Author - Maitreyee Vaishampayan

All you need to know about Index Funds

When one talks of investing in the equity markets, one aspires to be as successful as Warren Buffett. While many consider him to be their investing ‘Guru,’ he calls investing a simple game that advisors have convinced the public is harder than it is. He has recommended investing in low-cost index funds. So what are these index funds?

An index fund is a type of mutual fund or exchange-traded fund (ETF) that purchases all (or a representative sample) of securities in a particular index. The goal is to match the fund performance as closely as the benchmark it tracks. Some of the most common indices are S&P 500, NASDAQ-100, and Russell 2000. Closer home, we have the Nifty 50 index, S&P BSE Sensex, and Nifty-Next 50.

How do index funds work? Consider an index fund that follows the Nifty Index. There will be 50 equities in this fund’s portfolio, all of which will be distributed similarly. Bonds and equity-related products may both be included in an index. The index fund makes sure to invest in each security that the index tracks.

A passively managed index fund attempts to replicate the returns provided by the underlying index, whereas an actively managed mutual fund strives to surpass its underlying benchmark. A passively managed index fund manager may have to reduce the tracking error as much as possible.

Portfolios of index funds only change significantly when their benchmark indices change. The management of a fund that tracks a weighted index may occasionally adjust the percentage of various securities to reflect the weight of those stocks’ participation in the benchmark. A technique called weighting equalizes the impact of each asset in an index or portfolio.

Why would you invest in an index fund?

The primary advantage of investing in an index fund is the lower management expense ratio compared to their actively managed counterparts. (A fund’s expense ratio includes all the operating expenses such as payment to advisors and managers, transaction fees, and accounting fees).

As index fund managers are focused on replicating the benchmark performance, they do not need to hire research analysts to assist in the stock selection process. As trading is also less frequent, the transaction fees and commission expenses are also lower.

Are there any risks to investing in an index fund?

Yes, like any investment, index funds are also subject to certain risks. First, the index fund will be subject to the same risks as the securities in the index it tracks. Second, there is less flexibility to react to price declines in the securities in the index vis-à-vis a non-index fund.

If the fund does not exactly follow the index, there can also be a tracking error. The performance of an index fund, for example, may not perform as well as the index if it only holds a portion of the securities in the market index.

So, who should consider investing in an index fund?

Now that we know what index funds are, and the pros and cons of investing in index funds, we wonder if index fund investing is right for us.

As index funds track a market index, the returns are approximately like those offered by the index. Hence, investors who prefer predictable returns and want to invest in the equity markets without taking a lot of risks prefer index funds.

The Taxation Aspect

Being equity funds, index funds are subject to dividend distribution tax and capital gains tax. Redemption of index fund units may lead to taxable capital gains. The capital gains earned in the case of a holding period of less than one year is short-term capital gain (STCG) which is taxed at 15%. In case of a holding period of more than one year, an investor would be liable to pay long-term capital gain tax (LTCG). LTCG up to Rs 1 lakh is not taxable, and the amount above that is taxed at the rate of 10% without indexation benefits.

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

This Week in a Nutshell (5th – 9th September)

Technical talks

NIFTY opened the week on 5th September at 17,546 and closed at 17,833 on 9th September.  The index made a weekly gain of 1.7% during the week. On the upside, the upper Bollinger band level of 18,199 might act as a resistance. On the downside, it can take support at the 50-week moving average near 17,137. Even though the RSI of 60 does suggest some caution, in the recent past NIFTY has comfortably traded at a 60+ RSI level.

Among the sectoral indices, PSU BANK (+4.3%), IT (3.5%), and MEDIA (3.2%) led the gainers during the week. AUTO was the only sector that ended marginally in the red.

