Author - Rutuja Chavan

This week in a nutshell (26th September- 30th September)

Technical talks

NIFTY opened the week on 26th September at 17,165 and closed on 30th September at 17,094 after declining to 16,750. The 50WMA of 17,100 may act as a key support level, while the recent weekly high of 18,320 may act as key resistance for the index.

Among the sectoral indices, Pharma (+2.9%) and IT (+1.5%) were the top gainers while Energy (-3.5%), Auto (-3%), and Realty (-3.0%) were the losers in the week.

Weekly highlights

  • On 30th September, in its ongoing attempts to control inflation in the economy, India’s Monetary Policy Committee increased the benchmark repo rate by 50 basis points to 5.9%, marking its fourth straight increase. The Monetary Policy Committee maintained its stance of focusing on removing accommodative measures in order to keep inflation within target while fostering growth in the upcoming years. At an unanticipated meeting in May, the committee raised rates for the first time by 40 basis points. Then, by 50 basis points in June and 50 basis points in August
  • The majority of the drop in India’s foreign exchange reserves is due to the shift in valuation as the dollar rose. India’s foreign exchange reserves stood at $537.5 billion, Das said in his monetary policy speech on Friday. About 67% of the decline in forex reserves in FY23 was due to valuation changes resulting from dollar appreciation, he said.
  • The year’s best market for car sales is still India. Sales have been consistent thus far in 2022, and with the festive season commencing at the end of September, we anticipate a higher fourth quarter, according to a note written by Moody’s Investor Service. India will beat its regional and international competitors thanks to a more improved macroeconomic climate, the reduction of semiconductor shortages, and dealer restocking, it added.
  • According to the Swedish news agency, a fourth leak on the Nord Stream pipeline has been discovered off the coast of southern Sweden. All four leaks that have been found are in international seas; two are close to Sweden and two to Denmark. Since Russian President Vladimir Putin invaded Ukraine seven months ago, Europe and, by extension, the rest of the world, have been dealing with an energy crisis.  The pipeline leaks have added to Europe’s existing economic woes.
  • Concerns about historically high inflation and future monetary tightening by central banks, particularly the Federal Reserve, would probably temper any sustained rally. BOE’s sudden intervention to buy an unlimited amount of long-dated bonds sparked record gains for gilts. Last Friday’s announcement of significant tax cuts by UK Chancellor of the Exchequer Kwasi Kwarteng led to a run on British assets due to worries about the government’s ability to pay for the change and its potential to further accelerate inflation.
  • US markets plummeted repeatedly by the Federal Reserve’s resolve to keep raising interest rates until inflation eases. Wall Street indices were volatile during the week with Nasdaq and S&P ending 1.7% and 1.5% lower respectively on Friday.
  • As concerns about restricted oil supplies were overshadowed by growing worries about a global recession and a rising dollar, oil is anticipated to post its first quarterly loss in more than two years. West Texas Intermediate prices, which have fallen by almost 24% this quarter, were trading close to $80 a barrel on Friday. The dollar’s recent record-high rise has rattled crude as aggressive central bank rate hikes cloud the outlook for global growth.
  • FII (Foreign Institutional Investors) turned net sellers this week, selling shares worth Rs 1,59,900 mn. DII (Domestic Institutional Investors) were net buyers, buying shares worth Rs 1,37,440 mn.

Things to watch out for next week

  • Auto companies are expected to release their September volumes of sales. The early festive season this year, which started on 26 September versus 7 October last year, is expected to brighten the outlook for the passenger vehicle (PV) segment. However, the two-wheeler (2W) segment is expected to be muted given the weak rural demand.
  • Quarterly updates by FMCG companies like Marico and banks are expected to drive the markets in the coming 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.”

This week in a nutshell (18th July- 22nd July)

Technical talks

NIFTY opened the week on 18th July at 16,183 and closed on 15th July at 16,719 (+3.3%). The index is trading above the 20DMA level of 16,580. On the upside, the 50DMA level of 17,073 might act as a resistance. The RSI (52), and MACD turning upwards suggests a positive sentiment ahead.

