Tag - Covid-19

Major housing demand is coming from first-time buyers – HDFC

Update on Indian Equity Market:

On Tuesday, NIFTY ended at 17,749 (-0.6%) as it closed near its high at 17,533. Among the sectoral indices, OIL & GAS (+1.3%), PSU BANK (+1.24), and METAL (+0.6%) ended higher, whereas REALTY (-3%), IT (-2.2%), and MEDIA (-1.7%) ended lower. Among the stocks POWERGRID (+4.4%), COALINDIA (+4.2%), and NTPC (+3.74%) led the gainers while BHARTIARTL (-3.7%), TECHM (-3.5%), and BAJFINANCE (-3.3%) led the losers.

Excerpts of an interview with Mr. Keki Mistry, Vice-Chairman and Managing Director of HDFC Ltd (HDFC) with CNBC TV18 on 27th September 2021:

  • Between 2017-2020, demand for housing was largely coming from Tier 2, Tier3 towns or outskirts of big cities but not that much in the center of big cities like Mumbai and Bengaluru.
  • In the last year, people in Mumbai, Delhi, and Bengaluru are buying houses because housing has become very affordable compared to what it has been in the last 20 years.
  • From 2017-20, prices in the center of big cities have remained the same or may have marginally come down. This was complemented by rising income levels of individuals. An average income level of 6-7% a year if compounded on a 3-year basis, gives an approximate increase of 25% against a 0% (virtual) increase in property prices.
  • So, the cost of a house as a multiple of the annual income of a typical customer has become a lot lesser.
  • Mistry believes that structural demand for housing will always remain strong since it is a very under-penetrated market. The factor that points towards a sustained growth of housing in the Indian market apart from increased affordability is a Mortgage-GDP ratio of less than 11%. This ratio ranges between 40-60% in Western countries.
  • Unlike people in the West, Indians prefer buying houses in their late 30s. From a demographic standpoint, two-thirds of India’s population falls in the under-35 age category which will eventually need to buy houses in the next 1-10 years. The average of a first-time buyer in Mumbai is between 37-39 years.
  • The pressure that this sector faced, particularly in big cities like Mumbai, has been quashed because bigger developers took over incomplete projects of smaller developers. But this process takes time because approvals from various authorities need to be obtained.
  • Demand in the industry is muted. Only the reputed developers are seeing traction because customers prefer buying an under-construction property from reputed developers rather than buying the same from a less reputed developer. That is because the risk of a project not getting completed is very little in the case of the former.
  • Collection numbers, from a retail standpoint, are back to pre-covid levels but, the distress that people encountered from April to June might not have gone away completely.
  • These problems are temporary as far as individual NPAs are concerned. He does not believe that the housing finance sector will see any severe loan losses because the security cover is huge and the average loan amount is a small component of the value of the property at origination.
  • The loan to value ratio (loan as a percent of the value of the property) for most lenders is less than 70% which means from day one the individual has a 30% equity in the property upfront.
  • Since all loans are paid equally in monthly installments, this ratio will keep declining every passing month as the installments get paid. Therefore, an individual’s equity in the property keeps rising, and the losses on a housing portfolio of any lender, as long as there is prudent lending, would be almost non-existent to very negligible.

Asset Multiplier Comments

  • The demand from homebuyers is picking up due to subdued interest rates and the government’s push towards the affordable housing segment.
  • Due to a higher focus on individual loans vs non-individual, and a greater share of lending to salaried individuals, HDFC’s loan portfolio did not suffer any major setbacks in terms of asset quality. Moreover, HDFC has a provision buffer in place which is higher than the regulatory requirement.
  • Due to increased demand and low interest rates, rising competition among housing finance companies could exert pressure on interest rates.

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

  • The closing price of HDFC was ₹ 2,802 /- as of 27-Sept-2021. It traded at 5x/4x/4x the consensus BVPS estimate of ₹ 651/703/769 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,016/- implies a P/BV multiple of 4x on FY24E BVPS of ₹ 769/-

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.”

 

 

Higher Provisions due to increasing Covid-19 Cases to be made – SBI Life

Update on Indian Equity Market:

On Thursday, markets ended lower with Nifty closing 42 points to end at 15,680. DRREDDY (+2.8%), HINDALCO (+2.1%), and BJAT (+1.7%) were the top gainers on the index while BAJAJFINSV (-2.2%), BRITANNIA (-1.4%) and INFY(-1.2%) were the top losers for the day. 

