Author - Maitreyee Vaishampayan

Week in a Nutshell (13-17 June)

Technical talks

NIFTY opened the week on 13th June at 15,878 and closed down 4% on 17th June at 15,294. The index is trading below the lower Bollinger band and the next support is likely at 15,183. The recent high of 16,794 might act as a resistance. The RSI (14) of 36 indicates the index is nearing the oversold levels.

During the week, METAL (-9.1%), IT (-8.2%), and PSU Bank (-7.7%) led the sectoral losers. There were no sectoral gainers.

Weekly highlights

  • High inflation has investors worried in recent weeks about a toll on corporate profits and economic growth. On Monday, the S&P 500 confirmed it’s in a bear market at is now down more than 20 percent from its most recent record closing high.
  • After a selloff triggered by a series of interest rate hikes by the Federal Reserve and other major central banks, all three US indices ended in the red this week. NASDAQ and Dow Jones were down 4.8% each while S&P 500 was down 5.8%. The cosmetics company Revlon Inc surged ~80% on Friday after reports suggested Reliance Industries may be considering buying out the company.
  • The Federal Reserve raised interest rates by three-quarters of a percentage point, the most since 1994. Officials have indicated that aggressive rate hikes will continue, with severe measures being used to combat rising inflation.
  • Crude oil prices were impacted as investors worried about the global economic outlook and markets were impacted post interest rate hikes around the world. Brent Oil was down 6.9% during the week and ended at USD 113.6/barrel while Crude oil ended 8.4% lower at USD 110.4/barrel on Friday.
  • The Indian Index of Industrial Production (IIP) climbed from 2.2% in March to 7.1% in April. The April industrial growth rate of 7.1 percent is the highest in eight months, notwithstanding the benefit of a favorable base effect.
  • Wholesale price inflation soared to a record high in May due to rising food and fuel prices, posing a challenge to authorities dealing with high inflation. Wholesale prices climbed to 15.9 percent in May vs 15.1 percent in April and was, according to economists, India’s highest since September 1991.
  • Retail inflation for May was 7.04% from April’s near-eight-year high of 7.79 percent due to a favorable base effect. The fall in inflation in May is unlikely to do much to slow down the Reserve Bank of India’s (RBI) rate hike cycle.
  • Foreign institutional investors (FIIs) continued to be sellers, selling equities worth Rs 232,740 mn. Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 172,270 mn.

Things to watch out for next week

  • Major central banks followed the US Federal Reserve in raising interest rates. Rising prices and tightening monetary policies have rattled investors which dragged the equities world over.
  • S&P Global will release the flash purchasing managers indices (PMI) data for June for major economies later next week. In addition, inflation, and consumer and business climate gauges will also be released. This will provide insights into the current state of the global economy.
  • With quarterly earnings season out of the way, investors will focus on macroeconomic activities and action would be stock specific. Indian investors’ attention will be on the progress of the monsoon across the country.

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.”

A three-dimensional approach to 5G -TCS

Update on the Indian Equity Market:

On Monday, NIFTY closed in the green at 16,661 (+1.9%), led by M&M (+5.0%), TITAN (+4.9%), and INFY (+4.6%). KOTAKBANK (-2.0%), JSWSTEEL (-1.9%), and SUNPHARMA (-1.7%) were few of the laggards. Among the sectoral indices, CONSUMER DURABLES (+4.2%), REALTY (+4.1%), and IT (+3.9%) led the gainers, and there were no losers for the day.

Excerpts of an interview with Mr. N Ganapathy Subramanium, Chief Operating Officer, TCS published in Business Standard on 30th May 2022:

  • The annual report outlines the company’s ambition to reach USD 50bn revenue. Currently, TCS has 600,000 employees with revenues of USD 25bn. It doesn’t want to double the employees to double its revenues, so there is an element of nonlinearity there. The company doesn’t just want to work with clients, it wants a play in the ecosystem.
  • TCS wants to create systems that give real-time information.
  • Metaverse is currently a hype cycle. If it succeeds, the COO would like TCS to be present in that segment as well.
  • TCS will continue to enter unchartered territories. Currently, it is not present in B2B businesses, it may get into consumer businesses in the future.
  • BFSI, being one of the early adopters of technology consumes the largest amount of technology talent and resources. Almost every aspect of banking is changing and demand for transformative solutions in the banking space is at an all-time high.
  • TCS is the largest provider of technology services and has a solid play in the BFSI segment. About 30-35 percent of the world’s population uses the company’s product. In insurance as well, it has built a solid platform, with about 20-25mn policies administered across major markets.
  • Many Indian insurance companies use the TCS platform for processing policies and claims, in both life and non-life.
  • Discussions with clients don’t seem to suggest the peak is over for the IT sector.
  • For FY22, the total contract value (TCV) stood at USD 11.3bn. The quarterly run rate is USD 8-9bn. A year back, it was USD 6-7bn. The company’s focus is on getting the deals, irrespective of the size.
  • TCS is supporting several customers in rolling out the 5G network. Its approach to 5G is three-dimensional. First act as a systems integrator to integrate, deploy the network, and operate it for telco customers. Second how to help enterprises build a private 5G network within their facilities. Third, leverage the two network layers to build vertical applications on top of it. The company’s strength is in software, and with more networks getting softwarised TCS will have a bigger role to play beyond applications.

