a dip in the margins for a quarter or two to drive the volumes, they are prepared for it.  Next year, the Company is expecting a better performance from both India and international business and on the margin front, they hope to sustain the levels if not improving.
  • FMCG sector has been experiencing challenges over the last few quarters with regards to a weakening consumer sentiment, sagging rural demand and liquidity pressures in the channel still continue.
  • GCPL expectation is that over the next one-two quarters, the industry will start seeing a recovery in demand particularly led by the rural sector which has been a big cause of concern.
  • The rural sector has been growing at 0.5x the growth rate which was 1.2x or 1.3x a few quarters ago. The deterioration in growth has been significantly fair. Recently there has been some gradual recovery because the rabi crops have been good. The rural inflation also augurs well for rural consumers. It is putting more money in the hands of farmers.

Consensus Estimate: (Source: market screener website)

  • The closing price of Godrej Consumer Product Ltd was ₹ 640/- as of 06-March-2020.  It traded at 41x/ 35x/ 32x the consensus earnings estimate of ₹ 15.6/18.1/20.0 for FY20E/FY21E/FY22E respectively.
  • The consensus target price is ₹ 754/- which implies a PE multiple of 38x on FY22E EPS of ₹ 20.0/-.
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26 Feb

Ashok Leyland bets big on modular platform, says it will reduce the cost of ownership for customers

Update on the Indian Equity Market:

On Tuesday, NIFTY closed marginally lower at 11,813. The top sectoral gainers were Realty (+1.0%), IT (+0.8%) and Metal (+0.2%). The worst sectoral performers were Pharma (-2.2%), Auto (-0.7%) and Media (-0.6%). The top gaining stocks for Nifty50 were TCS (+2.3%), JSW Steel (+1.6%) and Tata Steel (1.5%) while the losers were Dr Reddy (-2.7%), Sun Pharma (-2.6%) and Hindalco (-2.6%).

Excerpts from an interview with Mr Anuj Kathuria, Chief Operating Officer (COO) – Ashok Leyland aired on CNBC18 TV on 22nd February 2020:

  • After unveiling tractor-trailer in 46-tonne category range, Hinduja Group flagship Ashok Leyland COO said modular platform range will reduce the cost of ownership for customers and the company is offering few vehicles to select customers.
  • Mr Kathuria said that the modular platform is going to have an entire range of vehicles starting from the 16-tonne right up to the 55-tonne. The platform allows the customers to configure the vehicles as per their applications and business requirements. It naturally would help them get a superior total cost of ownership and total cost of operations. It reduces the number of parts that are required to build vehicles. It inherently ensures better aftermarket support.
  • He added that the modular platform vehicles are BS-VI compliant. The technology used on BS-VI is mid-NOx technology that ensures the operating cost or the fuel efficiency or the fluid efficiency is best-in-class.
  • About the transition from BS-IV to BS-VI, he said that the offerings that Ashok Leyland can make to the customer are many more. They increase multi-fold but definitely there will be certain sweet spots in the configurations. However, if tomorrow a customer comes up with a new application and new requirement, it can be configured very quickly, most of the configurations are being homologated, so the time to market would be significantly different on this platform.
  • According to him, the Medium and Heavy Commercial Vehicle (M&HCV) growth is linked to the economic growth of the country.
  • The decline in demand for M&HCVs has been up to 45%. From his point of view, this decline is a combination of the cyclicality as well as certain structural changes that happened. Thus, the CV (Commercial Vehicle) industry will have to wait and watch the axle load norms that brought in excess capacity overnight of almost 20-25%. This would take some more time to be absorbed by the industry.

Consensus Estimate: (Source: market screener website)

The closing price of Ashok Leyland Ltd. was ₹ 81/- as of 25-February-2020.  It traded at 43x/27x/17x the consensus earnings estimate of ₹ 2.0/ 3.2/ 5.0 for FY20E/ FY21E/ FY22E respectively.

