28 May

This week in a nutshell (23rd May – 27th May)

Technical talks

NIFTY opened the week on 23rd May at 16,291 in the red and ended in the green at 16,352 on 27th May, after high volatility during the week. The index gained 0.4% during the week. The next support and resistance levels for the index would be 16,253 and 16,414 respectively. It breached its 20 DMA levels and closed above that. The RSI (14) of 48 indicates the index is moving towards the overbought zone.

Among the sectoral indices, FINANCIAL SERVICES (+4.3%), PRIVATE BANK (+4%), and BANK (+3.9%) were the gainers during the week while METAL (-8.7%), OIL AND GAS (-3.7%) and REALTY (-3.3%) led the losers.

Weekly highlights

  • US major indices closed the week in green after the 7 weeks of consecutive losses, the S&P 500, Nasdaq, and Dow Jones closed the week with gains of 6%, 7%, and 5% respectively. The rally was led by factors such as minutes from the federal reserve’s FOMC May meeting, a fall in weekly jobless claims, and inflation slowed slightly in April.
  • Oil prices settled higher on Friday supported by the demand will continue to be elevated, the Brent crude and WTI crude closed with a gain of 1% and 0.9% respectively.
  • The government of India has waived the customs duty on the import of some raw materials used by the steel industry and increased the tax on the exports of iron ore and concentrates to 50% from 30% earlier. This measure was taken to cool off the elevated steel prices in India. These duty changes in raw materials and intermediaries will lead to more availability of steel in the domestic market and reduce the elevated steel prices which give some relief to industries such as auto, construction, etc. who already struggling with supply challenges and input cost pressures.
  • On 25th May 2022, The power ministry said that they are working on a scheme to liquidate the past dues of power distribution companies (discoms). This scheme will provide relief to the entire chain in the power sector which is currently struggling under the pressure of non-payments. Delay of payments by discoms to power generating companies affects the cash flows and disrupts the provisions for the input supply such as coal. But this scheme will provide adequate liquidity and ensures that the discoms will pay their dues regularly.
  • Amidst retail inflation surging the government of India announced the reduction in excise duty on petrol and diesel by Rs 8 and Rs 6 per liter respectively, and effectively this will reduce the petrol and diesel price by Rs 9.5 and Rs 7 per liter respectively. Along with the central government, some state governments have also slashed the value-added tax (VAT) on petrol and diesel. This reduction in excise duty on fuel will help the consumers and corporates while battling inflation.
  • Department of promotion of industry and internal trade (DPIIT) said the total FDI equity inflows were at USD 58.77bn in FY22 vs USD 59.63bn in FY21 in India, a contraction of 1% in FY22. Although the total FDI into India stood at USD 83.57bn in FY22 and rose by 2%, Singapore, the US, and Mauritius remain the top 3 contributors to FDI while IT, Auto, construction, and pharma sectors attracted the highest inflows.
  • On 26th May 2022 ONGC said that they will invest Rs 310bn over the next 3 years to explore the basin for oil reserves, this will augment the production of the nation in its attempt to be self-reliant in the energy sector. In this program ONGC is trying to explore ~1700mn tonnes of oil and oil equivalent gas.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 96,890mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 112,580mn during the week.

Things to watch out for next week

  • The report on India’s GDP growth, which is due on Tuesday, will be closely watched by investors. Aṣ India’s economic recovery from the Covid-19 pandemic is expected to have stumbled again in the Jan-Mar period.
  • On Monday the US indices are closed on account of the Memorial Day but in the truncated week investors will closely watch the May employment report, monthly vehicle sales, and Federal Reserve’s beige book.
  • The 4QFY22 earnings season is coming to an end. The Automobile companies are expected to release the monthly volume data for May, which will be closely watched. The volatility will likely continue next week amidst results, institutional activities, India’s GDP data, and global cues.

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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27 May

Slow and Steady wins the Race

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

A penny saved is a penny earned.

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

SIP versus EMI.

