Author - Sharvari Joshi

HCL Tech to roll out salary hikes for all employees in phases

Update on the Indian Equity Market:
On Monday, NIFTY closed flat at 11,873 (+0.9%). Top gainers in NIFTY50 were ICICI bank (+5.1%), Nestle (+4.5%), and GAIL (+4.2%). The top losers were Divi’s Lab (-3.6%), Eicher Motor (-3.1%), and Hero Motocorp (-2.9%). Top sectoral gainers were PSU BANK (+4.2%), BANK (+3.1%), and PVT BANK (+3.2%) and the sectoral losers were PHARMA (-1.7%), MEDIA (-1.6%), and AUTO (-1.1%).

Excerpts of an interview with Mr. C VIjaykumar, CEO and Mr. Prateek Aggarwal, CFO, HCL Technologies (HCLT) with ET Now dated 16th October 2020:

• They signed 15 transformational deals. The momentum in the market for modernisation and digital transformation services has been great.
• The life sciences and healthcare and retail CPG verticals grew 8% plus sequentially which is a very impressive performance. All verticals, all geographies, all service lines, and all modes had a sequential growth. So it is a very good all-round performance.
• Some amount of recovery is due to the dip that they had in the first quarter but a lot of transition of deals that were done in the previous quarter got done extremely well which helped in ramping up revenues.
• A lot of existing customers continue to demonstrate their faith by giving them more projects and some incremental work which all got built. The digital foundation, which is their erstwhile infrastructure services, is very strong.
• In the second half also they have projected an overall margin growth. They have upgraded the guidance. Now 20%-21% is the full-year EBIT guidance. So in the second half, they will continue to see a good margin performance.
• The salary increases that they are giving will create a certain impact as they get into the second half of the year. That is why overall margins in H1 were ~21% but for the full year, they are guiding it to be 20% to 21%.
• Mode 1 has got a lot of digital foundation services that has also grown impressively. Mode 2, of course, has grown almost 7% sequentially and almost 15% plus from a year-on-year perspective.
• This is all the new technologies including cloud solutions, application modernisation, analytics, internet of things and cybersecurity. This is good for the margin profile apart from the cost controls that are automatically in place. Due to some of the higher value services increasing as a ratio is also good from a margin perspective.
• The Board has decided to double the dividend that they have been paying on a per quarter basis. So far they were paying Rs 2 per share per quarter and now in this quarter, the board has doubled the Rs 2 per share per quarter to now Rs 4 per share per quarter.
• The important thing is this is not a one-time kind of a thing. It is something that they intend to continue for the quarters going forward and that is the important thing.
• The overall pipeline is at an all-time high. Their pipeline has increased by almost 35% compared to what it was. Their booking increased by 35% compared to what it was in the last quarter. The pipeline has increased by almost 20% and it is at an all-time high.
• However, conversion of these deals and that converting into revenue is normally a 3-6-months cycle. They have done good bookings in the last two quarters.

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

The closing price of HCLT was ₹ 846/- as of 19th October 2020. It traded at 19x/ 17x/ 15x the consensus earnings estimate of ₹ 45.3/ 50.3/ 55.7 for FY21E/22E/23E respectively.
The consensus price target of HCLT is ₹ 937/- which trades at 17x the earnings estimate for FY23E of ₹ 55.7/-.
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.”

TCS Management on COVID trigger, a multi-year transformation

Update on the Indian Equity Market:
On Friday, NIFTY closed flat at 11,914 (+0.7%). Top gainers in NIFTY50 were Wipro (+4.4%), ICICI bank (+4.1%), and Axis bank (+3.7%). The top losers were Grasim (-2.6%), Hindalco (-2.5%), and UPL (-2.3%). Top sectoral gainers were PSU BANK (+3.1%), BANK (+2.8%), and PVT BANK (+2.6%) and sectoral losers were REALTY (-1.6%), PHARMA (-1.3%), and MEDIA (-0.9%).

