Author - Pranav Mahajan

14 Jun

Everybody’s gung-ho on EVs (Electric Vehicles), are we another sheep in the herd?

 

The primary motive of any business is to earn profits. Why are we saying this now – because today, there are businesses that have hardly made any profits which in turn means that they have destroyed shareholder’s wealth, although they have been very beneficial for the consumer.

A few examples of such businesses can be airlines, which have been highly beneficial for the mankind but most of them have failed to make any profits. A recent example would be food delivery apps which provide us with the convenience of quickly delivering food at our doorstep, have been losing money.

What’s common here? Huge capital investment. A highly capital-intensive sector needs barriers to entry for the players to make money. If there are too many players, each one of them have to keep investing in order to just capture a small piece of the pie. Every player fails to make return on investment higher than their cost of capital, hence, all of them lose money.

Who benefits here – First, the consumer, who gets the products which are cheaper, with better quality and higher variety. Secondly, in the longer run, a player or just a handful of them who emerge as winners.

What does it take for the business to emerge as a winner – lower cost production, scalability and better quality of product. Achieving all three at the same time and on a consistent basis is extremely challenging when you have to face competitors who are also running towards the same goal.

Companies dealing in electric vehicles will be facing teething problems as they have to spend heavily on technology and infrastructure right from the initial stage. Legacy automobile manufacturers, which are funding their EV losses from their ICE (Internal combustion engine) business, are competing with new entrants specializing in EVs with the backing of deep pocketed private equity funds.

What is the conclusion? Are we writing obituaries of auto companies? – certainly not. There is a big market to be captured both for ICE vehicles as well as EV. The hope is that, whoever emerges as the winner may eventually turn profitable, although, nobody knows when.

  Volume data of electric vehicles sold

Source: Federation of Automobile Dealer’s Association

Consulting firm RBSA Advisors estimates Indian EV industry to grow by 90% every year for the next 10 years and will touch USD 150 bn in 2030.

 

 

 

 

 

 

 

 

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

 

 

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05 Jun

This Week in a Nutshell (May 30 to June 3)

Technical talks

NIFTY opened the week on 30th May at 16,527. After trading in a range of 350+ points, it finally ended with a gain of 1.4% and closed at 16,584. It closed just below the 50-week exponential moving average. With the weekly RSI at 46, the next support and resistance levels for the index would be 16,400 and 16,970 respectively.

Among the sectoral indices, REALTY (+4.9%), IT (+4.4%) and OIL & GAS (+3.9%) were the top gainers whereas, HEALTHCARE (-2.5%), PHARMA (-2%) and BANK (-1%) lost the most.

Weekly highlights

  • The US market had a 4 day trading week, as Monday was a holiday on account of The Memorial day. The major US indices had a sideways movement with a minor loss for the week.
  • The WTI Crude traded in a strict range of USD 111-120 per barrel. Same was the case with Brent which ended at USD 121 per barrel on Friday.
  • We know, like us, you are also suffering from frequent power cuts. The states and the centre continue to fight over whether to import the 5 times costlier coal in addition to using our domestic capacity. But why does India, the second-biggest coal producer import coal? Here’s a quick trivia. The calorific value, i.e., the heat produced by burning the Indian coal is only around 60% of the coal imported from Australia or America. Burning Indian coal also results in more pollution. And it’s just the way it is. Nature didn’t favor us with good coal!
  • The National Statistics Office on Tuesday released the Jan-March 2022 GDP figure. The 4.1% GDP growth couldn’t meet the NSO’s and RBI’s estimates. It also slowed sequentially for the third straight quarter. 20.9%, 8.5%, 5.4%, and 4.1% was the trajectory of the quarterly GDP growth with full-year FY22 growing at 8.7%.
  • The start of each month brings out two crucial data points; Monthly GST collection and Automobile sales numbers. The GST collection of ₹1.41 tn in May is 16% lower than the record high collection in April which was ₹1.68 tn. The collection in May pertains to the sales occurred in April. And yes, it is an anomaly, May collections are always lower than that of April.
  • Coming to the number of vehicles auto manufacturers sell to the auto dealers. Broadly speaking, the percentage growth was flattish to negative compared to the previous month across all segments as companies continue to face supply chain issues, a surge in raw material prices, and semiconductor shortages.
  • Amazon along with a group of investors are in talks with Vodafone Idea to invest up to ₹ 200 bn. Only time will tell if Amazon through Voda-Idea succeeds at giving a tough time to Jio in this concentrated three-player telecom market.
  • The foreign institutional investors (FII) net sold equities worth ₹ 66,539mn and domestic institutional investors (DII) were net buyers in equities with buying shares worth ₹ 68,448mn.