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

Why SIP matters

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

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

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

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

Asset Multiplier comments:

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

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

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26 May

Targeting revenues of USD 70 mn from exports – Bharat Electronics

Update on the Indian Equity Market:

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

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

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

Asset Multiplier Comments

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

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

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

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

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25 May

Asset Light Model to drive margins – Indian Hotels

Update on the Indian Equity Market:

On Wednesday, NIFTY lost over 200points from the day’s high to close at 16,026 (-0.6%). ASIANPAINT (-8%), ADANIPORTS (-5.6%), and DIVISLAB (-4.1%) dragged the index down. NTPC (+3.9%), HDFCLIFE (+2.9%), and SBILIFE (+1.9%) led the gainers. Among the sectoral indices, FINANCIAL SERVICES (+0.7%), FINANCIAL SERVICES 25/50 (+0.7%), and PRIVATE BANK (+0.3%) led the gainers, while IT (-3.4%), REALTY (-2.9%), and MEDIA (-2.9%) led the losers.

Excerpts of an interview with Mr. Puneeet Chhatwal, MD & CEO, Indian Hotels Company Ltd (IHCL) published in the Economic Times on 24th May 2022: 

  • The Company has launched the Ahvaan (Call to Action) Plan 2025, which is a combination of key strategic imperatives. It remains confident of adding 60 hotels to its portfolio in the next three-and-a-half years, thus reaching the 300th It plans to add more than 400 villas and bungalows to its homestay business.
  • Most of the growth is based on an asset-light model, the management fee incomes and incomes from its old and newly re-imagined businesses like Chambers, home delivery, and homestays will help IHCL increase its margin by another 800 bps. At the end of the business cycle, the company is expecting Pre-Covid margins of 25% to increase to 33%.
  • The backbone of IHCL is the Taj brand, which is complemented by its distribution platform of the selections which has individual properties which are strong names in their respective markets. In addition, there is Vivanta which is an upscale segment.
  • The Ginger business has been re-imagined in the last four years. Qmin, the home delivery, and Ama, homestay businesses are also digital businesses, which will be supported by AI initiatives. IHCL has a separate app that has been very successful in driving more than 50% of the revenue in Qmin and that is the Qmin app. IHCL wants to also move as much as possible with Ama on the digital platform and that will help to grow that brand.
  • Being on the Tata Neu platform which has a loyalty program increases the reach of all of the brands by a significant multiple, which the company would not have been able to achieve on its own.
  • The company is confident that its asset-light model, strict check on corporate overhead, and control of fixed costs have helped it achieve margins above 25% in 4QFY22.
  • Notwithstanding the external shocks, the Company’s brands and their repositioning are driving market share and RevPAR (Revenue per Available Room) up.
  • The supply in the last several years has been constrained and now the demand is beginning to come back both in the corporate and the leisure segments. Leisure domestic has been quite resilient, international is beginning to pick up and government delegations are beginning to pick up.
  • IPL assisted in April and May and when demand goes up and supply stays limited, the rates and the occupancy increases are witnessed.

Asset Multiplier Comments

  • There is an overall recovery in demand for the hotel industry expected in FY23 and FY24, contingent on the virus-related disruptions abating. The pent-up demand coupled with increased priority on the quality of stay post-Covid-19 is expected to propel the industry growth.
  • IHCL with its array of hotels catering to different budgets is expected to be a beneficiary of this recovery, in line with the industry.
  • The management’s asset-light strategy and new revenue-generating avenues bode well for margin and return ratio expansion.

Consensus Estimates: (Source: market screener website)

  • The closing price of Indian Hotels Company Ltd was ₹ 222/- as of 25-May-2022.  It traded at 57x/ 38x the consensus earnings estimate of ₹ 3.9/ 5.9/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 271/- implies a P/E Multiple of 46x on the FY24E EPS estimate of ₹ 5.9/-.

