Author - Pratik Mate

Best Demand Environment in a Decade – Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY closed lower at 18,211 (-0.3%) dragged by MEDIA (-2.0%), METAL (-1.5%) and PRIVATEBANK (-1.4%). PSU BANK (+2.1%), IT (+1.0%) and PHARMA (+0.9%) were the gaining sectors. The top gainers in NIFTY50 were ASIANPAINT (+4.1%), UPL (+3.8%), and DIVISLAB (+2.3%). The top losers were AXISBANK (-6.5%), BAJFINANCE (-4.8%), and ONGC (-3.5%).

Edited excerpts of an interview with Mr. C P Gurnani, MD, and CEO of Tech Mahindra with CNBCTV18 on 26th Oct 2021:

  • The company is committed to the high growth trajectory over the full year of FY22, which resulted in its highest ever sequential growth in a decade. Every business segment has reported sequential growth in Q2FY22.
  • The Company has a best-in-class geographic mix with North America contributing less than 50%, Europe contributing 25%, and the Rest of the World Contributing 25%, with a geographical presence in 90 Countries. The company is well diversified in terms of geography.
  • The Company increased its guidance of around 500-600 Mn USD in Deal wins to 750 Mn to 1 Bn USD over the next few quarters, on the back of a robust deal pipeline and sustained growth in the demand environment.
  • The Company plans to improve its margins by keeping control on sub-contracting costs which are at historically high levels. Utilisation has reduced due to fresher intake in the last quarter, which the company expects to improve over time.
  • Cloud Migration and 5G are the biggest drivers of growth in new deal wins. There’s a huge movement in the legacy to digital business which is expected to continue over the next few quarters.
  • The company made two acquisitions during the quarter- Loadstone and WeMake website. Loadstone has revenue of about 35 Mn USD and is EPS accretive, the other acquisition was IP Driven and is insignificant to the topline.
  • Current levels of attrition are hurting the demand fulfillment of the company and the company plans to reduce attrition by shifting to tier-2 cities and new HR Policies.

 Asset Multiplier Comments

  • The management commentary of continued strength in end demand aided by significant deal wins, and healthy deal pipelines driven by 5G and cloud will help the company sustain its revenue growth guidance.
  • Attrition and supply-side issues are the biggest headwinds for IT Companies. The company’s bottom-line can only see sustained growth if these challenges are dealt with in the upcoming quarters.

Consensus Estimate (Source: market screener website)

  • The closing price of Tech Mahindra was ₹ 1,568/- as of 26-October-21. It traded at 25x/22x/19x the consensus EPS estimate of ₹ 64/73/81 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,703/- implies a PE multiple of 21x on FY24E EPS of ₹ 81/-.

 

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.”

Organic growth to sustain as guided, no big bang acquisitions planned– HCLTECH

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended its 7-day winning streak to close at 18,419 (-0.3%), dragged down by REALTY (-4.7%), PSUBANK (-3.7%), and FMCG (-3.2%). The sectoral gainers were IT (2.2%), and FINANCIAL SERVICES (0.2%). Among the stocks, TECHM (+4.3%), LT (+3.3%), and INFY (+1.8%) led the gainers while ITC (-6.3%), TATAMOTORS (-4.9%), and EICHERMOT (-4.5%) were the top laggards.

HCLTECH missed the street estimates in the declared earnings for the quarter ended 30th September 2021. Mr. C Vijayakumar, Chief Executive Officer, and Mr. Prateek Aggarwal, Chief Financial Officer at HCL Technologies discussed the quarter gone by and reaffirmed its annual FY22 guidance in an interview with CNBC-TV18 on 18th October 2021:

