Aim to go back to 20%-22% ROE- Mahindra & Mahindra

Update on the Indian Equity Market:

 

On Thursday, Nifty closed 1.0% higher at 10,755. Within NIFTY50, HINDALCO (+6.6%), HDFC (+4.3%), and SBIN (+4.1%) were the top gainers, while INFRATEL (-1.9%), COALINDIA (-1.5%) and TECHM (-1.2%) were the top losers. Among the sectoral indices, METAL (+1.9%), FIN SERVICE (+1.6%), and BANK(+1.4%) gained the most.  FMCG(-0.3%) was the only sector to close in red.

 

Aim to go back to 20%-22% ROE- Mahindra & Mahindra

 

Excerpts of an interview with Mr. Anish Shah, Joint MD–Mahindra & Mahindra published on ET Auto dated 7thJuly2020:

  • M&M’s loss making subsidiaries had a difficult couple of years. M&M is now looking to take direct action.
  • The loss-making subsidiaries are being evaluated and categorized into 3 groups – Category A: companies with clear path to 18% Return on Equity (ROE). Category B: companies with unclear path to profitability but can deliver quantified strategic benefit, and Category C: Calls for a possible exit through alliance or sale as it does not fit into A or B.
  • This review of subsidiaries will be carried out every 6 months to ensure businesses are on track and milestones are being achieved.
  • Over the last 4 years, profits of M&M were being eroded by the loss-making subsidiaries- 1% in FY17, 12% in FY18 because of international subsidiaries, 25% in FY19, and over 1.7% in FY20.
  • 2 years ago, M&M management started ‘challenge round’ where as Head of Group Strategy, Mr. Anish Shah was asked to challenge all proposals and recommend to the board whether to invest or not. In the process, tough calls have been taken on two-wheeler business, Baby Oye, and Mom and Me among others.
  • In 4QFY20, M&M took a call to stop further investments in SsangYong and Gen Z. Almost 60% of losses came from SsangYong and Gen Z.
  • By the end of this FY21E, the remaining loss making subsidiaries will be addressed and shut down in absence of a clear path. Entering into FY22, a lot of these problems will be history.
  • M&M aims to have a simpler structure going forward. While the focus is looking at the loss making subsidiaries and getting them back on track, M&M does not want to change the spirit of entrepreneurship.
  • Multiple reasons led to the losses in last 2 years. The environment is one reason and excess confidence in some business is the other. Essentially, there will be a higher financial discipline that will come in.
  • M&M’s share price, as of high of August 2018, had a 31% annualized growth rate over a period of 17 years. The factors that drove this return were, – earnings-per-share growth of 34%, cash generation of Rs 23 bn per year on an annualized basis and annual return on equity of 22%. In order to get back to that kind of performance, M&M will have to get back to 20%-22% RoE and 30%-plus growth rate in cash generation.
  • M&M’s ROE in the last few years has gone down from 20% to 12%. In stage 1, by fixing loss making subsidiaries M&M should be back to 18% ROE. In the next stage, taking a look at 0-10% ROE businesses and fixing them, should mean going back to 20-22% of ROE.
  • M&M’s preference is to have a solid and conservative business over a rapidly growing risky business. M&M Finance’s business is strong and M&M is putting in capital to ensure that in any scenario, if things get much worse, there is no impact on the business. Mahindra Finance has always raised capital before it is needed, so they didn’t wait until the capital was needed. There were some analyst concerns regarding the capital issue but M&M is confident that M&M Finance should have a very high degree of subscription.
  • M&M aims to be the gateway to the largest and fastest growing themes in India and hospitality is one of them. M&M has a timeshare model and a long-term bond with the consumers. As a result, M&M expects that it’s hospitality business may not be impacted much. Post the COVID-19 crisis, M&M’s hospitality business can grow much faster.
  • As for Meru, M&M is looking at it closely to see what the real path to profitability is. M&M does not have a definitive answer to that yet.

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

  • The closing price of M&M was ₹ 563/- as of 09-July-2020. It traded at 22.1x/ 16.7x the consensus EPS estimate of ₹ 25.5/ 33.7for FY21E/ FY22E respectively.
  • Consensus target price of ₹ 556/- implies a PE multiple of 16.5x on FY22E EPS of ₹ 33.7/-.

 

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.”

