Tough for industry to crank up quickly: TVS Motor Company

Update on the Indian Equity Market:

On Friday, NIFTY ended up 90 pts (+0.9%) at 9580 levels ahead of the release of GDP data for the January-March quarter of 2019-20 (Q4FY20). Among the sectoral indices, REALTY (4.3%), PHARMA (3.2%) and FMCG (3.0%) were among the top gainers while IT (-0.1%) and MEDIA (-0.04%) were the losers.
IOC (+7.5%), WIPRO (+6.3%) and ONGC (+5.1%) were the top gainers. AXISBANK (-2.3%), BHARTIARTL (-2.3%) and ADANIPORTS (-1.5%) were the top losers.

Edited excerpts of an interview with Mr. Venu Srinivasan, Chairman, TVS Motor Company:

TVS Motor Company Chairman speaks of the challenges ahead while easing the lockdown. Mr. Srinivasan believes the devastation caused by the pandemic is not going to disappear in a hurry

• His comments on COVID-19: It is going to be a very painful period in our economic history. He thinks we have to hunker down and go through it because there is definitely no stop to this infection. The truth is that Covid-19 is likely to stay around for a long, long time to come. Being a fast mutating virus, a vaccine may not be found very quickly either. Yet, the good part at least for now is that it is not so fatal, which means we will learn to get on with our lives and live with it. As he explains, this is information based on over five months of the virus being studied internationally which, in turn, could have played a key role in prompting many countries to ease up their lockdowns.
• During this time, there have been more updates coming in about Covid-19 and many Indian States have decided to open up factories in recent weeks. However, the recovery process will take time, especially when you have clogged all the wheels of the industry with grease which has caked and stuck. Add some rust to this and it is obvious that you cannot just switch it on and expect it to run.
• Srinivasan said that the top priority is to protect factories from accidents and make sure that all safety norms are in place. Right from furnaces to chemical reactors and heat exchangers, everything needs to be reset. Across the country, you have to evaluate the status of the plant and make sure that it is done in a systematic process.
• There are other challenges to contend with as the industry slowly limps back to a state of normalcy. Companies need to cope with the reality that lots of people, including the younger lot, are not turning up for work.
• For those living in containment zones, he advised them to stay there and not come to work since others will be put to risk in the process. However, there are people who are not in the containment zone but are still refusing to come to work because there is pressure from parents, spouses, children, and peers. There is a lot of fear but people are slowly coming in and we will have enough at work in TVS added Mr. Srinivasan.
• The situation is a lot more complex for ancillary suppliers, especially the small ones, categorized as Tier 2/3 vendors. These entities employ a lot of migrant labor who are clearly in no mood to return to the cities in a hurry.
• He also stated that migrants who have gone back with great difficulty to their villages while paying large sums of money. Some have even entirely lost their savings and they are not going to come back just because you say jobs are open from tomorrow.
• In this backdrop, he believes that it will take four to twelve weeks for “this wheel to start up and get running”. It is not as if everybody is going to come to work because factories are open, especially when it involves units which are further down the automotive supply chain. These encompass smaller ancillary suppliers with low value-added manual jobs and the impact will be even more significant for them. In and around Chennai, continues Srinivasan, there is a large migrant population in these small and medium auto ancillary units. Likewise, the construction industry is also “largely migrant-driven” and a major provider of employment.
• Given the situation, whatever we do, the industry cannot crank up that quickly. And once we crank up, he is not sure if demand is going to come back that quickly either said Mr Srinivasan.
• In other words, it is not just a question of production but also of demand which will take a few quarters coming through the system.
• He said that it is anybody’s guess if it will be two or three quarters even while pessimists are talking of six quarters. We have to see it day by day.
• No wonder he describes this as “an unprecedented situation” where the whole world has been compelled to opt for a lockdown. India was no exception to the rule either.
• He also added that when Covid first struck, there was nothing known about it and we had to take drastic action to protect our society. A few months have gone by and serious studies have shown that there is going to be no quick breakthrough in a vaccine.
• The good news for India is that the fatality rate is very, very low, unlike North America or Europe which have seen huge losses of lives. The next step, according to Srinivasan, is to evaluate the cost of livelihoods lost versus lives lost and the right thing to do now is to gradually and selectively open up the economy.