Weekly highlights

  • The US indices snapped a three-week losing streak despite remarks from the Federal Reserve officials on rising treasury yields. Geopolitical tensions and the US central bank’s aggressive tightening may tip the US economy into recessions were on investors’ minds during the volatile week. The US markets had a truncated week due to Labor Day weekend with the tech stocks and blue chips leading the rally. NASDAQ closed up 4.1%, S&P 500 up ~3.7%, and Dow Jones Industrial Average up ~2.7%.
  • Crude oil prices also remained volatile during the week with the OPEC+ meeting on Monday 5th. To support oil prices, which have fallen due to concerns about an economic downturn, OPEC and its partners, led by Russia, decided on a modest reduction in production. For October, the oil producers will reduce their output by 100,000 barrels per day (bpd), or just 0.1% of the world’s demand. They also concurred that Saudi Arabia, the organization’s dominant member, could call an emergency meeting at any time if volatility continues. Price hikes due to the output reduction would worsen India’s current account deficit.
  • The volatility in crude prices continued after reports that the Biden administration might stop releasing barrels from the US Strategic Petroleum Reserve on the market after October, in an attempt to keep energy prices down that have led to unprecedented inflation. Brent Oil ended the week at USD 92.4/barrel (-0.7%) while Crude Oil WTI (West Texas Intermediate) ended the week down 2.4% at USD 86.1/barrel.
  • After Russia announced that one of its key gas supply pipelines to Europe will remain closed indefinitely, gas prices in Europe increased by 30% on Monday. A leak in the Nord Stream 1 pipeline, according to Russia, will cause it to remain closed beyond the three days of scheduled repair last week.
  • In India, FADA released the data for retail sales of automobiles for August-22. The sales grew 8.3% YoY driven by an increase in vehicle registrations across all major segments. Two-wheeler retail sales grew 8.5% YoY while passenger vehicle sales grew ~6.5% YoY.
  • The National Company Law Tribunal (NCLT) Mumbai panel directed Zee Entertainment to call a shareholders’ meeting on October 14 to approve the merger with Culver Max Entertainment on Wednesday (formerly Sony Pictures Network).
  • To increase domestic supply in response to a decline in the area under the paddy crop in the current Kharif season, the Indian Government implemented a 20 percent export levy on all non-Basmati rice, with the exception of parboiled rice.
  • The Foreign Institutional Investors (FII) purchased equities worth Rs 61,367mn. Domestic Institutional Investors (DII) sold shares worth Rs 3,521 mn.

 Things to watch out for next week

  • Global markets will watch out for the US inflation numbers expected to be released on Tuesday 13th, ahead of the Federal Reserve policy meeting on September 20-21.
  • Indian investors’ attention would be on the consumer price index (CPI) inflation numbers for August, before the monetary policy meeting scheduled to be held towards the end of September. The industrial production data for July and wholesale price index (WPI) inflation for August is also expected to be released in week starting 12th. 

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.”

This week in a nutshell (25th July- 29th July)

Technical talks

NIFTY opened the week on 25th July at 16,663 and closed on 29th July at 17,158. It made a weekly gain of 3%. The index has managed to sustain above the 50DMA of 17,087 level, which might act as a support. On the upside, the recent high of 18,115 might act as a resistance.

Among the sectoral indices, METAL (+7.7%), MEDIA (+5.2%), and IT (+3.5%) were the top gainers while AUTO (-0.7%), PSU BANK (-0.1%), and FMCG (-0.04%) led the losers in the week.

Weekly highlights

  • After upbeat forecasts from Apple and, the US indices closed the week in the green. Tech-heavy NASDAQ was up 4.5%, S&P 500 up 4.3%, and Dow Jones Industrial Average was up ~3% for the week. The earnings season continued to cause volatility in US markets. A profit warning from Walmart dragged down retail shares during the week. Exceptionally weak consumer confidence data added to investors’ worries.
  • The US Commerce Department said the American economy contracted in the second quarter of CY22. This was the second straight quarterly decline in gross decline profit (GDP) reported by the government. This news increased the chances of a recession in the US which impacted investor sentiments.
  • The Federal Reserve increased the interest rates for a second consecutive quarter by 0.75 percentage points, in line with expectations. Elevated inflation has been attributed to supply chain issues and higher prices for food and energy along with broader price pressures.
  • The Reserve Bank of India (RBI) said on July 22 that India’s foreign exchange reserves dropped to $572.71 billion. This was the lowest level in more than 20 months, after declining by $7.54 billion in the week ending July 15. As of November 6, 2020, foreign exchange reserves were last as low.
  • Brent Oil settled 5.4% up at USD 104/barrel. Crude Oil WTI was up 3.6% at USD 98/barrel. Supply concerns and a weaker US dollar lifted oil prices this week. Investors’ attention is on OPEC and allies meeting to discuss production quotas for September. This meeting is expected to have a significant impact on the oil markets because OPEC+ has reached the end of its plan to gradually unwind its production cuts from May 2020 and there is no clear roadmap of predetermined quotas.
  • Due to price erosion pressure, Indian pharmaceutical companies are likely to experience reduced revenue growth from the US generics market in FY23, according to rating agency Icra. The US has always been a significant market for Indian pharmaceutical companies. ICRA says that in recent years, revenues from there have grown relatively slowly because of persistent pricing pressure, the absence of significant generic product launches, and increased regulatory scrutiny. ICRA says high single-digit to low-teens price erosion caused the revenues from the US pharmaceutical market for its sample of eight top Indian pharmaceutical companies to drop by 0.2% in FY22.
  • FII (Foreign Institutional Investors) turned net sellers this week, selling shares worth Rs 1,460mn. DII (Domestic Institutional Investors) continued to be net buyers and purchased shares worth Rs 23,835mn.

