Author - Pratik Talvatkar

Week in a Nutshell (14th November – 18th November)

Technical talks

NIFTY opened the week on 14th November at 18,376 and closed at 18,308 on 18th November. The index lost 0.4% during the week. The index’s next support and resistance levels would be 18,298 and 18,325 respectively. The RSI (14) of 64 indicates the index is in the overbought zone.

Among the sectoral indices, PSU BANK (+2.4%), BANK (+0.7%), and PRIVATE BANK (+0.4%) were the gainers during the week while MEDIA (-5.4%), CONSUMER DURABLES (-3.1%) and AUTO (-2%) led the losers.

Weekly highlights

  • The S&P 500 and NASDAQ ended the week marginally lower and lost 0.8% and 0.5% respectively however Dow Jones Industrial Average closed the week marginally higher with a 0.3% gain. St Louis Fed Reserve President alluded the Fed’s key policy rate will need to be further increased which was a cause of concern for investors. Data showed fewer Americans filed new applications for unemployment benefits last week, suggesting tightness in the labor market. The economy has survived rate hikes, according to a report released on Wednesday that highlighted solid retail sales growth in the previous month.
  • Both Brent crude and West Texas Intermediate closed the week negatively at $87.7 and $80.1 per barrel respectively, brent crude and West Texas Intermediate lost 8% and 10% respectively during the week. On Monday, the Organization of the Petroleum Exporting Countries (OPEC) cut down its global oil demand growth forecast for 2022 for the 5th time and reduced the next year’s outlook due to economic challenges including high inflation and tightening of the monetary policies across the globe. Oil demand is expected to increase by 2.55mn barrels per day (bpd) or 2.6% in 2022 down by 0.1mn bpd from an earlier forecast.
  • India’s retail inflation measured by the Consumer Price Index (CPI) data for the month of October stood at 6.77% vs 7.41% in September-22 and fell to a three-month low, data released on Monday. Despite the easing down, inflation data remains above the RBI’s comfort level of 6% for the 10th consecutive month.
  • India’s Wholesale Price Index (WPI) inflation for the month of October 22 fell to 8.39% vs 10.7% in September 22 and fell to the lowest since March 21. The decline in the rate of WPI inflation was primarily driven by price declines across the commodities.
  • Inflow of inflation data continues during the week, UK and Japan also released their inflation data. UK’s inflation jumped to 11.1% and rose to a 41-year high in October 2022 vs 10.1% in September 2022. Japan’s inflation also hit a 40-year high in October 2022 and stood at 3.6% vs 3% in September 2022.
  • India’s industrial growth measured by the Index of Industrial Production (IIP), delivered a growth of 3.1% above consensus estimates in September 2022. Growth in IIP is led by the mining, manufacturing, and electricity sectors.
  • International Monetary Fund (IMF) said, the global economic outlook is even gloomier than projected last month due to the tightening monetary policy on account of persistently high inflation, weak growth momentum in China, and ongoing supply disruptions and food insecurity led by Russia-Ukraine war. It has cut the global growth forecast to 2.7% from 2.9% earlier for 2023.
  • Indian IT companies L&T Infotech (LTI) and Mindtree have received approval for a merger from National Company Law Tribunal (NCLT) and they will start operating as an LTIMindtree effective from 14th November 2022. The board of both companies has fixed 24th November as a record date for the allocation of shares of the merged entity to eligible shareholders. LTI-Mindtree announced the merger in May 2022, postmerger Mindtree shareholders will get 73 LTI shares for every 100 shares of Mindtree.
  • India’s foreign exchange reserves stood at USD 530bn for the week ended 12th November 2022, which declined by USD 1.087bn. in the previous reporting week, the reserves declined by USD 6.561bn. the reserves have been declining as the RBI defends the rupee amidst of global pressures.
  • During the week both Foreign and Domestic institutional investors were the net buyers, Foreign Institutional Investors (FIIs) net bought shares worth Rs 3,492mn, and Domestic Institutional Investors (DIIs) net bought shares worth Rs 22,750mn.

 

Things to watch out for next week

  • US markets have a truncated next week as markets will be closed on Thursday, 24th November on account of Thanksgiving Day. Inventors will closely watch the initial jobless claims data and FOMC meeting minutes on 23rd
  • In India investors will closely watch the weekly forex reserve data next week, how the RBI is defending the rupee amidst global pressures. The result season in India for the July-September quarter officially ended during the week of 14th-18th We expect stock-specific action as the results are out of the way.

