Tag - margins

Best Demand Environment in a Decade – Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY closed lower at 18,211 (-0.3%) dragged by MEDIA (-2.0%), METAL (-1.5%) and PRIVATEBANK (-1.4%). PSU BANK (+2.1%), IT (+1.0%) and PHARMA (+0.9%) were the gaining sectors. The top gainers in NIFTY50 were ASIANPAINT (+4.1%), UPL (+3.8%), and DIVISLAB (+2.3%). The top losers were AXISBANK (-6.5%), BAJFINANCE (-4.8%), and ONGC (-3.5%).

Edited excerpts of an interview with Mr. C P Gurnani, MD, and CEO of Tech Mahindra with CNBCTV18 on 26th Oct 2021:

  • The company is committed to the high growth trajectory over the full year of FY22, which resulted in its highest ever sequential growth in a decade. Every business segment has reported sequential growth in Q2FY22.
  • The Company has a best-in-class geographic mix with North America contributing less than 50%, Europe contributing 25%, and the Rest of the World Contributing 25%, with a geographical presence in 90 Countries. The company is well diversified in terms of geography.
  • The Company increased its guidance of around 500-600 Mn USD in Deal wins to 750 Mn to 1 Bn USD over the next few quarters, on the back of a robust deal pipeline and sustained growth in the demand environment.
  • The Company plans to improve its margins by keeping control on sub-contracting costs which are at historically high levels. Utilisation has reduced due to fresher intake in the last quarter, which the company expects to improve over time.
  • Cloud Migration and 5G are the biggest drivers of growth in new deal wins. There’s a huge movement in the legacy to digital business which is expected to continue over the next few quarters.
  • The company made two acquisitions during the quarter- Loadstone and WeMake website. Loadstone has revenue of about 35 Mn USD and is EPS accretive, the other acquisition was IP Driven and is insignificant to the topline.
  • Current levels of attrition are hurting the demand fulfillment of the company and the company plans to reduce attrition by shifting to tier-2 cities and new HR Policies.

 Asset Multiplier Comments

  • The management commentary of continued strength in end demand aided by significant deal wins, and healthy deal pipelines driven by 5G and cloud will help the company sustain its revenue growth guidance.
  • Attrition and supply-side issues are the biggest headwinds for IT Companies. The company’s bottom-line can only see sustained growth if these challenges are dealt with in the upcoming quarters.

Consensus Estimate (Source: market screener website)

  • The closing price of Tech Mahindra was ₹ 1,568/- as of 26-October-21. It traded at 25x/22x/19x the consensus EPS estimate of ₹ 64/73/81 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,703/- implies a PE multiple of 21x on FY24E EPS of ₹ 81/-.

 

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

Organic growth to sustain as guided, no big bang acquisitions planned– HCLTECH

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended its 7-day winning streak to close at 18,419 (-0.3%), dragged down by REALTY (-4.7%), PSUBANK (-3.7%), and FMCG (-3.2%). The sectoral gainers were IT (2.2%), and FINANCIAL SERVICES (0.2%). Among the stocks, TECHM (+4.3%), LT (+3.3%), and INFY (+1.8%) led the gainers while ITC (-6.3%), TATAMOTORS (-4.9%), and EICHERMOT (-4.5%) were the top laggards.

HCLTECH missed the street estimates in the declared earnings for the quarter ended 30th September 2021. Mr. C Vijayakumar, Chief Executive Officer, and Mr. Prateek Aggarwal, Chief Financial Officer at HCL Technologies discussed the quarter gone by and reaffirmed its annual FY22 guidance in an interview with CNBC-TV18 on 18th October 2021:

  • The Products and Platforms business has been a laggard in FY22, with quarterly slippages affecting the guidance of the segment but the impact is immaterial to the top-line growth, where the company has reaffirmed its EBIT margin guidance of 19-21%.
  • Q2FY22 was the best quarter for the company with unprecedented growth in client mining, large deal wins, and total headcount. The company has introduced a formal dividend pay-out policy on the back of its commitment to rationalise capital allocation.
  • The Company has rolled out the first tranche of wage hikes in Q2FY22 and expects the second tranche to be rolled out in Q3FY22. It expects the slippages in the Products and Platforms business to be recovered in the upcoming quarter.
  • The company had a track record of a high dividend pay-out until FY20. With a significant outflow due to an acquisition, the pay-outs were subdued over the past few quarters. With a recovery in free cash flows and demand from investors, the company has decided to come up with a formal dividend policy with higher pay-outs.
  • The current demand environment has established momentum in the organic business. The company plans to focus on executing current demands rather than go all-in after a major acquisition. The company may add small tuck-ins to expand capabilities or geographies.
  • In Q2Fy22, the company had a strong deal win rate. The pipeline in Q1FY22 was at the highest level ever, it slightly moderated because the company closed a lot of deals.
  • The pipeline has a good mix of mid-size and large deals. There is also a lot of momentum in existing accounts, where customers are ramping up on several digital initiatives, with smaller ticket transformational projects are being taken up by the company.
  • The company expects to exceed its initial guidance on hiring 20,000-22,000 freshers on the back of robust demand and backfilling attrition in the recent quarters.
  • Momentum is seen across all verticals with BFSI and Manufacturing being the leaders. The manufacturing vertical is seeing an uptick in engineering services with various transformational deals and projects being undertaken.

 

Asset Multiplier Comments

  • COVID-19 pandemic has unmistakably created a paradigm shift in the ITES Industry, with a strong focus on digitisation around the world across both size and verticals will result in a high growth period for the industry.
  • HCL Tech like its peers will also continue to face supply-side crunch and attrition problems. The situation is expected to improve over the next few quarters which will help to reduce the margin pressures.

Consensus Estimate: (Source: market screener website)

  • The closing price of HCLTECH was ₹ 1,232/- as of 19-October-2021. It traded at 25x/ 22x/20x the consensus earnings estimate of ₹ 49/ 56/ 63. for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1360/- implies a PE multiple of 22x on FY24E EPS of ₹ 63/-.

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.”

Recovery on cards, high volume growth ahead – Marico

Update on Indian Equity Market:

On Wednesday, markets ended flat with Nifty closing 9 points lower at 17,354. KOTAKBANK (+3.6%), POWERGRID (+1.8%), and GRASIM (+1.6%) were the top gainers on the index while DIVISLAB (-2.4%), NESTLEIND (-2.4%), and WIPRO (-1.7%) were the top losers for the day. Among the sectoral indices, BANK (+0.8%), PRIVATE BANK (+0.7%), and CONSUMER DURABLES (+0.7%) were the top gainers, while IT (-0.8%), MEDIA (-0.6%), and AUTO (-0.5%) were the laggards.

Excerpts of an interview with Mr. Saugata Gupta, MD, and CEO at Marico on CNBCTV18, dated 07th September 2021:

  • Marico’s portfolio is concentrated on items of daily use, which saw a faster recovery in June itself. The entire FMCG sector is witnessing volume recovery due to its inherent nature and the company expects 8-10% volume growth for H2FY22. 
  • The company expects a muted 3rd wave if it occurs on the back of rapid vaccinations and an adequate monsoon which will help demand to improve significantly.
  • The only issue that the company expects to face is rising inflation in its input costs. However, the company believes this won’t persist beyond Q3FY22 and that it will see an eventual softening in raw material prices.
  • The company expects that it’ll meet its revenue targets of Rs. 4.5-5 bn in FY22 and double them to Rs. 8.5-10 bn by FY24 on the back of strong growth drivers like diversification and premiumisation. 
  • The company is on track to meet its diversification targets, with the discretionary food segment demonstrating robust recovery. Now the company plans to focus on premiumisation in Personal Care and digital brand growth.
  • Digital Brands are an important segment for the company. Its recent acquisition of Beardo Brand is now fully integrated, and the company plans to expand into a couple of more digital brands either organically or inorganically.
  • The worst margin pressure for the company is over as Copra prices (a key raw material for the company) have settled down. The company expects vegetable and other oil prices to cool off towards Q3FY22 and EBITDA margins to reach a comfortable 19-20% level.