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14 Feb

Shemaroo says economic slowdown impacted business from YouTube

Update on the Indian Equity Market:

On Thursday, NIFTY closed at 12,174 (-0.2%). NIFTY50 was led by Yes Bank (+6.4%), Dr Reddy (+3.6%), and Zee (+2.6%). IndusInd Bank (-3.6%), Tata Steel (-1.8%) and NTPC (-1.7%) were the top losers. Pharma (+0.9%), IT (+0.8%) and Media (+0.6%) were the top gaining sectors. PVT BANK (-1.4%), Bank (-0.8%) and Fin Service (-0.7%) were among the losing sectors.

Excerpts from an interview with Mr Hiren Gada, CEO and CFO of Shemaroo Entertainment aired on CNBCTV18 on 12th February 2020:

  • Mr Gada said that in the next 3-4 years the company is aiming for an equal split across its digital and traditional business. This year the Company is hoping to be about one-third and two-third between digital and traditional.
  • This year the core customer base on the traditional side which is the broadcasters, faced tremendous slowdown on the ad side as well as on the new tariff orders. The content investment has been low-key and that has affected the entire ecosystem according to Mr Gada.
  • The expenses on account of new initiatives have dragged the EBITDA margins down in FY20. They are looking at the margins in the line of approximately 25% from a regular operating business.
  • Mr Gada revealed that digital operations contribute 50% of Shemaroo’s revenues, but the overall economic slowdown in the country also impacted the company’s YouTube revenues.
  • He added that the slowdown has had an effect on the Company’s capital-raising plans.
  • The Company had envisaged the new investment capex for which they were looking to raise money but looking at the current market conditions and given where the current stock price is, the Company will relook at the whole investment project and plan differently in terms of how they are taking that going forward.

Consensus Estimate: (Source: market screener website)

  • The closing price of Shemaroo was ₹ 97/- as on 13-February-20. It traded at 3.3x/ 3.0x the consensus EPS estimate of ₹ 34.5/38.3 for FY20E/ FY21E respectively.
  • Consensus target price is ₹ 280/- which implies a PE multiple of 7.3x on FY21E EPS of ₹ 38.3/-
By Entertainment, Shemaroo , , , 0 Comments Read more...
05 Feb

SBI Cards IPO to hit the market this quarter: SBI Chairman

Update on the Indian Equity Market:

On Tuesday, NIFTY ended positive at 11,979 (+2.3%). The top gainers in NIFTY were TITAN (+7.3%), Infratel (+5.7%) and IOC (+5.6%). ZEE (-5.3%), Bajaj Auto (-3.8%) and Yes Bank (-2.8%) were the top NIFTY losers. All the sectors were in the green. The top sectoral gainers were Metal (+3.3%), Financial Service (+2.9%) and Realty (+2.8%).

Excerpts from an interview with Mr Rajnish Kumar, Chairman, State Bank of India (SBI) that was published in Economic Times on 03rd February 2020:

  • SBI believed that no one needed an insurance cover as far as deposits in SBI are concerned. But as far as the system is concerned, after the problems with the cooperative bank which happened in Mumbai, there was a demand that the limit for insurance cover which was set some 27 years ago needs to be revised. This move was much needed and will create more confidence in the minds of the people about banks.
  • AGR Telecom problems: According to him, the matter is sub judice and will be waiting for the Supreme Court decision. The hearing is on 4th February. He thinks and believes that the matter will ultimately be sorted out to the satisfaction of both the parties – the government and the telecom operators. He had a general discussion with a lot of people in the telecom sector where they hinted that they will have at least three to four large telecom operators and the country cannot be served with a lesser number of telecom operators. This has given Mr Kumar  confidence and hope that this matter will get sorted out.
  • Barring one HFC account, things are looking up at least on the corporate recovery front.  This HFC account was in trouble, and SBI was readying for it since September and had started providing for it. Mr Kumar had said in the past that from the recovery and resolution perspective, December and March quarters are likely to be very good for the banking system. SBI is expecting some good resolution and implementation of resolution plans in respect of a couple of large accounts.
  • The loan growth for SBI was around 7% in this quarter coming from their international banking book. There is more demand for foreign currency borrowings from Indian corporates. The retail story is intact and SBI is growing very well. The only thing is the corporate sector demand revival. The loan pipeline is fairly good. As these loans get disbursed, FY21E growth numbers may turn out to be better than FY20. The utilization of limits definitely improved in the last two months and SBI may end up somewhere around 9% YoY growth.
  • The loan processing fee has improved significantly on a QoQ basis for SBI. It indicates that during the December quarter, SBI has processed more proposals. The loan pipeline is of more than Rs 1 lakh crore and all of these loans will get disbursed eventually over the next six months and that is a good indicator from a recovery point of view.
  • SBI Card valuation: According to him, the penetration of credit cards in India is very low and as the economy develops, there will be demand for credit and credit cards. At the same time, SBI card business is growing decently. SBI IPO is expected to happen in this quarter.
  • He said that the move by the government to divest stake in IDBI Bank and list LIC are two measures that stand out in this year’s budget.

