14 Mar

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.”

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14 Mar

This Week in a Nutshell (7th-11th March)

Technical talks

NIFTY opened the week on 7th March at 15,867 and ended at 16,630 on 11th March. NIFTY regained 2.4% throughout the week. The next support and resistance levels for the index would be 16,800 and 16,400 respectively.

All the sectoral indices gained this week, with Media  (+6.7%), Pharma (+6.3%), and IT (+3.4%) being the gainers.

Weekly highlights

  • Early in the week, Wall Street indices plummeted as oil prices soared to their highest levels since 2008, above $130 per barrel, owing to the ongoing conflict between Russia and Ukraine. Asian stocks followed the lead of their Wall Street counterparts.
  • The threat of a US and European ban on Russian products, as well as a delay in Iranian talks, triggered a massive stagflationary shock for international markets on Monday, sending oil prices soaring by more than 10%.
  • Global oil prices fell on Wednesday by the most in nearly two years after OPEC member the United Arab Emirates said it supported pumping more oil into a market roiled by supply disruptions due to sanctions on Russia. Brent and Crude WTI closed at USD 112.67 /barrel, USD 109.33/barrel respectively.
  • Indian Insurance monthly data for February 2022 was released during the week, the industry’s new business premium rose 27% over the previous month to Rs 27,465 crore in February 2022, 22% higher on a YoY basis.
  • The International Monetary Fund indicated that the war in Ukraine has sent a wave of more than 1 mn refugees to neighboring countries while triggering unprecedented sanctions on Russia. The US banned Russian oil imports while Britain would slowly phase out the imports.
  • The domestic market also witnessed a heavy sell-off early in the week however, the mood was reversed as the results of the state election turned positive for the market, and oil prices started cooling off.
  • US consumer prices surged in February 2022, culminating in the largest annual increase in 40 years, and inflation is poised to accelerate further in the months ahead as Russia’s war against Ukraine drives up the costs of crude oil and other commodities.
  • Japanese household spending rose for the first time in six months in January on a year-on-year basis, largely because of weakness in the prior year, even as the fast spread of the COVID-19 Omicron variant likely weighed on consumption later in the month.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 246,884 mn. Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 177,291 mn.

Things to watch out for next week

  • The markets will react to the FOMC meeting and the interest rate decision slated to come during this week.
  • By March 15th, companies are expected to file their advance tax that would signal the expected earnings of the listed companies in upcoming quarters.
  • The market will focus on the reduction of commodity prices and diplomatic development between Russia & Ukraine.
  • The market will also focus on inflation data to be released in India & the US, and the US Fed meeting is scheduled for next week.

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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10 Mar

Don’t invest like a Billionaire…

“If you want to learn how to shoot a cover drive, emulate Sachin Tendulkar. If you want to learn how to cook, watch Sanjeev Kapoor. If you want to get rich, do what rich people do…right?”

This is a often repeated fallacy that imitating rich and famous people’s investing strategies will result in success, however nothing could be farther from the truth. The intuition is obvious—if that person is rich, they must know how to handle their finances. And if they’re doing something with their money, I should probably do the same thing. 

The problem with this strategy is that their investing goals might be completely different than yours, aside from growing your wealth, there might be nothing common between your financial dreams and theirs. The rich and famous make investment choices that align with their lifestyles. 

A famous renowned mutual fund manager that can, and does, change strategies in a heartbeat. If he’s bullish on electric motorcycles on Monday morning, he may sell the entire position by Thursday afternoon. Within the last few months, he may have short sold the stock of any automobile company, and called for “the mother of all crashes” in crypto. You’ll see plenty of articles about what Mutual Fund Managers may be trading at any point in time because “Guess what this ace investor is Buying…” is a click-inducing headline. But it’s impossible to track his whipsawing strategy by following the headlines—you’ll only know his next move well after it’s made. You can follow him into the halfpipe, but you might end up in traction.

the CEOs and insiders—is it possible that these folks are selling because they know disaster is around the corner? Sure. But let’s remember that these people sometimes just need cash, too. Most of a CEO’s pay doesn’t come in the form of a biweekly salary; it comes in stock-based compensation. So, whether they want to buy a boat or need to pay their kid’s tuition, selling stock will be the primary way to get cash. They might also be selling as part of an ongoing plan to reduce their concentration in their company’s stock. Diversification is a tenet of Investing 101, hardly an ominous sign of impending doom. You can follow them into the halfpipe, but you might be misinterpreting their motives.

