Author - Pratik Mate

Preference for Margins over Volume Growth: HDFC Life

Update on Indian Equity Market:

Markets were on the rise today, with Nifty increasing 212 points to 14,865. Bajaj Finance (8.0%), Indusind Bank (4.9%), and Eicher Motors (4.8%) were the top gainers on the index while Britannia (-2.0%), Hindalco (-1.0%), and Nestle (-1.0%) were the top losers for the day. Among the sectoral indices, Bank (3.0%), Private Bank (3.0%), and Financial Services (2.9%), led the gainers while Realty (-0.6%), Pharma (-0.3%), and Metal (-0.3%) ended in the red.

 

Excerpts of an interview with Ms. Vibha Padalkar, CEO of HDFC Life with Bloomberg Quint dated 28th April 2021:

 

  • HDFC Life expects to record profit margins upwards of 70% irrespective of the covid-19 impact. 
  • Company prefers to protect high profit margins and to grow moderately than chase topline growth, especially in the protection segment due to uncertainty and higher risk due to covid-19.
  • Company aims to expand into the annuity segment which is a highly lucrative and retiral segment which is showing good potential going forward.
  • The risk associated with price hike as a result of covid-19 cannot be ruled out entirely. The company ensures that the price hike will be passed over to customers in a phased manner.
  • In order to reduce risk, the company wants to diversify its product portfolio to improve contributions from annuity and protection segments

 

Asset Multiplier Comments:

  •  The Company has identified key areas, in order to sustain growth by focusing on margins cover and sustainable growth, which provides a long term positive outlook for the company.
  • These efforts will help the company grow beyond FY22 and with the expansion of the Insurance industry is poised for stellar growth.

 

Consensus Estimates (Source: market screener website):

  • The closing price of HDFC Life was ₹ 673/- as of 28-April-2021.  It traded at75x/ 67x the consensus EPS estimate of ₹ 9/ ₹ 10 for FY22E/23E respectively.
  • The consensus price target is ₹ 758/- which trades at 76x the EPS estimate for FY23E of ₹ 10/-
  • 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.”

 

Semiconductor shortage to resolve in 3-4 months: Eicher Motors

Update on Indian Equity Market:

An alarming increase in the number of Covid-19 cases resulted in a bloodbath in India’s Equity Markets, with Nifty slipping 258 points to 14,359. Adani Ports (-4.8%), Power Grid (-4.1%), ONGC (-4.0%) were the top losers on the index while Dr Reddy’s (+1.4%), Britannia (+0.9%), and Cipla (+0.9%) were the top gainers for the day. Among the sectoral indices, PSU Bank (-4.3%), Realty (-4.1%), and AUTO (-2.8%) led the losers while Pharma (+0.2%) was the only index to end in the green.

 

Excerpts of Interview with Mr. Vinod Dasari, Whole-time Director, Eicher Motors and CEO, Royal Enfield with CNBC-TV18 dated 16th  April 2021:

 

  • Demand has picked up strongly owing to backlogs from last year. The industry is facing some problems due to fresh restrictions owing to the rising COVID-19 cases. 
  • Learning from the past lockdowns, the industry is better equipped to deal with the short-term uncertainties and continue to keep up with the demand in the short term.
  • Royal Enfield expects supply-chain constraints in the first couple of months of FY22 and expects the recovery to be along the lines of FY21.
  • Metals inflation is putting pressure on margins, and the import restrictions on steel have resulted in an increase of 20% in prices which is unfathomable.
  • Optimistic about the semi-conductor and Anti-lock braking system (ABS) shortages, in the short run, there’s a notable pressure however recovery is expected within the next 2-3 months as all the stakeholders are coordinating to mitigate the issue.

 

Asset Multiplier Comments:

  • Demand is poised to recover in the FY22, however, Q1FY22 may see muted growth due to lockdowns and supply-side issues.
  •  As witnessed in Q4FY21, the demand is robust irrespective of the ongoing pandemic, the outlook for the auto industry is favourable for FY22 subject to supply-chain improvements.

 

Consensus Estimates (Source: market screener website):

 

  • The closing price of EICHER MOTORS was ₹ 2,377/- as of 19-April-2021.  It traded at 27x/ 21x the consensus EPS estimate of ₹ 87/ ₹ 115 for FY22E/23E respectively.
  • The consensus price target is ₹ 3,105/- which trades at 27x the EPS estimate for FY23E of ₹ 115/-

 

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 (April 12th to 16th)

 

Technical talks

  • NIFTY opened the week on 12th April at 14,645 and closed on 16th April at 14,617. After beginning the week with major losses, the index rebounded to close flat for the week. The index is trading below its 20DMA of 14,661, which may act as resistance. The next level being 50DMA at 14,863. The Index breached its 100DMA at 14,316 during the week where it may find support.