Things to watch out for next week

  • The RBI’s monetary policy committee commences its bi-monthly meeting on Monday and will conclude it on Tuesday. The MPC decides whether to increase interest rates or not. This time, the market consensus suggests that it is a question of how much will they be raised and not about raising or not. The committee’s stance and future outlook will also be a key factor to watch out for.
  • World over, the markets are convinced that Central banks have no other option than to raise interest rates to curb the surging inflation.
  • With the Mar-22 earnings season over, the focus will shift to how monsoon season plays out in India. A normal monsoon would boost demand for consumer goods, and automobiles (cars and farm equipment) and aid recovery in rural India.

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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23 May

Input cost uncertainty here to stay for the next 6 months – Pidilite Industries

Update on the Indian Equity Market:

On Monday, NIFTY having opened in the green, could not sustain the gains and closed at 16,214 (-0.32%). M&M (+4.1%), MARUTI (+4%), and HINDUNILVR (+2.3%) were the top gaining stocks, while, JSWSTEEL (-13.2%), TATASTEEL (-12.3%), and DIVISLAB (-9.6%) fell the most.

Within the indices, AUTO (+1.8%), IT (+1.0%), and CONSUMER DURABLES (+0.84%) were the only gainers while METAL (-8.1%), OIL&GAS (-1.6%), and PHARMA (-1.4%) were the top losers.

Excerpts of an interview with Mr. Bharat Puri, MD, Pidilite Industries (PIDILITIND) with BQ Prime on 19th May 2022:

  • In FY22, Pidilite Industries has grown its revenue by 35% and the 20% volume growth was led by both the consumer as well as the B2B segments. The company had to take a 5-15% price rise throughout different categories of products.
  • Higher input costs have been lowering the margins for the last 12 months. Although the management was expecting softening of input costs from the first quarter of FY23, the unprecedented Russia-Ukraine war will delay it for at least the next 6 months.
  • Even though the company can pass on the higher costs, it will take calibrated pricing decisions while keeping costs tight. Previously, it only passed on about 75% to the extent of inflation and lowered its margins in the short run.
  • There is a strain in demand from rural and semi-urban areas but hopefully, a good monsoon and the government’s front-loading on spending will help the second half. The real estate segment is seeing a revival with hotels and restaurants spending on renovation after the reopening of the economy. Hence revenue is not so much of an issue.
  • The company has gained market share in the last 2-3 years as pandemic advantaged companies with flexible supply chains and having a presence in multiple locations. Also, the company has always focused on volume-led growth over margins as margins can always be regained.
  • In the last 2 years, the Pidilite has put up 10 new facilities and made supply chains much more agile and resilient. Focusing on the next phase of growth, it has 12 more facilities under construction. It has invested heavily in going digital.
  • Going forward, the company will focus on its core categories where it has a market-leading position while venturing into pioneering categories like tile adhesives, epoxy grouts, etc.

Asset Multiplier Comments

  • We believe, Pidilite Industries, a market leader in the adhesive business will fare well against its peers in this high inflationary scenario. With manageable borrowings not denting the free cash flows, the company can further take a hit on the margins if required.
  • Companies dealing in chemicals and allied businesses have been facing a difficult time with back-to-back events like Covid, rampant lockdowns in key raw material producer China, the Russia-Ukraine war, and rising oil prices. Times like these mostly result in the large becoming the larger.

Consensus Estimates: (Source: TIKR website)

  • The closing price of PIDILITIND was ₹ 2,188/- as of 23-May-2022.  It traded at 75x/58x the consensus earnings estimate of ₹ 29/38 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,250/- implies a P/E Multiple of 59x on the FY24E EPS estimate of ₹ 38/-.

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

 

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10 May

Banking on technological transformations in BFSI sector – Intellect Design Arena

Update on the Indian Equity Market:

On Tuesday, NIFTY ended at 16,240 (-0.4%). HINDUNILVR (+3%), ASIANPAINT (+2.9%) and INDUSINDBK (+2.4%) were the top gaining stocks. COALINDIA (-7.5%), TATASTEEL (-7.3%) and ONGC (-7%) lost the most.

