Author - Maitreyee Vaishampayan

Plan to cross USD 1bn revenue by FY23 – Laurus Labs

Update on the Indian Equity Market:

The Nifty50 made a comeback in the last hour to end the day a little changed at 14,634. Among the index components, SBILIFE (+5.4%), BHARTIARTL (+4.5%), and ADANIPORTS (+4.5%) ended the day with gains. TITAN (-4.6%), INDUSINDBK (-2.3%), and RELIANCE (-1.9%) ended in the red. METAL (+2.2%), FMCG (+1.1%), and PHARMA (+0.3%) were the top sectoral gainers while MEDIA (-1.4%), PRIVATE BANK (-1.1%), and BANK (-1.0%) led the sectoral losers.

Excerpts of an interview with Mr. Satyanarayana Chava, Founder & CEO, Laurus Labs aired on CNBC TV-18 on 30th April 2021:

  • Laurus Labs recently declared 4QFY21 results, wherein Active Pharmaceutical Ingredient (API) revenue is up 88 percent and formulations are up 61 percent YoY. EBITDA margins reported were 33.4%.
  • They have the capacities, products to be made, and customer demand and expect reasonable growth in FY22.
  • The 30% + EBITDA margin is a benchmark. They will aim to achieve these margins to maintain healthy growth.
  • They continue to invest in infrastructure, investing Rs 7,000mn in FY21. They have earmarked Rs 15,000-17,000 mn for FY22 and FY23 for capex to augment their capacities in all 3 divisions.
  • The growth in API business has nothing to do with manufacturing Covid-19 drugs. The growth came primarily from antiretroviral, oncology and contract manufacturing for other generic companies. So far, there hasn’t been any disruption in the supply chain and no impact is expected from the 2nd Covid wave. There was an increase in logistic cost though.
  • The internal target is to cross USD 1bn in revenues by FY23E. With the capex incurred in FY21 and planned in FY22-23E, there will be a growth in revenues in FY22-23E.
  • The raw material price increase in products such as Paracetamol and Azithromycin was due to higher demand. In the products Laurus labs is manufacturing, the demand has not shot up as it has for the 2 products.
  • They are not passing on any of the incremental costs to customers. Due to covid-19, there was an incremental expense of USD 10mn, which was not passed onto customers.
  • Rather than investing in a one-time product, they are investing in the longer term. There is significant investment being made in the CRAMS business as they foresee sizeable growth in that division.

Asset Multiplier Comments

  • The ramp-up in formulations business is expected to continue over FY20-23E. The execution in the US and EU are crucial to drive the next leg of formulations growth.
  • With a renewed focus on the synthesis segment, with R&D, increase in the number of customers, and addition of capabilities positions Laurus to evolve its business mix over the next 3-5 years.

Consensus Estimate: (Source: market screener website)

  • The closing price of LAURUSLABS was ₹ 478/- as of 03-May-2021. It traded at 22x/ 20x the consensus earnings estimate of ₹ 21.3/ 23.9 per share for FY22E/FY23E respectively.
  • The consensus target price of ₹ 414/- implies a PE multiple of 17x on FY23E EPS of ₹ 23.9/-.

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.”

This week in a nutshell (April 26th to April 30th)

Technical talks

NIFTY opened the week on 26th April at 14,449 and closed on 30th April at 14,631. It made a weekly gain of 1%. The index is trading above its 20DMA of 14,618 which might act as a support. On the upside 50DMA of 14,783 might act as a resistance. The RSI (50), and MACD turning downwards suggests a further possible decline.

Weekly highlights

  • The Reserve Bank of India (RBI) capped the tenure of MDs and CEOs of private banks at 15years. Promoters can hold this post for a maximum of 12 years but the RBI can choose to give them a 3-year extension under extraordinary circumstances. These rules apply to private banks, small finance banks, and wholly-owned subsidiaries of foreign banks. These new rules will apply once the tenure of existing MDs/CEOs for which approvals have been taken is completed. This will impact banks such as Kotak Mahindra Bank, where Mr. Uday Kotak has been the head of the institution for 17 years and there could be a change in the management once his term is completed in 2024.
  • The Securities and Exchange Board of India (SEBI) has directed the mutual fund (MF) industry that a fifth of the salary of top executives is to be paid in the form of mutual fund schemes they oversee. The allotment of MF units will be done every month and will be subject to a 3-year lock-in. The industry welcomed the move as it increases accountability and would ensure a better selection of securities.
  • Several automobile manufacturing companies have announced plans to shut down plants for up to a fortnight from May 1. The surge in Covid-19 cases and scattered lockdowns across states and cities are the reasons attributed to the temporary shutdown. This will impact production and sales in the June-21 quarter.
  • FII (Foreign Institutional Investors) selling and DII (Domestic Institutional Investors) buying trend continued this week as well. There was a net outflow of Rs 44571mn from the FII kitty while DII invested Rs 52833 mn.

