Author - Rujuta Tamhankar

Week in a Nutshell (21st November – 25th November)

Technical talks

NIFTY opened the week on 21st November at 18,174 and closed at 18,484 on 25th November. The index gained 1.3% during the week. The index’s next support and resistance levels would be 18,400 and 18,600 respectively. The weekly RSI (14) of 65 indicates the index is in the overbought zone.

Among the sectoral indices, MEDIA (+2.5%), REALTY (+1.2%), and AUTO (+0.9%) were the gainers during the week while FMCG (-0.3%), FINANCIAL SERVICES (-0.3%), and BANK (-0.2%) led the losers.

Weekly highlights

  • The US markets had a truncated week as the markets were closed on 24th November due to Thanks Giving and closed early on 25th November due to Black Friday sales. The S&P 500, NASDAQ and Dow Jones Industrial Average gained 1.5%, 0.7%, and 1.7% respectively.
  • Both Brent crude and West Texas Intermediate closed in green at $83.84 and $76.55 per barrel respectively.
  • US Fed’s November 2022 meeting minutes were released, indicating that the rate hikes could moderate due to improved economic data.
  • India and Australia signed a Free Trade Agreement (FTA), which is projected to promote Indian exports to Australia in textiles, jewellery, information technology, steel, and leather areas.
  • Covid instances are on the rise in China, and there are growing fears that the country, which is one of the world’s top consumers, could tighten restrictions following several reported fatalities from the virus.
  • The government has imposed a 10-year term limit for Managing Directors (MD) of state-owned banks, which bodes well for PSBs.
  • During the week Foreign Institutional Investors (FIIs) net sold shares worth Rs 14,790 mn, and Domestic Institutional Investors (DIIs) net bought shares worth Rs 17,810 mn.

Things to watch out for next week

  • US markets will be watching Black Friday sales performance, which is a proxy for the strength of the consumer and retail sectors in the United States. With the Job Openings and Labor Turnover Survey (JOLTS), ADP’s National Employment Data, and the Labor Department’s November nonfarm payrolls report, the labour market will also be in the focus. The Case-Shiller National Home Price Index and Freddie Mac’s House Price Index (HPI) for September will provide the most recent data on home prices. The Bureau of Economic Analysis (BEA) will release its October Personal Consumption Expenditures (PCE) Price Index on Thursday, providing an update on consumer inflation.
  • In India, investors will be watching the 2QFY22 GDP growth rate data, published on November 30th, and the monthly vehicle volume data for November.

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 (19th September- 23rd September)

 

Technical talks

NIFTY opened the week on 19th September at 17,540 and closed on 23rd September at 17,327. The index lost 1.2% during the week. The index has managed to sustain above the 50DMA of 17,327 level, which is acting as a support. On the upside, the recent high of 18,114 might act as a resistance.

Among the sectoral indices, FMCG (+3.9%), PHARMA (+2.1%), and AUTO (+1.1%) were the top gainers while REALTY (-3.9%), PSU BANK (-3.1%), BANK (-3.0%) were the losers in the week.

