Author - Pratik Mate

15 Mar

Focus on next stage of digital transformation – HDFC Bank

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended in its 5 day winning streak and closed at 16,663 (-1.2%). Among the sectoral indices, AUTO (+0.6%), and FMCG (+0.2%) were the only gainers while METAL (-4.1%), IT (-2.6%), and OIL & GAS (-2.5%) were the top sectoral indices that closed in the red. Among the NIFTY50 stocks, TATACONSUM (+3.7%), M&M (+2.4%), and CIPLA (+2.0%) led the gainers while TATASTEEL (-5.2%), HINDALCO (-5.2%), and ONGC (-4.9%) led the losers.

Excerpts of an interview with Mr. Parag Rao, Country Head, HDFC Bank published in Economic Times on 14th March 2022:

  • The bank did face a couple of outages and it impacted the customers. The regulator took notice of this and conveyed that it has no issues with the bank’s growth plans and strategic direction in which the bank is going, but it would like it if the bank reconsiders its investments in infrastructure so that it can sustain this growth.
  • The bank in the interim was not allowed to do two things. One was the credit card ban; it could not issue new credit cards to customers and at the same time, all the new digital initiatives which the bank was planning to launch were put on temporary hold till such time the bank strengthened and demonstrated the capability to manage this kind of growth.
  • The bank’s new motto is technology become the driver and magnet to get business for the bank and that is how it has started the transformation. In this context, the first embargo on the issuance of credit cards was lifted in August-21. Since then, the bank has gotten back to its regular run rates and rapid growth plans on its credit card base.
  • HDFC Bank is a very large bank. It has commitments and responsibility to a very large customer franchise and in that sense, this pause in its growth was for a very good cause and it is now far better prepared for the next five years.
  • The bank’s strategy can be broken up into three core parts; one is reimagining the entire customer experience and building new digital platforms which would take the customer experience that much far into the future. The context has already been set over the last five to seven years with the emergence and explosion of the digital wave.
  • This digital wave has brought about significant changes in the way customers would interact with their principles, banks, and various other categories practically in every industry and so there was a different need for customers in this whole digital world.
  • All of this has expanded the kind of needs and demands that the customer expects from the institution. So reimagining customer experience and building completely new digital platforms to enhance customer value is one leg of the bank’s strategy.
  • One immediate change over the next couple of months will be the relaunch of PayZapp 2.0 on a completely new platform. The Bank aims is to be among the top three payment apps in the country and a significant ramp-up for PayZapp not just by how it engages and provides the services of holistic payments to its existing set of 60 million customers.
  • The Bank’s planned investments into technology are expected to double over the next 3 years as compared to the past 3 years. The bank is focused on expanding its digital infrastructure by bringing new and skilled talent to lead the transformation.

Asset Multiplier Comments

  • After 16 months of restrictions imposed by the RBI, HDFC Bank is all set to leverage its investments in technology to fuel the next stage of growth in customers by expanding its omnichannel presence.
  • While HDFC Bank is a leader in a lot of parameters in the banking sector, it requires significant catch-up to its peers like ICICI Bank and SBI who have already ahead of the curve when it comes to customer acquisition and tech-based infrastructure development.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of HDFC Bank was ₹ 1424 /- as of 15-March-2022. It traded at 2.7x/ 2.4x the consensus Book Value per share estimate of ₹ 520/600 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1970/- implies a P/B multiple of 3.3x on FY24E BVPS estimate of ₹ 600/-

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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24 Feb

Ignoring the risks of Macro Events


The Russian army’s invasion of Ukraine is the latest macro event that has investors concerned about equity markets. It is also the latest macro event that most investors would do well to ignore.  We worry about specific, prominent issues because we want to protect against the losses that may occur if our worst fears are realised. The irony is the most sure-fire way for investors to make consistent and substantial losses is by jumping from one high profile risk to the next, making consistently poor decisions along the way.

We have all seen the charts depicting the benefits of taking a long-term approach to equity investing.  They show how markets have produced strong returns in-spite of wars, recessions, and pandemics. They are a great illustration of the benefits of a long-term approach, but they don’t tell us everything. What they fail to show is all those critical issues that worried investors but never came to pass. We are always wondering about the next great risk to markets; the key to successful investing is finding ways of drowning out this noise.