 

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.”

Basic checklist for an equity investment

When you decided to start investing, you end up with many options such as Gold, Real estate, bonds, Equity, Bank FDs, and many more. An equity investment attracts more to all types of investors whether an investor is risk averse, risk neutral or risk taker. The vision of every investor is to generate wealth while making an investment with or without having risk.

When you invest in equity you are not only buying a particular stock, you are buying a piece of business that generates value for you. Many people find difficulties while making equity investment decisions, but here are some basic checklists for equity investments that will help you to start your investment journey.

  1. What is your goal and time horizon? – the first step to choosing investments is to determine your goal, time horizon, and most importantly your risk appetite. No doubt everyone’s goal is to make money but some investors focused on generating additional income during retirement, and some investors focus on the capital appreciation and building wealth. While making an investment you also need to determine the time horizon because it plays an important role. Your time horizon could be based on your financial goals.
  2. Nature and perspective about business – “Never invest in a business you don’t understand,” the quote comes from Mr Warren buffet. One of the easy ways to burn capital is to invest in a business that you do not understand. Understand the type of business, current environment of the business, and outlook about the business along with the past financial track record of the company while investing.
  3. Uniqueness in business – A unique business model differentiates the company from its industry peers. Uniqueness in the business model indicates the company’s ability to maintain its competitive advantage over its peers. This translates into adequate margins, consistent cash flow generation, and increasing the company’s value over time.
  4. Quality of management – Do not only analyze the numbers but analyze the people behind the numbers. The quality of the management of the company plays an important role when making an investment decision. Father of growth investing, Mr Philip A Fisher says, investors should pick such companies for investments that have managements that show a strong sense of trusteeship and moral responsibility to their shareholders.
  5. Financial ratios are critical – Balance sheet, Profit and loss statements, and cash flow statement are the three main documents released by the company. With the help of these, you can evaluate a variety of financial ratios, performance, historical growth, and financial strength. Understanding the financial ratios will lead you to move in the right direction. You can evaluate this ratio between different years and between its industry peers. Many basic ratios are critical for analysis such as Return on Equity (ROE), Return on Capital Employed (ROCE), Debt to Equity, inventory, and asset turnover ratio, profitability margins, and many more.
  6. Be aware of value traps – Some companies look undervalued relative to their industry peers. There is always a risk that the company looks undervalued and might it suffering from financial distress and low future growth potential. Many new investors fall into this value trap. To avoid that trap always evaluate the company’s financial numbers, quality of management, competitive advantages, and nature of business.
  7. Avoid rumours – Another easy way of losing capital is to chase rumours and speculative news. Do not hurry and buy stock on such news without checking new developments. It is all right to not buy the stock which looks attractive based on the rumours and speculations.

At the end of your research process, you might end up with a list of limited numbers of companies. It is fine. Your research process helped you to eliminate companies which not suitable for your financial goal, and your risk appetite.

Happy Investing!

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 (12th – 16th September)

Technical talks

NIFTY opened the week on 12th September at 17,891 and ended in the red at 17,531 on 16th September, after high volatility during the week. The index lost 2% during the week. The next support and resistance levels for the index would be 17,497 and 17,636 respectively. It broke its 20 DMA levels and closed below that.

Among the sectoral indices, METAL (+1.9%), PRIVATE BANK (+1.3%), and BANK (+0.9%) were the gainers during the week while IT (-7%), REALTY (-3.3%) and OIL & GAS (-3.2%) led the losers.

