Author - Richa Varu Rathod

The Fed Game!!

Fed raised interest rates and pledged a whatever-it-takes approach to fighting inflation. Let us understand the rationale behind this decision.

Around 2 years back the world was panicking due to the pandemic. Economists were worried as everyone was locked inside their houses, not purchasing things, not using many services, leading to spending going down. When spending goes down, companies’ profits go down. When profits go down, people lose their jobs. When jobs are lost, the economy slows down, people grow poorer which is not good for the economy.

A slowing economy is an economist’s nightmare. Central banks across the world were facing this problem. Business and spending are hugely driven by borrowed money that is paid back. One way central banks try to stimulate more spending is by making it easier to take loans by lowering interest rates. India did the same in CY20.

There’s one more option on top of this: print more money. India did not opt for this option but the US did. As we all know, the US is the world’s biggest economy, whatever the US does affects the rest of the globe. Low-interest rates coupled with an excess supply of money caused the effect they wanted to see.

People and businesses started borrowing money. The money supply increased leading to spending and the economy started seeing its effects. So, the question arises why don’t we just keep the rates low and keep money printing? When there’s too much money easily available to everyone, spending increases too much. This leads to too many buyers of goods and services and not enough goods suppliers and service providers. There’s a ton of demand, but not enough supply. This always leads to prices increasing, contracting the buying capacity of the consumers which leads to inflation. Low-interest rates and money printing for too long result in inflation.

The US central bank printed high amounts of money is now leading to record inflation. How do central banks deal with this situation now? The opposite of what they did to increase economic activity – increase interest rates and stop printing money.

The inflation the world is seeing right now is not just because of low-interest rates and money printing. The markets falling is also because of the inflation that we’re seeing. Due to disruptions during the pandemic, many items are in short supply. That is making this inflation worse. Oil is one such. Microchips that go in all sorts of gadgets and cars are another example.

Of course, this isn’t the first time we’re seeing inflation. It has happened in the past multiple times. Inflation isn’t hurting India as much as it is hurting the west so far.

As an investor, you should focus on real returns. Real returns are what you get once you subtract the inflation. If an investment is giving you 6% and inflation is 7%, you actually lost money at a rate of 1% per annum. If you’re able to make 15% and the inflation is, say, 9%, your real return is 6%. Needless to say, this doesn’t mean you simply invest only in high return (which are high-risk) investments. You need to diversify according to your risk-bearing capacity. But the point remains, as an investor, real returns are the only way you should think of returns.

The equity markets are impacted due to such economic activities and investors might benefit from such a situation in long term. Our team recommends value stocks and you can even benefit from these stocks which are available at cheap rates.

Happy investing!!

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.”

 

Aims to reach Revenue of Rs 50,000 mn by FY25E: Bata India

 

Update on the Indian Equity Market:

On Monday, the Nifty failed to close in the green, despite recovering much of its intraday losses. Nifty closed at 16,530 (-0.1%). METAL (+1.1%), OIL & GAS (+0.6%), and PRIVATE BANKS (+0.2%) were the top sectoral gainers. MEDIA (-1.3%), REALTY (-0.8%), and CONSUMER DURABLES(-0.6%) were top losing sectors.

The top losers were SHREECEM (-3.1%), BPCL (-2.6%), and ASIANPAINT (-2.5%) while BAJAJAUTO (+4.0%), JSWSTEEL (+2.7%), and TATACONSUM (+1.7%) were the top gainers.

 Aims to reach Revenue of Rs 50,000 mn by FY25E: Bata India

Edited excerpts of an interview with Mr. Gunjan Shah, MD & CEO, Bata India with ET NOW on 2nd June 2022:

  • 4QFY22 has been a robust quarter for Bata. Revenue grew by 13% YoY and EBITDA grew by 45% on the back of price hikes and improved product mix.
  • When asked why the volume growth has been weak, are these metrics likely to continue, the CEO replied that the company has proactively worked towards margin expansion through different levers:
    • First, improving the product mix. The movement towards casualization and sneakerization has aided the effort. In 4QFY22, sneakers contributed ~20% of the total revenue.
    • Second, bringing cost efficiencies in different operations.
    • Third, price hikes.
  • Short-term bounce back has been seen in the market. There is a normalization of consumer behavior after distortion of almost 2 years. Reopening of schools and offices and marriage season is pushing the fashion and formal footwear sales.
  • Longer-term trends lie in “sneaker-isation” and “casualisation’ as people now want to take comfort out of home as well. Bata is making sure that its portfolio is in line with these trends and has been backed by the latest launched campaign of 24/7 casual collection along with Brand Ambassador Disha Patani.
  • Bata aspires to reach Rs 50,000 mn revenue by FY25E with the help of the following levers:
    • Ensuring portfolio in line with the faster-growing categories (Sneakerization),
    • Footprints expansion through deeper penetration into the Tier 3&4 cities to tap the rural and middle India which is ramping up at a faster pace,
    • Digital Footprint expansion, and
    • Keep looking into the inorganic opportunities.
  • Bata delivered ~24% EBITDAM in 4QFY22. Management commented that they are just nearing the pre covid levels and have worked on cost efficiencies to aid margin expansion and will try to keep the margins stable.
  • The company is looking to increase the market share in smaller towns aggressively by adding new stores. It expects consumer preference to shift from an unorganized market to an organized market.
  • The promoters sold ~2.8% stake in the company through a block deal on 1st Jun 2022 on which the CEO commented that it doesn’t impact the majority control the promoter has over the operations. It was a minor dilution which was in line with the restructuring of the family trust.

Asset Multiplier Comments

  • We think Bata is striking the right chord to bring in revenue growth. Strong market leadership, the revival of formal footwear along with strong growth in casual portfolio and various distribution initiatives would help the company reach rich dividends.
  • Continuous focus on cost savings across rentals & operations, manufacturing and driving efficiencies in its value chain, and improving product mix will aid margin expansion.

Consensus Estimate (Source: market screener website)

  • The closing price of Bata India was ₹ 1,829/- as of 06-June-2022. It traded at 54x/44x the consensus EPS estimate of ₹34.2/41.9 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,980/- implies a PE multiple of 47x on the FY24E EPS estimate of ₹ 41.9/-.

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 (May 2nd to May 6th)

                                                                                       Technical talks

NIFTY opened the week on 2nd May at 16,924 and closed on 6th May at 16,411. During the week, NIFTY was down 1.63%. The index has breached the 50-week moving average on the weekly chart with RSI at 42. Immediate support for the index stands at 16,269 and resistance at 16,763.

Nifty Realty (-8.0%), Nifty Media (-6.0%), and Auto (-5.0%) were the top losers and there were no sectoral gainers during the week.

                                                                                     Weekly highlights

  • Wall Street had a very volatile week. At the start of the week, the stocks were trading higher on the back of news that the European Union is working on new sanctions against Russia for waging war on Ukraine that will target Moscow’s oil industry.
  • The rally continued after the Federal Reserve delivered a widely expected interest-rate hike of half a percentage point with another half-percentage-point rate hike expected at the upcoming policy meetings in June and July.
  • Bureau of Labor Statistics released data revealing a tight labor market that has emboldened millions of Americans to seek better-paying jobs, while also contributing to the biggest inflation surge in four decades.
  • Later in the week, US stocks ended sharply lower amid a broad sell-off, as investor sentiment cratered in the face of concerns that the Federal Reserve’s interest rate hike would not be enough to tame surging inflation. All three main Wall Street benchmarks erased gains made in the earlier rally.
  • The downward journey continued as stronger-than-expected jobs data amplified investor concerns over bigger interest rate hikes by the U.S. Federal Reserve to tame surging prices.
  • Indian markets also followed the lead and were no less volatile. Entirely unexpected – the Reserve Bank of India (RBI) on May 4 increased the repo rate by 40 basis points to 4.4 percent for the first time in almost two years since the start of the pandemic in 2020. This comes when inflation has been rising to an 18-month high amidst a rebound in domestic economic activity.
  • RBI Governor stated that India’s foreign exchange reserves are “sizeable” and the outlook for the country’s overall external sector is bright. Potential market opportunities have opened up due to geopolitical conditions and the recent trade agreements.
  • LIC launched its IPO on 4th May 2022. Through this IPO, the government of India will be liquidating its 3.5 percent stake in the corporation. The offer has garnered bids of 223.4 mn equity shares against the offered size of 162 mn shares, subscribing 1.38 times on Friday.
  • International Monetary Fund released data saying India’s GDP to hit USD 5 tn in FY29E and the Rupee at 94 a Dollar.
  • Oil prices dipped as worries about an economic downturn that could dampen demand for crude vied with concerns over new sanctions from the European Union against Russia, including an embargo on crude oil.
  • Larsen and Toubro Infotech (LTI) board approved amalgamation with Mindtree, creating a USD 3.5 bn IT service provider named LTIMindtree.
  • Axis AMC suspended two fund managers pending investigation of potential irregularities after conducting a suo moto investigation over the last two months and used reputed external advisors to aid the investigation.
  • Foreign institutional investors (FIIs) continued to be sellers, selling equities worth Rs 1,27,335 mn. Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 85,333 mn.