Even though we can be certain that there are some events that will cause dramatic (short-term) losses for risky assets; ignoring them is absolutely the best course of action for most long-term investors. This is for a host of reasons:

We cannot predict future events: Pre-emptively acting to deal with prominent risks that pose a threat to our portfolios requires us to make accurate forecasts about the future. Something that humans are notoriously terrible at.

We don’t know how markets will respond: We don’t only need to forecast a particular event; we also need to understand how markets will react to it. What is in the price? How will investors in aggregate react? Even if we get lucky on point one, there is no guarantee we will accurately anticipate the financial market consequences. It is worth pausing to reflect on these first two reasons. Forecasting events and their impact on markets is an unfathomably complex problem to solve. We are incredibly unlikely to succeed in it.

We are poor at assessing high profile risks: We tend to judge risks not by how likely they are to come to pass, but how salient they are. This a real problem for macro events because the attention they receive makes them inescapable, so we greatly overweight their importance in our thinking and decision making..

We need to be consistently right: Even if we strike lucky and are correct in adjusting our portfolio for a particular event, that’s not enough – we need to keep being right. Over the long-run being right about any individual prominent macro event is probably more dangerous than being wrong, because it will urge us to do it again.

If we find ourselves consistently worried about the next major risk that threatens markets, there are four steps we should take:

1) Reset our expectations: Investing in risky assets means that we will experience periods of severe losses. These are not something we can avoid. They are the reason why the returns of higher risk assets should be superior over time. We cannot have the long-term rewards without bearing the short-term costs.

2) Check we are holding the right investments: The caveat to ignoring the risks of major macro events is that we are sensibly invested in a manner that is consistent with our long-term objectives

3) Engage less with financial markets and news: There is no better way to insulate ourselves from short-term market noise and become a better long-term investor than to stay away from financial markets. Stop checking our portfolio so frequently and switch off the financial news.

4) Educate ourselves about behaviour, not macro and markets: What really matters to investors is not the latest macro event or recent markets moves, but the quality of our behaviour and decision making.

Source: Most Investors Should Ignore the Risk of Major Macro Events By Joe Wiggins

Asset Multiplier Comments:

  • Macro Events are a recurring feature of the markets, trying to anticipate when they will occur, rather than accepting them as an expected feature of long-term investing, will inevitably lead to worse outcomes.
  • Provided we are appropriately diversified, the real investment risk stemming from major macro events is not the issue itself but our behavioural response to it – the hasty decisions we are likely to make because of the fears we hold.
  • Long Term Investors are better off not being bothered by macro events and it’d serve them well to not check their Portfolio Performance daily to avoid unwise decisions.

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 Feb

Mutual Fund arm to be listed at a favorable time – SBI

Update on the Indian Equity Market:

On Tuesday, Nifty closed lower at 17,092 (-0.7%) all sectoral indices ended in the red. The top losers were  MEDIA (-3.3%), REALTY (-2.9%), and PSU BANK (-1.5%).

Among the NIFTY components, the top losers were TATASTEEL (-4.1%), BPCL (-3.7%), and TCS (-3.5%) while M&M (+1.7%), BAJAJFINSV (+1.2%), and HEROMOTOCO (+1.2%) were the top gainers.

Edited excerpts of an interview with Mr. Ashwani Bhatia, MD of SBI with ETNow on 22nd February 2022:

