Author - Pratik Talvatkar

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.”

Entertainment first company that contains learning: Nazara Technologies

Update on the Indian Equity Market:

On Monday, NIFTY settled 109 points lower at 17,675 (-0.6%). HCLTECH (-2.7%), LT (-2.6%), and INFY (-2.5%) were the top losers. GRASIM (+2.6%), ADANIPORTS (+1.8%), and CIPLA (+1.5%) were the gainers. Among the sectors, IT (-1.1%), FINANCIAL SERVICES (-0.56%) and FINANCIAL SERVICES 25/50  (-0.53%) led the losers OIL&GAS (+1.9%), MEDIA (+1.4%), and REALTY (+1.1%) were the gainers.

Excerpts of an interview with Mr. Manish Agarwal, CEO, Nazara Technologies (NAZARA) published in Business Standard on 9th April 2022:

  • The journey from a telco value-added services provider in 2017 to a diversified e-sports company gives the belief that the company had volume, velocity, leadership, IPs, and also the predictability and visibility of revenues.
  • The telco subscription business segment currently contributes less than 10% of total business and the business that the company was not operating in the last five years, is now dominating the portfolio.
  • Skill-based real money gaming contributes only 4% of the company’s business while its market share in the gaming industry is almost 80%.
  • But the company is not aggressively expanding its offerings in the real money gaming business segment as it doesn’t have more clarity. With more clarity on taxation of skill-based real money gaming, the offerings will be expanded.
  • NAZARA is an entertainment-first company that also contains learning, NAZARA is not a learning-first company like Byju’s or Unacadamy. NAZARA has an aim that the child should get entertained and along with entertainment children can get a certain amount of learning.
  • The Company’s product portfolio has varied offerings for different age groups. For the age group of 2-7 years the company has the subscription-based product which is Kiddopia and for the age group of 7-12 years company has games like Roblox where kids have a social community and they can create their games.
  • To expand its business the company is making investments to acquire more IP’s, distribution capabilities, and advertising tech stacks for better monetization. After expanding in India, the company plans to expand its business in the Middle East and Africa.
  • NAZARA’s positioning as a gaming company from India has a halo effect and other benefits that will result in the coming years but it’s tough to explain the company’s diversified portfolio and gaming business model.

Asset Multiplier Comments

  • We expect that the increased penetration of skill-based real money gaming and which contributes ~80% to the gaming market to create new opportunities for the company where the company doesn’t have a strong presence.
  • We believe that the reopening of schools and colleges may impact the number of users as students are now busy with offline schools and examinations. However, 1QFY23 might be a strong quarter for the company due to school vacations. Its diversified product offering is a key positive for the company.

Consensus Estimate: (Source: market screener website)

  • The closing price of Nazara Technologies was ₹ 1,675/- as of 11-April-2022. It traded at 81/ 54x the consensus EPS estimate of ₹ 21/31/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,428/- implies a P/E Multiple of 78x on the FY24E EPS estimate of ₹ 31/-.

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.”

Antiretroviral API sales expected to normalize from 1QFY23 – Laurus Labs

Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 17,325 (+0.6%) near the day’s high of 17,344. PHARMA (+1.5%), HEALTHCARE (+1.3%), and CONSUMER DURABLES (+1%) were the top sectoral gainers. MEDIA (-1.2%), PSU BANK (-0.8%), and OIL & GAS (-0.2%) led the sectoral losers. Among the NIFTY50 components, EICHERMOT (+4.5%), HDFC (+3.3%), and DIVISLAB (+3.2%) led the gainers. HEROMOTOCO (-6.7%), ONGC (-3%), and COALINDIA (-2.7%) led the losers.

Laurus Labs has been granted a license to manufacture Molnupiravir and Paxlovid, the COVID drugs from the Medicines Patent Pool (MPP).