Within the sectoral indices, PRIVATE BANK (+0.8%), BANK (+0.6%) and FINANCIAL SERVICES (+0.5%) closed in the green while METAL (-5.2%), REALTY (-2.9%) and OIL & GAS (-2.3%) ended in the red.

 

Excerpts of an interview with Mr. Arun Jain, Chairman & MD, Intellect Design Arena (INTELLECT) with The Economic Times on 9th May 2022:

  • The company, which mainly sells software to banks and financial institutions, showcased an FY22 revenue growth of 25%. EBITDA and PAT grew by 33% and doubled their cash balance over the previous year. Subscription revenues grew by 112%.
  • Sequentially, EBITDA Margins were lower due to an increase in salary costs, a multi-million-dollar deal with a Russian Bank in Germany falling through owing to the Russia-Ukraine war, and capacity building for a USD 75mn quarterly revenue run rate.
  • The company’s license-linked products have a life cycle of about 10 years. This translates into continuing revenue streams in the form of maintenance, production support agreements, change requests, etc. The revenue from these license-linked products crossed the mark of ₹ 10bn in FY22. The company joined hands with 48 new clients in FY22.
  • An improvement in margins over the last two years was achieved by shrinking the product delivery cycle to 6 months against the industry average of 12-18 months. This was made possible by being operationally efficient. Also, the pandemic led cost savings in travel and business promotion upped the margins.
  • Its license-linked revenues (license, AMC, and subscription) make up 56% of revenues. The subscription revenue growth of 112% YoY translated to higher margins.
  • The company is moving its products to platform-based. Platforms consist of multiple products. It is experiencing a YoY increase in average deal size by winning large transformational deals in multiple countries. Banks and financial institutions’ digital transformation & cloud adoption journeys play a big role in achieving the company’s target of a 20% revenue growth year on year.
  • Focusing on ‘destiny deals’, the company is making additional investments in geographies like Vietnam, France, and Saudi Arabia, to deepen engagements with their major clients. This will bring in more subscription deals.
  • The company enjoyed success with Government eMarketplace, LIC, and AMFI. Going ahead, the company expects to offer a retail / corporate banking ecosystem.

Asset Multiplier Comments:

  • The banking services penetration in India will rise with a rise in India’s per capita income. The expansion of the banking & financial services sector in rural India will create more demand for digital transformation which provides scalability.
  • This may eventually result in better revenue prospects for a company like Intellect Design Arena from banks, NBFCs, insurance companies, and the likes.

Consensus Estimates:

  • The closing price of Intellect was ₹ 608/- as of 10-May-2022. It traded at 23x/16x the consensus EPS estimate of ₹ 26.3/37.9 for FY23E/FY24E respectively.
  • The consensus price target price for Intellect is ₹ 940/-. It implies a P/E multiple of 25x on the FY24E EPS of ₹ 37.9/-

 

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

 

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26 Apr

Transport and Plant Engineering to drive growth going ahead – L&T Technology Services

 

Update on the Indian Equity Market:

On Tuesday, the Nifty 50 closed 247 points higher (+1.5%) at 17,200. The move was led by ADANIPORTS (+6.1%), BAJAJ-AUTO (+6%), and HEROMOTOCO (+4.9%). However, ONGC (-2%), APOLLOHOSP (-1%) and AXISBANK (-0.7%) were the top losers.

Within the sectoral indices, REALTY (+3.6%), AUTO (+2.8%) and PSU BANK (+2.3%) were the top gainers and no index closed in the red.