Things to watch out for next week

  • The Automobile companies will report monthly volume data for April-21. The data will be important to ascertain the impact of the second Covid-19 wave and lockdowns on the demand.
  • The 4QFY21 result season continues in the next week as well. The Commentary from biggies such as Hero MotoCorp and HDFC will be critical.

Expect 20 percent plus EBITDA margins to continue – Mindtree

Update on the Indian Equity Market:

The Indian Equity market indices gained after the Indian government announced that all citizens over the age of 18 can have Covid-19 vaccinations from May 1.  The markets pared morning gains as investors were worried due to the increasing Covid-19 cases in the second wave. Nifty 50 ended at 14,296 (-0.4%).  Among the stocks, DRREDDY (+3.6%), BAJAJFINSV (+3.5%), and HDFCLIFE (+3.0%) ended with gains while ULTRACEMCO (-4.9%), HCLTECH (-3.4%), and HDFC (-3.3%) led the losers. Among the sectoral indices, MEDIA (+3.0%), PHARMA (+1.3%), and AUTO (+1.0%) led the gainers while IT (-1.4%), FMCG (-0.6%), and FINANCIAL SERVICES (-0.6%) led the losers.

Excerpts of an interview with Mr. Debashis Chatterjee, MD & CEO, Mindtree aired on CNBC TV-18 on 19th April 2021:

  • Mindtree reported 4QFY21 quarterly results, with the consolidated net profit reporting a ~54% YoY growth to Rs 3,174 mn due to strong operational efficiency.
  • Two successive quarters of 5percent plus growth instills confidence in the Company in terms of momentum generated by deal closures.
  • The order book stood at USD 1.4 bn as of 31-March-21. The order book was 12% more than the previous year. The pipeline has never been stronger and with the changes done in terms of the 4*4*4 strategy- the execution is going well.
  • They have focused on some of the strategic accounts and focusing on cross-selling and up-selling as a part of their strategy. Considering these factors, they remain confident of delivering double-digit growth in FY22E and maintaining the margins at 20 percent plus.
  • They have added net 1600 employees in 4QFY21. Owing to a strong pipeline and a high demand, Mr. Chatterjee expects hiring to be robust in the next couple of quarters.
  • The war for talent has aggravated in the last couple of quarters. With a focus on cross-skilling of employees, they have been able to contain the attrition.
  • There has been a delay in BFSI deal closures, which are expected to happen in 1QFY22. Given the interest rate regimes, there have been some in-sourcing trends in the banking clients. Post the deal closures in 1QFY22, there is some recovery expected in the BFSI vertical.

Asset Multiplier Comments

  • The commentary on deal signings, consistent margin improvement, and the ability to sustain these improved margins are key positives for the Company.
  • The pandemic accelerated clients’ interest in Data, Cloud migration, and other disruptive technologies, across IT services companies. This is expected to benefit IT services companies for the foreseeable future.

Consensus Estimate: (Source: market screener website)

  • The closing price of MINDTREE was ₹ 2,033/- as of 20-April-2021. It traded at 25x/ 24x the consensus earnings estimate of ₹ 80.1/ 86.1 per share for FY22E/FY23E respectively.
  • The consensus target price of ₹ 1,857 implies a PE multiple of 22x on FY23E EPS of ₹ 86.1/-.

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.”

Uptick in demand to continue for the next 1-2 quarters – SAIL

Update on the Indian Equity Market:

On Thursday, the Indian equities ended with gains despite the weekly options expiry led volatility. The Nifty50 ended at 14,874 (+0.4%) lower than the day’s high of 14,984. METAL (+3.9%), IT (+1.2%), and REALTY (+0.8%) led the sectoral gainers while PSU BANK (-0.9%), PRIVATE BANK (-0.6%), and BANK (-0.6%) led the losers. JSWSTEEL (+9.6%), TATASTEEL (+5.4%), and SHREECEM (+4.8%) were the top gainers among Nifty50 components. SUNPHARMA (-1.1%), INDUSINDBK (-1.1%), and SBILIFE (-1.0%) led the laggards.