Asset Multiplier Comments:

  • The food and FMCG Industry has adapted to the pandemic imposed changes. Despite the pandemic, the volumes have improved and may recover sharply soon with further unlocking. With an expanding product portfolio, the growth rates may be significantly higher.
  • Marico has an established portfolio, brand awareness with consumers, and a focus-induced approach to premiumisation which it can leverage to expand volumes to grow further and deliver value to shareholders.

Consensus Estimates (Source: market screener website): 

  • The closing price of Marico was ₹563/- as of 08-September-2021.  It traded at 56x/47x/40x the EPS estimates of ₹10/ 12/ 14  for FY22E/23E/24E.
  • The consensus price target is ₹ 600/- which trades at 43x the EPS estimate for FY24E of ₹ 14/-

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.”

 

Price hikes neutralised material price increase – Berger Paints

Update on the Indian Equity Market:

On Wednesday, Indian stocks recovered from sharp declines and closed the session almost unchanged. The Nifty50 ended marginally higher at 16,282 led by TATASTEEL (+4.0%), JSWSTEEL (+3.5%), and IOC (+2.5%). SHREECEM (-2.1%), KOTAKBANK (-1.9%), and SUNPHARMA (-1.8%) led the laggards. Among the sectoral indices, METAL (+3.1%), OIL & GAS (+1.2%), and PSU BANK (+0.5%) led the gainers. PHARMA (-1.5%), PRIVATE BANK (-0.7%), and BANK (-0.6%) led the laggards.

Excerpts of an interview with Mr. Abhijit Roy, MD & CEO, Berger Paints (BERGEPAINT) with Economic Times on 10th August 2021:

  • April and May months were impacted due to the lockdown restrictions. In June and July, demand bounced back to normal. Demand is likely to remain strong in the subsequent months.
  • The Company has taken price hikes in the water-based paints which contribute to a bulk of their sales. This hike neutralised the entire raw material price increase. In solvent-based enamel paints, they are yet to pass on the entire price increase. In industrial paints, negotiations are ongoing and expected to be finalised soon.
  • Some erosion in terms of gross margin is expected to be made up by cost savings and BERGEPAINT expects to retain the current level of margins.
  • The price increase is about 5-6%, taken in stages. Despite the discretionary nature of their products, demand hasn’t really been affected.
  • The revenue from new construction projects declined in FY21. With the easing of restrictions, there has been a surge in new construction projects. New construction projects and repainting are contributing to overall growth in the business.
  • The inventory levels are low at the company level. With every price increase, there was an increase in dealer-level inventory.
  • BERGEPAINT has always welcomed competition. The company has its own strengths and built its own network over time. Brand building takes a long time in the paints category, and BERGEPAINT continues to maintain its market share.

Asset Multiplier Comments

  • BERGEPAINT 1QFY22 results beat street estimates as the impact of lockdowns was not as severe as anticipated. Most companies have been bearing the brunt of higher crude oil prices. BERGEPAINT was no exception and reported margins were lower sequentially.
  • Though near-term headwinds remain due to higher raw material prices, we believe BERGEPAINT to benefit from rising distribution reach, a strong presence in urban markets, and calibrated pricing.

Consensus Estimate: (Source: market screener website)

  • The closing price of BERGEPAINT was ₹ 820/- as on 11-August-2021. It traded at 88x/ 71x/ 59x the consensus earnings estimate of ₹ 9.3/11.5/13.8 for FY22E/ 23E/ 24E.
  • The consensus target price of ₹ 696/- implies a PE multiple of 50x on FY24E EPS of ₹ 13.8/-.

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.”

Volume recovery on cards, Margins to improve in H2FY22: Marico

Update on Indian Equity Market:

On Tuesday, markets ended higher with Nifty closing 246 points to close at 16,130. TITAN (+4.0%), HDFC (+3.8%), and INDUSINDBK (+3.5%) were the top gainers on the index while JSWSTEEL (-0.8%), SHREECEM (-0.3%), and BAJAJ-AUTO (-0.3%) were the top losers for the day. Among the sectoral indices,  FMCG (1.7%), FINANCIAL SERVICES (1.7%), and AUTO (1.6%) were the top gainers, while MEDIA (-0.8%), METAL (-0.1%) were the only losers.