Among the sectoral indices,  PHARMA (+0.9%),  AUTO (+0.8%), and FMCG (+0.4%) were the top gainers, while IT (-0.6%), FINANCIAL SERVICES (-0.4%), and PRIVATE BANK (-0.3%) were the top losers.

 

Excerpts of an interview with Mr. Mahesh Kumar Sharma, MD and CEO of SBI Life on CNBCTV18 dated 30th June 2021:

  • SBI Life Insurance saw a slowdown in their group business in May. The company only registered a growth of 1.35 percent in new business premium, owing to the lockdown.
  • On a YoY basis, the company saw higher claims in H2FY21 over H1FY21. To address the issue of higher claims, the company has taken steps to tackle the negative impact.
  • SBI Life has set aside a higher amount for provisions for any potential spike in Covid-19 claims Rs 1,830 mn vs Rs 400 mn in FY21 and has changed the mortality assumptions for better risk management.
  • If vaccinations continue at this rate, the company expects the full recovery to pre-covid levels by the end of this year. However, the company is confident of a spike in claims during the upcoming quarter.
  • Despite the lockdowns in May, the company expects positive performance due to lifting restrictions and a digital outreach system developed by the company to contact its customers.
  • Individual Non-single premiums are the biggest contributors to the company’s new business premiums due to raising awareness about health insurance and other products due to the pandemic. The company expects to maintain its growth trajectory in the new business premium in the mid-teens over the next few years. 
  • The company hasn’t changed its underwriting policy. The company is confident of the vaccination drive boosting the number of vaccinated insurable population and has no plans to reduce the scope of insurance to the only vaccinated population. 

Asset Multiplier Comments:

  • The insurance sector has been one of the worst-hit sectors due to Covid-19. With the effects of the pandemic tapering and an informed target customer base, there are better days ahead.
  • India’s insurance penetration is very low compared to developed countries. This industry has reached an inflection point from where SBI Life and its peers can achieve steady growth.

 

Consensus Estimates (Source: market screener website): 

  • The closing price of SBI Life was ₹1,007/- as of 1-July-2021.  It traded at 53x/ 46x the EPS estimate of ₹ 19/ ₹ 22  for FY22E/23E respectively.
  • The consensus price target is ₹ 1190/- which trades at 54x the EPS estimate for FY23E of ₹ 22/-
  • In the case of 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.”

Targeting Sputnik V import by June; to be priced at $10 – Dr Reddy’s Lab

Update on the Indian Equity Market:

On Thursday, the Nifty index ended with gains of 0.8% at 14,406 levels led by Metals and Financials. Within NIFTY50, WIPRO (+3.5%), ICICIBANK (+3.45%), and TATASTEEL (+3.2%) were the top gainers, while SHREECEM (-2.8%), TITAN(-2.7%), and TATACONSUM (-1.9%) were the top losing stocks. Among the sectoral indices, FMCG (-0.7%), PHARMA (-0.4%) and IT (-0.2%) were the losers, and BANK (+2.2%), FINSERVICE (+2.1%) AND MEDIA (+1.9%) were the top gainers.

Targeting May end or early June for Sputnik V import; vaccine to be priced at $10, says Dr Reddy’s Lab

Excerpts of an interview with Mr. G V Prasad, Co Chairman and Managing Director, Dr Reddy’s Laboratories (DRL), aired on CNBC-TV18 dated on 20th April 2021:

  • V Prasad, Co-Chairman and MD at Dr Reddy’s Laboratories (DRL), on Tuesday, said that the target for the import of Sputnik V vaccine, against COVID-19, is May end or early June.
  • DRL is doing its best to accelerate the import and expects to get products launched in Q1FY22E. The cold chain and logistics are in place as they talk to the Russian Direct Investment Fund (RDIF) to accelerate the shipments.
  • He also mentioned that the launch of the India-made Sputnik V vaccine is likely to be in the Q2FY22E. Each manufacturer is in a different stage of the manufacturing process. But he hopes that in Q2 India will have Indian manufactured vaccine available at least from one-two players. So, overall Q2 should see the launch of the Indian vaccine.
  • Prasad clarified the pricing on the vaccine and said it would be uniform across the globe. He added that starting with the imported vaccine, the Russian organization has a uniform price of US $10 across the world. So, when it comes in, it will be priced at the same price that this product is offered anywhere else in the world.
  • The Pharma companies manufacturing the vaccines along with the government will have to come up with a price, which he hopes to be less than the imported price. He assured that the companies will not make profit out of this vaccine and expects the vaccine price not to be higher than US$10. 2 doses of vaccines are required and Mr. Prasad doesn’t think price would be an issue and people are willing to pay this price and don’t need to be subsidized.
  • Meanwhile, he welcomed the government’s announcement of liberalized and accelerated Phase 3 strategy of COVID-19 vaccination from May 1. The government said that anyone above 18 years of age will be eligible for vaccination from May 1. This announcement was a very major move by the government which will improve availability, by decentralizing the whole process, the logistics will be much better and it will be market-driven. So, he is optimistic about the way forward.
  • He believed that the private sector can now fully participate in the vaccine drive now and India will see a rise in availability. A rise in private organizations setting up vaccination centers will be seen and the imported vaccine will immediately relieve some pressure. People will also have the choice to get vaccinated with their choice of vaccines.
  • Last, he noted that there will not be any shortage of Remdesivir in the coming weeks. He said that Favipiravir is still available as it is not in much demand. He thinks there has been a significant overuse of Remdesivir. There is a gap in the market as the shortage was sudden and DRL is doing its best to improve the supply of Remdesivir and from next week onwards, they will have a good number of supplies for this product.
  • On April 5, the RDIF and drug firm Panacea Biotec had said that they had agreed to produce 100 million doses per year of Sputnik V COVID-19 vaccine in India.
  • The efficacy of Sputnik V is 91.6 percent as confirmed by the data published in the leading medical journal, Lancet. It has been registered in 59 countries globally, the statement said. The price of Sputnik V is US $10 per shot, it added.

Asset Multiplier Comments

  • Although DRL denied to comment on the profit margins expected from the vaccine and said they are not here to make profits out of this situation we feel that Pharma sector as a whole will see a high single digit or low double-digit growth in FY22E led by covid’s second wave related opportunities.
  • The increasing cases and lockdowns in major states in India will impact the market sentiment. The investors will rush back to the defensives and Pharma sector being one of them is likely to benefit.

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

  • The closing price of DRREDDY was ₹ 5,200 as of 22-April-2021. It traded at 26x/ 22x the consensus EPS estimate of ₹ 196/233 for FY22E/ FY23E respectively.
  • The consensus target price of ₹ 5,491/- implies a PE multiple of 23x on FY23E EPS of ₹233/-.

 

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.”

 

Semiconductor shortage to resolve in 3-4 months: Eicher Motors

Update on Indian Equity Market:

An alarming increase in the number of Covid-19 cases resulted in a bloodbath in India’s Equity Markets, with Nifty slipping 258 points to 14,359. Adani Ports (-4.8%), Power Grid (-4.1%), ONGC (-4.0%) were the top losers on the index while Dr Reddy’s (+1.4%), Britannia (+0.9%), and Cipla (+0.9%) were the top gainers for the day. Among the sectoral indices, PSU Bank (-4.3%), Realty (-4.1%), and AUTO (-2.8%) led the losers while Pharma (+0.2%) was the only index to end in the green.

 

Excerpts of Interview with Mr. Vinod Dasari, Whole-time Director, Eicher Motors and CEO, Royal Enfield with CNBC-TV18 dated 16th  April 2021:

 

  • Demand has picked up strongly owing to backlogs from last year. The industry is facing some problems due to fresh restrictions owing to the rising COVID-19 cases. 
  • Learning from the past lockdowns, the industry is better equipped to deal with the short-term uncertainties and continue to keep up with the demand in the short term.
  • Royal Enfield expects supply-chain constraints in the first couple of months of FY22 and expects the recovery to be along the lines of FY21.
  • Metals inflation is putting pressure on margins, and the import restrictions on steel have resulted in an increase of 20% in prices which is unfathomable.
  • Optimistic about the semi-conductor and Anti-lock braking system (ABS) shortages, in the short run, there’s a notable pressure however recovery is expected within the next 2-3 months as all the stakeholders are coordinating to mitigate the issue.

 

Asset Multiplier Comments:

  • Demand is poised to recover in the FY22, however, Q1FY22 may see muted growth due to lockdowns and supply-side issues.
  •  As witnessed in Q4FY21, the demand is robust irrespective of the ongoing pandemic, the outlook for the auto industry is favourable for FY22 subject to supply-chain improvements.