Weekly highlights

  • US major indices witnessed huge volatility during the week and closed the week in the red, inflation data and the federal reserve’s announcement in the next week regarding interest rate dragged down the investors’ sentiments the S&P 500, Nasdaq, and Dow Jones closed the week with heavy loss of 5%, 6%, and 4% respectively.
  • Oil prices fell for a third straight week, the Brent crude and WTI crude closed with a loss of 1% and 1.3% respectively during the week.
  • India’s retail inflation based on Consumer Price Index (CPI) surged to 7% in Aug-22 and burst the downward trend of the last 3 months. The surge was mainly led by higher food prices, as it accounts for nearly half of the CPI basket. The inflation remains above the RBI’s tolerance level of 6% for the last 8 months in a row. Along with CPI India’s Wholsale Price Index (WPI) data was also released. India’s WPI inflation stood at 12.4% in Aug-22, a decline from 13.9% in Jul-22, drop in fuel prices dragged down the WPI inflation below the previous month.
  • US CPI data was released during the week ahead of the Federal Open Market Committee (FOMC) meeting in next week, US CPI inflation stood above the expectation at 8.3% for Aug-22. The decline in gasoline prices helped to cool down the rate compared to the previous two months’ rate but the cost of food, housing, and autos remains elevated.
  • Mining conglomerate Vedanta and Taiwanese electronic manufacturer Foxconn announced an investment of Rs 1,540 Bn for India’s first semiconductor plant in Gujrat through a 60:40 joint venture. The plant is expected to start production in two years. Local manufacturing of chips is expected to bring affordability to manufacturing electronic devices and it will reduce the dependency on other countries.
  • Union health and family welfare ministry of India released the National List of Essential Medicines 2022 (NLEM 2022) on Tuesday. The NLEM 2022 consists of 384 drugs vs 376 drugs in 2015. New 34 drugs were added and dropped 26 drugs in the new list. The National Pharmaceuticals Pricing Authority (NPPA) fixes the prices for these drugs. The government said several important medicines will become more affordable and reduce patients’ out-of-the-pocket expenditure.
  • On Thursday, IMF spokesperson stated that the global economic outlook continues to be dominated by downside risk and in CY23 some countries are expected to fall into recessions, but it is too early to say if there will be a widespread global recession. IMF revised down the CY22 and CY23 global growth to 3.2% and 2.9% respectively in Jul-22.
  • Data released by the commerce ministry of India shows India’s merchandise export stood at USD 33.9 bn and trade deficit stood at USD 27.9 bn for the month of Aug-22. Electronic goods, rice, oil meals, tea, coffee, and chemicals witnessed positive growth.
  • Foreign investors invested ~ Rs 56 bn into the domestic equity markets in September so far in the anticipation of growth in consumer spending on account of the upcoming festive season and stronger macro fundamentals than other emerging markets.
  • The foreign institutional investors (FIIs) and Domestic institutional investors (DIIs)  both were the net sellers during the week. FIIs sold equities worth Rs 19,216mn and DIIs sold equities worth Rs 29,368mn.

Things to watch out for next week

  • Next week will be very crucial for the global financial markets as the investors will closely watch the Federal reserve’s FOMC interest rate decision on Wednesday and the Bank of England MPC meeting on Thursday as well as initial jobless claims in the US.
  • The investors might ride a rollercoaster in the next as volatility will likely persist in the next week amidst central banks’ stance on interest rates, heated inflation, and raw material and supply chain uncertainties on account of geopolitical tensions and elevated commodity prices.

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.”

Do market crashes hurt us?

Stock market shocks or crashes are part of market life cycles and market shocks are unavoidable. The market also needs some correction after a big rally, but honestly, as an investor, we need not worry about them. In the market crash, our portfolio also crashes but all of those are unrealized losses. Our investments only convert into losses after we sell them in the losses.

Source – Chartink.com

The above picture is a witness of how the market has recovered after the market crashes in 2008-09 and 2020-21.

During the market crash, everyone has the same question which is “What do we do now?” the simpler answer is, to do nothing, all we need to do is while investing. If you believe in your investment strategy, don’t need to change it, people sell in panic and often regret their decisions. “Nothing lasts forever”.

But we all know it’s not easy to watch our investment portfolio fall continuously along with the market but we can control the damages by taking some easier steps, so let’s discuss these steps.

Start early – Early investments helps to create higher wealth and compound your wealth rapidly. It gives more time to grow your investments and keeps you disciplined about your investment decisions. If your investment span is 20-25 years then 2 or 3 market crashes don’t affect your portfolio value.

Diversification“don’t put all your eggs in one basket” is an old saying on the street that simplifies diversification. If our portfolio has huge exposure to one specific stock or sector then no one can save us from the concentration risk. If something went wrong with that particular stock or sector, our overall portfolio value will come down even if the market is performing better. While investing, we need to be sure that we do not invest a large chunk of money in a specific stock or sector and that our portfolio is well diversified. The over-diversification also hurts us as we add so many stocks from different sectors it is difficult to keep a track of all. Often our decisions go wrong.