Things to watch out for next week

  • According to Financial Express, the RBI is expected to hike interest rates by 35-50bps in the monetary policy meeting to be held between August 3-5. The interest rate differential between US and India should be kept minimal to avoid depreciation of the Indian Rupee.
  • Investors’ attention would be on company-specific news as the earnings season has picked up momentum. There could be volatility in Indian markets post earnings of companies like M&M, UPL, SBI, Varun Beverages, and consumer companies Dabur, Godrej Consumer, and ITC. Comments on the impact of inflation on demand, and easing of supply chain challenges would drive the share price.

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.”

Is there any easy way to pick quality stocks?

After completing your education, you started working and realise a portion of your earnings needs to be invested in equity markets to earn returns. One glance at the media, and you realize equity investing is just too complicated. How to understand the financial jargon, the never-ending ratios?!

You don’t need to have a very high IQ to make money in equities. But you certainly need to understand the basics of accounting to understand the business.

You must first identify a business.  A look around your house will give you different investment ideas. Start with your daily cup of tea or coffee, and you will find several businesses which you will understand.

Once you have identified the business, you can have a look at the information published by the company – website, annual reports, and corporate presentations to understand the business.

Once you have a fairly good idea of the factors that influence the business, you come to the financials. The Holy Trinity of Profit and Loss Statement, Balance Sheet, and Cash flow statement. Each of these will tell you different information. The profit and loss statement will help you understand how the company makes money, its expenses, and its profitability. The balance sheet will explain how well the company is utilizing the funds invested by shareholders, and the cash flow will answer the most basic question – does the business generate free cash for shareholders?!

Analysts can derive any number of ratios from these statements which can be difficult to interpret. Understanding the basic ratios to compare two companies within a sector is critical. One search on Google can help understand some of the basic ratios.

In addition to the financials several qualitative factors aid decision-making.

  1. Management: The management will lead the company to achieve its goals and generate shareholder wealth over a long time. The information about the education and experience of management is available on the corporate websites. A LinkedIn search will help gather additional information about the previous experiences of the key managerial personnel.
  2. Promoter holding: Investors might prefer companies that have a promoter’s wealth tied to its success. There have been several cases where companies run by people who don’t have a financial interest in them have been mismanaged.
  3. Other factors such as a moat or competitive advantage of a company, demand for the products, or bargaining power with suppliers are some other factors that help understand a company better.

If you are someone who simply does not have the time to study accounting, it does not mean that you should not consider equity investing. You can hire SEBI registered Research Analysts who will do all the work and advise stocks that you can consider investing in.

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.”

Week in a Nutshell (13-17 June)

Technical talks

NIFTY opened the week on 13th June at 15,878 and closed down 4% on 17th June at 15,294. The index is trading below the lower Bollinger band and the next support is likely at 15,183. The recent high of 16,794 might act as a resistance. The RSI (14) of 36 indicates the index is nearing the oversold levels.

During the week, METAL (-9.1%), IT (-8.2%), and PSU Bank (-7.7%) led the sectoral losers. There were no sectoral gainers.