Excerpts of an interview with Dr. Satyanarayana Chava, founder, and CEO, Laurus Labs (LAURUSLABS), with CNBC-TV18 on 28th March 2022:

  • To treat the COVID virus Paxlovid is a more effective drug compared to Molnupiravir. As the number of cases in Asia except in China and Africa is declining significantly.
  • On opportunity, Mr. Chava said, as an API or formulation for Paxlovid company didn’t see a great opportunity in the emerging markets. As the company got the license, they are preparing themselves to grab the opportunity available to them.
  • Mr. Chava added it will take 3 to 4 months for the company to file for regulatory approval after that it will see a clear picture of the opportunity for the company. It’s too early to comment on the opportunity and currently, the company doesn’t see any visibility.
  • Logistics challenges from China and higher prices of petrol-driven solvents are impacting margins but due to the company’s scale, it can manage the impact better than its peers. The company has the challenge of passing higher input costs to customers.
  • On the margins front, the Company can maintain its EBITDA margin of ~30% and the company expects despite the input cost challenges company will be able to manage its margins.
  • The company has 11 final approvals and several tentative approvals for antiretroviral to sell in low and middle-income country (LMIC) markets. The company expects two more final approvals lined up in the coming months.
  • In FY22 company has a challenge in antiretroviral API sales but the company expects 4QFY22 will be a better quarter. From 1QFY23 onwards company expects normalcy in API sales. It also got new approvals in the formulation and it expanded its geographies for formulations and custom synthesis business also performing well.
  • The company expects growth in all divisions in FY23 and is targeting revenue of USD 1bn by FY23.
  • LAURUSLAB received an order from a Global Life Science company in February 2022. The company has started its supplies and is preparing to produce larger quantities in the coming quarters and also the company is well-positioned to deliver its order.

Asset Multiplier Comments

  • We believe that the recent approvals to LAURUSLAB for Molnupiravir and Paxlovid are not likely to add any major incremental revenues as covid cases subside and peers of LAURUSLABS also got the approval for the same drug and this might not add any competitive advantage for the LAURUSLAB.
  • We expect that the issues in antiretroviral API sales to be normalized from 1QFY23 with continuous improvement but lockdowns in China and geopolitical tensions are leading to higher input costs that can put pressure on margins in the shorter term.

Consensus Estimate: (Source: market screener website)

  • The closing price of LAURUSLABS was ₹ 592/- as of 28-March-2022. It traded at 28x/22x the consensus earnings estimate of ₹ 21/ 27/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 575/- implies a P/E Multiple of 21x on the FY24E EPS estimate of ₹ 27/-.

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

Week in a nutshell (21st – 25th March)

Technical talks

NIFTY opened the week on 21st March at 17,329 and ended at 17,153 on 25th March. Amid the geopolitical tensions and oil prices volatility, the Indian benchmark index closed in the red with a weekly loss of 1%. The next support and resistance levels for the index would be 17,024 and 17,442 respectively.

Among the sectoral indices, MEDIA (+7%), METAL (+5%), and OIL & GAS (+3%) were the gainers during the week. CONSUMER DURABLES (-5%), FMCG (-3.4%), and FINANCIAL SERVICES (-3%) led the losers.

Weekly highlights

  • The S&P 500 and Dow Jones ended higher on Friday and Nasdaq closed marginally lower. Financial shares rose on Friday and boosted S&P 500 as the US treasury yield jumped to near its 3 years high. Investors will watch how the Federal Reserve will tighten its policy after Fed Chair Jerome Powell this week said the central bank needs to move quickly to combat high inflation.
  • Oil prices recovered from early losses and ended higher on Friday after the two consecutive weekly losses as the missile attack hit Saudi Aramco’s storage facility and Saudi Arabia warned the crude supplies are at risk. Brent Crude and West Texas Intermediate finished the week at USD 119 and 113 a barrel up 10% and 8% for the week respectively.
  • In India, petrol prices continue to increase. The oil companies hiked the price by 80 paise per liter on Saturday, this is the fourth hike in the last five days. Oil companies started the series of price hikes from 22 March and petrol price increased by Rs 3.20 per liter till date from 22 March. Since 4th November 2021 prices had been frozen. These will lead to inflationary pressure on Indian consumers as well as organizations.
  • India’s exports exceeded USD 400bn in 2021-22, added ~USD 110bn through the year with a 37% increase on an annual basis. Engineering goods, petroleum products, gems, and jewelry witnessed an increase in the share of exports. Even electronics goods and agricultural commodities saw an uptick in exports.
  • United Nations downgraded India’s projected economic growth for 2022 from 6.7% to 4.6%. India in particular will face restraints on several fronts like energy access and prices, primary commodity restrictions, food inflation, tightening policies, and financial instability.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 53,450mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 40,250mn.

