Author - Rutuja Chavan

This Week in a nutshell (17- 21 Jan)

Technical talks

NIFTY opened the week on 17th Jan at 18,240 and closed on 21st Jan at 17,617. During the week, NIFTY declined by 3% and formed a doji candle on the daily chart on Friday, indicating indecision between buyers and sellers. At the current juncture, on the weekly chart, the index has breached the 20-weekly moving average while the RSI is at 47.  Going ahead 17,505 and 17,776 would be the next support and resistance levels, respectively.

All the sectoral indices declined in the week with IT (-7.4%), Pharma (-5.2%), and Media (-3.8%) leading the losers.

Weekly highlights

  • Equity markets in India witnessed volatility during the week ended Jan 21, 2022 due to the ongoing results season and mixed budget expectations.
  • Companies in the auto and consumer sectors are facing margin pressures due to the on-going commodity inflation. Companies expect muted demand as affordability of consumers has become uncertain and they have signaled potential price hikes to pass on higher input costs.
  • The RBI has announced two consecutive auctions to infuse funds of Rs 7,50,000 mn and Rs 5,00,000 mn into the banking system as the inter-bank rates rose.
  • The RBI on January 20 permitted all existing non-deposit-taking NBFC-Investment and Credit Companies with asset size of Rs 10,000 mn and above to undertake factoring business subject to satisfaction of certain conditions.
  • India Ratings and Research expects the India’s economy to grow at 7.6 percent YoY in FY23.
  • Turkey opened a crucial crude pipeline that runs from Iraq after it blew up by an explosion. The explosion happened after a pylon fell on a pipeline due to bad weather, causing fire. Supply disruptions complemented by the shutdown risked tightening the energy markets. The sharp rise in the crude oil price dented investor sentiments in the last week
  • China has lowered a set of key policy rates and lending benchmarks to boost its slowing economy.
  • The U.S. Treasury Secretary Janet Yellen delivered a positive outlook for the US economy of substantial inflation slowdown and signaled a potential for long-term growth of the US economy.
  • The U.S. stocks tumbled amid weak company earnings and prospects for higher U.S. interest rates. U.S. stocks closed in the red on Friday and all three major indices suffered weekly losses as the prospect of rising interest rates and shaky company earnings cast doubt on the strength of the recovery from the COVID-19 pandemic.
  • The NASDAQ 100 tumbled 7.5% as result of aggressive sell-off on the back of disappointing results from Netflix and other tech companies. Investors have been anxious about tech’s growth as the economy recovers.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 126,400 mn. Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 5,080 mn.

Things to watch out for next week

  • The Federal Reserve’s meeting next week will be watched carefully, as investors’ hope for more guidance on the central bank’s plan to raise interest rates. The pace at which Fed tightens the monetary policy could be key. A steeper than expected trajectory of rate increases may hurt economic growth.
  • The domestic market is expected to remain volatile next week ahead of the budget announcement on 1st February.
  • Companies such as Axis bank, L&T, Marico, Cipla, Maruti Suzuki, Dr Reddy’s Labs, and Kotak Mahindra Bank are set to report earnings next week. Management commentary on provisioning, loan book growth will be key for banks while commentary on raw material inflation, rural demand will be key for consumer companies.
  • Earnings release, risks in the global economy, expected rise in US interest rates, Budget and Geo-political events will continue to influence the market mood. Rising COVID-19 cases and threats to further curb movement and businesses and rising inflation might also set the direction of the markets.

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

Seeing demand uptick for second-hand CVs- Shriram Transport Finance

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the red at 17,746 (-1%) near its high of 17,795. Among the sectoral indices, MEDIA (+0.9%), AUTO (+0.5%), and CONSUMER DURABLES (+0.5%) closed higher while IT (-1.5%), REALTY (-1.5%), and FINANCIAL SERVICES (-0.9%) closed in the red. Among stocks, UPL (+2.2%), INDUSINDBK (+1.8%), and BAJAJ-AUTO (+1.7%) were the top gainers while JSWSTEEL (-3%), ULTRACEMCO (-2.7%), and SHREECEM (-2.6%) were among the top losers.