Weekly highlights

  • High inflation has investors worried in recent weeks about a toll on corporate profits and economic growth. On Monday, the S&P 500 confirmed it’s in a bear market at is now down more than 20 percent from its most recent record closing high.
  • After a selloff triggered by a series of interest rate hikes by the Federal Reserve and other major central banks, all three US indices ended in the red this week. NASDAQ and Dow Jones were down 4.8% each while S&P 500 was down 5.8%. The cosmetics company Revlon Inc surged ~80% on Friday after reports suggested Reliance Industries may be considering buying out the company.
  • The Federal Reserve raised interest rates by three-quarters of a percentage point, the most since 1994. Officials have indicated that aggressive rate hikes will continue, with severe measures being used to combat rising inflation.
  • Crude oil prices were impacted as investors worried about the global economic outlook and markets were impacted post interest rate hikes around the world. Brent Oil was down 6.9% during the week and ended at USD 113.6/barrel while Crude oil ended 8.4% lower at USD 110.4/barrel on Friday.
  • The Indian Index of Industrial Production (IIP) climbed from 2.2% in March to 7.1% in April. The April industrial growth rate of 7.1 percent is the highest in eight months, notwithstanding the benefit of a favorable base effect.
  • Wholesale price inflation soared to a record high in May due to rising food and fuel prices, posing a challenge to authorities dealing with high inflation. Wholesale prices climbed to 15.9 percent in May vs 15.1 percent in April and was, according to economists, India’s highest since September 1991.
  • Retail inflation for May was 7.04% from April’s near-eight-year high of 7.79 percent due to a favorable base effect. The fall in inflation in May is unlikely to do much to slow down the Reserve Bank of India’s (RBI) rate hike cycle.
  • Foreign institutional investors (FIIs) continued to be sellers, selling equities worth Rs 232,740 mn. Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 172,270 mn.

Things to watch out for next week

  • Major central banks followed the US Federal Reserve in raising interest rates. Rising prices and tightening monetary policies have rattled investors which dragged the equities world over.
  • S&P Global will release the flash purchasing managers indices (PMI) data for June for major economies later next week. In addition, inflation, and consumer and business climate gauges will also be released. This will provide insights into the current state of the global economy.
  • With quarterly earnings season out of the way, investors will focus on macroeconomic activities and action would be stock specific. Indian investors’ attention will be on the progress of the monsoon across the country.

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 three-dimensional approach to 5G -TCS

Update on the Indian Equity Market:

On Monday, NIFTY closed in the green at 16,661 (+1.9%), led by M&M (+5.0%), TITAN (+4.9%), and INFY (+4.6%). KOTAKBANK (-2.0%), JSWSTEEL (-1.9%), and SUNPHARMA (-1.7%) were few of the laggards. Among the sectoral indices, CONSUMER DURABLES (+4.2%), REALTY (+4.1%), and IT (+3.9%) led the gainers, and there were no losers for the day.

Excerpts of an interview with Mr. N Ganapathy Subramanium, Chief Operating Officer, TCS published in Business Standard on 30th May 2022:

  • The annual report outlines the company’s ambition to reach USD 50bn revenue. Currently, TCS has 600,000 employees with revenues of USD 25bn. It doesn’t want to double the employees to double its revenues, so there is an element of nonlinearity there. The company doesn’t just want to work with clients, it wants a play in the ecosystem.
  • TCS wants to create systems that give real-time information.
  • Metaverse is currently a hype cycle. If it succeeds, the COO would like TCS to be present in that segment as well.
  • TCS will continue to enter unchartered territories. Currently, it is not present in B2B businesses, it may get into consumer businesses in the future.
  • BFSI, being one of the early adopters of technology consumes the largest amount of technology talent and resources. Almost every aspect of banking is changing and demand for transformative solutions in the banking space is at an all-time high.
  • TCS is the largest provider of technology services and has a solid play in the BFSI segment. About 30-35 percent of the world’s population uses the company’s product. In insurance as well, it has built a solid platform, with about 20-25mn policies administered across major markets.
  • Many Indian insurance companies use the TCS platform for processing policies and claims, in both life and non-life.
  • Discussions with clients don’t seem to suggest the peak is over for the IT sector.
  • For FY22, the total contract value (TCV) stood at USD 11.3bn. The quarterly run rate is USD 8-9bn. A year back, it was USD 6-7bn. The company’s focus is on getting the deals, irrespective of the size.
  • TCS is supporting several customers in rolling out the 5G network. Its approach to 5G is three-dimensional. First act as a systems integrator to integrate, deploy the network, and operate it for telco customers. Second how to help enterprises build a private 5G network within their facilities. Third, leverage the two network layers to build vertical applications on top of it. The company’s strength is in software, and with more networks getting softwarised TCS will have a bigger role to play beyond applications.