Consensus Estimate: (Source: market screener website)

The closing price of SBI was ₹ 306/- as on 4-February 2020. It traded at 1.2x/ 1.1x/ 1.0x the consensus book value of ₹ 249/ 280/ 317 for FY20E/ FY21E/ FY22E respectively.

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29 Jan

Rajiv Bajaj recommends 3 steps to revive growth in the auto industry

Update on the Indian Equity Market:

On Monday, NIFTY closed at 12,119 (-1.1% down its previous close).  The top gainers for the day were Dr Reddy (+5.6%), M&M Ltd (+1.9%) and CIPLA (+1.2%). The stocks that were beaten down in today’s session included Vedanta (-4.8%), Tata Steel (-4.7%) and JSW Steel (-4.3%). The only sectoral gainer for the day was Nifty Pharma (+1.5%). The top losing sectors were Nifty Metal (-3.1%), Nifty PSU Bank (-2.3%) and Nifty Bank (-1.3%).

Excerpts from an interview with Mr Rajiv Bajaj, MD, Bajaj Auto Ltd on CNBC-TV18 on 23rd January 2020:

  • Mr Rajiv Bajaj, MD, Bajaj Auto said if the auto industry has to be put back on 15 per cent growth track then the government would need to do three simple things:
  1. The mandatory insurance that was brought into play in September 2018, should be rolled back.
  2. Imposing the anti-lock braking system (ABS) on 150 CC or 200 CC scooters or motorcycles was complete overkill and he urges the government to consider recalibrating this to at least for 250 CC plus two-wheelers.
  3. At a time when goods and services tax (GST) for electric vehicles (EVs) had been correctly lowered to 5 per cent, the government should also consider lowering GST for petrol or diesel vehicles from 28 to 18 per cent.

However, if these things are not done, then he anticipates around 20% plus decline from March or April once BS-VI prices come into play.

  • The industry has been systematically done in by over-regulation. This over-regulation, whether it is of insurance or of safety norms and now BS-VI, has pushed up the cost of two-wheelers ranging from between 20% and 30%, depending on whether it is a small or a big vehicle. If one is going to have this kind of cost escalation in a 12-18-month period then it is bound to have an impact on volumes.
  • Sharing his rationale for why mandatory insurance should be removed, he said that people are riding all kinds of two-wheelers, people are living in all kinds of circumstances. If somebody is buying a little vehicle that can do no more than 50 kilometres an hour, and living outside the city, there is no crazy traffic and he doesn’t have to be overly concerned as long as he is wearing a helmet then that choice should be left to him.
  • When asked about rural demand growth and whether there are any signs of recovery, he said he doesn’t see any signs of that.
  • In terms of sales, according to him, January is slightly better than December because December was impacted by a huge pre-buying in October. January-February would be better.
  • The auto industry is going to continue to see a decline in volumes, manufacturers are also very concerned about the billing of BS-IV and how things may pan out because there are two views again, one is that in March, Companies will have a lot of pre-buying of BS-IV and the other view is that they may not.
  • He said three years back when they moved from BS-III to BS-IV they had to follow their competition that put out discounts ranging from Rs 7,000 to Rs 25,000. Bajaj Auto don’t make that kind of money on most of their motorcycles. So, it is better to produce BS-VI, to let go of BS-IV because if one is left with BS-IV inventory with the dealers then between the dealer and manufacturer, the manufacturers are going to suffer a lot of pain.
  • Most of the auto players will be selling only BS-VI vehicles from March – from the middle of March or so. Bajaj Auto would not want to carry BS-IV stock beyond the first week of March etc. The Company has planned their production accordingly. Thus, he added saying, “If that means we are going to lose some share in March because competition will have heavy discounts on BS-IV vehicles and push up their share for the month, we are not playing that game”.
  • According to him, BS-VI models are going to be 15-20% more expensive which means a definite decline in the volumes. Thus, nobody knows the exact degrowth number but it is going to be very significant.