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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24 May

E-Sports to be the new driver of growth – Nazara Technologies

 

 

Update on the Indian Equity Market:

On Tuesday, NIFTY settled lower at 16,125 (-0.6%). DIVISLAB (-6.0%), TECHM (-4.0%), and GRASIM (-3.9%) were the top losers. DRREDDY (+2.0%), HDFC (1.7%), and KOTAKBANK (+1.4%) were the gainers. Among the sectors, MEDIA (-2.6%), IT (-1.9%), and HEALTHCARE (-1.5%) led the losers. FINANCIAL SERVICES (+0.3%), and BANK (+0.1%) led the gainers.

Excerpts of an interview with Mr. Manish Agarwal, CEO, Nazara Technologies with Economic times on 24th May 2022:

  • The company’s revenue mix is an evolving pie chart as it is operating in 5 growth segments viz gamified learning / E-Sports / freemium / ad tech and skill-based real money gaming. All of these areas have a very large Target Audience Market and strong tailwinds based on organic growth momentum and inorganic velocity in different segments.
  • Gamified learning was the largest segment in FY21 and now E-Sports is the largest segment in FY22 the company believes E-Sports has the potential to further evolve if mid-size M&A were to happen in skill-based real money gaming.
  • The online gaming segment has been on the rise for a few years now. In 2020, this segment grew to Rs 79 billion and had a steady growth of 28% in 2021. Even with the lockdown being lifted, this sector has continued to show growth.
  • The Online Gaming sector was valued at Rs 101 billion in 2021, according to an EY FICCI report. The number of esports players doubled from 3,00,000 in 2020 to 6,00,000 in 2021. Additionally, the number of online gamers grew by 8% from 360 million in 2020 to 390 million in 2021, and is expected to rise to 450 million by 2023. The gaming segment is expected to grow exponentially in all verticals including E-Sports for the company.
  • The management expects the online gaming industry to reach 500 million gamers by 2025 and will become the fourth largest segment of India’s M&E sector. It is expected to reach Rs 153 billion at a CAGR of 15%. This growth is expected to be mainly driven by three things: NFTs, Metaverse, and esports.
  • For the next few quarters – the management expects esports to continue to build on the momentum of Q4 and the opening of offline events and the growth of D2C biz with M&A of Wings and Planet Super Hero will be key drivers of growth for the company.
  • The company is present in 5 of the most dominant consumer trends in gaming and will also participate in web 3 so besides this, the management doesn’t think there are any unexplored new opportunity segments. The management’s aim this year is to strengthen leadership in each of the segments that the company operates across emerging markets outside the Indian subcontinent.

Asset Multiplier Comments

  • The online gaming sector is still an underpenetrated segment in India. With increasing internet accessibility and smartphone availability, India offers a largely untapped market in the online gaming segment, which has been accelerated by the pandemic and lockdowns.
  • Being the market leader in this segment, Nazara Technologies is well poised to strengthen its leadership in the E-sports category for the medium term.

Consensus Estimate: (Source: market screener website)

  • The closing price of Nazara Technologies was ₹ 1,200/- as of 24-May-2022.  It traded at 28x/ 21x the consensus earnings estimate of ₹ 43/ 58/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1796 /- implies a P/E Multiple of 31x on the FY24E EPS estimate of ₹ 58/-

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

 

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23 May

Input cost uncertainty here to stay for the next 6 months – Pidilite Industries

Update on the Indian Equity Market:

On Monday, NIFTY having opened in the green, could not sustain the gains and closed at 16,214 (-0.32%). M&M (+4.1%), MARUTI (+4%), and HINDUNILVR (+2.3%) were the top gaining stocks, while, JSWSTEEL (-13.2%), TATASTEEL (-12.3%), and DIVISLAB (-9.6%) fell the most.

Within the indices, AUTO (+1.8%), IT (+1.0%), and CONSUMER DURABLES (+0.84%) were the only gainers while METAL (-8.1%), OIL&GAS (-1.6%), and PHARMA (-1.4%) were the top losers.

