17 Jul

Existing book has been taken care of – Yes Bank

Update on the Indian Equity Market:

On Thursday Nifty closed +1.2% higher at 10.740. Among the sectoral indices, IT (+2.8%), Pharma (+1.7%), and Auto (+1.2%) closed higher. Media (-1.7%) was the only sector to close lower. Infosys (+9.5%), BPCL (+6.9%), and CIPLA (+5.6%) closed on a positive note. Bharti Infratel (-7.0%), TechM (-2.7%), and ITC (-2.4%) were among the top losers.

Excerpts from an interview of Mr Prashant Kumar, CEO, Yes Bank with ET dated 14th July2020:

  • His view on the current capital raise: the current CET (common equity Tier 1) is 6.3% and this capital raise will take it to 13% giving a buffer of 500 basis points over the regulatory requirement.
  • This will also take care of the growth requirements for at least two years. Even after two years of growth CET would be around 12% to 13%.
  • On usage of funds: the existing book has already been taken care of and the provision on account of future slippage will be taken care of by the pre-provisioning operating profit. So, this capital will not be used for any provisioning. In the worst-case scenario 100 basis points of capital may be used for provisions mainly due to Covid19.
  • On the loan book post Covid-19: three sectors which have been impacted by coronavirus are hospitality, aviation and real estate. The bank is not seeing any recovery in these three sectors. Except these sectors, recovery is happening. Second, all term loans have been extended by 6 months.
  • He expects things in these sectors to normalize within 2-3 months. The impact on book could be around Rs 10,000 crore, which could be at risk out of total book of Rs 1.71 lakh crore as of March 2020.
  • On the liability side: there has been a net addition in deposits and in the last two months the bank has been able to reduce 100 basis points on saving bank rate and 50 basis points on term deposits, which is a good thing.
  • The targeted CASA ratio is 40% in next three years from 27% in march20.
  • On corporate lending: the bank will not do incremental lending on the corporate side at least during the current financial year, and repayments would reduce the corporate loan book. The bank expects corporate book to come down to 50% from 55% now and further to 40% in FY22.
  • On Return on Assets (RoA) front: RoA is expected to be at 1% by 2023 through improved margins and also lower costs from our branch network, outsourced employees, vendor contracts, lease rentals.
  • He says, rural and semi urban branches will be converted into business correspondent model and some 30 to 35 branches will be merged.
  • On the retail side, the existing book is largely secured. Going forward, the bank will look at secured loans to salaried customers, equipment finance, vehicle finance, gold loans, two-wheeler finance. On MSME, the bank is present in the entire ecosystem of dealer financing but most of it is secured by collateral.
  • Now the challenge is to generate profits. Deposit part has been taken care and the bank is moving towards profit direction. Once capital is there, it would be only to look at growth without having NPAs. The bank’s pre-provisioning profit is improving and when provisioning requirements lessen, there will be a net profit.
  • On technology front, investments have been made. Even today the bank has 40% market share on UPI.

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

  • The closing price of Yes bank was ₹ 19/- as of 16-July-2020.  It traded at 1.5x/ 0.5x the consensus Book value estimate of ₹ 12/32 for FY21E/ FY22E respectively.
  • The consensus average target price for Yes Bank is ₹ 30/- which implies a PB multiple of 0.9x on FY22E BV of ₹32/-.

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.”

 

 

 

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16 Jul

Financial services sector to witness sharp spike in Non-performing assets – Kotak Bank

Update on the Indian Equity Market:

Markets failed to keep the initial gains as Nifty closed the day 0.1% higher at 10,618. IT sector led the index higher with WIPRO (+16.9%), INFY (+6.5%) and HCL (+5.7%) while the losing stocks for the day RELIANCE (-3.9%), BHARTIARTL (-3.6%) and ZEEL (-2.9%). Among the sectors, IT (5.2%), FMCG (0.7%) and PHARMA (0.6%) while REALTY (-2.1%), MEDIA (-1.7%) and PSU BANK (-1.4%) were the laggards.