The lesson is simple, the right investing strategy can’t be found by blindly imitating rich people or by listening to “experts” on the news channels every morning. Investing is a very personal discipline, and you don’t know their time horizons, motivations, or even their personal finance acumen—plenty of rich folks end up going broke.   

Ultimately, you can’t find the “right” strategy by following anyone in the world because the search begins within YOU. Your goals, your saving and spending habits, and your personality are unique and crucial inputs to your investment strategy. If you need help matching YOU with your investments, it’s time to talk to a financial advisor. The best advisors aren’t the smoothest talkers or those with the most expensive suits. The best advisors are those who truly listen to understand you, then devise a strategy that fits.     

Source: Don’t invest like a billionaire by demystifyingmarkets.com

Asset Multiplier Comments

  • Investing is a deeply personal exercise that is based on a lot of parameters which differ from person to person. Blindly following rich people or investing gurus for financial advice is not the best approach to investing.
  • Everyone’s income, savings, goals regarding investing, expectations from wealth generation is different, so the best way to start investing is consulting a financial advisor who can help us with a tailor-made plan for investing.

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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10 Mar

‘Experience of the Future’ stores next big thing – Westlife Development

Update on the Indian Equity Market:

On Thursday, NIFTY50 ended in the green for the 3rd straight session at 16,595 (+1.5%). The trends for five state assembly elections may have aided the sentiment as the ruling BJP led in the majority of the seats in India’s largest state of Uttar Pradesh.

Among the sectoral indices, FMCG (+3.0%), PSU BANK (+2.3%), and METAL (+2.3%) led the gainers while IT (-0.1%) was the only sectoral index that closed in the red. Among the NIFTY50 stocks, HINDUNILVR (+5.2%), TATASTEEL (+4.3%), and GRASIM (+4.1%) led the gainers while COALINDIA (-3.8%), TECHM (-1.5%), and DRREDDY (-1.2%) led the losers.

Excerpts of an interview with Mr. Amit Jatia, Vice Chairman, Westlife Development published in Financial Express on 10th March 2022:

  • India has an inflationary tendency, so cutting costs is a part of the Company’s DNA. Vice-Chairman believes sales growth should be accompanied by a 100-250bps cost reduction YoY to survive.
  • If a certain cost increased, the company finds a reduction in some other avenue to maintain the balance. He doesn’t believe this policy will change in the next three to five years.
  • He believes inflation is here to stay. The company takes a 3-5% price hike every year and CY22 will not be any different.
  • Currently, there are a total of 316 McDonald’s outlets out of which 248 have McCafe inside them, which are proper coffee shops.
  • The company is working on accelerating the expansion of its network and plans to have over 500 stores in the next 3-5 years. This will require an investment of over Rs 8bn.
  • The expansion strategy will also be aligned to the company’s omnichannel strategy with a robust portfolio of ‘experience of the future’ (EOTF) stores, drive-throughs, and stores with separate take-out windows. The company will be doubling its drive-throughs within India. Menu innovation, omnichannel presence, and network expansion will continue to be the key levers for Westlife.
  • The EOTF stores are a big thing now, as the company is trying to change the way the QSR industry will operate in the future.
  • There are no favorites when one talks about the McDonald’s brand. Offerings like McAloo Tikki, McChicken, McSpicy, McVeggie are all consumer favourites, and the company is not dependent on one product.
  • The eating behaviour of customers has changed tremendously. Earlier, consumers were focused on snacking when eating out at a QSR, now they are looking at a complete meal. As a result, the Company’s focus has shifted towards larger opportunities which are meals.
  • In the last 2 years, the company has pivoted to become an omnichannel brand wherein the digital channels are accelerated at a phenomenal rate for McDonald’s. Its drive-through, contact-less take-away, on-the-go service ensured continuity of operations. Also, as stores were reopened delivery continued to grow. So, both in-store dining and delivery have provided an impetus to revenue and profitability growth. In 3QFY22, as most of the dine-in restrictions were eased, revenue from convenience channels grew 55% YoY with McDelivery reporting its highest ever revenue so far.
  • The new range of burgers along with the Fried Chicken platform and McCafe helped accelerate the average unit volume growth by 30% without any significant capex investment.