Asset Multiplier Comments

  • Post FY22 earnings, the management alluded that tech spending continues to remain strong and believes it would be the last to be cut despite an economic downturn. The company is focusing on tech integration led hyperscaler deals in its Industry 4.0 initaitive helping it win more transformational deals.
  • Deal wins across segments, reduction in subcontractor costs and better realisation would likely drive revenue growth in the medium term, while employee costs and attrition are likely to be a drag.

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

  • The closing price of TCS was ₹ 3,380/- as of 30-May-2022.  It traded at 29x/ 25x/ 23x the consensus earnings estimate of ₹ 118/ 133/ 146/- for FY23E/FY24E/FY25E respectively.
  • The consensus target price of ₹ 3,939/- implies a P/E Multiple of 27x on the FY25E EPS estimate of ₹ 146/-.

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.”

Asset Light Model to drive margins – Indian Hotels

Update on the Indian Equity Market:

On Wednesday, NIFTY lost over 200points from the day’s high to close at 16,026 (-0.6%). ASIANPAINT (-8%), ADANIPORTS (-5.6%), and DIVISLAB (-4.1%) dragged the index down. NTPC (+3.9%), HDFCLIFE (+2.9%), and SBILIFE (+1.9%) led the gainers. Among the sectoral indices, FINANCIAL SERVICES (+0.7%), FINANCIAL SERVICES 25/50 (+0.7%), and PRIVATE BANK (+0.3%) led the gainers, while IT (-3.4%), REALTY (-2.9%), and MEDIA (-2.9%) led the losers.

Excerpts of an interview with Mr. Puneeet Chhatwal, MD & CEO, Indian Hotels Company Ltd (IHCL) published in the Economic Times on 24th May 2022: 

  • The Company has launched the Ahvaan (Call to Action) Plan 2025, which is a combination of key strategic imperatives. It remains confident of adding 60 hotels to its portfolio in the next three-and-a-half years, thus reaching the 300th It plans to add more than 400 villas and bungalows to its homestay business.
  • Most of the growth is based on an asset-light model, the management fee incomes and incomes from its old and newly re-imagined businesses like Chambers, home delivery, and homestays will help IHCL increase its margin by another 800 bps. At the end of the business cycle, the company is expecting Pre-Covid margins of 25% to increase to 33%.
  • The backbone of IHCL is the Taj brand, which is complemented by its distribution platform of the selections which has individual properties which are strong names in their respective markets. In addition, there is Vivanta which is an upscale segment.
  • The Ginger business has been re-imagined in the last four years. Qmin, the home delivery, and Ama, homestay businesses are also digital businesses, which will be supported by AI initiatives. IHCL has a separate app that has been very successful in driving more than 50% of the revenue in Qmin and that is the Qmin app. IHCL wants to also move as much as possible with Ama on the digital platform and that will help to grow that brand.
  • Being on the Tata Neu platform which has a loyalty program increases the reach of all of the brands by a significant multiple, which the company would not have been able to achieve on its own.
  • The company is confident that its asset-light model, strict check on corporate overhead, and control of fixed costs have helped it achieve margins above 25% in 4QFY22.
  • Notwithstanding the external shocks, the Company’s brands and their repositioning are driving market share and RevPAR (Revenue per Available Room) up.
  • The supply in the last several years has been constrained and now the demand is beginning to come back both in the corporate and the leisure segments. Leisure domestic has been quite resilient, international is beginning to pick up and government delegations are beginning to pick up.
  • IPL assisted in April and May and when demand goes up and supply stays limited, the rates and the occupancy increases are witnessed.