Among the sectoral indices, PSU BANK (+7.7%), Private Bank (+6.6%), and IT (+6.4%) led the gainers, whereas Pharma (-1%) was the only loser this week.

Weekly highlights

  • IMF chief Kristalina Georgieva cautioned policymakers from the Group of 20 major nations on Saturday to take immediate measures to tackle inflation, saying that the “exceptionally uncertain” global economic outlook may worsen if higher prices persisted.
  • Sula Vineyards has filed papers with the market regulator Securities and Exchange Board of India (SEBI) to raise capital through an initial public offering ( IPO). If the plans go forward, it will be the first IPO in India by a pure-play wine company, and the second in recent weeks by a player in the alcohol and spirits sector.
  • India’s foreign exchange reserves plunged by US$8 billion in the week ended July 8 to US$580.25 billion, the lowest in more than 15 months, data released on July 15 by the Reserve Bank of India (RBI) showed. The decline in reserves was driven by a US$6.66 billion drop in the RBI’s foreign currency assets, which fell to US$518.09 billion from US$524.75 billion as of July 1.
  • GDP growth predictions for 2022 remain the highest among developing market peers for India. Passenger vehicle sales, two-wheeler sales, electricity generation, and bank credit all increased in June for the second month in a row. The June unemployment rate (7.8 percent, according to CMIE) is higher than in May but significantly lower than it was in February (8.11 percent).
  • Less than three weeks after they were implemented, the government lifted duty on gasoline exports and reduced windfall levies on other fuels.
  • Reliance Industries Ltd reported a 7.9% increase in profit QoQ for 1QFY23 on the back of improved performance of oil-to-chemicals, retail and telecom businesses. However, it failed to meet expectations. The profit was impacted by higher finance costs as a result of rising interest rates, rupee devaluation, and lower other income.
  • The Down Jones Industrial Average, NASDAQ and S&P500 opened the week in red. However, positive earnings release resulted in a three-day winning streak for the indices. The NASDAQ and S&P500 fell 1.7 percent and 1%, respectively, on Friday, as disappointing earnings from social media companies and poor economic data stoked recession fears.
  • The ECB boosts interest rates by 50 basis points, the first increase since 2011. On Thursday, the European Central Bank raised interest rates more than anticipated, showing that concerns over runaway inflation now outweigh growth considerations, even as the eurozone economy struggles to recover from Russia’s war in Ukraine.
  • FII (Foreign Institutional Investors) were net buyers of shares worth Rs 40,380 mn and DII (Domestic Institutional Investors) were net buyers of shares worth Rs 9,380 mn this week.

Things to watch out for next week

  • With results season picking up, quarterly numbers are to be watched out for. Auto companies like Bajaj Auto, Maruti Suzuki, and Tata Motors are set to report earnings next week. Commentaries about the semi-conductor shortage situation and demand sentiments from auto companies are expected to give some color about the economic recovery.
  • We expect markets to continue volatile as a result of investor reactions to earnings releases and macroeconomic news such as supply-related constraints, interest rate hikes, and rising inflation.

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.”

The Impact of Rupee Depreciation

The rupee has been on a downward spiral since January 2022 (-6.28%) leading to negative market sentiments. It settled at a fresh low of ₹79.64 on 13th July, 34 paise away from ₹80.    Rising crude oil prices, a strengthening Dollar Index, and huge amounts of FII (Foreign Institutional Investors) outflows in Indian markets are the primary reasons for the depreciation of the rupee.

Source: Trading View

What does the depreciation of a currency exactly mean?

Currency depreciation is the loss of a currency’s value in terms of its exchange rate versus other currencies. It specifically refers to currencies with a floating exchange rate, which is a system in which the value of a currency is determined by the forex market based on supply and demand. For example, if the value of 1 USD changes from ₹75 to ₹80, the change will be termed ‘depreciation’ of the rupee.