Excerpts of an interview with Mr. Bharat Puri, MD, Pidilite Industries (PIDILITIND) with BQ Prime on 19th May 2022:

  • In FY22, Pidilite Industries has grown its revenue by 35% and the 20% volume growth was led by both the consumer as well as the B2B segments. The company had to take a 5-15% price rise throughout different categories of products.
  • Higher input costs have been lowering the margins for the last 12 months. Although the management was expecting softening of input costs from the first quarter of FY23, the unprecedented Russia-Ukraine war will delay it for at least the next 6 months.
  • Even though the company can pass on the higher costs, it will take calibrated pricing decisions while keeping costs tight. Previously, it only passed on about 75% to the extent of inflation and lowered its margins in the short run.
  • There is a strain in demand from rural and semi-urban areas but hopefully, a good monsoon and the government’s front-loading on spending will help the second half. The real estate segment is seeing a revival with hotels and restaurants spending on renovation after the reopening of the economy. Hence revenue is not so much of an issue.
  • The company has gained market share in the last 2-3 years as pandemic advantaged companies with flexible supply chains and having a presence in multiple locations. Also, the company has always focused on volume-led growth over margins as margins can always be regained.
  • In the last 2 years, the Pidilite has put up 10 new facilities and made supply chains much more agile and resilient. Focusing on the next phase of growth, it has 12 more facilities under construction. It has invested heavily in going digital.
  • Going forward, the company will focus on its core categories where it has a market-leading position while venturing into pioneering categories like tile adhesives, epoxy grouts, etc.

Asset Multiplier Comments

  • We believe, Pidilite Industries, a market leader in the adhesive business will fare well against its peers in this high inflationary scenario. With manageable borrowings not denting the free cash flows, the company can further take a hit on the margins if required.
  • Companies dealing in chemicals and allied businesses have been facing a difficult time with back-to-back events like Covid, rampant lockdowns in key raw material producer China, the Russia-Ukraine war, and rising oil prices. Times like these mostly result in the large becoming the larger.

Consensus Estimates: (Source: TIKR website)

  • The closing price of PIDILITIND was ₹ 2,188/- as of 23-May-2022.  It traded at 75x/58x the consensus earnings estimate of ₹ 29/38 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,250/- implies a P/E Multiple of 59x on the FY24E EPS estimate of ₹ 38/-.

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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22 May

This week in a nutshell (16th May- 20th May)

Technical talks

NIFTY opened the week on 16th May at 15,845 and closed on 20th May at 16,266. It made a gain of 2.7% during the week. The index is trading below the 20DMA level of 16,514 which might act as a resistance. On the downside, the 10 DMA level of 16,072 might act as a support. The RSI (44), and MACD turning upward suggests a further possible upside.

Among the sectoral indices, AUTO (+4.8%), FMCG (+4.5%), and REALTY (+4.3%) led the gainers, whereas IT (-2.8%) was the only loser during the week.