Asset Multiplier Comments

  • There is an overall recovery in demand for the hotel industry expected in FY23 and FY24, contingent on the virus-related disruptions abating. The pent-up demand coupled with increased priority on the quality of stay post-Covid-19 is expected to propel the industry growth.
  • IHCL with its array of hotels catering to different budgets is expected to be a beneficiary of this recovery, in line with the industry.
  • The management’s asset-light strategy and new revenue-generating avenues bode well for margin and return ratio expansion.

Consensus Estimates: (Source: market screener website)

  • The closing price of Indian Hotels Company Ltd was ₹ 222/- as of 25-May-2022.  It traded at 57x/ 38x the consensus earnings estimate of ₹ 3.9/ 5.9/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 271/- implies a P/E Multiple of 46x on the FY24E EPS estimate of ₹ 5.9/-.

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.”

 

Strong growth expected in Navratna, Kesh King and Fair & Handsome – Emami

Update on the Indian Equity Market:

On Tuesday, the shares of Life Insurance Corporation of India Ltd (LIC) got listed on the bourses and it closed at an 8% discount to its issue price of Rs949.

NIFTY closed 2.6% higher at 16,259, led by HINDALCO (+9.8%), TATASTEEL (+7.7%), and COALINDIA (+7.6%). There was no NIFTY stock that ended in the red. METAL (+6.9%), OIL & GAS (+3.7%), and MEDIA (+3.0%) led the sectoral gainers and no sector ended in the red.

Excerpts of an interview with Mr. NH Bhansali, CEO – Finance, Strategy & Business Development, and CFO, Emami published in the Economic Times on 16th May 2022:

  • New age channels like modern trade and e-commerce are growing very strongly for Emami. These contributed 15% and 13% to domestic sales in 4QFY22 and FY22 respectively.
  • The company has taken price hikes of ~4.5% and may take further hikes in case the need arises. Due to price hikes, strategic procurements, and other cost optimisation initiatives, the gross margin contraction was limited to 30bps and it was 62.4% in 4QFY22.
  • There has been significant inflation for key materials like crude derivatives, vegetable oils, camphor, and packaging materials. Geo-political uncertainty and high inflation is impacting input costs adversely.
  • 4QFY22 witnessed unprecedented inflation which hurt consumer wallets across rural and urban areas, which impacted volumes. With a good monsoon season and an uptick in government initiatives to boost rural income, the management expects the slowdown to fade away.
  • The Company’s rural distribution initiatives like Project KHOJ have continued to progress with ~8,000 rural towns being added in FY22 taking the total tally to 40,000 rural towns which will aid rural growth.
  • Notwithstanding the pandemic-related challenges and inflationary pressure, Emami managed to increase its leadership position and increased household penetration for most of its brands.
  • The Company expects gross margin pressure of ~200bps in 1QFY23.
  • Despite the high base in the pain management portfolio, it expects a strong growth in Navratna, Kesh King, and Fair and Handsome, which have been impacted for the last 2 years due to the pandemic. This would help maintain the double-digit growth rate momentum.
  • The company is expanding its distribution footprint across markets and channels to supplement the growth targets.
  • Emami maintains a bullish view on digital businesses- Zanducare or e-commerce. Through the D2C model, it is connecting directly with consumers and generating superior consumer insights leading to higher offtakes.

Asset Multiplier Comments

  • High inflation and a weak rural sentiment are expected to weigh on the short-term outlook for the company. Unprecedented levels of inflation are leading to downtrading across markets. The impact of downtrading is expected to be lower for Emami as it generates 24% from smaller SKUs.
  • A severe summer season across India and rural recovery post a good monsoon season could act as a tailwind for the company.

Consensus Estimates: (Source: Market screener website)

  • The closing price of Emami was ₹ /- as of 17-May-2022.  It traded at x/ x the consensus earnings estimate of ₹ 16.7/ 20/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 565/- implies a P/E Multiple of 28x on the FY24E EPS estimate of ₹ 20/-

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.”

Optimistic about the motor segment in the future – ICICI Lombard

Update on the Indian Equity Market:

The Indian indices opened the week in the red, reflecting global market weakness. Investors are concerned about the high inflation, which might accelerate the rate hikes. NIFTY ended 1.3% lower at 16,954 dragged by COALINDIA (-6.5%), BPCL (-6.0%), and TATASTEEL (-4.3%). BAJAJ-AUTO (+2.0%), HDFCBANK (+1.1%), and ICICIBANK (+1.0%) were some of the gainers.