Asset Multiplier Comments

  • Post FY22 earnings, the management alluded that tech spending continues to remain strong and believes it would be the last to be cut despite an economic downturn. The company is focusing on tech integration led hyperscaler deals in its Industry 4.0 initaitive helping it win more transformational deals.
  • Deal wins across segments, reduction in subcontractor costs and better realisation would likely drive revenue growth in the medium term, while employee costs and attrition are likely to be a drag.

Consensus Estimates: (Source: market screener and website)

  • The closing price of TCS was ₹ 3,380/- as of 30-May-2022.  It traded at 29x/ 25x/ 23x the consensus earnings estimate of ₹ 118/ 133/ 146/- for FY23E/FY24E/FY25E respectively.
  • The consensus target price of ₹ 3,939/- implies a P/E Multiple of 27x on the FY25E EPS estimate of ₹ 146/-.

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.”

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.”


Strong growth expected in Navratna, Kesh King and Fair & Handsome – Emami

Update on the Indian Equity Market:

On Tuesday, the shares of Life Insurance Corporation of India Ltd (LIC) got listed on the bourses and it closed at an 8% discount to its issue price of Rs949.

NIFTY closed 2.6% higher at 16,259, led by HINDALCO (+9.8%), TATASTEEL (+7.7%), and COALINDIA (+7.6%). There was no NIFTY stock that ended in the red. METAL (+6.9%), OIL & GAS (+3.7%), and MEDIA (+3.0%) led the sectoral gainers and no sector ended in the red.

Excerpts of an interview with Mr. NH Bhansali, CEO – Finance, Strategy & Business Development, and CFO, Emami published in the Economic Times on 16th May 2022:

  • New age channels like modern trade and e-commerce are growing very strongly for Emami. These contributed 15% and 13% to domestic sales in 4QFY22 and FY22 respectively.
  • The company has taken price hikes of ~4.5% and may take further hikes in case the need arises. Due to price hikes, strategic procurements, and other cost optimisation initiatives, the gross margin contraction was limited to 30bps and it was 62.4% in 4QFY22.
  • There has been significant inflation for key materials like crude derivatives, vegetable oils, camphor, and packaging materials. Geo-political uncertainty and high inflation is impacting input costs adversely.
  • 4QFY22 witnessed unprecedented inflation which hurt consumer wallets across rural and urban areas, which impacted volumes. With a good monsoon season and an uptick in government initiatives to boost rural income, the management expects the slowdown to fade away.
  • The Company’s rural distribution initiatives like Project KHOJ have continued to progress with ~8,000 rural towns being added in FY22 taking the total tally to 40,000 rural towns which will aid rural growth.
  • Notwithstanding the pandemic-related challenges and inflationary pressure, Emami managed to increase its leadership position and increased household penetration for most of its brands.
  • The Company expects gross margin pressure of ~200bps in 1QFY23.
  • Despite the high base in the pain management portfolio, it expects a strong growth in Navratna, Kesh King, and Fair and Handsome, which have been impacted for the last 2 years due to the pandemic. This would help maintain the double-digit growth rate momentum.
  • The company is expanding its distribution footprint across markets and channels to supplement the growth targets.
  • Emami maintains a bullish view on digital businesses- Zanducare or e-commerce. Through the D2C model, it is connecting directly with consumers and generating superior consumer insights leading to higher offtakes.

Asset Multiplier Comments

  • High inflation and a weak rural sentiment are expected to weigh on the short-term outlook for the company. Unprecedented levels of inflation are leading to downtrading across markets. The impact of downtrading is expected to be lower for Emami as it generates 24% from smaller SKUs.
  • A severe summer season across India and rural recovery post a good monsoon season could act as a tailwind for the company.

