27 Mar

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.”

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24 Mar

Confident of delivering double-digit growth for India business- Zydus Lifesciences

Update on the Indian Equity Market:

On Thursday, NIFTY settled at 17,223 (-0.1%) near the day’s high of 17,291. MEDIA (+6%), METAL (+1.5%), and IT (+1.2%) were the top sectoral gainers. PRIVATE BANK (-1.8%), BANK (-1.7%), and CONSUMER DURABLES (-1.6%) led the sectoral losers. Among the NIFTY50 components, DRREDDY (+4.7%), COALINDIA (+2%), and ULTRACEMCO (+1.8%) led the gainers. KOTAKBANK (-3%), TITAN (-2.6%), and HDFCBANK (-2.5%) led the losers.

Excerpts of an interview with Mr. Sharvil Patel, MD, Zydus Lifesciences (ZYDUSLIFE) with CNBC-TV18 on 24th March 2022:

  • In the US, the generic business has always been cyclical and it needs to be seen in a three-to-five-year window. They believe any company with a very strong portfolio and good cost management and backward integration capabilities can do well in the US market.
  • Mr. Patel believes that the US generic market is a very large opportunity that exists and the volumes are very large as well which makes it an opportunity worth taking effort for.
  • For ZYDUSLIFE, the pricing pressures are expected to continue and one has to constantly optimize costs, and build efficiencies through larger scale and backward integration. This is what ZYDUSLIFE is doing in terms of operational efficiencies as well as sourcing efficiencies.
  • In the next 18 months, ZYDUSLIFE is expected to have a very good portfolio of generic launches that will help it cross the current USD 700-800 mn revenue range that it is at and come closer to a billion-dollar revenue range.
  • Once it has a resolution for one of its facilities as well as more important launches in FY24, ZYDUSLIFE will be on an upward trajectory for its US generic business.
  • For India business, ZYDUSLIFE has taken efforts to reduce complexity both in terms of the large portfolio and the way its business units were formed. With a lot of restructuring, it is at a stage where the focus is on the top 30 molecules with the new introductions on the proprietary molecule side.
  • ZYDUSLIFE is confident about delivering better than market growth and double-digit growth for the India formulations business.
  • It is expected to produce 10 mn doses per month of the Covid vaccine ZyCov-D which means they can vaccinate about 3 mn people. ZYDUSLIFE has submitted a trial of the vaccine for the age group of 12-18 and has received a DCGI (Drugs Controller General of India) approval but is waiting for NTAGI (National Technical Advisory Group on Immunization) clearance.
  • A booster dose strategy has worked out where it has to change vaccines from the earlier vaccination to the next vaccine.
  • Even though ZYDUSLIFE is delayed by 6 months, it believes there is enough room for it to make the vaccine available with a production of 8 to 10 mn doses a month.

Asset Multiplier Comments

  • The US business is expected to ramp up in the next 18 months on the back of new launches and approvals and meet its revenue guidance of USD 1 bn. With its backward-integration capabilities and operational efficiencies, we believe ZYDUSLIFE is well placed to tackle the US pricing pressures.
  • It is working on a pipeline comprising injectables, biosimilars, NCE-led specialties, and vaccines. We expect these to contribute to ZYDUSLIFE’s growth trajectory over subsequent quarters.
  • We expect EBITDA margins to be under pressure due to increased raw material costs.

Consensus Estimate: (Source: market screener website)

  • The closing price of ZYDUSLIFE was ₹ 366/- as of 24-March-2022. It traded at 17x/ 15x the consensus earnings estimate of ₹ 21/ 24/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 482/- implies a P/E Multiple of 20x on FY24E EPS estimate of ₹ 24/-

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.”

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24 Mar

The Get Rich Slowly Investment Philosophy

 

 

 

 

 

 

 

 

The Get Rich Slowly Investment Philosophy

An investment philosophy contains the core beliefs that guide an investor’s actions and decisions when saving for the future. It’s like the money blueprint for the stock market. Without a defined philosophy, the choices become arbitrary. Investors buy and sell based on whim and emotion. When there’s a clear ideology, the options become limited to strategies that fit the investment beliefs.