Excerpts of an interview with Mr. Saugata Gupta, MD & CEO, Marico on CNBCTV18 dated 2nd August 2021:

  • 1QFY22 began with the momentum that was handed over from the last quarter of FY21. May sales were affected due to the 2nd wave of lockdown. Recovery was seen in June, and supply-side issues are slowly improving.
  • Growth rates are improving drastically in the South, which is the company’s stronghold. Barring major disruptions, the company expects to deliver 8-10% volume growth.
  • Gross margins declined both sequentially and YoY. This was due to raw material costs pressure, both in copra and vegetable oil-based products. The company took price hikes which resulted in less pressure on margins.
  • The company expects Copra prices to come down and some deflationary easing on margins and hopes to record 19%+ margins for the rest of the year. 
  • The company makes lower gross margins in the food business and expects margins to improve with scale. The company expects volumes to grow in soya, honey and oodles, and add around 100 crores to the top line.
  • The company’s focus is to add volume growth and expects margins to grow with scale. However, the company expects more product diversification over the next 4-5 years.

 

Asset Multiplier Comments:

  • The food and FMCG Industry has adapted to the pandemic imposed changes. Despite the pandemic, the volumes have improved and may recover sharply soon with further unlocking. With expanding product portfolio, the growth rates may be significantly higher.
  • Marico has an established portfolio and brand awareness with consumers which it can leverage to expand volumes to grow further and deliver value to shareholders.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of Marico was ₹544/- as of 03-August-2021.  It traded at 54x/45x the EPS estimate of ₹10/₹ 12 for FY22E/23E.
  • The consensus price target is ₹ 560/- which trades at 47x the EPS estimate for FY23E of ₹ 12/-

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.”

Double-Digit revenue growth expected in FY22 – Mindtree

Update on Indian Equity Market:

On Thursday, markets ended higher with Nifty closing 70 points to close at 15,924. HCLTECH (+5.0%), L&T (+3.7%), WIPRO (+3.0%) were the top gainers on the index while ONGC (-3.0%), EICHERMOT (-1.3%) and BHARTIARTL (-0.9%) were the top losers for the day. Among the sectoral indices,  REALTY (+4.2%), IT (+1.3%), and BANK (+0.7%) were top gainers, while AUTO (-0.4%), MEDIA (-0.4%), and PSUBANK (-0.3%) were the losers.

Excerpts of an interview with Debashis Chatterjee, MD, and CEO of Mindtree on CNBCTV18 dated 14th July 2021:

  • Robust Deal Pipeline and order book growth was seen and more renewals led to an increase in the scope of the value of the deals and the new deal wins have been characterised by multi-year long-term deals and not just project-based deals.
  • The company’s strategy of 4x4x4 across 4 of its major service lines is helping the company cross-sell and upsell a lot of the services in the existing deals in its 4 service lines of Customer Service, Data Analytics, Cloud Management, and Enterprise IT.
  • The company has guided for double-digit revenue growth of around 20% and improved EBIT margins in FY22. It hopes to achieve this as a result of the foundational changes in cost efficiencies it has done over the last 2-3 years.
  • Quarter specific and client specific headwinds may occur on the margins front. With the opening up of client businesses and increase in revenue growth aided discretionary spending, the company expects a topline growth as well.
  • The company is rolling a subsequent wage hike in Q2FY22 to deal with high levels of attrition currently faced by the industry. The company plans to undertake significant outreach programs with its personnel to manage attrition.
  • BFSI is seeing significant revival and the company expects its client base and deal wins to grow over the next few quarters after covid-induced consolidations. As far as the Travel Sector is concerned the effects of the pandemic are still looming. Full recovery may take some quarters, new contactless business models may help the company with new deal wins as the clients reimagine their business models.

