Expect attrition rate to get a little worse before improving – Happiest Minds Technologies

Update on Indian Equity Market:

On Monday, NIFTY ended at 17,397 (-1.07%). Among the sectoral indices, FMCG (+0.9%) was the only sector that ended higher, whereas Metal (-6.6%), PSU Bank (-4.2%), and Realty (-2.10%) ended lower. Among the stocks HUL (+2.9%), Bajaj Finserv (+1.1%), and ITC (+0.8%) led the gainers while Tata Steel (-10%), JSW Steel (-7.7%), and Hindalco (-6.1%) led the losers.

Excerpts of an interview with Mr. Venkatraman Narayanan (MD & CFO) and Mr. Joseph Anantharaju (Executive VC) with CNBC TV18 on 17th September 2021:

  • The demand scenario has only got better from where they are at the end of the first quarter. Things are looking very well for customer additions and the growth of existing customers. So, demand is looking good.
  • On the supply side they said, the supply situation is not as good, but they are managing to hold on with employee net additions of about 300 in the first quarter. They are trying to keep similar numbers for the next three to four quarters.
  • Most verticals that they are operating in seem to be showing strong demand growth with customers initiating or implementing digital transformation initiatives. A few of them should be a little ahead or having spent more, like edutech which continues to be strong for them. In high tech and retail they are seeing a good spend with the whole e-commerce move. They are seeing some initiatives in digital media as well.
  • They further said, in terms of technologies, the cloud is almost a done deal now. Most of their clients are operating on the cloud, and a lot of work is happening around leveraging artificial intelligence and analytics.
  • One thing they have noticed in the last few months is that more clients are looking at more automation. They have seen a strong uptick in automation as well, from a technology angle.
  • On attrition, they said things are going to get a little bit worse and then start improving. As there is always a slow build-up when it comes to attrition. People move out looking for new opportunities but the company keeps adding and backfilling the opened positions.
  • So demand was increasing but along with supply-side affected due to high attrition rate that’s why it is likely to get worse. The attrition rate was 15% in last quarter it will increase and then they will stabilise it over some time.
  • On margins, they said the sustainable margins should be in the range of about 22% to 24%.

 

Asset Multiplier Comments

  • The IT sector is witnessing a high attrition and there is a talent war among the competitors, which might affect the margins. The companies are trying to decrease the attrition rates which might help in margin expansion in the medium term.
  • Happiest Minds is seeing healthy demand and is targeting industry leading growth in the medium to long term.
  • The company also has a strong demand growth in verticals that they are operating.

Consensus Estimate: (Source: market screener website)

  • The closing price of Happiest Minds was ₹ 1,491/- as on 20-Sept-2021. It traded at 113x/ 90x/ 78x the consensus EPS estimate of ₹ 13.2/ ₹16.5/ ₹19.1 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,155/- implies a PE multiple of 60x on FY24E EPS of ₹19.1/-

 

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.”

This Week in a nutshell (Sep 13th to Sep 17th)

This Week in a nutshell (Sep 13th to Sep 17th)

Technical talks

NIFTY opened the week on 13th Sep at 17,365 and closed on 17th Sep at 17,585. During the week, the index hit record highs, gaining 1.2 percent and saw a bullish candle formation on the weekly scale. At the current juncture, support for Nifty is placed at 17,430 and 17,250 zone, while resistance can be seen around 18,111 levels.

On the sectoral front, Nifty Media index outperformed other indices with a gain of over 13 percent and PSU Bank index rose 5 percent. On the other hand, Nifty Metal and Realty indices fell 1 percent each.

