Author - Maitreyee Vaishampayan

Expect 30% YoY constant currency revenue growth in 3QFY22 – WIPRO

Update on the Indian Equity Market:

On Monday, NIFTY50 rose for the seventh consecutive session to close at 18,477 (+0.8%), led by PSU BANK (+4.0%), METAL (+3.9%), and IT (+1.6%). The sectoral losers were PHARMA (-0.9%), and MEDIA (-0.7%). Among the stocks, HINDALCO (+5.2%), INFY (+4.8%), and TECHM (+3.7%) led the gainers while M&M (-2.2%), HCLTECH (-2.1%), and DRREDDY (-1.8%) led the laggards.

Wipro recently declared earnings for the quarter ended 30th September 2021, which beat street estimates. Mr. Thierry Delaporte, CEO, Wipro discussed the quarter gone by and his plans for the upcoming quarters with The Economic Times on 18th October 2021:

  • Mr. Delaporte took charge as the CEO of the company during the Covid pandemic. During that time, the company moved into execution mode and it has been fast at defining the people who are going to drive the organisation forward.
  • During the last year, the company has taken bold steps and changed about 30% of the top 200 leaders. It has been an unprecedented change and a lot of talent has also been brought in from outside. Wipro made its biggest acquisition, Capco which is delivering great results.
  • The CEO’s responsibility was to ensure the company remains driven by a sense of purpose and pays attention to the world around it.
  • What needed to change was assertiveness about strategy, running operations, making decisions, and sticking to it. The second thing he wanted to change was raising the bar in terms of ambition, and the third is a ruthless focus on accountability and outcome.
  • Wipro will deliver ~30% year-on-year constant currency revenue growth in 3QFY22E. He expects the growth to continue in FY23E as well, as the company is firing on all cylinders. Wipro will continue to do more acquisitions and possibly a big one.
  • The best performing company in the IT industry is the one with the best talent in terms of quality – people who understand the business and how technology can be leveraged to transform. These are the people Wipro is hiring. The talent is also in terms of quantity because of the increased demand and higher attrition levels.
  • Wipro plans to integrate a lot more freshers. In FY22E, Wipro plans to hire about 16,000-17,000 and 25,000-30,000 in FY23E.
  • He expects higher attrition to continue for the next 3-4 quarters. In 2QFY22, Wipro’s attrition was 20.5% and he expects it to worsen. There’s always seasonality, in the last quarter of the year and people tend to stick around, according to Mr. Delaporte.
  • Wipro would be investing more in 5G and artificial intelligence than in quantum computing right now. He is betting big on engineering services.

 Asset Multiplier Comments

  • The IT sector has been a beneficiary of the increased investment in technologies due to shifting to work from anywhere post the pandemic. While revenue growth is expected for the quarters to come, the sector was also a beneficiary of lower operating costs.
  • As people return to the office for work, some of these costs are expected to come back. The increased pace of vaccinations around the world will likely increase people traveling for work. The talent war has already led to companies rolling out 2-3 wage hikes in a year. With the costs increasing, Wipro like all other IT companies may face margin pressures in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of WIPRO was ₹ 711/- as of 18-October-2021. It traded at 32x/ 28x/ 25x the consensus earnings estimate of ₹ 22/ 25/ 28 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 676/- implies a PE multiple of 24x on FY24E EPS of ₹ 28/-.

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 (4th – 8th October)

Technical talks

NIFTY opened the week on 4th October at 17,616 and closed on 8th October at 17,895. It made a weekly gain of ~1.6%. On the upside, 17,948 might act as a resistance. On the downside, 20DMA of 17,648 might act as a support. RSI (14 days) of 66 is indicating the index is in an overbought zone.