Back when I was doing stupid stock-market tricks, I didn’t have a coherent investment philosophy. Today, I do. After a decade of reading and writing about money, I’ve come to believe that a smart investor should:

Start early. “The amount of capital you start with is not nearly as important as getting started early,” writes Burton Malkiel in The Random Walk Guide to Investing. “Every year you put off investing makes your [goals] more difficult to achieve.” The secret to getting rich slowly, he says, is the extraordinary power of compounding. Given enough time, even modest investment returns can generate real wealth.

Spread the risk. Another way to smooth the market’s wild ups and downs is through diversification, which simply means not putting all of the eggs into one basket. Own more than one stock, and own other types of investments. When investors spread their money around, it decreases risk while (counter-intuitively) earning a similar return.

Keep costs low. In Your Money and Your Brain, Jason Zweig notes, “Decades of rigorous research have proven that the single most critical factor in the future performance of a mutual fund is that small, relatively static number: its fees and expenses. Hot performance comes and goes, but expenses never go away.

Keep it simple. Most people make investing far too complicated. There’s no need to guess which stocks are going to outperform the market. Average investors probably can’t. For the average person, it’s much easier and more profitable to simply buy index funds.

Make it automatic. It’s important to automate good behavior so that investors don’t sabotage themselves. You want to remove the human element from the equation. It is recommended to create a monthly transfer from a savings account to an investment account.

Ignore everyone. Everyone might think that a smart investor pays attention to daily financial news, keeping his finger on the pulse of the market. But they are wrong. Smart investors ignore the market. If someone is investing for twenty or thirty years down the road, today’s financial news is mostly irrelevant. Decisions should be based on investors’ personal financial goals, not on whether the market jumped or dropped today.

Conduct an annual review. While it does zero good to monitor investments daily, it’s smart to look things over occasionally. Some folks do this quarterly. The author recommends once per year. An annual review lets the investor shift their money around if needed. And it’s a great time to be sure if the investment strategy still matches the goals and values.

Source: The Get Rich Slowly investment philosophy and strategy by J.D Roth

Asset Multiplier Comments:

  • Simplicity is often key to prolonged success having a simple investing philosophy limits the number of investment strategies at disposal. Adopting an investment philosophy that slowly compounds wealth will help investors outperform most other individual investors over the long term.
  • Investing based on emotions and whims may result in some lucky gains but it cannot be a sustainable basis for creating wealth.
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23 Mar

 Organic revenue growth guidance of 20% for the medium term: Happiest Minds

Update on the Indian Equity Market:

On Wednesday, Nifty closed lower at 17,246 (-0.4%)in the highly volatile session. METAL (+1.2%), OIL AND GAS (+0.4%) and PHARMA (+0.4%) were the top sectoral gainers.AUTO (-1.0%), FINANCIAL SERVICES (-0.9%) and BANK (-0.6%) were top losing sectors.

The top losers were KOTAKBANK (-2.6%), HDFC (-2.4%), and BRITANNIA (-2.1%) while DIVISLAB (+2.5%), HINDALCO (+2.5%) and TATASTEEL (+2.0%) were the top gainers.

Edited Excerpts of an interview with Joseph Anantharaju, Executive VC& Chief Executive Officer-Product Engineering Services, and Venkatraman Narayanan, MD and CFO, Happiest Minds with CNBC-TV18 on 22nd March, 2022:

  • The IT industry is facing two concerns i.e. higher attrition and margin pressure. On margins, the MD commented that the company has been outperforming its guidance of 22-24%(EBITDAM) for the last four quarters. This is largely on account of Work From Home (WFH)scenario and other cost saving factors.
  • For FY23E,the MD stated that demand seems to be robust and the company would be working on maintaining the EBITDA Margins at 24-25%. The pressure would be from wage hikes to retain the talent as the attrition rates are high. The new recruitment would cost higher. This increase in cost is expected to be compensated through rate increases to the customers. The favourable exchange rate is also helping to maintain the margins.
  • MD’s Comment on the Russia-Ukraine conflict: There is flow of work continuing to India. Earlier it was because of entire digitalization move, which was applying pressure on supply side. Now he expects this conflict to add to this pressure. According to him, demand would not be an issue, but meeting the demand and requirements of the customers and attracting talent would be a challenge.
  • The bill rates of services rendered from Eastern Europe are higher than services rendered from India. There is a headroom to cover for the increased cost by negotiating for higher rates without impacting the quality of deliverables. This is the upside for the Indian Tech Industry.
  • On the company’s organic revenue growth guidance of 20%, the MD clarified that it is for a period of time spanning five years. He expects the revenue growth range to be around 32% YoY for FY22E.
  • On high attrition rate problem, VC commented that the company expects the number to trend down a bit. It has taken a few measures, upcoming high increments and increased level of engagement, learning and development training to attract people is expected to maintain or reduce the current attrition levels. With current campus batch coming in and supply increasing,the company expects the attrition rates to taper down and to release some pressure on margins going forward.
  • The contribution of BFSI segment have been reducing in past couple of quarters. BFSI sector for the company have not been a traditional segment. Consulting, leasing and payroll service providers are the type of clients of the company. BFSI sector have been highly penetrated by the earlier entrants and large IT companies. Happiest Minds have been entering BFSI sector in adjacent areas rather than the traditional/old ones.
  • The marginal drop in BFSI segment is because of the recalibrations and reallocation in the verticals. Edutech is growing faster than BFSI in last two quarters. The recent merger and acquisition has lead to faster growth in Consumer Packaged Goods (COG) segment.
  • There is openness from existing and new customers with regards to considering the rate adjustments due to inflation and wage increases.

Asset Multiplier Comments

  • We think the strong deal momentum across verticals, emphasis on digital business and client centric approach may help the company to achieve its medium-term guidance of 20%+ revenue growth.
  • The ongoing talent crunch may keep margins under check in the near term, but the initiatives taken by the company may help to maintain the EBITDA Margins stable at 24-25%.

Consensus Estimate (Source: market screener website)

  • The closing price of Happiest Minds was ₹ 1,145/- as of 23-March-2022. It traded at 76x/ 68x the consensus earnings per share estimate of ₹15/ 17 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,510/- implies a PE Multiple of 89x on FY24E EPS estimate of ₹ 17/-.

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.”

 

 

 

 

 

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22 Mar

Acquisitions to lower EBIT by 45-50bps in 1st year – PERSISTENT

Update on the Indian Equity Market:

After a volatile session on Tuesday, NIFTY settled at 17316 (+1.2%) near the day’s high of 17,334. IT (+2.0%), OIL & GAS (+1.9%), and AUTO (+1.2%) were the top sectoral gainers. REALTY (-1.0%), CONSUMER DURABLES (-0.7%), and PHARMA (-0.3%) led the sectoral losers. Among the NIFTY50 components, TECHM (+4.2%), BPCL (+3.0%), and TATAMOTORS (+3.0%) led the gainers. HINDUNILVR (-2.9%), NESTLEIND (-2.7%), and BRITANNIA (-2.2%) led the losers.

Excerpts of an interview with Mr. Sandeep Kalra, CEO and ED, Persistent Systems (PERSISTENT) with The Economic Times on 21st March 2022:

  • PERSISTENT recently acquired MediaAgility, which is recognised as a Google premier partner which is the highest level of partnership in the Google ecosystem. MediaAgility comes with seven different Google cloud specialisations, ranging from migration cloud, NetApp development, modernisation, security, etc. In terms of the industry verticals, MediaAgility has a presence in BFSI, healthcare, life sciences, media entertainment, and gaming.
  • Explaining the rationale behind the recently concluded acquisitions, the CEO suggested the enterprises had already started their digital transformation journey before the pandemic. These transformation journeys sped dramatically during COVID, and hyperscalers have taken notice. They’ve been releasing more services, including vertical-specific offers, at an increased rate nearly every month.
  • The hyperscalers – IBM, Google, AWS – are expected to play an incrementally bigger role in the enterprise journey. PERSISTENT is already present in these segments, with revenues over USD 100mn. The recent acquisition of Data Glove added to PERSISTENT’s capabilities on the Microsoft Azure cloud technology.
  • With the MediaAgility acquisition, the Company intends to increase its presence on the Google Cloud Platform. Each of the platforms has their own niches and own customer base and PERSISTENT is trying to be the Uber of the cloud services for its customers.
  • Whenever an acquisition is done, there is a cost of doing it, and the Company expects a 45-50bps hit on the EBIT in the first year. The Company is confident of the acquisition being margin accretive once the integration process is complete.
  • PERSISTENT has established its footprint in BFSI, and healthcare life sciences and has 35plus enterprise customers across the US, India, and the UK. MediaAgility has a delivery centre in Mexico which complements PERSISTENT’s footprint in Guadalajara, Mexico. The acquisition will add over 500 cloud engineers with significant Google-certified capabilities.
  • The Company is following a strategy of bolt-on or tuck-in acquisitions and these would be in areas where it wants to expand its capabilities or expand its geographical footprint.
  • The overall demand environment is continuing to be healthy and over the last 12 months, PERSISTENT has announced deal wins in terms of an ACV of USD 882 mn and in excess of USD 1.1 bn in TCV terms. This Is a fairly healthy run rate in terms of the order book. The overall demand environment is good and PERSISTENT is building a capability that will last irrespective of the demand environment.
  • The revenue growth is expected to be healthy due to strong order bookings. The EBITDA margin is expected to be in the 16-17% range. The Company is looking to grow its capabilities and acquire market share.
  • In terms of long-term aspirations, the Company intends to improve its margin by about 2-3 percent over the next two to three years.
  • Attrition is one of the headwinds to the Indian IT sector. The Russia-Ukraine crisis is expected to increase the pressure on Indian talent.
  • In terms of tailwinds, IT services have a better pricing power compared to commoditised services. PERSISTENT being a specialised technology services company has a little better pricing power.
  • The Company has done multiple acquisitions in the last 12 months, with a capital commitment of over USD 220mn over the next few years. For now, it will take a little pause and focus on integrating the acquired companies. Should there be an opportunity in Eastern Europe, the Company would pursue it over the next 9 – 12 months.

Asset Multiplier Comments

  • PERSISTENT has completed 4 acquisitions in FY22 to strengthen domain capabilities in IBM Cloud, Microsoft Azure, Google Cloud. These acquisitions have helped increase the Company’s presence in verticals like High Tech, BFSI, and Healthcare and bolster near-shore and on-shore presence in North America.
  • IBM has been PERSISTENT’s partner for over 25 years, contributing over 25% to the total revenues in FY21. Alongside addition in domain capabilities, these acquisitions have helped reduce the concentration risk.

Consensus Estimate: (Source: market screener website)

  • The closing price of PERSISTENT was ₹ 4,532/- as of 22-March-2022. It traded at 41x/ 34x the consensus earnings estimate of ₹ 110/ 132/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 4,682/- implies a P/E Multiple of 35x on FY24E EPS estimate of ₹ 132/-

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.”

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21 Mar

Capex of Rs 5500 mn to expand room air conditioner manufacturing capacity– Blue Star

Update on the Indian Equity Market:

On Monday, NIFTY ended at 17,118 (-1.0%) as it closed near the intraday low level of 17,096. Among the sectoral indices, METAL (+1.5%), MEDIA (+0.5%), and PHARMA (+0.0%) were the gainers, whereas FMCG (-1.7%), FINANCIAL SERVICES 25/50 (-1.4%) and AUTO (-1.2%) led the losers. Among the stocks, COALINDIA (+3.3%), HINDALCO (+2.2%), and UPL (+1.8%) led the gainers, while BRITANNIA (-3.5%), GRASIM (-3.1%), and TATACONSUM (-3.1%) led the losers.

Excerpts of an interview with Mr. B Thiagarajan, MD of Blue Star (BLUESTARCO) with The Economic Times on 17th March 2022:

  • The company expects a very positive summer season after two consecutive poor summer seasons. The company will attempt to grow its sales 25-30% faster than the industry.
  • BLUESTARCO has stocked its inventory till June-22 and it will hold the current prices till May-22. Two developments might affect the product prices- 1) The ongoing Russia-Ukraine war may sharply increase the commodity prices post May-22, 2) The company may exhaust its stock by May and may have to review the prices by mid-April.
  • The company is expanding its room air conditioners manufacturing capacity, with a third factory coming up in Sri City. The company is making a total investment of Rs 5,500 mn in three phases, Rs 2,200 mn being invested in the first phase. The factory may get commissioned in the 3QFY23E.
  • The company has applied for the PLI scheme under which it may receive Rs 730 mn for its investment in the factory.
  • The company is expanding the manufacturing capacity for commercial refrigeration and deep freezer units by around 250,000 units. This factory located in Wada will get commissioned in the first week of April-2022.
  • The CEO expects the semiconductor supply issue to stabilise during the 3-4 months before the Diwali-festival season. The company is betting on the fact that the penetration of room air conditions in India is 7% and will improve.

