14 Sep

Large sized deal ramp-up due to Evosys acquisition – MASTEK

Update on the Indian Equity Market:

On Tuesday, the benchmark Nifty 50 index ended at a record closing of 17,383 (+0.2%). The top gainers on the index were INDUSINDBK (+4.0%), HCLTECH (+2.5%), and HEROMOTOCO (+2.2%). The laggards were led by ULTRACEMCO (-1.1%), HDFC (-1.1%), and BPCL (-1.1%). Among the sectoral indices, MEDIA (+14.4%), PRIVATE BANK (+1.1%), and CONSUMER DURABLES (+0.9%) led the gainers while METAL (-0.4%), FMCG (-0.3%), and FINANCIAL SERVICES (-0.1%) led the losers.

Excerpts of an interview with Mr. Hiral Chandrana, Global CEO, Mastek with Economic Times on 13th September 2021:

  • The Company has a strong business in the UK and is working with the leading public sector institutions. MASTEK has a healthy business and is not going to reduce its UK exposure. They expect to continue the run in many areas including the private sector.
  • 1QFY22 was a good quarter in terms of the order book. The company is witnessing a good momentum in 2QFY22 along with an increase in deal size. The acquisition of Evosys (cloud business) is helping MASTEK get involved in larger-sized deals.
  • There are delays in some deals due to their large size and higher competition.
  • While the talent market remains challenging, MASTEK has taken a lot of steps in terms of salary hikes and skill transformation. They are looking at various elements of how training and reskilling are done.
  • 12-15 months back, the company was operating in the 13-14% EBITDA margin range. Now, they are comfortable in the 20plus percentage EBITDA margin. While there could be some margin fluctuation on a QoQ basis, the CEO believes they have good leverage in terms of fixed cost to achieve margins in the 20% plus range.
  • In some of their cloud implementation business, which was acquired through Evosys, the work is delivered through business outcomes. There are elements of pricing and realisation that can be leveraged based on the outcome delivered.
  • In cases where skills-based work is in high demand, customers realise they need to pay more. There are certain skills for which the company can command higher prices.
  • Customers are going through digital adoption and they are changing business models. They are changing their supply chains. It is a huge transformation and technology is a big enabler. Mr. Chandrana believes this trend will continue at least for the next one and a half or two years.
  • There is a huge opportunity for automation and digital adoption. Cloud has taken off in a big way, and MASTEK is investing heavily in that space for the next 18-24 months.

Asset Multiplier Comments

  • MASTEK’s presence in the local government has been established through the Evosys acquisition. There could be new business opportunities for the company with the UK government as a result of Brexit.
  • A strong order book, ramp-up of large deal wins, revival of the UK and US businesses are indicative of the revenue growth for MASTEK in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of MASTEK was ₹ 2,899/- as on 14-September-2021. It traded at 31x/ 25x the consensus earnings estimate of ₹ 94/ 114 for FY22E/ 23E.
  • The consensus target price of ₹ 2,890/- implies a PE multiple of 25x on FY23E EPS of ₹ 114/-.

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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13 Sep

Will keep investing to grow the household insecticides market – Godrej Consumer

Update on the Indian Equity Market:

On Monday, NIFTY closed 0.1% lower at 17,355. Top gainers in NIFTY50 were COALINDIA (+3.9%), HINDALCO (+3.3%), and KOTAKBANK (+1.7%). The top losers were RELIANCE (-2.3%), ICICIBANK (-1.8%), and SBILIFE (-0.9%). The top gaining sectors were MEDIA (+1.3%), METAL (+1.3%), and IT (+0.9%) while the top sectoral losers were BANK (-0.6%), PRIVATE BANK (-0.5%), and PSU BANK (-0.4%).