Excerpts of an interview with Mr. Rajesh Gopinathan, CEO & MD, and Mr. NG Subramaniam, COO, TCS with ET now dated 8th October 2020:
● They fundamentally believe that technology will be a solution and therefore there will be even more relevance to their services to their customers.
● They were confident about their ability to switch to the new operating model and that was what was underlying the commentary that they had given earlier on that in about six months’ time or the end of Q3, they should be looking at coming back to parity and from a cost structure and margin perspective, by the end of Q4 they should be looking at parity.
● What has changed during the course of the last six months is that they have been able to execute on the operational resiliency program that NGS laid out; second, they have been able to participate significantly in this technology-led transformation that is at the heart of their customer’s response to the COVID crisis.
● First-quarter was about their internal resiliency. The second quarter has been about participating in the customer side. Now they are a lot more confident because both legs have been executed and it is with that confidence that they are giving their comments.
● What they are seeing is an urgency to accelerate the digital transformation on all fronts. Three priorities – the first one is the resiliency of your IT landscape. The second is their own internal employee experience, can they continue to operate remotely and safely and then contribute even more productively? The third being customer experience, how can they continue to be wherever their customers want to do business and how their experience can be touchless, contactless while providing all the accessibility options for different segments if possible.
● If you put these three things together, then the migration to the cloud becomes very important. The intent is to move to a hyper-scale platform with agility, resilience, adaptability, flexibility, and all those things.
● In the current context, they provide significant value and there is clearly an urgency to say that look I am going to move to that kind of an architecture which is much more modern, much more futuristic, which means that when you go an invest in this and it is not going to be a simple hop on and hop off once you move in there.
● It is going to be irreversible and you have to continue with that journey for three to five years where you will pretty much become a native and will embed your businesses into that technology by which you will extend your organizational capabilities with the ecosystem concept and bring in a lot more credibility to the business you do business with your customers. That is the multi-year transformation that they are seeing.
● In a technology, anything more than three to five is very difficult to call out but they are very confident about three years because it is something they have visibility to.
● Within those three to five years, there are going to be a lot more new ways of doing business, of reaching out to customers who are going to emerge.
● COVID has provided a business trigger and they are not sure whether in the absence of COVID, this adoption would have been at the same speed. It is unfortunate that the trigger happened in such a negative way but the trigger for the shift has kicked in. That is the way to understand what is going on.
● In the last three months, they have upped their quotient on delivery guidelines for delivering through secured, borderless workspaces.
● We are seeing that people love the flexibility that they have. While talking to one of the employees the other day, he was saying that this conference room crap has completely gone away and the collaboration meetings are a lot more democratic and they are able to decide and deliver things faster.
● They are able to incrementally innovate, multiple elements, and levers of productivity which is there. They are completely focussed on making sure that it is working superbly and people are able to deliver productivity with a lot of pride.
● Their operating philosophy has been to maintain stable margins. They are very systemic about trying to manage within that range which they think is beneficial to all stakeholders; customers, their employees, and their investors.
● Short-term volatility will have its own impact and it is more of a philosophical thing. There is no right margin to operate at, it is relative competitiveness and the aspiration that you have. It is a fair and achievable and sustainable band and that continues to be their guiding principle.

Consensus Estimate: (Source: market screener and investing.com websites)
● The closing price of TCS was ₹ 2,811/- as of 9th October 2020. It traded at 33x/ 28x/ 25x the consensus earnings estimate of ₹ 85.1/ 101.0/ 113.0 for FY21E/22E/23E respectively.
● The consensus price target of TCS is ₹ 2,802/- which trades at 25x the earnings estimate for FY23E of ₹ 113/-.

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.”

Premium brands witnessing a growth of 50% – Bajaj Auto

Update on the Indian Equity Market:
On Tuesday, NIFTY closed in minor red at 11,222 (-0.05%). Top gainers in NIFTY50 were Hindalco (+5.3%), ULTRACEMCO (+3.3%) and HERO MOTOCORP (+2.8%). The top losers were UPL (-3.5%), ONGC (-3.5%), and INDUSIND (-3.4%). Top sectoral gainers were METAL (+1.9%), AUTO (+0.3%), and IT (+0.2%) and sectoral losers were PSU BANKS (-2.2%), FMCG (-1.5%), and PVT BANK (-1.3%).