  • Globally inflation is becoming a worry. The world has not seen those kinds of inflation rates in the US. They were last seen in the 70s and the early part of the 80s. The Indian economy is slightly different, and SBI plans to wait and watch.
  • The process has started for the listing of SBI Mutual Fund and all the paperwork has begun. The public will be hearing something from the company rather soon. There is no urgency for the bank to go to the market. When it believes that the timing is good, the markets are favorable and the valuations are lucrative, it will go to the market.
  • SBI does not need capital at the moment and the Bank’s capital position right now is quite comfortable. The Asset Management business (SBI MF) is doing extremely well. It has grown more than the market and it continues to gain market share. It has gained customers and right now it is running an NFO where it is garnering a decent response as well.
  • The bank just rejigged some rates in some buckets based on its ALCO requirements. It raised rates in the one to two years bucket a little earlier because that forms the bulk of its deposit base on the fixed deposit side. Recently, it did the same for longer tenure fixed deposits.
  • The Bank is adopting a wait and watch approach, but for the moment, there is no movement on the advances side. But it expects a natural progression on rate hikes on the assets side.
  • The bank believes it is going to be a very gradual way in which RBI will start reversing the policy rates. Starting with changing the stance, then moving on to the reverse repo and repo rates so on and so forth.
  • Currently, there is no thinking on when the bank will do the YONO IPO. Right now, it remains part of the bank’s digital offering and packaging. It understands the potential of value unlocking to shareholders, however, there are no immediate plans for a separate listing of YONO.
  • SBI spends a significant amount both on the opex and capex as far as IT goes and is in line with whatever is happening outside. It started with the YONO quite a few years back but at the same time, it has tried to keep pace with all the new developments that have come in be it UPI or BharatPe or all the other instruments that have been started by the government or by NPCI and others.
  • Going forward, SBI believes the way we are going to transact, the way we are going to get loans is going to become much simpler because there is going to be a digital trail and with CIBIL, with scores, with all the kind of enablement that digital provides, things will become much better as far as lending and banking is concerned.

 Asset Multiplier Comments

  • As India’s largest bank and lender, SBI has managed to leverage its vast branch distribution network for its AMC business to transform SBI MF into one of the country’s largest Asset Management Companies. Its separate listing will provide for a significant value unlocking for all the shareholders.
  • SBI is often considered as a proxy for the Indian Economy, SBI’s plans for digital transformation-driven growth and increased penetration across rural India provide an excellent opportunity for the bank to be one of the best in the country.

 Consensus Estimate (Source: market screener website)

  •  The closing price of SBI was ₹ 498 /- as of 22-February-2022. It traded at 1.5x/1.3x/ 1.2x the consensus BVPS estimates of ₹ 333/ 380/ 426 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 650 /- implies a BV Multiple of 1.6x on FY24E BVPS estimate of ₹ 426/-.

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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21 Feb

This Week in a Nutshell (14-18 Feb)

Technical talks

NIFTY opened the week on 14 th February at 17,076 and ended at 17,276 on 18 th February. NIFTY gained 1.2% throughout the week after a gap-down opening. The next support and resistance levels for the index would be 17,185 and 17,315 respectively.
Except for IT (+0.3%), all the sectoral indices fell this week, with PSUBANK (-4.7%), REALTY (-2.8%), and MEDIA (-2.6%) being the biggest losers.

Weekly highlights

  • Indian equity markets remained volatile throughout the week due to rising inflation worries, the anticipation of Interest Rate hikes, and Geopolitical tensions between Ukraine and Russia.
  • The uncertainty around the Russia-Ukraine situation at the start of the week was enough to deal another blow to global markets that were already skittish about high inflation and the prospect of aggressive U.S. Federal Reserve interest rate hikes to tame it. Markets have been rattled by a rates outlook that could hold as many as seven Federal Reserve increases in the year ahead. St. Louis Fed president James Bullard on Thursday reiterated his call for the Fed funds rate to be raised to 1 percent by July to combat stubbornly high inflation.
  • Oil prices remained majorly volatile throughout the week as oil reached a 7 year high of $95/Barrel due to rising concerns over Russian oil supply on the back of impending invasion of Ukraine but cooled off as Russia actions were not considered as threatening during the start of the week, Oil was also dragged down by a possibility of an Iran Nuclear Deal, that could add Iranian Oil supply to the world.
  • The Life Insurance Corporation of India filed its IPO papers with the SEBI on Sunday. As per the DRHP, LIC's offer is entirely an offer for sale of 316,249,885 by the shareholder valued at $8 Billion, by the Government of India. This means the government would sell a 5 percent stake via the IPO. The much-awaited IPO of LIC is India’s biggest share sale of all time.
  • Retail inflation rose to 6.01 percent in January on an annual basis and breached the RBI’s upper tolerance level, mainly due to higher prices of certain food items, as per government data released on Monday. The Consumer Price Index (CPI) based retail inflation was 5.66 percent in December 2021 and 4.06 percent in January 2021.
  • IT services giant Tata Consultancy Services (TCS) on Sunday said the members of the company have approved the buyback of shares worth up to ₹18,000 crores by passing a special resolution through postal ballot.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs  10,885 mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 10,163 mn.