Will keep investing to grow the household insecticides market – Godrej Consumer

Excerpts of an interview with Mr. Sunil Kataria, CEO- India & SAARC at Godrej Consumer Products (GODREJCP), aired on CNBC TV18 on 9th September 2021:

  • Input cost inflation has not slowed down against the expectation that the inflation would come down in the July-August period. Current inflation pressures may remain for another 6 months.
  • Demand is holding steady currently. Rural demand was strong even in the 1st wave of covid-19. The positive thing now is that urban demand has also seen a sharp recovery.
  • Discretionary demand has come back strong. Provided the festive season does not get disrupted and continued ramp-up of vaccination, further growth should be possible.
  • GODREJCP is taking calibrated price increases in some products to mitigate the higher input cost prices. Further mitigation is being done via overhead cost control. GODREJCP has taken 7%-8% price hikes so far in FY22.
  • Management expects to maintain EBITDA margins in the 25%-26% band. This operating performance will be delivered without compromising on ad spends. Ad spends are an important investment in brand building.
  • The core business of soaps and household insecticides had strong tailwinds in FY21 and did not suffer due to the covid-19 disruption.
  • Discretionary items like hair color and hair care faced a challenge in 1HFY21 but came back strongly in 2HFY21.
  • Management expects both- core and discretionary categories to perform well going forward. Mr. Kataria expects overall double-digit growth across all categories.
  • GODREJCP is seeing big momentum in personal wash and hygiene so increasing capacity additions there. But capex outlay is not an issue for a cash-rich FMCG business.
  • Being the market leader in household insecticides, GODREJCP will undertake continued investments in increasing product portfolio and brand building in household insecticides.

Asset Multiplier comments:

  • Consumer staples, as well as discretionary companies across board, have been taking price hikes to mitigate the impact of input cost pressure. However, all managements are taking a calibrated approach as demand is still a bit fragile in some product baskets due to the economic impact of lockdowns.
  • How the rural demand shapes up from here remains to be seen as the covid-19 2nd wave has impacted rural India more than the 1st

Consensus Estimate: (Source: market screener websites)

 

  • The closing price of GODREJCP was ₹ 1,119/- as of 13-September-2021.  It traded at 59x/51x/44x the consensus earnings estimate of ₹ 19.0/22.0/25.2 for FY22E/23E/24E respectively.
  • The consensus price target is ₹ 1,058/- which trades at 42x the earnings estimate for FY24E of ₹ 25.2/-

 

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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12 Sep

This week in a nutshell (6th – 9th September)

Technical talks

NIFTY opened the week on 6th September at 17,399 and ended the truncated week at 17,369 on 9th September. The index made a weekly loss of 0.2%. On the upside, 17,378 might be a critical level to watch for. On the downside, 16,451 might act as a support. The RSI (82) indicates the index is in the overbought zone.