Consensus Estimate: (Source: market screener website)

The closing price of Bajaj Auto Ltd was ₹ 3,082/- as on 23-January-2020. It traded at 18.2x/ 17.0x/ 15.3x the consensus earnings estimate of ₹ 170/ 182/ 202 for FY20E/ FY21E/ FY22E respectively.

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13 Jan

Tata Motors shifts focus to cars on weak demand for CVs

Update on the Indian Equity Market:

On Friday, NIFTY closed at 12,257 (+0.3% higher than the previous close). Among the stocks, Coal India (+3.3%), Infosys (+1.7%) and Ultratech Cement (+1.6%) were the gainers. Yes Bank (-5.0%), Zee Entertainment (-3.5%), and Indusind Bank (-1.2%) were the top losing stocks. Nifty Realty (+1.8%), Nifty Metal (+1.2%) and Nifty Auto (+0.8%) were the top sectoral gainers while Nifty Pvt Bank (-0.1%) was the only sectoral loser.

Excerpts from an interview with Mr Guenter Butschek, MD & CEO, Tata Motors Ltd published in Livemint on 10th January 2020:

  • Tata Motors Ltd (TML) is betting big on passenger vehicles (PVs) to lead its turnaround plans as it transitions to Bharat Stage-VI emission norms. The move to BS-VI will give the company ‘a much more powerful play’ in the domestic market during the next fiscal.
  • With the new range of products, including upgrades for BS-VI, Mr Butschek is confident that March 2020 would be the turning point. If this gets support from the tailwinds, TML will get back to the previous growth path.
  • Referring to TML’s new product pipeline, including the company’s ambitious electric vehicle plans, Mr Butschek said the company plans to unveil 26 products at next month’s Delhi Auto Expo in February, including the 14 new commercial and 12 new passenger vehicles. This would be the biggest display of new vehicles. TML also plan global unveils of four new vehicles.
  • Mr Butschek termed the transition to BS-VI as ‘the single biggest engineering and investment effort ever’ put in by TML. He said a team of 3,500 engineers worked on BS-VI projects, upgrading over 20 engine platforms, 100 lead vehicle models and 1,000 variants. TML invested more than ₹ 1,200 crore in FY19 and hired 500 additional engineers for the process.
  • According to him, TML’s turnaround story in PVs and CVs is inspiring in terms of cost reduction. The Company has been able to reduce their breakeven point during tough times which is clear proof that they have done their homework. They are done with their investments and now they need is the volumes.
  • One key step was to bring down product development costs in its common vehicle architecture, which would form the base for several upcoming models.
  • In PVs, it has developed flexible vehicle platforms, code-named Alpha and Omega, which would power up to 12-14 new nameplates in the near- to mid-term. The new premium hatchback Altroz is going to be the first model from its Alpha architecture. The two modular platforms will also power the range of electric cars planned by the Company.
  • Mr Butschek said that TML would remain cautiously optimistic while estimating that the market would recover by 2HFY21, once the BS-VI transition is behind.
  • TML is seeing marginal improvement in retails. While the market sales volumes were flat YoY in December, TML’s sees improvement in its performance comparing the previous months.
  • For CVs, revenue from which was over four times the revenue of PVs, Mr Butschek said absorption of excess freight-carrying capacity could take up to five years, thereby hampering demand from the truck fleet owners across the country. Introduced in July-August 2018, the new axle load norms raised the permissible gross vehicle weight (GVW) of over 16-ton heavy trucks by about 12-25%, thereby creating excess carrying capacity for fleet operators.
  • A good vehicle scrappage policy could help reviving the demand for CVs in the near term, said Butschek.