How does this impact import?

India, as a net importer, relies heavily on imported goods to meet its needs. Imported goods become more expensive due to depreciation in the value of the rupee leading to inflationary environments. India imports 80% of its crude oil and this has a multiplier effect on the prices of fuel – diesel, petrol, and cooking gas – which are already high.

Industries like oil and gas, paints, food, and beverages that depend on imports for their raw material needs suffer when the currency depreciates. Elevated commodity prices tend to dent the profitability of these companies. Industries usually pass on these elevated prices to customers to reduce the hit on profitability.

How does this impact export?

From a revenue perspective, industries like Pharma and IT benefit when the currency depreciates as companies earn more rupees while exchanging dollars. Pharma companies with subsidiaries outside of India tend to report higher consolidated margins because higher cost inventory translates into lower operating expenses.

Current Account Deficit widens

Current Account Deficit (CAD) is a measurement where a country’s imports of goods and services exceed its exports. A depreciating currency coupled with elevated commodity prices tends to inflate the CAD due to expensive imports and force the central bank to dip into its forex reserves to finance the deficit. India’s CAD widened to a record high of $25 billion in June from $24 billion in May. On a quarterly basis, the gap increased 122.8% in the June quarter to $70 billion from $31 billion in the year-ago period.

Source: RBI Website

 How does the RBI intervene?

When the value of a country’s domestic currency tumbles, the central bank intervenes by selling its foreign reserves, causing capital outflow. This aids in curtailing the arresting in the value of the domestic currency. According to the RBI’s Weekly Statistical Supplement, the RBI sold $5 billion in foreign exchange reserves during the week of July 1, 2022, reducing the overall reserves to $588 billion.

 

Source: RBI Website

Inflation, combined with currency depreciation, has a double-whammy effect on the economy and consumers. Many Central Banks around the world, including the RBI, have raised interest rates to combat inflationary pressures in raw materials and other commodities. This is also expected to help moderate the Rupee’s value decline. The RBI has also announced a slew of policies aimed at increasing forex inflows while maintaining overall macroeconomic and financial stability.

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.”

Navigating through the challenges of the IT industry

During the 4QFY22 result season, stocks of IT services companies plummeted due to managements’ comments on probable medium-term margin pressures. IT stocks have been in a slump since then and have been struggling to show some signs of reversal. How does one navigate through this sector?

Demand prospects for Digital and Cloud Services:

Digital services comprise of service and solution offerings of an IT company that enable clients to transform their businesses. These include offerings that enhance customer experience, leverage AI-based analytics, and big data, engineer digital products and IoT, modernize legacy technology systems, migrate to cloud applications and implement advanced cybersecurity systems. Most firms are transitioning through IT and cloud-based solutions to meet competition and cut costs. Global lockdowns and work from home (WFH) culture have accelerated the expansion of digital services.

The BFSI sector is the largest contributor to the revenues of many IT companies. Enterprise clients in the Financial Services sector have ramped up tech spending to enhance customer experience, digitize core systems, and leverage technology to strengthen risks and controls.

Source: Company quarterly update

Cloud migration has picked up pace in the last 3 years. The recent global lockdowns and WFH culture led by Covid-19 have acted as a trigger to accelerate this journey. Enterprise clients are looking to migrate to cloud-based operations, which act as a business continuity tool in times of uncertainty. The shift to hybrid working models has contributed to the demand for IT services. Cloud transformation helps clients deploy streamlined operational efficiencies, increased adaptability and scalability, data security, and cost management.

Supply-side constraints

The IT industry has been facing certain structural headwinds such as:

Attrition levels: Voluntary attrition is when employees leave an organization for better prospects in the industry. With a robust demand environment, IT services organizations have seen higher attrition, resulting in supply-side constraints since 2QFY22. These challenges are expected to put pressure on margins over the medium term. IT companies are taking measures to stabilize attrition levels by correcting compensations, faster career growth, skill development programs, and greater engagement with employees.