Asset Multiplier Comments

  • With increased focus on hygiene due to the pandemic, customers’ preference has shifted towards branded products. We believe McDonald’s (Westlife Development) is well-placed to benefit from this opportunity due to its brand recall, strong network, and variety of products.
  • With the new launches such as Fried chicken, the company is evolving from being just a burger company and providing tough competition to its peers.
  • With the entry into adjacent spaces such as Gourmet burgers and Fried chicken without incremental capex, the company will be able to improve its margins and provide better returns to shareholders.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of Westlife Development was ₹ 478 /- as of 10-March-2022. It traded at 76x/ 52x the consensus earnings estimate of ₹ 6.3/9.2 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 629/- implies a P/E multiple of 68x on FY24E EPS estimate of ₹ 9.2/-

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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09 Mar

Container unavailability is a serious challenge going forward- Vinati Organics

 

Update on the Indian Equity Market:

On Wednesday, NIFTY50 ended in green at 16,345 (+2%). Among the sectoral indices, MEDIA(+4%), REALTY(+2.9%), and AUTO (+2.8%) were the top gainers, whereas METAL (-0.4%), was the only loser. Among the stocks, ASIANPAINT (+6%), RELIANCE (+5.5%), and BAJFINANCE (+5%) were the top gainers while SHREECEM (-2.6%), ONGC (-2.5%), and POWERGRID (-2%) led the losers.

Excerpts of an interview with Ms. Vinati Saraf Mutreja, MD, Vinati Organics (VINATIORGA) with CNBCTV18 on 8th March 2022:

  • Raw materials come from refineries and are crude dependent. As crude prices increase, VINATIORGA’s raw material prices will also increase. It has a pass-through clause for most of its products as they have formula-based pricing and can pass on these raw material price hikes to its customers to a certain extent.
  • Exporters like VINATIORGA are facing logistical issues like the unavailability of containers and this is expected to be a serious challenge going forward.
  • On a positive note, VINATIORGA is witnessing good demand. Its main product Acrylamide Tertiary-butyl Sulfonic acid (ATBS) which is used in oil and gas and oil drilling is witnessing positive demand from North America and Europe.
  • Ibuprofen which was very slow last year has started picking up. Butyl Phenol is also experiencing a breakthrough in the market.
  • Ms. Mutreja expects the EBITDA margins to be maintained between 28-30%. EBITDA per kilogram remains more or less constant because of the formula pricing. It sometimes does not necessarily capture some of the fixed expenses like utility costs, fuel costs, overheads, and general inflation. These expenses get hedged as capacities get expanded and utilization levels improve owing to better demand.
  • VINATIORGA saw very high logistics costs in CY21 which eventually started tapering down by Dec-21-Jan 22. After the Russia-Ukraine war started in February, the costs have gone up again. Obtaining bookings and container availability has become a challenge for the entire industry, especially in North America, Europe, and Southeast Asia.
  • Costs have gone up 20-30% for US and Europe bookings in Jan-Feb 22.
  • VINATIORGA is foraying into the production of niche chemicals through Veeral Organics (a subsidiary) at a total capex of Rs 2,500 mn. It involves different products one of which has application in the fragrance industry, one is used as a polymer additive, one is used in the pharmaceutical industry. This is a greenfield project and is expected to be completed in 15 months. Total revenue of Rs 3,000 mn is expected from this project.
  • Veeral Additives is another project which is a merger with VINATIORGA. It is subject to NCLT approval which is causing some delay. This anti-oxidants plant which is used in resins and plastics is expected to come on stream later in March-22.