Weekly highlights

  • World stocks hit fresh record highs on Tuesday on growing bets that the U.S. Federal Reserve will push back tapering its bond purchases and keep its expansive policy for the near term. The latest rally, which started after Fed Chair Jerome Powell’s dovish speech at the Jackson Hole Symposium in August, received a further boost from a surprisingly soft U.S. payrolls report on Friday. The U.S. economy created 235,000 jobs in August, the fewest in seven months as hiring in the leisure and hospitality sectors stalled, reducing expectations that the Fed will opt for an early tapering of its monthly bond purchases.
  • Investors were caught by surprise by a sudden rally in the benchmark 10-year Indian bond yield. In the previous week (ended 3rd September), the yield had dropped ten basis points, the biggest weekly drop since April. There was a quick turn of sentiment after the benchmark 10-year bond yield rose to its highest since March. The sentiment change was aided by 1QFY22 GDP growth which grew ~20% YoY albeit on a low base and global market cues. The rally in the bond yield was led by mutual fund investors and overseas investors. The spike in overseas investors’ interest could be attributed to the appreciation of INR against USD. (Source: Bloomberg Quint Read more at: https://www.bloombergquint.com/business/a-surprise-bond-rally-sweeps-over-india-as-global-funds-pile-in )
  • The Securities and Exchange Board of India (SEBI) has introduced an optional T+1 settlement cycle for the market, which will come into effect from January 1, 2022. The T+1 cycle means settlements will have to be cleared within one day of the actual transactions taking place. A switch to the T+1 settlement cycle is expected to boost market liquidity and trading turnover while reducing settlement risk and broker defaults. While this move could be beneficial for the domestic investors, foreign investors may face challenges adjusting to this system due to time zone differences. While the regulator has come up with the new settlement cycle, the onus is on the exchanges if they want to opt for the shorter cycle.
  • The monthly data for life insurance premiums collected by companies was released by the Life Insurance Council. The industry reported a 3% YoY increase in the New Business Premiums (NBP) collected, led by private players. This growth comes after the NBP collected reported a decline of 11% YoY in July-21.
  • Stocks ended lower Friday, with major indexes booking weekly losses as the Dow Jones Industrial Average and the S&P 500 extended a losing streak to five sessions. Investors said uncertainty around the spread of the delta variant of the coronavirus that causes COVID-19 hung over markets this week as investors also weighed the timing of the Federal Reserve’s eventual tapering of its monthly bond purchases. The slide left the Dow down 2.2% for the week, while the S&P 500 suffered a 1.7% fall and the Nasdaq declined 1.6%.
  • Institutional activity trends reversed this week compared to last week. Foreign institutional investors (FII) turned sellers with an outflow of Rs 11,139mn. Domestic institutional investors (DII) tuned buyers with an inflow of Rs 11,160mn.

Things to watch out for next week

  • The Indian CPI and WPI data are expected next week. A key indicator for measuring the changes in purchasing trends and inflation.
  • As the result season has drawn to a close, the developments from Wall Street will be the guiding force for the Dalal Street.

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 Sep

Recovery on cards, high volume growth ahead – Marico

Update on Indian Equity Market:

On Wednesday, markets ended flat with Nifty closing 9 points lower at 17,354. KOTAKBANK (+3.6%), POWERGRID (+1.8%), and GRASIM (+1.6%) were the top gainers on the index while DIVISLAB (-2.4%), NESTLEIND (-2.4%), and WIPRO (-1.7%) were the top losers for the day. Among the sectoral indices, BANK (+0.8%), PRIVATE BANK (+0.7%), and CONSUMER DURABLES (+0.7%) were the top gainers, while IT (-0.8%), MEDIA (-0.6%), and AUTO (-0.5%) were the laggards.

Excerpts of an interview with Mr. Saugata Gupta, MD, and CEO at Marico on CNBCTV18, dated 07th September 2021:

  • Marico’s portfolio is concentrated on items of daily use, which saw a faster recovery in June itself. The entire FMCG sector is witnessing volume recovery due to its inherent nature and the company expects 8-10% volume growth for H2FY22. 
  • The company expects a muted 3rd wave if it occurs on the back of rapid vaccinations and an adequate monsoon which will help demand to improve significantly.
  • The only issue that the company expects to face is rising inflation in its input costs. However, the company believes this won’t persist beyond Q3FY22 and that it will see an eventual softening in raw material prices.
  • The company expects that it’ll meet its revenue targets of Rs. 4.5-5 bn in FY22 and double them to Rs. 8.5-10 bn by FY24 on the back of strong growth drivers like diversification and premiumisation. 
  • The company is on track to meet its diversification targets, with the discretionary food segment demonstrating robust recovery. Now the company plans to focus on premiumisation in Personal Care and digital brand growth.
  • Digital Brands are an important segment for the company. Its recent acquisition of Beardo Brand is now fully integrated, and the company plans to expand into a couple of more digital brands either organically or inorganically.
  • The worst margin pressure for the company is over as Copra prices (a key raw material for the company) have settled down. The company expects vegetable and other oil prices to cool off towards Q3FY22 and EBITDA margins to reach a comfortable 19-20% level.

