Current capacities fully utilized, need expansion to meet demand: Minda Industries

Update on Indian Equity Market:

After a blockbuster start of a 3-day week, markets traded lower to end the last day of FY21 as Nifty closed the day 154 points lower at 14,691.  Within the index, TATASTEEL (2.3%), GRASIM (2.3%), and UPL (1.9%) were few of the gainers while HDFC (-3.9%), HDFCBANK (-3.8%), and FMCG (1.0%) led the winners while FIN SERVICES (-2.0%), PVT BANK (-1.9%), and BANK (-1.7%) led the losers. 

Excerpts of an interview with Mr. Sunil Bohra, ED & Group CFO, Minda Industries Ltd (MINDAIND) with CNBC -TV18 dated 30th March 2021:

  • The board of MINDAIND has approved the company’s expansion into four-wheel lighting business and four-wheel alloy wheel businesses due to an improved market scenario and increased demand.
  • In the Bawal plant of Haryana, the current capacity of 120,000 wheels/ month will be increased to 180,000 wheels/ month. This will be a part of the brownfield expansion.
  • The second plant aiming at the production of lighting is a Greenfield expansion plan.  Both the plants are expected to commission the production in FY22E.
  • The company is already running its alloy wheel business beyond its current capacity. The company is making sure that surplus capacity is available considering the additional orders received by the company. The aftermarket sales are having a positive momentum further creating demand for the alloy wheel segment.
  • Current sales in the lighting business are around Rs 4bn odd a year. The new orders received by the company are for more than Rs 2bn a year leading to the creation of a new plant.
  • The financing for both projects will be from internal accruals. The company might need a little bit of debt depending upon the funding requirement.

Asset Multiplier Comments:

  • The decision to expand the lighting and alloy business paints a healthy picture about the order book of the company for at least the next 24 months. The Company is expected to witness above-average growth due to pent-up orders.
  • The company is currently running the business at full capacity utilization. As a result, the growth in fundamentals till the commissioning of the new plant might not represent the true state of demand for the company.

Consensus Estimates (Source: market screener website):

  • The closing price of MINDAIND was ₹ 540/- as of 31-March-2021.  It traded at 94x/ 41x/ 29x the consensus EPS estimate of ₹ 5.8/ 13.5/ 18.9 for FY21E/22E/23E respectively.
  • The consensus price target is ₹ 535/- which trades at 28x the EPS estimate for FY23E of ₹ 18.9/-

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

Maintaining FY22 guidance of topline of over Rs 100 bn – Dixon Technologies

Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 14,844 (+2.3%). Top gainers in NIFTY50 were UPL (+7.6%), JSW Steel (+4.9%), and Shree Cement (+4.9%). The top losers were Hindalco (-0.3%), Axis Bank (-0.2%), and M&M (-0.1%). The top sectoral gainers were IT (+2.9%), METAL (+2.8%), and PHARMA (+2.7%), and the only sectoral loser was REALTY (-0.03%).
Excerpts of an interview with Mr. Atul Lall, MD, Dixon Technologies (DIXON) with CNBC -TV18 dated 26th March 2021

  • He estimates FY21 revenue to be around Rs 62-63 bn, which is a decent growth over last year’s revenue of almost Rs 44 bn. They will also have growth in profitability. 
  • This is despite Q1 being a complete washout because of the pandemic. In FY22, they are targeting very aggressive growth. 
  • He had previously mentioned a revenue estimate of Rs 100 bn plus in FY22 and a significant increase in the bottom line as well. They still stand by the same; possibility they will do even better.
  • He expects the EBITDA margins to remain in the range of 4.4-4.5 percent going ahead on the back of the product mix. He is also expecting a 25-30 percent CAGR run-rate in topline post FY22.
  • He expects Capex to be ~2,500-2,600 mn in FY22 and he expects FY22 to be a solid growth year for the company.
  • He said that commodity price rise is impacting the consumer durable companies.
  • They have two kinds of revenue streams. One is an OEM revenue stream wherein they work on a prescriptive basis. All price increases on the commodity side, they have been able to pass on to their principle because that is the way the contracts are drafted.
  • He also said that for FY21, Dixon Technologies has met the eligibility criteria on investment and revenue threshold for handset manufacturing PLI. However, they have not yet heard from the government.