Edited excerpts of an interview with Mr Uday Kotak, Managing Director, Kotak Bank Ltd. (Kotak); dated 14th July 2020 from CNBC TV-18:

  • The banks would need to be capitalized to the extent of Rs 2-3 lakh crore. The recent fund raising spree by banks was a step in this direction.
  • The banking sector’s total loan book is about Rs 100 lakh crore. The loan losses to the extent of 4-5 percent of total loans could turn Non-Performing Loans (NPL) due to COVID-19. Against this spike in NPL, he believes that the financial sector will need recapitalization of 2-3 percent of the loan book.
  • The financial sector is going all out to beef-up the reserves to be able to absorb the shocks coming out of the crisis. The key lesson for lenders from the crisis is to tighten their lending practices and make loans after taking risks into account.
  • Commenting on the recent surge in the stock market, he said that the market is ignoring short term issues and valuations are based on future recovery. Lower interest rates and disproportionate liquidity globally and locally are helping the equity market as savers have few avenues to invest in.
  • He also mentioned sectors like airlines, tourism, entertainment, hotels and restaurants had been disproportionately affected due to the issues faced by these industries.
  • He said that if the job situation worsens, unsecured customers will add risk. He will be closely watching for recovery in the most affected sectors and job stability very closely.

Consensus Estimate: (Source: market screener, investing website)

  • The closing price of Kotak Bank was ₹ 1,289/- as of 15-July-2020. It traded at 3.3x/ 2.9x/ 2.7x the consensus BV estimate of ₹ 393/ 442/ 472 for FY21E/ FY22E/ FY23E respectively.
  • The consensus target price of ₹ 1,382/- implies a PB multiple of 2.9x on FY23E BV of ₹ 472/-.

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.”

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15 Jul

Slow and steady recovery over the next 2-4 years – Info Edge

Update on the Indian Equity Market:

On Tuesday, amid rising coronavirus cases and fresh lockdowns being imposed in some of the Covid-19 hotspots in India, the Nifty50 ended 1.8% lower at 10,607. PRIVATE BANK (-3.3%), PSU BANK (-3.1%), and BANK (-3.2%) dragged the index lower. PHARMA (+0.5%) was the only sectoral index to end in the green. Among the Nifty50 stocks, DRREDDY (+1.9%), TITAN (+0.9%), and BHARTIARTL (0.3%) were the only gainers. INDUSINDBK (-5.5%), AXISBANK (-4.9%), and EICHERMOT (-4.5%) led the laggards.

Edited excerpts of an interview with Hitesh Oberoi, MD & CEO, Info Edge India with Economic Times on 13th July 2020:

  • The months of April and May witnessed lockdown and a halt in all business activities. The JobSpeak Index published monthly is closely linked to revenue on their platform and it has gone up by 33%. The activities on all the platforms- 99acres, Naukri, Shiksha, and Jeevansathi are almost back to normal.
  • They are growing 25-30% in the emerging markets already. The big cities like Mumbai and Delhi, which are more impacted by Covid and lockdown, they are still down 25-30%.
  • Revenue in Naukri and all the verticals will follow with a lag, that’s how it always works. Green shoots in sectors like IT, healthcare, pharma, and tech can be seen. Other sectors like travel, tourism, hospitality, and auto things continue to be 70-80% below where they were last year.
  • The company is a cash-rich company, with Rs 1,500 crore cash with a 50% EBITDA margin and they see a lot of opportunity going ahead. There are four verticals from an internal business standpoint: jobs, real estate, matrimony, and education.
  • Although the company is a clear leader in jobs, they want to do many things in that vertical, which will require investment over time. They already have a play in recruitment automation which they want to scale up. They invested in an HR services company, createHR, and are looking at what can be done in adjacent spaces.
  • Things are only getting started right in the real estate vertical. They are currently in the residential buy segment and plan to get into rentals and commercial real estate. Even in the residential buy segment, the plan is to break away from the rest of the pack and investment will be required in multiple areas, going forward.
  • On the matrimony portal, Jeevansathi volumes have doubled or tripled in the last couple of years. There is still a long way to go as it is still the number three player.
  • In all the verticals, investments will be made in the product development, branding, and innovation. A lot more strategic investing will be done in adjacent areas.
  • They have invested in three education companies in the last year and are open to the idea of acquiring companies and doing more M&A in the categories they operate in. To be able to do these activities, the cash they currently have won’t be sufficient, hence the board has enabled QIP to raise more money.
  • Capital raising is not something which is done every year, it is done maybe once in five to seven years. Hopefully, the capital raised will last for a couple of years. Info Edge has never done a large M&A but done a bunch of strategic investments. At the same time, to buy any company in the internet space, a lot of money is required. They do not want to risk all the money they have in the bank on an M&A. Should an opportunity arise to buy a distressed asset or something that will help gain market share, they want to be ready and that is why they are raising funds.
  • About a year ago, Zomato was losing $ 40 million a month which was brought down to $ 20 million a month before Covid. April and May were bad for all companies, including Zomato and Swiggy. Due to Covid, the volumes have fallen and the business is down to about 50% levels. The crazy discounting, spend on customer acquisition which companies were doing is now over and companies are focusing on fixing their supply chains and other issues. As a result, Zomato which was losing ₹ 30-40 an order till some time back, is now making ₹ 30 an order.
  • Zomato is now very comfortable on cash and has enough money in the bank to last them a couple of years. There are a lot of investors interested in investing in Zomato and talks with a few are going on right now.
  • People not being able to go out and dine anymore like they used to, is probably a big opportunity for all the delivery companies. Since dining out can be very expensive, people were doing that maybe once or twice a month. For that kind of money, they can order in food maybe twice or thrice. Consumers do not want to just eat home food all the time and since going out to dine is unsafe, ordering in will therefore increase.

