Author - Rutuja Chavan

This Week in a nutshell (18th Oct to 22nd Oct)

Technical talks

NIFTY opened the week on 18th October at 18,500 and closed on 22nd October at 18,114 during the week, the index lost -2%. Nifty is trading at an RSI of 72, with support at 18,095 and resistance at 18,602.

Weekly highlights

  • China Evergrande Group pulled back from the edge of default by paying a bond coupon of $83.5 million before Saturday’s deadline. This came as a surprise as Evergrande was expected to make payments to local creditors and suppliers first who are waiting for the company to make due payments.
  • Applications for unemployment benefits in the US have dropped by 6,000 to 2,90,000 this week. Layoff levels have become normal but hiring by companies has been slow. It is observed that people who were laid off have stopped looking for new jobs.
  • India is going through a coal crisis which has coincided with an increase in demand for electricity. The Centre is planning to maintain sufficient reserves of coal and natural gas to tackle future shortage of coal.
  • India’s top private banks including HDFC Bank, Kotak Mahindra Bank, Axis Bank and IndusInd Bank are bidding for Citi’s consumer banking business after it announced exit from consumer banking in 13 countries including India.
  • Maharashtra is witnessing a declining trend in its covid cases and hence the Government eased restrictions starting 22nd October by reopening amusement parks and cinemas. Restaurants and shops are also allowed relaxed timings. This will have a positive impact on the restaurant and entertainment industry.
  • Federal Reserve Chair Jerome Powell indicated that the central bank would begin winding down its bond purchases but remain patient on raising interest rates.
  • US markets continued their rally this week but fell on Friday as the Fed warned about concerns about inflation.
  • The foreign institutional investors (FII )sold equities worth of Rs 73,530 mn, while domestic institutional investors (DIIs) sold equities worth of Rs 45,040 mn.

Things to watch out for next week:

  • Result season continues next week in the US, and India. Big IT companies such as Facebook, Microsoft, Alphabet are set to announce earnings next week. In India, banks like Kotak bank and IndusInd bank are set to report earnings. commentary from banks regarding loan book growth will be critical.
  • Pharma biggies such as Cipla, Lupin and Torrent will also report earnings next week.
  • Commentary regarding raw material inflation and logistical challenges would be critical.

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 quarter is all about consolidation of growth momentum – TCS

Update on the Indian Equity Market:

On Monday, NIFTY ended higher at 17,946 (+0.3%) as it closed near the intraday high level of 18,041. All the sectoral indices were gainers, led by AUTO (+3%), REALTY (+1.7%), and METAL (+1.5%) except IT which was down by (-3.3%). Among the stocks, TATAMOTORS (+9.1%), COALINDIA (+4.4%), and MARUTI (+3.4%) led the gainers while TCS (-6.3%), TECHM (-2.7%), and INFY (-1.8%) led the losers. 

Excerpts of an interview with Mr. Rajesh Gopinathan, CEO and MD, of TCS  with Business Standard on 11th October 2021:

  • TCS believes that this is one of the best quarters they have had. The growth was broad-based. From a deal win standpoint, every vertical has come back strongly.
  • Large verticals like retail and manufacturing have all done well.
  • Growth has been driven by three aspects: increased outsourcing, building a digital core, and growth and transformation agenda of clients.
  • This growth is evident in customer metrics as the numbers are above pre-pandemic baselines and each layer of the customer pyramid has grown.
  • This growth momentum is expected to continue as the demand is strong but there could be seasonality of demand and operations which are specific to industries and regions. How this seasonality pans out remains to be seen.
  • Two years ago, TCS experimented by taking in 32,000-35,000 freshers in the first two quarters and this model proved to be successful. They plan to do this in FY22 as well, as their approach to providing fresher training is modified.
  • Fresher training is no longer looked at as a standalone activity. Rather, it is deeply integrated into business units themselves. The training is more aligned to where demand is and the focus of the curriculum is in tune with the business units.
  • By participating in G&T (Growth and Transformation) projects, TCS has been trying to be aware of which part of the customer agenda they were partnering with. Creating awareness and articulating what TCS does, both internally and externally are the key part.
  • What matters is that TCS is relevant to its customer base. They have over 1,000 customers and 98% of its business is repeat business’s relevance to customers should continue and increase.

Asset Multiplier Comments

  • TCS like the entirety of the IT Industry has been facing the brunt of attrition-related margin pressures. Strong brand building and employee satisfaction have helped it keep attrition at an industry low.
  • We expect these input pressures to sustain over the next 2-3 quarters post which TCS’ long-term growth levers would kick in and help the company venture into the next phase of growth.

 Consensus Estimate: (Source: market screener website)

  • The closing price of TCS was ₹ 3,686/- as of 11-Oct-2021. It traded at 38x/33x/30x the consensus earnings per share estimate of ₹ 105/119/132 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,978/- implies a PE multiple of 30x on FY24E EPS of ₹/132-.

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.”