• However, this has to be done with care, especially if there is a big spread and hence the need for a phased/gradual manner he said. It is also clear now that it is better to quarantine the vulnerable part of the population rather than the whole country.
• WFH positives: From TVS Motor’s point of view, the entire exercise of working from home (WFH) has had some interesting positives. He observed a lot of staff functions that are not needed any more. Similarly, area and regional offices are not needed either since many of the people can work from home elaborated Srinivasan.
• Likewise, travel can reduce by up to 50 per cent on an average, especially air travel, which will come down dramatically. As he puts it, there is so much time lost going to the airport, being screened amid tight security before flying out and then spending time on the road all over again before reaching the final destination. We now realise that any time we went to meet someone for an hour, we ended up travelling seven hours from Chennai to either Mumbai or Delhi. Now, with digital taking over in the Covid-19 world, many meetings can be done comfortably online. Yet, it is not as if the physical part will be taken over completely since we also need to see people in board meetings and their body language, especially if someone is objecting to a certain proposal.
• He further added that there is the limitation of video conferences, where one only sees the person who is speaking. All meetings cannot happen online.
• According to Srinivasan, it is also difficult to predict all the changes that will happen in a post-Covid world. One school of thought subscribes to the belief that everyone will be hesitant to travel by public transport and private ownership of cars and two-wheelers will grow.
• From Srinivasan’s point of view, the positives will be better hygiene standards at least till the fear lingers and some paranoia persists. Likewise, he adds, personal space/distancing will grow with hugging and physical displays of affection taking the backseat.
• On the business side, digital buying of vehicles will increase and customers will be happier to check out road tests, spec comparisons and reviews online before zeroing in on a certain car or two-wheeler. This will save needless trips to dealerships.
• There has been a lot of debate on the excessive dependence on China as a single supply point for sourcing components especially during the pandemic. More recently, geopolitical tensions have peaked with the US, Australia and some European nations clearly livid with China for, what they feel, its alleged role in unleashing Covid-19 on the world.
• According to Srinivasan, long supply chains are going to be suspect going forward and manufacturers will have to produce some significant quantity in the free trade region where they will be selling products. For instance, this does not have to be the US, but Canada or Mexico.
• He cites the example of TVS Motor which, two years ago, decided to go in for a de-risk strategy in sourcing from China. There was no Covid-19 in sight then but many of its Chinese suppliers relocated to India following a carefully thought out plan.
• He said that they felt that there were a dozen parts which came largely from China. Even if the value was merely 10-12 per cent, it just meant that a bike could not be produced without them. They took a decision that they had to be made here and it really helped them.
• While the lockdown pretty much ensured that the wheels of industry came to a grinding halt, the fact remained that the China shutdown was no threat to our production at all. This was not true for other automakers, who felt the pinch when supplies from China were cut off.
• With Covid-19, the need to produce closer to home has also become more pronounced. From the industry’s point of view, the pandemic has posed a huge risk in terms of wreaking havoc across the supply chain. Shutting down borders, logistics, transport and so on have only made the situation more complex in India.
• The good part is that the lockdown has seen cleaner air and rivers, which only reinforces the need to keep this going even after economic activity resumes optimally in the coming weeks. Srinivasan thinks this is also a good opportunity for the Centre to spend more on the Swachh Bharat Mission where 20 cities, for instance, can be earmarked for a zero pollution drive.
• He stated that we need rigid enforcement of laws in sewage treatment. Small industries were releasing untested sewage and this is a wakeup call for the country to take Swachh Bharat seriously in terms of recycling, cleaning and reuse.
• For the auto sector which has made big investments in Bharat Stage-VI emission standards, the key is to continue the effort towards cleaner mobility. He informed that there was some degree of over-enthusiasm to go all electric in two years, which is just not feasible.
• It is his view that the world will take a couple of years to get back to normal in an L-shaped, and not V-shaped, recovery curve. He sees this situation as an opportunity to reset use of people, buildings, energy, travel and everything in life. How much less can we live with in terms of eating out, having simpler food, not buying as many clothes or having as many haircuts!!