Weekly highlights

  • The US indices closed the week in the red as investors worried that inflation and rising interest rates may adversely affect the overall demand and performance of businesses. Broad-based selling led to S&P 500 closing down 3%, Nasdaq 100 by 4.5%, and Dow Jones by 3%.
  • International Holding Company PJSC (IHC) announced the completion of Rs 154bn investment in Adani Group’s companies namely Adani Green Energy, Adani Transmission, and Adani Enterprises. IHC’s investment will support and accelerate Adani Group’s growth plan to supply the country with 45 gigawatts (9% of India’s non-fossil energy) by 2030.
  • The Adani Group has entered into agreements to acquire Swiss cement major Holcim Ltd.’s stake in Ambuja Cements and ACC Ltd as ~ USD 10.5 bn. After this deal, the Adani group will become the second-largest cement maker in the country with a capacity of about 70 Metric tons Per Annum.
  • Maruti Suzuki India has planned to invest Rs 180bn in its new manufacturing facility in Haryana to roll out 1 mn units per annum in 8 years. The first set of vehicles is expected to roll out of the facility in 2025.
  • Indonesia, the world’s largest supplier of palm oil said that it will lift a ban on exports from Monday (23rd May). Indonesian President Joko Widodo said that the decision will take place despite bulk cooking oil being at higher prices than the target, as the government considers the welfare of 17 million workers in the palm oil industry.
  • The Union Cabinet on Wednesday approved the National Biofuel Policy-2018 with several amendments, the major one on advancing the blending target of 20% blending of ethanol in petrol to 2025-26 from 2030 earlier. The policy is intended to help in meeting the target of reducing import dependence on fossil fuels.
  • India’s power ministry said that it would cut domestic fuel supply to state government-run utilities by 5% if they do not import coal for blending by June 15, as officials struggle to address rising power demand. A heatwave pushed power use to a record high and forced India to reverse a policy of slashing coal imports.
  • Data released on Tuesday showed that India’s wholesale price index (WPI) based inflation rose to 15% in April 2022, a double-digit figure for the 13th consecutive month. It has spiked further due to the Russia-Ukraine Conflict, and headwinds arising out of disruption in the global supply chain. Fuel Inflation rose to ~39%, and food inflation was ~8%.
  • FII (Foreign Institutional Investors) continued to be net sellers, selling of shares worth Rs 114,013 mn and DII (Domestic Institutional Investors) continued to be net buyers, buying of shares worth Rs 94,729 mn this week.

Things to watch out for next week

  • The next week’s focus will be on the world economic forum (WEF) to be held in Davos from 22nd May to 26th The key topics that would be addressed during the sessions at WEF include ease of doing business reforms, energy transition, digital economy, startups, emphasis on innovation, and research in the healthcare ecosystem.
  • We expect the markets to remain volatile as investors show the sentiments of fear guided by news related to the Ukraine-Russia war, supply-related constraints, and rising inflation.

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

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19 May

Reducing dependency on two-wheeler segment – Minda Corporation

Update on the Indian Equity Market:

On Thursday, NIFTY settled down lower at 15,809 (-2.7%). HCLTECH (-6%), WIPRO (-5.8%), and INFY (-5.2%) were the top losers. ITC (+3.4%), DRREDDY (+1%), and POWERGRID (+0.4%) were the only gainers. Among the sectors, IT (-5.7%), METAL (-4%), and PSU BANK (-2.7%) led the losers. There were no sectoral gainers for the day.

Excerpts of an interview with Mr. Aakash Minda, ED, Minda Corporation (MINDACORP) with ET Now on 18th May 2022:

  • The company delivered revenue of Rs 9,470mn with an EBITDA margin of 11.4% and this was in line with management guidance of delivering consistent and improved performance.
  • MINDACORP is targeting to grow and perform more than 10-15% above the industry on a quarterly and annually and deliver consistent and sustainable EBITDA in double digits.
  • On Electric vehicles (EV) he said, MINDACORP has a very strong order book. In FY22 the company received a lifetime order book worth Rs 9,500mn and from FY23 it will start contributing to the revenues of ~Rs 700-800mn.
  • MINDACORP’s ~45-50% revenue was contributed by the 2W segment but this segment did not perform well. The company is focusing on diversifying its segments and reducing its dependency on 2W from ~50% to 40-45% and growing in other areas like passenger cars.
  • In FY22 the export revenues stood at 12% of total sales but in FY23 the company expects that the exports will be more than FY22.
  • On geographic expansion, America and Europe are the biggest markets of exports for the company but it is also focusing on entering into newer geographies.
  • In the last two years, raw material and logistics prices have gone up significantly and have impacted MINDACORP, although the company Is doing back-to-back arrangements with the customers the lag persists.
  • The company expects the input costs pressures and semiconductor chip shortage will continue in FY23 which will drag down the growth and profitability of MINDACORP and the overall industry for the upcoming quarters and years.
  • For FY23, it will maintain its CAPEX spend of ~4-5% of revenues and invest in new technology and smarter, futuristic, and advanced products. All the CAPEX will be funded from internal cash accruals.