Things to watch out for next week

  • Investors will be busy with increased volatility amidst Russia-Ukraine Standoff and the geopolitical tensions as a result of that.
  • US Markets will be jittery as the end date of the US Fed’s Asset Purchase scheme in March draws near, persistent inflation and any indication regarding rate hikes will be closely monitored.
  • Equity markets in India are likely to see decreased volumes due to increased volatility and decreased participation in anticipation of Insurance Behemoth LIC’s $8 Billion IPO next month.

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

Performance Chasing and Outcome Bias

“Money flows into most funds after a good performance and goes out when bad performance follows.” (John Bogle)

We have all seen the wording discretely appended to mutual fund marketing stating that ‘past performance is no guide to future results’. Despite the ubiquity of this message, we struggle to heed its warning. This leads to the damaging behaviour of performance chasing, where we sell our holdings in laggard fund managers and reinvest in recent winners.

The tendency of mutual fund returns to experience mean reversion shows that our propensity to sell strugglers and buy recent winners is not just pointless; it is often the exact opposite of what we should be doing.

This damaging behaviour is driven by outcome bias.  Attempting to mitigate outcome bias and prevent performance chasing behaviour means overriding our instincts and also having a willingness to fail unconventionally.  Neither of these is simple, but that does not mean there is nothing we can do.

How Can We Prevent Performance Chasing?

Outcome bias cannot be switched off.  Whilst awareness is a starting point, it is evident from our continued performance chasing behaviour that it alone is insufficient.  We need to make clear and focused interventions to change our behaviour:

Stop Using Performance Screens: Mutual fund performance screens are ubiquitous across the investment industry. Everyone uses some form of historic performance screen to rank funds. Outcome bias and the performance chasing behaviour that follows are difficult enough to avoid even if you are not actively employing tools that encourage it. So, it is best avoided.

Create decision rules: A simple step to avoid performance chasing behaviour is to create fixed decision rules that strictly prohibit it. On average, it should be an effective means of avoiding the cost of purchasing active managers with a high potential for severe mean reversion.

Go Passive: The best behavioural interventions are the simple ones. Anything that requires behavioural discipline or continued effort raises the prospect of failure. Given this, what is the best way to avoid performance chasing in active mutual funds?  We can restrict ourselves to buying only passive market trackers.

Specify the activity in which you believe skill exists: When investing with an active manager, we are taking the view that the underlying manager has some form of skill. We tend, however, to be very vague about what we mean by this.

Extend your time horizons: Our susceptibility to outcome bias is greatly influenced by the time horizons involved. If we assess investment performance over one day it can be considered to be pure luck, but as we extend the period skill can exert more of an influence.

Performance chasing behaviour is, of course, not isolated to our selection of active fund managers.  It is also not entirely driven by outcome bias. This is not to say that outcomes do not matter.  Of course, all investors are seeking better long-term results for their clients. If we want to invest in active managers, we need to think far more about decision quality and process, and far less about yesterday’s performance.

Source: Why Do We Chase Past Performance and What Can We Do About It? By Joe Wiggins

Asset Multiplier Comments:

  • Selecting funds based on past performance is like driving a car by looking in the rear-view mirror. There’s very little correlation between past performance and future returns.
  • The best way to overcome outcome bias is to focus on passive index-linked funds, which remove the variability of performance chasing.
  • If investing in actively managed funds focus on investment thesis and stock selection process rather than past performance.

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 Feb

Product Specific Price Erosion in US Markets – Sun Pharma


Update on the Indian Equity Market:

On Thursday, NIFTY closed in the red at 17,560 (-1.2%). Among the sectoral indices IT (-2.1%), REALTY (-1.7%), and FINANCIAL SERVICES (-1.4%) were top losers, and AUTO (+0.4%) and CONSUMER DURABLES (+0.1%) were sectoral gainers. HEROMOTOCO (+2.3%), BAJAJ-AUTO (+2.1%) and DIVISLAB (+0.9%) were the top gainers. HDFC (-3.5%), ONGC (-3.0%), and SBILIFE (-2.9%) were among the top losers.