Asset Multiplier comments:

  • The COVID-19 pandemic has left a lasting impact across all walks of life, and the electronics industry is no exception as it has also suffered a decline in growth. This is a temporary phase – especially for consumer electronics and appliances – as some of these devices have grown to be an integral part of our lives.
  • The electronics industry is basically divided into two categories—industrial electronics and consumer electronics. The latter has witnessed more growth than the former due to its popularity among consumers and because of more foreign direct investment in it. 
  • The industrial electronics segment in India is still facing challenges because of various taxation policies and the lack of an ecosystem for manufacturing components.

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

  • The closing price of DIXON was ₹ 3,635/- as of 30-March-2021.  It traded at 122x/ 67x/ 49x the consensus earnings estimate of ₹ 29.7/ 54.5/ 74.4 for FY21E/22E/23E respectively.
  • The consensus price target is 3,288/- which trades at 44x the earnings estimate for FY23E of 74.4/-

 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.”

 

 

 

The week in a nutshell (22nd-26th March)

Technical Talks

 NIFTY opened the week on 22nd March at 14,736 and closed on 26th March at 14,507, it made a weekly loss of 1.5%. The index is trading below its 10DMA of 14,680, which might act as a resistance. On the downside, 100DMA of 14,053 might act as a support. The short-term moving average is cutting longer-term moving from above which might lead to further correction in the index.                                                           

Weekly highlights

  • Loan moratorium case: The Supreme Court directed that no compound or penal interest shall be charged from borrowers for the six-month loan moratorium period, which was announced last year amid the COVID19 pandemic. The amount already charged shall be refunded, credited, or adjusted. The apex court refused to interfere with the Centre’s and Reserve Bank of India’s (RBI’s) decision to not extend the loan moratorium beyond August 31 last year. Banks can start declaring their bad loans (loans which have not been repaid for 90 days or more), with the Supreme Court vacating the relief granted earlier not to declare the accounts of borrowers as NPA.
  • SEBI on AT-1 Bonds: The Securities and Exchange Board of India (SEBI) amended the norms for valuing perpetual bonds. Now the maturity would be 10 years until March 31, 2022, and would be increased to 20 and 30 years over the subsequent 6-month period. From April 2023 onwards, the residual maturity of AT1 bonds will be 100 years from the date of issuance of the bond. As per estimates, banks have issued AT1 and tier 2 bonds worth ₹ 3.5 tn. A fifth of these bonds are held by Mutual funds. This move by SEBI provides much-needed relief to the MF industry. (Source- Business Standard edition 23 March 21)
  • Oil: A container ship blocking the Suez Canal created a new setback for global trade as officials stopped all ships entering the channel. A ship ran aground in the Suez Canal is blocking transit in both directions through one of the world’s busiest shipping channels for oil and grain and other trade linking Asia and Europe. Officials suggest it might take weeks to clear the blockage, which will impact ~30 percent of the world’s shipping container volume daily and ~12 percent of the total global trade of all goods. Oil prices jumped about 6 percent on Wednesday after this incident.
  • The Insolvency and Bankruptcy Code (IBC) suspension which ended on Wednesday, March 24 has not been extended by the Government. This is a welcome move by the banking sector as it will help reduce the burden of Non-Performing Assets (NPAs) on their balance sheets.
  • The institutions swapped their strategy from the last week, with FIIs outflow for the week totaling Rs 67,013 mn. The DIIs turned net buyers to the tune of Rs 50,181 mn.

                        Things to watch out

  • The Auto Companies will be reporting their monthly volume data for March. The non-availability of chips may impact sales this month. A Business Standard report suggested an average delay of ~6months for Maruti Suzuki’s Ertiga CNG variant delivery and 1.5-2 months for all other models. The delay could be as long as 8-10 months for Mahindra & Mahindra’s All-New Thar and 1.5-2 months for its Scorpio, and Bolero. This suggests that despite the demand, Companies are facing problems with supplying sufficient stocks due to the global semiconductor shortage.

 

Capital raise on cards to fund aggressive growth plans – Can Fin Homes

Update on the Indian Equity Market:

On Thursday, Nifty closed 1.5% lower at 14,325. Within NIFTY50, TATASTEEL (+2.9%), DRREDDY (+0.8%), and ICICIBANK (+0.6%) were top gainers, while IOC (-4.0%),MARUTI (-3.9%), and COALINDIA(-3.4%) were the top losing stocks. Among the sectoral indices, METAL (+0.02%) was the only gainer whileMEDIA (-3.1%), AUTO (-2.8%), and PSU BANK (-2.6%) ended with the most losses.