Asset Multiplier Comments

  • Management’s guidance of outperforming the industry through contract wins in EVs increased revenues from CVs, and export focus will be key positives for the company.
  • Higher input costs, supply chain issues, semiconductor chip shortage, higher fuel costs, and increasing inflationary pressures on consumers are the key risks for the overall auto and auto component industry.
  • We believe Management’s target of reaching 12% EBITDAM by end of FY24E is achievable on the back of premiumization, improved product mix, commercial vehicle pick up, stable copper prices, localization of components, and productivity of labor.

Consensus Estimates: (Source: Market screener website)

  • The closing price of MINDACORP was ₹ 199/- as of 19-May-2022.  It traded at 20x/ 16x the consensus earnings estimate of ₹ 10/ 12.7/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 264/- implies a P/E Multiple of 21x on the FY24E EPS estimate of ₹ 12.7/-

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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18 May

Capex of 2.6 bn pounds to be utilized for electrification operations – TATAMOTORS

Update on the Indian Equity Market:

On Wednesday, NIFTY settled lower at 16,204 (-0.1%). POWERGRID (-4.5%), BPCL (-3.2%), and TECHM (-2.2%) were the top losers. TATACONSUM (+3.1%), HINDUNILVR (2.1%), and ULTRACEMCO (+2.0%) were the gainers. Among the sectors, REALTY (-1.8%), PSU BANK (-1.6%), and CONSUMER DURABLES (-0.5%) led the losers. FMCG (+1.3%), PHARMA (+1.1%), and HEALTHCARE (+0.6%) led the gainers.

Excerpts of an interview with Mr. P.B Balaji, Group CFO, Tata Motors with Economic times on 17th May 2022:

  • In terms of capex plans, the company intends to spend Rs 60bn on Tata Motors and 2.6 bn pounds on JLR, which will be utilised for innovations and to prepare the company for the future as the industry transitions from IC engines to an industry of net-zero commitments. Capex will be used by the company for both traditional and electrification-related operations.
  • Capex will be funded by internal accruals, and the firm will generate free cash flows of over a billion pounds after spending 2.6 bn pounds on capex. The commercial vehicle business of Tata Motors is cash positive, whereas the passenger car division is cash neutral. The TPG transaction was executed to ensure investments in electrification are made on time.
  •  The failure to meet market demand due to the semiconductor shortage is affecting revenues, both at JLR and Tata Motors is expected to result in a loss of contribution, profitability, and operational leverage.
  • As far as China lockdowns are concerned, they have impacted the April numbers for all OEMs that were released on 16th May 2022.
  • The Company’s supply chain has not been directly harmed by the Russia-Ukraine war. They have two vendors in the regions that are being diverted.
  • Interest rate rises will undoubtedly weaken demand in the future as a result of inflation in fuel, commodities, and food. However, from the standpoint of JLR and Tata Motors, the premium market is not facing that challenge.
  • Domestically, the firm hasn’t seen any impact on demand, but it will be watching this closely for the next three to six months to see how the demand plays out.
  • Due to commodities, oil, and the resulting fuel price increase, management has begun to identify a risk of greater inflationary expectations, which might harm the premium sector as well as demand in India.
  • Due to the commodity cost rise, the company has roughly 200 basis points of unrecovered margins, compared to about 540 basis points previously.
  • The company anticipates commodity prices to stay steady at current levels. In April, the company raised its prices. If commodity prices continue to climb, the company will increase prices to protect our margins.
  • Lithium costs have risen as demand for electric cars has grown. The company has taken price hikes which are absorbed by the market.  There is a very attractive equation in terms of the running cost of an electric vehicle vis-à-vis a diesel or a petrol car.

Asset Multiplier Comments

  • As supply-side concerns ease and commodity headwinds settle, Indian business, which was severely impacted by the second Covid wave, could witness some supply-side recovery. The renewed product range in its PV business is expected to lead to market share gains, and it is projected to achieve FCF breakeven by FY23E due to macroeconomic recovery.
  • JLR’s profitability is likely to improve as a result of cost-cutting activities in both variable and fixed costs, improved mix, increased operational leverage, and cost savings from its modular platform.