Asset Multiplier Comments:

  • All Indian IT companies are enjoying the tailwinds arising out of the pandemic. Mindtree is well poised to grow further due to growth in upcoming technologies.
  • The Company is making efforts to deal with the issue of rising attrition. The rising attrition is a result of a talent war in the Indian IT Industry due to the low supply of skilled professionals.

Consensus Estimates (Source: market screener website): 

  • The closing price of Mindtree was ₹ 2,732/- as of 15-July-2021.  It traded at 33x/30x/25x the EPS estimate of ₹ 84/ ₹ 92/ ₹ 108 for FY22E/23E/24E respectively.
  • The consensus price target is ₹ 2,830/- which trades at 26x the EPS estimate for FY24E of ₹ 108/-

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 robust demand but need to watch for supply issues– Galaxy Surfactants

Update on the Indian Equity Market:

On Thursday, Nifty snapped its two-day losing streak to end at 15,738 (+0.7%). Among the sectoral indices, MEDIA (+4.6%), REALTY (+3.3%), and PSU BANK (+2.4%) led the gainers while AUTO (-0.1%) was the only sectoral loser. Among the stocks, BAJFINANCE (+7.7%), BAJAJFINSV (+3.8%), and SBIN (+2.6%) led the gainers while BAJAJ-AUTO (-1.0%), EICHERMOT (-0.7%), and UPL (-0.7%) led the losers.

Excerpts of an interview with Mr. U Shekhar, Founder, and MD, Galaxy Surfactants (GALAXYSURF) with CNBC TV-18 on 9th June 2021:

  • Operating margins have gone down in 4QFY21 due to a sharp increase in raw material prices. As a result, revenue increase has been in direct correlation with the increase in material prices.
  • Overall, for the year sales volume growth was ~5.2% with specialty care products growing 15.7% in 2HFY21 over 1HFY21. Performance surfactants volume grew ~8.8% in FY21.
  • FY21 and FY22E are going to be focused on mitigating supply chain disruptions. Demand will be strong with a focus on GALAXYSURF’s response to customers’ supply chain requirements.
  • New products have been launched and expect EBITDA per ton to increase sequentially.
  • The delay in the arrival of raw material along with sustained higher freight costs remains a concern for the regular availability of raw material.
  • There could be certain costs to maintain an inventory that might have a marginal impact on margins.
  • FY21 was a ten months performance, especially for India. The US and Egypt business was not impacted as much, in terms of operations. The growth in terms of specialty care was in 2HFY21 when customers’ demand improved. With the introduction of new products in FY22, they are confident of additional revenues from new customers. A 6-8% volume growth is expected.
  • International sales have remained stable at ~65%. Mr. Shekhar expects a ratio of 65-35/67-33 for international and domestic sales.

 

Asset Multiplier Comments

  • The Company has given a Capex guidance of Rs 1.5bn for FY22, with a large part to be spent on the specialty care portfolio. The ongoing capex projects are expected to be completed in 1HFY22, resulting in the introduction of new products, which will aid volume growth post 2HFY22.
  • With clients’ focus on reducing carbon footprint, the launch of new green products will strengthen the Company’s market position in specialty care products.

 

Consensus Estimate: (Source: market screener website)

  • The closing price of GALAXYSURF was ₹ 3,061/- as of 10-June-2021. It traded at 34x/ 30x the consensus earnings estimate of ₹ 89/102 for FY22E/FY23E respectively.
  • The consensus target price of ₹ 2,742/- implies a PE multiple of 27x on FY23E EPS of ₹ 102/-.

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 a demand recovery once restrictions are lifted – Blue Star

 

Update on Indian Equity Market:

On Monday, markets were on the rise, with Nifty increasing 128 points to close at 14,950. COAL INDIA (8.2%), UPL (8.0%), and HINDALCO (6.2%) were the top gainers on the index while SHREECEM (-1.9%), BRITANNIA (-1.28%), and ULTRACEMCO (-1.28%) were the top losers for the day. Among the sectoral indices, Metal (4.7%), PHARMA (2.8%), and MEDIA (+2.5%) led the gainers. There were no sectoral losers for the day.