Excerpts of an interview with Mr. Amit Chadha, MD & CEO, L&T Technology Services (LTTS) on CNBC-TV18 taken on 24th April 2022:

  • The company had to face a minor slowdown in its telecom and Hi-tech business due to dropping a low-margin project from one of its top 30 clients. These two segments contribute around 20% to the revenue.
  • It had the highest quarterly deal wins and the deal pipeline is at a record level. The company got its 2nd USD 100mn deal in the last two years. The effect of these will reflect in the coming quarters.
  • FY23 growth will be driven by transportation and plant engineering segments. It bagged a large deal in the electric vehicle space.
  • To achieve and support this growth, the company is planning to employ 2,500 freshers in FY23. It employed 3,000 freshers last year. It is not seeing any respite in attrition levels for at least two quarters.
  • Despite the hiring, proposed wage increments, and travel costs coming back, the company has given guidance of an 18% EBIT margin for FY23. It has set its target to achieve a USD 1.5 bn revenue by FY25.
  • It has launched a new vertical within its Hi-tech segment for metaverse that will predominantly focus on experience through devices, platforms, and software. This vertical is expected to be much more profitable than the rest of the Hi-tech business.
  • Along with that, the company is making investments in 5G labs in Munich and transportation labs in the United States. The company has filed 98 new patents this year as compared to 28 filed last year.
  • The company is also looking to acquire a USD 50-100mn revenue company, as it has been acquiring companies every 18-24 months. A company within medtech space in the US and an automotive company in Europe are on the radar.

Asset Multiplier Comments:

  • High attrition has become an industry-wide phenomenon and hasn’t left any IT company unaffected. We think on the similar lines of most managements that attrition is unlikely to come down for at least a few quarters.
  • Attrition along with increased travel and wage hike is likely to be the headwinds in the near term. The company plans to offset these headwinds with growth, better quality revenues, and operational efficiency gains.
  • Given LTTS’s experience in the Engineering-R&D domain and the 6 new deal wins in 4QFY22, including one 100 million+ transaction, we believe the firm is on track to achieve its revenue target of USD 1.5 bn by FY25 and retain its EBIT margin projection of 18% or above.

Consensus Estimate: (Source: Marketscreener and TIKR websites)

  • The closing price of LTTS was ₹ 4,049/- as of 26-Apr-2022. It traded at 37x/ 31x the consensus earnings estimate of ₹ 108/129 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,621/- implies a P/E Multiple of 36x on the FY24E EPS estimate of ₹ 129/-

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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18 Apr

To launch its first EV model by 2025 – Maruti Suzuki

Update on the Indian Equity Market:

On Monday, NIFTY ended 290 points in the red and closed at 17,173. FMCG (+0.6%), AUTO (+0.4%), and METAL (+0.3%) were the gainers, whereas, IT (-4.6%), PSU BANK (-2.5%), and FINANCIAL SERVICES (-2.2%) were the losers. Among the stocks, NTPC (+6.4%), SBILIFE (+2%), and HDFCLIFE (+1.7%) were the gainers and INFY (-7.2%), HDFC (-4.8%), and HDFCBANK (-4.6%) were the top losers.

Excerpts of an interview with Mr. Hisashi Takeuchi, MD & CEO, Maruti Suzuki published in Business Standard on the 18th April 2022:

  • The shortage of necessary electronic components and semiconductors has resulted in a backlog of 270,000 units – the equivalent of nearly two and a half months of the company’s domestic sales.
  • For sourcing the semiconductor chips, the company is working with the parent, Suzuki Motor Corporation as well as placing bulk orders directly with chipmakers.
  • The market share of the company has come down to 43.4% from 47.7% two years back. Despite clocking a 13% YoY sales growth in FY22, the loss in domestic market share was due to the total industry growing at a similar pace.
  • The company deals predominantly in the small car market and has lagged in the SUV segment. It has strategies to make a comeback by introducing multiple models in the SUV space.
  • With Suzuki announcing investment in Gujarat to manufacture electric vehicles, the company is targeting localisation which will help in end-product cost reduction.
  • To manufacture electric vehicles and batteries by setting up greenfield projects takes around two to three years. The company thinks, a launch in 2025 is achievable.

Asset Multiplier Comments:

  • We believe, the company will continue to face competition from other existing as well as new players. The company’s goal of regaining its lost market share is a big challenge for the new CEO.
  • The semiconductor shortage is likely to persist at least for a few months which will create a hindrance for most automobile companies. The players who can rationalize the short supply by prioritizing selling the premium category models will turn out to be better performers.