Among the sectoral indices, BANK (+0.1%), and PRIVATE BANK (+0.1%) were the only gainers. REALTY (-3.8%), METAL (-2.9%), and OIL & GAS (-2.4%) led the sectoral laggards.

Excerpts of an interview with Mr. Bhargav Dasgupta, MD & CEO, ICICI Lombard (ICICIGI) published in The Economic Times on 22nd April 2022: 

  • ICICIGI announced 4Q and FY22 earnings, which include Bharti Axa business earnings. Considering the standalone numbers coupled with Bharti Axa, the profit growth for FY22 was ~5%.
  • Considering the 4QFY22 quarterly profits, the growth was much better. The Company has outgrown the market.
  • The combined ratio has increased, due to 2-3 factors. Looking at the integrated company suggests Bharti Axa’s combined ratio has always been high. ICICIGI expects to bring it under control in subsequent years. (The combined ratio is indirectly proportional to the profitability of general insurance companies).
  • The profitability of ICICIGI was impacted due to three Covid-19 losses, which were ~ Rs 270mn in 4Q and ~Rs 5,500 mn for FY22. Another impact was due to the accounting methodology for insurance policies. The entire cost has to be accounted for upfront while the revenue (premium earned) is accounted for throughout the policy. In the case of a 12-month policy with a majority of the business undertaken in March, the full cost is accounted for in March while the topline is earned over the next 12 months.
  • The CEO believes a long-term shift is on the way and health consumption behavior is going to change. The change he believes is not just due to the pandemic and digitisation but it has been a global trend for some time now. Health consumption is expected to be very personal, self-driven, and digitised in the long term.
  • Traditionally health insurance in India has focussed on just the hospitalisation costs. But healthcare is about the continuum of preventive care, wellness, fitness, hygiene, and outpatient care. ICICIGI’s approach is providing the entire continuum of care including a pure insurance policy for OPD costs and wellness (preventive, advisory, and fitness).
  • People are willing to consume health in a digital mode. Telehealth, video-based consulting, and increasingly home-based care if the ailment is not severe – there are the components ICICIGI has built on in the last 2 years and is now investing to scale up distribution.
  • With the Bharti Axa acquisition, ICICIGI has inherited some of the crop insurance business. There, most of the commitments are for a longer time so ICICIGI will stay invested in that business for that period.
  • In the previous year, the motor insurance sector has been tepid. The biggest shift that happened in FY22 was health insurance has become number one for the general insurance industry. Traditionally, the motor has been the biggest segment, but in FY22 the new vehicle sales were muted.
  • ICICIGI expects growth momentum once the chip shortage issues are sorted in the next five-six months. It expects a pickup in rural demand for two-wheelers and is optimistic about the motor segment growth in the medium term.
  • Health insurance is expected to continue to grow as it is a very underpenetrated sector.
  • The company has taken small price hikes in motor insurance. On the health side, ICICIGI is not thinking of a price increase for its retail customers as it has profits of ~Rs 40-50 bn despite paying Rs 250bn Covid-19 claims.
  • The Company is not planning an immediate price hike on the retail health portfolio as it believes there are one-off episodes that are unlikely to sustain. Healthcare inflation is a worry and ICICIGI believes there is a need for more discipline in terms of pricing. Should the healthcare providers inflate the cost of healthcare, the Company may have to increase its prices.

Asset Multiplier Comments:

  • We expect a recovery in the motor segment as new car registrations are expected to recover with the improvement in supply chain and semiconductor availability.
  • With an increase in hiring across sectors, the growth in group health premiums is expected to continue. the pandemic has boosted the demand for such policies.
  • Headwinds due to loss of market share in the individual health insurance segment, and aggression by new-age large players are expected to hurt the profitability in the short term.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of ICICIGI was ₹ 1,315/- as of 25-Apr-2022. It traded at 35x/ 28x the consensus earnings estimate of ₹ 38/47 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,556/- implies a P/E Multiple of 33x on the FY24E EPS estimate of ₹ 47/-

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.”

Confident of doubling FY19 VNB in FY23 – ICICI Prudential Life Insurance

Update on the Indian Equity Market:

On Tuesday, Indian equity markets ended in the red for the fifth day in a volatile session. The benchmark index NIFTY50 settled at 16,959 (-1.3%), dragged by HDFC (-6.3%), HDFCLIFE (-6.3%), and SBILIFE (-4.5%). APOLLOHOSP (+5.3%), COALINDIA (+3.3%), and RELIANCE (+3.2%) were the top gainers. Among the sectoral indices, OIL & GAS (+0.8%) was the only one to end in green. IT (-3.0%), FMCG (-2.8%), and REALTY (-2.5%) were the top sectoral losers.