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

• The closing price of TVS Motors was ₹ 337/- as of 28-May-20. It traded at 33.1x/21.6x the consensus EPS estimate of ₹ 10.1/15.4 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 355/- implies a PE multiple of 23x on FY22E EPS of ₹ 15.4/-.

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.”

Cash flow will be a challenge for the hospitality industry – Prestige Group

Update on the Indian Equity Market:

On Friday Nifty closed 1.9%higher at 9,490. Among the sectoral indices Auto (+3.7%), Media (+3.6%), and PVT Bank (+2.79%) closed higher. PSU Bank (-0.4%) was the only sector that closed lower.ZEEL (+9.6%), Eicher Motor (+7.3%) and L&T (+5.8%) closed on a positive note. Wipro (-0.9%), ITC (-0.6%) and CIPLA (-0.5%) were among the top losers.

Excerpts from an interview of MrZaid Sadiq,Executive Director, Prestigegroupwith ET Now:

  • Before the crisis hit, the Indian hospitality industry along with tourism was one of the key segments driving the growth of the services sector in the Indian economy.
  • The pandemic and lockdown has brought things to a standstill and the hospitality industry is taking stock and reinventing them to successfully revive the sector in the post Covid world.
  • Speaking about the long term effect of Covid-19 on the industry he saidgiven the dynamic and the unprecedented nature of this global crisis, it is expected to witness the ripple effects of Covid-19 across socio-economic sectors for at least another year.
  • There is a hope to begin the journey towards recovery by June 2020 – provided India manages to flatten the corona virus curve.
  • Speaking about the post covid-19 strategy to garner business, he added thatthe pandemic is changing the world, and businesses that are able to come up with innovative solutions to offer the right customer experience will be in a position to seize the opportunity and accelerate the recovery journey.
  • The company is working closely with domestic partners and collaboration will be the key strategy. It will focus on the home-grown business; the ideal revenue stream will be Food & Beverage, including catering.
  • The focus on room business will be back after the economy stabilizes.
  • Speaking about the government, he saidthe Indian government has done a remarkable job of combating the global outbreak, the exact trajectory of which is still unknown.
  • The government should consider extending the option of delaying of loan repayment / EMIs to business entities and slashing GST rates as cash flow will be a challenge for hospitality industry.
  • The Covid-19 pandemic has taught us the importance of business agility, disaster preparedness, collaboration and compassion. The company is finding innovative ways to cut costs, manage unknown risks and work with fewer resources.

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

  • The closing price of Prestige Estate Projects was ₹ 145/- as of 28-May-2020.  It traded at 12.3x/ 10.75x the consensus Earnings per share estimate of ₹ 11.7/13.5 forFY21E/ FY22E respectively.
  • The consensus average target price for Prestige Estate Projects is ₹ 318/- which implies a PE multiple of 23.5x on FY22E EPS of ₹ 13.5/-

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.”

 

 

Need more clarity on the extension of the moratorium: Sanjiv Bajaj, Bajaj Finserv

Update on Indian equity market:

Ahead of the monthly F&O expiry session, the Nifty rallied 3.2% (286 points) largely on the back of banking stocks to close at 9,312.  Within the index, only eight stocks closed lower with SUNPHARMA (-2.0%), ULTRACEMCO (-1.5%) and ZEEL (-1.0%) being the biggest losers. Among the winners, AXISBANK (14.2%), ICICIBANK (8.9%) and WIPRO (7.1%) were the highest gainers. Within the sector indices, PVT BANK (7.5%),  BANK (7.3%) and FIN SERVICES (5.9%) were the highest gainers whereas PHARMA (-0.2%) and MEDIA (-0.1%) were the only sectors that closed in the red.

Excerpts from an interview with Mr Sanjiv Bajaj, MD & CEO, Bajaj Finserv aired on  ET NOW on 27th May 2020:

 

  • This pandemic has put the entire economy in a coma because both the demand as well as the supply side has stopped working. He further mentioned that the country needs to get out of lockdown as soon as possible. 
  • Reserve Bank of India (RBI) has taken significant steps and has been quite proactive in the last few months. There is a need to stimulate the demand side as well to balance the equation. People need to be given the confidence to start spending and buy things sensibly. This is how the economy will get back to its feet.
  • According to him, the extension of moratorium was not necessary. For the first three months, the moratorium was understandable as the economy was frozen. The second three-month moratorium needs to be better calibrated. There are still clarifications that a number of companies including Bajaj Finance (a subsidiary of Bajaj Finserv) are pursuing. He would prefer allowing a one-time restructuring which gives the option to the lender to decide which truly deserve extension rather than a blanket moratorium.

 

  • He sought two more clarifications from the RBI. Is the second three-month moratorium applicable only to pre-Covid loans or is it available to new loans today? If somebody takes a new loan today, does he not have to pay for three months? He said that if the above two conditions are allowed, this creates a disadvantage for the lenders.
  • Speaking about the borrowing profile, he mentioned that the sources of borrowing for Bajaj Finance have been well-distributed. The Company does not have over-dependence on Banks. Second, the Company sources 20% of borrowings from fixed deposits. Third, the company keeps 4-7% of borrowings into liquid assets where returns are 4-5% instead of a 20% RoE. This is to ensure that the book stays solid. 
  • He further mentioned that Bajaj Finance at a consolidated level has liquidity of Rs 210,000 mn. It probably takes away Rs 3,000-4,000 mn of profits every year but it creates a stronger franchise in many ways mimicking what a bank does. 

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

  • The closing price of Bajaj Finserv was Rs 4,249/- as of 27-May-2020. It traded at 1.9x/ 1.7x the consensus Book Value estimate of Rs 2,157/ 2,495 for FY21E/ FY22E respectively.
  • The consensus target price of Rs 6,054/- implies a PB multiple of 2.4x on the FY22E BV estimate of Rs 2,495/- 

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.”