Excerpts from an interview of Mr. Umesh Revankar, Vice Chairman & Managing Director, Shriram Transport Finance Corporation (SRTRANSFIN) with CNBC-TV18 dated 5th January 2022:

  • The demand for CV is increasing but not at the expected levels as the economy is not recovering as much as it was expected to. As a result, new CV (commercial vehicles) sales are lower than expectations.
  • Light Commercial Vehicles (LCVs) are showing good demand but it’s not as expected for heavy vehicles. However, demand for used vehicles is good.
  • The resale values have gone up significantly by 15-20% over the year and this reflects that people prefer to buy used vehicles in the current market situation rather than choosing a new vehicle. This eventually works for SRTRANSFIN and they are confident that as the market heats up, as the resale value goes up beyond 20%, eventually demand will come back.
  • The Omicron spread has increased in the last one week but they are not seeing any impact as such even though the city traffic has slowed down a bit. SRTRANSFIN hasn’t seen any downfall in Commercial Vehicle transportation even though mobility had come down in December. Overall, the long-distance movement has increased and hence the CV transportation has not seen any challenge as compared to what was seen in wave 2.
  • Revankar doesn’t expect many challenges as the covid variant is not supposed to be as strong and more people are getting vaccinated.
  • Marginal growth in disbursement can be expected on a QoQ basis and the AUM will be around 10% for FY22E. Larger growth in AUM is expected in FY23E because economic activities will reopen and demand for infrastructure will lead to a huge demand for heavy commercial vehicles and construction equipment.
  • As far as freight rates are concerned, margins for customers have improved because there was some decrease in the excise duties and the fuel prices had come down. Hence there were temporarily higher margins for customers. However, freight rates got corrected as they are linked to fuel prices and are a contractual obligation. But overall margins for truckers have remained strong.
  • Collections have been more than 100% in December. Hence, this shows that business is viable.
  • Revankar doesn’t look at GNPAs of 8% as a problem since the kind of customers they are lending to are individual operators who have to earn and pay. Hence there will be some delay in their collection. Individuals depend on corporates or entities for timely payments.
  • Credit cost for the long term is 2% on average and they are comfortable as long as it stays around 2%. So the GNPA is not an indicator for stress levels in their portfolio.
  • In terms of Net Interest Margin (NIM), SRTRANSFIN has always been eyeing a rate of 7% which has come down to 6.45% due to the higher liquidity they are carrying on their balance sheet due to the ongoing uncertainty in the market. Margins will move towards 7% once there is more certainty in the market.
  • Credit costs have been hovering around 2.5% due to the higher provisioning done in the last year. By March FY22, SRTRANSFIN hopes to bring down credit costs from last year’s mark of 2.48%

Asset Multiplier comments:

  • The company delivered good results in the impacted part of 1HFY22.
  • CV demand is gaining momentum and the company is the largest player in this space.
  • Appropriate provisioning, improving asset quality and strong growth strategy may contribute to the SRTRANSFIN’s topline.

Consensus Estimate: (Source: Market screener website and Tikr)

  • The closing price of Shriram Transport Finance Corporation was ₹ 1,216 as of 5-January-2022. It traded at 1.3x/1.1x/0.9x the consensus Book Value per share estimate of ₹ 968/ 1,087/ 1,219/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 1,660/- which implies a PB multiple of 1.4x on FY24E BVPS of ₹ 1,219/-.

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.”

CP Gurnani’s plan for Tech Mahindra amid Covid-19 uncertainty

Update on the Indian Equity Market:

On Tuesday, the benchmark index NIFTY 50 closed at 17,233 (+0.9%), 147 points higher. Among the sectoral indices, CONSUMER DURABLES (+1.4%), AUTO (+1.3%), and PSU BANK (+1%) led the gainers and there were no losers today. Among the NIFTY50 components, SUNPHARMA (+3.1%), ASIANPAINT (+2.8%), and M&M (+2.6%) were the top gainers while POWERGRID (-0.34%) and INDUSINDBK (-0.27%) led the laggards.