Capital raise on cards to fund aggressive growth plans – Can Fin Homes

Excerpts of an interview with Mr. Girish Kousgi, MD& CEO, Can Fin Homes (CANFINHOME), published on Economic times dated on 24th March 2021:

  • CANFINHOME witnessed a decline in loan book in the last couple quarters. This was due to repayments being higher than incremental disbursements. But December 2020 onward, the business is seeing a comeback.
  • CANFINHOME’s disbursements have been strong since December 2020. December 2020 disbursements were equal to disbursements in October 2020 and November 2020 put together. February 2021 saw disbursements at an all-time high and March 2021 is expected to be even better.
  • The demand for affordable housing revived couple months ago, while the non-affordable housing demand is back to 90% levels.
  • Several financial institutions have been focusing on mortgage segment. CANFINHOME has changed its pricing strategy to retain customers and attract good customers.CANFINHOME has moderated its pricing to be at par with best banks in India. This will contribute to CANFINHOME’s expectation of 17-18% loan book growth in next few quarters.
  • CANFINHOME’s aggressive pricing strategy will put a pressure on its margins. Mr Kousgi said the management will look for opportunities to improve yields where possible.
  • CANFINHOME has a capital adequacy of 24% and leverage at 7.3x. While the capital adequacy is comfortable, Mr Kousgi says capital raise is shortly on the cards to fund aggressive growth plans for next 3-5 years.
  • Kousgi does not anticipate any additional covid-19 related provision requirement.

 Asset Multiplier Comments:

  • Demand for housing has seen a revival in last few months due to attractive prices, lower interest rates, lower stamp duties, and other benefits.
  • In the covid-19 era, banks refrained from lending to the more risky segments such as unsecured consumer loans, SMEs, and vehicle finance.Several banks have ramped up their lending in the home loans space due to lack of other lending options. This has led to increased competition in the mortgage lending space.

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

  • The closing price of CANFINHOMEwas ₹ 575 as of 25-March-2021. It traded at 3.0x/ 2.5x/ 2.1x the consensus BVPS estimate of ₹ 192/233/271 for FY21E/ FY22E/ FY23E respectively.
  • The consensus target price of ₹ 593/- implies a PB multiple of 2.2x on FY23E BVPS of ₹271/-.

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.”

 

Expect Paracetamol prices to stabilize over a quarter or two – Granules India

Update on Indian Equity Market:

A day ahead of monthly F&O expiry, markets were in sell-off mode largely led by banks as Nifty fell 1.8% to 14,549. Within the index, CIPLA (1.8%), ASIANPAINT (1.4%) and POWERGRID (0.9%) were the only gainers while TATASTEEL (-4.7%), TATAMOTORS (-4.2%) and ADANIPORTS (-3.8%) led the losers. Among the sectoral indices, only PHARMA (0.1%) managed to close in green while PSU BANK (-3.3%), METAL (-3.2%), and REALTY (-2.9%) led the losers.

Excerpts of an interview with Ms. Priyanka Chigurupati, ED & Head of Strategy, Granules India (GRANULES) with CNBC -TV18 dated 23rd March 2021:

  • The bulk drug prices of common pain killer drug, Paracetamol, has risen by 75-80 percent in India over the past two to three months. This spike is due to a 60 percent price rise in the two key raw materials used to manufacture the drug.
  • The prices went up from Rs 350 in the domestic market to around Rs 600. The key raw material, Para Amino Phenol (PAP) has seen a sharp increase in the last few months. One of the Chinese facilities responsible for about 46% of the PAP production in the world has shut down resulting in a supply shortage.
  • On the other side, the Chinese companies have increased consumption of PAP due to increasing demand for Paracetamol, further adding pressure on the raw material. 
  • The Company expects this to be a little blip for the next quarter or two. The management is confident of achieving year-end guidance.
  • The Company expects excess supply of PAP in the world over the next few months. This will act as a catalyst for downward pressure on the prices.
  • The Company has passed on the increased cost to its customers. The Company uses formula-based pricing with its strategic partners and has been able to take up most of the price increases. 

Asset Multiplier Comments:

  • The rise in selling price will provide a boost to the top-line during the next quarter or two. This boost will be short-lived as the prices will revert to mean. The price rise has been sharp and may even see muted or slight decline in volumes.
  • As the Company has able to pass on most of the cost rise to its customers, the absolute profitability will see growth. The Company may witness a dip in margins as the base for revenues is high due to higher realization.