Asset Multiplier Comments

  • Earlier, customers had stocked Ibuprofen due to Covid-19 related concerns. Due to the lower-than-expected consumption and higher inventory, demand for IBB has also reduced. The demand for IBB may pick up again from March 2022.
  • The new capex for Veeral Organics involves the manufacturing of five new products. The company may target 10% of the total market size of Rs 25 bn.
  • The headwinds of high raw material costs and higher logistic costs may keep the company’s margins under pressure for the next 2 quarters. We expect the EBITDA margins to normalize back to around 30% level by September 2022. 

Consensus Estimate: (Source: Marketscreener and Investing.com websites)

  • The closing price of Vinati Organics was ₹ 1,858/- as of 08-March-2022. It traded at 58x/42x/33x the consensus earnings estimate of ₹ 32/44/56 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,052/- implies a P/E multiple of 36x on FY24E EPS estimate of ₹ 56/-

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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08 Mar

Will comfortably sail through the near-term headwinds – Page Industries

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended at 16,013 (+0.95%) as it closed near the day’s high. Among the sectoral indices, REALTY (+3.3%), MEDIA (+2.8%), and IT (+2.7%) were the top gainers, whereas METAL (-1.5%), and OIL&GAS (-0.7%) were the only losers. Among the stocks, IOC (+4.2%), SUNPHARMA (+4%), and TATACONSUM (+3.8%) were the gainers while HINDALCO (-4.6%), ONGC (-4.4%), and TATASTEEL (-2%) were the losers.

Excerpts of an interview with Mr. Chandrasekar K, CFO, Page Industries (PAGEIND) with Bloomberg Quint on 7th March 2022:

  • In 3QFY22, Page Industries clocked in 28% growth YoY in revenue and a 25% growth in volumes.
  • The company is experiencing uniform growth across metros as well as tier 2,3 & 4 cities.
  • The company’s current performance is way ahead of pre pandemic numbers in all aspects as 4 of the best quarters in the company’s history have come from the last 5 quarters.
  • An overall strong performance in calendar year 2021 was largely driven by growth in athleisure wear. The usage of athleisure wear has grown over the years but the lockdown and work from home situation acted as a catalyst for a spurt in demand.
  • In CY21, raw material prices have moved up by 20%. Page Industries has taken a price hike of 5% in Q1 and further hike of 8% recently. However, since the end of Q3, the raw material prices have weakened a bit, hence, no more price hikes have been planned. The company is targeting its full year EBITDA margins to be at its long run average level of 20%
  • The company has added 40,000 multi brand outlets (MBOs) in the last 2 years and the total store count now stands at 1,10,000 stores. The sales per store in smaller towns is almost similar to the stores in larger cities. Along with that, the company’s digital transformation started around 3 years back and as a result of that, E-commerce sales are at 8-9% of total revenues.
  • The company is looking for growth opportunities by increasing the penetration of premium apparel category which currently stands at 12% and athleisure wear which is in single digit. To capture these markets, the company has been actively hiring and investing in people is sales and in backend, even during the pandemic.

Asset Multiplier Comments

  • As the raw materials prices have moved up, all the apparel manufacturers have been forced to take much more frequent price hikes. These price hikes can hurt the smaller players much more in terms of loss of revenue due to lower demand from price sensitive customers.
  • Page Industries being a manufacturer of premium category products and having sufficient pricing power, may take price hikes if required and is likely to have no pressure on the margins, without any material impact on the top line.

Consensus Estimate: (Source: TIKR and Investing.com websites)

  • The closing price of Page Industries was ₹ 39,406/- as of 08-March-2022. It traded at 89x/66x/56x the consensus earnings estimate of ₹ 445/593/705 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 40,805/- implies a P/E multiple of 58x on FY24E EPS estimate of ₹ 705/-

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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07 Mar

To produce 60% of energy from non-carbon sources in next five years– Tata Power

Update on the Indian Equity Market:

On Monday, NIFTY ended at 15,863 (-2.4%) as it closed near the day’s open level of 15,868. Among the sectoral indices, METAL (+2.1%) was the only gainer, whereas REALTY (-5.5%), PRIVATE BANK (-4.8%), and PSU BANK (-4.6%) led the losers. Among the stocks, ONGC (+13.2%), HINDALCO (+6.3%), and COALINDIA (+4.2%) led the gainers while INDUSINDBK (-8.1%), MARUTI (-6.5%), and AXISBANK (-6.4%) led the losers.