  • The Products and Platforms business has been a laggard in FY22, with quarterly slippages affecting the guidance of the segment but the impact is immaterial to the top-line growth, where the company has reaffirmed its EBIT margin guidance of 19-21%.
  • Q2FY22 was the best quarter for the company with unprecedented growth in client mining, large deal wins, and total headcount. The company has introduced a formal dividend pay-out policy on the back of its commitment to rationalise capital allocation.
  • The Company has rolled out the first tranche of wage hikes in Q2FY22 and expects the second tranche to be rolled out in Q3FY22. It expects the slippages in the Products and Platforms business to be recovered in the upcoming quarter.
  • The company had a track record of a high dividend pay-out until FY20. With a significant outflow due to an acquisition, the pay-outs were subdued over the past few quarters. With a recovery in free cash flows and demand from investors, the company has decided to come up with a formal dividend policy with higher pay-outs.
  • The current demand environment has established momentum in the organic business. The company plans to focus on executing current demands rather than go all-in after a major acquisition. The company may add small tuck-ins to expand capabilities or geographies.
  • In Q2Fy22, the company had a strong deal win rate. The pipeline in Q1FY22 was at the highest level ever, it slightly moderated because the company closed a lot of deals.
  • The pipeline has a good mix of mid-size and large deals. There is also a lot of momentum in existing accounts, where customers are ramping up on several digital initiatives, with smaller ticket transformational projects are being taken up by the company.
  • The company expects to exceed its initial guidance on hiring 20,000-22,000 freshers on the back of robust demand and backfilling attrition in the recent quarters.
  • Momentum is seen across all verticals with BFSI and Manufacturing being the leaders. The manufacturing vertical is seeing an uptick in engineering services with various transformational deals and projects being undertaken.

 

Asset Multiplier Comments

  • COVID-19 pandemic has unmistakably created a paradigm shift in the ITES Industry, with a strong focus on digitisation around the world across both size and verticals will result in a high growth period for the industry.
  • HCL Tech like its peers will also continue to face supply-side crunch and attrition problems. The situation is expected to improve over the next few quarters which will help to reduce the margin pressures.

Consensus Estimate: (Source: market screener website)

  • The closing price of HCLTECH was ₹ 1,232/- as of 19-October-2021. It traded at 25x/ 22x/20x the consensus earnings estimate of ₹ 49/ 56/ 63. for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1360/- implies a PE multiple of 22x on FY24E EPS of ₹ 63/-.

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.”

Multi-Year growth potential for all verticals – Infoedge

Update on the Indian Equity Market:

On Tuesday, NIFTY ended higher at 17,822. The top gainers in NIFTY50 were ONGC (+10.8%), INDUSINDBK (+5.0%), and COALINDIA (+4.2%). The top losers were CIPLA (-2.4%), HINDALCO (-2.1%), and SHREECEM (-1.8%). The top gaining sectors were OIL & GAS (+2.8%), IT (+1.2%), and MEDIA (+0.8%), while the top sectoral losers were REALTY (-1.4%), HEALTHCARE (-0.7%), and PHARMA (-0.5%).  

Edited excerpts of an interview with Mr. Hitesh Oberoi, CEO & MD, Info Edge with CNBCTV18 aired on 04th September 2021:

  • In the last few quarters, the job market, especially for engineers has not been of the type one has seen in maybe the last two decades. It’s a super-hot market with attrition rates for most companies going through the roof, talent is impossible to hire.
  • The company believes it is a rock-solid market, and it is slowly spreading now to the non-IT sectors as well. Starting with the IT market, which has been growing for the last three quarters but now, it’s now beginning to spread to the other sectors as well, as the Indian economy starts to recover.
  • There is a limited pool of talent, every company wants to go digital and companies have brought forward their multi-year plans. Companies that were hoping to get 30-50 percent of their business to come from digital in the next five years are now hoping that 70 percent of their business will be digital in the next two years.
  • The fact that there are remote working opportunities, people are able to get jobs not just in India but even overseas. There is this massive surge right now, one cannot overnight produce a lot of engineers, or overnight upskill them. Unless the demand is hit for some reason, the situation will continue to be like this for the next few quarters as well.
  • The company is a pure-play internet company that runs an online job portal Naukri.com. It has massively benefitted from this uptick in the employment market and has managed to translate that to revenue growth as well.
  • The company is also bullish on the growth prospects of its other website 99acres.com, a real estate classifieds platform due to demand pick-up post lock down impact. According to him, growing prices, demand pick up across the country, cheaper credit availability are all signs of a multi-year growth cycle for real estate.
  • The Wedding cycle is also poised to pick up with more liberal government policies and the pent-up demand due to lockdowns that had brought this industry to a stand -still, the upcoming festive and wedding season bodes well for Matrimony.com.
  • Infoedge continues to be a startup incubator and aggregator with investments across startups like Zomato and Policy Bazaar and the company will continue to be on the lookout for strategic acquisitions in the startup ecosystem which is currently in a valuation bubble.
  • The Company is planning to launch an in-house blue-collar job portal called JobHai which is currently in the test marketing stage and also has made strategic investments in real estate, jobs, and education verticals.
  • The company has significant cash and capital balances to fund more startups and acquisitions to expand its portfolio and will look at listing each of its businesses separately if it believes that will help shareholders unlock more value.