Excerpts from an interview of Mr. NS Kannan, MD & CEO of ICICI Prudential Life Insurance Company (IPRULIFE) with CNBC-TV 18 on 19th April 2022:

  • IPRULIFE announced 4QFY22 and FY22 earnings. APE (Annual Premium Equivalent) grew 20% YoY in FY22, driven by multi-product, multi-channel architecture. VNB (Value of New Business) grew 33% YoY in FY22. In addition to topline growth, the VNB margin grew from 25.1% in FY21 to 28% in FY22.
  • The margin growth can be attributed to the increase in the sale of protection products and a diversified product profile.
  • The Company has an objective of doubling the absolute VNB of FY19 by FY23. IPRULIFE requires 22% growth in FY23 to achieve the target. The growth in VNB will be led by topline growth and margin expansion levers.
  • As the company recovers from the pandemic, it hopes for a much clearer route for growth.
  • Fulfillment was impacted due to the pandemic, the company could not get the medical examination of customers done. Given the awareness of insurance, the demand remains high.
  • VNB has grown from Rs 12,860mn in FY18 to Rs 21,630mn in FY22. The driver for this has been the partnerships established. ICICI bank accounts for ~25% of the topline. The Company has tied up with several banks (7 in FY22), which contribute ~15% of the topline. Direct business is ~13% of the topline. Agency channel contributes ~25% of the business. The well-diversified channel mix has resulted in topline growth despite the challenges posed by the pandemic.
  • The growth driver for VNB margin is product mix. ULIP’s contribution has reduced from ~80% to ~48% of total revenue in FY22. The protection business has also scaled up significantly.
  • The savings business is expected to grow at the nominal GDP growth rate in India. The protection business which is an underpenetrated one is a significant opportunity.
  • The life insurance sector has benefitted from liberalization. Insurance penetration can be measured as a percentage of the sum assured. Based on that metric, IPRULIFE has a 13.5% market share.

Asset Multiplier comments:

  • The insurance sector in India is a multi-decadal opportunity aided by rising disposable income, young population, and awareness. The pandemic has increased the awareness of insurance and digitization initiatives by companies have helped meet the demand.
  • IPRULIFE is likely to see a growth in the Banca channel sales, aided by new partnerships forged in the previous years and a turnaround in sales from its parent, ICICI Bank. With a focus on scaling up the agency and direct channels through recruitment and training of new agents, we expect the topline growth will help it achieve its target of 2x VNB of FY19 by FY23E.

Consensus Estimate: (Source: Market screener website)

  • The closing price of ICIC was ₹ 512/- on 19-April-2022. It traded at 55x/ 48x the consensus EPS estimate of ₹ 9.3/ 10.6/- for FY23E/FY24E respectively.
  • The consensus average target price is ₹ 678/- which implies a PE multiple of 64x on FY24E EPS of ₹ 10.6/-.
  • 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.”

This week in a nutshell (11th – 13th April)

Technical talks

NIFTY opened the truncated week at 17,741 on 11th April. The index closed 1.5% lower at 17,476 on 13th April. RSI (14) of 53 is trending downwards and MACD is trending upwards. On the upside, 18,191 could act as resistance while 20DMA of 17,296 could act as support.

FMCG (+1.7%), and Metal (+0.1%) were the only sectoral indices to close the week with gains. IT (-3.0%), Realty (-2.1%), and Auto (-1.1%) led the laggards.

Weekly highlights

  • IT heavyweights TCS, and Infosys released 4QFY22 and FY22 earnings this week. While the numbers were largely in line with the street estimates, attrition continues to be a problem. While demand continues to be robust, there are headwinds of hiring, salary increments, and return of travel spending.
  • US markets ended the week in the red on Thursday. Bond rates spiked as investors worried about the prospect of aggressive policy tightening in the United States. Oher central banks around the world have started increasing interest rates. Following the release of US economic data for retail sales and jobless claims, the benchmark US government yield increased.
  • Fuel costs rose during the first full month of the Russia-Ukraine war, causing inflation in the United States to reach a 40-year high. While prices began to rise last year as the economy recovered from the Covid-19 outbreak, the most recent monthly report showed expenses for numerous items reaching record highs. According to the report, the increase may be leveling out.
  • The European Central Bank confirmed its asset purchase program will end in the third quarter. Once the bond-buying program is completed, the ECB is expected to begin interest rate hikes, following the Bank of England and the US Federal Reserve.
  • A substantial rise in automobile output in March bolstered US industrial activity for the third straight month, possibly indicating that the worst of the industry’s production woes from 2021 were passed.
  • Oil prices retreated after the release of a larger-than-expected build in the US oil stocks. Brent oil closed at USD 111/barrel while Crude oil WTI closed at USD 107/barrel on Thursday.
  • FII (Foreign Institutional Investors) continued to be sellers this week and sold shares worth Rs 63,342mn while DII (Domestic Institutional Investors) continued to be buyers and bought shares worth Rs 27,674 mn.