Excerpts of an interview with Mr. Praveer Sinha, CEO and MD of Tata Power (TATAPOWER) with The Economic Times on 4th March 2022:

  • Coal needs to be looked at from two perspectives, domestic coal, and international coal. The domestic coal availability is very good. India doesn’t import much Russian coal and it will stay insulated as its price is expected to increase as the Russia-Ukraine war continues.
  • For domestic coal, the cost of diesel will go up and the mining cost of coal will also go up. It will have an impact but not a very large impact. In India, nearly 600 million tons of coal are supplied by domestic coal companies.
  • Merchant tariff rates will remain distressed. Normally 190-gigawatt consumption is seen in peak summer which may go up to 220 gigawatts. The line-up of coal inventory needs to be done so that the company doesn’t have the situation of zero coal stocks in its plants.
  • The company has a long-term arrangement with Indonesian coal companies through which it keeps on receiving its required coal every month. It gets coal at the price defined by the local government from Indonesia.
  • From producing 15% of its energy from non-carbon sources four years ago, to nearly 30% now, Tata Power plans on producing nearly 60% of its energy from non-carbon sources in the next five years.
  • The company says that the coal prices have been high for the last year and will continue to remain in this range. It expected the prices to come down near $100 in the later part of CY-2022, but the prices will now remain upward of $150.
  • No capacity addition is happening in thermal and all the old plants will get decommissioned once completely used. There is a trend that all future investments will happen in renewable energy such as solar, wind, and hybrid solutions of solar, wind, hydro.

Asset Multiplier Comments

  • Tata Power’s long-term arrangements with Indonesian coal companies for buying coal give it a cushion against the rising coal prices in the short to mid-term.

Consensus Estimate: (Source: market screener website)

  • The closing price of Tata Power was ₹ 217/- as of 07-March-2022. It traded at 28x/24x the consensus earnings estimate of ₹ 7.9/9.4 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 206 /- implies a P/E multiple of 22x on FY24E EPS estimate of ₹ 9.4/-

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.”

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05 Mar

This Week in a Nutshell (28Feb-4 March)

Technical talks

NIFTY opened the truncated week on 28th February at 16,482 and ended at 16,245 on 4th March. Amid the geopolitical tensions, the Indian benchmark index extended in the red for a fourth consecutive week. The index lost 1.4% during the week. The next support and resistance levels for the index would be 16,134 and 16,937 respectively. The RSI (14) of 35 indicates the index is in the oversold zone.

Among the sectoral indices, METAL (+7.0%), and IT (+2.1%) were the only gainers during the week. AUTO (-9.2%), FINANCIAL SERVICES (-5.6%), and BANK (-5.6%) led the losers.

Weekly highlights

  • Investors’ appetite was rattled by the intensifying Russia-Ukraine conflict, which obscured a much better-than-expected monthly jobs data in the USA. After Russia seized a Ukrainian nuclear plant and expanded its attack on numerous cities on Friday, all three major US indices — the Nasdaq 100, Dow Jones, and S&P 500 – closed the week in the red. As a result, investors shifted their portfolios away from risky assets and toward bonds and gold.
  • Oil prices soared to multi-year highs as Russia’s invasion of Ukraine escalated and buyers shied away from supplies from the world’s second-largest crude exporter. Brent Crude and West Texas Intermediate finished the week at USD 118 and 115 a barrel, up 20.5 percent and 25.6 percent, respectively.
  • For the month of February-22, the auto OEMs reported monthly volumes. With the easing of supply chain limitations and fresh launches, the demand for passenger vehicles (PVs) has remained strong. The market for 2Ws was muted, but premium 2Ws are seeing increased demand as chip availability improves. A modest increase in CV demand is being aided by robust demand from the infrastructure and construction sectors. Due to a high base and an extended rain that damaged the Kharif crop, tractor sales were hurt. In the medium term, the auto sector may benefit from improved rural sentiment and a healthy Rabi season.
  • Chairman of the Federal Reserve, Jerome Powell, informed the US Congress on Wednesday that he intends to propose a quarter-point interest rate rise at the Fed meeting on 16th He hinted that, depending on the effects of the Ukraine war and other circumstances, the Fed may be willing to raise rates even further.
  • The Indian manufacturing sector’s Purchasing Managers’ Index (PMI) rose to 54.9 in February from 54 in January. A reading above 50 is indicative of expansion in activities. Though there has been an improvement in manufacturing activity in February, input cost pressures remain a concern. Indians are facing the prospect of higher petrol and diesel prices once voting for the state election concludes.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 225,630 mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 167,430