Asset Multiplier Comments

  • We expect the demand for the room ACs to remain robust due to hybrid working models, online schooling, and low penetration in the Indian market.
  • The upcoming deep freezer factory in Wada will help in substituting imports thereby reducing imports of some SKUs.
  • The company has launched a comprehensive range of affordable ACs and is eyeing a market share of 14% in 2022. (Blue Star’s press release)

Consensus Estimate: (Source: market screener website)

  • The closing price of Blue Star was ₹ 972/- as of 21-March-2022. It traded at 36x/28x the consensus earnings estimate of ₹ 27/35 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,092/- implies a P/E Multiple of 31x on FY24E EPS estimate of ₹ 35/-

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.”

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19 Mar

This Week in a Nutshell (14th-18th March)

Technical talks

NIFTY opened the week on 14th March at 16,646 and ended at 17,287 on 17th March. NIFTY gained 1.8% throughout the week. The next support and resistance levels for the index would be 16,711 and 17,380 respectively.

All the sectoral indices gained this week, with Financial Services  (+6.8%), Bank (+5.7%), and Auto (+5.6%) being the gainers.

Weekly highlights

  • The retail inflation rate in India – measured by the Consumer Price Index (CPI)- came in at 6.07% in February 2022 as compared to 5.93% in February 2021. Commodity prices are expected to remain at elevated levels due to the geopolitical tensions disrupting supply chains and rising costs.
  • Russia-Ukraine update: Ukraine has warned that peace negotiations could last for weeks and said evacuations of combat zones continued, with another 5,000 people leaving Mariupol. Russia repeated a threat to target arms convoys sent by the US and its allies.
  • After losing ground for 5 consecutive days in the hopes of Russia-Ukraine coming to some sort of agreement, WTI crude settled above US$100/barrel on 18th March after negotiations between Russia and Ukraine deteriorated. Oil prices are expected to remain volatile till there’s some resolution on what Russia’s ultimate goal is.
  • The Federal Reserve on Wednesday raised interest rates by 25bps for the first time since 2018 and laid out an aggressive plan to push borrowing costs to restrictive levels. Investors in the US seemed to shrug off the initial jitters of the rate hike as Feds Chair Jerome Powell said the economy is strong enough to weather the rate hikes and maintain its current strong hiring and wage growth.
  • The Bank of England on Thursday hiked its main interest rate to its pre-pandemic level by 0.25%, the third increase in a row, to battle decades-high inflation. K. inflation hit a 30-year high in January and is expected to rise further as Russia’s invasion keeps energy prices high.
  • NASDAQ (+2%) and S&P500 (+1%) rallied for the fourth consecutive session on Friday as Fed met market expectations by starting its rate-hiking cycle on Wednesday.
  • The foreign institutional investors (FII) turned buyers this week and bought equities worth Rs 16,860 mn. Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 12,900mn.

Things to watch out for next week

  • The geopolitical tensions between Russia and Ukraine are expected to continue impacting supply chains, high commodity prices, and volatility in crude oil prices.
  • In India, the next few weeks are expected to be quiet on the corporate front as companies will be in a silent period before the announcement of the FY22 earnings.

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.”

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16 Mar

No direct impact of Russia-Ukraine conflict on IT sector– Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY50 closed 312 points higher at 16,975 (+1.87%). All the sectoral indices closed in the green with REALTY (+3.6%), METAL (+2.6%), and PRIVATE BANK (+2.4%) being the top gainers. Among the individual stocks, ULTRACEMCO (+4.6%), AXISBANK (+3.5%), and BAJAJ-AUTO (+3.3%) were the top gainers while CIPLA (-1.3%), SUNPHARMA (-0.4%), and TATACONSUM (-0.1%) were the top losers.