Excerpts from an interview of Mr. CS Muralidharan, CFO of Sun Pharma, with CNBC-TV18 dated 02nd February 2022:

  • The government’s focus on healthcare initiatives and push for modernisation in the Union Budget 2022 bodes well for the industry, the incentive for manufacturers is something to look for considering the medium-term horizon.
  • US Specialty Revenues for 9MFY2022 exceeded full-year FY2021 Revenues, the growth in revenues was fuelled by contribution from all the products. Winlevi was recently launched in the US in November 2022 is showing good traction.
  • The company is on a very good footing now because they have been focusing on increasing their prescription of core products which has helped the company record good growth in the global specialty business.
  • The company is now increasing its geographical presence across the globe as a part of the strategy to leverage its pipeline across global markets, it recently launched its Derma-Specialty products Illumya and Cequa in Canada which is seeing good traction.
  • Price Erosion in the US has been a product-specific issue for the company as compared to its other peers which have seen pricing erosion across the board. The company has seen pricing erosion in the ex-Taro generic business but it has managed to control the same by leveraging new launches and efficient supply chain management.
  • Global uncertainty around COVID-19, especially the caseload in the US has impacted the company’s ability to give guidance over the medium term. The company has plans to continue its growth momentum by focusing on specialty revenues and Indian business and the rest of the world emerging markets.
  • EBITDA margins are seeing some pressures due to rising costs. However, the company has reiterated that margins will say stable due to increased operational efficiencies and cost-saving measures.
  • Despite strong competitive pressures, the company has consistently managed to improve its market share in the domestic business and outperform the industry growth by a large margin.

Asset Multiplier comments:

  • US Generic Business has been seeing competitive pricing pressures for all pharma manufacturers. Sun Pharma has effectively managed to mitigate pricing pressures due to prudent policies.
  • Domestic India and the Rest of the World Emerging Market Business has seen good traction in the past few quarters, Sun Pharma can leverage its presence to unlock the next stage of the growth cycle in these markets.

Consensus Estimate: (Source: Market screener website)

  • The closing price of Sun Pharma was ₹ 885/- as of 03-February-2022.  It traded at 28x/25x/22x the consensus Earnings per share estimate of ₹ 32/35/40/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 972/- which implies a PE multiple of 24x on FY24E EPS of ₹ 40/-.

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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24 Jan

Inflationary headwinds reducing, topline growth outperforms – Asian Paints



Update on the Indian Equity Market:

On Monday, NIFTY closed in the red at 17,149 (-2.7%). Among the sectoral indices REALTY (-5.9%), METAL (-5.2%), and MEDIA (-4.6%) were top losers, and there were no sectoral gainers. CIPLA (+2.9%), and ONGC (+0.9%) were the only gainers. BAJFINANCE (-6.4%), JSWSTEEL (-6.9%), and TATASTEEL (-5.9%) were among the top losers.

Excerpts from an interview of Mr. Amit Syngle, MD & CEO, Asian Paints with Economic Times dated 21st January 2022:

  • In 1HFY22 the company had taken a 7% hike and in Q3FY22, they had already taken two hikes in November and in December totaling about 15%. Quarter on quarter, the company had a very strong volume growth at 18% and value growth of 26%.
  • With a healthy topline growth quarter on quarter, the margins have gone up because of the price hike which has been taken and so has the EBITDA margins being impacted in a very strong way.
  • The company is on a very good footing now because they have taken the pressure of inflation head-on and raised prices to the tune of about 22% for the year so far. The next quarter looks good from the point of view of addressing the inflation by the company.
  • The price increases have been unprecedented. Notwithstanding that, the company has seen quite a strong volume growth as well as value growth because October and November were very good for the company given the festive period.
  • The COVID-19 pressure was off to that extent, the consumer sentiment was quite good even in December. The company got a little bit hit in the second fortnight of December because of the third wave emerging but overall the company saw very healthy volumes, very good value growth. The company has gained a good quantum of market share in the third quarter as seen forward.
  • People have been experiencing COVID for the last year and nine months and the experience has been that there is an impact on consumer sentiment, which happens immediately when such a wave starts. But overall, there is only a little bit of a deferment of sales because people do not put off their painting or the renovation cycles.
  • The company’s outlook is that while in January there might see some impact of price hike and COVID-19, going forward, in February and March, it expects to see recovery with sales coming back strongly.
  • Going forward, it sees the environment as still inflationary. Despite taking price hikes or the crude hitting high prices and as prices of some of the crude derivatives go higher, some prices of select raw materials might come down. So overall, it expects the impact of Q4 over Q3 to be mild but the environment would remain inflationary.