 

Excerpts of an interview with Mr. B Thyagarajan MD of Blue Star with CNBC- TV 18 dated 7th May 2021:

 

  • Till 15-April-21, secondary sales were growing at a healthy pace. The increased restrictions have resulted in the slow down of Air- Conditioning and Commercial Refrigeration verticals.
  • The company feared a washout as evidenced in Q1FY21 but it actually posted a 20% lower compared to its earnings in Q1FY20. The Company hopes sales could normalize by the end of May and sees recovery in the months of June-July owing to a hot extended summer.
  • Blue Star had already hiked prices as of 1st April. As the Company has significant inventories owing to slow down, it doesn’t expect any more margin pressure and expects it to stabilize around 8%.
  • The company witnessed a stellar growth in the pharma-health care sectors across air-conditioning and commercial refrigeration verticals due to covid-19 developments and vaccine transports.
  • The manufacturing sector in both Electro-Mechanical and Air-Conditioning segments showed good growth in Q4FY21. The 1st financial quarter is seasonally focused on residential air-conditioning sees its growth prospects dampened due to lockdowns. 
  • Capacity expansion will be operational in the Wada plant for Deep Freezers by Q2FY22 and another plant is expected to be operational in H1FY23 for Air conditioning in Sri City.
  • It expects pent-up demand to drive residential air conditioning growth by around 10% for FY22 owing to prolonged work from home exposure and reduced spending on other luxuries.

 

Asset Multiplier Comments:

  • The seasonal nature of the company’s demand may impact the performance in the short term. The improved macro factors, longer summers due to climate change present good growth prospects over the long term.
  • The margins have been beaten down due to various factors, we expect pressure to ease off in the medium term.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of Blue Star was ₹ 833/- as of 10-May-2021.  It traded at 44x/ 32x the consensus EPS estimate of ₹ 19/ ₹ 26 for FY22E/23E respectively.
  • The consensus price target is ₹ 790/- which trades at 30x the EPS estimate for FY23E of ₹ 26/-

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.”

 

Plan to cross USD 1bn revenue by FY23 – Laurus Labs

Update on the Indian Equity Market:

The Nifty50 made a comeback in the last hour to end the day a little changed at 14,634. Among the index components, SBILIFE (+5.4%), BHARTIARTL (+4.5%), and ADANIPORTS (+4.5%) ended the day with gains. TITAN (-4.6%), INDUSINDBK (-2.3%), and RELIANCE (-1.9%) ended in the red. METAL (+2.2%), FMCG (+1.1%), and PHARMA (+0.3%) were the top sectoral gainers while MEDIA (-1.4%), PRIVATE BANK (-1.1%), and BANK (-1.0%) led the sectoral losers.

Excerpts of an interview with Mr. Satyanarayana Chava, Founder & CEO, Laurus Labs aired on CNBC TV-18 on 30th April 2021:

  • Laurus Labs recently declared 4QFY21 results, wherein Active Pharmaceutical Ingredient (API) revenue is up 88 percent and formulations are up 61 percent YoY. EBITDA margins reported were 33.4%.
  • They have the capacities, products to be made, and customer demand and expect reasonable growth in FY22.
  • The 30% + EBITDA margin is a benchmark. They will aim to achieve these margins to maintain healthy growth.
  • They continue to invest in infrastructure, investing Rs 7,000mn in FY21. They have earmarked Rs 15,000-17,000 mn for FY22 and FY23 for capex to augment their capacities in all 3 divisions.
  • The growth in API business has nothing to do with manufacturing Covid-19 drugs. The growth came primarily from antiretroviral, oncology and contract manufacturing for other generic companies. So far, there hasn’t been any disruption in the supply chain and no impact is expected from the 2nd Covid wave. There was an increase in logistic cost though.
  • The internal target is to cross USD 1bn in revenues by FY23E. With the capex incurred in FY21 and planned in FY22-23E, there will be a growth in revenues in FY22-23E.
  • The raw material price increase in products such as Paracetamol and Azithromycin was due to higher demand. In the products Laurus labs is manufacturing, the demand has not shot up as it has for the 2 products.
  • They are not passing on any of the incremental costs to customers. Due to covid-19, there was an incremental expense of USD 10mn, which was not passed onto customers.
  • Rather than investing in a one-time product, they are investing in the longer term. There is significant investment being made in the CRAMS business as they foresee sizeable growth in that division.