Consensus Estimate: (Source: market screener website)

  • The closing price of Tata Motors was ₹ 196/- as on 10-January-20. It traded at 25x/ 12x/ 8x the consensus EPS of ₹ 7.5 / 15.6 / 22.9 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price is ₹ 187.5/- which implies a PE multiple of 8x on FY22E EPS of ₹ 23/-
By Tata Motors , , , , , 0 Comments Read more...
08 Jan

In India, commercial vehicles unlikely to do well in 2020: Timken India CMD

Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 12,052 (0.5% higher). Among the stocks, Vedanta(+3.7%), Zee (+2.4%) and Ultratech Cement (+2.0%) were the gainers. Infratel (-1.8%), BPCL (-1.5%), and Infosys (-1.3%) were the top losing stocks. Nifty Realty (+1.9%), Nifty Media (+1.0%) and Nifty Financial Services (+0.8%) were the top sectoral gainers. All the sectors ended in the green.

Excerpts from an interview with Mr Sanjay Koul, CMD, Timken India published in Economic Times on 06th January 2020:

  • Every time the emission norms change, there is a dip in the market. The commercial vehicles market dipped before the emission norms came into effect. This time because of the axle load change and the rest of the liquidity issues played a role and demand dipped.
  • According to him, the rebound is also going to be a little bit early because of the fact that the inventory corrections have taken place in the market, liquidity is going to be sorted out and is sure that the man on the road is going to be able to borrow the traditional LFOs and small truck owners will be able to go and borrow money.
  • While the inventory correction has taken place, there is going to be a little bit of pre-buying. So, January-February should be okay. After that, as the liquidity eases out and freight movement takes place, there might be a pleasant surprise of the markets coming back a little bit early.
  • Timken serves fragmented markets. Anything which has wheels or anything which is moving on stationary equipment needs a bearing. Timken has the strategy of serving the diverse fragmented markets – be it on-road, off-road, off-highway, rails, trains, power, coal, mining.
  • A large part of Timken’s business comes from the power transmission space. Timken sees a very strong offtake in terms of the wind market. Wind power has taken off, not only for domestic consumption but also a lot of gearbox manufacturers are exporting gearboxes out of India to other markets, including China.
  • According to Mr Koul, in 2020, in India commercial vehicles would not do well, but they would start coming up slowly and steadily. Rail in India would be pretty much good which is divided into locomotives, freight, and passenger. In passenger, there is a further division into mass rapid transportation, which is the Metro rail. In India, the rail system including metros is being modernized and they are being made high speed and highly safe. This market would be pretty okay. As the infrastructure push from the government takes place, the off-highway market should be okay and this is seen in December which was a decent month as far as the excavators and backhoes are concerned in India. Power coming out of thermal should not be great but at the same time, the wind would be pretty much good. On the whole, 2020 would be a mixed bag for Timken. The commercial vehicles which have huge traction as it consumes a lot of small bearings might not be great. The other areas which consume large value bearings would be okay.
  • Exports have been an important part of the Company’s strategy. For many years, they have been exporting both in terms of heavy trucks of highways and railway systems. Timken will continue exporting these to different markets around the globe. Timken currently serves Chinese, African, American, European and Russian markets. If one market is down, another market would be up. The Company has been able to serve these different export markets. But when the global markets are struggling themselves, it is a challenge for emerging markets as the supply chains have not really changed a lot in the last decade or so. But still, exports are okay for Timken, if not great.
  • For margin expansion, there are two aspects according to him. One is the cost and the other is pricing. Cost is the aspect which will act as a catalyst for Timken going forward. Timken is working on cutting waste. The Company makes sure that they do not waste a downturn. The Company continuously works on the cost front so that they optimize and generate less and less waste. Whereas on the price front, there is going to be stagnant pricing.
  • Timken’s endeavour is to make sure that they keep on generating as much value as possible as they are the leader in supply chaining the bearing pieces. Thus, Mr Koul is not unduly worried about the margin front.