Weekly highlights

  • The week started with economic data:
    • Consumer Price Index-based Inflation (CPI) for Aug-21 came in at 5.3 percent, compared with 5.6 percent in July-21.
    • Food prices cooled further, especially in the case of vegetable inflation; data released by the National Statistical Office (NSO) showed.
    • Consumer Food Price Inflation (CFPI) for Aug-21 stood at 3.1 percent compared to 3.9 percent in Jul-21. However, concerns remained with high edible oil prices, which registered an increase of 33 percent YoY.
    • The wholesale price-based inflation rose marginally to 11.4 percent in Aug-21, mainly due to higher prices of manufactured goods, even as prices of food articles softened.
    • India’s exports rose by ~45.8 percent YoY to $33.3 bn in August and imports increased by 51.7 percent YoY to $47.1 bn, according to commerce ministry data released on Tuesday.
  • An inter-ministerial task force comprising representatives from the Commerce, Railways and Shipping ministries looked to initiate several short-term actions to make more containers available to exporters and cushion prices that have gone up by 200-300 percent YoY.
  • With low number of cases and increasing vaccination drives, the economic activities normalised. Domestic air passenger traffic surged 33.8 percent MoM in Aug-21, more than doubled when compared to the same month in the past year, the aviation sector regulator said.
  • Finance Minister Nirmala Sitharaman on Thursday announced that the Cabinet has cleared the formation of a ‘bad bank’. The government will guarantee up to Rs 306 bn for security receipts issued by the National Asset Reconstruction Company (NARCL).
  • Inflation in India is likely to ease only gradually, Reserve Bank of India Deputy Governor Michael Patra said on Thursday, adding that the outlook on growth and inflation will help determine the future course of monetary policy.
  • Positive economic data and government reforms in telecom, banking and automobile sectors helped boost market sentiments. The banking sector, which underperformed till now, came into its own during the week.
  • Wall street on the other hand started strongly but lost ground later as economic uncertainties and the increasing likelihood of a corporate tax rate hike dampened investor sentiment and prompted a broad sell-off despite signs of easing inflation.
  • US consumer prices rose a lower-than-expected 0.3 percent in Aug-21, the smallest increase in seven months and a hopeful sign that inflation pressures may be cooling.
  • Oil prices steadied at the end of the week as the threat to US Gulf crude production from Hurricane Nicholas receded.
  • The foreign institutional investors (FII) bought equities worth of Rs 65,455 mn, while domestic institutional investors (DIIs) sold equities worth of Rs 22,925 mn.

Things to watch out for next week

  • Nervousness would be seen in the market next week ahead of Federal Reserve and ECB meeting, which could provide some indications on when the central banks will start withdrawing their monetary stimulus and start raising interest rates eventually.
  • With weak US job data and inflation increasing at a slower pace, Fed is not expected to hint on taper plans in the upcoming meeting.
  • The weak global cues on account of worry over slower economic growth and rising Delta variant cases globally would keep market oscillating between greed and fear.

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.”

 

Semiconductor shortage to persist – Motherson Sumi

Update on Indian Equity Market:
On Thursday, markets ended on a high with Nifty closing 110 points higher to close at 17,630. INDUSINDBK (+7.3%), ITC (+6.6%), and SBI (+4.5%) were the top gainers on the index while GRASIM (-1.8%), BHARTIARTL (-1.3%), and TCS (-1.3%) were the top losers for the day. Among the sectoral indices PSU BANK (+5.4%), PRIVATE BANK (+2.7%), and BANK (+2.2%) were the top gainers, while MEDIA (-1.7%), METALS (-0.6%), and IT (-0.6%) were laggards.

Excerpts of the Interview with Mr VC Sehgal, Chairman of Motherson Sumi with CNBCTV18, dated 15th September 2021:

A lot of struggling semiconductors manufacturers are coming back on stream. However, with the uncertainty and guidance from manufacturers, the company expects this issue to persist beyond Q2CY22.
The sophistication required and the manufacturing processes of these semiconductor chips are extremely complex, the current structural barriers faced by these manufacturers can’t be removed overnight.
Demand has picked up for the entire sector, however, there’s a rise in inventory for OEMs as manufacturers wait for semiconductors to be supplied to complete the production and deliver the automobiles.
OEMs like Motherson Sumi are agnostic towards the engine that is fitted into the automobile, whether EV or ICE. However, the shift towards EV is value accretive for the company.
PLI scheme is more focused on technology transfer and development than actual production, however, these schemes coupled with the EV push by the government will result in robust demand for OEMs.
Raw Material price hikes and other margin pressures are a function of cycles and thus the company is not planning to take any aggressive steps to counter it. Right now the focus is only on delivering on the pent-up demand as fast as possible.

Asset Multiplier Comments:
Semiconductor shortage is an issue that’s going to persist for the upcoming quarters and is universal. The Auto and Ancillary Sector has to bear the brunt until things get better.
Motherson Sumi by the virtue of its product portfolio is indifferent to the ICE/EV competition, thus it is better placed for robust growth ahead once the supply side issues subside.