Consensus Estimates: (Source: Market screener website)

  • The closing price of Emami was ₹ /- as of 17-May-2022.  It traded at x/ x the consensus earnings estimate of ₹ 16.7/ 20/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 565/- implies a P/E Multiple of 28x on the FY24E EPS estimate of ₹ 20/-

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.”

Optimistic about the motor segment in the future – ICICI Lombard

Update on the Indian Equity Market:

The Indian indices opened the week in the red, reflecting global market weakness. Investors are concerned about the high inflation, which might accelerate the rate hikes. NIFTY ended 1.3% lower at 16,954 dragged by COALINDIA (-6.5%), BPCL (-6.0%), and TATASTEEL (-4.3%). BAJAJ-AUTO (+2.0%), HDFCBANK (+1.1%), and ICICIBANK (+1.0%) were some of the gainers.

Among the sectoral indices, BANK (+0.1%), and PRIVATE BANK (+0.1%) were the only gainers. REALTY (-3.8%), METAL (-2.9%), and OIL & GAS (-2.4%) led the sectoral laggards.

Excerpts of an interview with Mr. Bhargav Dasgupta, MD & CEO, ICICI Lombard (ICICIGI) published in The Economic Times on 22nd April 2022: 

  • ICICIGI announced 4Q and FY22 earnings, which include Bharti Axa business earnings. Considering the standalone numbers coupled with Bharti Axa, the profit growth for FY22 was ~5%.
  • Considering the 4QFY22 quarterly profits, the growth was much better. The Company has outgrown the market.
  • The combined ratio has increased, due to 2-3 factors. Looking at the integrated company suggests Bharti Axa’s combined ratio has always been high. ICICIGI expects to bring it under control in subsequent years. (The combined ratio is indirectly proportional to the profitability of general insurance companies).
  • The profitability of ICICIGI was impacted due to three Covid-19 losses, which were ~ Rs 270mn in 4Q and ~Rs 5,500 mn for FY22. Another impact was due to the accounting methodology for insurance policies. The entire cost has to be accounted for upfront while the revenue (premium earned) is accounted for throughout the policy. In the case of a 12-month policy with a majority of the business undertaken in March, the full cost is accounted for in March while the topline is earned over the next 12 months.
  • The CEO believes a long-term shift is on the way and health consumption behavior is going to change. The change he believes is not just due to the pandemic and digitisation but it has been a global trend for some time now. Health consumption is expected to be very personal, self-driven, and digitised in the long term.
  • Traditionally health insurance in India has focussed on just the hospitalisation costs. But healthcare is about the continuum of preventive care, wellness, fitness, hygiene, and outpatient care. ICICIGI’s approach is providing the entire continuum of care including a pure insurance policy for OPD costs and wellness (preventive, advisory, and fitness).
  • People are willing to consume health in a digital mode. Telehealth, video-based consulting, and increasingly home-based care if the ailment is not severe – there are the components ICICIGI has built on in the last 2 years and is now investing to scale up distribution.
  • With the Bharti Axa acquisition, ICICIGI has inherited some of the crop insurance business. There, most of the commitments are for a longer time so ICICIGI will stay invested in that business for that period.
  • In the previous year, the motor insurance sector has been tepid. The biggest shift that happened in FY22 was health insurance has become number one for the general insurance industry. Traditionally, the motor has been the biggest segment, but in FY22 the new vehicle sales were muted.
  • ICICIGI expects growth momentum once the chip shortage issues are sorted in the next five-six months. It expects a pickup in rural demand for two-wheelers and is optimistic about the motor segment growth in the medium term.
  • Health insurance is expected to continue to grow as it is a very underpenetrated sector.
  • The company has taken small price hikes in motor insurance. On the health side, ICICIGI is not thinking of a price increase for its retail customers as it has profits of ~Rs 40-50 bn despite paying Rs 250bn Covid-19 claims.
  • The Company is not planning an immediate price hike on the retail health portfolio as it believes there are one-off episodes that are unlikely to sustain. Healthcare inflation is a worry and ICICIGI believes there is a need for more discipline in terms of pricing. Should the healthcare providers inflate the cost of healthcare, the Company may have to increase its prices.