Weekly highlights

  • Wall Street indices were volatile and reacted to because of the Fed’s interest rate decision on 21st September. Nasdaq and S&P ended 1.6% and 1.7% lower respectively.
  • Oil prices during the week reacted to supply concerns ahead of the European Union embargo on Russian oil which offset fears of a global recession that could dampen fuel demand, stalled Iran nuclear agreement, and Fed interest rate hike. Brent oil futures and WTI futures ended lower wherein the former settled at USD 85/ barrel and the latter 5% lower at USD 79/barrel. 
  • The Federal Reserve raised its key interest rate by 0.75% on Wednesday, bringing the target range to between 3% and 3.25%. According to the Fed’s forecasts, interest rates will reach 4.4% by FY23E.
  • On September 22nd, the Bank of England raised its key interest rate by 0.5% to 2.25% from 1.75%, which is its biggest rate hike in 27 years. 
  • According to a circular issued by the Ministry of Finance on September 16, the government of India reduced the windfall tax on locally produced crude oil to Rs 10,500 from Rs 13,000 per tonne, easing the burden on consumers.
  • The RBI is depleting its foreign exchange reserves at a faster rate than during the taper-tantrum period in 2013, in order to prevent the rupee from overshooting. The country’s foreign exchange reserves fell by USD 2.2 bn for the week ended September 9 to USD 550.8 bn due to a drop in foreign currency assets (FCAs), a major component of overall reserves. Between January and July 2022, the RBI sold a net of USD 38.8 bn from its forex reserves. In July alone, a net of USD 19 bn was sold, and intervention remained intense in August when the rupee fell below 80 against the dollar.
  • The Asian Development Bank cut its growth forecasts for Asia, which includes India and China, for 2022 and 2023 on September 21 due to mounting risks from increased monetary tightening, the fallout from Ukraine’s war, and Covid-19 lockdowns in China. The ADB forecasts a 4.9% growth in the region’s economy in 2023.
  • On September 20, Yes Bank announced that its board of directors had approved the sale of USD 6 bn (approximately Rs 480 bn) in stressed debt to private equity firm JC Flowers after the bank received no challenger bids to JC Flowers’ base bid for the Rs 48,000 crore NPA portfolio.
  • FII (Foreign Institutional Investors) turned net sellers this week, selling shares worth Rs 43,620 mn. DII (Domestic Institutional Investors) were net buyers, buying shares worth Rs 11,380 mn.

Things to watch out for next week

  • Fed’s 75 basis point rate hike is expected to have a ripple effect which will weigh on MPC’s monetary agenda when it meets on 28th September. Investors will be looking forward to the comments from RBI regarding inflation and interest rate hikes.
  • Various economic data points are set to be released next week starting from Japan’s PMI and policy meet, China’s industrial profits and manufacturing PMI, US 2QFY22 GDP data, and jobless claims for the week.

 

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.”

Have you heard about the Metaverse?

Have you heard that Facebook has changed its name to Meta and that Mark Zukerberg is betting the future of his company on a vision that will have us spend more time in the virtual world?

Well really, the metaverse uses different sets of technologies such as virtual reality (VR) and augmented reality (AR) to allow people to have real-time interactions and immersive experiences across distances. It’s expected to be a space wherein our digital world and the physical world converge.  The provider companies will be looking forward to providing experiences to users such as virtual concerts, theme parks, casinos, sports arenas, shopping centers, etc. There are several games such as Decentral, Roblox, Minecraft, etc. that have their own metaverse worlds equipped with their own avatars, interactions, and currency. The gaming industry allows users to pay real currency for virtual currency which can buy you lands, farms, and businesses to progress faster in the game.

The ‘metaverse’ has essentially amplified this concept wherein you can build, trade, and make money using NFTs via cryptocurrency. Virtual goods can be turned into NFTs and stored on metaverse platforms as assets. Metaverse users can then trade these NFTs for cryptocurrency or choose to cash out.  Now, you would be wondering what are these NFTs. NFT is a nonfungible token associated with a digital or physical asset and stored on blockchain technologies such as cryptocurrencies such as bitcoin, or Ethereum. These can be sold or traded.

For example, ‘Decentraland’ is a 3D virtual world browser-based platform where users buy virtual plots of land as NFTs via the MANA cryptocurrency, which uses the Ethereum blockchain.

These platforms are targeted toward the tech-savvy younger audience (15-30-year-olds) wherein the audiences are expected to be present in a Meta world for businesses such as work meets or for fun activities such as concerts. The experience would be similar to consumers visiting physical stores to purchase goods. Metaverse could facilitate hybrid work meetings or training programs spanning multiple locations.  Several brands are beginning to experiment with the metaverse. Nike is looking to connect with younger generations through a gaming and virtual reality experience and has launched Nikeland, a virtual world made in partnership with Roblox. By early 2022, nearly seven million people had visited Nikeland.