Weekly highlights

  • Auto companies released the monthly volume data for September-21. Domestic CV volumes were robust, aided by healthy freight availability and better freight rates. Tractor sales reported a strong MoM growth albeit on a low base due to good rainfall. Supply issues and an inauspicious period led to subdued volumes for other segments. Companies suggest an inability to cater to demand due to supply chain challenges. This has led to lower inventory build-up before the festive season. This might lead to longer waiting periods or postponement of festival purchases by customers.
  • Media reports suggest the government may abandon its demand for spectrum charges of Rs 400 bn from telecom operators to support companies. This latest move may provide another ray of hope to companies such as Vodafone Idea Ltd and Bharti Airtel Ltd after the government’s decision to offer a 4-year moratorium on dues.
  • The Organisation of the Petroleum Exporting Countries, Russia, and their allies (OPEC+) said it would stick to its existing plan for a gradual increase in oil output, which sent crude prices to three-year highs. West Texas Intermediate reached USD$ 78 a barrel while Brent Crude rose 3% to ~US$ 82 a barrel. The OPEC+ ignored calls from big consumers such as the USA and India for extra supplies after oil prices surged over 50% this year.
  • The US indices (Dow Jones Industrial Average, S&P 500, and Nasdaq) held on to weekly gains. Throughout the week, investors’ attention has been on rising energy prices, concerns about inflation, and negotiations on the debt ceiling. On Thursday, the US Senate has voted to extend the debt ceiling until December 3. This provides some relief to investors worried about the government default this month.
  • The Indian equity markets remained volatile during the week ended October 8. The key positives were RBI maintaining its stance with no rate change, and Moody’s upgrading India’s outlook to stable from negative. Rising bond yield, and crude oil prices, Fitch cutting India’s FY22 GDP growth forecast (to 8.7% from 10% in June) worried investors.
  • The government of India has sold the national carrier, Air India to the Tata Group. Tata Sons submitted a winning bid of Rs 180bn as the Enterprise value. The conclusion of this sale indicates the government is serious about its ambitions of privatisation.
  • Though the foreign institutional investors (FII) selling continued this week, the quantum was much lower at Rs 36,857mn vs Rs 61,520mn last week. Domestic institutional investors (DII) buying reduced to Rs 34,581mn from the Rs 75,030 mn in the previous week.

Things to watch out for next week

  • The 2QFY22 result season has started with TCS reporting earnings this week. The result season takes centre stage next week with other IT companies such as Infosys, Mindtree, and Wipro set to announce their earnings. While the street is estimating sequential revenue growth for the companies, commentary on deal wins and margin pressures due to rising employee costs & attrition would be critical.

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 will remain as third private telco, not turning into a PSU – Vodafone Idea

Update on Indian Equity Market:

On Thursday, the benchmark Nifty50 made a record high of 17,844 and closed at 17,823 (+1.6%). BAJAJFINSV (+4.6%), HINDALCO (+4.5%), and LT (+3.7%) led the gainers. HDFCLIFE (-1.1%), DRREDDY (-1.0%), and JSWSTEEL (-0.6%) led the laggards. Among the sectoral indices, REALTY (+8.7%), FINANCIAL SERVICES (+2.3%), and BANK (+2.2%) led the gainers. MEDIA (-1.7%) was the only sector that ended in the red.

Excerpts of an interview with Mr. Ravinder Takkar, MD & CEO, Vodafone Idea (IDEA) published in Business Standard on 23rd September 2021:

  • The recent telecom package suggests the government recognizes the importance of the telecom industry. Also, it recognizes that competition in the industry is important and does not want a monopoly or a duopoly.
  • While the company has always stated it wants to be the third player, there have been questions around its survival. With the reforms, there is no reason to believe that Vodafone Idea will go away and the telecom market will have less than three players.
  • The four-year moratorium on the spectrum and AGR (adjusted gross revenue) dues will allow the company to make investments and continue to focus on the network. Their 4G network covers 1bn people currently and there is a potential opportunity to increase by 100-150mn. The company plans to increase its capacity, provide a great experience and introduce new services by deploying cash saved due to the moratorium.
  • The reforms package has addressed investor concerns and Mr. Takkar believes it’s a great opportunity to get external funding. The funding can come from new investors, existing promoters, or a mix of both.
  • The talks of Vodafone Idea being converted into a PSU or the government having a role in running the company are incorrect. The government wants the management of Vodafone Idea to run it efficiently and competitively.
  • The tariff has been one of the biggest challenges in the industry and pricing has been used as a tool to kill competition, gain market share, and create a scenario of stress.
  • To fix the industry, pricing has to improve and that has been the company’s stance for a long time. The reforms have created the right environment for price increases. Price increases will come soon and it will be gradual so that there isn’t a huge shock for the customers.
  • There are two elements in ARPU (average revenue per user per month) – pricing and customer mix. The difference with the competitor’s ARPU is due to the mix of customers. Vodafone Idea has a higher proportion of 2G customers. As migration from 2G to 4G happens, the ARPU is expected to improve. As pricing in the industry goes up, ARPU will go up for everyone.
  • The ARPU in India needs to increase to ₹ 200 as it was five years ago, and eventually increase to ₹ 300 for the industry to be sustainable.