Asset Multiplier Comments

  • The intensity of digital penetration across India has increased over the past few years, however, there is a lot more value to be unlocked for companies like Infoedge by expanding across India.
  • Infoedge has created a value chain through its verticals and strategic acquisitions that range from education to jobs, insurance to real estate, and now food delivery, which will likely consolidate its presence as the undisputed leader of internet-based aggregators in India.

Consensus Estimate (Source: market screener website)

  • The closing price of Infoedge was ₹ 6,493/- as of 05-Oct-21. It traded at 193x/148x/118x the consensus EPS estimate of ₹ 36/47/59 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 6,520/- implies a PE multiple of 111x on FY24E EPS of ₹ 59/-.

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 (27th Sept to 01st Oct)

Technical talks

NIFTY opened the week on 27th September at 17,932 and closed on 01st October at 17,532 during the week, the index lost -2.23%. Nifty is trading at an RSI of 58, with support at 17336 and resistance at 18,138.

Weekly highlights

  • US President Joe Biden on Thursday signed a nine-week stopgap funding bill that averts a government shutdown but fails to resolve the threat of a US default linked to the debt limit.
  • US Treasury Secretary Janet Yellen has said that if lawmakers fail to raise the debt limit by about Oct. 18, the government may not be able to pay its bills, posing a dire risk to the US and World Economy with the US Treasury defaulting on its debt obligations.
  • Japan’s former foreign minister Fumio Kishida is set to replace Yoshihide Suga as prime minister after he won the ruling Liberal Democratic Party’s leadership vote on Wednesday. Kishida will succeed Prime Minister Suga, the world’s eyes will be on the third-largest economy in the world which is facing stagnant economic growth battered by the coronavirus pandemic, the remnants of an unprecedented public health crisis, and increased political manoeuvring by China.
  • Brent Crude is at its highest since October 2018 and heading for $80 per barrel, as investors fretted about tighter supplies because of rising demand in parts of the world. Brent crude was up $1.44, or 1.8%, to settle at $79.53 a barrel, having posted three straight weeks of gains. Global supplies have tightened due to the fast recovery of fuel demand from the outbreak of the Delta variant of the coronavirus and Hurricane Ida’s hit on U.S. production
  • China’s top state-owned energy companies have been ordered to ensure there are adequate fuel supplies for the approaching winter at all costs, a report said Friday, as the country battles a power crisis that threatens to hit growth in the world’s number two economy. The country has been hit by widespread power cuts that have closed or partially closed factories, hitting production and global supply chains. The crisis has been caused by a confluence of factors including rising overseas demand as economies reopen, record coal prices, state electricity price controls and tough emissions targets.
  • The country’s top carmaker Maruti Suzuki said that it will produce fewer cars in October due to the ongoing global chip crisis. It expects vehicle production at two of its plants to be around 60 per cent of normal levels. The chip shortage has emerged as a major crisis around the world since 2020 after a sharp rise in demand for consumer electronics and continued global supply chain disruptions.
  • During the week, the foreign institutional investors (FII) net sold equities worth Rs 61,520 mn, while domestic institutional investors (DIIs) bought equities worth Rs 75,030 mn.

Things to watch out for next week

  • Q2FY22 Result season to begin with software services leader TCS announcing its results.
  • Rising Oil Prices, US Treasury Yields, Evergrande’s default, and the uncertainty over the U.S default of its debt obligations will be the themes that are in focus this week.