Investment in fixed income securities – Like the diversification in sectors and stocks, we need to diversify our investment portfolio with investments in the different asset classes. While equity markets are struggling for most investors, fixed-income securities are safe houses. As the name fixed income securities suggests, they give you a fixed return on your investments. If you invested in both equity as well as fixed income securities your losses from the equity are set off by the returns from fixed income securities. In fixed-income securities, you can invest in corporate and treasury bonds and Bank deposits.

Avoid panic selling – During the market crash, negative news and bad sentiments influence many investors to get out of their investments even in the losses. After every crash markets have recovered. Because of some short-term challenges, don’t change your long-term strategies and be invested.

Good opportunity to buy? – Lower and discounted prices look tempting to buy and average out your investments but not every discounted price needs to be a good opportunity. Avoid panic buying. But market crashes allow us to add good stocks to our portfolio as most of the good stocks are traded at lower prices. Here we can use a staggered way of investing, we do not invest all our money at once we should make systematic plans to invest for when to buy and how much to buy because no one knows where the market is heading.

If we stick to our long-term investment strategy and avoid some silly mistakes the market crash doesn’t hurt more.

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 research and analysis and should consult their investment advisors to determine the merit, risks, and suitability of the information provided.”

Monsoon – One of the key growth drivers of the Indian economy?

Southwest monsoon arrives early in the mainland of India and it covered many Indian states and union territories but many of those states have received deficit rainfall in early June.

But wait, why does it matter to us, how the excess or deficit rainfall is going to affect the Indian economy and Investors?  So, let’s discuss

In India, the monsoon season starts in June and lasts till September. India receives more than ~70% of rainfall in this period. India is an agrarian economy and more than half of the workforce is engaged in agriculture and the allied sector. The farm sector also has a double-digit contribution to India’s GDP.

*LPA – Long Period Average

Here is the equation – Good monsoon = Good farm output = Strong consumer demand and vice versa

The monsoon has a direct relationship with the agricultural and allied sectors. Approximately half of India’s total food output is contributed by Kharif crops that are largely dependent on monsoon. A good monsoon season accelerates the farm output and boosts the income of the farmer community. This improves the spending power of rural areas which leads to strong demand sentiments. There is a hidden part of the above equation which is “Inflation”. Normal monsoon and bountiful harvest keep inflation under control since food contributes ~45% in the consumer Price Index (CPI). That is why a normal monsoon is a crucial factor for the inflation.

If we record deficit and a drought-like situation, it will directly weaken the farm production and lowers the income of the farmers. This reduces the consumption demand. At the same time, we get a hit from inflation as lower food production accelerate the food inflation. The government may have to spend towards import of food and adversely impacts the overall economy.

Sectors that have a large exposure to monsoon –

  • Consumer –India’s rural market contributes a significant share of the revenue of the Indian companies. Many Indian consumer companies are expanding their reach and significantly stepping up direct distribution in rural markets. The normal monsoon will improve the purchasing power of the rural population and may revive the sluggish rural demand and drive revenue growth.
  • Automobiles and farm equipment – Tractor companies have a direct relationship with the monsoon. A good monsoon improves the farmers’ spending capacity for better farm equipment. This will effectively result in better crop yields. Major Indian 2W makers derive ~50% of their revenue from the rural areas. This demand is again dependent on the agricultural growth.
  • Agro chemicals and fertilizers – Agrochemicals and fertilizers business directly depends on farmers’ income and agricultural growth. Companies derive their major revenues during the monsoon period. As the good monsoon sentiments enable farmers to spend more on crop care protection chemicals and fertilizers.

In the short, we need a normal monsoon for the smooth economic activity, especially in rural areas, So, let’s hope and pray for a good and normal monsoon every year.

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

 

Expect good growth potential in the credit card industry – SBI Cards

Update on the Indian Equity Market:

On Tuesday, NIFTY closed in the red at 16,416 (-0.9%), dragged by TITAN (-4.5%), UPL (-4.4%), and DRREDDY (-3.9%). ONGC (+4.8%), NTPC (+1.5%), and COALINDIA (+1.4%) were the top gainers. Among the sectoral indices, OIL & GAS (+0.9%) and AUTO (+0.5%) were the only gainers while CONSUMER DURABLES (-2.3%), REALTY (-1.7%) and MEDIA (-1.6%) led the losers.