Excerpts of an interview with Mr. Rajiv Bajaj, Managing Director – Bajaj Auto with CNBC -TV18 dated 28th September 2020:
● Bajaj Auto has partnered with KTM, Husqvarna and Triumph. So Bajaj Auto cannot engage with Harley due to these partnerships.
● Harley Davidson has decided to end India operations on account of low sales and a global rewire strategy. The company which sold over 58,000 units in North America in the first six months of this year has sold just over 25,000 units in India in a ten year period.
● Bajaj agreed that Harley could never really take off in India due to the high price point but said that Bajaj Auto’s partnership’s with KTM and Husqvarna show how brands like Harley can succeed in India.
● Bajaj Auto tied up with KTM in 2007 when the latter was selling 65,000 motorcycles a year and struggling and today KTM has surpassed Harley with a sale of three hundred thousand units a year.
● This year they should make close to two hundred thousand KTM’s & Husqvarna’s for global sales including India. These bikes between 125-400 cc are very competitively priced and KTM has distribution all over ASEAN and Latin America which KTM could not do before. This should be the goal of brands like Harley Davidson also.
● Distribution is about demand fulfilment and will not generate demand. If Harley is looking at making a 300-400cc motorcycle then they must get it absolutely right. The Street 750 did not succeed as it was considered a poor man’s Harley.
● Q2 is in line with July projections. Projected 1 mn motorcycle & 3W sales if supply chain supports. They can reach 2.5 mn in October if production supports. 3W sales are moving up too.
● Pulsar sales are expected to be at an all-time high of 2 lakh units in October. Exports have seen an all-time high in September-October.
● Premium segments like KTM, Dominar have seen close to 50% growth. KTM exports in the US, EU & Australia see 30-100% growth.
● They see no obvious evidence of a shift to COVID linked personal mobility pick up.
● They have re-engineered CT and Platina portfolio for a profitable share gain.
● Lockdown has destroyed Tier 1 & 2 suppliers. Tier 1 suppliers facing labour issues.
● Bajaj Auto can see sales of 4 lakh units in the month of September.

Consensus Estimate: (Source: market screener and investing.com websites)
● The closing price of Bajaj Auto was ₹ 2,901/- as of 29th September 2020. It traded at 19x/ 16x/ 14x the consensus earnings estimate of ₹ 149/ 179/203 for FY21E/22E/23E respectively.
● The consensus price target is ₹ 3,010/- which trades at 15x the earnings estimate for FY23E of ₹ 203/-
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.”

There will never be a threat of hostile takeover in Happiest Minds: Happiest Minds

Update on the Indian Equity Market:
On Friday, NIFTY closed in minor red at 11,505 (-0.1%). The top gainers in NIFTY50 were Dr Reddy (+9.9%), Cipla (+7.1%) and Adani Ports (+3.7%). The top losers were HDFC Bank (-2.3%), Shree Cement (-2.0%), and Bajaj FInserv (-1.8%). The top sectoral gainers were PHARMA (+4.9%), REALTY (+1.9%) and AUTO (+0.4%) and Top sectoral losers were PSU BANK (-1.6%), BANK (-1.3%), and FIN SERVICES (-1.2%)

Excerpts of an interview with Mr Ashok Soota, Chairman & Director, Happiest Minds with ET now dated 18th September 2020:
● He wanted to make a distinction between what is a broader IT services market and the digital part of the IT services market.
● They are born digital, born agile, 97% of their business comes from digital and the traditional IT market is growing much smaller and that is why they are able to grow at a faster rate — a compound of 20% plus as compared to about 8% to 10% for the larger IT players today.
● IT services business is growing, it is the entire market typically and slowdowns and recessions and more so in this one where everything is becoming virtual, IT will definitely grow faster within that. The transformation towards digital will also get accelerated.
● Their largest and fastest-growing vertical is edutech. How that is going to benefit from this environment because everything is becoming virtual.
● The other vertical in which they have got a very strong presence is the rest of the high tech world. Again because it is a core competence at Happiest Minds, two of them account for 76% of their business which has been only marginally or not impacted by the COVID crisis.
● The other 24% has been affected but fortunately, they have got a very marginal presence in travel and hospitality which is the worst impacted vertical and therefore they have to continue to build on the strengths that they have.
● When they began Happiest Minds, they were in what was called a SMACK pack which included analytics and cloud after that they have added over the years the internet of things, machine learning, virtual and augmented reality and so on.
● Going forward, I do not want to speculate on whether my shares will go up or go down if they raise more equity obviously, but there are no immediate plans to do so.
● Whatever happens, they will keep one thing in mind that there will never be a threat in the sense of ownership which could create a hostile acquisition situation.