Asset Multiplier Comments

  • The government’s relief package provides 4 years of moratorium on AGR and spectrum dues which are expected to reduce the payment burden for Vodafone Idea significantly. With the option to convert deferred dues into equity, the worst-case scenario is the company would be owned by the Government, which ensures survival.
  • Though the government’s relief package has provided a much-needed breather for the Company, it has to accelerate capex in 4G to recoup some of the lost market share. Additionally, increasing ARPU would help in strong cash generation.

Consensus Estimate: (Source: market screener website)

  • The closing price of IDEA was ₹ 10.6/- as of 23-Sept-2021. The consensus estimates of loss per share for FY22E/FY23E/FY24E are ₹ 9.2/ 6.8/ 6.0 /-.
  • The consensus target price is ₹ 6.5/-.

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.”

Large sized deal ramp-up due to Evosys acquisition – MASTEK

Update on the Indian Equity Market:

On Tuesday, the benchmark Nifty 50 index ended at a record closing of 17,383 (+0.2%). The top gainers on the index were INDUSINDBK (+4.0%), HCLTECH (+2.5%), and HEROMOTOCO (+2.2%). The laggards were led by ULTRACEMCO (-1.1%), HDFC (-1.1%), and BPCL (-1.1%). Among the sectoral indices, MEDIA (+14.4%), PRIVATE BANK (+1.1%), and CONSUMER DURABLES (+0.9%) led the gainers while METAL (-0.4%), FMCG (-0.3%), and FINANCIAL SERVICES (-0.1%) led the losers.

Excerpts of an interview with Mr. Hiral Chandrana, Global CEO, Mastek with Economic Times on 13th September 2021:

  • The Company has a strong business in the UK and is working with the leading public sector institutions. MASTEK has a healthy business and is not going to reduce its UK exposure. They expect to continue the run in many areas including the private sector.
  • 1QFY22 was a good quarter in terms of the order book. The company is witnessing a good momentum in 2QFY22 along with an increase in deal size. The acquisition of Evosys (cloud business) is helping MASTEK get involved in larger-sized deals.
  • There are delays in some deals due to their large size and higher competition.
  • While the talent market remains challenging, MASTEK has taken a lot of steps in terms of salary hikes and skill transformation. They are looking at various elements of how training and reskilling are done.
  • 12-15 months back, the company was operating in the 13-14% EBITDA margin range. Now, they are comfortable in the 20plus percentage EBITDA margin. While there could be some margin fluctuation on a QoQ basis, the CEO believes they have good leverage in terms of fixed cost to achieve margins in the 20% plus range.
  • In some of their cloud implementation business, which was acquired through Evosys, the work is delivered through business outcomes. There are elements of pricing and realisation that can be leveraged based on the outcome delivered.
  • In cases where skills-based work is in high demand, customers realise they need to pay more. There are certain skills for which the company can command higher prices.
  • Customers are going through digital adoption and they are changing business models. They are changing their supply chains. It is a huge transformation and technology is a big enabler. Mr. Chandrana believes this trend will continue at least for the next one and a half or two years.
  • There is a huge opportunity for automation and digital adoption. Cloud has taken off in a big way, and MASTEK is investing heavily in that space for the next 18-24 months.