Things to watch out for next week

  • The report on US inflation, which is due on Thursday, will be closely watched by investors. Consumer prices increased at the quickest rate in over four decades from January to February. The future for US markets is clouded by geopolitical tensions, as Russia’s invasion of Ukraine has moderated expectations for how swiftly the Federal Reserve will tighten monetary policy in the months ahead.
  • Continuing FII selling, increasing prices of oil, food grains, and metals, and declining Rupee are leading Indian equity markets down. On Monday evening, polls for five states will close. We expect retail prices of petrol to increase substantially immediately. Exit polls on state elections may drive the sentiments in the markets before the results are announced on 10th March.

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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03 Mar

What to do in these times?

As Indian markets continue to fall along with most other international markers, investors are wondering if this is the time to buy their favorite stocks. The latest trigger for the decline was the Russia – Ukraine conflict. The situation keeps changing every day but the impact on commodities – oil, sunflower oil, metals such as aluminum, copper and nickel, corn, wheat – prices have been immediate. The auto industry would be specifically affected as Russia is also a significant supplier of palladium a key component in semiconductor chips. Natural gas prices are already on the rise and Russia’s ejection from the global swift system could cause a lag in trade payments affecting balance sheets. The best outcome from investors’ perspective would be the cessation of hostilities and the world going back to its previous way of working. The possibility of this happening is fairly low.

Indian investors have to worry about three more developments in early March. We expect oil prices to be increased any time after 7th March (the last date of polling in UP). Credit rating agency ICRA points out that “While it is difficult to pinpoint the exact amount of lagged revision in RSPs (retail selling prices) of MS (motor spirit) and HSD (high-speed diesel) that is warranted by the surge in crude oil prices to the current levels, we expect it to be in a range of Rs 6-8/litre, i.e., similar to the cushion offered by potential excise reversion to pre-Covid rates,” its Chief Economist Aditi Nayar said in a report.

The international crude oil price, in Indian basket terms, surpassed the USD 100 per barrel mark on February 24 for the first time since September 4, 2014, the report said. The price of the Indian crude oil basket has averaged USD 93.1 per barrel so far in February 2022, a 10.5 percent surge relative to USD 84.2 per barrel in January 2022, it added.

Another development to watch out for is the results of five state assembly polls that will be announced on 10th March. Global investors are watching Fed action on interest rates to be announced on 16th March. This may bring some volatility to asset prices in emerging markets such as India.

The third development to watch will be the IPO of Life Insurance Corporation. The timing and size of the issue have not been announced yet. This could be a very large issue and reduce the liquidity in the market. Investors may sell other holdings to invest in this IPO. This could lead to a decline in share prices around the time of the IPO.

Another development to watch out for would be the conclusion of the Winter Olympics in China, which had affected the supply of key raw materials, especially heavy metals and pharma companies, due to Beijing’s determination to reduce pollution. We can expect the supply chain woes dependent on Chinese raw materials to ease, lowering the pressure on costs.

Should we add defensive sectors to the portfolio?

In uncertain economic times, investors have preferred to invest in defensive sectors like software services, pharma, and the consumer sector in the past. Is it time to do that again now?