Consensus Estimates (Source: market screener website):
The closing price of Motherson Sumi was ₹224/- as of 16-September-2021. It traded at 32x/20x/17x the EPS estimate of ₹ 7/₹ 11/₹ 13 for FY22E/23E/24E
The consensus price target is ₹ 256/- which trades at 19x the EPS estimate for FY24E of ₹13/-
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.”

Expects volumes to beat industry growth by 10% – JK CEMENT

Update on Indian Equity Market:

On Wednesday, NIFTY ended at 17,519 (+0.8%) as it closed near its high at 17,533. Among the sectoral indices, PSU BANK (+2.8%), CONSUMER DURABLES (+1.0%), and AUTO (+0.9%) ended higher, whereas MEDIA (-1.6%) ended lower. Among the stocks NTPC (+7.5%), BHARTIARTL (+4.8%), and COALINDIA (+4.0%) led the gainers while TATACONSUM (-1.0%), NESTLEIND (-0.6%), and GRASIM (-0.5%) led the losers.

Excerpts of an interview with Mr. Rajneesh Kapoor, Chief Operating Officer, JK Cement (JKCEMENT) with CNBC TV18 on 12th September 2021:

  • JKCEMENT saw an average price decline of 3-4% across all regions in India excluding the East. Traditionally, August is a time where prices drop as a result of peak monsoons. JKCEMENT expects this sentiment to continue in the month of September as well.
  • However, this year’s August was slightly different as the company saw the highest volumes in terms of market demand in FY22 and Kapoor expects this trend to continue hereafter.
  • Volumes in Q3FY22 and Q4FY22 are going to be really good as a result of an increase in capacity utilization hence, there could be an uptick in prices in October and November as the monsoon starts receding. September could see a price uptick of 1.2%.
  • Demand has been healthy across all regions in the country amounting to 40-50% on a year-to-date basis. However, the prices at this point of time are marginally below on a Y-o-Y basis as compared to last year.
  • The real challenge that the industry faces today is in terms of cost. US Petcoke which used to be imported at a rate of 74$ to 78$ per ton is currently trading at 190$ per ton. This problem gets complemented by the scarcity of coal not only in India but also in international markets. China has stopped coal production for safety reasons and Indonesia, also a big supplier has peak monsoons which is why coal supplies have gone down. As a result, fuel cost has increased close to 100%.
  • Going forward, the price increase is going to be a necessity and this could take place post-monsoon.
  • In terms of volumes, JKCEMENT expects good growth because of capacity growth in FY20. Mr. Kapoor expects JKCEMENT to be 10 percent ahead of the market.
  • Capacity addition highlights: Capacity expansion at Panna, Madhya Pradesh is progressing as per the schedule and is expected to be commissioned by Mar-23.

Asset Multiplier Comments

  • The construction business is expected to resume its pace after the monsoon recedes and hence the demand for cement could go up.
  • JKCEMENT has decided to do several capacity expansions and up-gradation of its existing kilns.
  • These could contribute in increasing JKCEMENT’s market share and revenues.

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

  • The closing price of JKCEMENT was ₹ 3395 /- as on 15-Sept-2021. It traded at 28x/25x the consensus EPS estimate of ₹ 123/138 for FY22E/FY23E respectively.
  • The consensus target price of ₹ 3,429/- implies a PE multiple of 25x on FY23E EPS of ₹138/-

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.”

 

Large sized deal ramp-up due to Evosys acquisition – MASTEK

Update on the Indian Equity Market:

On Tuesday, the benchmark Nifty 50 index ended at a record closing of 17,383 (+0.2%). The top gainers on the index were INDUSINDBK (+4.0%), HCLTECH (+2.5%), and HEROMOTOCO (+2.2%). The laggards were led by ULTRACEMCO (-1.1%), HDFC (-1.1%), and BPCL (-1.1%). Among the sectoral indices, MEDIA (+14.4%), PRIVATE BANK (+1.1%), and CONSUMER DURABLES (+0.9%) led the gainers while METAL (-0.4%), FMCG (-0.3%), and FINANCIAL SERVICES (-0.1%) led the losers.