Excerpts of an interview with Mr. Rama Mohan Rao Amara, MD & CEO, SBI Cards (SBICARD) with ETMarkets on 7th June 2022:

  • In FY22 the company’s new accounts grew by 33% YoY and cards in force have delivered a growth of 16% YoY. The RBI consumer confidence survey suggests an improvement in consumer confidence and continued recovery despite global and domestic economic headwinds.
  • The company’s medium to long-term strategy in card sourcing continues to be at similar levels in the open market and BANCA channels with some variance. SBICARD aims to focus on sustainable growth in card volume and spending going forward.
  • In the current scenario of the central bank increasing interest rates, SBICARD’s interest cost will also go up slowly in line with the industry. Over the years SBICARD’s long-term borrowing mix will increase, which will help to reduce the impact of higher interest rates.
  • Mr. Amara said that the overall impact will be gradual due to revising interest rates, but said if the impact is higher then the company will pass on some hikes on new EMI bookings and wherever possible to offset the impact.
  • Credit card growth depends on a combination of factors. In India, the credit card market is underpenetrated, and inflationary pressures might be impacting spending and it differs from product to product
  • Spending on credit cards has seen a steady increase even during the Covid period. At SBICARD spending grew by 51% in 4QFY22 vs 11% in 4QFY21 YoY, despite the key categories such as travel, entertainment, and dining being impacted. The company expects robust growth in spending as key categories are coming back to normalcy.
  • The company’s Co-brand card portfolio contributes a significant share of the revenue. Many of their Co-brands have gained good traction and the company will also continue to explore similar synergies going forward.
  • Credit card continues to be an important payment format in the country. In April-22 the outstanding credit cards registered a growth of ~21% YoY and grew over the 75mn mark.
  • Despite the growth, he believes that the credit card market is underpenetrated in the country as compared to globally and expects a huge potential for growth in this sector.
  • Due to Covid, the digital payment mode has been accelerated. As per RBI data in Apr-22, E-commerce spending stood at ~Rs 657bn, and the overall credit card share stood at ~60%.
  • ~54% of SBICARD’s retail spends contributed by online spending and continues to grow, in the past two years categories like health and fitness, rental, utilities, education, etc have emerged significantly.
  • The company has seen a healthy increase in EMI conversions and the share of EMI also increased from 29% in 4QFY21 to 34% in 4QFY22.

Asset Multiplier Comments

  • We expect credit card spending to register healthy growth as economic activities start to pick up. With a recovery in key categories such as travel, entertainment, dining, etc., and with a widespread network of SBI branches and a strong customer base, SBICARD is well-positioned to capture the growth in the Credit card industry.
  • We expect the current cycle of interest rate hikes might affect the profitability in the short term. But SBICARD’s improvement in its asset quality and increased long-term borrowing mix may help cushion the impact. if the company were to increase its lending rates, its market share could be impacted.
  • Its robust distribution network, co-branded channels, strong open market sourcing capabilities, lower customer acquisition costs, better asset quality, and strong parentage with sizable opportunities are the key positives for the stock. But the increasing competitive intensity from competitors and new-age fintech companies might become an area of concern for the company.

Consensus Estimates: (Source: market screener website)

  • The closing price of SBICARD was ₹ 765/- as of 07-Jun-2022.  It traded at 7.4x/5.9x the consensus book value per share estimate of ₹ 103/130 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,128/- implies a P/BVPS multiple of 8.7x on the FY24E BVPS estimate of ₹ 130/-.

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 (23rd May – 27th May)

Technical talks

NIFTY opened the week on 23rd May at 16,291 in the red and ended in the green at 16,352 on 27th May, after high volatility during the week. The index gained 0.4% during the week. The next support and resistance levels for the index would be 16,253 and 16,414 respectively. It breached its 20 DMA levels and closed above that. The RSI (14) of 48 indicates the index is moving towards the overbought zone.

Among the sectoral indices, FINANCIAL SERVICES (+4.3%), PRIVATE BANK (+4%), and BANK (+3.9%) were the gainers during the week while METAL (-8.7%), OIL AND GAS (-3.7%) and REALTY (-3.3%) led the losers.