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

● The closing price of Happiest Minds was ₹ 358/- as of 18-September-2020.
● Equity shares of Happiest Minds Technologies Ltd are listed effective from September 17, 2020. So we don’t have any consensus estimates.

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.”

Jeevansathi was the only business which did well in Q1: Info Edge

Update on the Indian Equity Market:
On Wednesday, NIFTY closed in the red at 11,278 (-0.3%). The top gainers in NIFTY50 were Tata Steel (+3.6%), Zee (+3.1%) and Cipla (+2.7%). The top losers were SBI (-4.1%), GAIL (-3.4%), and Bajaj FInserv (-2.9%). The top sectoral gainers were PHARMA (+1.9%), MEDIA (+1.2%) and METAL (+0.9%) and Top sectoral losers were PSU BANK (-2.9%), BANK (-2.1%), and PVT BANK (-1.8%)

Excerpts of an interview with Mr Hitesh oberoi, MD and CEO, Info Edge with ET now dated 8th September 2020:
• They were impacted by the lockdown in April and May and that resulted in billing stopping by 44% but revenue was down only 10% because we benefited from deferred revenue of previous quarters.
• The billing growth of the previous quarters helped them and resulted in revenue decline of only 10%. Cost declined by about 17% and therefore EBITDA went up. But yes this billing growth will impact revenue growth in the coming quarters.
• Q1 was very badly impacted by both 99acres and Naukri. Requirement billings were down 44% and real estate billings were down 71%. But they have seen a recovery of some sorts in the last couple of months.
• Traffic on all their portals is back to near base level and they are back to where they were at the same time last year. On some metrics they are showing healthy growth.
• In July and August, their billings were tracking at 80% of what it was last year. So there has been a handsome recovery in July and August
• September is their biggest month in this quarter, almost half of the collections happen in September. So if September is good, that will give them much more confidence going forward.
• In July and August they have seen job seekers come back with a bang. So job seeker activity on the site is at an all-time high. They are seeing more app downloads. They are seeing more applications, more resumes being modified, more people registering
• Recruiter activity which had slowed down considerably in April, May and June, has also started inching up. They are back to 65-70% levels in Naukri
• They have seen a handsome recovery in IT. They are seeing reasonable sort of activity in sectors like healthcare, education, pharmaceuticals, insurance. But sectors like travel, hospitality, tourism, retailing, apparels all these sectors continue to be impacted by the slowdown. They are yet to show any signs of recovery.
• Jeevansathi was actually the only business in their portfolio which did well in Q1. It kept growing through the lockdown as well. Jeevansathi billings grew by 13% in Q1 and in the month of July and August the billings growth has been even better. In August, they grew billings by 23% in Jeevansathi.
• They are constantly on the lookout for investing in or acquiring both for strategic and financial purposes. They have an AI of sorts through which they make their financial investments.
• They just finished raising $250 million through their QIP. So they are now sitting on close to Rs 3,300 crore of cash.
• The purpose of this QIP was to look around for acquisitions and inorganic sort of opportunities in the spaces they operate. Their preference would be to do a deal at some point in time in the next 12 to 18 months in either matrimony or real estate or education.
• Zomato also had a terrible Q1 but business has come back strongly in Q2. The dining out part of the business has been more impacted because many of the restaurants are still shut but delivery is picking up. The company has done a very good job of cutting burn.
• Burn is now down to maybe $2-3 million a month from maybe $30-40 million a month a year ago. So, they have done a fantastic job on that front where unit economics is improved. They are making a profit per order now where they were losing maybe 35-40 cents to an order earlier.
• Covid has told us is that the world is all about essential services and clearly some of the services they offer are essential in nature to more middle class Indians.
• On the whole, you will see a more aggressive Info Edge. Of course, a lot will depend on what happens to India as a whole. At the end of the day, their businesses are index to GDP growth.
• They are very well positioned. Their Naukri business is very profitable and the two other categories they operate in are matrimony and real estate.
• Covid crisis is likely to throw up opportunities because a lot of companies have been very negatively impacted by it and hopefully there will be many more opportunities going forward than there were in the last three years.

