Author - Pranav Mahajan

How do we learn things? Through feedback loops



How do humans learn anything? Through feedback loops. Imagine you are riding your bike and getting late for the office – you don’t see any traffic cop at the red light… and you jump it. There was an incentive and an opportunity. A few hours later, you get a challan message. There was a camera that caught you. The next time you won’t dare to jump the red light as you already got feedback from your previous misadventure. Similarly, if you, as a good Samaritan, helped a blind man cross the road, you will instantly feel good for the deed.

Sportspersons make excellent use of feedback they receive when they make a right move or a wrong move. A tennis player who keeps hitting the net while playing a backhand topspin, instantly realizes that she has to practice it more while training.

Unfortunately, in investing, it is risky to rely on feedback.

You buy a stock and the next day the market falls and takes the stock down with it. Does it instantly become a bad investment? A long-term approach is critical for most investments to succeed.

There are a dozen reasons for markets to go up and many times the same reasons for them to fall. But feedbacks are most useful when the link between our actions and results is clear. A stupendous 25% GDP growth takes the market down just because the street was expecting an even higher number. In investing, the instant results of any action can be highly misleading. Over short time horizons, meaningless noise dominates outcomes.

Learning from short feedback loops only works if the impact of negative feedback is minor. You know that drinking poison will kill you. You don’t have to verify it by consuming it and facing its consequences. Similarly, we already know the risks involved in taking concentrated stock positions, borrowing money to invest in the stock market, and putting money in an unregulated instrument like crypto. The negative consequences of these won’t count as lessons after facing catastrophic losses.

Investors learn from their own experiences and the experience of others. Our sample size is simply too small. And hence, it is far too easy to learn the wrong lessons.

Here is a short, non-exhaustive list of things to remember:

  • Ignore near-term feedback as much as possible.
  • Decide what type of feedback is useful.
  • Learn the right things from the right people.
  • Weigh evidence correctly.
  • Focus on general principles rather than specific stories.

In investing, useful feedback is often received too late because meaningful results only emerge over time. Investing is an exercise in dealing with short-term noise, deep uncertainty and profound behavioural challenges. The best we can do is base our decisions on sound principles, always be willing to learn and understand that most short-term feedback can be ignored.



With excerpts from

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


How and why to read an Annual Report

When we buy shares of a company, we become part owners of that business. But we as owners do not participate in the day-to-day activities of the business. That is the job of a management team that may or may not be part owners like you and the other shareholders. Here, the management always has a better idea of what’s going on in the business, and the shareholders i.e., the owners can be kept in the dark. This can result in a Principal-Agent conflict. Better disclosure norms in addition to management’s integrity prevent this conflict to a certain extent. An annual report plays a big role in this.

  • The Annual Report (AR) of a company is an official communication from the company to its investors: A listed company generally issues an investor presentation every quarter or twice a year and many companies conduct a conference call for the investors to ask questions to the management. However, conducting such calls is only advisable by the regulation and not a mandatory requirement. On the other hand, issuing an Annual Report is a requirement for a listed company.
  • The AR is the right source to get information about the company; hence AR should be the first choice for the investor to source company-related information: If a company publishes a quarterly presentation, it would contain time-specific content, i.e., information about that specific quarter. However, an AR generally includes a company’s history, recent developments, and plans.
  • The AR contains many sections, with each section highlighting a certain aspect of the business: Apart from general information about the company, an AR always has the Chairman’s and/or CEO’s message, a management discussion and analysis (MD&A) section, and the company’s standalone and consolidated statement of accounts.
  • The AR is also the best source to get information related to the qualitative aspects of the company: The MD&A section is one of the most important sections in the AR. It has the management’s perspective on the country’s overall economy, their outlook on the industry they operate in for the year gone by (what went right and what went wrong), and what they foresee for the year ahead.
  • The AR contains three financial statements – Profit & Loss Statement, Balance Sheet, and Cash Flow statement. There’s a famous saying that goes, “Revenue is vanity, profit is sanity but cash is the only reality”. It suggests that revenue and profit figures can be manipulated but it is extremely difficult to tamper with the cash flow statement. Yes, basic accounting knowledge is required to analyze financial statements.
  • The standalone statement contains the financial numbers of only the company into consideration. However, the consolidated numbers contain the company and its subsidiaries’ financial numbers. It is important to look at both standalone and consolidated numbers especially when the subsidiaries are partly owned by the parent entity.

Does this short article cover everything that has got to do with reading annual reports? Absolutely not. But it might help a beginner to skim through an AR and determine, from the sea of information available, what is material and what is noise – separate the wheat from the chaff.

Are you reading an AR for the first time? We suggest choosing a company about which you have some domain knowledge. For example, a pharmaceutical company if you’re a doctor, a tech company if you’re from that field, or an automobile manufacturer if you have a knack for it.

Finally, reading an annual report is an art and one gets better at it with practice.


Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered 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 (August 8-12)

Happy 76th Independence Day to all our readers!