Source: Company quarterly update

Subcontracting costs: Subcontracting is the process of outsourcing partial obligations of a contract. Due to tight labor market conditions and the non-availability of talent in-house, IT firms have turned to subcontractors. Rising subcontracting costs have brought margins under pressure. Reduced dependency on these services through increased hiring programs and stabilization of attrition levels can subside margin pressures.

Higher retention, hiring costs, and travel costs: Wage increments, employee retention costs, and accelerated hiring are some of the key factors that could drive margin pressures. With the reopening of economies, we expect travel costs to normalize over the medium term.

Industry-wide outlook:

While the above-mentioned factors are expected to take a hit on the profitability of IT services companies, we expect demand prospects to be robust with digital transformation and cloud migration being a key area of focus for enterprise clients. We expect margin pressures to persist over the medium term.

Should one invest now?

We believe the favorable long-term outlook remains intact, driven by enterprise client demand for cloud and automation, improved utilization levels, as well as the normalization of inflationary pressures. Increased costs due to supply challenges are likely to be transient. This may be the right time for investors with a longer time frame for investing to look at the sector.

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.”

Short-Term Performance is Everything

Two years ago value investing was dead, now it is the obvious approach to adopt in the current environment. What has changed? Short-term performance. There are more captivating rationales but underlying it all is shifting performance patterns. These random and unpredictable movements in financial markets drive investors’ behavior and are the lifeblood of the asset management industry; but they are also a poison for investors, destroying long-term returns.

Narratives + extrapolation

Short-term performance in financial markets is chaotic and meaningless (insofar as investors can profitably trade based on it), but they don’t see this; instead, they construct stories of cause and effect.  Furthermore, because the stories are so compelling, investors are certain that they will go on forever. This is why when performance is strong absolutely anything goes. Extreme valuations, unsustainably high returns, and made-up currencies cannot be questioned – haven’t you seen the performance, surely that’s telling you something? Of course, what it is telling is not particularly useful. It is just that investors struggle to accept or acknowledge it. There must always be a justification.

Performance is not a process

Financial markets do not provide short-term rewards for efforts and hard work. Nor can any investment approach consistently outperform the market except by chance (unless someone can predict the near future). Many investors seem to accept this. If performance is good a fund manager can say almost anything and it will be accepted as credible. If performance is bad then everything said will be disregarded. The problem with lauding short-term performance as evidence of skill poses the question of what happens when conditions change. If the process leads to consistently good short-term outcomes, what does one say when short-term outcomes are consistently bad? When performance is strong it is because of ‘process’, when it’s weak it is because of ‘markets’.

Sustaining the industry

Not only do the uncertainties of markets give investors something to talk about, but they also give them something to sell. The sheer number of funds and indices available to investors is a direct result of the randomness of short-term performance. There will always be a new story or trend to exploit tomorrow. Judgments made based on short-term performance will make everyone look skillful some of the time.

Misaligned incentives

The obsession with short-term performance is a vicious circle. Everyone must care about it because everyone cares about it. This creates a harmful misalignment problem where professional investors aren’t incentivized to make prudent long-term decisions; they are incentivized to survive a succession of short-time periods. Irrespective of whether this leads to good long-term results.

Source: ‘Short-Term Performance is Everything’, by Joe Wiggins published on www.behaviouralinvestment.com

Asset Multiplier Comments:

  • If investors are concentrated on short-term success, long-term returns may be unsatisfactory.
  • Investors can avoid the chances of capital erosion and damaging outcomes by choosing to stay focused on their long-term investing approaches.
  • They should refrain from trying to make sense of short-term market fluctuations because doing so can be mentally taxing and lead to poor choices.
  • Long-term investing decisions can make one look foolish in the short term, but they are sustainable ways of achieving capital gains over the long run.