Consensus Estimate: (Source: market screener and investing.com websites)
● The closing price of Info Edge was ₹ 3,270/- as of 09-September-2020. It traded at 128x/ 93x/ 69x the consensus earnings estimate of ₹ 25.6/ 35.2/ 47.5 for FY21E/22E/FY23E respectively.
● The consensus price target is ₹ 2599/- which trades at 55x the earnings estimate for FY23E of ₹ 47.5/-

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

Lost 60 days of sales which is 50-60% of the business during summer – Voltas

Update on the Indian Equity Market:
On Monday, NIFTY closed in the red at 11,387 (-2.2%). The top gainers in NIFTY50 were ONGC (+1.6%) and TCS (+0.6%). The top losers were Sun Pharma (-7.3%), SBI (-5.9%), and Cipla (-5.5%). The top sectoral losers were MEDIA (-5.8%), PSU BANKS (-4.7%), and PHARMA (-4.6%) and there were no sectoral gainers.

Excerpts of an interview with Mr Pradeep Bakshi, MD and CEO of the Tata Group AC Company, with CNBC TV18 dated 28th August 2020:
● Generally summer months starting from March till June accounts for more than 50% of the sales in the compressor products like the air-conditioner products. Unfortunately, due to the lockdown, right from March 20 onwards until May 20, they lost out nearly 60 days of sales.
● Out of three and a half months, they lost out two months that is somewhere around 50-60% of the business was lost for the industry during these summers because of the lockdown.
● Voltas has done better than the industry while highlighting that most brands haven’t registered growth.
● During this period, the industry has been able to sell the products but most of the brands have not registered growth. However, Voltas’ business, they have done decent numbers during this period.
● In terms of volume, revenue and profitability they are way ahead of the competition and the industry.
● The industry as a whole has not been able to do a great job during Q1. Until July, August also, they have been doing sales, some numbers are clicking but there is a large pile-up of inventory in the industry.

Consensus Estimate: (Source: market screener and investing.com websites)
● The closing price of Voltas was ₹ 635/- as of 31-August-2020. It traded at 48x/ 30x/ 27x the consensus earnings estimate of ₹ 13.2/ 20.9/ 23.9 for FY21E/22E/FY23E respectively.
● The consensus price target is ₹ 659/- which trades at 28x the earnings estimate for FY23E of ₹ 23.9/-
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.”

Execution back on track with return of labour and availability of raw materials: Dilip Buildcon

Update on the Indian Equity Market:
On Thursday, NIFTY closed in red at 11,312 (-0.8%). Top gainers in NIFTY50 were NTPC (+6.9%), ONGC (+3.3%), and Power grid (+2.6%). The top losers were Tata Motors (-2.6%), HDFC (-2.3%), and Axis bank (-2.2%). The top sectoral gainers were MEDIA (+3.1%), METAL (+1.0%) and REALTY (+0.4%) and sectoral losers were FIN SERVICES (-1.3%), PVT BANKS (-1.3%), and BANK (-1.3%).