Asset Multiplier Comments

  • MASTEK’s presence in the local government has been established through the Evosys acquisition. There could be new business opportunities for the company with the UK government as a result of Brexit.
  • A strong order book, ramp-up of large deal wins, revival of the UK and US businesses are indicative of the revenue growth for MASTEK in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of MASTEK was ₹ 2,899/- as on 14-September-2021. It traded at 31x/ 25x the consensus earnings estimate of ₹ 94/ 114 for FY22E/ 23E.
  • The consensus target price of ₹ 2,890/- implies a PE multiple of 25x on FY23E EPS of ₹ 114/-.

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 (6th – 9th September)

Technical talks

NIFTY opened the week on 6th September at 17,399 and ended the truncated week at 17,369 on 9th September. The index made a weekly loss of 0.2%. On the upside, 17,378 might be a critical level to watch for. On the downside, 16,451 might act as a support. The RSI (82) indicates the index is in the overbought zone.

Weekly highlights

  • World stocks hit fresh record highs on Tuesday on growing bets that the U.S. Federal Reserve will push back tapering its bond purchases and keep its expansive policy for the near term. The latest rally, which started after Fed Chair Jerome Powell’s dovish speech at the Jackson Hole Symposium in August, received a further boost from a surprisingly soft U.S. payrolls report on Friday. The U.S. economy created 235,000 jobs in August, the fewest in seven months as hiring in the leisure and hospitality sectors stalled, reducing expectations that the Fed will opt for an early tapering of its monthly bond purchases.
  • Investors were caught by surprise by a sudden rally in the benchmark 10-year Indian bond yield. In the previous week (ended 3rd September), the yield had dropped ten basis points, the biggest weekly drop since April. There was a quick turn of sentiment after the benchmark 10-year bond yield rose to its highest since March. The sentiment change was aided by 1QFY22 GDP growth which grew ~20% YoY albeit on a low base and global market cues. The rally in the bond yield was led by mutual fund investors and overseas investors. The spike in overseas investors’ interest could be attributed to the appreciation of INR against USD. (Source: Bloomberg Quint Read more at: https://www.bloombergquint.com/business/a-surprise-bond-rally-sweeps-over-india-as-global-funds-pile-in )
  • The Securities and Exchange Board of India (SEBI) has introduced an optional T+1 settlement cycle for the market, which will come into effect from January 1, 2022. The T+1 cycle means settlements will have to be cleared within one day of the actual transactions taking place. A switch to the T+1 settlement cycle is expected to boost market liquidity and trading turnover while reducing settlement risk and broker defaults. While this move could be beneficial for the domestic investors, foreign investors may face challenges adjusting to this system due to time zone differences. While the regulator has come up with the new settlement cycle, the onus is on the exchanges if they want to opt for the shorter cycle.
  • The monthly data for life insurance premiums collected by companies was released by the Life Insurance Council. The industry reported a 3% YoY increase in the New Business Premiums (NBP) collected, led by private players. This growth comes after the NBP collected reported a decline of 11% YoY in July-21.
  • Stocks ended lower Friday, with major indexes booking weekly losses as the Dow Jones Industrial Average and the S&P 500 extended a losing streak to five sessions. Investors said uncertainty around the spread of the delta variant of the coronavirus that causes COVID-19 hung over markets this week as investors also weighed the timing of the Federal Reserve’s eventual tapering of its monthly bond purchases. The slide left the Dow down 2.2% for the week, while the S&P 500 suffered a 1.7% fall and the Nasdaq declined 1.6%.
  • Institutional activity trends reversed this week compared to last week. Foreign institutional investors (FII) turned sellers with an outflow of Rs 11,139mn. Domestic institutional investors (DII) tuned buyers with an inflow of Rs 11,160mn.

Things to watch out for next week

  • The Indian CPI and WPI data are expected next week. A key indicator for measuring the changes in purchasing trends and inflation.
  • As the result season has drawn to a close, the developments from Wall Street will be the guiding force for the Dalal Street.

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.”