Technical talks

NIFTY opened the week on 8th August at 17,401; with a holiday on Tuesday, the four-day work week ended with NIFTY closing at 17,698 (+1.7%). The index is trading above all the moving averages on a daily as well as weekly timeframe. On the upside, the upper Bollinger band level of 18,100 might act as a resistance. On the downside, it can take support at the 50 week moving average near 17,100. Even though, the RSI of 60 does suggest some caution, in the recent past NIFTY has comfortably traded at 60+ RSI level.

Among the sectoral indices, METAL (+4.6%), PRIVATE BANK (+3.6%), and FINANCIAL SERVICES (+3.0%) led the gainers, whereas MEDIA (-2.0%), FMCG (-1.1%), and PHARMA (-0.6%) were the losers this week.

Weekly highlights

  • The US market closed the week in green as Dow Jones continued its streak with 6th consecutive week of positive returns. During the week, the US declared its July CPI inflation. At 8.5%, it is lower than the previous month, but still on the higher side from an absolute point of view.
  • Coming to the Indian markets, our market cap to gross domestic product ratio (Mcap/GDP) has crossed 100 percent. With a positive move in markets since July, we currently stand at 102 percent against a long-term average of 81 percent. India’s GDP is estimated at nearly USD 3 trillion.
  • The Mcap/GDP ratio is also known as the Buffett Indicator, as Warren Buffett considers it to gauge the mood of the market. Too high a number suggests that the market seems to be overvalued and the opposite on the other side.
  • However, this can be applicable to a developed market like the US. In a developing market like India, with a gradual move towards formalization of the economy, the market capitalization will inch up higher as more and more companies get listed and this will eventually reflect in the GDP.
  • The civil aviation ministry has removed the lower and upper caps on airline fares from 31st The caps were imposed in May 2020 to regulate airfares in times of the pandemic. Especially with the removal of the lower cap, it is more likely that airfares for short-distance domestic flights will come down as airlines compete with each other for passengers.
  • China’s trade surplus stood at USD 101 billion in July. It is the highest since 1987. The trade surplus is the excess of exports over imports. Despite political tensions between India and China, in a globalized world, where there is interdependency on each other when it comes to the manufacturing of goods, Chinese exports doing well translates positively for the world economy as well as for India.
  • FII (Foreign Institutional Investors) were net buyers of shares worth Rs 78,499 mn and DII (Domestic Institutional Investors) were net sellers of shares worth Rs 24,780 mn this week.


Things to watch out for next week

  • The corporate results season for the April-June quarter of FY2023 comes to an end as we approach 15th As we celebrate the 76th Independence Day of India, we enter into another four-day work week on Tuesday. Going forward, company-specific developments will be keenly watched.
  • Just like this week, during which we saw a few new 2-wheeler launches from Honda and Royal Enfield and a Hyundai car, next week is also lined up with new cars from Toyota, Maruti-Suzuki, and an EV from Mahindra. As we approach the festive season, we are expecting many more such launches.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered 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.”


Do REITs deserve a place in your portfolio?


Real estate investment trusts are like mutual funds, where money is pooled from investors and units are allotted to them, which represent ownership in real estate assets. REITs invest in income-generating real estate properties. These income-generating real estate properties can be residential buildings where flats are rented, commercial office spaces, warehouses, hotels, shopping malls, airports, etc. In India, as of now, only commercial REITs are allowed to do business.

Speaking about India specific, a REIT will raise money from investors and either acquire a developed property or develop a property on its own. Later on, this property is rented to different tenants, which are predominantly corporate entities. The rent collected is then distributed to the unitholders after deducting all the necessary expenses.

Each REIT has a sponsor who acts as a trustee for the unitholders and owns the property on behalf of the unitholders. The day-to-day activities concerning the properties such as choosing the right tenant, negotiating the lease terms with the tenants, maintenance of the properties, etc are handled by a management team (REIT Manager) appointed by the sponsor.

Let’s look at some advantages of considering REITs as an investment:

  • Direct exposure to real estate requires a large amount of investment, whereas, REIT units are available at a low-ticket size. Over and above that, an investment through REIT provides diversification benefits, which is difficult to achieve by directly owning properties.
  • REITs are highly regulated and are required to distribute at least 90% of the net distributable cash flow to the unitholders. It is also mandatory for a REIT to have at least 80% of its portfolio invested in fully developed properties. This eliminates execution risk to a large extent.
  • The dividend distributed by the REIT is often tax-free in the hands of the unitholder. This may not always hold as it depends on the REITs ownership structure.
  • As REITs distribute more than 90% of their net distributable cash flow to the unitholders, a REIT acts as a hybrid instrument with regular dividend pay-out and capital gains due to share price change.
  • REITs also provide stability to your portfolio as a REIT’s stock price does not fluctuate much because it is valued based on the value of real estate assets it is owning, and real estate prices generally fluctuate less than stock prices.

Although there are no specific disadvantages of having a small exposure to a REIT, here are certain difficulties a REIT, as a business, can face, which will eventually affect the unit price and NDCF:

  • Recently in the COVID period, most companies chose work from home over going to the office. In such a situation, there can be lease cancellations or uncertainty about future lease renewals.
  • Any economic slowdown results in MNCs laying off employees and in the worst-case scenario, exiting the country. REITs lose business when office spaces are kept vacant for a long period.