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.”

What We Should Remember About Bear Markets: Part II

(In continuation with the previous article…)

Some losses won’t be temporary: For sensibly diversified, long-term investors the losses from most bear markets should be temporary (there is a long-run premium attached to equity investing after all), but investors should not naively assume that everything will recover. Imprudent investment decisions will be exposed in bear markets. Inappropriate leverage, unnecessary concentration, and eye-watering valuations tend to bring about permanent losses of capital that time will not heal.

Emotions will dominate: The ability to make good, long-term decisions during a bear market is severely compromised. The emotional strains that investors are going to feel will outweigh rational thought – what happens if things continue to deteriorate and they do nothing? It is during such times that systematic decision-making – such as rebalancing and regular saving – comes to the fore.

Risk tolerance will be examined: Bear markets are the worst possible time to find out about one’s tolerance for risk. Everyone becomes risk-averse when they are losing money. The issue for investors is that experiencing a 37% loss in real life is very different from seeing it portrayed as a hypothetical situation. If possible, investors should avoid reassessing their appetite for risk during tough periods.

Investors will extrapolate: During a bear market, it’s difficult to perceive anything except doom and gloom. Investors might believe that things will keep getting worse – prices will be lower again tomorrow.

Each bear market will be different: Investors should ignore all charts comparing current declines with other bear markets in history, they are entirely unhelpful. There is no reason to believe that such a deeply complex, unpredictable system should mimic patterns of the past. Each bear market is unhappy in its own way.

Bear markets are the ultimate behavioral test: The outcomes of bear markets are more about investors than they are about the market. Investors entering a bear market with identical portfolios will have wildly different results based on the decisions that they make during it.

Source: ‘What We Should Remember About Bear Markets’ by Joe Wiggins published on behaviouralinvestment.com

Asset Multiplier comments:

  • It is difficult but necessary to remain a long-term investor during bear markets. During times of uncertainty, investors should resist allowing their emotions to influence their rational decision-making.
  • Rather than chasing winners or trying to time the market, investors should concentrate on rebalancing their portfolios and keeping them steady.
  • Accepting that stock markets have ups and downs is a key element of investment discipline. This helps investors protect their capital and maintain their calm amidst turbulent 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.”

What We Should Remember About Bear Markets: Part I

The following article is taken from ‘What We Should Remember About Bear Markets’ by Joe Wiggins.

Bear markets are an inescapable feature of equity investing. They are also the greatest challenge that investors will face. This is not because of the (hopefully temporary) losses that will be suffered, but the poor choices investors are liable to make during them. Bear markets change the decision-making dynamic entirely. In a bear market, smart long-term decisions often look foolish in the short-term; whereas in a bull market foolish long-term decisions often look smart in the short term.

If investors are to enjoy long-run investment success, they need to be able to navigate such exacting periods. There are certain features of bear markets that it pays to remember:

They are inevitable: Bear markets are an ingrained aspect of equity investing. Investors know that they will happen; they just cannot know when or why. Their occurrence should not be a surprise. The long-run return from owning equities would be significantly lower if it were not for bear markets.

It will feel predictable: As share prices fall, hindsight bias will go haywire. It will seem obvious that this environment was coming – the warning signs were everywhere. Investors will heedlessly ignore all the other periods where red flags were abundant and no such market decline occurred.

Nobody can call the bottom: Market timing is impossible, and this fact does not change during a bear market. The only difference is the attraction of attempting it when falling portfolio values can become overwhelming, and the damage it inflicts will likely be greater than usual.

Economic and market news will be conflated: The temptation to interlace economic developments with the prospects for stock market returns can become irresistible during a bear market. Weak economic news will make investors increasingly fearful about markets, despite this relationship being (at best) incredibly hazy.