Asset Multiplier Comments:

  • The food and FMCG Industry has adapted to the pandemic imposed changes. Despite the pandemic, the volumes have improved and may recover sharply soon with further unlocking. With an expanding product portfolio, the growth rates may be significantly higher.
  • Marico has an established portfolio, brand awareness with consumers, and a focus-induced approach to premiumisation which it can leverage to expand volumes to grow further and deliver value to shareholders.

Consensus Estimates (Source: market screener website): 

  • The closing price of Marico was ₹563/- as of 08-September-2021.  It traded at 56x/47x/40x the EPS estimates of ₹10/ 12/ 14  for FY22E/23E/24E.
  • The consensus price target is ₹ 600/- which trades at 43x the EPS estimate for FY24E of ₹ 14/-

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 Sep

Bank to see a greater expansion in rural areas – HDFC bank

Update on the Indian Equity Market:

On Tuesday, NIFTY ended lower at 17,362 (-0.1%) as it closed 40 points below the opening level of 17,402. Among the sectoral indices, CONSUMER DURABLES (+1.0%), FMCG (+0.3%), and FINANCIAL SERVICES (+0.2%) ended higher, whereas REALTY (-2.3%), IT (-1.3%), and PSU BANK (-1.3%) ended lower. Among the stocks, BHARTIARTL (+2.6%), HDFC (+2.5%), and GRASIM (+1.6%) led the gainers while SUNPHARMA (-2.2%), BPCL (-1.8%), and HINDALCO (-1.8%) led the losers.

Excerpts of an interview with Mr. Rahul Shukla, Group Head, Commercial & Rural Banking, of HDFC Bank (HDFCBANK) with Economic Times on 6th September 2021:

  • The reality is very different from what is spoken about in TV newsrooms. The commercial vehicle and construction equipment business is strong, credit utilisation by MSMEs is steadily increasing every month, the healthcare sector is fairly credit-strong.
  • The bank continues to expand its geographic footprint, extending credit in rural and semi-urban areas of the country, and sees no credit challenges in finding new business.
  • The bank is active in transportation finance, where it finances trucks, construction equipment, and tractors. The disbursements in July were 40% higher than in June, and in August, were 20-25% higher than in July.
  • The bank operates in 100,000 villages and in two years, it may expand to 200,000 villages. Even if it’s a huge jump, it is still only 30% of the market. The bank has a robust digital platform which has helped it to add new customers.
  • Rural lending today is about 90% crop-based lending. Crop-based lending is largely related to the price of dal and sugarcane. As the ecosystem is completely changing, there is a lot of push in vegetables, fruits, poultry, piggery, etc. which accounts for 60-65% of the crop-based lending.

Asset Multiplier Comments

  • Banks were willing to lend to the rural population during the 1st covid wave period as they were not as much affected as urban areas. The rural population was largely affected during the 2nd covid wave, and it is still recovering from the impact. Therefore, the dynamics related to lending may be different going forward.
  • HDFC Bank has seen a reduction in interest expenses and other operating expenses over the last 5 years. This trend is likely to continue in the upcoming years as the bank continues to manage its deposits and borrowings well. With reducing provisions led by an increase in NPA recoveries, the bank’s increasing geographic footprint, and well-balanced CASA deposits, we expect the bank’s prospects to improve further.

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

  • The closing price of HDFCBANK was ₹ 1,570/- as of 07-Sept-2021. It traded at 3.7x/3.2x/2.7x the consensus book value estimate of ₹ 423/488/574 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,760/- implies a PB multiple of 3.1x on FY24E BVPS of ₹ 574/-.

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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06 Sep

Exide Life to add 30-40% agency force – HDFC Life

Update on Indian Equity Market:

On Thursday, NIFTY ended at 17,378 (+0.3%). Among the sectoral indices, REALTY (+3.2%), IT (+1.5%), MEDIA (+1.3%) ended higher, whereas PRIVATE BANK (-0.5%), BANK (-0.5%), and FINANCIAL SERVICES (-0.3%) ended lower. Among the stocks, WIPRO (+5.0%), HCL TECH (+2.7%), and INFOSYS (+1.8%) led the gainers while IOC (-1.6%), IndusInd Bank (-1.2%), and ONGC (-1.2%) led the losers.