 

Technology will drive the economic recovery: Tech Mahindra CEO

Update on the Indian Equity Market:

On Wednesday, NIFTY ended down 94 pts (-0.87%) at 10,705.
Among the sectoral indices, METAL(+1.57%), FMCG (+0.84%) and PHARMA (+0.71%) were top gainers while AUTO (-1.95%),REALTY (-1.95%)and IT(-1.72%) were among the top losers.
Among the stocks, INDUSINDBK (+4.5%), VEDL (+2.7%) and JSWSTEEL(+2.31%) were the top gainers. BAJFINANCE(-4.62%), ZEEL(-4.6%) and ASIANPAINT (-3.25%) were the top losers.

Technology will drive the economic recovery: Tech Mahindra CEO
Edited excerpts of an interview with Mr. C P Gurnani, Chief Executive Officer, Tech Mahindra with Economic Times dated 7th July, 2020:

Need for digitalisation is on a high and so it is still advantage Indian IT industry.
Manufacturing, travel, logistics, hospitality are some of the sectors re-inventing themselves to be future ready and we are helping our clients to cope with the post Covid world., says CP Gurnani, CEO, Tech Mahindra

• When asked about his views on future of IT companies, he said that most of the Tech M family have remained safe and healthy, the pandemic have impacted few lives and locations. The command and control centre of the company is constantly monitoring the wellbeing of the employees.
• His comments on IT sector’s performance as compared to the month of Mar-20, now that the Pharma, financial and telecom sectors have normalized: He believes that here will be two quarters of stress and if the second wave is not that strong and till the time a vaccine is not discovered, overall global IT spend will come up. Technology will drive the economic recovery and the way consumption is done. So he remains optimistic but at the same time conscious that manufacturing sector, travel, logistics, hospitality are some of the sectors which are re-inventing themselves to be future ready ad Tech M is helping their clients to cope up with the post Covid world.
• When asked about IT budgets and client engagement he informed that they are all seeing increased demand from sectors like telecom, healthcare, pharmaceuticals, media and entertainment and e-education. So that is the positive side. The second positive side is the growth of the digital economy. The need for digitalisation has become equally important for the corner shops or the grocery shops. People now want to participate in the digital economy, even the retail sector. The stress is only for offline, the online retail sector is doing well. So technology and online services are playing a critical role during the lockdown and in a lot of ways, the feeling of optimism is relative and the relative part is where we will continue to see demand.
• When asked about his views on telecom sector and whether it is now going to be the driving vertical because globally spend in telecom and data is only going to intensify, is Tech M in a position to capitalise on it, Where does he see the telecom business moving for Tech Mahindra, he answered that a lot will depend on the next quarter results because all of us understand that the new age technologies like 5G, AI, machine learning, data analytics, Cloud, automation will be the drivers for change in growth for the telecom businesses. How we translate it into revenue will depend upon how these organisations respond to economic development or in certain cases, a little bit of a slowdown in the economy. He also requested to remember that at this stage the stimulus money has kicked in. The US is about 17-18% deficit, India would be about 7-8% deficit. If we follow the money and look at the digital requirements, there is business to be had but a lot depends on how the world responds over the next two quarters.
• When asked about the reason why market is not rewarding Tech M with best PE multiple and lower margins, he stated that the Board has asked for a plan which addresses three parts to what Tech Mahindra will do. Number one is the industry mix. Number two is geography mix. One of the biggest challenges, which is an advantage as well as a disadvantage is that US business is only 45-48%, the rest of the world is 55%. That has effectively meant the energies which have gone into operating in Latin America or operating in Africa could have been better used. Tech M is now working on a plan focusing on: a) geographic reach, b)service offerings and c)some of their big bets like 5G have been relatively slow but he committed to the board that we do understand the challenges. We are going to follow the path of differentiated connected solutions strategy at the same time, we need to do a better job of choosing a few of the geographies particularly where because of the local labour policies, it becomes very difficult to operate profitably. So we are conscious of the need for turnaround or transformation. We are very clear and know the direction, now we need to bring in the speed.
• When asked whether the Covid crisis have pushed the plans forward by 6 or 12 months, he replied that he will attend the financial analysts meet himself in November-20 and would give definitive answers. Till that time, because of the uncertainty called Covid he would want to reserve his comments but the strategy, direction and speed — all three are high on his radar.
• His views on work from home: Today, 93% people are working from home. About 6% to 7% go to work which is also because there are clients in Australia, Philippines, some in the US, who have restrictive and more stringent policies. So till December, the ratios are not going to dramatically change. Most of the clients have accepted that work from home is the reality. The positive outcome to all of this is that most of us are now becoming a lot more conscious about data security, cyber security and making sure that we use and equipment which are part of the Tech Mahindra ecosystem. The last thing you want is risks off too much of distributed processing. So 25% to 30% work from home is a given in the future. People like him would still go to office because some people like to interact with people, to have some cooler talk, go to the canteen and ask people for feedbacks and listen to them. Similarly, he would like to visit his customers. So, he thinks about 25% to 30% at any given point of time will be work from home. About two days in a week, people would like to come back to work. The structured interactions, the whole human machine technology refresh will happen in those two days a week. It is interesting times, but the new normal is here to stay.
• When asked about the cost structure and any chances of cost reduction due to work from home he said that in a lot of ways most of Indian IT companies despite being a $181 bn business had stopped investing a lot on campuses. The reason was that most of the growth was coming which was non-linear growth. Number two, it is also evident that if 25% of the workforce is common for everybody, then we do not need commercial space for a long time.The third part is it is not that the employee cost or the infrastructure cost will come down dramatically. Wewill have to start providing some level of allowances which compensate because people are not spending their time and energy from coming to the workplace. In balance, it is a good thing for the industry. It is a great thing for the gig economy, it is almost a wonderful thing for a flexible workforce and it is a wonderful thing for adoption of AI and machine learning.
• His outlook on India specific business for IT companies as no Indian IT company gets even 10% of the business from India : Most of us are hesitant about India business. Nasscom has been trying to persuade various government departments on the payment terms. Unfortunately, what has happened is that IT buying is almost like they used to buy hardware where the manpower cost was probably 6% or 7%. Today the manpower cost in any IT project is 60% to 70%. So, in payment terms and the way acceptance of the solution is addressed, the Indian government has not adopted itself to the new normal. We have seen it in the last two-three years that the Indian IT spending may have gone up, but the players which are participating, have only got very limited. India Inc has to spend more on IT needs. It has to realize the need for cloud, need for cyber security is very high and at the same time it has to take into account that whether we like it or not, employee payroll has to be delivered every month and you cannot have a situation where an employee works for a project and get paid after a year.