Excerpts of an interview with Mr Rohan Suryavanshi, Head -Strategy & Planning, Dilip Buildcon with ET now dated 18th August 2020:
● 1QFY21 was impacted by Covid but the good news is that they have had a very strong order book. The Rs 8,900 crore worth of orders that they have won are spread across different verticals.
● They have dam irrigation orders, tunnel orders, special bridge orders and also road orders. All these have different lead times of two to four years and these orders will start sort of giving revenues in the later part of this year which would be about the end of Q3FY21 to the start of Q4FY21.
● Execution has definitely picked up from when the lockdown was imposed. They have started seeing reverse migration of now labourers coming back to sites. They have also started seeing normalisation in all the raw material supply chains which has been disrupted.
● 90% plus of their labourers have come back to the sites and all the raw material disruptions are behind barring some sites where there might be local disruptions.
● The only thing that is impacting right now are the monsoons. Since they have had good monsoons across the country that is impacting work for the industry as a whole.
● For the past couple of years, they have been focussing on debt reduction and working capital cycle improvement which had also seen their debt equity ratio falling to 0.81 last year from 1.06 a year before.
● In FY21, because of Covid and because of the impact that it has had, they will avail of a moratorium, and also avail of whatever facilities the RBI has given them.
● Current debt numbers and the current working capital cycle numbers will not go up from here and will actually reduce and this is all obviously dependent on how the rest of the year looks and hopefully they would not have any more large disruptions or shutdowns because all those things will impact revenue and profitability.
● In 1QFY21, their revenues were only reduced by about 17% as a YoY basis from same quarter last year, which is exceptionally good as opposed to the industry average of about 40% plus reduction in revenues.
● The business model of having their own people, having their own equipment, doing everything on their own without any subcontracting has definitely helped them in getting this revenue and being ahead of the curve when the recovery came.

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

● The closing price of Dilip Buildcon was ₹ 404/- as of 20-August-2020. It traded at 18x/ 11x the consensus earnings estimate of ₹ 22.0/ 37.7 for FY21E/22E respectively.
● The consensus price target is ₹ 406/- which trades at 11x the earnings estimate for FY22E of ₹ 37.7/-
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.”

Healthcare and hygiene portfolio has grown by 29% in Q1 – Emami

Update on the Indian Equity Market:
On Tuesday, NIFTY closed in the green at 11,322 (+0.5%). Top gainers in NIFTY50 were Zee (+5.2%), JSW Steel (+3.9%), and Axis bank (+3.9%). The top losers were Shree Cement (-3.9%), Titan (-3.6%), and UPL (-2.3%). The top sectoral gainers were MEDIA (+1.9%), PVT BANK (+1.7%) and METAL (+1.6%) and sectoral losers were PHARMA (-1.4%), IT (-0.5%), and REALTY (-0.5%).

Excerpts of an interview with Mr NH Bhansali, CEO, Emami with ET now dated 10th August 2020:

● April was impacted badly. They progressed well in May and in June they grew in single digit. The July trajectory is also good. They grew in double digits in July and they expect the growth to resume.
● On the international front also, while they have declined in the first quarter but in the second quarter, they expect to improve on the international front as well. They expect moderate growth in 2QFY21.
● The healthcare and hygiene portfolio has grown by 29% in Q1FY21 and it contributed around 43% of the turnover in the first quarter. While the summer brands and other brands including the male grooming all de-grew by 44%.
● This pulled down the overall growth which contributed around 57%. Going forward they expect good growth from the healthcare and hygiene products kind of sanitizers.
● new launches there in the healthcare and sanitizers like Boroplus Sanitizer, soaps, aloe vera gel, zandu immunity range, chyawanprash they all contributed around 5% of the turnover.
● Navratna and others were declining in the first quarter but now in June-July they have started recovering. Kesh King range was declining in April-May but cumulatively in June, the Kesh King range has been able to wipe out its losses.
● It is stable now, it has maintained its growth and they expect now the growth to come in in the second quarter. Summer brands have also now started picking up while the decline earlier was higher but in June-July the decline has been lesser.
● The gross margins have reduced by 230 bps and EBITDA margins has improved by 480 bps. The gross margin has been mainly because of the benign cost and they expect this kind of margins to continue.
● On the EBITDA level, they had taken many initiatives, right from reducing on the advertisements which was not required in the April as they were completely off air in April, May and June now gradually they are resuming some of the advertisements
● They have internally targeted to improve their costs by around Rs 80-100 crore in the next 12 months and they are well on the path and they would continue to achieve it.
● They have made 12 new launches in this quarter and which were all around health and hygiene and sanitizers and all. In the times to come, they are planning to get into the home hygiene products which may include disinfectants, toilet cleaners and bathroom cleaners and other things.
● Rural demand has picked up well, in fact, it is visible in the rural areas compared to the urban but there is no significant down trading on LUPs.
● They have initiated so many things, they have done digital marketing because their focus is more on addressing the consumers digitally without physical touch so while the retail and modern trade has been impacted, and they are exploring other channels also.
● They are doing a lot many initiatives by telemarketing, digital marketing, tele-calling for taking the orders and ensuring that the supplies are done on time. In fact, the E-commerce business has more than doubled in this first quarter despite such a decline and it is continuing to grow.