What are the big tech companies such as Meta (earlier Facebook), Google, and Microsoft doing with metaverse?

Meta, in December 2021 announced that it plans to invest USD 10 bn into metaverse platforms and that money will be going towards connecting people via this new digital experience.

Microsoft announced in January 2022, that it would be acquiring Activision Blizzard, an enormous video game developer, and publisher for USD 68.7 bn. Google has invested about USD 39.5 mn in a private equity fund for all metaverse projects for utilizing augmented reality and making services like Maps and YouTube into the virtual landscape.

Tech Mahindra announced the launch of the first-of-its-kind ‘Meta Village’, a digital twin of Paragon in Maharashtra to gamify learning on the Roblox platform. Strengthening its commitment to the ‘Make in India’ initiative, Tech Mahindra initiated its launch of the Meta Village to drive innovation in the education sector at the grassroots level. The Meta Village will ensure that the students play on Roblox to learn the basics of computers and coding in Bharat Markup Language (BHAML), a platform built by Markers lab that enables anyone to code in their native language.

How will it affect companies?

Metaverse is an immersive experience that holds potential for innovation in branding, marketing, and commerce. Metaverse creates opportunities for companies to reach out to consumers in a more engaging manner. Brands would have to create their presence in the metaverse with 3D representations of their products, for example, a ‘try on virtual clothing’ option for a clothing brand.

What do these new developments mean for investors like us?

Investors can invest in businesses involved in immersive hardware, semiconductors, interactive platforms, connectivity, and other potential layers that comprise the metaverse universe. Patience is essential to realize meaningful returns on metaverse investments, which may take a decade or more to develop.

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 (1st August- 5th August)

Technical talks

NIFTY opened the week on 1st August at 17,243 and closed on 5th August at 17,397. The index gained 1.4% during the week. The index has managed to sustain above the 50DMA of 17,105 level, which acts as a support. On the upside, the recent high of 18,114 might act as a resistance.

Among the sectoral indices, IT (+2.8%), AUTO (+2.1%), and METAL (+2.1%) were the top gainers while REALTY (-2.9%) was the only loser in the week.

Weekly highlights

  • Wall Street indices fluctuated throughout the week due to better than anticipated corporate earnings, economic data, and US-China tensions following Speaker of the US House of Representatives Nancy Pelosi’s visit to Taiwan, which led to China conducting military exercises near Taiwan.
  • China’s factory activity contracted in July after rebounding from COVID-19 lockdowns as new virus outbreaks and a bleak global outlook weighed on demand. 
  • Oil prices fell ahead of the OPEC+ meeting on August 3rd. In the meeting, it was decided that the cartel will add only 100,000 barrels a day of oil in September. Consumers feeling the inflationary squeeze due to higher oil prices won’t find much relief from the increase. Brent oil futures and WTI futures were mixed wherein the former settled 0.6% up at USD 94/ barrel and the latter 0.01% lower at USD 89/barrel. 
  • The 5G spectrum auction concluded on August 2nd, with bids exceeding Rs 1.5 bn. Approximately 71% of the total spectrum was sold in the auction held through 40 rounds of bidding. The government has received bids totaling Rs 1,501,730 mn. 
  • Reliance Jio was the highest bidder at the 5G spectrum auction, with bids of over Rs 880,000 mn. Bharti Airtel took 19,867 MHz for Rs 430,840 mn, while Vodafone Idea acquired the spectrum worth Rs 187,990 mn.
  • Bank of England raised the interest rate by 50 bps to 1.75% despite warning that recession is on its way, even as inflation is now expected to top 13%.
  • RBI in its policy meeting on Friday raised the repo rate by 50 bps. It now stands at 5.4%. The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
  • After nine months of relentless selling, foreign investors turned net buyers in July, investing Rs 49,890 mn in Indian equities as the dollar index fell and corporate earnings improved. This is in stark contrast to the stock market’s net withdrawal of Rs 501,450 mn in June. 
  • FII (Foreign Institutional Investors) turned net buyers this week, buying shares worth Rs 54,620 mn. DII (Domestic Institutional Investors) turned net sellers by selling shares worth Rs 17,650 mn.