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

• The closing price of Tech M was ₹ 582/- as of 08-Jul-20. It traded at 14x/12x the consensus EPS estimate of ₹ 40.8/50.3 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 647/- implies a PE multiple of 12.9x on FY22E EPS of ₹ 50.8

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.”

Steel companies in India running at 90% capacity – Jindal Group

Update on the Indian Equity Market:

On Tuesday Nifty closed 0.3% higher at 10,799. Among the sectoral indices, Pvt Bank (+2.7%), IT (+2.1%), and Bank (+1.9%) closed higher. Metal (-1.7%), Realty (-0.7%), and FMCG (-0.4%) closed lower. Bajaj Finance (+7.8%), IndusInd Bank (+5.9%) and Bajaj FinServ (+4.5%) closed on a positive note. Adani Ports (-3.5%), PowerGrid (-3.0%) and Grasim (-2.9%) were among the top losers.

Excerpts from an interview of Mr Sajjan Jindal, Chairman, Jindal Group with ET Now dated 6th July 2020: 

  • Speaking about the current economic scenario he said the June GST collection of Rs 90,000 crore gives a good indication. The auto industry is sluggish and is operating at about 30-35% level from a production perspective.
  • October this year could be better than last October.
  • For steel products, domestic demand is about 50% of the capacities which is about 50-60 million tonnes for the year. By the end of the year, it is expected to go to the normal level, which is 110 million tonnes.
  • The steel industry in India is balancing the current situation by exporting steel to different parts of the world. Therefore, steel companies in India are running at close to 90% capacity.
  • There should not be any control over imports and exports. But when it comes to China, the country has not behaved properly with India.
  • The steel companies buy refractories from China for steel making and it is one of the important ingredients for manufacturing steel. The company buys 90% material from China, but there are plans to bring down the dependence on China and focus on domestic manufacturing or exports from other countries. 
  • In the beginning, there will be a pain as Indian supplies are going to be expensive. The company will work with Indian producers and the emerging markets to bring down the cost and improve the quality.
  • The group has given clear instructions that they will not import any material directly from China which is close to $400 million.
  • The industry has to come together to support the army and government and automatically this will go a long way in developing the Indian industry.
  • On Coal Import, he said India does not have good quality metallurgical coal needed for manufacturing steel. So, the company have to import that. The group cannot be 100% self-reliant on everything. But importing manufactured products is not a great idea. So the industry should be developed.