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 persist – Motherson Sumi

Update on Indian Equity Market:
On Thursday, markets ended on a high with Nifty closing 110 points higher to close at 17,630. INDUSINDBK (+7.3%), ITC (+6.6%), and SBI (+4.5%) were the top gainers on the index while GRASIM (-1.8%), BHARTIARTL (-1.3%), and TCS (-1.3%) were the top losers for the day. Among the sectoral indices PSU BANK (+5.4%), PRIVATE BANK (+2.7%), and BANK (+2.2%) were the top gainers, while MEDIA (-1.7%), METALS (-0.6%), and IT (-0.6%) were laggards.

Excerpts of the Interview with Mr VC Sehgal, Chairman of Motherson Sumi with CNBCTV18, dated 15th September 2021:

A lot of struggling semiconductors manufacturers are coming back on stream. However, with the uncertainty and guidance from manufacturers, the company expects this issue to persist beyond Q2CY22.
The sophistication required and the manufacturing processes of these semiconductor chips are extremely complex, the current structural barriers faced by these manufacturers can’t be removed overnight.
Demand has picked up for the entire sector, however, there’s a rise in inventory for OEMs as manufacturers wait for semiconductors to be supplied to complete the production and deliver the automobiles.
OEMs like Motherson Sumi are agnostic towards the engine that is fitted into the automobile, whether EV or ICE. However, the shift towards EV is value accretive for the company.
PLI scheme is more focused on technology transfer and development than actual production, however, these schemes coupled with the EV push by the government will result in robust demand for OEMs.
Raw Material price hikes and other margin pressures are a function of cycles and thus the company is not planning to take any aggressive steps to counter it. Right now the focus is only on delivering on the pent-up demand as fast as possible.

Asset Multiplier Comments:
Semiconductor shortage is an issue that’s going to persist for the upcoming quarters and is universal. The Auto and Ancillary Sector has to bear the brunt until things get better.
Motherson Sumi by the virtue of its product portfolio is indifferent to the ICE/EV competition, thus it is better placed for robust growth ahead once the supply side issues subside.

Consensus Estimates (Source: market screener website):
The closing price of Motherson Sumi was ₹224/- as of 16-September-2021. It traded at 32x/20x/17x the EPS estimate of ₹ 7/₹ 11/₹ 13 for FY22E/23E/24E
The consensus price target is ₹ 256/- which trades at 19x the EPS estimate for FY24E of ₹13/-
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.”

Recovery on cards, high volume growth ahead – Marico

Update on Indian Equity Market:

On Wednesday, markets ended flat with Nifty closing 9 points lower at 17,354. KOTAKBANK (+3.6%), POWERGRID (+1.8%), and GRASIM (+1.6%) were the top gainers on the index while DIVISLAB (-2.4%), NESTLEIND (-2.4%), and WIPRO (-1.7%) were the top losers for the day. Among the sectoral indices, BANK (+0.8%), PRIVATE BANK (+0.7%), and CONSUMER DURABLES (+0.7%) were the top gainers, while IT (-0.8%), MEDIA (-0.6%), and AUTO (-0.5%) were the laggards.

Excerpts of an interview with Mr. Saugata Gupta, MD, and CEO at Marico on CNBCTV18, dated 07th September 2021:

  • Marico’s portfolio is concentrated on items of daily use, which saw a faster recovery in June itself. The entire FMCG sector is witnessing volume recovery due to its inherent nature and the company expects 8-10% volume growth for H2FY22. 
  • The company expects a muted 3rd wave if it occurs on the back of rapid vaccinations and an adequate monsoon which will help demand to improve significantly.
  • The only issue that the company expects to face is rising inflation in its input costs. However, the company believes this won’t persist beyond Q3FY22 and that it will see an eventual softening in raw material prices.
  • The company expects that it’ll meet its revenue targets of Rs. 4.5-5 bn in FY22 and double them to Rs. 8.5-10 bn by FY24 on the back of strong growth drivers like diversification and premiumisation. 
  • The company is on track to meet its diversification targets, with the discretionary food segment demonstrating robust recovery. Now the company plans to focus on premiumisation in Personal Care and digital brand growth.
  • Digital Brands are an important segment for the company. Its recent acquisition of Beardo Brand is now fully integrated, and the company plans to expand into a couple of more digital brands either organically or inorganically.
  • The worst margin pressure for the company is over as Copra prices (a key raw material for the company) have settled down. The company expects vegetable and other oil prices to cool off towards Q3FY22 and EBITDA margins to reach a comfortable 19-20% level.