Asset Multiplier comments:

  • Asian Paints has been an undisputed market leader in the paints category, despite inflationary near-term headwinds. We believe the company is likely to outperform based on its strong brand image and execution capabilities.
  • The expected boom in real estate augurs well for the company as we are entering a multi-year cycle of developmental activity that’ll help the top line of the company.

Consensus Estimate: (Source: Market screener website)

  • The closing price of Asian Paints was ₹ 3,155/- as of 24-January-2022.  It traded at 93x/67x/55x the consensus Earnings per share estimate of ₹ 34/47/57/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 3,380/- which implies a PE multiple of 59x on FY24E EPS of ₹ 57/-.

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 Jan

Demand momentum robust, seen steady growth in the order book – Blue Star


 

Update on the Indian Equity Market:

On Wednesday, NIFTY closed in the green at 18,212 (+0.9%). Among the sectoral indices, REALTY (+1.9%), OIL & GAS (+1.5%), and AUTO (+1.5%), closed higher while  PHARMA (-0.2%)  and HEALTHCARE (-0.2%) closed in the red. M&M (+4.5%), BHARTIARTL (+3.7%), and INDUSINDBK (+2.8%) were the top gainers. TITAN (-1.6%), TATASTEEL (-1.5%), and SHREECEM (-1.1%) were among the top losers.

Excerpts from an interview of Mr. B Thiagarajan, MD, Blue Star with Economic Times dated 6th January 2022:

  • Right from August onwards, the company has had a good festival season, the demand held up till the New Year sale in quite a few markets. Building up to Sankranti, the sales are good, however, the spike in COVID cases can have some impact on the retail movement, and the company doesn’t expect much loss of sales as it is peak winter season.
  • The company had taken 3 price hikes in CY21 and it has no plans of further price hikes on the back of stabilising commodity prices, improved product portfolio, and efficient supply chain. The company expects commodity prices to be stable over the summer season.
  • The company has improved its supply chain efficiency with regards to insulating itself from shocks by ordering semiconductors till FY23 in advance, blocking raw material inventory for 6 months instead of its usual policy of 3 months. The supply chain challenges continue but it has somewhat eased and the company is fully secured for the summer season.
  • The company has seen robust demand in the room air conditioner industry owing to excellent momentum from tier-3, tier-4, and tier-5 towns. The penetration in the middle class is fast improving.
  • PLI has become an important enabler to create a huge component ecosystem. To earn the PLI, the industry has to improve its revenue which means the competition will be intense and prices will come down while the scale builds up. It is a question of maintaining profitability by building scale.
  • IT, ITES workforce are returning to offices and therefore air conditioning demand is coming. The biggest demand is from the manufacturing sector. Huge expansions are taking place thanks to the PLI in various sectors the government has offered. Capacity expansion is leading to new factories coming up, thus the company expects a huge demand for industrial cooling.
  • There are many social infrastructure projects like the metro railways or water-related projects and the resulting order book is at a record high at this point. It is very encouraging as far as the B2B segment is concerned and the cash flow is also good indicating encouraging signs for the segment.
  • Once in two years, energy labels are getting changed and therefore people will have to buy higher energy efficiency products. But the demand for five-star ACs is not going up significantly because the consumers are predominately first-time, middle-class buyers, who are more price-driven.
  • However in the B2B segment, the real hot selling products are highly energy-efficient like VRB (Vanadium redox battery) or the VFD (Variable Frequency Drive) driven, as manufacturers are more focused on setting up green buildings, platinum rated, and gold rated factories.