Consensus Estimate: (Source: market screener website)

  • The closing price of Info Edge (India) was ₹ 2,899/- as of 14-July-2020. It traded at 112x/ 81x the consensus earnings estimate of ₹ 25.8/ 35.9 per share for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 2,557/- implies a PE multiple of 71x on FY22E EPS of ₹ 35.9/-.

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.”

 

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14 Jul

With growth, margins will also improve – TCS

Update on the Indian Equity Market:

On Monday, NIFTY closed at 10,815 (+0.4%). Top gainers in NIFTY50 were Tech M (+5.5%), Hindalco (+3.8%), and HCLT (+3.7%). The top losers were Power grid (-2.2%), Bajaj Finance (-2.1%), and HDFC Bank (-1.9%). Top sectoral gainers were IT (+1.7%), METAL (+1.5%), and FMCG (+1.3%) and sectoral losers were REALTY (-1.6%), PSU BANK (-1.6%), and FIN SERVICES (-1.3%).

Excerpts of an interview with V Ramakrishnan, CFO, TCS and Milind Lakkad, CHRO, TCS with ET now dated 10th July 2020:

  • 95% of our people are working from home and only 1% come to work for various reasons. It has been a change for everybody. It hasn’t been an easy cakewalk but they have done very different things.
  • Associate health and well being has been a paramount thing for them and has been a key factor in decision making.
  • They do everything while continuing to take care of associates’ health and ensure that they continue to be a happy organisation.
  • The aspiration of 26-28% margin is very much intact. Of course this pandemic has changed certain dynamics. So, the timing of when they will get back, is dependent on the recovery. They are confident of recovery in the coming quarters.
  • Recovery will be very segment and specific country driven, but they expect that to happen across many of the sectors.
  • Along with growth, obviously the margins will also be improving because in the current quarter, the reduction in the margins is directly related to the contraction in the demand and in the revenue.
  • While they were able to get back almost 300 bps outside of anything to do with employee cost but still they had a dip of about5% that is directly related to the drop in revenue so with improvement in the recovery, they will also see the improvement in margins.
  • The investment is driven by what is required to make sure that they are abreast of what is happening on the technology front to make sure that TCS people are equipped and in terms of what they can showcase to their So the investments have been going on and the balance sheet is strong.
  • They will continue to invest in research and innovation, in building capabilities at scale among the employees and also in labs and customer experience areas.
  • Going forward, they will continue to get all 40,000 offers they made in the campuses in India and that will go through from this mid-July though the year. The engagement with the fresher recruits and everything else is on very actively for the last three months and they will honour all of those offers.
  • They have to be conscious that some of the sectors have been badly affected and there is an expectation from some of the customers and some of the sectors for support. They have been very supportive and we have looked at it in the contextually and depending on the relationship, it is a very mutually beneficial relationship.
  • Their dividend or return policy has been 80% to 100% of free cash flow. So, there is no departure from that policy. In the last couple of years, they have been very close to 100% or even slightly higher. They will stay within that range.
  • Customers’ ability and willingness to adapt to the Work from home model and to be able to connect people from wherever they are. So, the location independence of this model will change the dynamics for everybody.
  • They always thought that the most important meetings have to happen in person and that is not the case anymore. They just come together, discuss and have a chat and then the two CEOs connect in a jiffy. Those are big things that will help establish a deeper relationship with customers going forward.

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

  • The closing price of TCS was ₹ 2,222/- as of 13-July-2020.  It traded at 27x/ 23x the consensus earnings estimate of ₹ 82.6/ 95.6 for FY21E/22E respectively.
  • The consensus price target of TCS is ₹ 2,088/- which trades at 22x the earnings estimate for FY22E of ₹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.”