Excerpts of an interview with Mr. Hiral Chandrana, Global CEO, Mastek with Economic Times on 13th September 2021:

  • The Company has a strong business in the UK and is working with the leading public sector institutions. MASTEK has a healthy business and is not going to reduce its UK exposure. They expect to continue the run in many areas including the private sector.
  • 1QFY22 was a good quarter in terms of the order book. The company is witnessing a good momentum in 2QFY22 along with an increase in deal size. The acquisition of Evosys (cloud business) is helping MASTEK get involved in larger-sized deals.
  • There are delays in some deals due to their large size and higher competition.
  • While the talent market remains challenging, MASTEK has taken a lot of steps in terms of salary hikes and skill transformation. They are looking at various elements of how training and reskilling are done.
  • 12-15 months back, the company was operating in the 13-14% EBITDA margin range. Now, they are comfortable in the 20plus percentage EBITDA margin. While there could be some margin fluctuation on a QoQ basis, the CEO believes they have good leverage in terms of fixed cost to achieve margins in the 20% plus range.
  • In some of their cloud implementation business, which was acquired through Evosys, the work is delivered through business outcomes. There are elements of pricing and realisation that can be leveraged based on the outcome delivered.
  • In cases where skills-based work is in high demand, customers realise they need to pay more. There are certain skills for which the company can command higher prices.
  • Customers are going through digital adoption and they are changing business models. They are changing their supply chains. It is a huge transformation and technology is a big enabler. Mr. Chandrana believes this trend will continue at least for the next one and a half or two years.
  • There is a huge opportunity for automation and digital adoption. Cloud has taken off in a big way, and MASTEK is investing heavily in that space for the next 18-24 months.

Asset Multiplier Comments

  • MASTEK’s presence in the local government has been established through the Evosys acquisition. There could be new business opportunities for the company with the UK government as a result of Brexit.
  • A strong order book, ramp-up of large deal wins, revival of the UK and US businesses are indicative of the revenue growth for MASTEK in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of MASTEK was ₹ 2,899/- as on 14-September-2021. It traded at 31x/ 25x the consensus earnings estimate of ₹ 94/ 114 for FY22E/ 23E.
  • The consensus target price of ₹ 2,890/- implies a PE multiple of 25x on FY23E EPS of ₹ 114/-.

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.”

Will keep investing to grow the household insecticides market – Godrej Consumer

Update on the Indian Equity Market:

On Monday, NIFTY closed 0.1% lower at 17,355. Top gainers in NIFTY50 were COALINDIA (+3.9%), HINDALCO (+3.3%), and KOTAKBANK (+1.7%). The top losers were RELIANCE (-2.3%), ICICIBANK (-1.8%), and SBILIFE (-0.9%). The top gaining sectors were MEDIA (+1.3%), METAL (+1.3%), and IT (+0.9%) while the top sectoral losers were BANK (-0.6%), PRIVATE BANK (-0.5%), and PSU BANK (-0.4%).

Will keep investing to grow the household insecticides market – Godrej Consumer

Excerpts of an interview with Mr. Sunil Kataria, CEO- India & SAARC at Godrej Consumer Products (GODREJCP), aired on CNBC TV18 on 9th September 2021:

  • Input cost inflation has not slowed down against the expectation that the inflation would come down in the July-August period. Current inflation pressures may remain for another 6 months.
  • Demand is holding steady currently. Rural demand was strong even in the 1st wave of covid-19. The positive thing now is that urban demand has also seen a sharp recovery.
  • Discretionary demand has come back strong. Provided the festive season does not get disrupted and continued ramp-up of vaccination, further growth should be possible.
  • GODREJCP is taking calibrated price increases in some products to mitigate the higher input cost prices. Further mitigation is being done via overhead cost control. GODREJCP has taken 7%-8% price hikes so far in FY22.
  • Management expects to maintain EBITDA margins in the 25%-26% band. This operating performance will be delivered without compromising on ad spends. Ad spends are an important investment in brand building.
  • The core business of soaps and household insecticides had strong tailwinds in FY21 and did not suffer due to the covid-19 disruption.
  • Discretionary items like hair color and hair care faced a challenge in 1HFY21 but came back strongly in 2HFY21.
  • Management expects both- core and discretionary categories to perform well going forward. Mr. Kataria expects overall double-digit growth across all categories.
  • GODREJCP is seeing big momentum in personal wash and hygiene so increasing capacity additions there. But capex outlay is not an issue for a cash-rich FMCG business.
  • Being the market leader in household insecticides, GODREJCP will undertake continued investments in increasing product portfolio and brand building in household insecticides.