Major housing demand is coming from first-time buyers – HDFC

Update on Indian Equity Market:

On Tuesday, NIFTY ended at 17,749 (-0.6%) as it closed near its high at 17,533. Among the sectoral indices, OIL & GAS (+1.3%), PSU BANK (+1.24), and METAL (+0.6%) ended higher, whereas REALTY (-3%), IT (-2.2%), and MEDIA (-1.7%) ended lower. Among the stocks POWERGRID (+4.4%), COALINDIA (+4.2%), and NTPC (+3.74%) led the gainers while BHARTIARTL (-3.7%), TECHM (-3.5%), and BAJFINANCE (-3.3%) led the losers.

Excerpts of an interview with Mr. Keki Mistry, Vice-Chairman and Managing Director of HDFC Ltd (HDFC) with CNBC TV18 on 27th September 2021:

  • Between 2017-2020, demand for housing was largely coming from Tier 2, Tier3 towns or outskirts of big cities but not that much in the center of big cities like Mumbai and Bengaluru.
  • In the last year, people in Mumbai, Delhi, and Bengaluru are buying houses because housing has become very affordable compared to what it has been in the last 20 years.
  • From 2017-20, prices in the center of big cities have remained the same or may have marginally come down. This was complemented by rising income levels of individuals. An average income level of 6-7% a year if compounded on a 3-year basis, gives an approximate increase of 25% against a 0% (virtual) increase in property prices.
  • So, the cost of a house as a multiple of the annual income of a typical customer has become a lot lesser.
  • Mistry believes that structural demand for housing will always remain strong since it is a very under-penetrated market. The factor that points towards a sustained growth of housing in the Indian market apart from increased affordability is a Mortgage-GDP ratio of less than 11%. This ratio ranges between 40-60% in Western countries.
  • Unlike people in the West, Indians prefer buying houses in their late 30s. From a demographic standpoint, two-thirds of India’s population falls in the under-35 age category which will eventually need to buy houses in the next 1-10 years. The average of a first-time buyer in Mumbai is between 37-39 years.
  • The pressure that this sector faced, particularly in big cities like Mumbai, has been quashed because bigger developers took over incomplete projects of smaller developers. But this process takes time because approvals from various authorities need to be obtained.
  • Demand in the industry is muted. Only the reputed developers are seeing traction because customers prefer buying an under-construction property from reputed developers rather than buying the same from a less reputed developer. That is because the risk of a project not getting completed is very little in the case of the former.
  • Collection numbers, from a retail standpoint, are back to pre-covid levels but, the distress that people encountered from April to June might not have gone away completely.
  • These problems are temporary as far as individual NPAs are concerned. He does not believe that the housing finance sector will see any severe loan losses because the security cover is huge and the average loan amount is a small component of the value of the property at origination.
  • The loan to value ratio (loan as a percent of the value of the property) for most lenders is less than 70% which means from day one the individual has a 30% equity in the property upfront.
  • Since all loans are paid equally in monthly installments, this ratio will keep declining every passing month as the installments get paid. Therefore, an individual’s equity in the property keeps rising, and the losses on a housing portfolio of any lender, as long as there is prudent lending, would be almost non-existent to very negligible.

Asset Multiplier Comments

  • The demand from homebuyers is picking up due to subdued interest rates and the government’s push towards the affordable housing segment.
  • Due to a higher focus on individual loans vs non-individual, and a greater share of lending to salaried individuals, HDFC’s loan portfolio did not suffer any major setbacks in terms of asset quality. Moreover, HDFC has a provision buffer in place which is higher than the regulatory requirement.
  • Due to increased demand and low interest rates, rising competition among housing finance companies could exert pressure on interest rates.

Consensus Estimate: (Source: market screener and tikr.com websites)

  • The closing price of HDFC was ₹ 2,802 /- as of 27-Sept-2021. It traded at 5x/4x/4x the consensus BVPS estimate of ₹ 651/703/769 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,016/- implies a P/BV multiple of 4x on FY24E BVPS of ₹ 769/-

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.”

 

 

Expects volumes to beat industry growth by 10% – JK CEMENT

Update on Indian Equity Market:

On Wednesday, NIFTY ended at 17,519 (+0.8%) as it closed near its high at 17,533. Among the sectoral indices, PSU BANK (+2.8%), CONSUMER DURABLES (+1.0%), and AUTO (+0.9%) ended higher, whereas MEDIA (-1.6%) ended lower. Among the stocks NTPC (+7.5%), BHARTIARTL (+4.8%), and COALINDIA (+4.0%) led the gainers while TATACONSUM (-1.0%), NESTLEIND (-0.6%), and GRASIM (-0.5%) led the losers.

