Author - Pratik Talvatkar

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.”

Tea prices not going up further – Tata Consumer Products

Update on the Indian Equity Market:

On Monday, Nifty closed in the green at 16,794 (+0.8%) near the intraday high of 16,816. METAL (+4.9%), OIL & GAS (+2.6%) and IT (+1.1%) were the sectoral gainers, while AUTO (-0.7%), BANK (-0.6%), and FINANCIAL SERVICES (-0.5%) were the sectoral losers for the day. Among the NIFTY 50 stocks, HINDALCO (+7.2%), TATASTEEL (+6.3%), and POWERGRID (+5.6%) were the top gainers and HDFCLIFE (-3%), DRREDDY (-2.7%), and AXISBANK (-2.2%) were the top losers for the day.

Edited excerpts of an interview with Mr. Sunil D’Souza, MD and CEO, Tata Consumer Products (TCPL), with ET NOW on 25th February 2022:

  • 3QFY22 was a decent quarter for the company. Despite a high base of 3QFY21 TCPL delivered ~6%/28%/22% YoY growth in revenue/ EBITDA/ net profit respectively. The cash generation was up by ~30% and the working capital also improved by 14 days.
  • TCPL has seen good volume growth in India as well as market share gains across the beverage and food segment. The company increased its number of outlets and continues to focus on brand building. The advertising and promotional spending has increased. Strong growth in the food volumes was due to its focus on expanding Sampann which is the company’s foray into the pantry of Indian consumers.
  • The company is seeing a little bit of pressure on demand due to inflation but the company has different businesses and they are playing out differently. The company also tackled the demand situation in various ways, but the stress on the semi-urban and rural consumers dragged the demand under pressure.
  • The company seeing demand pressure on brands that cater to the mass markets, but the mass premium brands are performing well. Lower volume SKUs are doing better than higher volume SKUs.
  • TCPL continues to focus on the medium to longer-term to build a large food and beverage and FMCG business as well as company focusing on geographical expansion.
  • In the beverage segment, TCPL has good opportunities to gain market share and premiumise their portfolio and this is primarily driven by distribution, innovation, and brand building process. in the food business, TCPL launched lots of new products to cater to the market and Sampann will the big growth lever in the food business. The NourishCo which operates in ready to drink segment also growing more than ~100%.
  • Starbucks also performed well in 3QFY22 and delivered positive EBITDA from the last several quarters and in 3QFY22 posted positive EBIT and PAT. PBT reached breakeven levels. As the omicron wave subsides, the company expects Starbucks will grow at a good pace.
  • Despite all disruptions, volatility, and inflationary pressures the company delivered volume growth of 5% in tea.
  • Over the last 18-24 months company saw huge volatility in the tea prices, the prices were up by ~70%. The tea prices came down but it’s still higher by ~15%-20% from the pre-covid levels due to the droughts in Assam in May and November-20.
  • The company doesn’t expect the tea prices to go up further. After the 1st half of the year, one can expect to see softening in prices as the entire crop comes in. The company expects to be in a stable environment.
  • As the situation gets back to normal, the company expects good volume growth visibility and it has a clear focus on market share gaining and premiumization and aims of outperformance.
  • The international business delivered good margins in 3QFY22 despite the inflationary pressure of tea and coffee prices. To maintain its margins the company alters the prices as per the input costs trends accordingly.
  • Extended monsoons are impacting the salt drying process that leading to pushing up the prices. Oil-related inflation is affecting the food business but the company took price hikes of ~15% between August to November. As the volumes are starting to come back to normalcy company expects that they will maintain margins over there.
  • The company is in a comfortable space as they don’t expect any huge deviation in tea prices and is well placed in a good position on packaging, freight, and oil front.

Asset Multiplier Comments

  • We think the new products launches including premium and mass premium products will strengthen the product portfolio of the company. It is expected to drive the demand and open newer markets and growth opportunities for the company. TCPL is expected to maintain its leadership position in the salt business and focusing on strong selling and distribution channel will be the key positive for the company.
  • We belives that the company’s focus on Tata Sampann will strengthen its position in the underpenetrated Indian branded food industry and lead to gaining market share.
  • We think the commodity cost will continue to be an area of concern for the company because the Agri commodities such as tea, coffee, spices, and pulses have huge exposure to natural disasters, seasonality and market cyclicality and the unavailability of the raw material also might be a threat for the company.
  • The current Russian-Ukraine crisis affects the Indian tea exporters as Russia is the largest buyer of tea from India. The imposition of sanctions on Russia, depreciation of the Russian ruble, and increasing fuel cost badly affect the Indian tea planters and exporters.

Consensus Estimate (Source: market screener website)

  • The closing price of Tata Consumer Products was ₹ 716/- as of 28-February-2022. It traded at 62x/50x/42x the consensus EPS estimates of ₹ 11.5/14.4/16.9 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 843/- implies a P/E Multiple of 50x on the FY24E EPS estimate of ₹ 16.9/-.

