Author - Tanmay Gadre

Confident of maintaining 15- 20% growth in VNB – HDFC Life

Update on the Indian Equity Market:

On Tuesday, NIFTY ended higher at 18,268 (+0.8%) as it closed near the intraday high level of 18,310. Among the sectoral indices, REALTY (+3.6%), METAL (+2.7%), and MEDIA (+2.6%) ended higher, whereas PRIVATE BANK (-0.2%) was the only sector that ended lower. Among the stocks, TATAMOTORS (+6.0%), TATASTEEL (+4.2%), and SBILIFE (+3.8%) led the gainers while INDUSINDBK (-1.9%), ICICIBANK (-1.2%), and POWERGRID (-0.8%) led the losers.

Excerpts of an interview with Ms. Vibha Padalkar, MD and CEO, of HDFC Life Insurance (HDFCLIFE) with CNBC TV18 on 25th October 2021:

  • The company is bullish on prospects of the life insurance industry, assuming no covid 3rd wave takes place. As people get comfortable with the status quo, the company expects the demand for life insurance to come back.
  • The company has grown at a rate of 20%, which is faster than the industry growth rate and it is confident that it will continue to grow at this rate. VNB (Value of New Business) growth between 15-20% is possible.
  • From the product mix, Unit linked, participating, non-participating, annuity, and protection contribute around 26%, 30%, 32%,5%, and 7% of the APE (Annualised Premium Equivalent) respectively.
  • The company has paid out 2,456 claims worth Rs 5,560mn in 1HFY22, and it maintains an additional  Rs 2,000+ mn of provisions in case it needs to pay out any additional claims.
  • The company expects a 10-15% price hike in reinsurance products and it is in negotiation with its reinsurance providing partner over the price hikes. This will be done by the end of 3QFY22.
  • Individual term insurance doesn’t disproportionately contribute to the VNB of the company. The reinsurers charge HDFC life for the product over the lifetime of the policy, whereas the customers pay premium under the limited pay for 5-6 years altogether. As the period between these 2 differs, the company hasn’t yet figured out the cost it will pass on to its customers.
  • The company’s cash will go down by 12 to 14% after the acquisition and merger of Exide Life. HDFC life’s solvency may go down to 175-180% from the current 190-195%, but the profits from the next two quarters may get added on to the solvency and help bridge the gap.

 

Asset Multiplier Comments

  • As Exide Life’s agency channel will add 40% to the company’s current agency channel, the company will benefit from the effect of operating leverage. This will help improve the company’s margins.
  • The company has posted 20.8% YoY growth in APE and 23.6% YoY growth in VNB (Value of new business) numbers in 2QFY22. Given its better than industry growth rate, and the management’s confidence in maintaining it in the future, this might have a positive impact on the company’s fundamentals.
  • Increase in reinsurance costs will likely drive term insurance rates higher in the next few quarters. This may have impact on its future profitability.

Consensus Estimate: (Source: market screener website)

  • The closing price of HDFCLIFE was ₹ 690/- as of 26-Oct-2021.  It traded at 100x/ 76x/ 64x the consensus earnings estimate of ₹ 6/ 9/ 11/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 787/- implies a PE multiple of 74x on FY24E EPS of ₹ 10.7/-.
  • In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

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.”

Mid-market segment to lead growth in festive season – Bajaj Auto

Update on the Indian Equity Market:

On Monday, NIFTY ended higher at 17,691 (+0.9%) as it closed near the intraday high level of 17,751. All the sectoral indices were gainers, led by METAL (+3%), MEDIA (+2.6%), and REALTY (+2.2%). Among the stocks, DIVISLAB (+7.8%), HINDALCO (+4.6%), and NTPC (+4%) led the gainers while CIPLA (-3%), GRASIM (-2.3%), and UPL (-1.4%) led the losers.