Asset Multiplier comments:

  • Consumer staples, as well as discretionary companies across board, have been taking price hikes to mitigate the impact of input cost pressure. However, all managements are taking a calibrated approach as demand is still a bit fragile in some product baskets due to the economic impact of lockdowns.
  • How the rural demand shapes up from here remains to be seen as the covid-19 2nd wave has impacted rural India more than the 1st

Consensus Estimate: (Source: market screener websites)

 

  • The closing price of GODREJCP was ₹ 1,119/- as of 13-September-2021.  It traded at 59x/51x/44x the consensus earnings estimate of ₹ 19.0/22.0/25.2 for FY22E/23E/24E respectively.
  • The consensus price target is ₹ 1,058/- which trades at 42x the earnings estimate for FY24E of ₹ 25.2/-

 

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.”

 

This week in a nutshell (6th – 9th September)

Technical talks

NIFTY opened the week on 6th September at 17,399 and ended the truncated week at 17,369 on 9th September. The index made a weekly loss of 0.2%. On the upside, 17,378 might be a critical level to watch for. On the downside, 16,451 might act as a support. The RSI (82) indicates the index is in the overbought zone.

Weekly highlights

  • World stocks hit fresh record highs on Tuesday on growing bets that the U.S. Federal Reserve will push back tapering its bond purchases and keep its expansive policy for the near term. The latest rally, which started after Fed Chair Jerome Powell’s dovish speech at the Jackson Hole Symposium in August, received a further boost from a surprisingly soft U.S. payrolls report on Friday. The U.S. economy created 235,000 jobs in August, the fewest in seven months as hiring in the leisure and hospitality sectors stalled, reducing expectations that the Fed will opt for an early tapering of its monthly bond purchases.
  • Investors were caught by surprise by a sudden rally in the benchmark 10-year Indian bond yield. In the previous week (ended 3rd September), the yield had dropped ten basis points, the biggest weekly drop since April. There was a quick turn of sentiment after the benchmark 10-year bond yield rose to its highest since March. The sentiment change was aided by 1QFY22 GDP growth which grew ~20% YoY albeit on a low base and global market cues. The rally in the bond yield was led by mutual fund investors and overseas investors. The spike in overseas investors’ interest could be attributed to the appreciation of INR against USD. (Source: Bloomberg Quint Read more at: https://www.bloombergquint.com/business/a-surprise-bond-rally-sweeps-over-india-as-global-funds-pile-in )
  • The Securities and Exchange Board of India (SEBI) has introduced an optional T+1 settlement cycle for the market, which will come into effect from January 1, 2022. The T+1 cycle means settlements will have to be cleared within one day of the actual transactions taking place. A switch to the T+1 settlement cycle is expected to boost market liquidity and trading turnover while reducing settlement risk and broker defaults. While this move could be beneficial for the domestic investors, foreign investors may face challenges adjusting to this system due to time zone differences. While the regulator has come up with the new settlement cycle, the onus is on the exchanges if they want to opt for the shorter cycle.
  • The monthly data for life insurance premiums collected by companies was released by the Life Insurance Council. The industry reported a 3% YoY increase in the New Business Premiums (NBP) collected, led by private players. This growth comes after the NBP collected reported a decline of 11% YoY in July-21.
  • Stocks ended lower Friday, with major indexes booking weekly losses as the Dow Jones Industrial Average and the S&P 500 extended a losing streak to five sessions. Investors said uncertainty around the spread of the delta variant of the coronavirus that causes COVID-19 hung over markets this week as investors also weighed the timing of the Federal Reserve’s eventual tapering of its monthly bond purchases. The slide left the Dow down 2.2% for the week, while the S&P 500 suffered a 1.7% fall and the Nasdaq declined 1.6%.
  • Institutional activity trends reversed this week compared to last week. Foreign institutional investors (FII) turned sellers with an outflow of Rs 11,139mn. Domestic institutional investors (DII) tuned buyers with an inflow of Rs 11,160mn.