These are larger economic issues that will be faced by any other business along with a REIT.

In India, we currently have 3 listed REITs and while the Nifty 50 index is down 6% year to date, the REITs are up from 8.5% to 10.5% for the same period. Investors’ interest has come back to REITs with the opening up of the economy and higher occupancy levels of the office spaces. The only limitation here is that of limited options as there are only 3 REITs and 1 International REIT Fund of Fund in India. This significantly limits the choices for investors.

Source: Tradingview

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.”

Week in a Nutshell (20-24 June)

Technical talks

NIFTY opened the week on 20th June at 15,334 and closed just below 15,700 on 24th June. The index is trading near the lower Bollinger Band level of 15,370 which might act as a support, although a weak one as the markets have been falling for the past three weeks. On the upside, the 16,200 level might act as a resistance, since a gap was made last week. The RSI (14) at 40 has been consistently coming down.

Among the sectoral indices, AUTO (+6.9%), CONSUMER DURABLES (+4.6%), and FMCG (+4.2%) were the gainers during the week. METAL (-2.7%) was the only loser.

Weekly highlights

  • All the major US indices have risen from 5.4% to 7.5%, a recovery after two weeks of continuous selling.
  • The WTI Crude oil fell 1.7% and Brent Crude closed flat for the week after worries about the US economy going into a recession, which means lower oil demand.
  • The minutes of the RBI MPC meeting got released this week. The rate-setting committee has indicated of further rate hikes are on their way as inflation has been consistently staying above the upper tolerance band of 6%. The RBI has the mandate to control inflation and let it stay at 4% +/- 2%. Hiking or lowering interest rates is one of the prominent tools to control inflation.
  • Another update related to RBI is the fall in forex reserves that the RBI maintains. The latest data released by the RBI report shows that the foreign currency reserves have fallen by USD 10 bn in the last two weeks as the RBI has stepped up intervention in the foreign exchange market. The RBI has been selling dollars to curb excessive volatility in the exchange rate and prevent runaway depreciation of the Indian rupee. The forex reserves with the RBI now stand at USD 590bn. The rupee has been depreciating against the dollar and now trades below ₹78.2/USD.
  • The government, from July 1 will ban 22 single-use plastic products such as plastic spoons, forks, plates, etc. Within that also falls plastic straws that come with tetra pack juices, milkshakes, and buttermilk. Manufacturers of such products including Amul, Parle Agro, Dabur, etc are pleading with the government to postpone the ban on straws as an alternative which is paper straws which are largely imported and they cannot be made available in a short span.
  • After a scare of a few electric two-wheelers catching fire, this week in Mumbai, a TATA Nexon EV car caught fire while parked. Now even though many EV manufacturers are saying that a small percentage of EVs catching fire is normal and is a global phenomenon, it will still create a negative sentiment in the minds of the prospective customers of electric vehicles.
  • However, good news for internal combustion engine (ICE) vehicles that run on traditional fuels like petrol, diesel, and CNG. Many manufacturers are about to launch their newer models and variants as we approach the monsoon and subsequently the festival season. Multiple test vehicles, covered in camouflage have been located by auto enthusiasts. This has always been a strong indication that upcoming launches are expected very soon.
  • FII (Foreign Institutional Investors) net sold ₹ 1,15,116 mn and DII (Domestic Institutional Investors) were net buyers this week. DIIs bought shares worth ₹ 1,16,704 mn.

Things to watch out for the next week

  • At the beginning of the month, economic data watchers will look for GST collection data, and in addition to that, stock market watchers will look for monthly automobile sales volume data. Automobile, a sector that contributes 7% to the GDP and creates big employment opportunities, a consecutive and steady recovery is essential for the economy.
  • The G7 Summit will be held in Germany on Monday. The leaders will likely discuss rising worldwide inflation and the post-war scenario in Russia, Ukraine, and the European Union.
  • The US economy had contracted 1.5% in the January to March 2022 quarter. A consecutive decline in the quarter ending June will officially make the US economy to enter into a recession. Hence, the quarterly GDP numbers to be released on June 29 will be keenly watched.

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.”


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


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

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

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

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

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

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

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

  Volume data of electric vehicles sold

Source: Federation of Automobile Dealer’s Association

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









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



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

Technical talks

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

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

Weekly highlights

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

Things to watch out for next week

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

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



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

Update on the Indian Equity Market:

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

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

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

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

Asset Multiplier Comments

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

Consensus Estimates: (Source: TIKR website)

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

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


Banking on technological transformations in BFSI sector – Intellect Design Arena

Update on the Indian Equity Market:

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

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


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

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

Asset Multiplier Comments:

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

Consensus Estimates:

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


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


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


Update on the Indian Equity Market:

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

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

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

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

Asset Multiplier Comments:

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

Consensus Estimate: (Source: Marketscreener and TIKR websites)

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

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