Excerpts of an interview with Ms. Vibha Padalkar, MD & CEO, HDFC Life Insurance with ET Now on 3rd September 2021:

  • The potential target company needs to have a credible distribution which Exide Life has. Exide Life has a strong agency channel and another aspect is the quality of the book.
  • Exide Life has a scale issue which is a problem for many smaller players. Presently, Exide Life has 37,000 agents and a lot of them are highly productive. This will add about 30% to 40% of agency force to HDFC Life.
  • Exide Life has a strong presence in the southern regions of India and also in tier II and III towns, about 40% of business comes from these geographies. This is complementary for HDFC Life which has a focus on Metro cities.
  • About 89% of the consideration is in share swap form. About 11% which is worth Rs 7,260mn will be a cash payout. After the share issue happens, Exide Industries will be on-boarded as HDFC Life shareholder with a 4.1% stake in the merged entity.
  • The first phase of the merger is after the CCI & IRDAI approval, HDFC Life will be able to issue shares to the seller and the entity becomes a subsidiary of HDFC Life. After that HDFC Life will go approach the NCLT for merger approval of the subsidiary into the parent company. But after the first phase HDFC Life will have a control over the business.
  • Due to the cash payout of Rs 7,260 mn, HDFC Life’s current solvency ratio will go down by about 15%. As this will happen after a few months, fresh profit will be generated by the company and the solvency ratio start recovering.
  • Exide Life’s embedded value is about Rs 27bn. HDFC Life is reasonably satisfied of the quality of their embedded value does not believe that there would be any material impact to that embedded value after HDFC Life take control of the entity.

Asset Multiplier Comments:

  • This deal has could expand HDFC Life’s presence in the southern regions of India. Growth is likely to be driven from the tier II and III towns as Exide Life has a strong presence in these geographies.
  • This deal is beneficial for HDFC Life in terms of distribution mix and product mix. This acquisition will improve the new business margins because of product mix and HDFC Life has focused on creating diversified channels and products.

Consensus Estimate: (Source: market screener website)

  • The closing price of HDFC LIFE was ₹ 735/- as of 06-Sept-2021. It traded at 100x/80x/67.7x the consensus EPS estimate of ₹ 7.3/ 9.2/ 10.8 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 777/- implies a PE multiple of 67.7x on FY24E EPS of ₹ 10.8/-
  • In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

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 Sep

This week in a nutshell (August 30th to September 3rd)

This week in a nutshell (August 30th to September 3rd)

Technical talks

NIFTY opened the week on 30th August at 16,776 and closed on 3rd September at 17,324. It made a weekly gain of 3.3%. The index is trading beyond all moving averages and at all-time high levels. 10DMA of 16,880 is the closest support. The RSI (83) suggests that the index is overbought.

Weekly highlights

  • Trends for FII and DII activity reversed compared to last week. FIIs were net buyers of Indian equities with an inflow of Rs 68,677 mn. DIIs turned bearish with a net outflow of Rs 14,211 mn.
  • As per data released by Ministry of Statistics and Programme Implementation, India’s GDP growth for 1QFY22 is estimated to be 20.1%. This growth is on low base of 1QFY21, where the GDP contraction was 24.4% YoY.
  • Ministry of Commerce and Industry released India’s preliminary foreign trade data for Aug-21. According to the press release, India’s merchandise exports for Aug-21 increased 45.2% over low base of Aug-20 and 27.5% over Aug-19. Merchandise imports for Aug-21 increased 51.5% over Aug-20 and 17.9% over Aug-19. The trade deficit widened at USD 13.87 bn in Aug-21 compared to USD 8.2 bn in Aug-20.
  • Indian Auto OEMs reported wholesale data for Aug-21. Carmakers were impacted by the global electronic component shortage, leading to production uncertainties. OEMs expect the pain to continue even in the upcoming crucial festive period. Some companies expect Sep-21 production volumes to be lower by as much as 60% of normal levels.
  • US jobs data for August came out on Friday and the numbers were lower than street forecasts. Lower job additions could mean that the US Fed may further delay any increase in interest rates.