Ambitious to take ROE to 18% – Axis Bank

Update on the Indian Equity Market:

On Tuesday, Nifty 50 closed at a record high of 17,132 (+1.2%), led by BHARTIARTL (+6.7%), BAJFINANCE (+5.1%), and HINDALCO (+4.9%). The top losers were TATAMOTORS (-1.5%), NESTLEIND (-1.2%), and INDUSINDBK (-1.2%). The sectoral gainers were led by METAL (+1.5%), HEALTHCARE (1.4%), and IT (+1.4%). MEDIA (-0.1%) was the only sector that ended in the red.

Excerpts of an interview with Mr. Amitabh Chaudhry, MD & CEO, Axis Bank (AXISBANK) published in The Economic Times on 27th August 2021:

  • There are reasonable indications that the private capex creation has started, but only in some segments at this stage. The private sector capex is robust in segments such as upstream refinery, steel, cement, chemical, pharma, renewable, and storage systems.
  • The government has come up with a scheme inviting investments into the electronics and industrial automation, logistics, and export-oriented industries. The government is also investing in railways, roads, and highways. An accommodative stance by the RBI and the government is helping in the economic revival.
  • A lot of retail customers were supported in the first covid wave through two specific moratoriums and restructuring. This resulted in retail delinquencies not being as high as estimated. During the second wave, there was no moratorium and a lot of customers who availed of the moratorium were adversely impacted by the second wave.
  • For AXISBANK, a lot of the slippages on the retail side were from secured assets and loan-to-value against the secured assets were low. Either the customer repays, or the bank sells the assets. Hence, recovery was never an issue, it was a timing issue.
  • The stimulus led to a system liquidity surplus resulting in lower market borrowing rates. As a result, well-rated corporates are sitting on huge piles of cash and have repaid their borrowings. As a result, the credit growth of the industrial sector is being led by mid-sized corporates and some refinancing.
  • AXISBANK believes there are considerable credit opportunities as the economy starts reviving.
  • The bank is already operating in the zone of 15-16% Return on Equity (ROE). The ambition is to take it to 18%, which is an uphill battle.
  • AXISBANK believes it is very important to scale the subsidiaries further over the next couple of years.
  • Over the past 5 years, the acceleration towards embracing technology with the rapid emergence of fintech and Covid has only hastened the pace. AXISBANK recognised a few years back the need to scale up investments in technology. The technology spend has gone up ~78% in the last 2 years.
  • The entire strategy of AXISBANK on the digital front is around challenging themselves and working in partnerships with fintechs to provide solutions. AXISBANK will expand partnerships with fintechs going forward.
  • There are significant growth opportunities for the next 5-7 years. The Bank is laying the foundation for the future where it can capitalise on business opportunities in every segment.

Asset Multiplier Comments

  • Though slippages could remain elevated in the near term, healthy PCR (Provision Coverage Ratio) protects the Balance Sheet against any potential stress.
  • The bank is positive on economic revival which will lead to credit growth, healthy NIMs eventually helping to achieve the Bank’s target of 18% ROE.
  • With the work-from-anywhere culture and remote decision making, each organisation has realised that technology up-gradation is non-negotiable. AXISBANK has taken a step in the right direction by undertaking technology investments and execution of transformation projects.

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

  • The closing price of AXISBANK was ₹ 738/- as of 31-August-2021. It traded at 2.0x/ 1.8x/ 1.5x the consensus book value estimate of ₹ 370/ 420/ 479 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 871/- implies a PB multiple of 1.8x on FY24E BV of ₹ 479/-.

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.”

Demerger will help maintain focus and direction for both segments – Aarti industries

Update on the Indian Equity Market:

On Tuesday, Indian stocks closed in the green aided by positive global cues, and positive U.S. vaccination news. Nifty 50 ended at 16,625 (+0.8%) led higher by BAJAJFINSV (+7.8%), HINDALCO (+3.9%), and ADANIPORTS (+3.8%). The top laggards were BRITANNIA (-1.4%), NESTLEIND (-1.4%), and ASIANPAINT (-1.1%). Among the sectoral indices, METAL (+2.9%), MEDIA (+2.0%), and PSU BANK (+1.8%) led the gainers. Typically considered defensives, FMCG (-0.7%), and IT (-0.2%) led the laggards.