Asset Multiplier Comments:

  • The food and FMCG Industry has adapted to the pandemic imposed changes. Despite the pandemic, the volumes have improved and may recover sharply soon with further unlocking. With an expanding product portfolio, the growth rates may be significantly higher.
  • Marico has an established portfolio, brand awareness with consumers, and a focus-induced approach to premiumisation which it can leverage to expand volumes to grow further and deliver value to shareholders.

Consensus Estimates (Source: market screener website): 

  • The closing price of Marico was ₹563/- as of 08-September-2021.  It traded at 56x/47x/40x the EPS estimates of ₹10/ 12/ 14  for FY22E/23E/24E.
  • The consensus price target is ₹ 600/- which trades at 43x the EPS estimate for FY24E of ₹ 14/-

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 tailwinds for Steel production in India – Jindal Steel and Power

Update on Indian Equity Market:

On Monday, markets ended at an all-time closing high with Nifty closing 226 points higher to close at 16,931. BHARTIARTL (5.0%), DIVISLAB (4.2%), and AXISBANK (4.0%) were the top gainers on the index while TECHM (-1.4%), NESTLEIND (-1.1%), and EICHERMOT(-1.1%) were the top losers for the day. Among the sectoral indices,  METAL  (2.5%), PSU BANK (2.0%), and BANK (2.0%) were the top gainers, while IT (-0.6%) was the only laggard.

Excerpts of the Interview with Mr. VR Sharma, Managing Director at Jindal Steel and Power Ltd on Economic Times, dated 24th August 2021:

  • The steep fall in Iron Ore prices has lifted the market spirits across the world. However, that hasn’t translated to a fall in steel prices due to stiffness in coking coal prices and high input costs for other ferrous metals. 
  • The lower iron prices aided by a $1000/MT steel price in international markets are translating into improved gross margins for producers, and the market will likely stabilise at these levels.
  • India has to reach a level of about 300 million tonnes by 2030. In nine years, it may be producing about 300 million tonnes of steel and consuming the same quantity. 
  • Overnight it is very difficult to build up capacities. Building up capacities takes about three to four years, all-steel producers are bullish about India’s prospects, and a Rs. 2 tn investment is expected to be made over the next 5 years.
  • The sector is showing healthy growth and the demand has already begun to pick up, the company expects the entire steel sector to shine in the upcoming years.
  • Steel demand will continue because infrastructure projects are in offing and there are a lot many projects on the table now. The construction sector is booming and the shipbuilding sector, defence sector, and the oxygen cryogenic plants are increasing in terms of number.
  • Headwinds such as adverse Chinese Steel Policy, logistical bottlenecks, Covid induced supply disruptions have led to coking coal prices being inflated. This is putting pressure on steel prices which are not expected to recover in the short term.
  • The industry expects to shift from coking coal to indigenous coal, which is both cost friendly and environment friendly and offers protection from such price shocks.
  • The Chinese steel industry has seen a  dip in production and consequently exports, being the second-largest steel producer, India is well poised to take the benefits of  Chinese fallback,

Asset Multiplier Comments:

  • The cyclical recovery in the steel sector may have finally arrived. With the tailwinds for this industry, it is likely to grow fast over new capex and recovery cycle for the decade. 
  • Jindal Steel and Power is one of the largest steel producers in India. It is well poised to reap the benefits of scale and the tailwinds. It is likely to deliver great value to its shareholders.

Consensus Estimates (Source: market screener website): 

  • The closing price of Jindal Steel and Power was ₹ 379/- as of 30-August-2021.  It traded at 7x/5x the EPS estimate of ₹56/₹ 77  for FY22E/23E. 
  • The consensus price target is ₹ 538/- implies a PE multiple of 7x on FY23E EPS of ₹ 77/-.

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.”