Consensus Estimates (Source: market screener website):

  • The closing price of GRANULES was ₹ 323/- as of 24-March-2021.  It traded at 15x/ 13x/ 11x the consensus EPS estimate of ₹ 21.8/ 24.8/ 29.7 for FY21E/22E/23E respectively.
  • The consensus price target is ₹ 450/- which trades at 15x the EPS estimate for FY23E of ₹ 29.7/-

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

 

Card industry has reached pre-COVID levels now – SBI Cards

Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 14,814 (+0.5%). Top gainers in NIFTY50 were Shree Cement (+4.7%), Ultratech Cement (+2.7%), and Divi’s Lab (+2.6 %). The top losers were Hindalco (-2.4%), ONGC (-2.1%), and Powergrid (-2.0%). The top sectoral gainers were PSU BANK (+2.9%), PVT BANK (+1.7%), and BANK (+1.7%) while the sectoral losers were METAL (-0.6%), IT (-0.4%) and MEDIA (-0.3%).
Excerpts of an interview with Mr. Rama Mohan Rao Amara, MD & CEO, SBI Cards (SBICARD) with CNBC -TV18 dated 22nd March 2021

  • The cards industry reached pre-COVID levels in November 2020, while the SBI Card reached pre-COVID levels in October 2020 and the share of online spending has steadily increased for the company and he expects the trend to continue.
  • The only positive outcome of COVID-19 is an increase in digital means by everyone. The share of online spending has increased. 
  • It used to be around 44 percent in SBICARD. That has steadily increased to 53 percent, almost a 900 basis points increase. 
  • Some of the segments like travel, entertainment, restaurants, etc. continue to be depressed, but other segments did record good growth. 
  • The way people chose online means to spend like utilities, groceries, insurance payments, etc. they have come handsomely. So this secular trend of online spending is likely to continue.
  • Q4 spends are lower than Q3. Q3 spends were elevated as it was the festive season. 
  • The credit cost for the short term will remain elevated, like 3QFY21. They made Rs 11,000 mn of management overlay which is much beyond the Rs 9,400 mn of base provisioning. 
  • They were very prudent in terms of categorizing the 30-day delinquency RBI RE on par with NPA and making stage 3 provisioning. So this is a journey and this has been the focus area for the company. So, the credit cost trajectory will be co-related to the decline in the contribution of RBI RE

Asset Multiplier comments:

  • The credit card market in India is smaller compared to its counterpart debit card however, the market is anticipated to witness significant growth in the coming years. With the increasing popularity of credit cards, banks are focusing on urban and semi-urban markets in order to increase their share in the market.
  • For SBI cards, the Credit Card industry has demonstrated a strong resilience as both card spends and new customer acquisitions have reached pre-COVID levels.
  • Increasing preference of consumers towards cashless transactions is likely to give a good growth boost to SBI cards.

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

  • The closing price of SBICARD was ₹ 958/- as of 23-March-2021.  It traded at 81x/ 45x/ 33x the consensus earnings estimate of ₹ 11.9/ 21.1/ 28.7 for FY21E/22E/23E respectively.
  • The consensus price target is 1,139/- which trades at 40x the earnings estimate for FY23E of 28.7/-

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

 

 

 

The rise in raw material cost may hit margins – Bajaj Auto

Update on the Indian Equity Market:

On Monday, Nifty closed in the red at 14,736 (-0.05%). Among the sectoral indices, Realty (+2.70%), FMCG (+1.70%), and IT (+1.85%) closed higher. PVT Bank (-1.70%), Bank (-1.63%), and Financial Services (-1.15%) closed in the red. Adani Ports (+5.17%), Britannia (+2.63%), and TCS (+2.58%) were the top gainers. Indusind Bank (-4.19%), Power Grid (-3.17%), and ICICI Bank (-2.20%) were among the top losers.

Excerpts from an interview of Mr Soumen Ray, CFO, Bajaj Auto with CNBC-TV18 dated 19th March 2021:

  • Speaking on the new dividend distribution policy, Mr Soumen Ray says, The Company will give up to 90% pay-out provided that the company has surplus funds in tune of Rs 150 bn or more.
  • He says, It also depends on Capex plans. The company is having surplus cash of Rs 180 bn.
  • The average annual Capex is around Rs2.5- 3bn and the company is using its assets effectively. The company is planning to put 1 factory in Chakan and cost is near $100mn.
  • The earlier policy was a 50% dividend pay-out.
  • On EV space, he says, The Company has strong EV plans but Capex required for EVs doesn’t need a large amount of money. It is important to sell the vehicle initially with lower profit and later scale-up that segment.
  • The EBITDA space of Bajaj Auto gives adequate ammunition to sell EV’s initially at not a great profit and later scale it up.
  • Speaking about raw material costs, he says, between Q4FY21E and 1QFY22E the industry will see a significant rise in raw material prices. This will lead to a hit on margins.
  • To avoid a dip in consumer sentiment the company will gradually increase its product prices.
  • Speaking on the Export market, he says, the demand continues to be healthy and INR has not depreciated as compared to other countries. The price of oil going up is positive for some African, and Latin American markets.
  • The container issue has improved from what it was in December 2020.
  • The company is giving discounts to some segments.

 

Asset Multiplier comments:

  • We believe the increase in dividend payout ratio will result in an effective capital allocation thereby improving the return of equity ratio (ROE).
  • We believe the gradual rise in product prices to offset higher raw material cost, high fuel prices, and rising cases of covid-19 might impact the near-term demand of 2 wheelers in the domestic market.

 

Consensus Estimate: (Source: Market screener website and Investing.com)

  • The closing price of Bajaj Auto was ₹ 3,667 as of 22-March-2021.  It traded at 23x/19x/17x the consensus Earnings per share estimate of ₹ 158/193/221 for FY21E/FY22E/FY23E respectively.
  • The consensus average target price is ₹ 3,976/- which implies a PE multiple of 18x on FY23E EPS of 221/-.

This week in a nutshell (March 15th to March 19th)

This week in a nutshell (March 15th to March 19th)

Technical talks

  • NIFTY opened the week starting 15th  March at 15,048 and closed on 19th March at 14,744, declining 2% in the 5 trading sessions. 
  • The index broke its support of 50 DMA on Thursday and rebounded back to almost the same level on Friday. Now 50 DMA at 14,748 will be the crucial resistance level to watch out for. On the downside, the index may find support at 100 DMA of 13,909. 

Weekly highlights

  • This week, FII buying intensity increased as they pumped in Rs 58,929 mn in the Indian equity market. DIIs turned net sellers with Rs 30,366 mn net outflow from equities.
  • The Consumer Price Index (CPI) inflation for the month of February came in at 5.03% against 4.06% in January 2021. An increase in inflation reduces the scope for a further repo rate cut by the Monetary Policy Committee. Repo rate cuts are a monetary measure of boosting economic growth.
  • India’s trade data for the month of February was released this week. Exports saw a YoY growth of 0.7% to USD 27.9 bn, while imports saw a YoY jump of 7.0% to USD 40.5 bn. The trade deficit for February 2021 was USD 12.6 bn vs USD 10.2 bn for the same month last year.
  • For the month of January 2021, the Index of Industrial Production (IIP) declined 1.6%. YoY decline in IIP suggests that the economy is still not entirely out of the shadow of covid-19 issues.
  • GOI announced its much-anticipated vehicle scrappage policy this week. Under this policy, Commercial Vehicles (CVs) aged 20+ years and Passenger Vehicles (PVs) aged 15+ years will be de-registered in absence of a fitness certificate. The policy also includes incentives to vehicle owners for scrapping old vehicles including scrap value, road tax rebate, discount on new vehicles, and waiver of registration fees for new vehicles. This policy is expected to boost auto demand in an environment where auto sales have been suffering for the past several quarters.
  • The US Fed reiterated its stance on keeping the interest rates near zero in the next few years. This announcement acted as a reassurance to the market that the US central bank will continue to remain pro-growth.

Things to watch out for next week

  • The yearlong suspension of the Insolvency and Bankruptcy Board of India (IBC) is coming to an end on 25th March 2021. The suspension was implemented to protect the corporate debtors from defaulting due to the Covid-19 impact. If there is no further extension of the suspension, it will open up an important avenue for creditors to resolve bad assets.

 

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.”

 

Reorganization of verticals will help the company reduce costs: Minda Industries

Update on Indian Equity Market:

Markets continued to feel the pressure of rising bond yields as Nifty fell 163 points to 14,558.  Within the index, ITC (4.0%), BAJAJAUTO (2.9%) and HINDALCO (1.9%) were few of the gainers while HCL TECH (-3.5%), INFY (-3.3%) and DIVISLAB (-3.0%) led the losers. Among the sectoral indices, only FMCG (0.1%), and METAL (0.04%) managed to close in green while IT (-3.1%), PHARMA (-2.3%) and PSU BANK (-2.0%) led the losers.