Consensus Estimate: (Source: market screener)

  • The closing price of TATAMOTORS was ₹ 415/- as of 18-May-2022. It traded at 24x/ 11x the consensus earnings estimate of ₹ 17.0/ 36.4/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 529 /- implies a P/E Multiple of 15x on the FY24E EPS estimate of ₹ 36.4/-

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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18 May

How to Deal with the Behavioural Challenges of Bear Markets

It is at times of severe market stress that investors’ worst behavioral impulses come to pass. Whilst the recent losses in the value of portfolios are undoubtedly painful; the poor decisions that investors will make as a result of the blazing environment will likely prove more damaging to their long-term outcomes.

Against such a turbulent market backdrop, which behavioral issues should investors be most concerned about?

  • Myopic Loss Aversion: Short-term losses are difficult, but they are also an inevitable feature of investing in risky assets. Indeed, the high long-term returns from equities investments are a result of their volatility and the risk of significant losses; in order to reap the benefits, investors must be willing to endure difficult periods. For most investors (particularly younger ones) it makes sense to reframe the issue – rather than markets falling steeply, they should think about the likelihood that long-term expected returns from risky assets are now materially higher.
  • Recency: Obsession with recent and salient issues means that they overwhelm one’s thinking. Whether it is wars, inflationary pressures or coronavirus. This is not to say that such issues are not important but from a long-term investment perspective, they are less vital than one thinks and feels they are at the time.  Investors should make investments such that they would have to leave them untouched and unseen for the next ten years.
  • Risk Perception: Investors are poor at judging risks.  They are prone to ignoring certain threats whilst hugely overstating others. Their judgment about the materiality of risk tends to be driven by its availability (how aware they are of it) and its emotional impact on them. The Russian invasion of Ukraine is a particularly damaging risk for investors because the magnitude of the impact is highly uncertain and it is deeply important.  Investors also need to be clear about what risks they are considering when making an investment decision – is it the risk of short-term losses, the risk of being whipsawed by volatile markets, or the risk of failing to meet their long-term objectives?
  • Narratives: Although investors should be driven by evidence, many of the investment decisions they make are founded on convincing stories.  In times of profound uncertainty, this flawed feature of one’s decision-making becomes highly problematic.  It is incredibly uncomfortable to acknowledge that investors have no clarity around a major issue such as the Russia-Ukraine war; so, they construct stories to relieve their discomfort.  These narratives help them ‘understand’ what has happened, but also, more damagingly, give them undue confidence about what will happen in the future.  It is better to admit not knowing an issue, rather than concocting a story.
  • Overconfidence: In the past three months everyone has become an expert in diplomacy and economics, despite having no previous grounding in the subject.  It is okay to have an opinion, but the vast majority of people are guessing, and nobody knows the near-term market or economic impact of the war.  Investors shouldn’t make investment decisions that suggest they do.

In these environments, making sensible long-term investment decisions is highly likely to leave one looking foolish in the short term. This doesn’t mean one should not make them.  The advantage of being able to invest for the long-term is at its greatest when it is the hardest thing to do.  The only way to benefit from this is to have a sensible investment plan that is clear about objectives and the decision-making process.  Sticking with this through tough times can provide a major behavioral edge.

Source: How to Deal with the Behavioral Challenges of Bear Markets by Joe Wiggins behaviouralinvestment.com

Asset Multiplier Comments:

  • In these uncertain times, the only thing investors can control is their investment process. So, investors should try not to get consumed by immediacy and noise.
  • One advantage of bear markets is that they allow you to buy quality stocks at high margin of safety. Fundamentally good companies tend to perform better in the long run so buying them at cheaper valuations may turn out to be advantageous.
  • Diversifying investments across various asset classes and sectors may help investors contain their portfolio risks.

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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