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Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 12,060 (-0.5% down its previous close).  The top gainers for the day were BPCL (+2.5%), HDFC (+1.6%) and Bajaj Finance (+1.2%). The stocks that were down in today’s session included Vedanta (-4.5%), Bharti Airtel (-4.4%) and Tata Motors (-3.2%). The sectoral gainers for the day were NIFTY Financial services (+0.3%) and NIFTY IT (+0.3%). The top losing sectors were NIFTY Metal (-2.4%), NIFTY Auto (-1.2%) and NIFTY Media (-1.1%).

Excerpts from an interview with Mr Sunil Mathur, Managing Director and Chief Executive Officer, Siemens India from Livemint dated 28^th January 2020:

• C&S Electric is an excellent acquisition for them. They are in a space that is a market for the future. Infrastructure is a huge market in India. A lot needs to be done and this is in the low voltage space of infrastructure.
• They were present in low voltage but very strong on the industrial side. What they lacked was a presence on the infrastructure side.
• They are looking at smart infrastructure as being a thrust area for them in the country and so this is perfect in that space. So, strategically it is a very good growth area and it is EPS accretive as well.
• C&S Electric did about ₹1,200 cr in terms of revenue and profitability in the range of 10-15% in last year. They are growing very well.
• They see a huge potential in this business not only from a domestic purpose but also from an export perspective. They see markets that are hugely competitive and what they would like to use this acquisition for is to also develop a manufacturing hub here and they can use them for design and manufacturing into low-cost markets outside the country.
• The profitability is in the 10-15% range, and if we look at the multiples from that perspective, both the revenue multiples as well as the EBITDA multiples, they are very comparable to the Schneider-L&T deal as well as compared to a lot of the other deals in the same space.
• It will improve RoCE because they are sitting on a lot of cash. They have ₹5,000 cr of cash. This is a ₹2,000 cr acquisition. So this should improve their RoCE and as it is margin accretive so it will help return on investment (RoIs) as well.
• A lot of it depends on when they get the regulatory approvals and when they start up over there, but if we take a volume of ₹1,200 cr topline and take a 10% bottom line and we are already there. Of course, that is a starting point.
• For export businesses, they will have to use their global network to start getting into customers and introducing their products to customers. So, they will build this up over a period of time but the potential is huge.
• The multiples today are terrifically high and so they have got to balance all that together and see whether it makes sense or not.

Consensus Estimate: (Source: market screener website)

• The closing price of Siemens Ltd was ₹ 1,502/- as on 28-January-2020. It traded at 49x/ 36x/ 31x the consensus earnings estimate of ₹ 30.5/ 41.7/ 48.6 for FY20E/ FY21E/ FY22E respectively.
• Consensus target price is ₹ 1,462/- which implies a PE multiple of 30x on FY22E EPS of ₹ 48.6/-

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 23^rd 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.

Update on the Indian Equity Market:

On Friday, Sensex ended up 227 pts higher and ended at 41,614 level and Nifty settled 68 pts higher at 12,248 level.  Pre-budget rally and decent Q3FY20 results throughout the day were the biggest factors driving the markets.

Among the sectors, Nifty Media (+1.0%), NIFTY Metal (+1.0%), NIFTY Financial Services (+0.9%) and NIFTY Bank (+0.8%) were the top-performing indices. All the key indices settled in the positive territory barring Nifty IT and Pharma indices. Among stocks, Powergrid, Cipla, Tata Motors and IndusInd Bank were among major losers on the Nifty, while gainers were AU Small Finance, Yes Bank, Ultracemco, Britannia and Tech M.

For the next 3 years, we will set aside Rs 90,000 mn Capex, says Hari Mohan Bangur, Managing Director, Shree Cement

Edited excerpts of an interview with Hari Mohan Bangur, Managing Director, Shree Cement; dated 24th January 2020:

• Shree Cement is the country’s second-largest cement producer. It backed out of the race to acquire Emami Cement as it wants to focus on organic growth.
• Company has raised Qualifies Institutional Placement (QIP) for the first time since listing decades ago.
• The funds raised via QIP will be used to fund capacity expansion planned over a period of six years, a part of it will also be from internal accruals. The amount raised and the internal generation are expected to suffice the planned growth.
• Shree Cement is a zero debt company and expects to maintain the status.
• The expansion strategy or the target of the company is to reach at least 55 mn tonnes per annum (mtpa) by FY23. The current installed capacity is 41.9 mtpa and it will go up to 75-80 mtpa in the next six years. More capacities will come in North, East and South India where Shree Cement already has a strong presence and clinkerisation units.
• The capex for the next 3 years is expected to be around Rs 90,000 mn. The capex projection for the next 6 years is difficult to say as it depends on many factors like USD behavior and market position.
• Organic growth will be the prime focus for Shree Cement. As organic growth takes time, planning is started early. Presently, various projects are at different stages, some of which had started 10 years back.
• If acquisition is available at reasonable cost it can be looked upon. Acquisition depends on the infrastructure in totality. USD 75-80 per tonne is the cost of putting a new unit, anything near to this rate or cheaper can be looked as an acquisition opportunity.
• There is no competition between Ultratech and Shree Cement as they are growing at their own speed and their speed doesn’t challenge Shree Cement even though both are in the same business.
• World GDP growth rate will be less than 3% and even with revised growth estimates, India’s GDP growth will be more than that.

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

• The closing price of Shree Cement was ₹ 23,180/- as of 24^th January 2020. It traded at 52x/ 41x/ 34x the consensus EPS for FY20E/ FY21E/ FY22E of ₹ 445/565/674 respectively.
  
• Consensus target price of ₹ 19,917/- implies a PE multiple of 30x on FY22E EPS of ₹ 674/-.

Update on the Indian Equity Market:On Thursday, Sensex ended higher led by gains in financial services and IT sectors, Sensex gained 170 pts and Nifty ended at 11,872. Retail inflation jumped to 4.62% in October from 3.99% in September. Vodafone Idea fell 20.27% after the department of telecommunications (DoT) asked operators to conduct a self-assessment of pending dues after last month’s Supreme Court verdict that upheld the government’s definition of adjusted gross revenue.
Among sectoral Indices, BSE IT was the biggest gainer with a rise of 1.1% followed by BSE Consumer Durables 0.9% and BSE Finance 0.8%.  BSE Telecom lost the most at 2.8%, BSE Metal was down 2.0% and BSE Capital Goods slipped 0.8%.
Among stocks, ICICI Bank Ltd, Bajaj Finance Ltd, HDFC twins—HDFC Bank Ltd and HDFC Ltd, Axis Bank Ltd, and Yes Bank were the biggest gainers in the financial services sector. In the tech sector, Infosys Ltd, Tata Consultancy Services Ltd, and Tech Mahindra Ltd gained the most.

UPL eyes ₹5600 mn of synergies from Arysta deal
Key takeaways from the interview of Mr Anand Vora, Chief Financial Officer, UPL; dated 11th November 2019:

• When asked about the Arysta acquisition and synergies, Mr Vora mentioned that UPL has already achieved Rs 3200 mn of synergies and targets ~ Rs 5600 mn of total synergies benefit to reflect in Profit and Loss Account for FY20.
• Mr Vora said that the EBITDA margins will improve to about 16-20% due to the merger.
• He commented on the tough external environment factors like the trade war and swine flu, not letting UPL take any price increase to push the volumes.
• Mr Vora added that the debt increase is due to the seasonality of the business and high working capital which will decrease significantly after December as cash inflows start against the receivables and this has been the trend for the last three years.
• He stated that the receivables have decreased as compared to last year and UPL is working in that direction. On average the net working capital of Arysta is higher than UPL but they are working on it and expect the working capital to trend closer to that of UPL.  
• When asked about the pressure on demand globally, he commented that they are in crop protection chemical business and farmers rarely keep their land vacant. In fact, once they have invested in seeds and spent on fertilizers, they are left with no choice but to use the crop protection chemical to protect their crops.

Consensus Estimate (Source: market screener website)

• The closing price of UPL was ₹ 535/- as of 14-November-19 and traded at 17.5x /11.5x /9.8x the consensus EPS for FY20E / 21E / 22E of Rs 31/47/55 respectively.
• Consensus target price of ₹ 704/- implies a PE multiple of 12.8x on FY22E EPS ₹ 55/-.