Excerpts of an interview with Mr. Sunil Bohra, ED & Group CFO, Minda Industries (MINDAIND) with CNBC -TV18 dated 17th March 2021:

  • Minda Industries has re-aligned its business verticals as the auto ancillary company is focusing on the centralization of operations of the company. The centralization theme will help cross-sale of products in the export market.
  • The company plans to have an increased focus on exports. Towards that goal, the company has set up a dedicated marketing office in Japan.
  • The objective of this move was to keep the fixed costs at the same level while increasing the sales. The company wanted to get synergies of scale to improve margins. The second objective was, some of the functions like marketing, commercial, were not reaping benefits of scale due to de-centralization.
  • The company now will have the ability to negotiate better prices with vendors. The company is confident of positive operating leverage at play in the medium term. This along with improved revenues will yield benefits for the company.

Asset Multiplier Comments:

  • The aim for the restructuring of an organization is a long-term process. If executed as per expectation, the company may see increased growth rates in revenues over a few years.
  • The objective of centralization is to keep fixed costs at similar levels to benefit from positive operating leverage. The company may witness improvement in profitability margins as a result of this move. 

Consensus Estimates (Source: market screener):

  • The closing price of MINDAIND was ₹ 551/- as of 18-March-2021.  It traded at 95x/ 41x/ 29x the consensus EPS estimate of 5.8/ 13.5/ 18.9 for FY21E/22E/23E respectively.
  • The consensus price target is 535/- which trades at 28x the EPS estimate for FY23E of 18.9/-

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

Lighting category is 2x that of fans category, see significant growth potential – Orient Electric

Update on the Indian Equity Market:

Nifty continued its losing streak, ending in the red for the fourth straight day ahead of the US Fed reserve policy statement on Wednesday. Nifty closed at 14721 (-1.3%), dragged by the PSU BANK (-3.8%), MEDIA (-3.0%), and REALTY (-3.0%) indices. None of the sectoral indices ended with gains. Among the stocks, only ITC (+1.5%), and INFY (+0.2%) closed in the green while BPCL (-5.0%), ONGC (-4.7%), TATAMOTORS (-4.5%) led the laggards.

Excerpts of an interview with Mr. Rakesh Khanna, MD, and CEO, Orient Electric with CNBC TV-18 on 16th March 2021:

  • The sales in 3QFY21 were good for the entire industry, due to pent-up demand, and staying at home has increased interest in home appliances.
  • The strong demand is continuing in 4QFY21, it is partly pent-up demand and partly due to change in behavior.
  • The management expects the EBITDA margin in 4QFY21 to be better than 3QFY21. This is due to operational leverage which comes with increased revenues with costs remaining stable, some good opportunities to help improve efficiencies. This efficiency improvement has largely been due to cost-cutting.
  • With raw material costs increasing, there could be some pressure on the margins in the time to come.
  • Recently, the company has diversified into lighting, switchgear, air coolers, and water heaters.
  • Lighting as a category is nearly twice in terms of size compared to the fans category, and the management expects significant growth in that segment.
  • Coolers are gaining traction as people are worried about getting fresh air. Water heaters adoption is going up due to change in consumer behavior.
  • The kitchen appliances are doing very well. Mr. Khanna is of the opinion the new categories the company has diversified into have a lot of potential.
  • To get a better brand recall in these new categories, the Ad spend could increase for the new categories.
  • They are operating at full capacity and the surge in demand has enabled the company to improve efficiencies at existing production facilities.
  • The company has been improving its EBITDA margin on a YoY basis for the last couple of years. As the company continues scaling up, they are confident of achieving operational efficiency to achieve better EBITDA margins.

Asset Multiplier Comments

  • During the lockdown period, consumer appliances and electrical sales were impacted. The pent-up demand and banning of certain items from China have helped the domestic electrical appliances companies. As a result, these companies are diversifying from their legacy categories to other categories.
  • Orient Electric already enjoys strong recall in the minds of consumers, being present in India for over six decades. Such a company will enjoy customer loyalty when it enters into new product categories.

Consensus Estimate: (Source: market screener website)

  • The closing price of Orient Electric was ₹ 313/- as of 17-March-2021. It traded at 61x/ 48x/ 39x the consensus earnings estimate of ₹ 5.1/ 6.5/ 8.0 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 310 implies a PE multiple of 39x on FY23E EPS of ₹ 8.0/-.

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.”