Excerpts of an interview with Mr. Rajneesh Kapoor, Chief Operating Officer, JK Cement (JKCEMENT) with CNBC TV18 on 12th September 2021:

  • JKCEMENT saw an average price decline of 3-4% across all regions in India excluding the East. Traditionally, August is a time where prices drop as a result of peak monsoons. JKCEMENT expects this sentiment to continue in the month of September as well.
  • However, this year’s August was slightly different as the company saw the highest volumes in terms of market demand in FY22 and Kapoor expects this trend to continue hereafter.
  • Volumes in Q3FY22 and Q4FY22 are going to be really good as a result of an increase in capacity utilization hence, there could be an uptick in prices in October and November as the monsoon starts receding. September could see a price uptick of 1.2%.
  • Demand has been healthy across all regions in the country amounting to 40-50% on a year-to-date basis. However, the prices at this point of time are marginally below on a Y-o-Y basis as compared to last year.
  • The real challenge that the industry faces today is in terms of cost. US Petcoke which used to be imported at a rate of 74$ to 78$ per ton is currently trading at 190$ per ton. This problem gets complemented by the scarcity of coal not only in India but also in international markets. China has stopped coal production for safety reasons and Indonesia, also a big supplier has peak monsoons which is why coal supplies have gone down. As a result, fuel cost has increased close to 100%.
  • Going forward, the price increase is going to be a necessity and this could take place post-monsoon.
  • In terms of volumes, JKCEMENT expects good growth because of capacity growth in FY20. Mr. Kapoor expects JKCEMENT to be 10 percent ahead of the market.
  • Capacity addition highlights: Capacity expansion at Panna, Madhya Pradesh is progressing as per the schedule and is expected to be commissioned by Mar-23.

Asset Multiplier Comments

  • The construction business is expected to resume its pace after the monsoon recedes and hence the demand for cement could go up.
  • JKCEMENT has decided to do several capacity expansions and up-gradation of its existing kilns.
  • These could contribute in increasing JKCEMENT’s market share and revenues.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of JKCEMENT was ₹ 3395 /- as on 15-Sept-2021. It traded at 28x/25x the consensus EPS estimate of ₹ 123/138 for FY22E/FY23E respectively.
  • The consensus target price of ₹ 3,429/- implies a PE multiple of 25x on FY23E EPS of ₹138/-

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 a substantial price hike due to spike in input costs – Maruti Suzuki

Update on Indian Equity Market:

On Thursday, NIFTY ended at 17,234 (+0.9%) as it closed near its high at 17,243. Among the sectoral indices, OIL & GAS (+0.8%), CONSUMER DURABLES (+0.6%), and FMCG (+0.6%) ended higher, whereas PSU BANK (-0.5%) and AUTO (-0.2%) ended lower. Among the stocks SHREECEM (+6.0%), HDFCLIFE (+5.8%), and CIPLA (+3.5%) led the gainers while M&M (-1.9%), ONGC (-0.9%), and BAJAJ-AUTO (-0.9%) led the losers.

Excerpts of an interview with Mr. Shashank Shrivastava, Executive Director of Maruti Suzuki (MARUTI) with CNBC TV18 on 31st August 2021:

  • MARUTI is looking to cut production in September due to a shortage of semiconductors. The auto manufacturer is also getting ready for a substantial price hike in the upcoming month and this will be the fourth one since January due to a sharp rise in commodity costs.
  • Commodity prices started going up from April-20 and they impacted MARUTI’s material cost, which is 75 percent of the total cost of manufacturing. The increase in prices of commodities like steel and copper was close to 50% and precious metals like Rhodium had a price hike of 257%.
  • Since they were already coming out of a bad year (FY20) which was 18% less than FY19 and Covid-19 had badly affected 1QFY21, they did not wish to compromise demand and hence there was no price hike.
  • However, they did increase prices in January by 1.4% in the hopes of some softening in commodity prices which did not pan out as expected. This made them deploy an additional price hike of 3.4% in April and another hike of 0.3% in CNG vehicles in August.
  • Shrivastava confirmed that the upcoming price rise would be substantial and it would be deployed across all models produced by MARUTI.
  • He did not reveal any production numbers for September since that depends on how the shortage situation pans out for their semi-conductor vendors.
  • The number of electronic components varies from product to product and model to model within MARUTI’s large portfolio and for the past few months, they have been trying to adjust production to maintain high levels of production.

 

Asset Multiplier Comments

  • Semiconductors are silicon chips that cater to control and memory functions. The shortage of such a crucial component has been impacting the automotive industry globally along with other industries, forcing them to cut down on production.
  • MARUTI reported a decline of 20% in sales in August, as compared to July 2021.
  • Owing to a supply constraint of electronic components due to the semiconductor shortage situation, MARUTI expects a decline of 60% in vehicle production in the month of September in Haryana and Gujarat. As certain fixed costs are to be incurred, margins could be affected in the short term.
  • With the festivities coming up, there could be a rise in demand for vehicles and how MARUTI is able to match this festive buying with its supply remains to be seen.
  • MARUTI is in no rush to join the electric vehicle bandwagon until they make it feasible for customers in terms of affordability.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of MARUTI was ₹ 6,780/- as of 02-Sept-2021. It traded at 40x/27x/21x the consensus EPS estimate of ₹ 188/280/354 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 7,560/- implies a PE multiple of 21x on FY24E EPS of ₹354/-

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.”