Things to watch out for next week

  • Post the end of 1QFY22 result season, we are in a quiet period with relatively lesser market developments.

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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02 Sep

Expect a substantial price hike due to spike in input costs – Maruti Suzuki

Update on Indian Equity Market:

On Thursday, NIFTY ended at 17,234 (+0.9%) as it closed near its high at 17,243. Among the sectoral indices, OIL & GAS (+0.8%), CONSUMER DURABLES (+0.6%), and FMCG (+0.6%) ended higher, whereas PSU BANK (-0.5%) and AUTO (-0.2%) ended lower. Among the stocks SHREECEM (+6.0%), HDFCLIFE (+5.8%), and CIPLA (+3.5%) led the gainers while M&M (-1.9%), ONGC (-0.9%), and BAJAJ-AUTO (-0.9%) led the losers.

Excerpts of an interview with Mr. Shashank Shrivastava, Executive Director of Maruti Suzuki (MARUTI) with CNBC TV18 on 31st August 2021:

  • MARUTI is looking to cut production in September due to a shortage of semiconductors. The auto manufacturer is also getting ready for a substantial price hike in the upcoming month and this will be the fourth one since January due to a sharp rise in commodity costs.
  • Commodity prices started going up from April-20 and they impacted MARUTI’s material cost, which is 75 percent of the total cost of manufacturing. The increase in prices of commodities like steel and copper was close to 50% and precious metals like Rhodium had a price hike of 257%.
  • Since they were already coming out of a bad year (FY20) which was 18% less than FY19 and Covid-19 had badly affected 1QFY21, they did not wish to compromise demand and hence there was no price hike.
  • However, they did increase prices in January by 1.4% in the hopes of some softening in commodity prices which did not pan out as expected. This made them deploy an additional price hike of 3.4% in April and another hike of 0.3% in CNG vehicles in August.
  • Shrivastava confirmed that the upcoming price rise would be substantial and it would be deployed across all models produced by MARUTI.
  • He did not reveal any production numbers for September since that depends on how the shortage situation pans out for their semi-conductor vendors.
  • The number of electronic components varies from product to product and model to model within MARUTI’s large portfolio and for the past few months, they have been trying to adjust production to maintain high levels of production.

 

Asset Multiplier Comments

  • Semiconductors are silicon chips that cater to control and memory functions. The shortage of such a crucial component has been impacting the automotive industry globally along with other industries, forcing them to cut down on production.
  • MARUTI reported a decline of 20% in sales in August, as compared to July 2021.
  • Owing to a supply constraint of electronic components due to the semiconductor shortage situation, MARUTI expects a decline of 60% in vehicle production in the month of September in Haryana and Gujarat. As certain fixed costs are to be incurred, margins could be affected in the short term.
  • With the festivities coming up, there could be a rise in demand for vehicles and how MARUTI is able to match this festive buying with its supply remains to be seen.
  • MARUTI is in no rush to join the electric vehicle bandwagon until they make it feasible for customers in terms of affordability.