Demand for home loans will rebound – HDFC

Update on the Indian Equity Market:

On Tuesday, Nifty ended marginally lower at 9,029. Among the sectors, Metal (+2.7%), Auto (+1.5%), and Realty (+1.2%) were the top gainers. IT (-1.9%), Pharma (-1.2%), and Media (-0.2%) were the only losers. JSW Steel (+5.9%), Eicher Motors (+5.7%), and Titan (+5.0%) led the gainers while Bharti Airtel (-5.9%), Bajaj Finserv (-5.1%), and TCS (-3.5%) ended in the red.

Excerpts from an interview with Mr. Keki Mistry, Vice Chairman & Chief Executive Officer, HDFC with BloombergQuint on 25th May 2020:

  • HDFC is offering a moratorium to all the customers. 79 percent of the borrowers have said they do not need it. A higher number of non-individual borrowers have opted for the moratorium compared to the individuals.
  • Since some developers are facing liquidity issues due to the lockdown, HDFC has to give them moratorium. The large developers are able to service their loans, with or without sales. Small and mid-sized developers have asked for the moratorium.
  • HDFC has not slowed down lending and is looking for fresh lending opportunities. In Mumbai and Madhya Pradesh, the offices are not open leading to slower disbursements. The offices which are currently open are working at 33 percent capacity and there will be a slowdown in disbursements during 1Q FY21. HDFC expects that 2Q FY21will be better than 1Q FY21 and consequently, 4Q FY21 will be back to 85 to 95 percent of normal levels.
  • Owning a home continues to be an important aspect of the lives of Indians. The lockdowns imposed in the aftermath of the virus outbreak has forced people to work from home, relying on internet connections and video conferencing apps. This trend could push people to buy larger homes or ones with a separate study room. Joint families could split into smaller units going forward meaning more people will be buying their own houses.
  • In the short term non-performing loans could rise but in the medium-to-long term, NPLs are expected to reduce. They have continued to tweak the credit underwriting model given the current situation.
  • In the affordable housing segment, the average loan size is Rs 17.7 lakh and most of the customers are salaried customers and not self-employed. The risk from job-losses or income cuts and its impact on NPLs is probably higher than in the pre-crisis period. There are co-borrowers to a mortgage, so if one person loses a job or faces a salary cut, they generally still do not default.
  • HDFC will be looking for opportunities to raise money. The liquidity level has been increased from around Rs 6,000 crores last year to around Rs 30,000 crores this year. HDFC has been recently sanctioned Rs 750 crores loan by the National Housing Bank recently.

Consensus Estimate: (Source: market screener website)

  • The closing price of HDFC was ₹ 1,506/- as of 26-May-2020. It traded at 2.8x/ 2.6x the consensus book value estimate of ₹ 531/ 574 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 2,406/- implies a PB multiple of 4.2x on FY22E BV of ₹ 574/-.

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

 

Over A Third of NBFC Loan book under Moratorium – Edelweiss

Update on the Indian Equity Market:

On Friday, NIFTY closed in the red at 9,039 (-0.74%). Top gainers in NIFTY50 were ZEEL (+7.1%),
M&M (+4.4) and CIPLA (+3.3%). The top losers were AXISBANK (-5.2%), HDFC (-5.1%) and
BAJAJFINSERV (-4.6%). Top sectoral gainers were IT (+1.4%), Media (+1.2%) and Pharma (+0.8%) and
sectoral losers were Fin service (-3.1%), PVT bank (-2.8%) and Bank (-2.6%).

Excerpts of an interview with Rashesh Shah, CEO, Edelweiss group with Bloomberg dated 20th May 2020:

  • Mr Shah said, “For us and for most NBFCs, about 35-38 per cent of the customers have availed of the moratorium. For the last 18 months, NBFCs have been squeezed for liquidity. Ironically, when we entered January 2020, I felt that liquidity had now been managed. And then Covid-19 happened.”
  • NBFCs have been coping with a liquidity crisis ever since the collapse of the IL&FS Group in 2018.
  • With the Covid-19 pandemic amplifying the economic slowdown, NBFCs are expected to face liquidity and solvency strains again. Moody’s Investors Services expects the moratorium to eventually weaken asset quality and add to liquidity stress.
  • April has been extremely challenging for NBFCs from a liquidity perspective. That was particularly because, for NBFCs, the moratorium was a one-way ride. While they had to offer moratoriums to their own customers, they themselves did not receive similar relief on repayments from banks—sparking concerns of asset-liability and cash-flow mismatches.
  • Non-bank lenders are continuing to repay their loans as scheduled. Most NBFCs have decided not to ask for a moratorium from banks and instead ask for fresh loans, as fresh funding can come on new terms and with a lot of specificity as to what you need.
  • Mr Shah expects the company to pay back Rs 4,000 crore to banks as part of its normal repayment schedule. Their ask is they get these funds back as long-term repo operation bonds, a loan or some other form so that they can maintain their liquidity reserves.
  • Mr Shah said Edelweiss, at any point, maintains at least Rs 6,000-8,000 crore of liquidity reserves. Over the last 18 months, the company has kept between 14-20% of its borrowings as liquidity reserves. That would be around 1.5-2.5 times their three-month repayments, Shah said. “We have been aiming for at least 2 times the three-month repayment as liquidity reserve and banks have seen that most NBFCs have reserves that will last at least till the end of July.”
  • Despite the government’s initiatives for the NBFC sector, Mr Shah believes that non-bank lenders have been treated somewhat unfairly. Increasingly NBFCs have been curtailed in what they can do and cannot do.
  • “The problem NBFCs are grappling with is asset-liability mismatch, when suddenly the commercial paper market and debt market closed down then the bank moratorium issue has come about, all this creates a lot of asset-liability mismatch risk.”, he added.
  • Someone in the system needs to take the ALM risk,” he said. “Banks can take it because they have the RBI backstop. But in the last 18 months, we said NBFCs cannot take it, now we say mutual funds cannot take it, then who will take that risk?”
  • Edelweiss also expects some amount of increase in stress and credit costs. However, since the company does not have a significant retail portfolio, it expects the risks to be limited. Credit cost was at 2% and then they had upped it to 4-4.5% of the book. It will now go to 5%.
  • For the industry though, retail loans will see some stress in the near-to-medium term. Long term, collateralized loans will not see much of an impact. Short term unsecured loans will see a lot of impacts.

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

  • The closing price of EDELWEISS was ₹ 42/- as of 22-May-2020.  It trades at 0.5x/ 0.4x its book value of ₹ 90.2 /100.0 for FY21E/22E respectively.
  • The consensus price target of EDELWEISS is ₹ 99/- which trades at 1.0x the book value of ₹ 100/-

 

The Uncomfortable Truth

Jon wonders on his blog as to what’s the biggest determinant of investing success. Smarts, information, strategy, or skill are all worthy possibilities.

The market naturally triggers emotional responses that lead to mistakes. Those best equipped to handle those triggers are more likely to succeed. That shouldn’t come as a surprise. Most things in life worth achieving require mental toughness to get through the obstacles that are certain to arise. And investing is full of obstacles. For example, markets can trick people into thinking that investing is ridiculously easy. Raging bull markets, especially, create the illusion that you can earn returns without risk and get rich quick. But once the bull market ends, as they all do, the bear market that follows presents investing as a certain money loser. And to add insult to injury, the market spreads bull and bear markets out far enough for investors to forget how the last one ended.

It’s at these opposite extremes, the major turning points in the market, where the right temperament is in short supply but needed most. Successfully navigating major market turns requires a willingness to think and act against the crowd. Stock prices reflect the obvious, not the obscure.

If the crowd believes a bull market will continue, then it’s obviously already priced in. Which means anything that might disrupt that trend is not. It’s not even an afterthought in the most enthusiastic bull markets. But you can’t wait for the disruption to surface because once the trend breaks, once the crowd realizes it, then the selling begins, and it’s too late. So you have to be willing to be early. You have to be able to sell when prices are rising while the bull market seems endless. But you also must be willing to buy when prices are falling, while the bear market appears to only get worse. Both are difficult. (If it were easy everyone would do it. And if everyone did, the market turns would just happen sooner.)

The final twist in this saga is that betting against the crowd usually fails. It’s only at the turning points where it succeeds. Except, bull markets and bear markets don’t come prepackaged with expiration dates. Being invested during the length of a bull market is very profitable. Getting out early, while profits look good, is hard. Because betting against it, will certainly look wrong, but being wrong is costly. And few investors are willing to stomach that.

Jon concludes that to be successful you have to be independent and decisive, with the courage to appear wrong but ultimately proved right. That’s why the greats stand out. That’s the uncomfortable truth.

 

We are deriving far more value by being together than being separate: ITC

Update on the Indian Equity Market:

On Thursday, Nifty ended 0.4% higher at 9,098. The top gainers among the Nifty 50 were ITC (+7.1%), Hindalco (+5.8%) and Asian Paints (+5.1%) while the losing stocks for the day Bajaj Finserv (-3.6%), Bajaj Finance (-2.9%) and NTPC (-2.9%). The gaining sectors for the day were Auto (+2.6%), FMCG (+2.2%) and Metal (+1.8%). The worst performing sectors were Pvt Bank (-0.7%), Financial services (-0.7%) and Bank (-0.6%).