Things to watch out for next week

  • India’s largest lender, State Bank of India (SBI), will report earnings on August 6. SBI is expected to report robust balance sheet growth, improvement in asset quality, and improved interest income.
  • Investors and traders are focused on corporate earnings and announcements. The earnings of companies such as SBI, Tata Consumer, HAL, Eicher, Hero Moto, and Aurobindo may cause volatility in Indian markets. Share price moments would be driven by management comments on the impact of inflation on demand and the supply chain challenges, particularly chip shortages for 2W companies.
  • With result season coming to an end next week, investors’ attention would be focused on company-specific news.

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.”

Week in a nutshell (27June-1July)

Technical talks

NIFTY opened the week on 27th June at 15,926 and closed at 15,752 on 1st July. The lower Bollinger Band level of 15,370 might act as a support, while, on the upside, the 16,250 level might act as a resistance.

Among the sectoral indices, FMCG (+2.8%), REALTY (+1.6%), and HEALTHCARE (+1.1%) were the gainers during the week. OIL&GAS (-4.2%) was the only loser.

Weekly highlights

  • All of the major US indices ended the week on a volatile note as oil prices rose and fell throughout the week. S&P 500 closed the week marginally higher at 3,825 and Nasdaq at 11,129.
  • WTI crude oil and Brent crude closed flat at -0.3% after fears that the US economy would enter a recession, resulting in lower oil demand.
  • Accenture reported 3QFY22 earnings, with revenues exceeding expectations at US$16.2 billion. According to the leadership, cost optimization, along with growth, is now the focus area for clients. However, it lowered its fiscal forecast due to a negative foreign exchange impact and rising inflation.
  • According to official data released on June 30th, output in India’s eight core infrastructure sectors increased by 18.1% in May, compared to 16.4% the previous year. This suggests that the economy is gradually returning to normalcy.
  • Japan’s factory activity growth slowed in June, with the PMI falling from 53 to 52, as supply disruptions, exacerbated in part by China’s strict COVID-19 curbs, hurt manufacturers, keeping the economy underpowered and with few catalysts to spur a robust recovery in the short run.
  • US consumer spending data was released on June 30th, showing that US consumer spending rose less than expected in May as motor vehicles remained scarce and higher prices forced cutbacks on purchases of other goods, indicating that the early recovery in economic growth was a losings steam.
  • On June 29, India’s Cabinet approved a plan that would allow local crude producers to sell oil to private companies, boosting revenue for state-run producers such as ONGC and Oil India. The decision will take effect on Oct. 1, and existing conditions for selling crude oil to government-run companies will be waived, according to a government statement, adding that exports will be prohibited. Reliance Industries’ share price tanked more than 7% Friday after the government levied an additional tax on crude oil.
  • FII (Foreign Institutional Investors) net sold ₹ 68,350 mn and DII (Domestic Institutional Investors) were net buyers this week. DIIs bought shares worth ₹ 59,250 mn.

Things to watch out for the next week

  • On Monday the labor markets will be in the spotlight next week, with the June nonfarm payrolls report due on Friday.
  • The 1QFY23 result season kicks off with IT major TCS reporting earnings on Friday.
  • The International PMI surveys, which track business sentiment in the United Kingdom and the eurozone, will be released on Tuesday, while the meeting minutes from the FOMC’s most recent policy meeting, held in mid-June, will be available on Wednesday.

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 helicopter orders worth Rs 600 bn – Hindustan Aeronautics

Update on the Indian Equity Market:

On Wednesday, NIFTY closed in the red at 16,342 (-0.5%). BHRATIARTL (-3.9%), ITC (-2.2%), and RELIANCE (-1.8%) led the losers while TATASTEEL (+1.7%), SBIN (-1.6%), and TITAN (-1.4%) led the gainers. Among the sectoral indices, REALTY (+2%), MEDIA (+1.4%), and PSU BANK (+0.7%) led the gainers, while OIL &GAS (-1.1%), FMCG (-1.0%), and CONSUMER DURABLES (-0.6%) were the only losers.