Asset Multiplier Comments

  • The ramp-up in formulations business is expected to continue over FY20-23E. The execution in the US and EU are crucial to drive the next leg of formulations growth.
  • With a renewed focus on the synthesis segment, with R&D, increase in the number of customers, and addition of capabilities positions Laurus to evolve its business mix over the next 3-5 years.

Consensus Estimate: (Source: market screener website)

  • The closing price of LAURUSLABS was ₹ 478/- as of 03-May-2021. It traded at 22x/ 20x the consensus earnings estimate of ₹ 21.3/ 23.9 per share for FY22E/FY23E respectively.
  • The consensus target price of ₹ 414/- implies a PE multiple of 17x on FY23E EPS of ₹ 23.9/-.

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.”

Expect 20 percent plus EBITDA margins to continue – Mindtree

Update on the Indian Equity Market:

The Indian Equity market indices gained after the Indian government announced that all citizens over the age of 18 can have Covid-19 vaccinations from May 1.  The markets pared morning gains as investors were worried due to the increasing Covid-19 cases in the second wave. Nifty 50 ended at 14,296 (-0.4%).  Among the stocks, DRREDDY (+3.6%), BAJAJFINSV (+3.5%), and HDFCLIFE (+3.0%) ended with gains while ULTRACEMCO (-4.9%), HCLTECH (-3.4%), and HDFC (-3.3%) led the losers. Among the sectoral indices, MEDIA (+3.0%), PHARMA (+1.3%), and AUTO (+1.0%) led the gainers while IT (-1.4%), FMCG (-0.6%), and FINANCIAL SERVICES (-0.6%) led the losers.

Excerpts of an interview with Mr. Debashis Chatterjee, MD & CEO, Mindtree aired on CNBC TV-18 on 19th April 2021:

  • Mindtree reported 4QFY21 quarterly results, with the consolidated net profit reporting a ~54% YoY growth to Rs 3,174 mn due to strong operational efficiency.
  • Two successive quarters of 5percent plus growth instills confidence in the Company in terms of momentum generated by deal closures.
  • The order book stood at USD 1.4 bn as of 31-March-21. The order book was 12% more than the previous year. The pipeline has never been stronger and with the changes done in terms of the 4*4*4 strategy- the execution is going well.
  • They have focused on some of the strategic accounts and focusing on cross-selling and up-selling as a part of their strategy. Considering these factors, they remain confident of delivering double-digit growth in FY22E and maintaining the margins at 20 percent plus.
  • They have added net 1600 employees in 4QFY21. Owing to a strong pipeline and a high demand, Mr. Chatterjee expects hiring to be robust in the next couple of quarters.
  • The war for talent has aggravated in the last couple of quarters. With a focus on cross-skilling of employees, they have been able to contain the attrition.
  • There has been a delay in BFSI deal closures, which are expected to happen in 1QFY22. Given the interest rate regimes, there have been some in-sourcing trends in the banking clients. Post the deal closures in 1QFY22, there is some recovery expected in the BFSI vertical.

Asset Multiplier Comments

  • The commentary on deal signings, consistent margin improvement, and the ability to sustain these improved margins are key positives for the Company.
  • The pandemic accelerated clients’ interest in Data, Cloud migration, and other disruptive technologies, across IT services companies. This is expected to benefit IT services companies for the foreseeable future.

Consensus Estimate: (Source: market screener website)

  • The closing price of MINDTREE was ₹ 2,033/- as of 20-April-2021. It traded at 25x/ 24x the consensus earnings estimate of ₹ 80.1/ 86.1 per share for FY22E/FY23E respectively.
  • The consensus target price of ₹ 1,857 implies a PE multiple of 22x on FY23E EPS of ₹ 86.1/-.

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.”