Excerpts of an interview with Rakesh Sharma, Executive Director, of Bajaj Auto (BAJAJ-AUTO) with CNBC TV18 on 1st October 2021:

  • Chip shortage is affecting the manufacturing of high-end bikes and their customers around the world are disappointed. The company is able to meet only 65% of the requirements.
  • On the export side, the company is very comfortable despite the container and chip shortage and it will do much more in October ‘21 compared to September ’21. The demand is returning well in markets like Latin America, Africa, South Asia. The company expects sales volumes through exports to remain over 200,000 vehicle per month.
  • Migration from internal combustion engine (ICE) vehicle to electric is going to continue. The company cannot determine the pace of this change as it is primarily driven by factors like overall costs coming down for customers, reassurance regarding charging infrastructure. In this phase, the company is pre-occupied with building capabilities.
  • The company’s retail outlook in the festive period is positive. The indicators like rural demand pickup, behaviour of retail finance, shaping up of enquiries, excitement at dealership level suggest a single digit to low-double digit growth during the festive season. It expects the mid-market segment to lead growth during the festive season.
  • The company plans to occupy and retain a premium position in 2-wheeler electric vehicles (EVs). It is offering the most highly priced vehicle in this segment with self-proclaimed value additions in terms of very good design, best performance, an all-steel body, and a very good customer care.

Asset Multiplier Comments

  • Bajaj Auto is planning to set up a separate subsidiary for EV. It already sells Chetak scooter and is planning to launch 3-wheeler EVs in FY22. This will help the company to build the required capabilities and cater to growth in the EV business.
  • The domestic volume figures will improve from 3QFY22 as the company plans to aggressively launch products in 125cc segment, and provide innovative offerings in the entry motorcycle segment.

Consensus Estimate: (Source: market screener website)

  • The closing price of BAJAJ-AUTO was ₹ 3823/- as on 04-Oct-2021. It traded at 21x/17x/15x the consensus earnings per Share estimate of ₹ 186/221/248 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 4232/- implies a PE multiple of 17x on FY24E EPS of ₹ 248/-.

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 (20th Sept to 24th Sept)

Technical talks

NIFTY opened the week on 20th September at 17,444 and closed on 24th September at 17,853. During the week, the index gaining 2.3% and touched a record high of 17,948 during the market hours on 24th September. Nifty is trading at an RSI of 78, with support at 10 DMA of 17565 and resistance at 18,095.

Weekly highlights

  • Evergrande, China’s second-biggest property developer, has US$83.5 million in dollar-bond interest payments due on a US$2 billion offshore bond and a US$47.5 million dollar-bond interest payment due next week. Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates. Chinese authorities are asking local governments to prepare for the potential downfall of the debt-ridden China Evergrande Group.
  • Federal Reserve Chairman Jerome Powell said the U.S. central bank could begin scaling back asset purchases in November 2021 and complete the process by mid-2022, after officials revealed a growing inclination to raise interest rates next year.
  • The Organisation for Economic Co-operation and Development (OECD) has marginally lowered India’s growth projection for the ongoing fiscal to 9.7%, a reduction of 20 basis points (bps), and to 7.9% for the next financial year, down 30 bps from its May-21 forecast, citing pandemic risks.
  • India is planning to set up around 14 gigawatt-hour (GWh) grid-scale battery storage system at the world’s largest renewable energy park at Khavda in Gujarat. This is in addition to a plan to invite bids for the largest global tender for setting up a 13GWh grid-scale battery storage system in Ladakh.
  • On 22nd Sept, the Tamil Nadu government signed a Memorandum of Understanding (MoU) for 24 projects worth ₹ 21.2 bn. M K Stalin, chief minister of Tamil Nadu said the government’s goal is to increase the state’s exports to USD 100 bn by 2030.
  • Tata and Airbus have signed a Rs 220 bn deal for the production of 56 C-295 transport aircraft for the air force. Under the deal, 40 of the 56 planes will be manufactured in India by a consortium of the Airbus Defence and Space and Tata Advanced Systems Limited (TASL) within 10 years of signing the contract, officials said.
  • India is considering an overhaul of its electricity transmission planning to give power companies nationwide unconditional access to the network. The government also proposes to allow states to trade their excess transmission capacities with other states, a senior government official said.
  • The foreign institutional investors (FII) net sold equities worth Rs 84 mn, while domestic institutional investors (DIIs) bought equities worth Rs 30,483 mn.