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

● The closing price of Emami was ₹ 337/- as of 11-August-2020. It traded at 34x/ 31x the consensus earnings estimate of ₹ 9.9/ 10.8 for FY21E/22E respectively.
● The consensus price target is ₹ 301/- which trades at 28x the earnings estimate for FY22E of ₹ 10.8/-
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.”

Regional lockdowns creating choppiness in operations – Mahindra Logistics

Update on the Indian Equity Market:

On Monday, NIFTY closed in red at 10,899 (-1.6%). Top gainers in NIFTY50 were Tata Motors (+6.9%), Titan (+3.6%), and Tata Steel (+1.6%). The top losers were UPL (-5.4%), IndusInd Bank (-3.7%), and HDFC Life (-3.7%). The top sectoral gainers were PSU BANK (+0.5%) and METAL (+0.3%) and sectoral losers were PVT BANK (-2.9%), BANK (-2.3%), and FIN SERVICES (-2.2%).

Excerpts of an interview with Mr Rampraveen Swaminathan, MD & CEO, Mahindra Logistics with ET now dated 3rd August 2020:

  • They had expected Q1FY21 to be a very difficult quarter as they saw the full impact of the national lockdown in April and a continuing impact in May and June as well, based on lockdowns in different parts and different states.
  • As a B2B business, they have seen very significant cessation of operations for many of their customers both in terms of services and manufacturing.
  • Despite that, there were a lot of positives as well for one of their efforts on cost reduction and cost management actually showed a lot of positive results. They were able to get a marginal profit (EBITDA) for the quarter.
  • A lot of work on cash flow management and receivables management resulted in strong positive cash flow operations in the quarter.
  • It has been three very different months and June was a much stronger month. In fact, June from a revenue and earnings perspective was better than April and May together.
  • They ended the quarter with some good momentum and it is something which they are hoping to leverage on in coming quarters.
  • The pandemic had two broad sets of challenges for them, the first one was on the supply side with shortage of trucks, drivers and with reverse migration of labour.
  • Towards the end of the quarter, they started seeing a very strong recovery at least in their operations but today, they have got 65% plus of their partner fleets back in operations and maybe 80% of their warehouses are now operating.
  • There are no significant challenges there but from a demand side which is the other set of challenges, some end markets have been obviously impacted more than others.
  • Over the next few months, they are expecting two-three things to rework positively for them. First they have seen a good trajectory or traction in order intake on the segments which are growing – e-commerce, FMCG, pharma and so on. They are hoping to gain some leverage from that.
  • The second thing is that they expect the farm sector to be doing better and to continue in the near term. That will play out positively for them.
  • The third thing is that they expect volumes in their existing operations to start coming back as customers start creeping up on operations, an automotives and discrete
  • There are a series of regional lockdowns which create choppiness in operations and demand and that is something which they have to work.
  • Local lockdowns definitely have a very large impact on enterprise mobility business because they are providing services to IT and IT enabled companies and large facilities on providing employee mobility.
  • On the transportation side of their business, a large part consists of line-haul which is really movement between states and that got impacted very significantly in the national lockdown. But in local lockdowns, that is not impacted so much.
  • The warehousing and value added services especially in terms of the work which they do for the e-commerce company or consumer company where they are providing distribution solutions, they see daily impact of volumes moving up and down because of local lockdowns.
  • Through the quarter they have paid all they employees fully as they have paid their third party associates as well through the entire lockdown but they did control a lot of other controllable discretionary expenses and those things at sites and otherwise allowed them to both offset the operating cost increases because of Covid and actually even more because they were able to create the headroom to preserve overall gross margins at a percentage level despite the stop in volumes.
  • He expects that some part of those benefits will continue through the rest of this year. There will be some impact as they try to scale up operations and as they launch new sites, but some of the learning and cost reductions will be more perennial and through the rest of this year as well.
  • They will have to infuse more working capital. As an asset light company they work closely with the partners and they will obviously have some rise in working capital but they hope to be able to manage and maintain the cash flow management initiatives they have launched in the last quarter.