Edited excerpts of an interview with Mr Sanjiv Puri, Chairman & Managing Director, ITC Ltd; dated 21st May 2020 from Retail Economic Times:

 

  • His understanding of the new normal: This current problem is not going away soon and will have to run the businesses and carry on with life and economic activity, taking safety precautions.
  • There are challenges in this current situation because of the impact on economic activity and certain sectors are very sharply impacted. ITC sees a fair amount of opportunities for them, particularly in their FMCG businesses. There is a lot of opportunity in the health, wellness, and nutrition and hygiene space. Consumers trust in the brands will add to the opportunities as well as the current geopolitical situation. There are going to be opportunities for sure, according to him and it is for the Company to be watchful and agile and make the best of the opportunities that fit into their capabilities and strategies.
  • In terms of the government package that is required, he added, one needs to reach out to the most vulnerable section of the society. The largest stimulus that can happen is actually getting back to work and how to adjust to the new normal. The longer one takes to adjust to the new normal, the bigger is the stress and the more resources will be required to pull it out. In order to get back to the new normal and get back economic activity in the new normal, first, the government has to tackle the issues of liquidity.
  • Going forward, India will see some measures to boost consumption. The reforms for the agriculture sector can have a transformative impact over a period of time. But at the same time, those measures are not going to give impact immediately but the medium term, these augur well for the economy.
  • FMCG the sector is slowly getting back to the normal demand levels. The demand varies across the categories. ITC is seeing good demand for staples.
  • The Company is seeing some stress but at an aggregate level for foods and personal care. Mr Puri believes over time, as the capacities scale-up and the distribution and logistics improves further, the opportunities in this category will go up further.
  • There are segments like education and stationery which have been severely impacted for the moment because the sessions of the schools have changed and the business is heavily indexed to the school sessions. But ultimately, children will have to go back to school and students will have to go through education.  So, it is more a timing issue than anything else.
  • ITC Hotels are adversely impacted. ITC hotels are supporting quarantine facilities/ dealing with helping some stranded guests. Most of the hotels are not operational as of now which is in line with the guidelines of the government.
  • The agriculture business of ITC is slowly getting back to normal and is indexed to food consumption, paper and paper board consumption. There is a little bit of lagging but once the economy fully opens up, ITC is hopeful to see more demand for paper boards and packaging.
  • Outlook for ITC 5 years down the line: 10 years back, it was 60% tobacco and 40% non-tobacco. Today, it is actually the other way around; about 60% is the non-tobacco. 80% of the capital employed is in non-tobacco business. 90% of employees are in the non-tobacco business which reflects the kind of investment ITC is making in the non-tobacco segments. This gives headroom for these segments to grow. Given the positioning of the Company, they are confident of expanding their footprints quite a lot in these segments.
  • Outlook for Tobacco Business: The biggest challenge that the tobacco segment faces in India is the threat of the illegal segment. As taxes have been rising, the illicit industry has been rising. Over a period of five-six years, the taxes on cigarettes tripled and at a CAGR level, the tax rate grew at about over 15% whereas the revenue growth was between 4% and 5%. ITC will see some improvement in the business once there is stability in the tax regime.
  • Dividing the two business- FMCG and Tobacco: There are a few things that are advantageous when they are combined as an organisation. ITC is able to leverage a large and robust distribution and logistics highway which are high-cost elements in any company’s operations. Splitting these two segments will mean duplication of resources. At some point of time in future, when each of these businesses is mature, the splitting thing will be revisited. But in today’s context, ITC is creating a lot of value through synergy.
  • The non-tobacco businesses are expected to grow at a much higher rate in the next 3-5 years. There will also be the base effect that must be factored in. But the rate of growth in the non-tobacco the segment will certainly be much faster, according to Mr Puri.

 

Consensus Estimate: (Source: market screener website)

  • The closing price of ITC Ltd was ₹ 188/- as of 21-May-2020. It traded at 15.5x/ 13.5x the consensus EPS estimate of ₹ 12.1/13.9 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 241/- implies a PE multiple of 17.3x on FY22E EPS of ₹ 13.9/-.

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.”

We are all about Made in India, Made for India– Nestle India

Update on the Indian Equity Market:

On Monday, Nifty closed higher (+2.1%) at 9,067. Within NIFTY50, DRREDDY (+5.9%), HDFC (+5.9%), and M&M (+5.7%) were the top gainers, while INFRATEL (-7.0%), INDUSINDBK (-2.6%) and HEROMOTOCO (-2.3%) were the top losers. All the sectoral indices gained in the session led by PHARMA (+4.1%), FIN SERVICE (+3.1%) and MEDIA (+2.4%).