Things to watch out for next week

  • The stock markets around the globe may remain volatile next week as the investors remain worried that Evergrande’s downfall could affect the creditors such as banks in China and abroad.
  • News of the US Federal Reserve starting to withdraw the monetary stimulus by Nov ’21 and a start of rising interest rates could prove to be negative factors for the markets as it will increase the cost of borrowing for the corporates.

 

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.”

Bank to see a greater expansion in rural areas – HDFC bank

Update on the Indian Equity Market:

On Tuesday, NIFTY ended lower at 17,362 (-0.1%) as it closed 40 points below the opening level of 17,402. Among the sectoral indices, CONSUMER DURABLES (+1.0%), FMCG (+0.3%), and FINANCIAL SERVICES (+0.2%) ended higher, whereas REALTY (-2.3%), IT (-1.3%), and PSU BANK (-1.3%) ended lower. Among the stocks, BHARTIARTL (+2.6%), HDFC (+2.5%), and GRASIM (+1.6%) led the gainers while SUNPHARMA (-2.2%), BPCL (-1.8%), and HINDALCO (-1.8%) led the losers.

Excerpts of an interview with Mr. Rahul Shukla, Group Head, Commercial & Rural Banking, of HDFC Bank (HDFCBANK) with Economic Times on 6th September 2021:

  • The reality is very different from what is spoken about in TV newsrooms. The commercial vehicle and construction equipment business is strong, credit utilisation by MSMEs is steadily increasing every month, the healthcare sector is fairly credit-strong.
  • The bank continues to expand its geographic footprint, extending credit in rural and semi-urban areas of the country, and sees no credit challenges in finding new business.
  • The bank is active in transportation finance, where it finances trucks, construction equipment, and tractors. The disbursements in July were 40% higher than in June, and in August, were 20-25% higher than in July.
  • The bank operates in 100,000 villages and in two years, it may expand to 200,000 villages. Even if it’s a huge jump, it is still only 30% of the market. The bank has a robust digital platform which has helped it to add new customers.
  • Rural lending today is about 90% crop-based lending. Crop-based lending is largely related to the price of dal and sugarcane. As the ecosystem is completely changing, there is a lot of push in vegetables, fruits, poultry, piggery, etc. which accounts for 60-65% of the crop-based lending.

Asset Multiplier Comments

  • Banks were willing to lend to the rural population during the 1st covid wave period as they were not as much affected as urban areas. The rural population was largely affected during the 2nd covid wave, and it is still recovering from the impact. Therefore, the dynamics related to lending may be different going forward.
  • HDFC Bank has seen a reduction in interest expenses and other operating expenses over the last 5 years. This trend is likely to continue in the upcoming years as the bank continues to manage its deposits and borrowings well. With reducing provisions led by an increase in NPA recoveries, the bank’s increasing geographic footprint, and well-balanced CASA deposits, we expect the bank’s prospects to improve further.

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

  • The closing price of HDFCBANK was ₹ 1,570/- as of 07-Sept-2021. It traded at 3.7x/3.2x/2.7x the consensus book value estimate of ₹ 423/488/574 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,760/- implies a PB multiple of 3.1x on FY24E BVPS of ₹ 574/-.