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

  • The closing price of MARUTI was ₹ 6,780/- as of 02-Sept-2021. It traded at 40x/27x/21x the consensus EPS estimate of ₹ 188/280/354 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 7,560/- implies a PE multiple of 21x on FY24E EPS of ₹354/-

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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01 Sep

Tanishq stands to benefit from Hallmarking – Titan

Update on the Indian Equity Market:

On Wednesday, NIFTY closed 0.3% down at 17,076. Top gainers in NIFTY50 were ASIANPAINT (+3.1%), TATAMOTORS (+2.6%), and SBILIFE (+1.9%). The top losers were M&M (-3.0%), CIPLA (-2.7%), and TATASTEEL (-2.7%). The top gaining sectors were REALTY (+5.6%), CONSUMER DURABLES (+2.0%), and PSUBANK (+0.9%), while the top sectoral losers were METAL (-1.8%), IT (-1.3%), and FINANCIAL SERVICES (-0.2%).

Tanishq stands to benefit from Hallmarking – Titan

Edited excerpts of an interview with Mr. Ashok Sonthalia, Chief Financial Officer, Titan with CNBCTV18 on 1st Sep, 2021:

  • At the time when brokers can no longer sell digital gold, Tanishq has launched digital gold.
  • While explaining the rationale behind the idea, Mr. Sonthalia informed that digital gold was one of the ways consumers wanted to lock-in the gold price. So, the company decided to experiment with it.
  • Digital gold has been launched recently in some pockets, response of which is yet to be seen. Company hopes that digital gold provides another way to consumers who want to invest with Tanishq in gold. They can buy at appropriate time and convert it into physical form.
  • Smaller players are facing severe challenge due to Hallmarking and it has led to lot of supply chain challenges.
  • Titan has been preparing for gold hallmarking for long time, without expecting any extension from the government. The well advance preparation has helped Tanishq to be 100% hallmarked currently.
  • The whole Hallmarking Unique ID (HUID) process is creating some teething trouble, due to which supply chain has gotten elongated by 5-7 days. This leads to having more inventory to that extent. But other than that, Tanishq is going to be fine on hallmarking and the company believes that these teething issues will also be sorted out going forward.
  • Government has been flexible regarding hallmarking as it has given a lot of time to the industry. The rule was introduced in Jun-21, no penalties were imposed until the end of Aug-21, so that manufacturers, wholesalers, and retailers of gold jewelry get enough time to comply.
  • Hallmarking will be positive for industry as consumers will be confident of buying gold from anywhere.
  • According to Mr. Sonthalia, the earlier model of pure gold and low making charges will be challenged now. Tanishq is in a favorable position as it always had pure gold plus making charges.
  • Tanishq will gain from hallmarking as it will be challenging for unorganized and small player to correct and re align their model now.
  • Mr. Sonthalia commented that the recovery of Tanishq has been pretty good post the second wave of COVID-19. Everyone in the organised sector including Tanishq is doing well.
  • According to him, the shift from unorganised to organised was a slightly longer-term story, but some of the elements have given an impetus and to that extent, organised sector is gaining from the unorganised sector and Tanishq is also benefitting.
  • His comments on 2QFY22E:
    • Tanishq jewelry and eyewear are in the growth phase.
    • The stores are still not fully operational. They are running between 80%-90%.
    • While Physical stores are operating at a slightly less capacity, digital and omni have supplemented to some extent.
  • According to company guidance given earlier, Titan plans to open 35 stores in FY22E. 11 stores have already been opened.
  • Company is working on physical and digital sales point aggressively. In 1QFY22, the physical retail stores expansion plan got impacted due to second wave but it is confident of completing the target by Mar-22E.The focus and investment on digital and omni is also going in a big way.
  • Many time the enquiry and selection of jewelry starts digital or in video calls but ends in physical stores. So, stores are not going to lose their importance and Titan plans to be very aggressive there too.

 

Asset Multiplier Comments

  • We believe that Mandatory hallmarking will standardize the purity of gold jewelry. It will take the industry towards being more structured and even further push the ongoing shift of business and customers from the unorganised to the organised jewelry segment.
  • With re-opening of stores, increasing wedding sentiments and rising vaccination pace, jewelry demand is expected to improve further. Hallmarking will benefit Tanishq as it has competitive edge over other small players who are facing issues.