Consensus Estimate: (Source: Tikr website)

  • The closing price of MARUTI was ₹ 7,579 /- as of 18-Apr-2022. It traded at 35x/22x the consensus earnings estimate of ₹ 219/343 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 9,150/- implies a P/E Multiple of 27x on the FY24E EPS estimate of ₹ 343/-

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

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09 Apr

This Week in a Nutshell (4-8th April)

Technical talks

NIFTY opened the week on 4th April at 17,809 and closed on 8th April at 17,784. After moving in the range of 500 points, it finally made a Doji candle which suggests indecisiveness in the market. The index is trading below the upper Bollinger Band level of 18,175 which might act as a resistance. On the downside, the 16,370 level might act as a support. The RSI (57) and MACD turning upward suggests a further although limited possible upside.

Among the sectoral indices, FMCG (+4.4%), METAL (+4.3%), and PSU BANK (+3.9%) were the gainers during the week. IT (-2.6%), MEDIA (-0.3%) were the week’s losers.

Weekly highlights

  • The US indices closed the week with the tech-heavy Nasdaq index falling 3.9%, S&P 500 fell by 1.3%, and Dow Jones was down by 0.3%.
  • The inflation in the US is at a 40-year high on the back of higher fuel and commodity prices. The minutes of the Federal Open Market Committee meeting in March revealed that several members had called for an aggressive 50 bps hike in interest rates. Still, the FED Chair, Jerome Powell chose to go for a 25 bps hike due to concerns over Russia’s invasion of Ukraine and its effects on the economy.
  • Closer home, the Reserve Bank of India also has the same worry about inflation. On Friday, the monetary policy committee concluded its bi-monthly meeting by keeping the repo rate unchanged at 4%. The rate at which RBI borrows money from banks to suck excess liquidity now stands at 3.75%.
  • A big, breaking newsworthy event occurred with HDFC Ltd., the housing finance giant and HDFC Bank, the largest private sector bank (by market cap) announcing their merger on Monday. An HDFC Ltd. shareholder with 25 shares will get 42 shares of HDFC bank. A lot is going on here from changing fundamentals to a rejig in mutual fund portfolio weights. The merger is expected to be over in the next 18 months subject to multiple regulatory approvals. There will be no dearth of updates and announcements. Worry not, we will be covering everything for you.
  • The long-awaited and recurringly delayed IPO of The Life Insurance Corporation of India is likely to conclude by May 12. A delay beyond that will require the government to issue a fresh filing with the market regulator. During the roadshows, the Centre has declared that it would not look for further equity dilution to prevent any downward pressure on the stock price.
  • The mutual fund industry AUM clocked in a 19.5% year on year growth and the average AUM stands at ₹38.4 trillion during the March 2022 quarter. The inflows through systematic investment plans (SIP) stood at nearly ₹230 bn for January and February 2022. SIPs inflows are largely driven by retail investors. Among the top 10 fund houses, five managed to clock industry-beating growth.
  • GST collections hit an all-time high in March at ₹1.42 trillion. The revenues for March 2022 are 15% higher than the GST revenues in the same month last year. The collections have stayed above the ₹ 1.10 trillion mark since July last year.
  • Since this was a week full of FY22 annual data points, an interesting piece of information is that the draft red herring prospectus (DRHP) filed with SEBI jumped nearly fivefold to 145 in FY22 compared to just 30 in the last financial year. FY22 saw the highest filings since 2007-08. Companies from new-age sectors such as fintech, online e-commerce and food delivery tapped the market for the first time. The year saw companies from several unique sectors as well as traditional businesses file their offer documents. A large number of filings was on account of the push from private equity and venture capital (PE/VC) investors looking to exit their investments.
  • FII (Foreign Institutional Investors) net sold ₹ 63,375 mn, and DII (Domestic Institutional Investors) were net buyers this week. DIIs bought shares worth ₹ 41,615 mn.

Things to watch out for next week

  • The 4QFY22 earnings season kicks off from Monday with IT giants TCS and Infosys publishing their quarterly and full year FY22 earnings. Management commentary on attrition, FY23 outlook and guidance will be key variables for the IT industry.
  • A quarter largely impacted by the Russia-Ukraine war, barring IT companies, which escaped from the brunt of the war, market will keenly look for those that got beaten up and others which have shown enough resilience this quarter.