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 demand uptick, but supply chain issues persist – Galaxy Surfactants

Update on the Indian Equity Market:

On Thursday, NIFTY ended at 16,637 (+0.01%) as it closed near the opening level of 16,628. Among the sectoral indices, OIL & GAS (+0.8%), CONSUMER DURABLES (+0.6%), and FMCG (+0.6%) ended higher, whereas METAL (-1.3%), MEDIA (-1.2%), and PSU BANK (-0.8%) ended lower. Among the stocks, BRITANNIA (+2.7%), TATACONSUM (+2.2%), and BPCL (+1.8%) led the gainers while BHARTIARTL (-4.4%), JSWSTEEL (-1.8%), and MARUTI (-1.5%) led the losers.

Excerpts of an interview with Mr. U Shekhar, Founder Promoter and MD of Galaxy Surfactants (GALAXYSURF) with CNBC TV18 on 26th August 2021:

  • The demand for the company’s products has been low in the first quarter of FY22 due to the 2nd Covid wave. The company sees demand getting better in the August and September months. However, the challenge of the supply chain is hampering the company’s ability to supply and cater to the increased demand.
  • The supply chain constraints faced are due to the shortage of containers, and closing of various ports in China. The logistics have been severely impacted due to the Covid and freight costs continue to be at high levels.
  • The workers in the company are unable to work due to the Covid wave in Indonesia and Malaysia, because of which the production is getting hampered.
  • The company sees significant opportunity in terms of its innovation products on speciality ingredients. The company is also commissioning its major project in Jagadia, Gujarat in the next 30 days and some more projects will commission in the next three-four months.
  • The expansion projects in the company’s Egypt factory will be operational in 3 to 4 months which will help the company to broaden the category of products in Egypt and also help serve the countries in Europe and US, much faster.
  • The company has planned a capex of ₹ 1500 mn each in the next 2 years and is well placed for financing this capex.

 

Asset Multiplier Comments

  • In the next few months, better availability of containers, easing restrictions, workers coming back to work, these will help reduce the supply side constraints for the company.
  • The company will be able to better cater to the strong demand as people around the world get vaccinated and things normalise.

Consensus Estimate: (Source: market screener website)

  • The closing price of GALAXYSURF was ₹ 3,094/- as on 26-Aug-2021. It traded at 35x/ 30x/ 27x the consensus EPS estimate of ₹ 89/105/114 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,417/- implies a PE multiple of 30x on FY24E EPS of ₹ 114/-.

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 (August 16th to August 20th)

Technical talks

NIFTY opened the week on 16th August at 16,518 and closed on 20th August at 16,450. It made a weekly loss of 0.5%. The index is trading near the 10 DMA of 16,414 which might act as a support. On the upside 16,701 level might act as a resistance. The RSI (65), and MACD turning downwards suggests a further possible decline.

Weekly highlights

  • Tens of thousands of people have tried to flee Afghanistan since the Taliban militants entered into its capital Kabul, on Sunday, completing a defeat of government forces and ending two decades of war. On Thursday, the United States struggled to evacuate the Americans and Afghans at Kabul airport due to obstacles like armed Taliban checkpoints and paperwork problems. With a deadline of 31st August declared by the president of America, Joe Biden, thousands of people remain to be airlifted from the chaotic country.
  • PM Narendra Modi on 15th Aug announced a $ 1.35 trillion ‘Gatishakti’ initiative to bring employment opportunities for the youth and to help in infrastructure growth. He said that Gatishakti will help local manufacturers turn globally competitive and develop possibilities of new economic zones.
  • The RBI has partially lifted restrictions that it had imposed on HDFC Bank last December, allowing it to resume issuing credit cards. However, restrictions on new digital launches remain. Despite the ban, HDFC Bank remains the largest credit card issuer, with 14.8 million cards outstanding at the end of June, followed by SBI Card with 12 million and ICICI Bank with 11.03 million. (Source: Mint)
  • Federal Reserve officials made plans to pull back the pace of their monthly bond purchases likely before the end of the year, meeting minutes released on Wednesday indicated. The committee members broadly agreed that employment has not met the “substantial further progress” benchmark the Fed has set before it would consider raising rates.
  • Ola launched its first e-scooter with the Ola S1 series in India on 15th August 2021. The electric scooter was launched in two variants – Ola S1 and Ola S1 Pro. The company is officially opening Ola S1 for purchase from 8th September 2021 and will start delivering across 1,000 cities and towns in October this year. 
  • FII (Foreign Institutional Investors) were net sellers and DII (Domestic Institutional Investors) were net buyers this week. There was a net outflow of Rs 43,144 mn from the FII while DII invested Rs 1,224 mn.