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

Price hikes not sufficient to protect the margins – Blue Star

Update on the Indian Equity Market:

On Monday, Nifty closed in the red at 17,207 (-0.4%) dragged by MEDIA (-2.7%), METAL (-2.1%), and OIL & GAS (-2%) were the top losers while PRIVATE BANK (+0.3%), BANK (+0.2%), and FINANCIAL SERVICES (+0.03%) were the top gainers for the day. Among the Nifty50 constitutents, the top losers were HINDALCO (-3.4%), UPL (-2.8%), and DIVISLAB (-2.3%) while WIPRO (+1.7%), INFY (+1.3%), and SHREECEM (+1.3%) were the top gainers.

Edited excerpts of an interview with Mr. B Thiagarajan, MD of Blue Star with ET Now on 17th February 2022:

  • Redesigning of product portfolio and correction of distribution penetration in northern regions led to improved market share. The company improved its market share from ~13% to ~13.25%, and its growth beat market expectations despite the muted festival season.
  • Redesigning of product portfolio happened because of the inflated commodity prices. Due to commodity price increase in FY21, the margins were under pressure but the company expects 4QFY22 to be a good quarter.
  • The company did the price hikes in Apr-21, Jul-21 as well as in Oct-21. Despite the price hikes company couldn’t able to protect margins. ~1.5% margin erosion was there.
  • If the commodity prices continue to go upward, the company will raise the prices and the call on price hikes will be taken in Apr-22 or May-22. The Company will be watching how the summer season is going to be.
  • On the debt front, the company doing well as well as cash flows are maintained strongly, with no concern over there.
  • Despite the CAPEX in Wada for the deep freezer plant which is going to be commissioned in March or April and another investment in Sri city for a new room air conditioner plant under the PLI scheme, the cash flow will remain strong.
  • The margins for 4QFY22 of Segment – I should be around 5.5% to 6% and for Segment – II it should be around 7%. For FY22, it should be ~6% to 6.25% as the summer season of FY22 wasn’t good for the company. The company expects its ROC to be the industry benchmark.
  • Order book as of 31st December 2021, was Rs 33,010mn vs Rs 31,570mn on 31st December 2020. The company expected that the office segment will not perform well but the demand came from that segment also which beat expectations.
  • Office consumption is going up but the growth was driven by manufacturing-related electromechanical products and for that segment, the outlook is very strong in the coming year. Big orders are expected to be finalized, whether it’s metro, railway, airport, or water-related MEP projects.
  • The company continues its expansion plan despite the hit in two consecutive summers because the outlook for the room air conditioner and commercial refrigeration business is very strong. The penetration of room air conditioner business is below 7% and the company expects that for the next five years it will continue to grow more than 15% and might be touch 20%.
  • For deep freezers, the company is setting up a new 2.5 lakh unit plant. In phase one of Sri city plant company targeting of ~4 lakh units and this plant expected to be commissioned in Oct-22 or Nov-22.

Asset Multiplier Comments

  • We expect increased penetration in newer geographies and segments will improve the company’s market share going forward. The company’s ongoing expansion plans, strong cash flow generation and healthy growth in order book will contribute to the company’s growth trajectory.
  • We believe that the increased pace of economic recovery, increased investments by both private as well as public sectors, and revival in consumer expenditure are expected to boost revenue and the summer season which is a demand driver for the company will bring more clarity on the demand scenario post covid
  • We expect the increased commodity prices to put margins under pressure in the subsequent quarters.

Consensus Estimate (Source: market screener website)

  • The closing price of Blue Star was ₹ 1,063/- as of 21-February-2022. It traded at 61x/39x/31x the consensus EPS estimates of ₹ 17.4/27.5/34.8 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,102/- implies a P/E Multiple of 32x on the FY24E EPS estimate of ₹ 34.8/-.

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 (07-11 Feb)

Technical talks

NIFTY opened the week on 7th February at 17,456 and ended at 17,375 on 11th February. NIFTY fell 0.5% throughout the week. The next support and resistance levels for the index would be 17,330 and 17,419 respectively.

Except for METAL (+3%), all the sectoral indices fell this week, with REALTY (-2.5%), FMCG (-2.2%), and CONSUMER DURABLES (-2%) being the biggest losers.