Time horizons will contract: Bear markets induce panic, which shortens time horizons dramatically. Investors stop worrying about the value of their portfolio in thirty years and start thinking about the next thirty minutes. Being a long-term investor gets even more difficult during a bear market.

Investors don’t consider what a bear market really means: In the near-term, bear markets are about painful and worry-inducing portfolio losses, but what they really are is a repricing of the long-run cash flows generated by a business / the market. The core worth of those companies does not fluctuate nearly as much as short-term market pricing does.

Lower prices are good for long-term savers: For younger investors saving for the long-term, lower market prices are attractive and beneficial to long-run outcomes (it just won’t feel like it).

Source: ‘What We Should Remember About Bear Markets’ by Joe Wiggins published on behaviouralinvestment.com

Asset Multiplier Comments:

  • Losing investment plans during bear markets is inevitable. Although difficult, long-term investors should sit through such exacting periods patiently and stick to their investment approaches.
  • Investors can use bear markets to their advantage by accumulating quality stocks at cheaper valuations and profiting from long-term gains.
  • Investors should avoid getting consumed by noise and immediacy and focus on building wealth over the long term.

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 Double Digit growth for India business – Torrent Pharma

Update on the Indian Equity Market:

On Tuesday, NIFTY closed in the red at 16,854 (-0.5%), dragged by KOTAKBANK (-3.5%), SUNPHARMA (-2.6%), and HDFC (-1.8%). Some of the gainers were ONGC (+5.2%), NTPC (+4.4%), and M&M (+3.4%).

Among the sectoral indices, REALTY (+2%), MEDIA (+1.5%), and METAL (+1.3%) led the gainers, and NIFTY PSU BANK (-1%), NIFTY BANK (-1.0%) and NIFTY FINANCIAL SERVICES (-0.9%) led the losers.

Excerpts of an interview with Mr. Sudhir Menon, CFO & ED, Torrent Pharma (TORRENT) with CNBCTV18 on 27th May 2022:

  • In 4QFY22, TORRENT reported an EBITDA margin of 26.3% as compared to 25.5% in 3QFY22. 3QFY22 was impacted on account of higher than expected price erosion in the US. TORRENT believes that the worst has already happened for the US.
  • IN FY23, TORRENT expects certain margin levers to play out. A few of these levers could be the price increase-driven margin improvement in the Branded Business which contributes 70% of overall revenues as of 4QFY22.
  • Certain cost optimization measures were undertaken in 4QFY22 by realigning capacities between its facilities in India which are expected to come through from 1QFY23.
  • Cash burn impact of 1-1.5% on the liquid facility which was discontinued in the US is expected to roll back into the margins.
  • There was an impact of increased freight expenses on the margins of 1.2-1.3% in 3QFY22 which continued in 4QFY22. TORRENT expects these costs to normalize over the next 2-3 quarters of FY23.
  • Overall, revenue growth in FY23 is expected to be better than FY22 and that would enable TORRENT to have operating leverage play out positively in the near term. TORRENT has guided for 300 bps margin improvement in FY23.
  • Acquisition of Dr. Reddy’s Laboratories’ 4 brands would help fill up the portfolio gap in gynecology and urology. As per AIOCD (All Indian Origin Chemists & Distributors) data set, the 4 brands combined had a revenue of Rs 450-500 mn.
  • India business registered 15% revenue growth in FY22 and most of the existing therapies TORRENT has outperformed the market.
  • TORRENT is growing at 2x of the market growth in therapies like GI (Gastro-Intestinal), CNS (Central Nervous System), and Anti-Diabetics and this is expected to continue.
  • It expects the Indian market to deliver low double-digit growth over the next two years and TORRENT is expected to grow 200 bps above the market as per its historical trend as it is over-indexed in some of the high growth markets.
  • One of the objectives TORRENT had taken was to achieve the 10 lakh MR (Medical Representatives) productivity in FY22. Now that it has achieved this productivity, TORRENT has been expanding its field force which is expected to bring in incremental revenue growth.
  • The new product pipeline is looking good for the next few years and TORRENT is seeing some of the large-size markets going off-patent in the coming years. With the incremental growth coming in the future, TORRENT believes it is well-placed to achieve double-digit growth for India Business.
  • The US story has not been playing out well for TORRENT because of the new launches not coming through due to pending US FDA inspections.
  • TORRENT has around 57 ANDA pending approvals. In the next 2-3 months if the US FDA reinspection takes place, TORRENT expects new products to start coming in from 4QFY23.