Excerpts of an interview with Tech Mahindra’s CEO and Managing Director CP Gurnani with Business Standard on 25th December 2021:

  • 50% of revenues for TECHM come from telecom service providers and the telecom ecosystem. The 3 factors that would really help telecom grow are; the first one being network up-gradation to 5G, second- newer platforms that will drive consumption of telecom and the third one which is the most dominant according to Mr. Gurnani is that the more work from home happens the more everyone would appreciate the importance of network service providers.
  • TECHM has not abandoned the ORAN (Open Radio Access Network), it is just that the number of players in this space has increased. Other than Rakuten, Microsoft, VMware, and Mavenir have come up with their own ORAN ecosystems. TECHM is definitely committed but to remain neutral, it was important for them to not be seen as execution partner to one. So, their strategy is to not be a product company but execute with some of the leading players.
  • There is a new way of managing networks which has become a theme for telcos. All the players in the telecom sector are trying to find viable alternate proofs of concept at a certain scale and volume and Mr. Gurnani believes that they are execution partner to every player including Airtel and Jio.
  • Talent is an industry-wide issue at this point as consumption from IT service providers, global technology and start-ups have increased. There is definitely a talent war going on.
  • TECHM anticipated the talent issue and opened offices in Tier 2 cities in Coimbatore, Vizag, Thiruvananthapuram, Indore, Nagpur, Calcutta, and Bhuvneshwar. So, the focus is on people’s preferences to work from their home locations.
  • TECHM has now opened offices in Vietnam, Bangladesh, and in the Eastern European block. As a strategy they are trying to catch young talent, train them and participate in their career development.
  • Work from the office is voluntary at Tech M till December-end due to safety reasons. A survey of TECHM’s employees showed that those below the age of 35 want to come to the office, 35-50 age group is leaning towards a hybrid model and 50 and above prefer working from home. TECHM’s work policy will be formed taking into account their client and employee needs.
  • TECHM will continue to try and be among the top 3 IT services companies in India.

Asset Multiplier Comments

  • We think Healthy deal wins, traction in the communication segment led by legacy modernization, 5G, customer care, automation, network, and cloud will help drive revenues.
  • Higher offshoring, synergies in portfolio companies, automation & operating leverage to help margin expansion going forward.

Consensus Estimate: (Source: market screener and Tikr website)

  • The closing price of Tech Mahindra was ₹ 1,806/- as of 28-December-2021. It traded at 28x/25x/22x the EPS estimates of ₹ 64/73/81/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,794/- implies a P/E Multiple of 22 on FY24 EPS estimate of ₹ 81/-

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

Goa unit accounts for 24-25% of US turnover– Lupin

Update on the Indian Equity Market:

On Thursday, the benchmark index NIFTY 50 closed at 17,248 (+0.2%), 27 points higher. Among the sectoral indices, IT (+1.2%), CONSUMER DURABLES (+0.4%), and OIL & GAS (+0.3%) led the gainers, while MEDIA (-1.8%), PSU BANK (-1.0%), and PHARMA (-0.9%) led the laggards. Among the NIFTY50 components, BAJFINANCE (+2.9%), INFY (+2.5%), and BPCL (+2%) were the top gainers while HINDALCO (-1.8%), CIPLA (-1.5%), and SUNPHARMA (-1.4%) led the laggards.

Excerpts of an interview with Mr. Ramesh Swaminathan, ED & Global CFO (LUPIN) with CNBC-TV18 on 15th December 2021:

  • The Establishment Inspection Report (EIR) that comes with Voluntary Action Indicated (VAI) means that the warning letter issued in 2017 on Lupin’s Goa plant has been lifted. LUPIN has about 109 products that are yet to be approved by the FDA and 24-25 out of these are from the Goa unit.
  • LUPIN expects a lot more approvals to come through from this unit over the next few weeks.
  • There has been a lag in LUPIN’s top line because approvals were not coming and the company was not able to leverage on the pipeline. LUPIN will launch new products as approvals start coming in from the Goa unit.
  • This unit is important to LUPIN because 24-25% of the US turnover comes from it and more approvals coming through would help elevate LUPIN’s revenues.
  • LUPIN’s other 3 facilities in India at Mandideep, Tarapur, Pithampur-II, and Somerset in the US also received warning letters which have affected their top line. It expects these units to get inspected over the next quarters and eventually contribute to the top line.
  • LUPIN has a rich pipeline but they are also focusing on more complex products in terms of innovations like complex injectables and biosimilars.
  • They already got approval for Albuterol which indicates the progress they have had in inhalation products. They also introduced Brovana and Spiriva is on the anvil and a lot many to come in the inhalation segment.
  • LUPIN’s facilities have been under the radar for the last 3-4 years and they have been constantly working on it. LUPIN believes they are in a state of readiness when it comes to India and they expect satisfactory solutions as and when the authorities inspect these facilities.
  • LUPIN has been working on the common thread that exists between all of its facilities with its team of consultants and is confident in this regard.
  • LUPIN is confident and prepared to launch Spiriva in the second half of FY23.
  • As far as diagnostics are concerned, LUPIN is thinking big in that direction but it’s not going to be the most important for them. A huge chunk of this segment is fragmented and only 20% of it belongs to the organized sector so that leaves vast scope for it to become organized.
  • LUPIN plans to follow a doctor-led scientific proposition with an ABL certificate.

Asset Multiplier Comments

  • Due to travel restrictions imposed by the COVID-19 virus outbreak, the entire pharma industry has been experiencing a delay in its facilities getting inspected. As the travel restrictions have been lifted, the inspections are expected to pick up the pace.
  • Many of the pharma companies have incurred Capex for new facilities or undertaken remediation of the FDA’s observations. As these facilities are yet to be inspected, there has been a lag in terms of contribution to revenues. Once the approvals start coming through, we expect the top line of companies like LUPIN to report good growth.
  • LUPIN has been impacted by the price erosion in its generic segment in the USA. The impact of this is expected to be mitigated as the specialized products are launched.

Consensus Estimate: (Source: market screener and Tikr websites)

  • The closing price of LUPIN was ₹ 904/- as of 16-December-2021.  It traded at 23x/ 17x the EPS estimates of ₹ 40/ 52/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 985 implies a P/E Multiple of 20x on FY24 EPS estimate of ₹ 52/-.

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 (Nov 29th to Dec 03rd)

Technical talks

NIFTY opened the week on 29th Nov at 17,065 and closed on 03rd Dec at 17,196. During the week, NIFTY lost 1.2 per cent and has formed a Doji candle indicating strong buying and selling pressure from both sides. At the current juncture, on the weekly chart, the index has breached the 20-weekly moving average. Going ahead, the level of 17,077 is likely to act as strong support in the near term and the levels of 18,334 and 18,600 will act as immediate resistance levels.

Nifty IT gained 3.6 per cent this week while Nifty Healthcare (-3%) and Nifty Pharma (-2.6%) lost the most.

Weekly highlights

  • Auto sales numbers for Nov-21 were released this week andwere below the street expectations. The dip in sales was mainly due to the ongoing global chip shortage. Tractor demand was affected due to the delayed harvest of Kharif crops due to late monsoon rains this year. Two-wheeler buyers are postponing their purchases amid rising fuel prices, increasing prices, and ownership costs.
  • Indian carmakers are looking to increase prices from January next year to offset the rising input prices.
  • India’s trade deficit broadened in November as compared to October. The trade deficit stood at $23.3 bn as compared to $19.7 bn last month as per preliminary trade data released by the government. Imports were down 3.3% MoM AT $53.5 bn and exports were down by 16.2% MoM at $30 bn.
  • The GST revenue collection in November stood at ₹1,31,526 crores surpassing the October numbers. This is the second-highest collection since the implementation of GST. Improvements in compliance and filing of returns, tax evasions, and enhancement of system capacity are some of the reasons why GST revenue numbers are scaling new highs.
  • The US markets witnessed increased volatility as Federal Reserve Chair Jerome Powell signalled winding up its asset purchases earlier than the decided time frame due to heightened inflation risks that are expected to be around in the next year as well.
  • The US government averted a nationwide session one day ahead of the deadline, passing the resolution by a 69 to 28 vote.
  • On Friday, the US markets saw a sharp sell-off in technology stocks sinking NDX 100 down by 1.7%. This was an exhausting week for traders in the US due to the Fed’s decision to taper stimulus sooner than before, the outbreak of Omicron, and mixed US jobs data.
  • Oil posted its longest stretch of weekly losses since 2018 as investors are worried about the impact of Omicron on demand, while OPEC+ decided to continue its supply to the markets. West Texas Intermediate crude futures fell 2.8% this week.
  • The foreign institutional investors (FII) sold equities worth Rs 1,58,190 mn, while domestic institutional investors (DIIs) bought equities worth Rs 16,45,00 mn.