Asset Multiplier Comments:

  • We expect a recovery in the motor segment as new car registrations are expected to recover with the improvement in supply chain and semiconductor availability.
  • With an increase in hiring across sectors, the growth in group health premiums is expected to continue. the pandemic has boosted the demand for such policies.
  • Headwinds due to loss of market share in the individual health insurance segment, and aggression by new-age large players are expected to hurt the profitability in the short term.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of ICICIGI was ₹ 1,315/- as of 25-Apr-2022. It traded at 35x/ 28x the consensus earnings estimate of ₹ 38/47 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,556/- implies a P/E Multiple of 33x on the FY24E EPS estimate of ₹ 47/-

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

Confident of doubling FY19 VNB in FY23 – ICICI Prudential Life Insurance

Update on the Indian Equity Market:

On Tuesday, Indian equity markets ended in the red for the fifth day in a volatile session. The benchmark index NIFTY50 settled at 16,959 (-1.3%), dragged by HDFC (-6.3%), HDFCLIFE (-6.3%), and SBILIFE (-4.5%). APOLLOHOSP (+5.3%), COALINDIA (+3.3%), and RELIANCE (+3.2%) were the top gainers. Among the sectoral indices, OIL & GAS (+0.8%) was the only one to end in green. IT (-3.0%), FMCG (-2.8%), and REALTY (-2.5%) were the top sectoral losers.

Excerpts from an interview of Mr. NS Kannan, MD & CEO of ICICI Prudential Life Insurance Company (IPRULIFE) with CNBC-TV 18 on 19th April 2022:

  • IPRULIFE announced 4QFY22 and FY22 earnings. APE (Annual Premium Equivalent) grew 20% YoY in FY22, driven by multi-product, multi-channel architecture. VNB (Value of New Business) grew 33% YoY in FY22. In addition to topline growth, the VNB margin grew from 25.1% in FY21 to 28% in FY22.
  • The margin growth can be attributed to the increase in the sale of protection products and a diversified product profile.
  • The Company has an objective of doubling the absolute VNB of FY19 by FY23. IPRULIFE requires 22% growth in FY23 to achieve the target. The growth in VNB will be led by topline growth and margin expansion levers.
  • As the company recovers from the pandemic, it hopes for a much clearer route for growth.
  • Fulfillment was impacted due to the pandemic, the company could not get the medical examination of customers done. Given the awareness of insurance, the demand remains high.
  • VNB has grown from Rs 12,860mn in FY18 to Rs 21,630mn in FY22. The driver for this has been the partnerships established. ICICI bank accounts for ~25% of the topline. The Company has tied up with several banks (7 in FY22), which contribute ~15% of the topline. Direct business is ~13% of the topline. Agency channel contributes ~25% of the business. The well-diversified channel mix has resulted in topline growth despite the challenges posed by the pandemic.
  • The growth driver for VNB margin is product mix. ULIP’s contribution has reduced from ~80% to ~48% of total revenue in FY22. The protection business has also scaled up significantly.
  • The savings business is expected to grow at the nominal GDP growth rate in India. The protection business which is an underpenetrated one is a significant opportunity.
  • The life insurance sector has benefitted from liberalization. Insurance penetration can be measured as a percentage of the sum assured. Based on that metric, IPRULIFE has a 13.5% market share.

Asset Multiplier comments:

  • The insurance sector in India is a multi-decadal opportunity aided by rising disposable income, young population, and awareness. The pandemic has increased the awareness of insurance and digitization initiatives by companies have helped meet the demand.
  • IPRULIFE is likely to see a growth in the Banca channel sales, aided by new partnerships forged in the previous years and a turnaround in sales from its parent, ICICI Bank. With a focus on scaling up the agency and direct channels through recruitment and training of new agents, we expect the topline growth will help it achieve its target of 2x VNB of FY19 by FY23E.

Consensus Estimate: (Source: Market screener website)

  • The closing price of ICIC was ₹ 512/- on 19-April-2022. It traded at 55x/ 48x the consensus EPS estimate of ₹ 9.3/ 10.6/- for FY23E/FY24E respectively.
  • The consensus average target price is ₹ 678/- which implies a PE multiple of 64x on FY24E EPS of ₹ 10.6/-.
  • In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

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