Things to watch out for next week

  • Investors enter the last week of FY22. This typically sees tax-loss harvesting and NAV management by institutional investors. We expect to see increased volatility in mid and small-cap companies till the end of March. From 1st April, quarterly and annual volume and the business update will likely be driving the market. Investors will be focused on Indian Auto companies’ volumes data for March-22.
  • Indian equity markets remain volatile next week amidst rising geopolitical tensions between Russia and Ukraine, a series of petrol price hikes, pressure on crude oil prices due to a missile attack on Saudi Aramco’s storage facility.

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.”

Supply-side issues disrupting demand fulfilment – Motherson Sumi

Update on the Indian Equity Market:

On Monday, NIFTY50 ended in green at 16,871 (+1.5%). Among the sectoral indices, MEDIA (+2.5%) BANK (+2.2%), and FINANCIAL SERVICES (+2.16%) were the top gainers, whereas REALTY (-1.7%), OIL & GAS (-0.5%), and METAL (-0.5%) were the top losers. Among the stocks, INFY (+3.8%), HDFCBANK (+3.3%), and SBIN (+3.2%) were the top gainers while IOC (-2.6%), ONGC (-2.3%), and HINDUNILVR (-1.7%) led the losers.

Excerpts of an interview with Mr. Vivek Chaand Sehgal, Chairman, Motherson Sumi Group (MOTHERSUMI) with CNBCTV18 on 11th March 2022:

  • The Russia-Ukraine crisis has impacted the auto ancillary industry in the last couple of days. Some of these companies have European exposure where supply has been affected due to the current geopolitical conflicts.
  • The industry was on track to return to normalcy in terms of semiconductor chip supplies but due to the current crisis industry got another hit. The situation has not yet recovered but he expects that the semiconductor situation should not be highly affected due to the crisis.
  • Sehagal added, due to the crisis certain companies and suppliers who have a presence in Ukraine are affected. This adversely affected the operations of car manufacturers. MOTHERSUMI doesn’t have any facility in Ukraine but the company has small plants in Russia but the operations weren’t impacted.
  • He doesn’t expect demand to get affected due to the current situation but supply-side issues are disrupting the demand fulfillment.
  • The impact of rising energy costs was exacerbated by the rising geopolitical issues on the Auto OEMs.
  • The company is taking a lot of initiatives to protect profitability and MOTHERSUMI’s team also strongly focuses on mitigating the issues.
  • On the back of semiconductor and other issues, the current crisis affecting car manufacturing operations and carmakers also wanted to revive their business as quickly as possible.
  • Sehagal expects that the situation of semiconductor shortage might be stretched out further. If the issues are not resolved till Sep-22 or Oct-22, they might be stretched out further till Jan-23 or Feb-23. Car manufacturers are also trying to solve these issues by 1HFY23.
  • On international business, Mr. Sehgal said the demand was steady and war-like situations accelerated the demand and expects the North American business perform better than expectations.

Asset Multiplier Comments

  • We think that the raw material cost inflation, increased energy costs in Europe, and other supply chain disruptions are likely to delay the recovery in MOTHERSUMI’s revenue and profitability.
  • Global major car manufacturers are shutting their plants in Russia due to current conflicts and with warlike situations continuing, the demand for luxury cars is getting impacted. The top 20 clients contribute ~70% of MOTHERSUMI’s revenue. The list includes some of the luxury car manufacturers. The demand reduction is likely to impact the company’s revenues in the short term.
  • We believe that the pick up in production levels of OEM’s post supply chains improvement, and a stabilisation in commodity prices, and the execution of strong order book will improve the performance of the company.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of MOTHERSUMI was ₹ 128/- as of 14-March-2022. It traded at 16x/12x the consensus earnings estimate of ₹ 8.1/11 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 206/- implies a P/E multiple of 19x on FY24E EPS estimate of ₹ 11/-

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.”