Excerpts of an interview with Mr. R Madhavan, Chairman and Managing Director at Hindustan Aeronautics (HAL) with BQ Prime on 8th June 2022: 

  • HAL anticipates revenue to increase by 6-7% in FY23. Revenue is expected to increase by double digits in FY24 and will continue to grow in FY25.
  • The company’s order book stands at Rs 820 bn, of which Rs 200 bn is for a repair and spare parts order and Rs 615 bn is for production for Light Combat Helicopters (LCH) to be delivered in 2024.
  • HAL is expecting orders worth Rs 600 bn for helicopters and basic trainers. These orders, coupled with other engine orders, will increase the company’s book-to-bill ratio from three to five times.
  • Due to the longer cycle time for the ministry’s order placing, the company must begin production or the helicopter manufacturing facilities would be underutilized. The company hopes to have a capacity of more than 90 to 100 helicopters every year. The order book is also required to be in that range so that the capacities that they have established are adequately utilized.
  • Management thinks that India should take advantage of the current geopolitical environment since countries are not favoring China and Russia for their respective source and support systems and platforms. Management sees this as an opportunity as India is capable of supporting Russia’s systems. Furthermore, Indian equipment is easier and less expensive to maintain than western competitors.
  • HAL is hoping to increase export orders as the Indian Ocean Commission area and West Asia gains traction.
  • The Tumkur facility will be inaugurated in July 2022, with an initial capacity of 30 helicopters, in addition to the present capacity of 30 helicopters. In phase 2, this capacity would be increased to 60-70 helicopters.
  • There is excess capacity for fixed-wing aircraft, with the Hindustan Turbo Trainer (HTT-40) trainer aircraft, as well as the Light Combat Aircraft (LCA) Mark-1A and LCA Mark-2, scheduled for production.
  • There hasn’t been much movement from large corporates in India’s defense industry, but the MSME sector has forayed into defense manufacturing, particularly in the avionics and accessories segment.
  • The Company anticipates some push from larger corporates, which is currently lacking, towards indigenous development of platforms and equipment.

Asset Multiplier Comments

  • Due to outstanding helicopter orders, HAL’s order book is likely to reach Rs 1,000 bn in CY22E/ FY23E, and the book-to-bill ratio is expected to rise from 3x to 5x.
  • We anticipate HAL will be able to meet its double-digit revenue growth projections starting in FY25E, as key projects like the LCA Tejas Mark-1A and LCH helicopter orders are scheduled to be completed in 2024.
  • As military threats have grown across the world, the demand for defense equipment has increased. HAL’s addressable market is likely to grow as the firm seeks to diversify its activities by increasing its foreign exposure.

Consensus Estimates: (Source: tikr website)

  • The closing price of Hindustan Aeronautics Ltd was ₹ 1,842/- as of 08-June-2022.  It traded at 15x/ 14x the consensus earnings estimate of ₹ 124.1 / 134.5/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,025/- implies a P/E Multiple of 15x on the FY24E EPS estimate of ₹ 134.5/-.

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.”

 

Royalty payments to accrue over the next 5 years – UNSP

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green at 16,628 (0.6%), led by RELIANCE (+3.6%), BAJAJFINSV (+3.4%), and SUNPHARMA (+2.7%). APOLLOHOSP (-5.0%), HEROMOTOCO (-3.5%), and EICHERMOT (-1.7%) were few of the laggards. Among the sectoral indices, OIL & GAS (+2.3%), IT (+1.8%), and METAL (+1.1%) led the gainers, and AUTO (-0.6%) and FINANCIAL SERVICES (-0.3%) led the losers.