Things to watch out for next week

  • As the world cautiously looks at the further developments in the Taliban-controlled Afghanistan, it may have a significant effect on the stock markets.
  • US employment data and the various economies getting back on track after the 2nd covid wave will be among the deciding factors that drive the stock 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.” 

 

Taking a conservative approach while phasing out NPAs – Manappuram Finance

Update on the Indian Equity Market:

On Thursday, NIFTY ended higher at 16,364 (+0.5%) as it closed near the intraday high level of 16,375. Among the sectoral indices, MEDIA (+2.3%), IT (+1.8%), and PSU BANK (+1.3%) ended higher, whereas PHARMA (-1.1%) and HEALTHCARE (-0.4%) ended lower. Among the stocks, POWERGRID (+6.0%), TECHM (+4.7%), and TATAMOTORS (+3.9%) led the gainers while EICHERMOT (-4.1%), DRREDDY (-0.8%), and CIPLA (-0.6%) led the losers.

Excerpts of an interview with Mr. VP Nandakumar, MD and CEO of Mannapuram Finance (MANAPPURAM) with Economic Times on 11th August 2021:

  • The two-third of the company’s primary business is lending against jewellery. The company has seen a sharp correction in the price fluctuation of metal used in jewellery and it believes that it has managed those prices well.
  • The company had to phase out its high loan to value (LTV) loans off the book, otherwise it would’ve faced a situation where the loan receivables would’ve overshot than the current price. As the company grows, it is targeting high ticket loans through differential pricing and is hopeful of a growth of around 15% on its gold loan book.
  • The gold auctions have been 2% of the disbursals, instead of the expected 3-4%. The expected credit loss (ECL) provisioning reported is low due to that. The company has provided adequately in microfinance and has been very conservative with the write off after 180 days.
  • The company has maintained a very high capital adequacy ratio of 35% and it wants to limit its capital allocation for unsecured business to around 15% of the net worth. The company does not have any plan on bringing in capital in at least next 1 year. The right time would be when the company is able to demonstrate that it can manage the MFI book well, better than the market.

Asset Multiplier Comments

  • To fight the gold price volatility Manappuram is taking the right steps like decreasing the LTV and has also come up with products/schemes to attract high ticket size customers. Despite the weak performance in quarter one, the company is confident of delivering 15% YoY Gold AUM growth in FY22E and stable NIMs.
  • Involvement of less paperwork, availability of flexible schemes and quick disbursements of the loan amount remains the strong points for gold loan companies. Due to the recent gold price decline, the gold loan company is experiencing a rough patch, but given the nature of the business we remain confident on the business model.

Consensus Estimate: (Source: market screener website)

  • The closing price of MANAPPURAM was ₹ 167/- as on 12-Aug-2021. It traded at 1.64x/1.32x the consensus book value estimate of ₹ 103/128 for FY22E/FY23E respectively.
  • The consensus target price of ₹ 169/- implies a PB multiple of 1.32x on FY23E BVPS of ₹ 128/-.

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

Wage hikes impacted margins in Q1FY22 – Tech Mahindra

Update on the Indian Equity Market:

On Monday, NIFTY ended higher at 15,885 (+0.8%) as it closed near the intraday high level of 15,983. Among the sectoral indices, REALTY (+4.8%), AUTO (+1.4%), and IT (+1.1%) ended higher, and there were no sectoral losers. Among the stocks, TITAN (+3.6%), SHREECEM (+3.5%), and BPCL (+3.1%) led the gainers while UPL (-2.3%), TATASTEEL (-1.5%), and BAJAJFINSV (-0.6%) led the losers. 