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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30 Mar

Developing new residential properties beyond top tier cities – Godrej Properties

Update on the Indian Equity Market:

On Wednesday, NIFTY closed at 17,498 (+1%). MEDIA (+2.3%), FINANCIAL SERVICES 25/50 (+2%) and FINANCIAL SERVICES (+2%) were the top gainers, whereas, METAL (-2.2%), OIL & GAS (-0.4%) and PHARMA (-0.2%) were the top losers. Within Nifty 50, HDFCLIFE (+3.5%), BAJAJFINSV (+3.3%) and TATACONSUM (+3%) were the top gainers and ONGC (-5.4%), HINDALCO (-4.9%) and JSWSTEEL (-4.6%) were the top losers.

Excerpts of an interview with Mr. Mohit Malhotra, MD & CEO, Godrej Properties (GODREJPROP), with The Economic Times on 28th March 2022:

  • Godrej Properties is developing a new residential property in Bangalore. It is a 30-acre plus project with a revenue potential of almost ₹ 10 bn.
  • After a period of an eight-year downcycle in the residential property market, the company is witnessing extremely strong consumer demand with affordability being at an all-time high.
  • The ongoing Russia-Ukraine war has resulted in a 30-40% jump in prices of key commodities like steel and aluminum.
  • Keeping the inflation factor in mind, the company has taken 4-8% price hikes across projects at the beginning of 4QFY22. Despite these price hikes, the company has not seen any major demand pushback from the customers.
  • The company is among the top players in the top four cities of Mumbai, NCR, Bangalore, and Pune. But the market share is between 3-4% and the strategy is to first increase this market share and then enter into new cities closer to these locations.
  • Intending to enter new cities in India, the company plans to do a plotted development in a recently acquired 50-acre land in Sonipat, Haryana. The project has a revenue potential of ₹ 7500-10000 mn.
  • Being very positive about the outlook of the market, for these expansion plans, the company is looking to invest close to USD 1 billion over the next few years.

Asset Multiplier Comments:

  • Industry-wide price hikes are inevitable as inflation is here to stay and the industry is already at very low profitability. However moderate price hikes are less likely to impact demand.
  • Godrej Properties being a near-zero debt company and looking to invest close to USD 1 billion, is gauging rising demand in metros as well as tier 2 cities. Near-term supply-side issues may not create a hindrance to the long-term demand trajectory.

Consensus Estimate: (Source: market screener & TIKR website)

  • The closing price of GODREJPROP was ₹1,662/- as of 30-March-2022. It traded at 87x/64x the consensus earnings estimate of ₹ 19/26 per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,584/- implies a P/E Multiple of 61x on the FY24E EPS estimate of ₹ 26/-.

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 Mar

No direct impact of Russia-Ukraine conflict on IT sector– Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY50 closed 312 points higher at 16,975 (+1.87%). All the sectoral indices closed in the green with REALTY (+3.6%), METAL (+2.6%), and PRIVATE BANK (+2.4%) being the top gainers. Among the individual stocks, ULTRACEMCO (+4.6%), AXISBANK (+3.5%), and BAJAJ-AUTO (+3.3%) were the top gainers while CIPLA (-1.3%), SUNPHARMA (-0.4%), and TATACONSUM (-0.1%) were the top losers.

Excerpts of an interview with Mr. C.P. Gurnani, MD & CEO, Tech Mahindra, published in Mint on 15th March 2022:

  • The main demand drivers are 5G and digital transformation, the legacy businesses preferring to move towards cloud; high demand for electric vehicles; increasing needs for cybersecurity; and sustainability.
  • Keeping that in mind, Tech Mahindra is betting big on opportunities in 5G and digital transformation. With the recent launch of TechMVerse, it has forayed into the metaverse space. For the first year, the company is planning to hire 1,000 people dedicated to TechMVerse. The operations will be spread across four hubs – Dallas, Hyderabad, London, and Pune.
  • Along with that, expanding the global reach by opening up new centers in tier-2, tier-3 cities like Latvia, Romania, and Costa Rica is creating more requirements for new hires. The company is targeting to hire from tier-2 cities like Bhubaneshwar, Chandigarh, Kolkata, Indore, and Coimbatore, as the level of skills is extremely good and attrition rates are much lower.
  • Although metaverse is a key differentiator, being a new technology, it will be initially incubated in a smaller group and then shared with the clients. Initially, the metaverse offerings including DealerVerse – metaverse-based car dealership; Middlemist – an NFT marketplace; or Meta Bank – a virtual bank, will be run as a separate unit. Eventually, will work together with various other verticals. The early adopters of metaverse are the gaming, healthcare, retail, and banking sectors.
  • The company has made 8 acquisitions in FY22 to build capability, de-risking the portfolio, and for geographic expansion.
  • Concerning the ongoing Russia-Ukraine conflict, the company will have no direct impact as the Indian IT sector is not dependent on either of the two countries.