Things to watch out for next week

  • Markets this week will be driven mostly by updates related to the new coronavirus variant Omicron, rising crude prices and increasing US dollar.
  • The Monetary Policy Committee will disclose its interest rate decision on Wednesday. The street will closely watch how the RBI will react to the current Omicron crisis, economic growth, inflation numbers and hawkish US Fed. Experts largely feel the central bank could hike the reverse repo rate. In this policy, RBI may remain less accommodative citing inflation concern and hawkish US Fed.

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 H2FY22 to be even better- Ashok Leyland

Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 18,000 (-0.6%) near its low of 17,959. Among the sectoral indices, AUTO (+2.5%), IT (+0.5%) were the only gainers. PSU BANK (-2.1%), OIL & GAS (-1.4%) and PHARMA (-1.3%) led the laggards. Among the stocks, MARUTI (+7.3%), M&M (+3.0%), and TATAMOTORS (+2.4%) led the gainers, while SHREECEM (-3.0%), RELIANCE (-3.0%), and HINDALCO (-2.5%) led the laggards.

Excerpts of an interview with Mr. Gopal Mahadevan, CFO and Whole Time Director, Ashok Leyland (ASHOKLEY) with CNBC-TV18 on 15th November 2021:

  • Things were expected to improve in April-21 but the second wave of covid impacted Q1FY22 for the entire industry and eventually, Q2FY22 saw a sharp recovery. With the reduction in covid cases, increased levels of vaccination, and reopening of economic activities, things are expected to improve quite swiftly in Q3FY22 and Q4FY22.
  • This will have a positive impact on the commercial vehicle industry. The core industries like infrastructure, commodities, and the manufacturing sectors are already showing good growth which augers well for the CV industry, specifically the truck segment.
  • Ashok Leyland is waiting for public transport to improve which hasn’t happened yet. Although offices are resuming, schools are still shut. The impact of office resumption will be seen on increasing bus volumes.
  • From Ashok Leyland’s standpoint, Light Commercial Vehicles are doing well and their market share stood at 23% in Q2FY22.
  • Ashok Leyland is trying its best to improve volumes and share of customers, consistently.
  • They are going to launch their CNG range of intermediate vehicles by Q4FY22 which would again kind of improve their presence in the ICV segment.
  • Ashok Leyland took a price hike of 2-2.5% approximately in Q1 and Q2FY22. They took a price hike in Q3 as well to set off some part of the raw material price increase, especially steel where the prices have gone through the roof due to consistent price increases.
  • They do expect costs to soften as things begin to rationalize. One thing to watch out for would be the semi-conductor demand because it is quite significant. There are constraints not only for the CV sector but also for passenger cars, 2-wheelers, and electronics. When this eases out, a push from the supply-side towards greater delivery will be seen.
  • Gross margins are expected to improve as demand improves.
  • Three reasons why a fraction of market share was lost:

1) Market share is based on wholesale. However, Ashok Leyland doesn’t intend to pump stocks into dealerships beyond a certain point. It is only focused on maintaining customer accounts and adding new ones.

2) Ashok Leyland is a significant South player but the volume growth there has not been as good as what it was in the rest of the country. South volumes are expected to start catching up in 2HFY22, especially in December and January which will push Ashok Leyland’s market share up.

3) CNG plays an important role in the ICV segment which accounts for a third of the overall MHCV market in terms of trucks. So, with the launch of CNG vehicles in the fourth quarter, market share is expected to go up.