 

No Plans to enter EV Segment in the short term: Maruti Suzuki

 

Update on Indian Equity Market:

On Wednesday, markets ended flat with Nifty closing 10 points lower to close at 16,634.  EICHERMOT (3.7%), HDFCLIFE (2.6%), HINDALCO (2.4%) were the top gainers on the index while BAJAJFINSV(-2.9%), TITAN (-2.2%) and MARUTI (-1.3%) were the top losers for the day. Among the sectoral indices,  OIL & GAS (1.1%), IT (0.7%) and FMCG (06%) were the top gainers, while PRIVATE BANK (-0.9%), METAL (-0.8%) and REALTY(-0.8%) were the top losers.

 

Excerpts of the Address by RC Bhargava, Chairman, Maruti Suzuki at 40th AGM dated 24th August 2021:

 

  • The Company will not enter electric vehicles in the short term and will enter “only when it is feasible” to sell reasonable numbers. The sales volume of existing EV (Electric Vehicle) Players is not significant enough to threaten Maruti’s Market Share.
  • The company is a market leader in ICE (Internal Combustion Engine). It has plans to be a market leader in EVs as well but the company feels, the conditions for EV penetration in India are not adequate yet.
  • The company’s short term focus is on Hybrid CNG to manage the headwinds raised by rising fuel prices until EVs reach their inflexion point.
  • The company plans to launch an SUV in this high growth segment with the aim to capture more market share in this highly competitive field consisting of a lot of players.
  •  The company is currently facing production issues due to semiconductor shortages. This is expected to continue till the end of FY22. There’s a significant reduction in production, however, no major operational loss is evident.  
  • The Company’s planned Capex is Rs. 45 bn but the company expects there will be a significant deviation in actuals by the end of the year.
  • There’s very low penetration per capita when it comes to the passenger vehicles segment. He feels that in order for India to be fully developed, India should not be pressured to meet its carbon emission reduction norms.

 

Asset Multiplier Comments:

 

  • Maruti Suzuki has a great brand presence across all segments in the Indian markets. With its cautious stance on EV, it risks losing out on market share to more aggressive EV players like Tata Motors.
  • ICE Vehicles are not still being phased out at a very rapid pace and a complete transition to EV is still a long way off. Till then Maruti Suzuki will likely continue to enjoy its position as the market leader.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of Maruti Suzuki was ₹6711/- as of 25-August-2021.  It traded at 36x/24x /19x the EPS estimate of ₹189/₹ 279/₹ 351  for FY22E/23E/24E.
  • The consensus price target is ₹ 7912/- which will put it at 23x the EPS estimate for FY24E of ₹ 351/-

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.”

 

2 Wheeler EV Segment at a growth inflexion point: Hero Electric

Update on Indian Equity Market:

On Wednesday, markets ended lower with Nifty closing 46 points to close at 16,569. EICHERMOT (+2.7%), ULTRACEMCO (+2.4%) BAJFINANCE (+2.1%) were the top gainers on the index while KOTAKBANK (-2.3%),HINDALCO (-2.3%) and ICICIBANK (-2.0%) were the top losers for the day. Among the sectoral indices,  FMCG (0.7%), CONSUMER DURABLES (0.6%) and PSU BANK (0.3%) were the top gainers, while PRIVATE BANK (-0.9%), METAL (-0.8%) and REALTY(-0.8%) were the top losers.

Excerpts of an interview with Mr Naveen Munjal, MD, Hero Electric on ET Now dated 17th August 2021:

  • Electric 2 Wheelers are the most lucrative segment in the EV Industry due to a lot of factors such as fewer infrastructure demands, simpler charging requirements, and ride distances.
  • The biggest tailwind for this segment is government support, FAME II ratings, state-specific concessions, and production-linked incentive schemes for EV Manufacturers.
  • The Total Cost of Ownership gap between ICE and EV is increasing daily due to the rise in fuel prices. Hence, the company expects demand to shift to EVs in the upcoming years to the point it’ll be 20% or a 4 billion unit segment in the next 5 years.
  • The consumer sentiment is shifting towards Electric Mobility not just in urban areas. The penetration is increasing in tier-3, tier-4, and some rural areas as well, so the sales would only go northwards from hereon.
  • The range is adequate for regular usage and for heavy usage the company offers multiple batteries as a backup. Most customers charge their bikes at home. However, the range anxiety can be addressed by installing charging stations, in which the company is investing heavily.
  • The company has also trained 6,000 mechanics and plans to train another 25,000 to solve any potential issues that may arise due to EV Malfunctions thereby creating an entire ecosystem.
  • India is leapfrogging technologies to have the most upgraded know-how as compared to other countries who took the traditional approach of innovating through the years, which is why the performance of Indian EV 2 Wheelers is best in class.
  • R&D that is being done is immense. So the vehicles in the future are going to be far better than what they are at this point. This range of vehicles is already better than what was three or five years back. This demonstrates the huge improvement in technology,