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

  • The closing price of Mahindra Logistics was ₹ 299/- as of 3-August-2020.  It traded at 53x/ 25x/20x the consensus earnings estimate of ₹ 5.6/ 12.2/ 14.8 for FY21E/22E/23E respectively.
  • The consensus price target is ₹ 316/- which trades at 21x the earnings estimate for FY23E of ₹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.”

Crude prices will continue to be less than $45 – HPCL

Update on the Indian Equity Market:

On Wednesday, NIFTY closed in red at 11,132 (-0.3%). Top gainers in NIFTY50 were Axis Bank (+6.7%), Titan (+4.9%) and Power Grid (+3.6%). The top losers were Hero Motocorp (-3.3%), BPCL (-3.1%) and HUL (-3.1%). Top sectoral gainers were PVT BANK (+0.7%), MEDIA (+0.5%) and BANK (+0.4%) and sectoral losers were PSU BANK (-1.6%), AUTO (-1.3%) and IT (-1.1%).
Excerpts of an interview with Mr M.K.Surana, CMD, HPCL with ET now dated 22nd July 2020:

  • Demand had picked up quite sharply after June and it reached around 88% or so. Normally in the Q2 of the financial year, because of the onset of the monsoon, demand reduces generally on a tonnage basis. The same effect is being seen this July as well.
  • It is slightly aided by some of the localised lockdowns in Karnataka, Maharashtra and other states. That’s why demand has been lower on the diesel side. Petrol demand is good more or less.
  • It is still 84% of normal and the trend is in line with what happens every year in the second quarter of the year as soon as the monsoon sets in.
  • Last year the monsoon was slightly delayed and so if you see year on year, that will also have some impact and this time it is slightly early.
  • There has not been any substantial worrisome trend as such. Rather it has been a consistently improving trend as far as demand is concerned. The impact that is seen is only because of the monsoon and the local lockdowns.
  • Next month, it should rebound to June level. Beyond 90%, definitely it will take some time to reach 100% as industrial and construction activities pick up. That should happen in the third quarter of the year.
  • He has maintained this view for a long time that the oil refining and marketing companies did not get fully valued the way our markets work. There is a huge potential, huge value in terms of the asset base.
  • Total demand consists of two parts – one is essential requirements for normal transportation of the people, for agriculture and industrial use. There the price elasticity has not been seen in the past to any extent.
  • As far as exports are concerned, it anyway happens on international pricing and one should remember that even the domestic prices are aligned to international pricing and the exports or imports whatever happens on the international pricing.
  • HPCL projects are at a very advanced stage. They will be trying to complete major projects like Vizag refinery expansion or Mumbai refinery expansion in the next calendar year.
  • Every year they take up some new projects that they may prioritise depending on the situation, but as far as all the projects which are already onsite and under construction are concerned, they do not have a rethinking on that.
  • They are comfortable with the borrowing level, as of today, their debt to equity ratio is less than one and long-term debt is less than around Rs 23,000 crore. Even short term debt they have brought down substantially to around Rs 32,000 crore.
  • Indian fuel retailing was started by MNCs like Esso, Burmah Shell, Caltex etc. Some of these MNCs after nationalisation became PSEs. It is done globally and it was not vastly different in India as compared to other parts of the world.
  • As far as the demand front is concerned, 85-90% of the demand has already come. By the end of June, they had touched 91%. The onset of monsoon may cause some reduction in the diesel demand but it will pick up. On the demand front, it has shown a very smart and quick and V-shape recovery and they are very happy with that.
  • As far as the prices of crude are concerned, they have remained in the $40 range and they think that it will continue to be less than $45 because some of the shale players will start returning as they are comfortable with $40 as the breakeven price.
  • With the reasonable crude prices and with improving cracks demand recovery, he believes that they would do well.

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

  • The closing price of HPCL was ₹ 228/- as of 22-July-2020.  It traded at 7x/ 6x the consensus earnings estimate of ₹ 32.1/ 39.4 for FY21E/22E respectively.
  • The consensus price target of HPCL is ₹ 272/- which trades at 7x the earnings estimate for FY22E of ₹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.”