  • At ₹ 3100 crores, its net debt position is comfortable and the D/E ratio is at 0.5. Ashok Leyland will continue to optimize net debt, work on working capital and astutely manage Capex.
  • The chip shortage issue was expected to be solved by September-21 but that hasn’t happened yet. In South-East Asia, capacities are being set up. As per analyst reports, the chip shortage is expected to ease by Q4FY22.
  • Ashok Leyland expects this to ease out and doesn’t see chip shortage as a permanent issue. Once capacities are set up and distribution gets rationalized, the shortage should come off.

Asset Multiplier Comments

  • We expect the raw material inflation to impact the bottom line in the medium term.
  • With the gradual reopening of the economy, bus demand is expected to pick up. The reopening of schools will also provide an impetus to the demand for buses.
  • With the launch of CNG vehicles in the fourth quarter and the anticipated festive demand, we expect an improvement in EBITDA margin levels.

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

  • The closing price of ASHOKLEY was ₹ 147/- as of 16-November-21. It traded at 237x/ 28x/ 19x the consensus EPS estimate of ₹ 0.6/ 5.2/ 7.6 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 152/- implies a PE multiple of 20x on FY24E EPS of ₹ 7.6/-.

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.”

Collection efficiency improved by 16% in 2QFY22 – Bandhan Bank

Update on the Indian Equity Market:

On Tuesday, NIFTY closed flat at 17,890 (-0.2%) led by REALTY (+4.0%), PSU BANK (+2.4%), and MEDIA (+1.0%). Those in red were METAL (-2%), OIL & GAS (-0.8%) and HEALTHCARE (-0.6%). Top gainers in NIFTY50 were MARUTI (+2.2%), NTPC (+2%), and TITAN (+2%). The top losers were TATASTEEL (-3.4%), GRASIM (-2.2%), and JSWSTEEL (-2%).

Excerpts of an interview with Mr. Chandra Shekhar Ghosh, MD & CEO, Bandhan Bank with CNBC-TV18 on 01st November 2021:

  • Asset quality is improving since the last quarter. In Q1, they faced a severe effect of the second wave of COVID-19, but from September it improved in a way that gives comfort to the bank and its future growth is coming
  • From Q1 to Q2, collection efficiency has improved by 16% and the Special Mention Account-0 (SMA-0) has become half, SMA-1 has come 25 percent down and SMA-2 is flat because they made higher provisions in this quarter.
  • Restructured book amount is ₹ 83.3 bn.
  • The second wave was severe than the first wave and the second wave entered the Eastern region which is Bandhan Bank’s core area in May. Hence, the May-June months were affected by that and the impact was seen in Q1FY22.
  • Eventually, August witnessed some improvement and September is when the bank saw a pick-up.
  • The Assam government has informed customers that if they don’t pay their respective dues, their credit history will be affected and they will not get credit in the future.
  • Ground-level customers are returning back and hence collection efficiency improved by 33% from June to September particularly in Assam.
  • Small borrowers are asking for time which is duly provided and it is seen that 66% of these borrowers are paying to the bank and NPA customers are also paying 65% to them
  • As a result, all of these customers don’t belong to the NPA bucket, they belong to the regular bucket.
  • Every day, 14,000 of Bandhan Bank’s customers are closing their loans which means they are coming to the regular category from the restructured and NPA one.
  • If this continues, the bank expects this to normalize in the next couple of months.

Asset Multiplier Comments

  • Bandhan Bank declared 2QFY22 earnings recently and reported a loss, impacted by significantly higher provisions. The Bank has provided for NPA to protect its balance sheet from the potential impact of a 3rd Covid wave.
  • With economic activity picking up ahead of the festive season, we believe credit growth will pick up. The bank is likely to be a beneficiary of this.

Consensus Estimate (Source: market screener websites)

  • The closing price of Bandhan Bank was ₹ 309/- as of 02-November-21. It traded at 3x/2x/2.1x the book value estimate of ₹ 102/130/150 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 310/- implies a Price/book multiple of 2.1x on the FY24E book value of ₹ 150/-.

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 (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.”