 

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13 Jul

Corporate rejig plan will take care of long-term requirements – Motherson Sumi

Update on the Indian Equity Market:
On Friday, Nifty ended -0.4% lower at 10,768. The top gainers for Nifty 50 were Reliance (+3.1%),
HUL (+2.5%), and Sun Pharma (+2.3%) while the losing stocks were Axis Bank (-3.2%), GAIL (-2.8%)
and ICICI Bank (-2.8%). Sectoral gainers for the day were Pharma (+0.9%), Realty (+0.7%) and FMCG
(+0.5%) while the losers were PSU Bank (-2.7%), Pvt Bank (-2.4%) and Bank (-2.2%).

Edited excerpts of an interview with Mr GN Guaba, CFO, Motherson Sumi Systems Ltd (MSSL); dated 07th July 2020 from Economic Times:

  • The Motherson Group last week announced a major rejig in its corporate structure, deciding to demerge its domestic wiring business into a separate listed entity.
  • As per the scheme, MSSL will first demerge the domestic wiring harness business and will get it listed separately. The second stage of the restructuring involves merging the principal holding company Samvardhana Motherson International Ltd (SAMIL) into the MSSL.
  • From the shareholders perspective, for every one share held by them of the MSSL pre-demerger, they will be allotted one new share of the demerged entity.
  • The proposed reorganisation will simplify the Group structure and protect the interest of all shareholders. It will give a fillip to the company’s M&A strategy.
  • MSSL’s partner Sumitomo had been for long keen to have a shareholding in the business which is purely focussed on Indian customers. MSSL was also looking to simplify the structure for the last eight years. They had looked at various alternatives, but could not pursue it on account of changing laws and regulations. 
  • On January 30 2020, the Company decided to have two separate listed companies as they thought this was the best way to protect the interest of all stakeholders including the minority shareholders.  
  • The contribution from the wiring harness business was at Rs 39 billion in FY20 and Rs 44.8 billion in FY19. The business constitutes 5-6 % of the total turnover.
  • MSSL is a leading manufacturer, supplying wiring harness to almost every OEM, including in all categories, CVs, bikes, trucks, passenger cars, etc. They are not chasing market share, since that proposition may compromise the bottom line. Sumitomo’s technical assistance and strategic guidance auger well for the wiring harness business in future. The idea is to clearly focus on the growing trends in the domestic market.
  • MSSL sees this restructuring to be EPS accretive in the first year of the merger’s scheme itself which is FY22E. From the semi-merger point of view, the substantial part of valuation is derived from MSSL itself; this ensures that they have protected the interests of the minority shareholders. This would be as a win-win situation for all.
  • The rejig process is likely to take 12 months or so. Based on the feedback from the Company’s bankers, restructuring will be completed by June 2021; the listing and trading of both the demerged entity as well as the SAMIL are likely to take place from July 2021.
  • The proposed restructuring scheme is a big step taken by MSSL Group. Thus, it will take care of their future long-term requirements.

Consensus Estimate: (Source: market screener website)

  • The closing price of Motherson Sumi System Ltd was ₹ 96/- as of 10-July-2020. It is trading at 41x/17x the consensus EPS estimate of ₹ 2.4/5.7 for FY21E/FY22E respectively.
  • The consensus target price of ₹ 111/- implies a PE multiple of 19.5x on FY22E EPS of ₹ 5.7/-.

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.”

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10 Jul

Aim to go back to 20%-22% ROE- Mahindra & Mahindra

Update on the Indian Equity Market:

 

On Thursday, Nifty closed 1.0% higher at 10,755. Within NIFTY50, HINDALCO (+6.6%), HDFC (+4.3%), and SBIN (+4.1%) were the top gainers, while INFRATEL (-1.9%), COALINDIA (-1.5%) and TECHM (-1.2%) were the top losers. Among the sectoral indices, METAL (+1.9%), FIN SERVICE (+1.6%), and BANK(+1.4%) gained the most.  FMCG(-0.3%) was the only sector to close in red.

 

Aim to go back to 20%-22% ROE- Mahindra & Mahindra

 

Excerpts of an interview with Mr. Anish Shah, Joint MD–Mahindra & Mahindra published on ET Auto dated 7thJuly2020:

  • M&M’s loss making subsidiaries had a difficult couple of years. M&M is now looking to take direct action.
  • The loss-making subsidiaries are being evaluated and categorized into 3 groups – Category A: companies with clear path to 18% Return on Equity (ROE). Category B: companies with unclear path to profitability but can deliver quantified strategic benefit, and Category C: Calls for a possible exit through alliance or sale as it does not fit into A or B.
  • This review of subsidiaries will be carried out every 6 months to ensure businesses are on track and milestones are being achieved.
  • Over the last 4 years, profits of M&M were being eroded by the loss-making subsidiaries- 1% in FY17, 12% in FY18 because of international subsidiaries, 25% in FY19, and over 1.7% in FY20.
  • 2 years ago, M&M management started ‘challenge round’ where as Head of Group Strategy, Mr. Anish Shah was asked to challenge all proposals and recommend to the board whether to invest or not. In the process, tough calls have been taken on two-wheeler business, Baby Oye, and Mom and Me among others.
  • In 4QFY20, M&M took a call to stop further investments in SsangYong and Gen Z. Almost 60% of losses came from SsangYong and Gen Z.
  • By the end of this FY21E, the remaining loss making subsidiaries will be addressed and shut down in absence of a clear path. Entering into FY22, a lot of these problems will be history.
  • M&M aims to have a simpler structure going forward. While the focus is looking at the loss making subsidiaries and getting them back on track, M&M does not want to change the spirit of entrepreneurship.
  • Multiple reasons led to the losses in last 2 years. The environment is one reason and excess confidence in some business is the other. Essentially, there will be a higher financial discipline that will come in.
  • M&M’s share price, as of high of August 2018, had a 31% annualized growth rate over a period of 17 years. The factors that drove this return were, – earnings-per-share growth of 34%, cash generation of Rs 23 bn per year on an annualized basis and annual return on equity of 22%. In order to get back to that kind of performance, M&M will have to get back to 20%-22% RoE and 30%-plus growth rate in cash generation.
  • M&M’s ROE in the last few years has gone down from 20% to 12%. In stage 1, by fixing loss making subsidiaries M&M should be back to 18% ROE. In the next stage, taking a look at 0-10% ROE businesses and fixing them, should mean going back to 20-22% of ROE.
  • M&M’s preference is to have a solid and conservative business over a rapidly growing risky business. M&M Finance’s business is strong and M&M is putting in capital to ensure that in any scenario, if things get much worse, there is no impact on the business. Mahindra Finance has always raised capital before it is needed, so they didn’t wait until the capital was needed. There were some analyst concerns regarding the capital issue but M&M is confident that M&M Finance should have a very high degree of subscription.
  • M&M aims to be the gateway to the largest and fastest growing themes in India and hospitality is one of them. M&M has a timeshare model and a long-term bond with the consumers. As a result, M&M expects that it’s hospitality business may not be impacted much. Post the COVID-19 crisis, M&M’s hospitality business can grow much faster.
  • As for Meru, M&M is looking at it closely to see what the real path to profitability is. M&M does not have a definitive answer to that yet.

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

  • The closing price of M&M was ₹ 563/- as of 09-July-2020. It traded at 22.1x/ 16.7x the consensus EPS estimate of ₹ 25.5/ 33.7for FY21E/ FY22E respectively.
  • Consensus target price of ₹ 556/- implies a PE multiple of 16.5x on FY22E EPS of ₹ 33.7/-.

 

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.”

 

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09 Jul

Technology will drive the economic recovery – Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY ended down 94 pts (-0.87%) at 10,705.
Among the sectoral indices, METAL(+1.57%), FMCG (+0.84%) and PHARMA (+0.71%) were top gainers while AUTO (-1.95%),REALTY (-1.95%)and IT(-1.72%) were among the top losers.
Among the stocks, INDUSINDBK (+4.5%), VEDL (+2.7%) and JSWSTEEL(+2.31%) were the top gainers. BAJFINANCE(-4.62%), ZEEL(-4.6%) and ASIANPAINT (-3.25%) were the top losers.

Technology will drive the economic recovery: Tech Mahindra CEO
Edited excerpts of an interview with Mr. C P Gurnani, Chief Executive Officer, Tech Mahindra with Economic Times dated 7th July, 2020:

Need for digitalisation is on a high and so it is still advantage Indian IT industry.
Manufacturing, travel, logistics, hospitality are some of the sectors re-inventing themselves to be future ready and we are helping our clients to cope with the post Covid world., says CP Gurnani, CEO, Tech Mahindra