                                                                       Things to watch out for next week

  • The 4QFY22 earnings season so far has not succeeded to uplift the market sentiments. The commentary so far from companies on rising pressure on their margins and muted demand environment has tempered the enthusiasm of investors.
  • We expect volatility to remain high in the coming days as surging global inflation is forcing investors to reconsider their assumptions of strong earnings growth. Fear of further up move in the US 10-year bond yield, geopolitical concerns, fluctuations in oil prices, and earnings season will keep the investors on their toes.

 

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.”

 

Guidance of 20%+ EBITDA Margin for FY23E – Mindtree

Update on the Indian Equity Market:

On Wednesday, the Nifty bounced back and closed at 17,137 (+1.5%) with support from recovery in the beaten-down HDFC stocks and the IT sector. AUTO (+2.2%), OIL & GAS (+1.9%), and IT (+1.2%) were the top sectoral gainers. MEDIA (-0.5%), METAL (-0.3%), and PSU BANK (-0.2%) were the top losing sectors.

The top losers were BAJAJFINANCE (-2.9%), BAJAJFINSV (-1.3%), and ICICIBANK (-1.3%) while BPCL(+4.2%), TATAMOTORS (+3.8%), and SHREECEM (+3.7%) were the top gainers.

Edited excerpts of an interview with Mr. Debashis Chatterjee, MD & CEO, Mindtree with CNBC-TV18 on 19th April 2022:

  • When asked about the merger of Mindtree and L&T Infotech, the CEO stated that it is speculation at this point and will not be able to comment on it. There were opportunities where both the companies have worked together in the past on specific deals.
  • If the management change happens, some leverages can be gained by working together. It will be able to extract synergies if the merger happens as the portfolio of both entities is complementary to each other.
  • The demand environment is robust as the need for getting future-ready has never been more than what it is today. To become future-ready, one has to do it with digital transformation.
  • There is a change in deal patterns as the deal cycles tend to be more iterative and of shorter spends. But over some time, it tends to become a large engagement with the particular client.
  • The deals 2 years ago were more of manage services deals which were annuity deals for 3-4 years and would give revenue visibility for a longer period. Currently, some of these deals are getting converted into digital transformation deals which are used by the clients to maximize their revenue stream. These deals are iterative deals that are of shorter period, but over some time when these short deals are added, it does become large.
  • Mindtree has adopted the strategy where it leverages its consulting-led capabilities, creates outcome-based opportunities, and works with clients as their transformation partners for a long period.
  • The CEO commented to look at the Total Contract Value (TCV) on annual basis. TCV for FY22 is up by 17% YoY at USD 1.6 bn and the TCV annual growth is on track.
  • It maintains the EBITDA Margin guidance of 20%+ for FY23E.
  • CEO commented that margin is a factor of many levers and disciplined execution. Two years back, Mindtree had spent a lot of time putting up proper processes to ensure margin management, use the levers consistently, and get a predictable model.
  • The objective of the company is sustainable margins and to re-invest the excess profit into the business.
  • The mantra of the organization is profitable growth for which margins are equally important.
  • Wage hikes are expected from time to time and will impact the margins by 100-200 bps. But, this is already baked in the margin guidance given by the company.

Asset Multiplier Comments

  • With Mindtree’s strong capabilities in all layers of digital i.e. experience, data, and back-end/core systems, it is well-positioned to become a digital transformation partner and participate in Clients’ revenue growth.
  • Looking at the deal wins momentum, focus on garnering multi-year engagements and scaling up top accounts would aid in sales traction moving forward.

 Consensus Estimate (Source: market screener website)

  • The closing price of Mindtree was ₹ 3,668/- as of 20-April-2022. It traded at 32x/27x the consensus EPS estimate of ₹115/134 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,381/- implies a PE multiple of 33x on the FY24E EPS estimate of ₹ 134/-.