Asset Multiplier Comments:

  • The intensity of tech spending is expected to increase as clients are willing to spend on IT via Capex and Opex. Cloud spend is a minimum 3- 4 years opportunity for the IT sector. The second round of IT spend is on artificial intelligence, augmented reality, virtual reality, data analytics, and IoT.
  • We believe Tech M is well positioned to capture a fair share of 5G network services spends and strong growth in communication will continue in FY23E. Spreading talent base to Tier 2 cities in India and Nearshore centres will help reduce employee cost by ~15% and also lower attrition rate. We expect increase in utilization rate and gradual reduction of sub-con costs (on the back of reducing attrition rate) will lead to margin expansion in FY23E.

 Consensus Estimate: (Source: Marketscreener & TIKR website)

  • The closing price of Tech Mahindra was ₹1,488/- as of 16-March-2022. It traded at 21x/ 18x the consensus earnings per share estimate of ₹72/₹81.5 for FY23E/FY24E respectively.
  • The consensus target price of ₹1,787/- implies a P/E multiple of 22x on FY24E EPS estimate of ₹81.5/-

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

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08 Mar

Will comfortably sail through the near-term headwinds – Page Industries

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended at 16,013 (+0.95%) as it closed near the day’s high. Among the sectoral indices, REALTY (+3.3%), MEDIA (+2.8%), and IT (+2.7%) were the top gainers, whereas METAL (-1.5%), and OIL&GAS (-0.7%) were the only losers. Among the stocks, IOC (+4.2%), SUNPHARMA (+4%), and TATACONSUM (+3.8%) were the gainers while HINDALCO (-4.6%), ONGC (-4.4%), and TATASTEEL (-2%) were the losers.

Excerpts of an interview with Mr. Chandrasekar K, CFO, Page Industries (PAGEIND) with Bloomberg Quint on 7th March 2022:

  • In 3QFY22, Page Industries clocked in 28% growth YoY in revenue and a 25% growth in volumes.
  • The company is experiencing uniform growth across metros as well as tier 2,3 & 4 cities.
  • The company’s current performance is way ahead of pre pandemic numbers in all aspects as 4 of the best quarters in the company’s history have come from the last 5 quarters.
  • An overall strong performance in calendar year 2021 was largely driven by growth in athleisure wear. The usage of athleisure wear has grown over the years but the lockdown and work from home situation acted as a catalyst for a spurt in demand.
  • In CY21, raw material prices have moved up by 20%. Page Industries has taken a price hike of 5% in Q1 and further hike of 8% recently. However, since the end of Q3, the raw material prices have weakened a bit, hence, no more price hikes have been planned. The company is targeting its full year EBITDA margins to be at its long run average level of 20%
  • The company has added 40,000 multi brand outlets (MBOs) in the last 2 years and the total store count now stands at 1,10,000 stores. The sales per store in smaller towns is almost similar to the stores in larger cities. Along with that, the company’s digital transformation started around 3 years back and as a result of that, E-commerce sales are at 8-9% of total revenues.
  • The company is looking for growth opportunities by increasing the penetration of premium apparel category which currently stands at 12% and athleisure wear which is in single digit. To capture these markets, the company has been actively hiring and investing in people is sales and in backend, even during the pandemic.

Asset Multiplier Comments

  • As the raw materials prices have moved up, all the apparel manufacturers have been forced to take much more frequent price hikes. These price hikes can hurt the smaller players much more in terms of loss of revenue due to lower demand from price sensitive customers.
  • Page Industries being a manufacturer of premium category products and having sufficient pricing power, may take price hikes if required and is likely to have no pressure on the margins, without any material impact on the top line.

Consensus Estimate: (Source: TIKR and Investing.com websites)

  • The closing price of Page Industries was ₹ 39,406/- as of 08-March-2022. It traded at 89x/66x/56x the consensus earnings estimate of ₹ 445/593/705 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 40,805/- implies a P/E multiple of 58x on FY24E EPS estimate of ₹ 705/-

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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