Excerpts of an interview with Mr. C.P. Gurnani, MD & CEO, Tech Mahindra, published in Mint on 15th March 2022:

  • The main demand drivers are 5G and digital transformation, the legacy businesses preferring to move towards cloud; high demand for electric vehicles; increasing needs for cybersecurity; and sustainability.
  • Keeping that in mind, Tech Mahindra is betting big on opportunities in 5G and digital transformation. With the recent launch of TechMVerse, it has forayed into the metaverse space. For the first year, the company is planning to hire 1,000 people dedicated to TechMVerse. The operations will be spread across four hubs – Dallas, Hyderabad, London, and Pune.
  • Along with that, expanding the global reach by opening up new centers in tier-2, tier-3 cities like Latvia, Romania, and Costa Rica is creating more requirements for new hires. The company is targeting to hire from tier-2 cities like Bhubaneshwar, Chandigarh, Kolkata, Indore, and Coimbatore, as the level of skills is extremely good and attrition rates are much lower.
  • Although metaverse is a key differentiator, being a new technology, it will be initially incubated in a smaller group and then shared with the clients. Initially, the metaverse offerings including DealerVerse – metaverse-based car dealership; Middlemist – an NFT marketplace; or Meta Bank – a virtual bank, will be run as a separate unit. Eventually, will work together with various other verticals. The early adopters of metaverse are the gaming, healthcare, retail, and banking sectors.
  • The company has made 8 acquisitions in FY22 to build capability, de-risking the portfolio, and for geographic expansion.
  • Concerning the ongoing Russia-Ukraine conflict, the company will have no direct impact as the Indian IT sector is not dependent on either of the two countries.

Asset Multiplier Comments:

  • The intensity of tech spending is expected to increase as clients are willing to spend on IT via Capex and Opex. Cloud spend is a minimum 3- 4 years opportunity for the IT sector. The second round of IT spend is on artificial intelligence, augmented reality, virtual reality, data analytics, and IoT.
  • We believe Tech M is well positioned to capture a fair share of 5G network services spends and strong growth in communication will continue in FY23E. Spreading talent base to Tier 2 cities in India and Nearshore centres will help reduce employee cost by ~15% and also lower attrition rate. We expect increase in utilization rate and gradual reduction of sub-con costs (on the back of reducing attrition rate) will lead to margin expansion in FY23E.

 Consensus Estimate: (Source: Marketscreener & TIKR website)

  • The closing price of Tech Mahindra was ₹1,488/- as of 16-March-2022. It traded at 21x/ 18x the consensus earnings per share estimate of ₹72/₹81.5 for FY23E/FY24E respectively.
  • The consensus target price of ₹1,787/- implies a P/E multiple of 22x on FY24E EPS estimate of ₹81.5/-

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.”

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16 Mar

Musings on the market

With state elections out of the way, the stock markets will stay focused on the ongoing Russia-Ukraine conflict and energy prices and its implications for domestic and global growth and inflation (interest rates).

We hope for diplomatic breakthroughs to end the ongoing Russia-Ukraine conflict and no further sanctions on Russia’s oil/natural gas exports. This could limit further damage to global supply chains and prices of materials and foodstuff. The decline in share prices in the last month has made many stocks attractive to long-term investors. We believe that even when diplomatic solutions are found, the world will not go to the situation as it existed before Russia entered Ukraine. Material costs will stay higher for longer, consumption will be reduced and interest rates will move up in 2022. Lockdown in China’s Shenzhen and Jilin province amid a surge in fresh cases may impact industries such as chemicals and automobiles. Issues with respect to the ports causing delays with shipping may hurt the global supply chain.

For the past few months, foreigners have sold Indian stocks in large quantities. Indians have continued to buy but not in equal strength. We believe that Indian indices may not fall sharply in the next few months if global conflict does not worsen. We think investors should now start to invest in a mix of defensive and pro-cyclical sectors now.

Sector Business Outlook
Pharma Steady growth in India. International business momentum picking up. Restarting of US FDA inspections may lead to quicker approvals, adding to topline growth.
Consumer Revenue and Margin growth will be challenged for the next few quarters.
Software Services The demand outlook is robust for the next 2-3 years. Winners will be focused on Digital solutions for clients.
Insurance Increasing demand as income levels rise. Increased supply of shares may cap the valuations for the next few months.
Defence The importance of having strong local manufacturing for defence needs is underscored by recent global developments.
Financial Services Increasing demand as COVID fears fades, stronger margins as the size of bad loans fall, sufficient new worth due to recent capital raising.
Auto and components A mixed outlook as supply constraints may ease over the next few quarters. Demand may suffer due to rising petrol prices.