Things to watch out for next week

  • The markets are likely to take cues from corporate earnings, and geopolitical tensions between Russia and Ukraine amid rising inflation globally.
  • The Indian markets would react to earnings from IT companies such as Mindtree, Larsen & Toubro Infotech (LTI), and HCL Technologies. While the market leaders have alluded to higher attrition, amidst a robust demand environment, the impact of attrition on smaller companies would be something to watch for.

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.”

CitiBank acquisition provides access to an affluent client base: Axis Bank

Update on the Indian Equity Market:

On Monday, NIFTY crossed the 18,000 mark to settle at 18,053 (+2.2%) aided by the surge in HDFC twins post the announcement of the merger of HDFC Ltd into HDFC Bank. HDFCBANK (+9.8%), HDFC (+9.1%), and ADANIPORTS (+4.1%) led the stock gainers. INFY (-1.1%), TATACONSUM (-0.4%), and TITAN (-0.2%) led the laggards. Among the sectoral indices, FINANCIAL SERVICES (+4.6%), BANK (+4%), and PRIVATE BANK (+3.9%) led the gainers and there were no sectoral losers.

Excerpts of an interview with Mr. Amitabh Chaudhary, MD & CEO, Axis Bank published in Economic Times on 1st April 2022:

  • Axis bank acquired Enam Financials, which was renamed Axis Capital. It is the number one player in the equity capital markets in India and is expanding business in the brokerage and M&A segments. Axis Capital will also benefit from the One Axis strategy.
  • Axis bank was distributing Max Financials’ products for over 10 years, so its acquisition provided an opportunity to sign up for a long-term deal and strengthened the partnership with Max.
  • Citi bank’s retail portfolio acquisition was in line with Axis bank’s strategy of granularizing retail business and premiumisation of the portfolio. The acquisition will create opportunities and synergies that will accelerate the journey to creating a franchise across the country.
  • The acquisition provides access to one of the best affluent consumer franchises in India and Axis bank will get access to salary accounts, 1600 plus corporate accounts, and Suvidha corporates. Axis bank will also gain 3,600 Citibank employees. There are a lot of interesting parts which will strengthen Axis Bank’s franchise.
  • The CEO believes they have structured a transaction where the Bank is protected from customer attrition.
  • The price paid for the transaction was approved by the Board. The transaction took slightly longer because it was a complex one. As it was a purchase of a portfolio, he believes it was better that some of the complications were discovered upfront rather than during the transition process.
  • It will take about nine to twelve months to get all the regulatory approvals. It will take time to get customer consent, which depends on the agreement customers have with Citibank. From there, it will take 18 months to transition every Citi customer to Axis’ platform.
  • Right now, wholesale banking has been muted due to muted credit growth. Axis bank wants to be careful about giving loans at prices where the NIMs doesn’t make any sense. Overall, he believes there is a lot of work that can be done on the wholesale banking franchise.
  • Axis bank’s balance sheet gives it the flexibility to fund Citi India’s consumer purchase through balance sheet liquidity, external capital, or a combination of both. The impact will be 230bps on the CET ratio. Though the resultant CT-1 ratio will be above regulatory requirements, the Bank may consider raising capital in the future.
  • A very important part of any merger of this size is how to execute that merger. The integration management committee has already been formed and some of the important considerations in that plan would be around customer attrition, staff attrition, technology transition, and also getting benefits in terms of ensuring that Axis bank can cross-sell more to the Citibank customers.

 Asset Multiplier Comments

  • We believe the deal will add to Axis Banks’ competitive positioning across the credit cards and wealth management segments.
  • The value accretion from Citibank’s portfolio in the long term depends on Axis Bank’s ability to retain and continually add customers as well as employees and its ability to up-sell and cross-sell. The deal is fairly small compared to the size of Axis Bank’s balance sheet.