Things to watch out for next week

  • The Indian CPI and WPI data are expected next week. A key indicator for measuring the changes in purchasing trends and inflation.
  • As the result season has drawn to a close, the developments from Wall Street will be the guiding force for the Dalal Street.

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.”

Recovery on cards, high volume growth ahead – Marico

Update on Indian Equity Market:

On Wednesday, markets ended flat with Nifty closing 9 points lower at 17,354. KOTAKBANK (+3.6%), POWERGRID (+1.8%), and GRASIM (+1.6%) were the top gainers on the index while DIVISLAB (-2.4%), NESTLEIND (-2.4%), and WIPRO (-1.7%) were the top losers for the day. Among the sectoral indices, BANK (+0.8%), PRIVATE BANK (+0.7%), and CONSUMER DURABLES (+0.7%) were the top gainers, while IT (-0.8%), MEDIA (-0.6%), and AUTO (-0.5%) were the laggards.

Excerpts of an interview with Mr. Saugata Gupta, MD, and CEO at Marico on CNBCTV18, dated 07th September 2021:

  • Marico’s portfolio is concentrated on items of daily use, which saw a faster recovery in June itself. The entire FMCG sector is witnessing volume recovery due to its inherent nature and the company expects 8-10% volume growth for H2FY22. 
  • The company expects a muted 3rd wave if it occurs on the back of rapid vaccinations and an adequate monsoon which will help demand to improve significantly.
  • The only issue that the company expects to face is rising inflation in its input costs. However, the company believes this won’t persist beyond Q3FY22 and that it will see an eventual softening in raw material prices.
  • The company expects that it’ll meet its revenue targets of Rs. 4.5-5 bn in FY22 and double them to Rs. 8.5-10 bn by FY24 on the back of strong growth drivers like diversification and premiumisation. 
  • The company is on track to meet its diversification targets, with the discretionary food segment demonstrating robust recovery. Now the company plans to focus on premiumisation in Personal Care and digital brand growth.
  • Digital Brands are an important segment for the company. Its recent acquisition of Beardo Brand is now fully integrated, and the company plans to expand into a couple of more digital brands either organically or inorganically.
  • The worst margin pressure for the company is over as Copra prices (a key raw material for the company) have settled down. The company expects vegetable and other oil prices to cool off towards Q3FY22 and EBITDA margins to reach a comfortable 19-20% level.

Asset Multiplier Comments:

  • The food and FMCG Industry has adapted to the pandemic imposed changes. Despite the pandemic, the volumes have improved and may recover sharply soon with further unlocking. With an expanding product portfolio, the growth rates may be significantly higher.
  • Marico has an established portfolio, brand awareness with consumers, and a focus-induced approach to premiumisation which it can leverage to expand volumes to grow further and deliver value to shareholders.

Consensus Estimates (Source: market screener website): 

  • The closing price of Marico was ₹563/- as of 08-September-2021.  It traded at 56x/47x/40x the EPS estimates of ₹10/ 12/ 14  for FY22E/23E/24E.
  • The consensus price target is ₹ 600/- which trades at 43x the EPS estimate for FY24E of ₹ 14/-

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.”

 

Bank to see a greater expansion in rural areas – HDFC bank

Update on the Indian Equity Market:

On Tuesday, NIFTY ended lower at 17,362 (-0.1%) as it closed 40 points below the opening level of 17,402. Among the sectoral indices, CONSUMER DURABLES (+1.0%), FMCG (+0.3%), and FINANCIAL SERVICES (+0.2%) ended higher, whereas REALTY (-2.3%), IT (-1.3%), and PSU BANK (-1.3%) ended lower. Among the stocks, BHARTIARTL (+2.6%), HDFC (+2.5%), and GRASIM (+1.6%) led the gainers while SUNPHARMA (-2.2%), BPCL (-1.8%), and HINDALCO (-1.8%) led the losers.