Consensus Estimate: (Source: market screener websites)

  • The closing price of JINDALSTEL was ₹ 156/- as of 07-July-2020.  It traded at NM/20 x the consensus earnings per share estimate of ₹ -6.3/7.8 for FY21E/ FY22E respectively.
  • The consensus average target price for JINDALSTEL is ₹ 176/- which implies a PE multiple of 23x on FY22E EPS of ₹ 7.8/-

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.”

Demand will not be affected due to peak prices – HPCL

Update on the Indian Equity Market:

Markets started the week on optimism as Nifty closed the day 1.5% higher at 10,764. The optimism was such that within the Nifty index, 40 out of 50 stocks ended in green. The top gainers for Nifty 50 were M&M (+7.4%), BAJFINANCE (+6.5%) and HINDALO (+5.7%) while the losing stocks for the day BAJAJAUTO (-1.1%), GAIL (-1.0%) and BHARTIARTL (-0.9%). Ten out of 11 sectors ended the day in green led by REALTY (3.0%), AUTO (2.9%) and METAL (2.5%) while PHARMA (-0.6%) was the only sector in the red zone.

Edited excerpts of an interview with Mr M K Surana, Managing Director and Chairman, Hindustan Petroleum Corporation Ltd. (HPCL); dated 6th July 2020 from CNBC TV-18:

  • Sales during the current quarter were 88% of the last year’s same quarter. As construction and industrial activities pick-up, the company expects to reach hundred percent of last year’s sales figure in the coming quarters.
  • He mentioned that the demand for fuel is not expected to get affected due to peak prices. This is because the price elasticity is not profound in India due to the nature of the requirement. 
  • The current situation has made people opt for personal vehicles for commuting. People are buying vehicles irrespective of the price of fuel for safety reasons. He expects this trend to continue in the coming months as well. 
  • About the marketing margins, he mentioned that the rise in price of petrol and diesel is in line with global markets. Whenever the price of raw material rises, it hurts the margins of the company as the base becomes larger. 
  • The prices are going up because of the rise in international crude prices. Oil marketing companies have no say in determining the final prices so the margins get affected during a surge in crude prices.
  • Generally, the company derives 50% of the fuel demand from urban markets, 15% demand comes from highways and remaining 35% comes from the rural markets.
  • Initially during the lockdown, the percentage of rural demand was more than highways and urban demand. As the unlocking of economy is taking place, the demand is again increasing in urban and highways whereas rural demand remains intact.

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

  • The closing price of HPCL was ₹ 216/- as of 6-July-2020. It traded at 7x/ 5x the consensus EPS estimate of ₹ 32.6/ 39.4 for FY21E/ FY22E respectively.
  • The consensus target price of Rs 274/- implies a PE multiple of 7x on FY22E EPS of ₹ 39.4/-.

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.”

Resurgence of demand across India, exports to take a little longer – Bajaj Auto

Update on the Indian Equity Market:

On Friday, the Indian market ended higher, making it the third straight week to end with gains. The Indian government’s approval of the acquisition of missiles, ammunition, and weapon systems worth Rs 38,900 crores led to the rally in defense stocks’ shares. Nifty ended 0.5% higher at 10,607. EICHERMOT (+4.2%), ADANIPORTS (4.1%), and BHARTIARTL (+4.1%) were the top gainers, while JSWSTEEL (-1.8%), TATASTEEL (-1.8%), and INDUSINDBK (-1.5%) were the top losers. Among the sectoral indices, IT (+1.1%), REALTY (+1.0%) and AUTO (+0.9%) ended in the green, while PSU BANK (-0.9%), PRIVATE BANK (-0.5%) and BANK (-0.5%) ended in the red.

Mr. Rakesh Sharma, Director, Bajaj Auto discussed the June auto sales data with CNBC TV18 on July 2nd, 2020. Here are the edited excerpts of the interview:

  • A lot of pent-up demand was witnessed in the past month wherever the dealer network was opening up.
  • In the last couple of weeks, they have noticed even spread of resurgence in demand. Initially, it was thought to be a semi-urban, and rural area phenomenon. Now, it is the urban areas that are responding and coming back extremely well.
  • There is optimism in the rural areas driven by the agricultural sector. In the urban areas, there is a revaluation of the mode of transport and a lot of the urban areas are driven by the need to adopt a safer mode of transport. In the last 10-15 days, demand has returned on both, the urban and rural sectors. Bajaj Auto is hopeful that this will continue into the next quarter.
  • Talking about production, he said there was a little bit of turbulence towards the end of June. Otherwise, production including their vendors and plants is completely geared up. In the niche areas of high-end bikes and electric scooters, their response rate was lower. Overall, they have responded to 90-95 percent of the market demand.
  • Had the logistical disturbances not existed in the last days of June, they could have catered to about 100 percent of the demand, except for the niche products.
  • The June story is a ramp-up story of the vendors, of the plant and of the dealers. Bajaj Auto has been able to increase their market share and share of exports. It can be said the June story is not so much of the demand coming up but the supply side coming up to speed to a very different situation.
  • Taking into consideration the fact that more Covid cases could break out, in the dealerships, and at the back end, Bajaj Auto is much better prepared and would not face any restraining issue going forward.
  • At the Aurangabad pant, there have been 40 cases and 3 casualties and there is no escalation. There is a constant effort for testing and contact testing. Production had gone way down to ensure rigorous contact testing, reporting, and sanitization. Now, production is back to normal, people are reporting to work.
  • Moving to exports, Africa has come back well and running at about 80 percent levels. ASEAN is slightly behind, at about 65 – 70 percent. Latin America is a bit of a concern as the recovery is only at 50 percent level. From shipment point, the return to normalcy will most likely be by August or September, as in transit stocks in exports are much higher and have to be calibrated with the low demand of the first quarter. Now that calibration is continuing to occur and is expected to be completed by August and expect to see some kind of normalcy in shipments coming back.

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

  • The closing price of Bajaj Auto was ₹ 2,935 on 03-07-2020. It traded at 20x/ 17x/ 15x the consensus EPS estimate of ₹ 147/175/198 for FY21E/ FY22E/ FY23E respectively.
  • The consensus target price of ₹ 2,774/- implies a PE multiple of 14x on FY23E EPS of ₹ 198/-.

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.”

 

When should you sell your stocks?

Ben Carlson reminds us that there is always going to be a good reason to sell out of the stock market. When stocks were getting slaughtered in March, investors wondered if they should sell because it felt obvious stocks would fall further. Now that stocks have rallied, investors are wondering if they should sell because it feels obvious stocks have risen too far, too fast.

So when should you sell some or all of your stocks?

  1. When you need to rebalance: The simplest form of selling comes when you have a target asset allocation in mind and religiously rebalance back to your target weights on a set schedule or pre-determined threshold. The timing of a rebalance will never be perfect but setting up a specific asset allocation that takes into account your willingness, ability and needs to take risk removes the temptation to go all-in or all-out based on your gut instincts and sell based on a set plan.
  2. When you’ve been proven wrong about an investment thesis: This one is more relevant for those who hold more concentrated positions in a single stock. Every investor should perform a premortem that signals when it’s time to pull the plug and bail on an investment idea that simply didn’t pan out. This can be harder than it seems because What if I just wait until it breaks even?! or What if it rallies right after I sell?! are both rather compelling arguments in a loser position.
  3. When you’ve won the game: If you’re lucky enough to amass something in the neighbourhood of 20-25x your expected living expenses in retirement and have a decent handle on your spending habits, at a certain point you may ask yourself—What’s the point of playing anymore?
  4. When you’ve determined your risk profile, time horizon or circumstances have changed: Every portfolio decision doesn’t have to come down to market fundamentals. You must also consider how your current circumstances impact your risk profile. Sometimes you need to dial down the risk because you’re in a better place financially than you expected. Maybe you received an unexpected windfall or aren’t spending as much as you budgeted for.

Carlson concludes that it is impossible to create a portfolio if you don’t have a handle on your goals and a reason to invest in the first place. Markets matter but you should always begin the investment decision-making process by thinking about where you are—and where you’d like to be.

We plan to raise Rs 6,000-8,000 crore in FY21 – Canara Bank

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green at 10,552 (+1.2%). Top gainers in NIFTY50 were M&M (+6.4%), HEROMOTOCO (+5.2) and TITAN (+3.8%). The top losers were AXISBANK (-1.9%), UPL (-1.0%) and VEDL (-0.9%). Top sectoral gainers were Auto (+2.8%), IT (+2.6%) and Metal (+0.6%) and sectoral losers were Bank (-0.1%) and PSU banks (-0.1%).