Asset Multiplier comments:

  • We think the healthy order book, expansion of business in the B2C segment, and PLI Investments will be the key positives for Bluestar but the supply chain and increased commodity prices may impact profitability.
  • Healthy growth opportunities in Industrial Manufacturing induced Capex and the government’s boost for social infrastructure will drive growth for Bluestar.

Consensus Estimate: (Source: Market screener website)

  • The closing price of Bluestar was ₹ 1,006/- as of 12-January-2022.  It traded at 60x/37x/30x the consensus Earnings per share estimate of ₹ 17/27/33/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 1,025/- which implies a PE multiple of 31x on FY24E EPS of ₹ 33/-.

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 Jan

Production levels improving gradually – Maruti Suzuki

Update on the Indian Equity Market:

On Tuesday, the benchmark index NIFTY 50 closed at 17,805 (+1.0%), 180 points higher. Among the sectoral indices, OIL & GAS (+1.3%), PSU BANK (+1.2%), and FINANCIAL SERVICES (+1.2%) led the gainers while HEALTHCARE (-0.8%), PHARMA (-0.8%), and REALTY (-0.5%) led the losers. Among the NIFTY50 components, NTPC (+5.2%), ONGC (+3.7%), and SBIN (+2.8%) were the top gainers while TATAMOTORS (-1.7%), COALINDIA (-1.7%) and TATACONSUM (-1.2%) led the laggards.

Excerpts of an interview with Mr. Shashank Srivastava, ED-Marketing & Sales of Maruti Suzuki (MSIL) with CNBC-TV18 on 03rd January 2022:

  • In December, MSIL could produce almost 90% of its planned production which was an improvement over the previous months. In September, the company did only about 40% of the production. In October it was about 60%. In November it was about 83-84% and it was close to 90% in December.
  • There seems to have been a progressive improvement on the supply side as well because of the improved situation on the semiconductor front. Going forward, the situation is still not expected to be normal and it is very difficult to pinpoint exactly at what time it will become normal. The company doesn’t believe January-22 will be normal.
  • 100% Normal Utilisation levels is a dynamic that involves the global supply chain and is a very complex issue involving not just Maruti Suzuki and India, but all the OEMs across the globe.
  • On the demand side, the momentum seems to be still pretty strong and it is across all segments. The company saw a good improvement in booking numbers as well as the overall inquiry level even in December.
  • The demand seems to be strong but in the last few months there was a supply disruption because of the semiconductor issue and that has led to the building up of waiting periods and the pending payments had gone up. Currently, MSIL has 2.3 lakh pending bookings. The demand for CNG seems to continue growing. The waiting periods for CNG models are much longer than that for the Petrol/Diesel models.
  • MSIL is very bullish about the Indian market in the long term and the company is planning to strengthen the portfolio in one of the areas where it is a little weaker as far as product portfolio is concerned. The Company plans to launch many new models in the mid SUV segment.
  • The company has no plans to launch an EV before 2025 because it believes the ecosystem which is required for sustainable large-scale, large-volume build-up in the industry is still not there. With regards to the product and investments in the product, Maruti Suzuki has been a very strong presence and along with its parent organization Suzuki Motor Corporation, the company plans to make robust investments in the e-product portfolio.
  • Commodity prices are pretty strong and there is no real relief on the cards. As a result, the company has announced a price hike. Most of the OEMs have announced a price hike in January-22 and the company plans to announce a price hike in line with that.

Asset Multiplier Comments

  • Auto Industry is undergoing a lot of turmoil due to high pent-up demand, increasing fuel prices, supply chain issues, and commodity inflation. As India’s largest carmaker- MSIL is at an inflection point as it navigates through these critical issues while maintaining its market share.
  • The migration to EV has already been started by MSIL’s peers, however, with the company delaying EV Launch to 2025, it remains to be seen how it reacts to aggressive expansion by its competitors in this segment.