• When asked about his views on future of IT companies, he said that most of the Tech M family have remained safe and healthy, the pandemic have impacted few lives and locations. The command and control centre of the company is constantly monitoring the wellbeing of the employees.
• His comments on IT sector’s performance as compared to the month of Mar-20, now that the Pharma, financial and telecom sectors have normalized: He believes that here will be two quarters of stress and if the second wave is not that strong and till the time a vaccine is not discovered, overall global IT spend will come up. Technology will drive the economic recovery and the way consumption is done. So he remains optimistic but at the same time conscious that manufacturing sector, travel, logistics, hospitality are some of the sectors which are re-inventing themselves to be future ready ad Tech M is helping their clients to cope up with the post Covid world.
• When asked about IT budgets and client engagement he informed that they are all seeing increased demand from sectors like telecom, healthcare, pharmaceuticals, media and entertainment and e-education. So that is the positive side. The second positive side is the growth of the digital economy. The need for digitalisation has become equally important for the corner shops or the grocery shops. People now want to participate in the digital economy, even the retail sector. The stress is only for offline, the online retail sector is doing well. So technology and online services are playing a critical role during the lockdown and in a lot of ways, the feeling of optimism is relative and the relative part is where we will continue to see demand.
• When asked about his views on telecom sector and whether it is now going to be the driving vertical because globally spend in telecom and data is only going to intensify, is Tech M in a position to capitalise on it, Where does he see the telecom business moving for Tech Mahindra, he answered that a lot will depend on the next quarter results because all of us understand that the new age technologies like 5G, AI, machine learning, data analytics, Cloud, automation will be the drivers for change in growth for the telecom businesses. How we translate it into revenue will depend upon how these organisations respond to economic development or in certain cases, a little bit of a slowdown in the economy. He also requested to remember that at this stage the stimulus money has kicked in. The US is about 17-18% deficit, India would be about 7-8% deficit. If we follow the money and look at the digital requirements, there is business to be had but a lot depends on how the world responds over the next two quarters.
• When asked about the reason why market is not rewarding Tech M with best PE multiple and lower margins, he stated that the Board has asked for a plan which addresses three parts to what Tech Mahindra will do. Number one is the industry mix. Number two is geography mix. One of the biggest challenges, which is an advantage as well as a disadvantage is that US business is only 45-48%, the rest of the world is 55%. That has effectively meant the energies which have gone into operating in Latin America or operating in Africa could have been better used. Tech M is now working on a plan focusing on: a) geographic reach, b)service offerings and c)some of their big bets like 5G have been relatively slow but he committed to the board that we do understand the challenges. We are going to follow the path of differentiated connected solutions strategy at the same time, we need to do a better job of choosing a few of the geographies particularly where because of the local labour policies, it becomes very difficult to operate profitably. So we are conscious of the need for turnaround or transformation. We are very clear and know the direction, now we need to bring in the speed.
• When asked whether the Covid crisis have pushed the plans forward by 6 or 12 months, he replied that he will attend the financial analysts meet himself in November-20 and would give definitive answers. Till that time, because of the uncertainty called Covid he would want to reserve his comments but the strategy, direction and speed — all three are high on his radar.
• His views on work from home: Today, 93% people are working from home. About 6% to 7% go to work which is also because there are clients in Australia, Philippines, some in the US, who have restrictive and more stringent policies. So till December, the ratios are not going to dramatically change. Most of the clients have accepted that work from home is the reality. The positive outcome to all of this is that most of us are now becoming a lot more conscious about data security, cyber security and making sure that we use and equipment which are part of the Tech Mahindra ecosystem. The last thing you want is risks off too much of distributed processing. So 25% to 30% work from home is a given in the future. People like him would still go to office because some people like to interact with people, to have some cooler talk, go to the canteen and ask people for feedbacks and listen to them. Similarly, he would like to visit his customers. So, he thinks about 25% to 30% at any given point of time will be work from home. About two days in a week, people would like to come back to work. The structured interactions, the whole human machine technology refresh will happen in those two days a week. It is interesting times, but the new normal is here to stay.
• When asked about the cost structure and any chances of cost reduction due to work from home he said that in a lot of ways most of Indian IT companies despite being a $181 bn business had stopped investing a lot on campuses. The reason was that most of the growth was coming which was non-linear growth. Number two, it is also evident that if 25% of the workforce is common for everybody, then we do not need commercial space for a long time.The third part is it is not that the employee cost or the infrastructure cost will come down dramatically. Wewill have to start providing some level of allowances which compensate because people are not spending their time and energy from coming to the workplace. In balance, it is a good thing for the industry. It is a great thing for the gig economy, it is almost a wonderful thing for a flexible workforce and it is a wonderful thing for adoption of AI and machine learning.
• His outlook on India specific business for IT companies as no Indian IT company gets even 10% of the business from India : Most of us are hesitant about India business. Nasscom has been trying to persuade various government departments on the payment terms. Unfortunately, what has happened is that IT buying is almost like they used to buy hardware where the manpower cost was probably 6% or 7%. Today the manpower cost in any IT project is 60% to 70%. So, in payment terms and the way acceptance of the solution is addressed, the Indian government has not adopted itself to the new normal. We have seen it in the last two-three years that the Indian IT spending may have gone up, but the players which are participating, have only got very limited. India Inc has to spend more on IT needs. It has to realize the need for cloud, need for cyber security is very high and at the same time it has to take into account that whether we like it or not, employee payroll has to be delivered every month and you cannot have a situation where an employee works for a project and get paid after a year.