Consensus Estimate: (Source: market screener website)

The closing price of Timken India Ltd was ₹ 900/- as of 07th January-20. It traded at 33x/30x/25x the consensus earnings estimate for FY20E/ FY21E/ FY22E of ₹ 27.6/30.7/36.7 respectively.

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30 Dec

Mr Rajendra Gogri on why Aarti Industries will continue to be a multi-bagger.

Update on the Indian Equity Market:

On Friday, Nifty closed 1% higher at 12,245. Among the stocks, Coal India (+3.5%), Axis Bank (+3.3%) and BPCL (+2.7%) were the gainers. Yes Bank (-1.4%), Wipro (-1.0%), and Infratel (-0.8%) ended in the red. Nifty PSU Bank (+2.9%), Nifty Realty (+1.6%) and Nifty Bank (+1.3%) were the top sectoral gainers. All the sectors ended in the green. 

Excerpts from an interview of Mr Rajendra Gogri, CMD, Aarti Industries Ltd (Aarti Ind) with ET NOW on 24th December 2019

  • Aarti Industries is a specialty chemical manufacturer with B2B sales to major global companies for a variety of end-use – polymer, agrochemicals, dyes, and pigments. The company has a value-added product chain. Because of this business model and multi-customer relations, Aarti Ind has been able to grow the business sizably. In the last few years, the overall competitiveness of India against China has increased, which has expanded margins for the chemical industry and also for Aarti Ind as well. That is a major reason for both volume growth as well as bottom-line growth.
  • According to him, India is in a very sweet spot as far as the specialty chemical industry is concerned because the cost-wise, now Chinese labour cost is double that of India and because of the trade war issue also, there is a big appetite for India. Now the buzz word is that the company is getting extra benefits in the global supply chain because they do not import anything from China for their specialty chemical business. They are totally backward integrated.
  • According to Mr Gogri, the key in the chemical industry will continue to be backing businesses with relatively better chemistry skills, operating in molecules, markets with oligopoly. With more chemistry skill and with a strong customer base, Aarti Ind is able to have a substantial market share in their line of products.
  • Two factors have impacted the growth this year:
  1. climate impact on US agrochemical market is specifically restricted this year.
  2. the global automobile sector slowdown was led by a slowdown in China, for some of the products which are going in the auto sectors, there is some demand pressure.
  • Aarti Ind is well spread in the product line as well as geography and is expected to grow.
  • There is a sizable scope for an import substitution with about $1 billion worth of chemicals within Aarti Ind chain being imported. The Company has identified quite a few products now which are virtually not made in India. The entire chlorotoluene chain which they have identified is not made in India and some of the downstream products are also not manufactured in India. They have also considered import substitution. That is one of the major criteria for identifying the products in addition to the direct demand for global markets.
  • Aarti Ind has signed 2-3 major contracts. Out of this, the first two contracts will be commissioning in 4QFY20 and that has the potential to give a substantial boost to their top line going forward. A first contract is a 10-year contract. It is a high value-added product and EBITDA is almost expected to be about 40%. Topline growth will be relatively less from that project but EBITDA growth will be substantially more.

Consensus Estimate: (Source: market screener website)

  • The closing price of Aarti Industries Ltd was ₹ 833 /- as of 27-December-19. It traded at 25x/ 20x/17x the consensus EPS estimate for FY20E/ FY21E/ FY22E of ₹ 33.0/40.9/48.2 respectively.
  • Consensus target price of ₹ 925/- implies a PE multiple of 19x on FY22E EPS of ₹ 48.2/-.
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