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

 

A Merger of Equals: HDFC

Update on the Indian Equity Market:

On Tuesday, the Nifty closed lower at 17,957 (-0.5%) as indices were trading on a weak note amid profit-taking in HDFC twins following a sharp rise in the last session. CONSUMER DURABLES (+2.4%), FMCG (+1.3%), and AUTO (+1.2%) were the top sectoral gainers. FINANCIAL SERVICES (-1.6%), PRIVATE BANK (-1.5%), and BANK (-1.5%) were top losing sectors. The top losers were HDFCBANK (-3.1%), BAJAJFINSV (-2.4%) and HDFC (-2.2%), while ADANIPORTS (+3.1%), NTPC (+2.8%) and TATAMOTORS (+2.4%) were the top gainers.

 A Merger of Equals: HDFC

Edited excerpts of an interview with Deepak Parekh, Chairman, HDFC with ET on 5th April 2022:

  • The merger between HDFC and HDFC Bank is a merger of equals and comes at the right time as the latest Reserve Bank of India (RBI) regulations have narrowed the operational arbitrage for non-bank lenders.
  • Both the institutions have been evaluating the pros and cons of a possible merger for mutual benefit.
  • Over the past two years, there have been regulatory changes for Banks and Non-Banking Financial Companies (NBFCs), considerably reducing the barriers for a potential merger.
  • A host of guidelines issued by the RBI in the last three years on harmonizing regulations between banks and NBFCs include guidelines requiring large NBFCs to conversion into commercial banks, particularly those with more than Rs 500 bn of asset bases.
  • Non-Performing Assets (NPA) classification has been harmonized, NBFCs are now required to provide liquidity coverage ratio, and scale-based regulation has been introduced where the upper layer of NBFCs will have a much stricter regulatory watch.  These measures have considerably reduced the risk arbitrage that was there between a Bank and an NBFC.
  • The Liquidity Coverage Ratio (LCR) requirements are a big drain on NBFCs same as Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR).
  • NBFCs need to keep their maturities in the next 30 days in a separate bank account. It needs to take all loan repayments, bond repayments, deposit repayments, and estimated disbursements in one account and transfer it to a liquid fund accruing a 2% return.
  • The strategic rationale for the proposed merger includes SLR and CRR for banks, which was 27% and has now been reduced to 22% (18% for SLR and 4% for CRR).
  • Interest rates are more favorable at present. Banks have an option to invest in priority sector lending (PSL) certificates, to meet the PSL requirements.
  • The merger makes the combined entity strong enough, countering competition and making the mortgage offering more competitive. The funding challenges both in quantum and cost will be minimized by the combined entity.
  • The bank has requested a phased-in approach in respect of SLR and CRR, priority sector lending as well as grandfathering of certain assets and liabilities and in respect of some of its subsidiaries. These requests are under consideration by RBI in terms of a letter received on April 1.
  • In a letter to RBI, HDFC has also asked for time, to be compliant on existing assets of HDFC, a specific period of 2-3 years, with new loans complying with SLR and CRR regulations.
  • The bank is aware that Developer finance, apart from earning a higher rate of interest, gets retail loans. When a builder launches a product and a construction finance is being offered, HDFC captures the first few days’ business, which emanates into large mortgage loans. However, loans given for the purchase of land will have to stop.
  • Chairman believes that the HDFC brand is not disappearing, and the brand will live through HDFC Life, HDFC MF, and HDFC Bank.
  • The time for a merger has come because of regulatory changes. NBFCs are being regulated like a bank but don’t enjoy the advantages of a bank like an overdraft, and lower cost of funds.

Asset Multiplier Comments

  • Benefits like an increase in product coverage, cross-selling opportunities to HDFC’s customers, the ability to raise funds at competitive rates, and loan book expansion will boost the performance of the Bank in long term.
  • We think the merger will be able to extract synergy benefits and will aid the competitive positioning of the combined entity as it will have the same cost structure as other banks.

Consensus Estimate (Source: market screener website)

  •  The closing price of HDFC was ₹ 2,623/- as of 05-April-2022. It traded at 3.7x/3.4x the consensus book value per share estimate of ₹ 716/ 785/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,200/- implies a PBV Multiple of 4x on the FY24E BVPS estimate of ₹ 785/-.