Excerpts of an interview with Ms. Soma Mondal, Chairman, Steel Authority of India Ltd (SAIL) published in The Economic Times on 7th April 2021:

  • There are three reasons why steel prices are among the highest in a decade. One, there have been supply-side constraints, even in the second and third phase of Covid, which has impacted the ramping up of capacities in certain parts of the world. Second, China is expected to close down some inefficient units as they have a target for reducing carbon footprint. Last, being raw material supply constraints have led to a rise in iron ore prices. These factors are driving steel prices up and the demand has picked up.
  • The uptick in demand is likely to continue for the next 1-2 quarters. As prices go up, many closed capacities expected to open up, supply constraints will be eased. The increased supplies are expected to put downward pressure on prices.
  • As the vaccination drive in on, the Covid situation is expected to come under control. This will lead to some pick-up in production, which is currently hampered due to increasing Covid cases.
  • The Company is focusing on reducing its borrowing. In April-20, the debt was Rs 520 bn, which was reduced to ~ Rs 350bn by March-21. They would like to bring the debt level even more because they want to start the next phase of expansion.
  • A total focus on the balance sheet, increased volume thrust on increasing efficiencies, reducing cost, and techno economic improvement will help improve the balance sheet and leverage position.
  • The conversion costs are high for SAIL because of wages and salaries. At higher volumes, this would go down. They are reducing their manpower, hence they are not recruiting as much. With a balanced approach to recruitment and increasing their volumes, the cost of production and conversion costs will be reduced.
  • Their primary aim is to meet the domestic demand and having a strategic presence in the export market.
  • With major capacities not coming up anywhere other than in India, she expects the demand and prices to remain strong. With a lower leveraged position, SAIL would plan the next phase of expansion.

Asset Multiplier Comments

  • The demand from the auto, construction, and white goods sector and infrastructure focus by the Indian government has led to the creation of demand for steel.
  • The strong demand and rising prices since the easing of lockdown restrictions are expected to continue driving the profitability of Indian steel manufacturers.

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

  • The closing price of SAIL was ₹ 96/- as of 08-April-2021. It traded at 7x/ 6x the consensus earnings estimate of ₹ 14.6/ 15.8 per share for FY22E/FY23E respectively.
  • The consensus target price of ₹ 82 implies a PE multiple of 5x on FY23E EPS of ₹ 15.8/-.

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.”

The week in a nutshell (22nd-26th March)

Technical Talks

 NIFTY opened the week on 22nd March at 14,736 and closed on 26th March at 14,507, it made a weekly loss of 1.5%. The index is trading below its 10DMA of 14,680, which might act as a resistance. On the downside, 100DMA of 14,053 might act as a support. The short-term moving average is cutting longer-term moving from above which might lead to further correction in the index.                                                           

Weekly highlights

  • Loan moratorium case: The Supreme Court directed that no compound or penal interest shall be charged from borrowers for the six-month loan moratorium period, which was announced last year amid the COVID19 pandemic. The amount already charged shall be refunded, credited, or adjusted. The apex court refused to interfere with the Centre’s and Reserve Bank of India’s (RBI’s) decision to not extend the loan moratorium beyond August 31 last year. Banks can start declaring their bad loans (loans which have not been repaid for 90 days or more), with the Supreme Court vacating the relief granted earlier not to declare the accounts of borrowers as NPA.
  • SEBI on AT-1 Bonds: The Securities and Exchange Board of India (SEBI) amended the norms for valuing perpetual bonds. Now the maturity would be 10 years until March 31, 2022, and would be increased to 20 and 30 years over the subsequent 6-month period. From April 2023 onwards, the residual maturity of AT1 bonds will be 100 years from the date of issuance of the bond. As per estimates, banks have issued AT1 and tier 2 bonds worth ₹ 3.5 tn. A fifth of these bonds are held by Mutual funds. This move by SEBI provides much-needed relief to the MF industry. (Source- Business Standard edition 23 March 21)
  • Oil: A container ship blocking the Suez Canal created a new setback for global trade as officials stopped all ships entering the channel. A ship ran aground in the Suez Canal is blocking transit in both directions through one of the world’s busiest shipping channels for oil and grain and other trade linking Asia and Europe. Officials suggest it might take weeks to clear the blockage, which will impact ~30 percent of the world’s shipping container volume daily and ~12 percent of the total global trade of all goods. Oil prices jumped about 6 percent on Wednesday after this incident.
  • The Insolvency and Bankruptcy Code (IBC) suspension which ended on Wednesday, March 24 has not been extended by the Government. This is a welcome move by the banking sector as it will help reduce the burden of Non-Performing Assets (NPAs) on their balance sheets.
  • The institutions swapped their strategy from the last week, with FIIs outflow for the week totaling Rs 67,013 mn. The DIIs turned net buyers to the tune of Rs 50,181 mn.