Consensus Estimate: (Source: market screener and Tikr website)

  • The closing price of Maruti Suzuki was ₹ 7,630/- as of 04-January-2022. It traded at 56x/30x/25x the EPS estimates of ₹ 136/251/304/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 8,172/- implies a P/E Multiple of 27x on FY24 EPS estimate of ₹ 304/-

 

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 Jan

This Week in a Nutshell (27-31 Dec)

Technical talks

NIFTY opened the week on 27th December at 17,004 and ended the week on 31st December at 17,354. The index made a weekly gain of 2.1%. On the upside, 17,400 could act as resistance while 17,166 could act as a support. RSI (14) of 53 and a positive divergence on MACD (26,12) indicates further upside in the index.

Among the indices, MEDIA was the only sector that ended the week with a loss of -1.0%. HEALTHCARE (5.5%), PHARMA (5.4%), and CONSUMER DURABLES (4.4%) led the gainers.

Weekly highlights

  • The US indices closed the curtailed week in the red, affected by low volumes due to the festive season and increasing worries of the Omicron variant of the COVID-19 virus. These factors combined with muted institutional activity and retail buying led the Indian markets higher, as Indian equities bounced back from last week’s losses Nifty50 ended ~2% higher.
  • The Central Government earned Rs 1.29 tn in gross Goods and Services Tax (GST) revenue for December. The Ministry of Finance said the average monthly gross GST collection for the third quarter of the ongoing fiscal was higher than the average monthly collection of Rs 1.10 lakh crore and Rs 1.15 lakh crore, recorded in the first and second quarters respectively.
  • India’s current account slipped into a deficit of $9.6 billion, or 1.3 percent of the gross domestic product (GDP) in the second quarter of the ongoing fiscal, the Reserve Bank of India reported. For the reporting quarter, the deficit was mainly due to the widening of the trade deficit to $44.4 billion from $30.7 billion in the preceding quarter, and an increase in net outgo of investment income.
  • The Central Board of Indirect Taxes and Customs (CBIC) stated that the GST rate on any worth of clothes will be 12% beginning next year. Currently, a 5% tax on sales up to Rs 1000 per piece is charged. Further, the GST rates on some synthetic fibres and yarn have been reduced from 18 to 12%, putting rates in line with the rest of the textiles sector, this was done to address anomalies caused by an inverted duty structure, which occurs when the tax rate on inputs is greater than the tax on the finished product.
  • Reserve Bank of India’s (RBI) financial stability report suggests stress for banks would rise in 2022, especially in the retail and MSME segment, but banks most are well-capitalized to deal with it. The report showed while bad loans may rise, they won’t hit double digits by September 2022. In the worst-case scenario, gross NPAs may rise to 9.5 percent due to all the benefits of moratoriums expiring, we might see short-term stress in the provisioning.
  • Fears over the impact of the Omicron variant of the COVID-19 virus resulted in Oil remaining volatile throughout the week. With the number of cases doubling, several countries have announced restrictions, there’s an anticipation of demand reduction and Brent Crude ended the week lower at $77.8 per barrel.
  • Foreign Institutional Investors (FII) continued to be net sellers this week, selling shares worth Rs 35,070 mn. Domestic Institutional Investors (DII) continued to be buyers and invested Rs 31,300 mn in Indian equities this week. The month of December ended with net FII outflows of Rs 4,55,790 Mn and net DII Inflows of Rs 4,02,490 Mn.

Things to watch out for next week

  • Rising cases of the Omicron variant of COVID-19 will be on investors’ minds this week. It’ll be interesting to see how India and other Emerging Markets respond to the anticipation of lockdown-like restrictions.
  • The U.S. Jobs non-farms payrolls report comes out Friday. Expectations are for growth of 400,000 jobs, vs. 210K last month and an average of 494K jobs added in the last six months. The key thing to watch out for would be the commentary of voluntary unemployment as the labour participation rate continues to fall post-pandemic.
  • The Organization of the Petroleum Exporting Countries (OPEC) meets on 04th At their previous meeting, OPEC reaffirmed their decision to increase oil production in 2022 and said that they expected a low impact from Omicron on demand for oil. With various industries reporting inflationary headwinds due to oil prices increasing, a lot of eyes will be waiting to see how OPEC responds to demands of output increase amid Omicron fears.
  • The Indian equity market is likely to see more selling pressure next week amid the concern over the spread of omicron variant and FIIs returning after a week of muted action due to the holiday season. Action is likely to be broad index specific until Q3FY22 result season beginning 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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