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

• The closing price of Tech M was ₹ 582/- as of 08-Jul-20. It traded at 14x/12x the consensus EPS estimate of ₹ 40.8/50.3 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 647/- implies a PE multiple of 12.9x on FY22E EPS of ₹ 50.8

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.”

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08 Jul

Steel companies in India running at 90% capacity – Jindal Group

Update on the Indian Equity Market:

On Tuesday Nifty closed 0.3% higher at 10,799. Among the sectoral indices, Pvt Bank (+2.7%), IT (+2.1%), and Bank (+1.9%) closed higher. Metal (-1.7%), Realty (-0.7%), and FMCG (-0.4%) closed lower. Bajaj Finance (+7.8%), IndusInd Bank (+5.9%) and Bajaj FinServ (+4.5%) closed on a positive note. Adani Ports (-3.5%), PowerGrid (-3.0%) and Grasim (-2.9%) were among the top losers.

Excerpts from an interview of Mr Sajjan Jindal, Chairman, Jindal Group with ET Now dated 6th July 2020: 

  • Speaking about the current economic scenario he said the June GST collection of Rs 90,000 crore gives a good indication. The auto industry is sluggish and is operating at about 30-35% level from a production perspective.
  • October this year could be better than last October.
  • For steel products, domestic demand is about 50% of the capacities which is about 50-60 million tonnes for the year. By the end of the year, it is expected to go to the normal level, which is 110 million tonnes.
  • The steel industry in India is balancing the current situation by exporting steel to different parts of the world. Therefore, steel companies in India are running at close to 90% capacity.
  • There should not be any control over imports and exports. But when it comes to China, the country has not behaved properly with India.
  • The steel companies buy refractories from China for steel making and it is one of the important ingredients for manufacturing steel. The company buys 90% material from China, but there are plans to bring down the dependence on China and focus on domestic manufacturing or exports from other countries. 
  • In the beginning, there will be a pain as Indian supplies are going to be expensive. The company will work with Indian producers and the emerging markets to bring down the cost and improve the quality.
  • The group has given clear instructions that they will not import any material directly from China which is close to $400 million.
  • The industry has to come together to support the army and government and automatically this will go a long way in developing the Indian industry.
  • On Coal Import, he said India does not have good quality metallurgical coal needed for manufacturing steel. So, the company have to import that. The group cannot be 100% self-reliant on everything. But importing manufactured products is not a great idea. So the industry should be developed.

Consensus Estimate: (Source: market screener websites)

  • The closing price of JINDALSTEL was ₹ 156/- as of 07-July-2020.  It traded at NM/20 x the consensus earnings per share estimate of ₹ -6.3/7.8 for FY21E/ FY22E respectively.
  • The consensus average target price for JINDALSTEL is ₹ 176/- which implies a PE multiple of 23x on FY22E EPS of ₹ 7.8/-

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.”

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07 Jul

Demand will not be affected due to peak prices – HPCL

Update on the Indian Equity Market:

Markets started the week on optimism as Nifty closed the day 1.5% higher at 10,764. The optimism was such that within the Nifty index, 40 out of 50 stocks ended in green. The top gainers for Nifty 50 were M&M (+7.4%), BAJFINANCE (+6.5%) and HINDALO (+5.7%) while the losing stocks for the day BAJAJAUTO (-1.1%), GAIL (-1.0%) and BHARTIARTL (-0.9%). Ten out of 11 sectors ended the day in green led by REALTY (3.0%), AUTO (2.9%) and METAL (2.5%) while PHARMA (-0.6%) was the only sector in the red zone.

Edited excerpts of an interview with Mr M K Surana, Managing Director and Chairman, Hindustan Petroleum Corporation Ltd. (HPCL); dated 6th July 2020 from CNBC TV-18:

  • Sales during the current quarter were 88% of the last year’s same quarter. As construction and industrial activities pick-up, the company expects to reach hundred percent of last year’s sales figure in the coming quarters.
  • He mentioned that the demand for fuel is not expected to get affected due to peak prices. This is because the price elasticity is not profound in India due to the nature of the requirement. 
  • The current situation has made people opt for personal vehicles for commuting. People are buying vehicles irrespective of the price of fuel for safety reasons. He expects this trend to continue in the coming months as well. 
  • About the marketing margins, he mentioned that the rise in price of petrol and diesel is in line with global markets. Whenever the price of raw material rises, it hurts the margins of the company as the base becomes larger. 
  • The prices are going up because of the rise in international crude prices. Oil marketing companies have no say in determining the final prices so the margins get affected during a surge in crude prices.
  • Generally, the company derives 50% of the fuel demand from urban markets, 15% demand comes from highways and remaining 35% comes from the rural markets.
  • Initially during the lockdown, the percentage of rural demand was more than highways and urban demand. As the unlocking of economy is taking place, the demand is again increasing in urban and highways whereas rural demand remains intact.