Asset Multiplier Comments  

  • The growth trajectory in TORRENT’s India branded generics business is expected to continue, due to new product launches in the upcoming quarters.
  • We expect a revival in tender business and new launches to drive growth in the Germany Business. Brazil is expected to continue its momentum in both the branded and generic segments.
  • With the worst of price erosion in the US business over, an improvement is expected with the resumption of USFDA inspections.
  • We expect cost-optimization measures, normalization in freight expenses, and closure of the Pennsylvania (US) facility to aid margin expansion in FY23.

Consensus Estimates: (Source: market screener website)

  • The closing price of TORRENT was ₹ 2,835 /- as of 31-May-2022.  It traded at 34x/27x the consensus earnings estimate of ₹ 84/ 106/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,194/- implies a P/E Multiple of 30x on the FY24E EPS estimate of ₹ 106/-.

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.”

 

Slow and Steady wins the Race

The most common excuse that people spell out when explaining the benefits of investing in a disciplined manner is not being able to save money by the end of the month. When it comes to investing, one need not wait till the time one can accumulate a lump sum to take the first step into investing in the stock market. Even saving Rs. 1,000 a month and investing in an equity-linked mutual fund, may accumulate lakhs a few years down the line. This form of small but periodic form of investment is called Systematic Investment Plan (SIP). One way of saving for investments is by cutting down unnecessary expenses.

A penny saved is a penny earned.

This age-old adage is the mantra for wealth creation. This is why budgeting becomes an important exercise. Most people spend first before they even think about saving, which is not a very helpful approach to savings or investing. Instead, follow the hierarchy of Earn – Save – Spend and these savings can be channelized into an investment product. Within the investment product universe, one of the options which aid long-term wealth creation is investing in an equity-based mutual fund for one’s long-term goals. The beauty of this approach will become apparent only after a couple of years when there is a neat sum gathering in one’s account, thanks to the market-linked gains that the investment may be accruing, all of which is an enriching experience. Just monitoring it and seeing it grow makes investors confident of their improving financial condition. As a result, investors tend to automatically start spending less and invest more.

SIP versus EMI.

Most people who find it hard to save and invest would happily purchase expensive items in debt. Paying EMIs (Equated Monthly Instalments) to buy a new car or a phone feels easier than investing some amount gradually to afford it in one go. Steer clear of instant gratification. It is better to start an SIP than to shell out money on EMIs. SIPs are the best EMI one pays. There is no point in paying interest on luxury. It is better to become rich enough to afford luxury.

Why SIP matters

The stock market is volatile. One day it is on an upward journey, but the tide may turn the next day.  Investors should avoid predicting the stock market moves. With SIP money gets invested at different market levels that will support one’s portfolio when there is a sudden market crash. The portfolio will not crash the way individual stocks or the benchmark indices like Sensex and Nifty may crash. SIP is a weapon to tame market volatility.

Compounding is the eighth wonder of the world. The longer one stays invested and runs their SIPs, the higher rewards they earn. For example, Rs 5,000 SIP each month will give Rs 11 lakh after 10 years at a compound annual growth rate of 12 percent. Continue it for another 10 years, and it will become Rs 46 lakh. One can start an SIP for short-term goals also. However, the selection of investment products will change accordingly. Investors should always align their investment strategy with their financial goals and timeline.