                        Things to watch out

  • The Auto Companies will be reporting their monthly volume data for March. The non-availability of chips may impact sales this month. A Business Standard report suggested an average delay of ~6months for Maruti Suzuki’s Ertiga CNG variant delivery and 1.5-2 months for all other models. The delay could be as long as 8-10 months for Mahindra & Mahindra’s All-New Thar and 1.5-2 months for its Scorpio, and Bolero. This suggests that despite the demand, Companies are facing problems with supplying sufficient stocks due to the global semiconductor shortage.

 

Lighting category is 2x that of fans category, see significant growth potential – Orient Electric

Update on the Indian Equity Market:

Nifty continued its losing streak, ending in the red for the fourth straight day ahead of the US Fed reserve policy statement on Wednesday. Nifty closed at 14721 (-1.3%), dragged by the PSU BANK (-3.8%), MEDIA (-3.0%), and REALTY (-3.0%) indices. None of the sectoral indices ended with gains. Among the stocks, only ITC (+1.5%), and INFY (+0.2%) closed in the green while BPCL (-5.0%), ONGC (-4.7%), TATAMOTORS (-4.5%) led the laggards.

Excerpts of an interview with Mr. Rakesh Khanna, MD, and CEO, Orient Electric with CNBC TV-18 on 16th March 2021:

  • The sales in 3QFY21 were good for the entire industry, due to pent-up demand, and staying at home has increased interest in home appliances.
  • The strong demand is continuing in 4QFY21, it is partly pent-up demand and partly due to change in behavior.
  • The management expects the EBITDA margin in 4QFY21 to be better than 3QFY21. This is due to operational leverage which comes with increased revenues with costs remaining stable, some good opportunities to help improve efficiencies. This efficiency improvement has largely been due to cost-cutting.
  • With raw material costs increasing, there could be some pressure on the margins in the time to come.
  • Recently, the company has diversified into lighting, switchgear, air coolers, and water heaters.
  • Lighting as a category is nearly twice in terms of size compared to the fans category, and the management expects significant growth in that segment.
  • Coolers are gaining traction as people are worried about getting fresh air. Water heaters adoption is going up due to change in consumer behavior.
  • The kitchen appliances are doing very well. Mr. Khanna is of the opinion the new categories the company has diversified into have a lot of potential.
  • To get a better brand recall in these new categories, the Ad spend could increase for the new categories.
  • They are operating at full capacity and the surge in demand has enabled the company to improve efficiencies at existing production facilities.
  • The company has been improving its EBITDA margin on a YoY basis for the last couple of years. As the company continues scaling up, they are confident of achieving operational efficiency to achieve better EBITDA margins.

Asset Multiplier Comments

  • During the lockdown period, consumer appliances and electrical sales were impacted. The pent-up demand and banning of certain items from China have helped the domestic electrical appliances companies. As a result, these companies are diversifying from their legacy categories to other categories.
  • Orient Electric already enjoys strong recall in the minds of consumers, being present in India for over six decades. Such a company will enjoy customer loyalty when it enters into new product categories.

Consensus Estimate: (Source: market screener website)

  • The closing price of Orient Electric was ₹ 313/- as of 17-March-2021. It traded at 61x/ 48x/ 39x the consensus earnings estimate of ₹ 5.1/ 6.5/ 8.0 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 310 implies a PE multiple of 39x on FY23E EPS of ₹ 8.0/-.

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.”