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 revenue growth guidance of 20% for the medium term: Happiest Minds

Update on the Indian Equity Market:

On Wednesday, Nifty closed lower at 17,246 (-0.4%)in the highly volatile session. METAL (+1.2%), OIL AND GAS (+0.4%) and PHARMA (+0.4%) were the top sectoral gainers.AUTO (-1.0%), FINANCIAL SERVICES (-0.9%) and BANK (-0.6%) were top losing sectors.

The top losers were KOTAKBANK (-2.6%), HDFC (-2.4%), and BRITANNIA (-2.1%) while DIVISLAB (+2.5%), HINDALCO (+2.5%) and TATASTEEL (+2.0%) were the top gainers.

Edited Excerpts of an interview with Joseph Anantharaju, Executive VC& Chief Executive Officer-Product Engineering Services, and Venkatraman Narayanan, MD and CFO, Happiest Minds with CNBC-TV18 on 22nd March, 2022:

  • The IT industry is facing two concerns i.e. higher attrition and margin pressure. On margins, the MD commented that the company has been outperforming its guidance of 22-24%(EBITDAM) for the last four quarters. This is largely on account of Work From Home (WFH)scenario and other cost saving factors.
  • For FY23E,the MD stated that demand seems to be robust and the company would be working on maintaining the EBITDA Margins at 24-25%. The pressure would be from wage hikes to retain the talent as the attrition rates are high. The new recruitment would cost higher. This increase in cost is expected to be compensated through rate increases to the customers. The favourable exchange rate is also helping to maintain the margins.
  • MD’s Comment on the Russia-Ukraine conflict: There is flow of work continuing to India. Earlier it was because of entire digitalization move, which was applying pressure on supply side. Now he expects this conflict to add to this pressure. According to him, demand would not be an issue, but meeting the demand and requirements of the customers and attracting talent would be a challenge.
  • The bill rates of services rendered from Eastern Europe are higher than services rendered from India. There is a headroom to cover for the increased cost by negotiating for higher rates without impacting the quality of deliverables. This is the upside for the Indian Tech Industry.
  • On the company’s organic revenue growth guidance of 20%, the MD clarified that it is for a period of time spanning five years. He expects the revenue growth range to be around 32% YoY for FY22E.
  • On high attrition rate problem, VC commented that the company expects the number to trend down a bit. It has taken a few measures, upcoming high increments and increased level of engagement, learning and development training to attract people is expected to maintain or reduce the current attrition levels. With current campus batch coming in and supply increasing,the company expects the attrition rates to taper down and to release some pressure on margins going forward.
  • The contribution of BFSI segment have been reducing in past couple of quarters. BFSI sector for the company have not been a traditional segment. Consulting, leasing and payroll service providers are the type of clients of the company. BFSI sector have been highly penetrated by the earlier entrants and large IT companies. Happiest Minds have been entering BFSI sector in adjacent areas rather than the traditional/old ones.
  • The marginal drop in BFSI segment is because of the recalibrations and reallocation in the verticals. Edutech is growing faster than BFSI in last two quarters. The recent merger and acquisition has lead to faster growth in Consumer Packaged Goods (COG) segment.
  • There is openness from existing and new customers with regards to considering the rate adjustments due to inflation and wage increases.

Asset Multiplier Comments

  • We think the strong deal momentum across verticals, emphasis on digital business and client centric approach may help the company to achieve its medium-term guidance of 20%+ revenue growth.
  • The ongoing talent crunch may keep margins under check in the near term, but the initiatives taken by the company may help to maintain the EBITDA Margins stable at 24-25%.

Consensus Estimate (Source: market screener website)

  • The closing price of Happiest Minds was ₹ 1,145/- as of 23-March-2022. It traded at 76x/ 68x the consensus earnings per share estimate of ₹15/ 17 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,510/- implies a PE Multiple of 89x on FY24E EPS estimate of ₹ 17/-.

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 21st to Feb 25th)

Technical talks

NIFTY opened the week on 21st Feb at 17,192 and closed on 25th Feb at 16,658. During the week, NIFTY was down 3.58%. At the current juncture, on the weekly chart, the index has breached the 20-weekly moving average while the RSI is at 45. Going ahead, For the bulls, 16,800-17,065 would be the immediate hurdle and the recovery may continue as long as 16,550 is held decisively.

Nifty Media (-7.7%), PSU Banks (-5.7%) and Auto (-4.6%) were the top losers and there were no gainers.

