Author - Maitreyee Vaishampayan

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.”

This week in a nutshell (5th – 9th July)

Technical talks

NIFTY opened the week on 5th July at 15,793 and closed on 9th July at 15,690. The index made a loss of 0.6% this week. On the upside, 20DMA of 15766 might act as a resistance and on the downside, 50DMA of 15,416 might act as a support. RSI (51) trending downwards suggests a further downside hereon.

Weekly highlights

  • The government’s GST collection for the month of June was Rs 928bn, below the Rs 1000bn for the first time in eight months as the Covid-19 second wave stalled the economic activities. With most of the country under partial/full lockdowns in May, a fewer number of e-way bills were generated. The GST data for June pertains to business transactions made in May. With the easing of restrictions, there could be an improvement in the GST collections for the month of July.
  • Post the Union Cabinet reshuffle on Wednesday, the new Health Minister, Mansukh Mandaviya announced a ₹ 231bn financial package for improving the health infrastructure in the country. Under the new package, the Centre would provide ₹ 150bn and the states ₹ 80bn. The plan would be implemented jointly by them to improve medical infrastructure at primary and district health centers. The plan aims to accelerate health system preparedness for immediate responsiveness for early prevention, detection, and management of Covid-19 with a focus on infrastructure development.
  • The Organization of the Petroleum Exporting Countries (OPEC) producers canceled a meeting when major players were unable to come to an agreement to increase supply. The producers abandoned talks after negotiations failed to close the division between Saudi Arabia, and United Arab Emirates. This news pushed Brent Oil and West Texas Intermediate oil prices to levels not seen since 2018 and 2014 respectively. After a volatile week, Brent Oil futures settled at US$ 75.6 per barrel and WTI futures settled at US$ 74.6 per barrel (As on 10-07-21).
  • The monthly life insurance premium data was released by the IRDAI. There was a pickup in the business acquisition in Jun-21 with the easing of lockdowns. The new business premium (NBP) which indicates premium acquired from new policies in a particular year rose ~4% YoY. Private insurers have led the growth in NBP, reporting ~34% growth YoY. The insurance companies have adapted to the changing needs of customers and improved their digital infrastructure which is a positive.
  • Though the foreign institutional investors’ (FII) selling continued this week, the quantum was much lower at Rs 20,277mn vs Rs 54,168mn last week. Domestic institutional investors (DII) buying reduced to Rs 896mn from the Rs 64,174 mn in the previous week.

Things to watch out for next week

  • The 1QFY22 result season has already started with TCS being the first company that reported earnings this week. The result season continues next week with Mindtree, Infosys, and Wipro set to announce their earnings.

Technological disruption accelerated in the past quarters – LTTS

Update on the Indian Equity Market:

Indian indices ended in the red for the 3rd consecutive day after profit booking by investors. The Nifty 50 ended at 15,722 (-0.2%), dragged by the MEDIA (-0.8%), BANK (-0.7%), and FINANCIAL SERVICES (-0.6%). IT (+0.6%) was the only sector which ended with gains. Among the Nifty 50 stocks, COALINDIA (+1.3%), RELIANCE (+1.2%), and DIVISLAB (+1.1%) ended with gains while SHREECEM (-1.9%), BAJAJFINSV (-1.8%), and POWERGRID (-1.5%) ended with losses.

Excerpts of an interview with Mr. Amit Chadha, CEO & MD, L&T Technology Services (LTTS) published in the Financial Express on 30th June 2021:

  • LTTS’s domestic market comprises plant engineering and product design related business, both for Indian conglomerates and MNCs. On the product design side, LTTS works with various global engineering centres or captive centres in the transportation, industrial products, medical and telecom segments. In the plant engineering segment, they help FMCG and chemical companies with the engineering support domain.
  • Over the past one year, LTTS has pushed the boundaries of virtual development by securing remote access to its labs and developing a Home Lab environment for select clients where engineers have high computer equipment replicated at their homes.
  • Engineering and the R&D (ER&D) services involve a suite of services- from ideation, conceptualisation, design, product development, testing and after-market launch, to support and enhance existing products.
  • In the current scenario, a lot of the work has evolved from physical to the secured virtual space- through simulation, high-end systems, and servers. This work can be done anywhere and can be accessed from anywhere.
  • Unlike other industries, the ER&D segment necessitates a part of the work to be executed and experienced upon in labs and requires the physical presence of the workforce in design centres.
  • A major trend LTTS is observing is the pace at which change is taking place. The acceleration of technological change and disruption that has been affecting processes, products, robotic automation in business functioning in the past few quarters has been different from that in the last 10 years.
  • The second megatrend observed is that companies are partnering with start-ups who have point solutions and are creating a technology ecosystem along with them. Enterprises are relying on bringing all the specialised capabilities and integrating them from start to finish. With the travel disruptions under the new normal, customers are comfortable with this nature of work being done out of offshore delivery centres.
  • The biggest change in technology trends is seen in the areas of electric autonomous connected vehicles, 5G technology, digital healthcare and digital manufacturing.
  • As an ER&D destination, India has gained prominence as a strategic R&D hub focused on innovation and disruptive technology. Clients seeking technology partners or India captive centres are no longer offshoring just for cost benefits, but to achieve flexibility and availability of talent, time to market, and localised products for developing and developed markets. This is where LTTS’ engineering domain expertise will help it stay ahead of its competition.
  • In the plant engineering segment, there has been a push from the Government with its ‘Invest in India’ initiative and promotion on setting up manufacturing facilities in India.

Asset Multiplier Comments

  • LTTS is a key beneficiary of the increasing tech adoption in ER&D. With 50% of its revenues coming from digital, LTTS will likely witness revenue growth from a growth in ER&D spends by Companies.

Consensus Estimate: (Source: market screener website)

  • The closing price of LTTS was ₹ 2,886/- as of 30-June-2021. It traded at 34x/ 29x/ 26x the consensus earnings estimate of ₹ 85.1/ 101/ 110 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,573/- implies a PE multiple of 23x on FY24E EPS of ₹ 110/-.

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.”

45% of sales from consumer segment helped margin expansion – Globus Spirits

Update on the Indian Equity Market:

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Excerpts of an interview with Mr. Shekhar Swarup, Joint MD, Globus Spirits (GLOBUSSPR) with CNBC-TV 18 on 21st June 2021:

  • They have been undergoing a structural change in the organisation in the last 18 months. There has been a higher demand for alcohol from Oil Marketing Companies (OMCs) in ethanol. That has helped increase margins for GLOBUSSPR.
  • There has been a structural change in the consumer segment. In FY21, 45% of the sales came from this segment, vs 35% in FY20. The increased sales from the consumer segment have also helped increase margins.
  • The lockdowns in April-May 21 have impacted volumes. In Rajasthan and Haryana, there haven’t been widespread lockdowns for alcohol sales. In West Bengal, there were lockdowns for some time. The impact hasn’t been as severe as the same time last year.
  • He believes they are in a position to grow the volumes in 1QFY22E.
  • As the share of consumer business is increasing, margins are growing. The cost escalation has been passed onto the consumers and he expects margin enhancement in the future.
  • They have an expansion project which is expected to be ready for operation in 3QFY22E. This is a 100 percent increase to capacities in West Bengal, which translates to about a third increase in their total capacities. Once these capacities come on stream, ethanol and ENA volumes are expected to grow further.
  • Manufacturing (distillery segment) margins were growing in the last 18months and have stabilised in the last 3months.
  • The premium segment is a new one for them and there be an investment into it for future growth.
  • The majority of the consumer business comes from the value segment. The Indian Made India Liquor (IMIL) and medium liquor segment has done well in FY21. Some new products are expected to be launched in this segment in FY22.

Asset Multiplier Comments

  • The company has a presence in 2 segments: Consumer business, marketing, and selling of IMIL and Indian-made Foreign Liquor (IMFL), and bulk manufacturing business of selling ethanol to OMCs and franchise bottling for brands.
  • GLOBUSSPR is expected to be one of the beneficiaries of the changing ethanol policy, leading to a growth in revenues and margin expansion. The focus on the consumer segment by addition of new products and distribution network expansion is expected to aid margin expansion.

Consensus Estimate: (Source: NSE website)

  • The closing price of GLOBUSSPR was ₹ 595/- as of 22-June-2021. The company reported an EPS of ₹ 48.9/- for FY21.
  • The consensus earnings estimate and price target estimates are not available.

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