Three-box framework for SUV-focus in EV space – M&M

Update on the Indian Equity Market:
On Monday, Nifty closed in the red at 14,930 (-0.7%), recovering from the day’s low due to a rebound in the metals and technology stocks. JSWSTEEL (+2.4%), TECHM (2.4%), and TATASTEEL (+2.3%) led the index gainers while DIVISLAB (-2.9%), BAJAJFINSV (-2.7%), and GAIL (-2.6%) led the laggards. Among the sectoral indices, METAL (+1.0%), IT (+0.6%), and PSU BANK (+0.2%) were the only gainers while MEDIA (-1.4%), PHARMA (-1.3%), and FINANCIAL SERVICES (-1.2%) led the laggards.

Mahindra & Mahindra (M&M) recently reorganized its EV (Electric Vehicle) strategy by setting up 2 new verticals, one for last-mile mobility, and the other for EV tech center. Mr. Rajesh Jejurikar, ED- Auto and Farm Sectors, M&M explained the rationale behind this strategy on CNBC TV-18 on 12th March 2021. Here are the excerpts of the interview:

  • To undertake a comprehensive look at the future, M&M has deployed a three-box framework. This framework suggests different businesses need different kind of attention and focus depending on company strategy and goals. Box 1 is the one that has the ability to scale up/Box 2 and 3 are more mid-long-term focus and need more technology and know-how.
  • According to M&M, Last mile mobility is a box 1 business, which has a ready customer market today and they have to drive growth and penetration. Their box 2 business is the SUV focus IC-derived electric vehicles, and box 3 is EV which is preparing M&M’s strategy for the longer term.
  • They have created a strong talent pool with good products at Mahindra Electric, which will help them in the future as well.
  • They want to be SUV-focused in EV space as well. Currently, there are no plans of manufacturing EVs in shared mobility space (Sedans and hatchbacks).
  • They believe the EV market penetration to be much higher by 2025-30, hence the need for a comprehensive SUV EV portfolio. They hope to have an electric variant for all price points they operate in.
  • The level of readiness should be for 50-80% conversion in FY2025-30. The extent of conversion is very hard to predict at this stage so they are not setting any targets per se.
  • They will launch eKUV100 and eXUV300 between CY21-CY22.
  • The last-mile mobility segment is at an inflection point and the pace of sales should pick up significantly. The goods carrier segment is completely ready and a committed sales team and channel will help drive sales for this segment. The PV (Passenger Vehicle) was also ready but the slowdown due to Covid-19 has hampered the sales and M&M expects sales to pick up in 2HCY21.
  • For last-mile mobility, export is a huge opportunity. M&M is already getting leads for alliances and partnerships in different markets across the world. Some of their key customers in the B2B segment are planning to take M&M products in their global ecosystem. While these deals will take some time to fructify, the initial response has been good.
  • When M&M canceled their JV with Ford, the rationale was the money saved from JV will be put into the EV business. Rs 30,000 mn has been set aside for creating a strong EV portfolio.

Asset Multiplier Comments

  • With the Covid-19 outbreak, the personal mobility demand has increased. Though Gen Z and millennials would prefer EVs for personal mobility, the success of EVs would largely depend on increasing penetration and availability of the infrastructure, which is currently lacking.
  • M&M has been stressing on reducing investments in non-profitable subsidiaries and focusing on the core business. This three-box framework for EV vertical is a step in the right direction.

Consensus Estimate: (Source: market screener and tickr websites)

  • The closing price of M&M was ₹ 846/- as of 15-March-2021. It traded at 31x/ 21x/ 18x the consensus earnings estimate of ₹ 27.4/ 41.1/ 46.8 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 959 implies a PE multiple of 20x on FY23E EPS of ₹ 46.8/-.

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.”

Investments in generics getting validated now – LUPIN

Update on the Indian Equity Market:

On Tuesday, the equity market reversed from the day’s lows and the Nifty50 index closed 1% higher led by the BFSI sector. The top gainers in the index were SBILIFE (+5.0%), KOTAKBANK (+3.1%), and HDFCBANK (+2.9%) while the losers were BPCL (-4.6%), TATASTEEL (-3.9%), and GAIL (-3.3%). The sectoral gainers were FINANCIAL SERVICES (+2.2%), FINANCIAL SERVICES 25/50 (+1.9%), and PRIVATE BANK (+1.8%). METALS (-2.5%), MEDIA (-1.4%), and REALTY (-1.1%) led the sectoral losers.