Consensus Estimate: (Source: market screener, investing websites)

  • The closing price of HPCL was ₹ 216/- as of 6-July-2020. It traded at 7x/ 5x the consensus EPS estimate of ₹ 32.6/ 39.4 for FY21E/ FY22E respectively.
  • The consensus target price of Rs 274/- implies a PE multiple of 7x on FY22E EPS of ₹ 39.4/-.

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

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06 Jul

Resurgence of demand across India, exports to take a little longer – Bajaj Auto

Update on the Indian Equity Market:

On Friday, the Indian market ended higher, making it the third straight week to end with gains. The Indian government’s approval of the acquisition of missiles, ammunition, and weapon systems worth Rs 38,900 crores led to the rally in defense stocks’ shares. Nifty ended 0.5% higher at 10,607. EICHERMOT (+4.2%), ADANIPORTS (4.1%), and BHARTIARTL (+4.1%) were the top gainers, while JSWSTEEL (-1.8%), TATASTEEL (-1.8%), and INDUSINDBK (-1.5%) were the top losers. Among the sectoral indices, IT (+1.1%), REALTY (+1.0%) and AUTO (+0.9%) ended in the green, while PSU BANK (-0.9%), PRIVATE BANK (-0.5%) and BANK (-0.5%) ended in the red.

Mr. Rakesh Sharma, Director, Bajaj Auto discussed the June auto sales data with CNBC TV18 on July 2nd, 2020. Here are the edited excerpts of the interview:

  • A lot of pent-up demand was witnessed in the past month wherever the dealer network was opening up.
  • In the last couple of weeks, they have noticed even spread of resurgence in demand. Initially, it was thought to be a semi-urban, and rural area phenomenon. Now, it is the urban areas that are responding and coming back extremely well.
  • There is optimism in the rural areas driven by the agricultural sector. In the urban areas, there is a revaluation of the mode of transport and a lot of the urban areas are driven by the need to adopt a safer mode of transport. In the last 10-15 days, demand has returned on both, the urban and rural sectors. Bajaj Auto is hopeful that this will continue into the next quarter.
  • Talking about production, he said there was a little bit of turbulence towards the end of June. Otherwise, production including their vendors and plants is completely geared up. In the niche areas of high-end bikes and electric scooters, their response rate was lower. Overall, they have responded to 90-95 percent of the market demand.
  • Had the logistical disturbances not existed in the last days of June, they could have catered to about 100 percent of the demand, except for the niche products.
  • The June story is a ramp-up story of the vendors, of the plant and of the dealers. Bajaj Auto has been able to increase their market share and share of exports. It can be said the June story is not so much of the demand coming up but the supply side coming up to speed to a very different situation.
  • Taking into consideration the fact that more Covid cases could break out, in the dealerships, and at the back end, Bajaj Auto is much better prepared and would not face any restraining issue going forward.
  • At the Aurangabad pant, there have been 40 cases and 3 casualties and there is no escalation. There is a constant effort for testing and contact testing. Production had gone way down to ensure rigorous contact testing, reporting, and sanitization. Now, production is back to normal, people are reporting to work.
  • Moving to exports, Africa has come back well and running at about 80 percent levels. ASEAN is slightly behind, at about 65 – 70 percent. Latin America is a bit of a concern as the recovery is only at 50 percent level. From shipment point, the return to normalcy will most likely be by August or September, as in transit stocks in exports are much higher and have to be calibrated with the low demand of the first quarter. Now that calibration is continuing to occur and is expected to be completed by August and expect to see some kind of normalcy in shipments coming back.

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

  • The closing price of Bajaj Auto was ₹ 2,935 on 03-07-2020. It traded at 20x/ 17x/ 15x the consensus EPS estimate of ₹ 147/175/198 for FY21E/ FY22E/ FY23E respectively.
  • The consensus target price of ₹ 2,774/- implies a PE multiple of 14x on FY23E EPS of ₹ 198/-.

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.”

 

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