Weekly highlights

  • US stock index futures tumbled on Monday after Russian President Vladimir Putin recognized two breakaway regions in eastern Ukraine, increasing concerns about a major war. It continued to be in red as Ukraine declared a state of emergency and the US State Department said a Russian invasion of Ukraine remains potentially imminent.
  • After weeks of warnings from Western leaders, Russia unleashed a three-pronged invasion of Ukraine from the north, east and south on Thursday, in the biggest attack on a European state since World War Two that threatened to upend the post-Cold War order on the continent.
  • However, US stocks recovered sharply reversal as US President Joe Biden unveiled harsh new sanctions against Russia after Moscow began an all-out invasion of Ukraine. Sanctions announced on Thursday targeted Russia’s banks but left its energy sector largely untouched.
  • The Dow on Friday registered its biggest daily percentage gain since Nov-20 with the market rebounding for a second day from the sharp selloff leading up to Russia’s invasion of Ukraine.
  • Oil prices fell below USD 100 a barrel, easing some concerns about higher energy costs, and all 11 of the major S&P 500 sectors ended up on Friday.
  • Coming to Indian markets, NIFTY tumbled more than 3 percent and extended the losing streak in the third straight week ended February 25 amid escalation of geopolitical tensions between Russia and Ukraine. The market witnessed extreme volatility in the last week amid uncertainty over war-like situation and registered the biggest single day fall on Thursday after Russia invaded Ukraine, however, witnessed a smart pull back on Friday after the US and UK imposed new sanction on Russia.
  • Foreign institutional investors (FIIs) sold equities worth of Rs 1,98,435 mn, and domestic institutional investors (DIIs) bought equities worth of Rs 2,15,118 mn.

 Things to watch out for next week

  • Volatility to remain high in the coming days as events in Ukraine will dictate the market moves, but that focus eventually will turn back to the Federal Reserve and the outlook for interest rates.
  • The Russia’s invasion of Ukraine might have a long-term effect on global growth and inflation as it will push up the commodity prices. With higher commodity and oil prices, companies will have to pass on the higher input prices to the consumers and if not, then margins are going to get hit and will bring down the earnings.

 

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.”

 

 Expect NIMs to be in the range of 3.2-3.3% – Federal Bank

Update on the Indian Equity Market:

On Thursday, Nifty closed lower at 17,110 (-1%) in the highly volatile session after Federal Reserve in its policy outcome indicated interest rates hike soon.

PSU BANK (+5.1%), BANK (+0.7%), and MEDIA (+0.6%) were the top gainers and IT (-3.6%), CONSUMER DURABLES (-2.3%), and HEALTHCARE INDEX (-2.3%) were top losing sectors.

The top losers were HCLTECH (-3.9%), TECHM (-3.6%), and DRREDDY (-3.4%) while AXISBANK (+3.3%), SBIN (+2.8%) and CIPLA (+2.3%) were the top gainers.

 Expect NIMs to be in the range of 3.2-3.3% – Federal Bank

Edited excerpts of an interview with Mr. Shyam Srinivasan, Managing Director and Chief Executive Officer, Federal Bank with ETNow on 25th January 2022:

  • In 3QFY22, Federal Bank’s advances grew by 4.5% QoQ and 12% YoY. 3QFY22 showed all-around improvement. The performance was broad-based which is an encouraging sign. Some businesses were driven by economic activity and the bank’s gain in market share.
  • In 3QFY22:
    • Corporate business come back strongly, and
    • Retail, which has been trending well, gathered steam and kept its pace with the developments in the economy.
  • The overall numbers show credit growth and improvement in the quality of the book.
  • The credit quality of the Bank is normally in the top quartile and credit costs have been well managed across lengths of time because of disciplined lending.
  • In 3QFY22, Federal Bank recorded its best-ever net profit and ROA crossed 1%. It crossed the Rs 5,000 mn quarter mark in net profits. So, it has been a diversified, broad-based, and on-target performance.
  • Generally, Bank’s performance is ahead of the industry by a multiple. As the economy picked up pace in 3QFY22, Federal Bank saw a good pick up and its market share gain amplified. The bank is witnessing organic, structural, and holistic growth and it is not one-off bolstering performance.
  • The bank is confident of continuing its momentum in 4QFY22E provided the economy is moderately affected by Coronavirus third wave.
  • The bank believes that green shoots in the economy should play through and if it does, the bank’s market share gain will be even more pronounced.
  • Looking at the last two-three years of the incremental credit in the country, the bank’s share is higher than its normal market share.
  • The bank is gathering momentum across and believes as things improve in the economy, its market share gain should be visible across the spectrum.
  • The credit cost of the bank has reached its bottom at 22 bps and there is no scope for further improvement. Mr. Srinivasan thinks that a normalized credit cost on an annualized basis of around 50-60 bps in a steady state would be a good place to be in. The bank always tries to maintain a balance between the kind of business momentum, and credit cost.
  • Recovery upgrade for 3QFY22 was strong and close to Rs 3,000 mn. Slippages in 3QFY22 were Rs 3,300 mn and almost matched the slippages of the 2QFY22. The incremental recovery upgrades are doing well, and collection efficiency is strong.
  • The CEO expects to see a pick up in capex in 2HCY22 as capacities are getting built-in.
  • Bank’s share gain is visible as it doesn’t have the baggage of any adverse credit and companies are beginning to look at borrowing opportunities. For a greater part of CY21 corporates had other borrowing opportunities to meet their credit requirements but those are turning out to be a little more expensive. So, banking and bank credit are looking more attractive and as that happens, Federal Bank is well-positioned to gain share.
  • Sequentially, the corporate book grew ~7% in 3QFY22. The bank is confident that this will repeat as its strengths, reach out programs and appetite remains strong. Bank thinks as capex picks up, the corporate book will grow even faster.
  • The Bank has been giving NIMs guidance to be in the range of 3.2% to 3.3%. The bank is presently at 3.27% levels and sees room for improvement of another 5 odd basis points.
  • NIMs are impacted by the mix of the book, frequency of credit growth, the quantum of credit growth, and reversals in slippages. Bank has successfully controlled all these variables and demonstrated NIMs expansion. Typically, in a rising interest rate scenario, NIMs tend to expand for banks.

Asset Multiplier Comments

  • We think the Bank’s performance in terms of the advances growth, profitability, and asset quality has been strong.
  • We expect this momentum to continue considering the improving economic condition which will aid higher disbursements and better asset quality.

Consensus Estimate (Source: market screener website)

  •  The closing price of Federal Bank was ₹ 100/- as of 27-January-2022. It traded at 1.08x/0.98x/ 0.87x the consensus Book Value Per Share estimates of ₹ 88.4/ 98.1/ 110 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 118/- implies a PBVPS Multiple of 1.07x on FY24E BVPS estimate of ₹ 110/-.

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 attrition situation won’t change for the next few quarters – Mindtree

Update on the Indian Equity Market:

On Monday, Nifty closed higher at 18,308 (+0.3%). AUTO (+2.1%), REALTY (+1.3%), and CONSUMER DURABLES (+0.5%) were the top gainers while HEALTHCARE (-0.9%), PHARMA (-0.7%), and BANK (-0.4%) were top losing sectors.

The top losers were HCLTECH (-5.7%), HDFCBANK (-1.4%), and CIPLA (-1.3%) while HEROMOTOCO (+5.1%), GRASIM (+3.5%), and ONGC (+3.2%) were the top gainers.

 Edited excerpts of an interview with Mr. Debashis Chatterjee, Managing Director, and Chief Executive Officer, Mindtree with Economic Times on 14th January 2021:

  • A lot of transformation deals are happening as the clients are looking at maximising their revenues. Clients are also looking at cost optimisation and there is a lot of effort in terms of workplace modernisation, and workforce transformation for every client.
  • Most of the deals are digital and cloud led which are short cycle deals. The short cycle deals over some time develop into larger strategic relationships.
  • From an overall TCV standpoint, Mindtree has YTD USD 1.2 bn deal wins, which is 21% up YoY. The pipeline is robust and the company is confident of the deals to flow through in the coming quarters.
  • The deal pipeline is a mix of both large and transformation deals. At present, the short cycle deals are more and the company expects it to eventually get translated into multiyear initiatives.
  • The company is focused on taking the margins to healthy levels. It is satisfied with a 20% EBITDA margin on yearly basis. It has put processes to track the margins and various levers which are working well for the company.
  • The travel transport and hospitality portfolio has reached the pre-pandemic levels (USD 200 mn run rate in 3QFY22).
  • The company has diversified its travel transport and hospitality portfolio beyond airlines and hospitality. It has ventured into food and beverage, surface transformation, and cruise liners making the portfolio more resilient to the virus. The company expects this portfolio to get less impacted by the omicron variant.
  • Mindtree has been looking at Merger and Acquisition (M&A) and will be open to looking at inorganic M&As as well. It has done one inorganic in the past and is seeing good results.
  • At least for the next couple of quarters, Mr. Chatterjee doesn’t think the attrition scenario to change. The management has organized themselves to deal with and manage the talent in a more nimble and agile manner.