We are all about Made in India, Made for India– Nestle India

Excerpts of an interview with Mr.Suresh Narayanan, Chairman, & MD –Nestle India published in Business Standard dated 20th May 2020:

  • Nestle has not been able to establish contact with all retail partners yet and does not have the exact count of stock in trade channel. As a result, it is difficult to quantify the business impact caused by the lockdown.
  • Nestle’s manufacturing had come to a halt and is gradually being ramped up to 70% of capacity.
  • On being asked whether the loss in business since April 1 could be at least 30%, Mr. Narayanan said that the impact could be higher than that.
  • Narayanan expressed that PM Modi’s call for swadeshi was misinterpreted by some. Nestle India is all about Made in India, Made for India, and serving India and Indian customers. Nestle is operating in India for the last 108 years, employees 7,200 Indians, works with over 100,000 Indian farmers and contributes ~ Rs 36,000 mn in taxes each year.
  • Narayanan observes that consumer preferences are changing. Many consumers may scale down due to poor consumer sentiment- leading to growth in popular products in essential categories. Some consumers may scale up towards safer/ more hygienic products. The shifting dynamics may lead to some product redundancy.
  • The ongoing reverse migration from urban to rural may boost rural market growth.
  • Nestle is working on its product portfolio to identify brands and products with better prospects. This exercise is also leading to a rescheduling of the innovation pipeline, wherein some projects may no longer be relevant. However, the pace of innovation will not slow down. Nestle has launched 50 products in last 3 years and will continue the trend.
  • Some operational issues still persist. Initial challenges like arranging trucks have become less severe. Obtaining permits (e-passes) for interstate transport is still an issue for Nestle. In terms of retail outlets, only 40%-50% have been activated so far.
  • Distribution in smaller towns and markets is better than large centers.
  • This crisis has accelerated e-commerce as a growth engine. Nestle has seen 90% jump in business through e-commerce (from 1.5% share of revenue a year ago to 3% now).
  • Narayanan expressed that he plans to be very conservative in terms of reopening of offices. The branch offices will remain shut for a few more weeks. Only the head office is functioning with a dozen employees vs. the capacity of 600. Even field executives have been allowed to operate only in green zones.

Consensus Estimate: (Source: market screenerand investing.com websites)

  • The closing price of NESTLEIND was ₹ 16,303/- as of 20-May-2020. It traded at 70.8x/ 59.5x the consensus EPS estimate of ₹ 230/ 274 for CY20E/ CY21E respectively.
  • Consensus target price of ₹ 16,464/- implies a PE multiple of 60.1x on CY21E EPS of ₹ 274

 

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.”

 

A big opportunity is beginning to unlock for us in the US: Cipla

Update on the Indian Equity Market:

On Tuesday, NIFTY ended up 56 pts (+0.63%) at 8879 level. Among the sectoral indices, MEDIA (2.0%), AUTO (1.03%) and IT (0.99%) were among the top gainers while PSU BANK (-2.59%), REALTY (-0.7%) and PVT BANK (-0.49%) were the losers.
BHARTIARTL (10.81%), ADANIPORTS (+9.0%) and ONGC (+5.69%) were the top gainers. UPL (-9.78%), VEDL (-2.65%) and RELAINCE (-2.2%) were the top losers.

A big opportunity is beginning to unlock for us in the US: Cipla

Edited excerpts of an interview with Mr. Umang Vohra, Managing Director (MD) & Global Chief Executive Officer (CEO), Cipla:

Our ambition is to dominate the inhaler space across all markets and offer solutions to patients, says Umang Vohra, MD & Global CEO, Cipla.

• His comments on Profit Margins: Company has guided at the beginning of the year and that is standing up at close to 19% range. The fourth quarter is usually off-season for the company and therefore historically, have always been subdued. There are some of the specific one-offs:
o Company was not able to invoice about Rs 2000 odd mn of sales on account of the last week of Covid closure and that is pretty high margin sales. The impact would have been directly on profitability.
o In comparison to the base in the previous year where there was a huge amount of cinacalcet sales, that is not the right comparison for 4QFY20 and for 1QFY21E too.
o Cinacalcet itself had some charges in 4QFY20 as exclusivity has ended.
o In the last six to nine months, a fair amount of cost and effort on the remediation was required for Goa which is now completely in numbers. The remediation effort and work for Goa that is required will finish approximately by June/July, 2020. The charges have largely been taken in 3QFY20.