Weekly highlights

  • The week began with major indices in red due to the rising Covid-19 cases and lockdown-like conditions imposed across major areas in the country.  Indices recovered during the week to end flat. Gains were seen in pharma, IT, metals, and auto stocks, while bank and realty indices ended in the red.
  • Due to the increasing number of COVID-19 cases in India, Foreign Institutional Investors (FII) turned net sellers this week,  at  Rs 10,590 mn. Domestic Institutional Investors (DII) were net buyers and pumped in Rs 6,080 mn.
  • Q4FY21 result earnings season started this week with the big 3 tech companies -TCS, Infosys, and  Wipro. All reported good revenue growth on the expected lines. Their comments for upcoming quarters suggest promising growth. On the back of a strong earnings show, Infosys has announced a buyback of Rs.92 bn, at an upper price limit of Rs. 1750/share.
  • The US Equity markets hit a record high during the week. The Dow Jones Industrial Average hit the historic milestone of 34,000 for the first time owing to economic recovery and stimulus package announced by President Joe Biden and reducing unemployment.
  • American banking major Citibank on Thursday announced that it will exit from the consumer banking business in India and 13 countries. This is a part of a global strategy of CEO Jane Fraser attributing the decision to an absence of scale to compete in these geographies. The bank has 35 branches in India and employs approximately 4,000 people in the consumer banking business. 
  • India’s retail inflation, measured by the Consumer Price Index (CPI), rose to 5.52 percent in March. Separately, the country’s factory output, measured in terms of the Index of Industrial Production (IIP), witnessed a contraction of 3.6 percent in February. The retail inflation during February was at 5.03 per cent.

Things to watch out 

  • Q4FY21 result season to continue with HDFC Bank and Nestle reporting their earnings. India’s COVID patient numbers will drive the sentiment of the market in the near term. Some economists are already reducing India’s GDP growth forecast for FY22 due to the second wave. We expect investors to focus back on cash flow creators – pharma, consumer, and software services. This is a holiday-shortened week due to a break on Wednesday. 

Tractor volumes show record growth, Momentum expected to continue: Escorts

Update on Indian Equity Market:

After yesterday’s rout markets traded flat to end the day as Nifty closed the day 45 points lower at 14,683.  Within the index, ADANIPORTS (+12.6%), TATACONSUM (+4.6%), and ASIANPAINT (+4.0%) were few of the gainers while POWERGRID (-2.3%), GRASIM (-1.3%), and EICHERMOT (-1%) led the losers. Among the sectoral indices, PHARMA (+1.8%), METAL (+1.4%), and REALTY (+1.2%)  led the winners while BANK (-0.5%), PRIVATE BANK (-0.4%), and MEDIA (-0.3%)  led the losers. 

Excerpts of Interview with Bharat Madan, Group CFO of Escorts Ltd. with CNBC-TV18 dated 5th April 2021:

  • Escorts posted very strong 10 percent tractor sales growth in March compared to the previous month. FY21 ended on a strong note with total tractor sales rising 24 percent vs FY20.
  • Escorts achieved an annual production level of 100,000 units for the first time in its history on the back of robust growth in sales despite the Covid-19 pandemic.
  • The rural sentiment is expected to be strong after a good Rabi season and a favorable monsoon outlook.
  • Demand is expected to grow for the next 6 months on account of expansion in South India.
  • Rising Covid-19 cases has not yet impacted demand but remain a concern. However, it is not expected to hamper any supply-side considerations.

Asset Multiplier Comments:

  • The Company is witnessing a strong demand on account of economic recovery and the company is poised to continue this upward trajectory for the upcoming 2 quarters.
  • Overall, the outlook for the auto industry is favorable and the effect of supply chain issues seems to be muted so there’s scope for sustained growth.

Consensus Estimates (Source: market screener website):

  • The closing price of ESCORTS was ₹ 1,223/- as of 06-April-2021.  It traded at 15x/ 13x the consensus EPS estimate of ₹ 84/ 94 for FY21E/22E/23E respectively.
  • The consensus price target is ₹ 1470/- which trades at 16x the EPS estimate for FY23E of ₹ 94/-

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.”