The Board of Aarti Industries recently approved the demerger of its pharma business.  Mr. Rajendra Gogri, MD, Aarti Industries (AARTIIND) discussed the rationale behind this move with Economic Times on 24th August 2021:

  • In the last few years, the pharma business revenues have almost doubled and EBIT has grown four times, with EBIT margins around 20 percent plus. The company foresees a significant opportunity in both, the pharma and specialty chemicals businesses. It has been decided to have a separate company so that there can be a separate focus and strategic direction for both the segments.
  • The process for demerger is expected to be completed in the next 9-15 months depending on the Covid situation.
  • Earlier AARTIIND had announced a Rs 50bn capex plan, out of which Rs7.5 bn will now be spent on the pharma division, and the balance on chemicals.
  • Both the segments have separate manufacturing facilities as well as R&D centres. The customer base also is separate. There is virtually no overlap in manufacturing as well as R&D in the market between both the segments.
  • In pharma, they are looking to add more than 50 products in the next 5-6 years. For pharma intermediates and API, a new greenfield expansion at Atali, Gujarat is being set up.
  • With a strong customer base across the world, AARTIIND expects a sizeable revenue growth over the next few years. In the next five years, the Company is looking at top line 2.5 to 3.5 times and three to four times at EBIT level for both the segments.
  • AARTIIND is totally backward integrated, especially in the Chemicals segment. Benzene is a key raw material which is domestically available and the Company does not foresee any raw material shortages but container freight is an issue. Usually, AARTIIND is able to pass on the freight increase to the customers but the availability of containers is impacting exports.

Asset Multiplier Comments

  • China had imposed penalties on chemical companies causing pollution and environmental damage. As a result, many chemical companies’ plants have been shut or relocated outside China. Additionally, with Covid-19 imposed restrictions, supply chain challenges have increased. Chemical companies in India have emerged as a beneficiary due to these challenges under the China+1 strategy.
  • AARTIIND is able to pass on the freight cost hikes to domestic customers almost immediately. There is a quarter’s lag while passing on the freight hikes to overseas customers. As the freight cost is eventually passed fully to the customers, the Company is able to maintain and improve its bottom line.

Consensus Estimate: (Source: market screener website)

  • The closing price of AARTIING was ₹ 920/- as on 24-August-2021. It traded at 43x/ 34x/ 33x the consensus earnings estimate of ₹ 21.3/ 26.7/ 28.0 for FY22E/ 23E/ 24E.
  • The consensus target price of ₹ 927/- implies a PE multiple of 33x on FY24E EPS of ₹ 28.0/-.

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.”

This week in a nutshell (2nd – 6th Aug)

Technical talks

NIFTY opened the week on 2nd August at 15,875 and closed on 6th August at 16,223. This is the highest closing ever for the index. The index made a weekly gain of 2%. On the upside, the index might be headed to 16,650. Based on Fibonacci levels, 16,150 could be an important level to watch on the downside. The next level of support may be at 20DMA of 15,880.

Weekly highlights

  • Indian benchmark indices hit record highs on Tuesday amid favorable global cues. Positive domestic macroeconomic data and easing of Covid-19 restrictions further boosted investor sentiment.
  • Manufacturing activity in India rebounded to a three-month high in July. The IHS Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 55.3 from 48.1 in June, back into the expansion zone.
  • Oil prices in Asia fell during the week as worries over China’s economy resurfaced. The rising number of Covid-19 cases in the US and China, the top two importers globally clouded the fuel demand outlook. On Thursday, there was an uptick in oil prices supported by tensions in the Middle East. As of Saturday, Crude Oil WTI was trading at USD 67.9/barrel and Brent Oil was trading at USD 70.3/barrel.
  • Auto OEMs reported monthly volume data for the month of July-21. With the gradual easing of lockdown restrictions, there was a pick-up in demand. Demand recovery is expected to accelerate in the coming months due to improving consumer sentiments, faster vaccine rollout, and traction in economic activity. The domestic PV industry volumes increased to 294000 units, representing a 21% CAGR over two years. Domestic 2W volumes were subdued but exports were robust due to healthy demand in geographies such as Africa, and Latin America. The slowdown in monsoon activity in July affected the sowing of Kharif crops led to subdued tractor volumes. Now with the prediction of a normal monsoon and pickup in the pace of sowing, the demand is expected to improve.
  • The RBI Monetary Policy Committee has decided to maintain the status quo and kept the interest rates unchanged with an accommodative stance. The repo rate is 4 percent and the reverse repo rate is 3.35 percent. The MPC has retained its GDP growth projection of 9.5 percent for FY22.
  • The government introduced a bill to amend the Income Tax Act and do away with the retrospective tax demands. Now no retro tax will be applicable for indirect tax transfer of Indian assets made before May 2012. Companies such as Cairn UK, and Vodafone are beneficiaries of this move. This is a step in the right direction to have a predictable tax regime that will attract foreign investors to India.