• His views on sale pick up in the year to come – A pretty solid year is expected on account of Sensipar, Albuterol approval and also esomeprazole granules approval received in the last week of 4QFY20.
• When asked about the US market he informed that US is a 55 mn unit market and with the recent shortage of Albuterol in the US, it moved to a 50-65 mn unit market. On the branded side, it is close to 4 bn in sales across the three brands of Albuterol. It is a very significant and sizable market for Cipla to play in.
• When asked about the main growth drivers going ahead he commented that respiratory franchise might be boosted by another complex inhaler filing. The inhaler opportunity can add to position Cipla as the lung leader. Already, Cipla is number two in terms of both Metered-dose inhaler (MDI) and Dry-powder inhaler (DPI) sold worldwide, just with the number of devices that Cipla sells worldwide in both these categories. Company’s ambition is to dominate this space across all markets and offer solutions to patients which they are not getting today.
• Cipla had albuterol approved that is a great validation for MDI. The trial just finished and a filing is imminent in the next one or two days for the Advair product which is a product that many companies have struggled to get a first part clinical trial approval and Cipla have just passed that.
• Cipla also filed another product which cannot be disclose right now due to IP. It has also filed another product which is again another inhaler in 4QFY20 and have a partnered asset which is another very large category where nobody else is working. That product is at the clinical trials stage with their partner.
• If we combine the above four and the rest of the products that Cipla is likely to do, a big opportunity is beginning to unlock for Cipla in the US and carries a fairly significant value for the company in the long term.
• His views on COVID-19, India and other emerging market business and the process for other prescription drugs: In the first two, three weeks of the lockdown, there was a serious dip because everyone was dealing with the lockdown initially. In week three and four, activity was resumed by doctors, who started interacting virtually with their patients. In the last week, the green and orange zones are opening up and activity is resuming in these areas. Of course, there are sections where the doctors are not meeting as much. For example, dentists and dermatologists because of the risk of this infection being real, are perhaps not meeting as much as interventionists, chest physicians etc. So, it is gradually opening up. As the red zones begin to open up, resumption in activity can be seen depending on the zone.

Consensus Estimate: (Source: market screener website)

• The closing price of Cipla Ltd. was ₹ 594/- as of 19-May-20. It traded at 25.4x/ 21.2x the consensus EPS estimate of ₹ 23.7/28.4 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 623/- implies a PE multiple of 22x on FY22E EPS of ₹ 28.4/-.

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.”

No asset quality challenges in gold loans- Manappuram Finance

Update on the Indian Equity Market:

On Monday, Nifty closed 3.4% lower at 8,823. Among the sectoral indices PVT Bank (-6.9%), Bank (-6.7%), Fin Services (-6.6%) closed lower. ITand Pharma closed marginally higher. Cipla (+5.5%),TCS (+2.5%), and INFRATEL (+2.3%) closed on a positive note. Indusind bank (-9.6%), Zee (-9.5%) and Eicher Motor(-7.9%) were among the top losers.

Excerpts from an interview of MrVP Nandakumar,MD & CEO, Manappuram Finance with ET Now 15thMay 2020:

  • Speaking about 4QFY20 profit jump, Mr.Nandakumar said the main gold business has grown well sequentially and in other businesses the growth is steady.
  • Speaking about provisions he said it is rather as a caution and that is the only reason for the higher provisioning.
  • Collections use to be higher in March-April period in non-gold portfolio, vehicle finance and home finance. But this time, March has been rather dull.From the very beginning, there were signs of lockdown in many places, particularly in places like Kerala. So from the second-third week of March, the collections slowed down. This also led to some increase in the provisioning.
  • Around 70% of branches are operational now and there is good demand for gold loans. At the same time there are lot of redemptions, people want to monetize the gold.
  • The demand for gold is at sub normal levels, as entire demand has not picked up.
  • Guiding for FY21 he said the first one or two quarters the company may not be able to grow gold loans, but there is expectation to grow in third and fourth quarter by 7-8%.
  • Speaking about non gold business share which declined from 34% to 33% on QoQ basis, he saidlast year there were advantages of price as well as demand, and the gold loan growth was much more than what was expected.The company have turned a little more conservative on non-gold business.Also there is some sluggishness in various economic activities.
  • Speaking about asset quality, he saidgold loan currently is around 69% and the company does not see any challenges in asset quality in gold loans. Gold loan tenure is three months and online gold loan is around 60%, even now regular transactions are taking place to the extent of Rs 700-800 crores, the interest collection is also taking place.
  • In other segments like vehicle finance, many of our customers have opted for moratorium. The collections are coming now through the online mode to the extent of 40-45%. Lending is primarily to the lower end that is light commercial vehicles and small commercial vehicles.
  • Another major part of portfolio is two-wheelers and the customer profile is self employed as well as salaried people and the collections are better there.

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

  • The closing price of Manappuram Financewas ₹ 122/- as of 18-May-2020.  It traded at 1.5x/ 1.25x the consensus Book value estimate of ₹ 80/97 for FY21E/ FY22E respectively.
  • The consensus average target price forManappuram Finance is ₹ 153/- which implies a PB multiple of 1.5x on FY22E BV of ₹97/-.

 

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.”