To conclude, one should believe in the power of SIP where one can start small to make their bigger dreams come true. Slow and steady wins the race – the timeless moral of the Tortoise and the Hare story cannot be timelier in the current market scenario. In an era of quick money-making where everyone is behaving like a rabbit, be a tortoise to beat them all.

Source: ‘Slow and Steady Wins the Race’ by Kapil Holkar in the October 2021 issue of Outlook Money

Asset Multiplier comments:

  • SIPs help investors reduce their portfolio risk, contain emotional biases, and are a disciplined approach to investing.
  • The longer one stays invested and runs their SIPs, the higher rewards can be earned due to the effect of compounding. The sooner one starts, the more time there is for the invested money to produce results.
  • SIPs differ across time horizons and risk profiles. Investors can achieve their short-term, medium-term, and longer-term financial goals by investing in SIPs in one go rather than choosing to pay EMIs.

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.”

Targeting revenues of USD 70 mn from exports – Bharat Electronics

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green at 16,170 (+0.9%). TATASTEEL (+5%), APOLLOHOSP (+5%), and JSWSTEEL (+4.5%) led the gainers while UPL (-2%), DIVISLAB (-2%) and SUNPHARMA (-1%) led the losers. Among the sectoral indices, PSU BANK (+3%), METAL (+2.7%), and BANK (+2.2%) led the gainers, while FMCG (-0.2%) was the only loser.

Excerpts of an interview with Mrs. Anandi Ramalingam, CMD, Bharat Electronics (BEL) with CNBC-TV18 on 25th May 2022: 

  • For FY23, BEL is expected to maintain a growth of about 15% YoY. EBITDA margins are expected to be in the range of 20-22% in FY23E.
  • Raw material content stood at 59.9% in FY22 and BEL is hopeful that it would come down to 56-57% because of the indigenization efforts that have been put in place.
  • BEL has guided for a lower EBITDA Margin range even though the Gross Margins are expected to expand because most of the contracts are fixed-term contracts whose prices are fixed when they are signed. But BEL has not been able to maintain this with its suppliers.
  • Many of the suppliers, post-covid, have started demanding higher prices. BEL is trying to deliver its contracts with minimal delay. It has not been able to pass on the increased input prices to its customers so even if the material content as a percentage is expected to decline, BEL is maintaining a lower EBITDA Margin guidance.
  • BEL is confident of logging in Rs 200 bn orders in FY23. Exports declined to USD 33 mn in FY22 from USD 52 mn in FY21 mainly due to the geopolitical crisis that took place in 4QFY22. Due to the crisis, logistics and financial transactions with international customers were impacted.
  • BEL received an order book of USD 179 mn in FY22 as many marketing offices have been set up in the overseas market and have started yielding results. BEL hopes to maintain the same order pipeline in FY23.
  • Revenues from exports are expected to increase as uncertainties and logistical issues have started easing out. BEL is targeting to clock in revenues worth USD 70 mn from exports.
  • BEL will be incurring a Capex of Rs 5-6 bn coupled with Rs 13bn of additional CapEx provided it gets selected for the PLI Scheme (Production-Linked Incentive).
  • The CapEx under PLI Scheme is done as a consortium with HAL (Hindustan Aeronautics Ltd) and other private companies.

Asset Multiplier Comments

  • We think BEL is well-positioned to tap the opportunities with the government’s Make in India and Atmanirbhar Bharat initiatives.
  • Looking at the healthy order book (both domestic and exports), strong export order inflows of USD 179 mn in FY22, intending to reduce dependence on defense and diversification into non-defense segments we expect good revenue growth for the next 2-3 years.

Consensus Estimates: (Source: market screener and investing.com website)

  • The closing price of Bharat Electronics Ltd was ₹ 227/- as of 26-May-2022.  It traded at 20x/ 17x the consensus earnings estimate of ₹ 11.3 / 13.2/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 242/- implies a P/E Multiple of 18x on the FY24E EPS estimate of ₹ 13.2/-.

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.”