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

  • The closing price of Axis Bank was ₹ 784/- as of 04-April-2022. It traded at 1.9x/ 1.7x the consensus book value per share estimate of ₹ 417/ 474/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 943/- implies a P/BV Multiple of 2x on the FY24E book value per share estimate of ₹ 474/-.

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.”

Acquisitions to lower EBIT by 45-50bps in 1st year – PERSISTENT

Update on the Indian Equity Market:

After a volatile session on Tuesday, NIFTY settled at 17316 (+1.2%) near the day’s high of 17,334. IT (+2.0%), OIL & GAS (+1.9%), and AUTO (+1.2%) were the top sectoral gainers. REALTY (-1.0%), CONSUMER DURABLES (-0.7%), and PHARMA (-0.3%) led the sectoral losers. Among the NIFTY50 components, TECHM (+4.2%), BPCL (+3.0%), and TATAMOTORS (+3.0%) led the gainers. HINDUNILVR (-2.9%), NESTLEIND (-2.7%), and BRITANNIA (-2.2%) led the losers.

Excerpts of an interview with Mr. Sandeep Kalra, CEO and ED, Persistent Systems (PERSISTENT) with The Economic Times on 21st March 2022:

  • PERSISTENT recently acquired MediaAgility, which is recognised as a Google premier partner which is the highest level of partnership in the Google ecosystem. MediaAgility comes with seven different Google cloud specialisations, ranging from migration cloud, NetApp development, modernisation, security, etc. In terms of the industry verticals, MediaAgility has a presence in BFSI, healthcare, life sciences, media entertainment, and gaming.
  • Explaining the rationale behind the recently concluded acquisitions, the CEO suggested the enterprises had already started their digital transformation journey before the pandemic. These transformation journeys sped dramatically during COVID, and hyperscalers have taken notice. They’ve been releasing more services, including vertical-specific offers, at an increased rate nearly every month.
  • The hyperscalers – IBM, Google, AWS – are expected to play an incrementally bigger role in the enterprise journey. PERSISTENT is already present in these segments, with revenues over USD 100mn. The recent acquisition of Data Glove added to PERSISTENT’s capabilities on the Microsoft Azure cloud technology.
  • With the MediaAgility acquisition, the Company intends to increase its presence on the Google Cloud Platform. Each of the platforms has their own niches and own customer base and PERSISTENT is trying to be the Uber of the cloud services for its customers.
  • Whenever an acquisition is done, there is a cost of doing it, and the Company expects a 45-50bps hit on the EBIT in the first year. The Company is confident of the acquisition being margin accretive once the integration process is complete.
  • PERSISTENT has established its footprint in BFSI, and healthcare life sciences and has 35plus enterprise customers across the US, India, and the UK. MediaAgility has a delivery centre in Mexico which complements PERSISTENT’s footprint in Guadalajara, Mexico. The acquisition will add over 500 cloud engineers with significant Google-certified capabilities.
  • The Company is following a strategy of bolt-on or tuck-in acquisitions and these would be in areas where it wants to expand its capabilities or expand its geographical footprint.
  • The overall demand environment is continuing to be healthy and over the last 12 months, PERSISTENT has announced deal wins in terms of an ACV of USD 882 mn and in excess of USD 1.1 bn in TCV terms. This Is a fairly healthy run rate in terms of the order book. The overall demand environment is good and PERSISTENT is building a capability that will last irrespective of the demand environment.
  • The revenue growth is expected to be healthy due to strong order bookings. The EBITDA margin is expected to be in the 16-17% range. The Company is looking to grow its capabilities and acquire market share.
  • In terms of long-term aspirations, the Company intends to improve its margin by about 2-3 percent over the next two to three years.
  • Attrition is one of the headwinds to the Indian IT sector. The Russia-Ukraine crisis is expected to increase the pressure on Indian talent.
  • In terms of tailwinds, IT services have a better pricing power compared to commoditised services. PERSISTENT being a specialised technology services company has a little better pricing power.
  • The Company has done multiple acquisitions in the last 12 months, with a capital commitment of over USD 220mn over the next few years. For now, it will take a little pause and focus on integrating the acquired companies. Should there be an opportunity in Eastern Europe, the Company would pursue it over the next 9 – 12 months.