 

Jason Leach points out that statistics abound showing that market corrections without recession are buying opportunities. Outside of recession, and after declines of 10%+, the US S&P 500 Index is higher one year later approximately 90% of the time with an average return of 25%+ (32 corrections since 1980 – source: LPL Research).

Data also shows that market corrections outside of recession around geopolitical tensions are buying opportunities. Outside of recession, only once since 1939 was the US S&P 500 Index lower one year after a domestic political or geopolitical shock (29 occurrences), with a median one-year return of 13% (source: Deutsche Bank).

Does this mean investors should be fully invested now? Not so fast, we think. Jason Zweig reminds us that glaringly obvious big fears, like the risk of nuclear war, can blind investors to insidious but more likely dangers, like the ravages of inflation. Second, investors need not only the courage to act (continue with regular investments in stocks) but the courage not to act—the courage to resist (not giving to the temptation of new products, hot IPOs).

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.”

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15 Mar

Focus on next stage of digital transformation – HDFC Bank

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended in its 5 day winning streak and closed at 16,663 (-1.2%). Among the sectoral indices, AUTO (+0.6%), and FMCG (+0.2%) were the only gainers while METAL (-4.1%), IT (-2.6%), and OIL & GAS (-2.5%) were the top sectoral indices that closed in the red. Among the NIFTY50 stocks, TATACONSUM (+3.7%), M&M (+2.4%), and CIPLA (+2.0%) led the gainers while TATASTEEL (-5.2%), HINDALCO (-5.2%), and ONGC (-4.9%) led the losers.

Excerpts of an interview with Mr. Parag Rao, Country Head, HDFC Bank published in Economic Times on 14th March 2022:

  • The bank did face a couple of outages and it impacted the customers. The regulator took notice of this and conveyed that it has no issues with the bank’s growth plans and strategic direction in which the bank is going, but it would like it if the bank reconsiders its investments in infrastructure so that it can sustain this growth.
  • The bank in the interim was not allowed to do two things. One was the credit card ban; it could not issue new credit cards to customers and at the same time, all the new digital initiatives which the bank was planning to launch were put on temporary hold till such time the bank strengthened and demonstrated the capability to manage this kind of growth.
  • The bank’s new motto is technology become the driver and magnet to get business for the bank and that is how it has started the transformation. In this context, the first embargo on the issuance of credit cards was lifted in August-21. Since then, the bank has gotten back to its regular run rates and rapid growth plans on its credit card base.
  • HDFC Bank is a very large bank. It has commitments and responsibility to a very large customer franchise and in that sense, this pause in its growth was for a very good cause and it is now far better prepared for the next five years.
  • The bank’s strategy can be broken up into three core parts; one is reimagining the entire customer experience and building new digital platforms which would take the customer experience that much far into the future. The context has already been set over the last five to seven years with the emergence and explosion of the digital wave.
  • This digital wave has brought about significant changes in the way customers would interact with their principles, banks, and various other categories practically in every industry and so there was a different need for customers in this whole digital world.
  • All of this has expanded the kind of needs and demands that the customer expects from the institution. So reimagining customer experience and building completely new digital platforms to enhance customer value is one leg of the bank’s strategy.
  • One immediate change over the next couple of months will be the relaunch of PayZapp 2.0 on a completely new platform. The Bank aims is to be among the top three payment apps in the country and a significant ramp-up for PayZapp not just by how it engages and provides the services of holistic payments to its existing set of 60 million customers.
  • The Bank’s planned investments into technology are expected to double over the next 3 years as compared to the past 3 years. The bank is focused on expanding its digital infrastructure by bringing new and skilled talent to lead the transformation.

Asset Multiplier Comments

  • After 16 months of restrictions imposed by the RBI, HDFC Bank is all set to leverage its investments in technology to fuel the next stage of growth in customers by expanding its omnichannel presence.
  • While HDFC Bank is a leader in a lot of parameters in the banking sector, it requires significant catch-up to its peers like ICICI Bank and SBI who have already ahead of the curve when it comes to customer acquisition and tech-based infrastructure development.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of HDFC Bank was ₹ 1424 /- as of 15-March-2022. It traded at 2.7x/ 2.4x the consensus Book Value per share estimate of ₹ 520/600 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1970/- implies a P/B multiple of 3.3x on FY24E BVPS estimate of ₹ 600/-

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.”

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