Edited Excerpts of an interview with Mr. LV Prabhakar, CEO, Canara Bank Ltd with Financial Express dated 2nd July 2020:

  • They have recovered from written-off accounts about Rs 1,470 crore, which is nearly 13% higher. Apart from that, the CRAR has been maintained at 13.65% and gross NPAs have been brought down by 62 basis points to 8.21%. PCR has increased by 773 bps to 75.86%.
  • This time, sufficient provisioning for all the expected risks has been made. For staff expenses, they have extra provision of about Rs 1,100 crore. NPA provisioning, they have set aside about Rs 11,596 crore for the year and for the quarter, they have made about Rs 5,300 crore.
  • As Syndicate Bank is getting merged with them, they have made Rs 340 crore extra provisioning.
  • In Q1FY21, they declared Dewan Housing Finance as a fraud. They have taken the impact in Q4FY20, which is about Rs 497 crore of extra provisions.
  • They have done extra provisioning because in the Covid scenario, they want to make their balance sheet strong. So wherever possible, they have proactively made provisioning. Simultaneously, they have taken care that CRAR did not get affected.
  • In the first month of Q2, they will have a board meeting, in which they are planning to get an approval for Rs 6,000-8,000 crore of capital. As of now, their capital ratios are adequate.
  • In order to factor in growth and any probable effect (of Covid), they are planning to go for a capital raise. This will be raised in Q3 or Q4 of FY21 in the form of or maybe AT-I (additional tier-I) bonds.
  • There is a risk there because now nobody wants to subscribe to AT-I bonds after some problems with another bank , or they could go for some kind of tier-II issue. In March 2020, they raised Rs 3,000 crore at 7.12% in tier-II category.
  • In terms of the number of borrowers, 19% and in terms of amount, 17% of the borrowers have availed moratorium.
  • Some people have preferred to pay back. In the MSME segment, about 38% of the people have opted for it, whereas in retail it is only 5%. Some of them are housing loans and a few for vehicle loans.
  • Whatever deferment is available is going to be for accounts which have defaulted after March 25. Before that the cases that came can be taken forward.
  • They expect that about Rs 3,700 crore will be recovered from NCLT in FY21. The main account expected (to be resolved) is Bhushan Power and Steel.
  • With Canara Covid support and the 100% government-guaranteed emergency credit line, in the last three months they have already disbursed about Rs 91,600 crore.
  • In FY21, they expect growth ranging around 7-8%. There will definitely be demand from retail for housing and vehicle loans. With all the support that MSMEs, there should be traction there, too.
  • NBFCs always need money because they invest further. As soon as the infrastructure side picks up, there will be demand from corporates as well.

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

  • The closing price of Canara Bank Ltd was ₹ 105/- as of 02-July-2020.  It traded at 0.3x/ 0.3x the consensus book value of ₹ 337 /336 for FY21E/22E respectively.
  • The consensus price target of Canara Bank is ₹ 127/- which trades at 0.4x the book value of ₹ 336/-

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.”

Steel consumption up in sectors linked to rural economy – Tata Steel

Update on the Indian Equity Market:

On Wednesday, Nifty ended 1.2% higher at 10,430. The top gainers for Nifty 50 were Axis Bank (+6.3%), UPL (+5.3%), and Bajaj Finserv (+5.2%) while the losing stocks were NTPC (-2.1%), Nestle (-2.1%) and LT (-2.0%). Sectoral gainers for the day were PSU Bank (+3.6%), Bank (+2.8%) and Financial Services (+2.7%) while the losers were Pharma (-1.0%), Realty (-0.7%) and IT (-0.2%).

Edited excerpts of an interview with Mr TV Narendran, CEO & MD, Tata Steel Ltd; dated 30th June 2020 from Economic Times:

  • The Company had tough six-seven months of the financial year starting from April last year till maybe October or November. Things started looking up after November. The demand started picking up. January to June is a peak season for steel consumption in India. So the steel demand was picking up. Apart from the auto industry, other industries were looking better and the steel prices were moving up. The Company started sensing things were going wrong because of the pandemic. It impacted them in Europe in February and they knew it was going to come to India as well. Tata Steel started taking some precautions by the end of February in India.
  • Prices in India were static because there were no sales but the fact that inventories were building up meant that all Indian producers were trying to export. So the export markets were crowded with Indian suppliers towards the end of March and early April.
  • By the end of April, China started pulling in quite strongly so a lot of steel exports started going to China. The Company saw a recovery of the international markets starting in April.
  • Between April, May, and June, steel prices have gone up by about $50 a tonne. The fact that Indian steel producers could export and had an export option, kept the domestic prices quite stable.
  • There was some pricing pressure because the prices have been trending upwards till March. There were some price corrections in May when the transaction started but the international prices were quite strong.
  • Consumption growth was seen in sectors which are linked to the rural economy.
  • In the automotive business, the tractors business has been reasonably strong. Motorcycles have been stronger than scooters because they are both dependent on the rural economy.
  • Rural infrastructure spending by the government has been positive. Tata Steel sells a lot of steel i.e., about 20% of their revenues, to the rural economy. The roofing sheets and reinforcing steel for the individual house builders segments are panning out strong.
  • The non-tractor and non-motorcycle automotive commercial vehicle, passenger vehicles are still quite a weak sector. There is some sign of improvement. Any improvement is only going to get them back to where they were last year and not where they were a year before last. So, it is a long haul back for them, according to Mr Narendran.
  • Tata Steel saw an EBITDA improvement in Kalinganagar and Jamshedpur of about Rs 2,000-2,500 a tonne Quarter on Quarter (QoQ) which was on the back of cost takeout and price hikes. Tata Steel would have sold at least half a billion tonnes more had there been no lockdown. This would have helped them in cost as well as realisations. They have lost half a billion tonne of March sales which was at the highest price.