Weekly highlights

  • US major indices closed the week in green after the 7 weeks of consecutive losses, the S&P 500, Nasdaq, and Dow Jones closed the week with gains of 6%, 7%, and 5% respectively. The rally was led by factors such as minutes from the federal reserve’s FOMC May meeting, a fall in weekly jobless claims, and inflation slowed slightly in April.
  • Oil prices settled higher on Friday supported by the demand will continue to be elevated, the Brent crude and WTI crude closed with a gain of 1% and 0.9% respectively.
  • The government of India has waived the customs duty on the import of some raw materials used by the steel industry and increased the tax on the exports of iron ore and concentrates to 50% from 30% earlier. This measure was taken to cool off the elevated steel prices in India. These duty changes in raw materials and intermediaries will lead to more availability of steel in the domestic market and reduce the elevated steel prices which give some relief to industries such as auto, construction, etc. who already struggling with supply challenges and input cost pressures.
  • On 25th May 2022, The power ministry said that they are working on a scheme to liquidate the past dues of power distribution companies (discoms). This scheme will provide relief to the entire chain in the power sector which is currently struggling under the pressure of non-payments. Delay of payments by discoms to power generating companies affects the cash flows and disrupts the provisions for the input supply such as coal. But this scheme will provide adequate liquidity and ensures that the discoms will pay their dues regularly.
  • Amidst retail inflation surging the government of India announced the reduction in excise duty on petrol and diesel by Rs 8 and Rs 6 per liter respectively, and effectively this will reduce the petrol and diesel price by Rs 9.5 and Rs 7 per liter respectively. Along with the central government, some state governments have also slashed the value-added tax (VAT) on petrol and diesel. This reduction in excise duty on fuel will help the consumers and corporates while battling inflation.
  • Department of promotion of industry and internal trade (DPIIT) said the total FDI equity inflows were at USD 58.77bn in FY22 vs USD 59.63bn in FY21 in India, a contraction of 1% in FY22. Although the total FDI into India stood at USD 83.57bn in FY22 and rose by 2%, Singapore, the US, and Mauritius remain the top 3 contributors to FDI while IT, Auto, construction, and pharma sectors attracted the highest inflows.
  • On 26th May 2022 ONGC said that they will invest Rs 310bn over the next 3 years to explore the basin for oil reserves, this will augment the production of the nation in its attempt to be self-reliant in the energy sector. In this program ONGC is trying to explore ~1700mn tonnes of oil and oil equivalent gas.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 96,890mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 112,580mn during the week.

Things to watch out for next week

  • The report on India’s GDP growth, which is due on Tuesday, will be closely watched by investors. Aṣ India’s economic recovery from the Covid-19 pandemic is expected to have stumbled again in the Jan-Mar period.
  • On Monday the US indices are closed on account of the Memorial Day but in the truncated week investors will closely watch the May employment report, monthly vehicle sales, and Federal Reserve’s beige book.
  • The 4QFY22 earnings season is coming to an end. The Automobile companies are expected to release the monthly volume data for May, which will be closely watched. The volatility will likely continue next week amidst results, institutional activities, India’s GDP data, and global cues.

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.”

 

Reducing dependency on two-wheeler segment – Minda Corporation

Update on the Indian Equity Market:

On Thursday, NIFTY settled down lower at 15,809 (-2.7%). HCLTECH (-6%), WIPRO (-5.8%), and INFY (-5.2%) were the top losers. ITC (+3.4%), DRREDDY (+1%), and POWERGRID (+0.4%) were the only gainers. Among the sectors, IT (-5.7%), METAL (-4%), and PSU BANK (-2.7%) led the losers. There were no sectoral gainers for the day.

Excerpts of an interview with Mr. Aakash Minda, ED, Minda Corporation (MINDACORP) with ET Now on 18th May 2022:

  • The company delivered revenue of Rs 9,470mn with an EBITDA margin of 11.4% and this was in line with management guidance of delivering consistent and improved performance.
  • MINDACORP is targeting to grow and perform more than 10-15% above the industry on a quarterly and annually and deliver consistent and sustainable EBITDA in double digits.
  • On Electric vehicles (EV) he said, MINDACORP has a very strong order book. In FY22 the company received a lifetime order book worth Rs 9,500mn and from FY23 it will start contributing to the revenues of ~Rs 700-800mn.
  • MINDACORP’s ~45-50% revenue was contributed by the 2W segment but this segment did not perform well. The company is focusing on diversifying its segments and reducing its dependency on 2W from ~50% to 40-45% and growing in other areas like passenger cars.
  • In FY22 the export revenues stood at 12% of total sales but in FY23 the company expects that the exports will be more than FY22.
  • On geographic expansion, America and Europe are the biggest markets of exports for the company but it is also focusing on entering into newer geographies.
  • In the last two years, raw material and logistics prices have gone up significantly and have impacted MINDACORP, although the company Is doing back-to-back arrangements with the customers the lag persists.
  • The company expects the input costs pressures and semiconductor chip shortage will continue in FY23 which will drag down the growth and profitability of MINDACORP and the overall industry for the upcoming quarters and years.
  • For FY23, it will maintain its CAPEX spend of ~4-5% of revenues and invest in new technology and smarter, futuristic, and advanced products. All the CAPEX will be funded from internal cash accruals.