Excerpts of an interview with Ms. Hina Nagarajan, MD & CEO, Diageo India with CNBC-TV18 on  30th May 2022:

  • UNSP has sold 32 popular brands which include Haywards and White Mischief for Rs 820 crores to Inbrew. The deal is expected to close in 3-4 months by 30th September 2022. The surplus will be invested prudently in the short term. The deal is ROCE accretive. This accelerates UNSP’s journey towards dividend distribution.
  • Ideally, the company would have liked to do a full slump sale in one go and take the money upfront. As part of the contract, the company has signed a 5-year franchise deal with Inbrew limited for Rs 12,930 mn, company has paid all the underlying interest. Royalty payments will accrue over the next 5 years and they will be higher in later years.
  • UNSP to focus on premium brands.
  • The company has reiterated guidance of sustained double-digit revenue growth with mid to high teen margins. The company has also cautioned about EBITDA margin pressures due to inflation and other short-term supply pressures which would be mitigated by productivity initiatives and product mix by including premium brands in the mix thus improving the pricing mix.
  • The company has stepped up advocacy with states on price increases. Assam which contributes about 7-8% of the business, MP, and Rajasthan have given some price increases.
  • UK- India FTA is being negotiated concerning the customs duty reduction on scotch imports. The company is optimistic that the deal will come through. However, it’s uncertain how much benefit the company will get, as the quantum and the timing are not known. If the import duty were to come down depending on the quantum, the range of momentum the brands could get would be between 7-15% and consumer prices would be reduced, thus increasing volumes.

Asset Multiplier Comments

  • This deal is a step forward to the UNSP’s premiumization strategy as the company sees potential in the premium/luxury segment. This will help the company to focus on the Prestige and Above segment where the core competencies of the company lie.
  • We remain positive on the premiumization trend in the liquor industry, however, state-wise pricing actions and portfolio reshuffle benefits will remain the key monitorable in the near term.

Consensus Estimates: (Source: market screener website)

  • The closing price of UNSP was ₹ 801/- as of 02-June-2022.  It traded at 53x/ 45x the consensus earnings estimate of ₹ 15/ 18 – for FY23E/FY24E respectively.
  • The consensus target price of ₹ 918 /- implies a P/E Multiple of 51x on the FY24E EPS estimate of ₹ 18/-.

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.”

 

Capex of 2.6 bn pounds to be utilized for electrification operations – TATAMOTORS

Update on the Indian Equity Market:

On Wednesday, NIFTY settled lower at 16,204 (-0.1%). POWERGRID (-4.5%), BPCL (-3.2%), and TECHM (-2.2%) were the top losers. TATACONSUM (+3.1%), HINDUNILVR (2.1%), and ULTRACEMCO (+2.0%) were the gainers. Among the sectors, REALTY (-1.8%), PSU BANK (-1.6%), and CONSUMER DURABLES (-0.5%) led the losers. FMCG (+1.3%), PHARMA (+1.1%), and HEALTHCARE (+0.6%) led the gainers.

Excerpts of an interview with Mr. P.B Balaji, Group CFO, Tata Motors with Economic times on 17th May 2022:

  • In terms of capex plans, the company intends to spend Rs 60bn on Tata Motors and 2.6 bn pounds on JLR, which will be utilised for innovations and to prepare the company for the future as the industry transitions from IC engines to an industry of net-zero commitments. Capex will be used by the company for both traditional and electrification-related operations.
  • Capex will be funded by internal accruals, and the firm will generate free cash flows of over a billion pounds after spending 2.6 bn pounds on capex. The commercial vehicle business of Tata Motors is cash positive, whereas the passenger car division is cash neutral. The TPG transaction was executed to ensure investments in electrification are made on time.
  •  The failure to meet market demand due to the semiconductor shortage is affecting revenues, both at JLR and Tata Motors is expected to result in a loss of contribution, profitability, and operational leverage.
  • As far as China lockdowns are concerned, they have impacted the April numbers for all OEMs that were released on 16th May 2022.
  • The Company’s supply chain has not been directly harmed by the Russia-Ukraine war. They have two vendors in the regions that are being diverted.
  • Interest rate rises will undoubtedly weaken demand in the future as a result of inflation in fuel, commodities, and food. However, from the standpoint of JLR and Tata Motors, the premium market is not facing that challenge.
  • Domestically, the firm hasn’t seen any impact on demand, but it will be watching this closely for the next three to six months to see how the demand plays out.
  • Due to commodities, oil, and the resulting fuel price increase, management has begun to identify a risk of greater inflationary expectations, which might harm the premium sector as well as demand in India.
  • Due to the commodity cost rise, the company has roughly 200 basis points of unrecovered margins, compared to about 540 basis points previously.
  • The company anticipates commodity prices to stay steady at current levels. In April, the company raised its prices. If commodity prices continue to climb, the company will increase prices to protect our margins.
  • Lithium costs have risen as demand for electric cars has grown. The company has taken price hikes which are absorbed by the market.  There is a very attractive equation in terms of the running cost of an electric vehicle vis-à-vis a diesel or a petrol car.

Asset Multiplier Comments

  • As supply-side concerns ease and commodity headwinds settle, Indian business, which was severely impacted by the second Covid wave, could witness some supply-side recovery. The renewed product range in its PV business is expected to lead to market share gains, and it is projected to achieve FCF breakeven by FY23E due to macroeconomic recovery.
  • JLR’s profitability is likely to improve as a result of cost-cutting activities in both variable and fixed costs, improved mix, increased operational leverage, and cost savings from its modular platform.

Consensus Estimate: (Source: market screener)

  • The closing price of TATAMOTORS was ₹ 415/- as of 18-May-2022. It traded at 24x/ 11x the consensus earnings estimate of ₹ 17.0/ 36.4/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 529 /- implies a P/E Multiple of 15x on the FY24E EPS estimate of ₹ 36.4/-

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 (1st August- 5th August)

Technical talks

NIFTY opened the week on 1st August at 17,243 and closed on 5th August at 17,397. The index gained 1.4% during the week. The index has managed to sustain above the 50DMA of 17,105 level, which acts as a support. On the upside, the recent high of 18,114 might act as a resistance.

Among the sectoral indices, IT (+2.8%), AUTO (+2.1%), and METAL (+2.1%) were the top gainers while REALTY (-2.9%) was the only loser in the week.

Weekly highlights

  • Wall Street fluctuated (Indices data to be inserted) throughout the week due to better than anticipated corporate earnings, economic data, and US-China tensions following Speaker of the US House of Representatives Nancy Pelosi’s visit to Taiwan, which led to China conducting military exercises near Taiwan.
  • China’s factory activity contracted in July after rebounding from COVID-19 lockdowns as new virus outbreaks and a bleak global outlook weighed on demand. (rephrase)
  • Oil prices fell ahead of the OPEC+ meeting on August 3rd. In the meeting, it was decided that the cartel will add only 100,000 barrels a day of oil in September. Consumers feeling the inflationary squeeze due to higher oil prices won’t find much relief from the increase. Brent oil futures and WTI futures were mixed wherein the former settled 0.6% up at USD 94/ barrel and the latter 0.01% lower at USD 89/barrel. 
  • The 5G spectrum auction concluded on August 2nd, with bids exceeding Rs 1.5 bn. Approximately 71% of the total spectrum was sold in the auction held through 40 rounds of bidding. The government has received bids totaling Rs 1,501,730 mn. 
  • Reliance Jio was the highest bidder at the 5G spectrum auction, with bids of over Rs 880,000 mn. Bharti Airtel took 19,867 MHz for Rs 430,840 mn, while Vodafone Idea acquired the spectrum worth Rs 187,990 mn.
  • Bank of England raised the interest rate by 50 bps to 1.75% despite warning that recession is on its way, even as inflation is now expected to top 13%.
  • RBI in its policy meeting on Friday raised the repo rate by 50 bps. It now stands at 5.4%. The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
  • After nine months of relentless selling, foreign investors turned net buyers in July, investing Rs 49,890 mn in Indian equities as the dollar index fell and corporate earnings improved. This is in stark contrast to the stock market’s net withdrawal of Rs 501,450 mn in June. 
  • FII (Foreign Institutional Investors) turned net buyers this week, buying shares worth Rs 54,620 mn. DII (Domestic Institutional Investors) turned net sellers by selling shares worth Rs 17,650 mn.