Excerpts of an interview with Mr. CP Gurnani, MD&CEO, and Mr. Milind Kulkarni, CFO of Tech Mahindra (TECHM) with CNBC TV18 on 30th July 2021:

  • A few of the things that worked well for TECHM over 1QFY22 were that the company focused on bringing in large deals that help in bringing order backlog and predictability in the operations. 
  • All of the company’s capital allocation is towards cloud and artificial intelligence (AI). TECHM has also made 5G investments in software-defined networks and cloud-based networks. The company usually looks forward to deal wins of US$ 800-1,000 mn every quarter and has signed one of its largest deals in healthcare in 1QFY22.
  • The company did better in a seasonally weak quarter and was able to maintain margins of 15%. There could be tailwinds coming from operating leverage and headwinds coming in terms of a higher cost of the employee addition and retention. Yet, the company is confident of maintaining the EBITDA margin.
  • Speaking of the company’s costs, there have been two increases. One is the salary increments, second is that the company had to employ a higher number of onsite contractors due to Covid restrictions. The company recovered from the impact partly through operational efficiency with improved utilisation of 60 bps and through increased offshoring.
  • Inorganic growth is going to continue to be the company’s differentiator. The company has improved a lot of synergy goal delivery, and integration capability. The company is also getting a lot of management talent through its acquisitions.
  • The company had planned for 16-18% attrition as the overall demand is not only for Tech Mahindra. The management has repurposed the company to look at tier 2 cities like Nagpur, Trivandrum, Chandigarh, Bhubaneshwar, and Kolkata for hiring. But the management may give another salary hike if the market moves in that direction.

Asset Multiplier Comments

  • As the country recovers from the second covid wave, the strong demand for the entire IT sector augurs well for the company in the mid to long term.
  • With strong deal wins, robust pipeline, margin levers like automation, offshoring, and cost optimization by centralising the back offices of newly acquired entities, TECM is confident of delivering 15%+ EBIT Margins. We believe this confidence is justified. 

Consensus Estimate: (Source: market screener website)

  • The closing price of TECHM was ₹ 1,206/- as on 2-August-2021.  It traded at 19x/18x/16x the consensus earnings estimate of ₹ 63/69/77 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,210/- implies a PE multiple of 16x on FY24E EPS of ₹ 77/-.

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.”

Confident of double-digit growth in FY22 – HCL Tech

Update on the Indian Equity Market:

On Thursday, NIFTY ended higher at 15,824 (+1.2%) as it closed near the intraday high level of 15,835. METAL (+3.0%), IT (+1.8%), and REALTY (+1.75%) led the sectoral gainers and there were no sectoral losers. Among the stocks, JSWSTEEL (+5.9%), TECHM (+5.4%), and BAJFINANCE (+4.2%) led the gainers while HINDUNILVR (-2.3%), ASIANPAINT (-1.8%), and BAJAJ-AUTO (-1.2%) led the losers.

Excerpts of an interview with Mr. C Vijayakumar, CEO & MD, and Mr. Prateek Aggarwal, CFO of HCL Technologies (HCLTECH) published with CNBC TV18 on 20th July 2021:

  • The company has seen a second consecutive quarter of revenue miss due to execution capabilities getting hit by the second Covid wave, and the company has a lot of concentration in NCR. As the revenue will recover in Q2FY22, the company is confident of the full year’s double-digit growth performance.
  • Speaking on segments, the products and platform segment has been disappointing for the last two quarters. The company expects a low single-digit growth for this segment, as around 25% of the products are either declining in nature or are being discontinued. IT services had a muted quarter, due to some executions and transitions in Europe that are taking longer than expected.
  • The company is expanding in new markets (geographically) categorized as Focus countries and New Frontier countries. The company has a reasonable presence in the countries under the Focus category and the growth rate will be higher than the company growth rate. New frontier countries are mid to long-term bets. These markets have to be built and are expected to give good outcomes in a couple of years.
  • The deals that the company has won are organic in nature, and a lot of them require to be built by hiring more talent, and onboarding them. The hiring of freshers could be more than the current guidance of 20,000-22,000. Speaking on salary hikes, the salaries are currently the same at entry-level, but the company expects to see a salary hike percentage in the next couple of years to be more than the rest of the company.
  • The company has accomplished a very good quality order book in the last 2 quarters, a lot of it being good long-term programs having annuity revenues, and are good capacity programs for digital transformation.