Asset Multiplier Comments

  • Management’s guidance of outperforming the industry through contract wins in EVs increased revenues from CVs, and export focus will be key positives for the company.
  • Higher input costs, supply chain issues, semiconductor chip shortage, higher fuel costs, and increasing inflationary pressures on consumers are the key risks for the overall auto and auto component industry.
  • We believe Management’s target of reaching 12% EBITDAM by end of FY24E is achievable on the back of premiumization, improved product mix, commercial vehicle pick up, stable copper prices, localization of components, and productivity of labor.

Consensus Estimates: (Source: Market screener website)

  • The closing price of MINDACORP was ₹ 199/- as of 19-May-2022.  It traded at 20x/ 16x the consensus earnings estimate of ₹ 10/ 12.7/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 264/- implies a P/E Multiple of 21x on the FY24E EPS estimate of ₹ 12.7/-

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

Expect to maintain 20% EBITDA margins – DABUR

Update on the Indian Equity Market:

On Wednesday, NIFTY ended lower at 16,167 (-0.5%). Among the sectoral indices, REALTY (+0.7%), BANK (+0.6%), and PRIVATE BANK (+0.5%) were the gainers, whereas IT (-1.2%), AUTO (-0.9%), and CONSUMER DURABLES (-0.7%) led the losers. Among the stocks, ONGC (+3.1%), AXISBANK (+2.5%), and INDUSINDBK (+1.7%) led the gainers, while SHREECEM (-3.3%), BAJAJFINSV (-2.2%), and LT (-2.1%) led the losers.

Excerpts of an interview with Mr. Mohit Malhotra, CEO of Dabur India (DABUR) with CNBC-TV18 on 6th May 2022:

  • On the back of the price increases that have happened across the industry, DABUR foresees a reduction in the volumes of the overall FMCG market.
  • In 4QFY22 the FMCG market declined by ~4%. As compared to the FMCG market, DABUR’s volumes grew by ~2%. The tonnage growth for the 4QFY22 stood at ~12%. While evaluating the volume growth it becomes 2% as the company sells juices in the beverage segment which have a lower value.
  • The company expects that it will grow at a mid-single-digit volume growth and low double-digit value growth with the support of price hikes and increases in volumes. It expects to grow ahead of the market and continue to gain market share across all categories.
  • The oral care business has grown at ~2.5% on a high base of last year and in toothpaste, DABUR gained a market share of 20bps. The oral care business is performing well in terms of revenue and profitability, and the company has also taken some price hikes to mitigate the cost inflation.
  • Dabur Red and Meswak also growing significantly. Herbal toothpaste which is a new category is also performing significantly well.
  • The overall hair care business grew by 16% on a YoY basis. In the hair care business, the market declined by ~6.5% but DABUR grew by ~3%.
  • In the overall hair oil market, DABUR gained ~70bps of market share and in all sub-segments of hair oil, it continues to gain market share. In the shampoo segment also the company grew ahead of the market and gained ~40bps market share.
  • On the back of the high base of 4QFY21, the growth looks a little bit muted in 4QFY22. However, the full-year growth numbers are very robust, the businesses are in good positions and the fundamentals also remain intact.
  • On operating margins the company targets to maintain ~20% EBITDA margins through further price hikes and cost-cutting measures.
  • The company also taking some measures to expand distributions as rural contributes ~47% of total business. The company expects by the end of 1QFY23 the rural consumption to be back to normal levels on the back of good monsoon and crop sentiments. It expects the rural business will continue to grow higher than urban business.
  • The company continues to invest in its brands and the company is in a good position in advertising spending.