On Women’s Day, CNBC-TV18 conducted interviews with some women leaders from India Inc. Here are the excerpts of an interview with Ms. Vinita Gupta, CEO, Lupin with CNBC TV18 on 8th March 2021:

  • Ms. Gupta believes that all the investments made to drive the generics business, and affordable medicines business to the next level are getting validated now. They have been investing in therapies like inhalation, biosimilars, complex injectables, and women’s health products over the past 5 years, and have made tremendous progress in the last 12-18months.
  • In the inhalation therapy, they have received the first major approval for Albuterol in Sept-2020. The timely approval despite the pandemic will be beneficial for asthma and COPD patients who are at a high risk of complications due to Covid-19 infection. Lupin was able to launch the product and is ramping up the production.
  • With more inhalation products pending approval from the US FDA, she believes the inhalation therapy will drive growth in the generics business.
  • There is still a very large number of Corona cases in particular in the US. From a lockdown point, some states have more of a lockdown than others. The elective procedures are still below pre-Covid levels, suggesting things aren’t yet back to normal. They hope things would be in the second half of this year with vaccinations ramping up over the next couple of months.
  • Lupin supplies medicines for about 5% of prescriptions in the USA so maintaining the supply continuity was essential through the pandemic.
  • Despite the pandemic, Lupin was able to achieve QoQ growth in both revenues and profits. She expects the growth to continue on FY22E as well. The Albuterol approval will be a significant growth driver in FY22E.
  • There are 5 other inhaler products in the pipeline in the next 2 years for Lupin in the USA. The FY23 will be a significant year as they intend to launch products like Albuterol, Fostair in Europe, Spiriva in 2023.
  • Price Erosion in the generics will continue to be one of the biggest challenges in FY22E. The price erosion has reduced from earlier periods to low-mid single digits now. The complex generics launches and operating efficiency will help offset the price erosion impact.
  • They have acute and chronic care products within their India portfolio. The chronic care areas such as diabetes, CNS, Cardiovascular, Respiratory have done extremely well. Acute care products have been struggling, in line with the overall acute market in India.

Asset Multiplier Comments

  • Domestic pharma companies have been facing price erosion pressures in generic products in the US for quite some time now. Hence, they have shifted focus on complex generics, and biosimilars which require a higher degree of specialization and are margin accretive. Some of these companies have shifted to a direct-to-market (DTM) approach rather than being partnered companies of US pharma majors.
  • Some domestic Indian companies such as Lupin and Cipla have specialization in respiratory/inhalation therapies. These companies expect Albuterol Sulfate inhaler products to be one of the key growth drivers in the near term. Apart from Albuterol Sulfate, these companies expect an incremental USD 100-150mn opportunity from the respiratory pipeline in the USA.

Consensus Estimate: (Source: market screener website)

  • The closing price of LUPIN was ₹ 1,033/- as of 09-March-2021. It traded at 43x/ 28x/ 23x the consensus earnings estimate of ₹ 23.9/ 37.5/ 45.7 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 1,045 implies a PE multiple of 23x on FY23E EPS of ₹ 45.7/-.

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 pro

Demand remains strong, expect 4QFY21 to be better than 3QFY21 – Berger Paints

Update on the Indian Equity Market:

On Wednesday, Nifty50 ended in the green at 15,246 (+2.2%), lifted by heavyweight Reliance Industries which gained after winning INR 571 bn worth of airwaves in the recently concluded spectrum auction.  The stock gainers in Nifty50 were TATASTEEL (+5.3%), BAJAJFINSV (+5.0%), and RELIANCE (+4.8%) while the auto companies HEROMOTOCO (-1.5%), MARUTI (-1.2%), and BAJAJ-AUTO (-1.2%) topped the losers. Among the sectoral indices, METAL (+3.3%), PSU BANK (+3.2%), and FINANCIAL SERVICES 25/50 (+2.9%) led the gainers. AUTO (-0.7%) was the only index to close in the red.