Asset Multiplier Comments:

  • Electric Vehicles are a thing of the future due to the headwinds faced by ICE Vehicles, the transition has already begun and India stands to be one of the biggest EV markets in the upcoming decade.
  • There are no pureplay EV Manufacturers that are listed on the bourses. However many 2 Wheeler Manufacturers are planning their foray into this segment. It should be noted that Hero Electric and Hero Motorcorp are two legally distinct entities with no connection to each other.
  • Hero Motorcorp has its own plans to manufacture Electric 2 Wheelers as it wants to expand into this lucrative growth-driven segment.

Consensus Estimates (Source: market screener website): 

  • The closing price of Hero Motorcorp was ₹2763/- as of 18-August-2021.  It traded at 17x/14x /12x the EPS estimate of ₹167/₹ 201/₹ 225 for FY22E/23E/24E.
  • The consensus price target is ₹ 3235/- which trades at 14x the EPS estimate for FY24E of ₹ 225/-.

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.”

Production loss to be minimal despite semi-conductor Shortage: Bharat Forge

 

Update on Indian Equity Market:

On Monday, markets ended higher with Nifty closing 34 points higher to close at 16,130, TATASTEEL(3.7%), BAJFINANCE (3.4%) M&M (2.4%) were the top gainers on the index while MARUTI (-2.6%),SHREECEM (-2.3%) and EICHERMOT (-2.3%) were the top losers for the day. Among the sectoral indices,  METAL  (1.5%), OIL & GAS (0.9%) and  FINANCIAL SERVICES (0.4%) were the top gainers, while MEDIA (-1.4%),  PSU BANK (-1%) and AUTO (-0.9%) were the top losers.

 

Excerpts of an interview with Baba Kalyani, CMD of Bharat Forge on CNBCTV18 dated 13th August 2021:

 

  • Despite mounting input cost inflation, Company managed to expand its margins by 100 bps sequentially and posted robust growth on both Revenue and Net profit Fronts in Q1FY22
  • Semi-Conductor shortage is a universal phenomenon that’s affecting industries and businesses across the world. In the case of OEMs, most of them have taken adequate steps to address this issue. 
  • In the short term, everyone is suffering some loss in production, however, the company expects no adverse impact on production in the medium-long term. The company reiterated that the situation was outside the control of anyone and its a matter of when and not if the issue will be resolved,
  • He stated that the industry has resorted to rationing of semiconductors to produce higher-value products. This will impact the supply in the short term. 
  • A lot of Passenger vehicle manufacturers have resorted to reducing the production of lower end passenger cars against higher value cars that offer better realisations.
  • Cost Reduction was the company’s important priority in the past 2 years and the company has optimised costs through downsizing, IoT and WC Management, to produce the best margins this company has seen.
  • The company has a strong balance sheet and healthy cash balance, the company plans to take forward its growth through inorganic acquisitions aimed at future technologies like e-mobility, renewables etc as the company gears itself for the future.

 

Asset Multiplier Comments:

 

  • The Semi-Conductor shortage will be dealt with sooner rather than later, barring any major disruptions, OEM and the entire Auto and Ancillary sector is recovering well.
  • Bharat Forge has managed to improve its margins and its plans to grow across all segments through strategic investments as it gets ready for the future are on the right track.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of Bharat Forge was ₹803/- as of 16-August-2021.  It traded at 45x/29x /26x the EPS estimate of ₹18/₹ 28/₹ 31 for FY22E/23E/24E.
  • The consensus price target is ₹ 900/- which trades at 30x the EPS estimate for FY24E of ₹ 31/-

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