Asset Multiplier Comments

  • PERSISTENT has completed 4 acquisitions in FY22 to strengthen domain capabilities in IBM Cloud, Microsoft Azure, Google Cloud. These acquisitions have helped increase the Company’s presence in verticals like High Tech, BFSI, and Healthcare and bolster near-shore and on-shore presence in North America.
  • IBM has been PERSISTENT’s partner for over 25 years, contributing over 25% to the total revenues in FY21. Alongside addition in domain capabilities, these acquisitions have helped reduce the concentration risk.

Consensus Estimate: (Source: market screener website)

  • The closing price of PERSISTENT was ₹ 4,532/- as of 22-March-2022. It traded at 41x/ 34x the consensus earnings estimate of ₹ 110/ 132/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,682/- implies a P/E Multiple of 35x on FY24E EPS estimate of ₹ 132/-

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.”

‘Experience of the Future’ stores next big thing – Westlife Development

Update on the Indian Equity Market:

On Thursday, NIFTY50 ended in the green for the 3rd straight session at 16,595 (+1.5%). The trends for five state assembly elections may have aided the sentiment as the ruling BJP led in the majority of the seats in India’s largest state of Uttar Pradesh.

Among the sectoral indices, FMCG (+3.0%), PSU BANK (+2.3%), and METAL (+2.3%) led the gainers while IT (-0.1%) was the only sectoral index that closed in the red. Among the NIFTY50 stocks, HINDUNILVR (+5.2%), TATASTEEL (+4.3%), and GRASIM (+4.1%) led the gainers while COALINDIA (-3.8%), TECHM (-1.5%), and DRREDDY (-1.2%) led the losers.

Excerpts of an interview with Mr. Amit Jatia, Vice Chairman, Westlife Development published in Financial Express on 10th March 2022:

  • India has an inflationary tendency, so cutting costs is a part of the Company’s DNA. Vice-Chairman believes sales growth should be accompanied by a 100-250bps cost reduction YoY to survive.
  • If a certain cost increased, the company finds a reduction in some other avenue to maintain the balance. He doesn’t believe this policy will change in the next three to five years.
  • He believes inflation is here to stay. The company takes a 3-5% price hike every year and CY22 will not be any different.
  • Currently, there are a total of 316 McDonald’s outlets out of which 248 have McCafe inside them, which are proper coffee shops.
  • The company is working on accelerating the expansion of its network and plans to have over 500 stores in the next 3-5 years. This will require an investment of over Rs 8bn.
  • The expansion strategy will also be aligned to the company’s omnichannel strategy with a robust portfolio of ‘experience of the future’ (EOTF) stores, drive-throughs, and stores with separate take-out windows. The company will be doubling its drive-throughs within India. Menu innovation, omnichannel presence, and network expansion will continue to be the key levers for Westlife.
  • The EOTF stores are a big thing now, as the company is trying to change the way the QSR industry will operate in the future.
  • There are no favorites when one talks about the McDonald’s brand. Offerings like McAloo Tikki, McChicken, McSpicy, McVeggie are all consumer favourites, and the company is not dependent on one product.
  • The eating behaviour of customers has changed tremendously. Earlier, consumers were focused on snacking when eating out at a QSR, now they are looking at a complete meal. As a result, the Company’s focus has shifted towards larger opportunities which are meals.
  • In the last 2 years, the company has pivoted to become an omnichannel brand wherein the digital channels are accelerated at a phenomenal rate for McDonald’s. Its drive-through, contact-less take-away, on-the-go service ensured continuity of operations. Also, as stores were reopened delivery continued to grow. So, both in-store dining and delivery have provided an impetus to revenue and profitability growth. In 3QFY22, as most of the dine-in restrictions were eased, revenue from convenience channels grew 55% YoY with McDelivery reporting its highest ever revenue so far.
  • The new range of burgers along with the Fried Chicken platform and McCafe helped accelerate the average unit volume growth by 30% without any significant capex investment.

Asset Multiplier Comments

  • With increased focus on hygiene due to the pandemic, customers’ preference has shifted towards branded products. We believe McDonald’s (Westlife Development) is well-placed to benefit from this opportunity due to its brand recall, strong network, and variety of products.
  • With the new launches such as Fried chicken, the company is evolving from being just a burger company and providing tough competition to its peers.
  • With the entry into adjacent spaces such as Gourmet burgers and Fried chicken without incremental capex, the company will be able to improve its margins and provide better returns to shareholders.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of Westlife Development was ₹ 478 /- as of 10-March-2022. It traded at 76x/ 52x the consensus earnings estimate of ₹ 6.3/9.2 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 629/- implies a P/E multiple of 68x on FY24E EPS estimate of ₹ 9.2/-

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.”