Consensus Estimate: (Source: market screener website)

  • The closing price of Tata Steel Ltd was ₹ 324/- as of 01-July-2020. It traded at 6.8x the consensus EPS estimate of ₹ 47.8 for FY22E.
  • The consensus target price of ₹ 376/- implies a PE multiple of 7.9x on FY22E EPS of ₹ 47.8/-.

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.”

Replacing China as a global chemical supplier is a medium to long term story- Lupin

Update on the Indian Equity Market:

 

On Tuesday, Nifty closed marginally lower at 10,302. Within NIFTY50, SHREECEM (+3.1%), MARUTI (+2.7%), and ICICIBANK (+2.6%) were the top gainers, while BPCL(-2.5%), POWERGRID (-1.9%) and SUNPHARMA (-1.9%) were the top losers. Among the sectoral indices, AUTO (+1.1%), FMCG (+0.3%), and FIN SERVICE (+0.3%) gained the most.  PSU BANK (-1.8%), MEDIA (-1.7%) and PHARMA (-1.5%) were the losing sectors.

 

Replacing China as a global chemical supplier is a medium to long term story- Lupin

 

Excerpts of an interview with Mr. Ramesh Swaminathan, Global CFO –Lupinpublished in Economic Times dated26thJune 2020:

  • The US Generic market has seen different phases in terms of pricing in the last 2 decades. Pricing was good during 2001-2005. In the 2005-2009 period, there was a sharp decline in prices which picked up later. 2011-2015 saw some tailwinds for pricing. 2015 onward due to customer consolidation and increased competition in generic space, the Pharma companies lost bargaining power leading to pricing pressure. However today, the situation has stabilized and everything depends on the portfolio.
  • There have been a lot of Indian generic entrants in the US generic space and that is where the competition is higher. US companies such as Teva, Mylan, and Sandoz have lost market share to the new entrants. But the smaller companies are now realizing that earning ROCE is not as easy. Companies have to invest in FDA approved manufacturing facilities of different kinds, there is a waiting period for getting ANDA approvals, and there is a working capital blockage. As a result, some players are backing out which will bring some pricing stability going forward.
  • In the last several years, Lupin, along with the other bigger companies, is focusing on delivering more complex generics including complex injectables, inhalation, etc. Complex injectables as a segment are growing at over 6-7%. Inhalations segment is growing at over 15%. These segments have lower competition because of the complexity involved.
  • In the specialty segment, a lot of the products are coming into the market over the next few years, which will help with the realizations for Indian generic companies. Companies need to have deep pockets because Specialty calls for a very different kind of approach. Innovation quotient and clinical data play a critical part.
  • Biosimilars is the sunrise industry for Indian pharma companies. There are considerable entry barriers, but once a company has a clone, has done immunogenicity studies well and, then potentially development risk will be mitigated. The pricing will also be better due to lower competition. Europe has adapted more to biosimilars. Once the American market picks up, the realization for players in that market would be much higher.
  • Lupin has got into women’s health because that is one space which has been vacated by big pharma and to that extent, the competition there is much lower.
  • Replacing China as a chemical producer for the world will be a medium to long term story. India has about 25% of USFDA approved API capacities in the world but there is still some way to go when it comes to supply. The government is trying to encourage this shift but the investments have to materialize.
  • There are 3 specific growth drivers for Indian pharma companies. One is the large American market, specifically the complex products which Lupin is also getting into. Second, the Indian domestic market is still underpenetrated. Due to the COVID-19 situation, there is going to be thrust from the Indian government and more public awareness which will aid faster growth. Third, many emerging markets are underpenetrated and if the portfolio is right, there is potential for growth in those markets.
  • There might be some demand contraction in India as well as America due to COVID-19 disruption. However, it is a very temporary situation and the second half of FY21E will be much better.
  • The flavor of the day seems to be a nationalistic foot forward. We can see in India as well as in America and other parts of the world. Lupin has been conscious about this for a while and has local manufacturing in countries where it operates. For Indian pharma companies, the basic paradigm should be low-cost manufacturing from India but supplemented with local manufacturing capabilities in overseas markets.