Asset Multiplier Comments

  • As the country recovers from execution capability-related issues caused by the second covid wave, the revenues can be expected to recover in FY22.
  • A strong order book that contributes to annuity revenues will position the company better in the mid to long term.

Consensus Estimate: (Source: market screener website)

  • The closing price of HCLTECH was ₹ 979/- as of 22-July-2021. It traded at 20x/17x/16x the consensus earnings estimate of ₹ 50/57/62 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 975/- implies a PE multiple of 16x on FY24E EPS of ₹ 62/-.

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.”

Not very concerned about 3rd wave impact on biz– Dabur India

Update on the Indian Equity Market:

On Wednesday, NIFTY ended marginally higher at 15,809 (+0.3%) as it could not sustain the intraday higher levels. Among the sectoral indices, IT (+3.2%), PHARMA (+0.3%), and MEDIA (+0.2%) ended higher while REALTY (-1%), PSU BANK (-0.5%), and AUTO (-0.3%) led the losers. Among the stocks, WIPRO (+7%), TECHM (+2.6%), and INFY (+2.1%) led the gainers while MARUTI (-1.4%), ADANIPORTS (-1%), and HINDUNILVR (-1%) led the losers. 

Excerpts of an interview with Mr. Mohit Malhotra, CEO of Dabur India (DABUR) published in Business Standard on 14th July 2021:

  • Share of Dabur’s healthcare portfolio went up to 45 percent from 30 percent and essentials like oral did well, while the share of skincare, hair oil, and foods shrank. 
  • Being well aware that the discretionary portfolio may not do well, the company has diversified into areas like edible oil and launched several other products.
  • The inflation has increased the input costs by 5-6 percent as it has hit the entire bucket of the business. 
  • The company has taken a 3 percent price hike and initiated cost optimisation measures. The company has planned to cut down Rs 1000 mn worth of costs in FY22, which won’t be enough. The pressure on operating margin can’t be ruled out till the December quarter.
  • Sales through e-commerce channels have grown to 8 percent from 2 percent before Covid. In FY21, in spite of travel restrictions, Dabur earned 6 percent of the sales through e-commerce.
  • The company has begun construction of their eighth plant, in Madhya Pradesh at an estimated cost of Rs 5,500 mn to meet current and future demand, taking advantage of the incentives provided by the government under its ‘Atmanirbhar Bharat’ program. The plant will help the company meet the demand for the next 10-12 years.
  • Earlier, the company was spending 5-6 percent on advertising through digital media, but now the company is putting 25 percent of its budget into digital. Last year, the company increased its media spending, but now it has cut it down to 8-10 percent of sales as growing costs are a threat.

Asset Multiplier Comments

  • People being eager to go back to offices and as the government has ramped up vaccination, it seems that the impact of the 3rd covid wave may not be as severe on the operations of Dabur as the second wave.
  • The increase in demand for health and wellness products is expected to continue post-Covid. The increase in market penetration of these products bodes well for Dabur.

Consensus Estimate: (Source: market screener website)

  • The closing price of DABUR was ₹ 586/- as of 14-July-2021.  It traded at 56x/ 49x the consensus earnings estimate of ₹ 10.5/ 12.1 for FY22E/FY23E respectively.
  • The consensus target price of ₹ 590/- implies a PE multiple of 49x on FY23E Earnings of ₹ 12.1/-.

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.”