Asset Multiplier Comments

  • We think Mindtree has a resilient business model and has a proven track record of strong execution capabilities. The company’s plan to hire at least 1,500 freshers per quarter displays management’s confidence in winning deals going ahead.
  • We believe robust deal wins, sustainable growth, focus on multiyear engagements and margin expansion will aid topline and bottom-line growth.

Consensus Estimate (Source: market screener website)

  •  The closing price of Mindtree was ₹ 4,510/- as of 17-January-2022. It traded at 47x/ 41x/ 36x the consensus earnings estimates of ₹ 96/ 111/ 128 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,570/- implies a P/E Multiple of 36x on FY24E EPS estimate of ₹ 128/-.

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 (10-14 Jan)


Technical talks

NIFTY opened the week on 10th Jan at 17,913 and closed on 14th Jan at 18,255. During the week, NIFTY added another 2.5% and ended up with a decent bullish candle on the weekly chart, suggesting the bulls are in no mood to give up. At the current juncture, on the weekly chart, the index has breached the 20-weekly moving average while the RSI is at 64.  Going ahead, for the bulls, 18,375-18,400 would be the immediate hurdle and on the flip side, 18,150 would be the support level. If the index succeeds to close below the same, the Nifty50 could retest 18,050-18,000 levels.

Among sectoral indices, Realty (+4.9%), PSU Banks (+4.1%), and Media (+3.3%) were the top gainers while this week while FMCG (-0.13%) was the only loser.

Weekly highlights

  • The Indian Indices opened high as India Inc started the earnings season with a bang giving hopes to investors that the numbers will surprise positively.
  • Amid weak global markets and rising COVID-19 cases, the domestic market displayed strong momentum on expectations of a healthy start to the earnings season. However, rising inflation and a worsening pandemic soured the mood on Dalal Street by the end of the week.
  • The World Bank projected India’s GDP growth at 8.3% for FY22E and 8.7% for FY23E.
  • The National Statistical Office released inflation data during the week. India’s headline retail inflation jumped to 5.59 percent in Dec-21. The latest Consumer Price Index (CPI) inflation print is 68 basis points higher than the Nov-21 level of 4.91 percent. It is the highest inflation has been since Jul-21 when it had also come in at 5.59 percent.
  • Globally, bourses were muted at the start of the week as reports of record-high Eurozone inflation at 5% kept investors on edge. However, Fed’s testimony to Congress uplifted the sentiments of the investors going ahead.
  • Fed Chair Jerome Powell acknowledged on Tuesday that high inflation has emerged as a serious threat to the Federal Reserve’s goal of helping put more Americans back to work and that the Fed will raise rates more than it now plans if needed to stem the surging prices.
  • The U.S. stock indexes rose as the week progressed after data showed that while U.S. inflation was at its highest in decades.
  • The consumer price index rose 0.5% in Dec-21 after advancing 0.8% in Nov-21. In addition to higher rents, consumers also paid more for food. Prices paid by U.S. consumers jumped 7 percent YoY in Dec-21. This shows that rising costs for food, rent, and other necessities are heightening the financial pressures on America’s households.
  • The weekly jobless claims report from the Labor Department was published on Thursday showing the number of Americans filing new claims for unemployment benefits increased to an eight-week high in the first week of January amid raging COVID-19 infections.
  • However, U.S. stocks closed mixed on Friday, but all three major indexes suffered weekly losses as the prospect of rising interest rates and weaker economic data cast some doubt on the strength of the recovery from the COVID-19 pandemic.
  • The foreign institutional investors (FII) sold equities worth Rs 40,029 mn, while domestic institutional investors (DIIs) bought equities worth Rs 36,293 mn.

Things to watch out for next week

  • Markets will react to the results of two heavyweights- HCL Technologies and HDFC Bank in early trade on Monday.
  • Earnings will continue to influence the market mood. Rising COVID-19 cases and threats to further curb movement and businesses and rising inflation might also set the direction of the markets.

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.”