 

Consensus Estimate (Source: market screener website)

 

  • The closing price of Titan was ₹ 1,944/- as of 1-Sep-21. It traded at 94x/68x/57x the consensus EPS estimate of ₹ 20.4/28.4/33.8 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,737/- implies a PE multiple of 51x on FY24E EPS of ₹ 33.8/-.

 

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.”

 

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31 Aug

Ambitious to take ROE to 18% – Axis Bank

Update on the Indian Equity Market:

On Tuesday, Nifty 50 closed at a record high of 17,132 (+1.2%), led by BHARTIARTL (+6.7%), BAJFINANCE (+5.1%), and HINDALCO (+4.9%). The top losers were TATAMOTORS (-1.5%), NESTLEIND (-1.2%), and INDUSINDBK (-1.2%). The sectoral gainers were led by METAL (+1.5%), HEALTHCARE (1.4%), and IT (+1.4%). MEDIA (-0.1%) was the only sector that ended in the red.

Excerpts of an interview with Mr. Amitabh Chaudhry, MD & CEO, Axis Bank (AXISBANK) published in The Economic Times on 27th August 2021:

  • There are reasonable indications that the private capex creation has started, but only in some segments at this stage. The private sector capex is robust in segments such as upstream refinery, steel, cement, chemical, pharma, renewable, and storage systems.
  • The government has come up with a scheme inviting investments into the electronics and industrial automation, logistics, and export-oriented industries. The government is also investing in railways, roads, and highways. An accommodative stance by the RBI and the government is helping in the economic revival.
  • A lot of retail customers were supported in the first covid wave through two specific moratoriums and restructuring. This resulted in retail delinquencies not being as high as estimated. During the second wave, there was no moratorium and a lot of customers who availed of the moratorium were adversely impacted by the second wave.
  • For AXISBANK, a lot of the slippages on the retail side were from secured assets and loan-to-value against the secured assets were low. Either the customer repays, or the bank sells the assets. Hence, recovery was never an issue, it was a timing issue.
  • The stimulus led to a system liquidity surplus resulting in lower market borrowing rates. As a result, well-rated corporates are sitting on huge piles of cash and have repaid their borrowings. As a result, the credit growth of the industrial sector is being led by mid-sized corporates and some refinancing.
  • AXISBANK believes there are considerable credit opportunities as the economy starts reviving.
  • The bank is already operating in the zone of 15-16% Return on Equity (ROE). The ambition is to take it to 18%, which is an uphill battle.
  • AXISBANK believes it is very important to scale the subsidiaries further over the next couple of years.
  • Over the past 5 years, the acceleration towards embracing technology with the rapid emergence of fintech and Covid has only hastened the pace. AXISBANK recognised a few years back the need to scale up investments in technology. The technology spend has gone up ~78% in the last 2 years.
  • The entire strategy of AXISBANK on the digital front is around challenging themselves and working in partnerships with fintechs to provide solutions. AXISBANK will expand partnerships with fintechs going forward.
  • There are significant growth opportunities for the next 5-7 years. The Bank is laying the foundation for the future where it can capitalise on business opportunities in every segment.

Asset Multiplier Comments

  • Though slippages could remain elevated in the near term, healthy PCR (Provision Coverage Ratio) protects the Balance Sheet against any potential stress.
  • The bank is positive on economic revival which will lead to credit growth, healthy NIMs eventually helping to achieve the Bank’s target of 18% ROE.
  • With the work-from-anywhere culture and remote decision making, each organisation has realised that technology up-gradation is non-negotiable. AXISBANK has taken a step in the right direction by undertaking technology investments and execution of transformation projects.

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

  • The closing price of AXISBANK was ₹ 738/- as of 31-August-2021. It traded at 2.0x/ 1.8x/ 1.5x the consensus book value estimate of ₹ 370/ 420/ 479 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 871/- implies a PB multiple of 1.8x on FY24E BV of ₹ 479/-.

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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