Excerpts of an interview with Mr. Abhijit Roy, MD &CEO, Berger Paints (BERGEPAINT) with CNBC TV18 on 2nd March 2021:

  • In 3QFY21, BERGEPAINT reported a 32% rise in volumes. The demand scenario is quite similar to 3QFY21 and with a low base of 4QFY20, the company expects to report strong growth in 4QFY21.
  • The management expects good growth from the waterproofing business and construction chemicals.
  • A part of the volume growth was partly on account of pent-up demand.
  • There is a shift towards premium and luxury categories which were suffering in the initial Covid-19 days. Overall, the demand scenario is strong, though 30%+ growth may not be sustainable.
  • There has been an increase in input costs, especially for solvent-based products and the industrial segment is affected. To compensate for the higher input costs, they have received price hikes from some customers. Discussions with some clients regarding price hikes is still pending.
  • The impact of cost hikes has been lesser on the decorative paints. The management expects an impact on gross margins but EBITDA margins are expected to be retained on account of cost-saving measures undertaken. The management believes a price hike may have to be taken for decorative paints as well if the material cost uptrend continues.
  • The company is currently operating at ~95% of its capacity due to the uptick in volumes. Hence, they are undertaking both brownfield and greenfield expansion projects. A new plant at Lucknow is being commissioned for ~Rs 7,000 mn. The new plant is expected to be operational by Jan 22.
  • The decorative paints segment is growing at a faster rate compared to Automobiles. The Auto segment is a mixed bag, with Commercial vehicles, and Tractors doing well and passenger vehicles and 2-wheeler lacking compared to expectations.
  • The protective coatings category is growing in double digits, albeit at a slower pace compared to decorative and automotive.
  • The premium category has picked up significantly after Oct-20.

Asset Multiplier Comments

  • The paint companies reported strong growth in the decorative paints segment due to pent-up demand, delayed festive season, strong momentum in tier 3-4 markets, and share gains from small, unorganized players.
  • The weak macro environment impacted the industrial coatings while auto coatings did well. The auto coatings recovery was in line with the recovery in the Passenger and Commercial vehicles.
  • We believe as the metros and cities return to normalcy, the premiumisation trend will be stronger.

Consensus Estimate: (Source: market screener website)

  • The closing price of BERGEPAINT was ₹ 729/- as of 03-March-2021. It traded at 101x/ 77x/ 65x the consensus earnings estimate of ₹ 7.2/ 9.5 /11.3 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 620 implies a PE multiple of 55x on FY23E EPS of ₹ 11.3/-.

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 (Feb 15th to Feb 19th)

Technical Talks

During this week NIFTY declined as expected, opening on 15th Feb at 15,270 and closing on 19th Feb at 14,982, a weekly loss of 1.9%. After hitting a new high of 15,432 this week, the index has started to decline. With the RSI (58) and MACD on a declining trend, the technical indicators indicate a further possible decline. On the downside, 20DMA of 14,759 could act as a support. On the upside, 15,432 is the key level to watch out for as the last high could act as a resistance.                                                                 

Weekly highlights

  • The Indian Cabinet launched a production-linked incentive scheme (PLI) for telecommunication and networking products. The outlay of ~Rs 122bn over five years is approved for manufacturing telecom equipment, 4G/5G next generation radio access network and wireless equipment, Internet-of-Things (IoT) access devices and other wireless equipment, and equipment like switches and routers. The scheme will be operational from April 1, 2021. This scheme is expected to incentivize telecom service providers and is another push for the Prime Minister’s Atma Nirbhar Bharat plan.
  • On the other side of the world, a severe winter storm hit North America, with Texas being the worst hit. The storm has impacted crude oil output in the energy rich state of Texas and it is estimated that about 4mn barrels a day of output is offline.
  • The Brent crude futures and US West Texas Intermediate (WTI) crude futures, both corrected after rallying to 13-month highs of $65.5 and $62.3 per barrel respectively. The correction has been due to worries that refineries will take time to resume operations after the big freeze.
  • On the domestic front, consecutive hikes in petrol and diesel are pinching the pockets of Indians. The rise in international crude prices and higher central and state taxes have led to petrol prices crossing a century in some states.
  • The foreign institutional investors’ (FII) buying in Indian equity market continued to decline. FIIs inflows for the week were Rs 44,080 mn. Domestic institutional investors’ (DII) selling continued this week as well with outflows of Rs 62,840mn vs Rs 56,430 mn in the previous week.

Things to watch out

  • With the quarterly result season out of the way, the attention is now onto macroeconomic developments.
  • The benchmark 10-year bond yields have surged post the Budget announcement of additional borrowing to bridge the deficit. To keep the yields under control, RBI has held a special G-sec auction, a separate open market operation (OMO) and Operation Twist this week. Further measures by RBI will be something to watch for. Equity markets are inversely related to interest rates so increasing bond yields could lead to a decline in share prices.