Things to watch out for next week

  • India’s largest lender, State Bank of India (SBI), will report earnings on August 6. SBI is expected to report robust balance sheet growth, improvement in asset quality, and improved interest income.
  • Investors and traders are focused on corporate earnings and announcements. The earnings of companies such as SBI, Tata Consumer, HAL, Eicher, Hero Moto, and Aurobindo may cause volatility in Indian markets. Share price moments would be driven by management comments on the impact of inflation on demand and the supply chain challenges, particularly chip shortages for 2W companies.
  • With result season coming to an end next week, investors’ attention would be focused on company-specific news.

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.”

Remain optimistic on business prospects but cautious in the near-term – UPL

Update on the Indian Equity Market:

On Thursday, NIFTY ended lower at 15,808 (-2.2%). All the sectoral indices ended in the red led by PSUBANK (-5.4%), METAL (-3.7%), and PRIVATEBANK (-3.5%). Among the stocks, WIPRO (+0.8%), EICHERMOT (+0.2%), and HCLTECH (+0.1%) led the gainers, while ADANIPORTS (-5.8%), INDUSINDBK (-5.7%), and TATAMOTORS (-4.2%) led the losers.

Excerpts of an interview with Mr. Jaidev Shroff, Global CEO, UPL with CNBC-TV18 on 9th May 2022:

  • The company remains optimistic about business prospects although cautious in the near term due to the global supply chain and shipping disruptions.
  • The company is quite comfortable committing to conservative guidance of 10% revenue growth in FY23E due to global uncertainties.
  • Europe had a challenging quarter in Q4FY22 with low single-digit growth. Europe has continued to ban certain traditional products which also impacts the portfolio. Europe is expected to be the slowest growing region in FY23E. The company expects a 7-8% YOY growth in the Europe business in FY23E.
  • In 4QFY22 Indian business grew by 63% on a YoY basis. The company anticipates the India business to continue this growth momentum for FY23E on the back of new launches in 4QFY22, strong commodity prices for farm products, and investments in sustainable technologies.
  • The company is investing in sustainable solutions that will provide considerable value to farmers, making agriculture more sustainable.
  • There is a global need for sustainable agriculture techniques and technologies. A slew of new technologies is being introduced by the company under the Natural Plant Protection (NPP) vertical. The company is reorganizing to focus on this business vertical which is expected to grow faster than the traditional businesses.
  • In FY22, the company incurred a debt of Rs 182,500 mn. The company’s goal is to reduce the debt to equity ratio to 2, or Rs 30,000 mn in absolute terms, by FY23E.

Asset Multiplier Comments

  • For FY23E, the management has guided growth across revenue and EBITDA at 10% and 12-15% YoY, supported by strong commodity prices, increased demand for biofuels fueled by high cost, and reduced availability of fertilizers.
  • Strengthening the supply chain through a reduction in imports and diversifying the raw material sourcing mix ensures a reliable supply base.
  • Reorganizing the firm’s focus towards the high margin and sustainable solutions business positions the company favorably to reach the company’s long-term growth objective of 7-10% from FY23-FY27E.

Consensus Estimates: (Source: Market screener website)

  • The closing price of UPL was ₹ 510/- as of 12-May-2022.  It traded at 8/7x the consensus earnings estimate of ₹ 62.1/72.6 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 974/- implies a P/E Multiple of 13.4x on the FY24E EPS estimate of ₹ 72.6/-

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.”