Things to watch out for next week

  • The quarterly result season continues with companies such as MRF, CAMS, Lupin, and Ashok Leyland reporting earnings next week.
  • Investors will get information about the pace of inflation in the US with the release of consumer price index reading and producer price index reading next week. A strong jobs report could put the Federal Reserve on track to announce a tapering of the bond-buying program as early as September.
  • The cues from Wall street tend to influence the sentiment on Dalal Street.

Expect Rs 35bn topline in FY22 – Wockhardt

Update on the Indian Equity Market:

The Indian indices started the week on a negative note dragged by selling in financials and auto stocks. Nifty closed at 15,824 (-0.2%), dragged by JSWSTEEL (-1.8%), WIPRO (-1.5%), and RELIANCE (-1.5%), The top gainers on the index were SBILIFE (+4.0%), BAJAJFINSV (2.4%), and HINDALCO (+1.9%). Among the sectoral indices, METAL (+0.6%), PHARMA (+0.4%), and MEDIA (+0.3%) led the gainers. REALTY (-1.0%), PSU BANK (-0.8%), and AUTO (-0.6%) were the laggards.

Excerpts of an interview with Mr. Habil Khorakiwala, Chairman, Wockhardt with CNBC TV-18 on 26 July 2021:

  • Wockhardt recently posted 1QFY22 earnings. The Company reported a consolidated net loss of ~ Rs 66mn vs a net profit of ~Rs 7598mn in 1QFY21.
  • The India business has grown due to its strategy of divesting the acute portfolio vs the chronic portfolio. With a presence in the therapy areas like diabetes, nephrology, and neurosciences. The differentiated strategy for diabetes- affordability, accessibility, and availability has helped them. On a QoQ basis, India business revenue improved from ~Rs 1,200mn to ~Rs 1,520mn.
  • There was a YoY growth of 69% in the UK business, and it’s a sustainable business. The UK government is manufacturing the AstraZeneca vaccine at the UK plant of Wockhardt. The vaccine business is expected to be sustainable for the next 1 year and this fill-and-finish business is a highly profitable one.
  • The Company’s UK plant received a visit from the UK Prime Minister, the Prince of Wales, and some other ministers. This is because Wockhardt is the only supplier and ~50% of all the UK vaccination has taken place from this facility.
  • The Company is in talks with 2 other vaccine manufacturers for fill-and-finish agreements. The Company is also expanding its capacities which are expected to commission early CY22. This business is expected to expand in the years to come.
  • Wockhardt would be filing the H14 form for its India facility and inviting the US FDA to visit for an inspection.
  • Wockhardt expects to achieve Rs 35bn in terms of topline and maintain the EBITDA margins from the 1QFY22 levels.

Asset Multiplier Comments

  • We believe that the company’s strategic plan is to shift from acute therapeutic areas to more chronic businesses like anti-diabetes, CNS (central nervous system), etc., and also to its niche antibiotic portfolio of NCEs (new chemical entities).
  • This research focus will likely increase the time to deliver returns to shareholders and also make them unpredictable. The vaccine business could be the savior in the medium term as the volumes may increase shortly.

Consensus Estimate: (Source: NSE)

  • The closing price of Wockhardt was ₹ 553/- as of 26-July-2021. The Company reported a loss of ₹ 35.4 per share for the year ended 31st March 2021.
  • The consensus earnings estimate and price target are not available.

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.”