Weekly highlights

  • Indian equity markets remained volatile at the start of the week ahead of RBI monetary policy and on Friday market ended the three-day winning streak. Markets declined after the US consumer prices data came in higher than expected which rose to a four-decade high.
  • On Thursday, the Reserve Bank of India kept the repo and the reverse repo rate and all other key policy rates constant and maintained its accommodative monetary stance amid the pandemic, and continue to provide support to growth. The current repo rate is at 4% and the reverse repo rate is at 3.35%.
  • Consumer prices in the US climbed to 7.5% in January on YoY, the sharp YoY increase since February 1982 the data released by Labor Department on Thursday. Ultra-low interest rates, strong consumption expenditure, supply chain concerns, worker scarcity, and federal reserve policy led to accelerating inflation.
  • All three major benchmark indices in the US fell on the 2nd consecutive session after Thursday’s inflation data came higher than expectations, amid bets on aggressive federal reserve tightening policy and rising worries about Ukraine-Russia tensions.
  • Oil prices settled at fresh seven-year highs amid rising fears of invasion of Ukraine by Russia and added to concerns over tight global crude supplies. Brent crude futures settled at 3.3% higher on Friday.
  • Industrial output in India fell to a 10-month low to 0.4% in December-2021 as per the data released by the statistics department on Friday. It was pulled down by manufacturing, capital goods, and consumer durables output, weak consumption and investment also lead to lower industrial output.
  • The tech giants in India have begun the process of getting employees back in the office. As the omicron wave subsides, companies have accepted a hybrid work model and will continue for a longer run.
  • On Thursday, the Government of India approved 20 applicants of the PLI scheme for the automobile and auto ancillary industry. The PLI scheme for the industry leads to gaining a share of India in the global automobile space.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 56,417 mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 49,554 mn.

Things to watch out for next week

  • Investors will turn their attention to economic factors as the earning season in India comes to an end in the next week.
  • The US Federal Reserve minutes from its meeting along with European GDP data for the 4QFY21 are going to be released next week. Investors will be watching the US producer prices and retail sales for January; these events are likely to drive the market next week.
  • Equity markets in India are likely to see more volatility ahead of the Fed meeting minutes and amid concerns over the Ukraine-Russia tensions.

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.”

Margin pressure due to the increased marketing spending – Info Edge

Update on the Indian Equity Market:

On Wednesday, NIFTY closed in the green at 17,780 (+1.2%). Among the sectoral indices, PSU BANK (+3.4%), PRIVATE BANK (+2.3%), and BANK (+2.1) were the top gainers. There were no sectorial losers for the day. BAJAJFINSV (+5.0%), INDUSINDBK (+5.0%), and HCLTECH (+3.5%) were the top gainers. TECHM (-1.4%), ULTRACEMCO (-1%), and BRITANNIA (-0.9%) were among the top losers.

Excerpts from an interview of Mr. Chintan Thakkar, Wholetime Director and CFO at Info Edge with CNBC TV18 dated 31st January 2022:

  • The real way to look at the numbers is to look at the billing as well as cash EBITDA. The revenue is coming from the billings that happened in the 2QFY22, the billings are almost collected, and it’s an all-cash collection.
  • The overall margins are impacted due to an increase in spending on marketing and advertising expenses. The company is investing in its platforms, Jeevansathi, and in 99 acres. In 3QFY22, the Company’s EBITDA margin and PBT were impacted due to the increased spending in marketing and advertisement expenses in Jeevansathi and 99 acres.
  • The biggest growth driver for the company is recruitment solutions. There it has not increased its marketing spend in absolute numbers and the increase is marginal.
  • 3QFY22 was a strong quarter from a margins standpoint, particularly from the recruitment side. The strong momentum started from 3QFY21 has continued to do well. The increase in momentum is with the building up in the recruitment business and the company expects upside trend over there.
  • The overall paid listing has gone up on 99 acres. Increasing paid listing rather than the free listing is a part of the company’s overall strategy .
  • Info Edge started reinvesting in the real estate segment which was affected in FY21 due to the pandemic and the company expects the uptrend in the real estate business and has increased its spending as compared to last year.
  • On startup investment he said, the startup ecosystem is very vibrant and Info Edge also invests in the startups ecosystem as the company knows how the mechanism works there.
  • Info Edge continues to innovate and improve and is also investing in their products for the future growth of the company.
  • The company is focused on efficient growth on the top line as well as on the margins front. Other than that, the company invests in some of the startups and takes stake over there for the future growth of the company which is part of their overall strategy. The Company is balancing between current growth as well as the future growth of the company.
  • The company is seeing continued momentum and the company has not seen any major impact of omicron on the business and expects the 4QFY22 to also be a good quarter.

Asset Multiplier comments:

  • We believe that as the economic activities recover, the real estate sector will grow at a significant rate as well the robust hiring activities would support the revenue growth and positive operating leverage should support margins in the near term.
  • We expect the company’s investments in the startups to scale up in the near term and start contributing to the company’s valuation.

Consensus Estimate: (Source: TIKR website)

  • The closing price of Info Edge was ₹ 5,114/- as of 2-February-2022.  It traded at 143x/129x/125x the consensus Earnings per share estimate of ₹ 35.8/39.6 /40.9/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 5,648/- which implies a PE multiple of 138x on FY24E EPS of 40.9/-.

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