Excerpts of an interview with Mr. Rahul Shukla, Group Head, Commercial & Rural Banking, of HDFC Bank (HDFCBANK) with Economic Times on 6th September 2021:

  • The reality is very different from what is spoken about in TV newsrooms. The commercial vehicle and construction equipment business is strong, credit utilisation by MSMEs is steadily increasing every month, the healthcare sector is fairly credit-strong.
  • The bank continues to expand its geographic footprint, extending credit in rural and semi-urban areas of the country, and sees no credit challenges in finding new business.
  • The bank is active in transportation finance, where it finances trucks, construction equipment, and tractors. The disbursements in July were 40% higher than in June, and in August, were 20-25% higher than in July.
  • The bank operates in 100,000 villages and in two years, it may expand to 200,000 villages. Even if it’s a huge jump, it is still only 30% of the market. The bank has a robust digital platform which has helped it to add new customers.
  • Rural lending today is about 90% crop-based lending. Crop-based lending is largely related to the price of dal and sugarcane. As the ecosystem is completely changing, there is a lot of push in vegetables, fruits, poultry, piggery, etc. which accounts for 60-65% of the crop-based lending.

Asset Multiplier Comments

  • Banks were willing to lend to the rural population during the 1st covid wave period as they were not as much affected as urban areas. The rural population was largely affected during the 2nd covid wave, and it is still recovering from the impact. Therefore, the dynamics related to lending may be different going forward.
  • HDFC Bank has seen a reduction in interest expenses and other operating expenses over the last 5 years. This trend is likely to continue in the upcoming years as the bank continues to manage its deposits and borrowings well. With reducing provisions led by an increase in NPA recoveries, the bank’s increasing geographic footprint, and well-balanced CASA deposits, we expect the bank’s prospects to improve further.

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

  • The closing price of HDFCBANK was ₹ 1,570/- as of 07-Sept-2021. It traded at 3.7x/3.2x/2.7x the consensus book value estimate of ₹ 423/488/574 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,760/- implies a PB multiple of 3.1x on FY24E BVPS of ₹ 574/-.

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.”

Exide Life to add 30-40% agency force – HDFC Life

Update on Indian Equity Market:

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Excerpts of an interview with Ms. Vibha Padalkar, MD & CEO, HDFC Life Insurance with ET Now on 3rd September 2021:

  • The potential target company needs to have a credible distribution which Exide Life has. Exide Life has a strong agency channel and another aspect is the quality of the book.
  • Exide Life has a scale issue which is a problem for many smaller players. Presently, Exide Life has 37,000 agents and a lot of them are highly productive. This will add about 30% to 40% of agency force to HDFC Life.
  • Exide Life has a strong presence in the southern regions of India and also in tier II and III towns, about 40% of business comes from these geographies. This is complementary for HDFC Life which has a focus on Metro cities.
  • About 89% of the consideration is in share swap form. About 11% which is worth Rs 7,260mn will be a cash payout. After the share issue happens, Exide Industries will be on-boarded as HDFC Life shareholder with a 4.1% stake in the merged entity.
  • The first phase of the merger is after the CCI & IRDAI approval, HDFC Life will be able to issue shares to the seller and the entity becomes a subsidiary of HDFC Life. After that HDFC Life will go approach the NCLT for merger approval of the subsidiary into the parent company. But after the first phase HDFC Life will have a control over the business.
  • Due to the cash payout of Rs 7,260 mn, HDFC Life’s current solvency ratio will go down by about 15%. As this will happen after a few months, fresh profit will be generated by the company and the solvency ratio start recovering.
  • Exide Life’s embedded value is about Rs 27bn. HDFC Life is reasonably satisfied of the quality of their embedded value does not believe that there would be any material impact to that embedded value after HDFC Life take control of the entity.

Asset Multiplier Comments:

  • This deal has could expand HDFC Life’s presence in the southern regions of India. Growth is likely to be driven from the tier II and III towns as Exide Life has a strong presence in these geographies.
  • This deal is beneficial for HDFC Life in terms of distribution mix and product mix. This acquisition will improve the new business margins because of product mix and HDFC Life has focused on creating diversified channels and products.

Consensus Estimate: (Source: market screener website)

  • The closing price of HDFC LIFE was ₹ 735/- as of 06-Sept-2021. It traded at 100x/80x/67.7x the consensus EPS estimate of ₹ 7.3/ 9.2/ 10.8 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 777/- implies a PE multiple of 67.7x on FY24E EPS of ₹ 10.8/-
  • In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

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.”