Consensus Estimate: (Source: market screener website)

  • The closing price of lupin was ₹ 910/- as of 30-June-2020. It traded at 31.9x/ 23.4x the consensus EPS estimate of ₹ 28.5/ 38.9 for FY21E/ FY22E respectively.
  • Consensus target price of ₹ 852/- implies a PE multiple of 21.9x on FY22E EPS of ₹ 38.9.

 

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.”

 

We import as there is little choice, should be self-reliant – Maruti Suzuki

Update on the Indian Equity Market:

On Monday, NIFTY ended down 71 pts (-0.7%) at 10,312 amid weak global cues.
Among the sectoral indices, FMCG (+0.7%) was the only gainer while REALTY (-3.6%), PSU BANK (-3.3%) and METAL (-2.6%) were among the top losers.
Among the stocks, BRITANNIA (+2.1%), HDFCBANK (+1.8%) and CIPLA (+1.4%) were the top gainers. COALINDIA (-5.0%), AXISBANK (-4.7%) and TECHM (-3.2%) were the top losers.

We import as there is little choice, should be self-reliant – Maruti Suzuki

Edited excerpts of an interview with Mr. R C Bhargava, Chairman, Maruti Suzuki with Business Standard dated 28th June, 2020:

• The answer to calls for boycotting Chinese imports lies in making Indian manufacturing much more competitive, deeper and widespread, but people should remember that shunning products from the neighboring country may lead to them paying more for goods.
• While stating that importing continuously for long period is not really in anybody’s commercial interest, he also asserted that certain products continue to be imported as there is little choice in the matter due to their non-availability in India, or because of quality and pricing issues.
• Everybody knows that importing products over time actually becomes more and more expensive as the rupee gets weaker. If you were importing something 10 years ago, the same product today will cost 60-70 % higher. So it is not really in anybody’s commercial interest to continue to import, you import because you really have little choice in the matter.
• The answer to the sentiments which are being expressed is to make Indian manufacturing much more competitive, much deeper, and much more widespread. What the Prime Minister has said about ‘Atmanirbhar’ means exactly that. If you start making more products in India at competitive prices, people will not import those products.
• Asked if companies, including those in the automotive sector, need to worry in the wake of rising voices against Chinese imports following Indo-China border clashes in Ladakh, Mr. Bhargava commented that this is a natural reaction to what has happened on the border. We had this happen with Pakistan also. It doesn’t become policy. He thinks the policymakers think carefully before they make or unmake a policy. They don’t react to popular sentiments.
• Explaining why industries in India import, he said that the reason why anybody imports is that either the product is not made in India, not available or what is made in India is not at the right quality or the product made in India is too expensive.
• He also underlined the need to understand whether stopping import will hurt or benefit India. If it is non-essential products it will not hurt us, but if it is essential then stopping imports is going to hurt us much more than it will hurt China. We need to see what the import is, what does it do to our whole industry, whether stopping imports is going to hurt us or benefit us.
• When asked if importing from China is inevitable under the current circumstances, Mr. Bhargava stated that it is inevitable unless we can find alternative sources of imports and which do not raise the prices to a level that consumers will get hurt.
• We should remember that consumers ultimately pays the price of imports, the same people who are asking for a boycott have to remember that in some cases it may lead to them being asked to pay more for the same product and asked are they ready for that.
• He also called for a comprehensive understanding of the circumstances and taking informed decisions on the pros and cons of importing from China before being swayed by sentiments.
• In case of stopping imports from China consumers will not get a car if a car has 2 per cent Chinese imports. He asked that if we stop that 2 per cent and stop making the car, who will it hurt, India or otherwise, how many jobs will Indians lose, how many people will lose a living, how much taxes will be lost.
• Commenting on instances of consumers cancelling bookings of vehicles from a Chinese auto firm, he said that it is the expression of a sentiment and he understands popular sentiment.

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

• The closing price of Maruti was ₹ 5,701/- as of 29-Jun-20. It traded at 39x/25x the consensus EPS estimate of ₹ 147/231 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 5,519/- implies a PE multiple of 24x on FY22E EPS of ₹ 231/-.

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.”