Asset Multiplier Comments

  • The geopolitical tensions coupled with high inflation are liked to impact the demand for discretionary items in the near term. Though companies have taken measures such as reduction in grammage or price hikes, these have not been sufficient to abate the high inflation. The margins of the companies are expected to remain under pressure in the medium term.
  • Market share gains from its peers in all categories, entry into adjacent categories and focus on premiumization position DABUR well despite shorter-term headwinds.

Consensus Estimates: (Source: Market screener website)

  • The closing price of DABUR was ₹ 510/- as of 11-May-2022.  It traded at 44/ 38x the consensus earnings estimate of ₹ 11.5/13.4 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 628/- implies a P/E Multiple of 47x on the FY24E EPS estimate of ₹ 13.4/-

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

Citec acquisition helps to eliminate some cyclicality from the market – Cyient

Update on the Indian Equity Market:

On Wednsday, NIFTY settled 162 points lower at 17,038 (-0.9%). BAJFINANCE (-7.2%), BAJAJFINSV (-3.8%), and TATACONSUM (-2.8%) were the top losers. HEROMOTOCO (+3.9%), TATASTEEL (+1.3%), and ASIANPAINT (+0.6%) were the gainers. Among the sectorial indices, MEDIA (+0.07%) only were the gainer while FINANCIAL SERVICES (-1.5%),  FINANCIAL SERVICES 25/50 (-1.4%) and CONSUMER DURABLES (-1.1%) led the losers

Cyient announced the acquisition of Citec on 25th April 2022 for EUR 94mn. Citec is a plant and product engineering services company that serves customers in the energy and mining industry.

Excerpts of an interview with Mr. Krishna Bodanapu, MD & CEO, Cyient  on CNBC-TV18 on 25th April 2022:

  • The idea behind Citec acquisition is to expand Cyient’s footprint into plant engineering space where Citec is well-positioned. This is a good opportunity for the company to diversify the risk which exists in its current product portfolio and this acquisition helps to eliminate some cyclicality from the markets where the company operates.
  • Citec primarily operates in plant design and plant engineering. All the new plants are coming that especially focus on diversifying from some of the traditional sources of energy and focusing on renewables such as hydrogen, LNG, etc. These are the unique capabilities that Cyient is getting with this acquisition.
  • Margins of Citec are approximately similar to what Cyient generates. Citec has a good global mix and has strong capabilities in Europe, especially in the Nordic countries. Citec has a large team in India and it has built a good balance of domain expertise and cost.
  • Bodanapu said they see similar growth potential in the Citec business as that of Cyient. The growth of Citec will converge more towards the Cyient growth including the guidance that management provided of 13% to 15% in the next one or two years because the company has to leverage some of the synergies and harmonize some of the operations. The company expects double-digit growth in the immediate term and then converges into Cyient’s growth.
  • From the revenue side company expects good synergies because Citec primarily operates in three areas such as plant engineering, digital plant engineering, and product engineering where the capabilities of Cyient align very well with the Citec capabilities.
  • In terms of the transport business the growth in this segment will be a little bit lower but the company seeing the recovery in the transport business as the defense business continues to do well, the engineering work started to happen and the maintenance, repair, and operations continue to come up steeply. The company expects the transport growth will be lower but other sectors will deliver good growth.
  • Bodanapu said, the company is going to add a significant batch of freshers over the next few months. The supply crunch coupled with significant wage inflation and a rise in the other expenses is likely to cause inflation in the mid-single digits. The company expects there are going to be headwinds, especially with the cost inflation but also the company seeing good tailwinds where the company broke the linearity of adding people to add revenue.

Asset Multiplier Comments:

  • We believe that this acquisition helps Cyient to diversify its product portfolio and services because it is heavily concentrated in aerospace, rail transportation, and communication. Post this acquisition the company can expand its presence in Energy, Industrial, and Plant Engineering which currently contributes ~2% of total revenues.
  • Citec will provide access to multiple European-based global companies and this will also provide a cross-selling opportunity for Cyient.
  • We think that this acquisition enables Cyient to expand its presence in the Europe region, especially in the Nordic countries with the help of the strong brand value of Citec where Cyient has a relatively smaller presence.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of CYIENT was ₹ 899/- as of 27-Apr-2022. It traded at 17x/ 15x the consensus earnings estimate of ₹ 53/ 61 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,140/- implies a P/E Multiple of 19x on the FY24E EPS estimate of ₹ 61/-

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.”