We think the demand outlook for these sectors might not get impacted in the short term but high commodity prices will keep the margins under pressure for longer than anticipated. Companies will struggle to protect their margins and juggle between passing the inflation to consumers and cost-cutting. This may impact profit outlook adversely for the medium term eventually impacting the share prices. Industries getting impacted due to the shortage/inflation of RM and energy prices will have to cut down their discretionary spending. Companies may have to restrict ad and IT budgets to protect their margins. This may slow down the growth of Media and Entertainment and software companies in the medium term.

In summary, we think that investors should be patient with their investments before any clarity emerges on the prevailing economic issues- how the war and Indian elections affect the oil prices and Fed’s meeting on 15th March.

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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03 Mar

Price hikes make sense when loss ratios are moving up- Bajaj Allianz General Insurance


Update on the Indian Equity Market:

On Thursday, NIFTY closed in the red at 16,498 (-0.6%). Among the sectoral indices, OIL & GAS(+1.5%), IT (+1.2%), and METAL (+1.2%) closed higher while AUTO (-2.3%), CONSUMER DURABLES (-1.3%), OIL & FINANCIAL SERVICES 25/50 (-1.3%) closed lower. Among the stocks, ONGC (+4.6%), UPL (+4.5%), and POWERGRID (+2.8%) were the top gainers while ULTRACEMCO (-6.7%), ASIANPAINT (-5.2%), and HDFCLIFE (-5%) were among the top losers.

Excerpts from an interview of Mr. Tapan Singhel, MD & CEO of Bajaj Allianz General Insurance (BAGIC) in Business Standard dated 3rd March 2022:

  • During the third wave in January 2022, claims moved up 241 percent compared to December 2021 but the severity and hospitalization were low as compared to the second wave. The claim ratio did move up but not as much as it did in the second wave.
  • COVID claims contributed 20% to the overall claim ratio. The company has settled COVID-related claims of over Rs 8,000 mn since April 2020.
  • There was a 20 percent movement in BAGIC’s loss ratios. They were the only ones to make underwriting profits in CY21 but COVID-19 still impacted the profitability of the business. There was some relief in the motor segment as the claim ratios declined during the pandemic.
  • BAGIC would have considered increasing its premiums had COVID-19 been a regular phenomenon.
  • Mr. Singhel worries about the rising medical inflation which has gone up 30-45 percent in the last three years from a typical range of 10-15 percent. He also pointed out the need to have regulators for hospitals to control hospital bill inflation and a reduction in GST of 18% on premiums.
  • The premiums on group health policies have gone up due to price hikes taken to manage increasing loss ratios in that segment. In retail health, companies can take price hikes only after three years. During the pandemic, many consumers purchased covid- related products. Overall, on a base effect, growth in retail seems lower.
  • The insurance industry has a direct correlation with the volumes of vehicles being sold. The semiconductor shortage has caused sales volumes to decline resulting in muted growth in motor insurance premiums.
  • Hikes in motor third-party premiums will be taken when loss ratios start moving up in this segment. The industry seems comfortable with the existing situation.
  • As infrastructure is the main focus of our country, Mr. Singhel believes there should be solutions to provide funding to contractors and free up their capital. He believes surety bonds to be a very good move by the regulator and the government and that BAGIC will be keeping an eye on this business. The idea is to not replace bank guarantees entirely.
  • BAGIC is sure that any acquisition they do would be adding value to the company, in terms of distribution or processes.

Asset Multiplier comments:

  • We expect the health claims ratio to moderate from its peak levels that were observed during the pandemic.
  • With economic activities picking up, we believe BAGIC is well placed to maintain its combined ratio at pre-covid levels over FY23 and 24.
  • Improvements in operating efficiencies and moderation in claims ratio are expected to improve BAGIC’s profitability over the subsequent quarters.

Consensus Estimate: (Source: Market screener website)

  • BAGIC is a subsidiary of Bajaj Finserv Ltd. The closing price of Bajaj FInserv was ₹ 15,704 as of 3-March-2022. It traded at 6.4x/5.5x/4.7x the consensus book value per share estimate of ₹ 2,452/ 2,848/ 3,326/ for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 16,341/- which implies a PE per share multiple of 4.9x on FY24E BVPS of ₹ 3,326/-.

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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