 

Consensus Estimates (Source: market screener website):

 

  • The closing price of EICHER MOTORS was ₹ 2,377/- as of 19-April-2021.  It traded at 27x/ 21x the consensus EPS estimate of ₹ 87/ ₹ 115 for FY22E/23E respectively.
  • The consensus price target is ₹ 3,105/- which trades at 27x the EPS estimate for FY23E of ₹ 115/-

 

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.”

 

An opportunity to re-imagine business – Cipla

Update on the Indian Equity Market:
On Wednesday, Nifty50 snapped its six-day winning streak to end 0.1% lower at 11,308. HCLTECH (+4.7%), SBIN (+4.3%), and TECHM (+2.8%) ended the day in the green. KOTAKBANK (-2.1%), CIPLA (-2.1%), and SUNPHARMA (-2.0%) led the laggards. Among the sectoral indices, PSUBANK (+2.7%), MEDIA (+2.4%), and AUTO (2.0%) led the gainers while PHARMA (-1.6%), REALTY (-0.7%), and METAL (-0.7%) led the losers.

Cipla recently declared 1QFY21 results. Mr. Umang Vohra, MD & Global CEO discussed the opportunities provided by the covid epidemic to the business with Economic Times on 11th August 2020. Here are the edited excerpts of the interview:

• He outlined three reasons for the good numbers reported. The first being that healthcare is a part of essential services continues to work despite the pandemic led lockdowns. The second being the tailwinds of the crisis is the increased levels of collaboration and cooperation with every healthcare authority in the world. The third reason being getting more Covid treatments out as soon as possible and ensuring drug supply is not affected.
• The Covid crisis has given an opportunity to reimagine their business. It has given an opportunity to understand what is important to running their business. There were a few costs that could not be incurred. Since all the manufacturing plants are operating, those costs have increased slightly as more precaution for social distancing needs to be taken. The absence of some of the field costs has helped the bottom line.
• The timelines of approvals are at an all-time high and in terms of pricing, the only market that was a concern was the US. In the US, more attention is paid to the availability of the product against price.
• Respiratory is the core therapy for Cipla and they are trying to expand their respiratory franchise. Albuterol is the first one and there is a reasonable pipeline built for unlocking the respiratory franchise in the US over the next 18-24 months.
• Albuterol production has ramped up quite significantly in the first quarter and it being a 60-million-unit market, Cipla will get its fair share in the market.
• Some of the cost control measures were voluntary and some were involuntary. Due to lockdowns, travel costs were not incurred. Some of that would resume again in the coming quarters. There is an ambitious cost program which has been running for the past 2-3 years and which will continue to run.
• The guidance for margins has been to the same level before lockdown; as a large portion of the cost base cannot be maintained so low. So the sustainable basis for every quarter is going to be slightly lower than the first quarter in absolute percentage terms.
• With the crisis lasting a little longer in India, chronic conditions will continue to stay the same. The respiratory linked illnesses, linked to weather and linked to winter will continue. Acute therapy is impacted as patients are healthier and not reporting sick. Hospitals are beginning to uptick now and expect to see a resumption of surgeries and elective procedures in a quarter’s time.
• Cipla’s business is changing and about 15-20% of its market will be very different compared to pre-covid.
• Digital has the ability to penetrate healthcare more significantly compared to physical representatives. Digital provides remote connect which is faster and economical.

Consensus Estimate: (Source: market screener website)
• The closing price of Cipla was ₹ 762/- as of 12-August-2020. It traded at 29x/ 25x/ 21x the consensus earnings estimate of ₹ 26.2/ 30.2/ 36.7 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 769/- implies a PE multiple of 21x on FY23E EPS of ₹ 36.7/-.

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.”

Covid19 Tests will become a part of company’s portfolio – Dr Lal Path Labs

Update on the Indian Equity Market:

On Wednesday, Nifty closed 0.06% higher at 11,102. Among the sectoral indices Metal (+4.0%), Auto (+1.8%) and Media (+1.1%) closed higher. Pharma (-0.5%), Fin services (-0.2%) and PSU Banks (-0.2%) closed on a negative side. Hindalco (+9.1%), Tata Steel (+6.7%) and Eicher Motor (+4.4%) closed on a positive note. UPL (-1.5%), HDF Life (-1.5%), and Wipro (-1.0%) were among the top losers.

Excerpts from an interview of Mr. Om Manchanda, MD, Dr Lal Path Labs with ET Now on 3rd August 2020:

  • The business was impacted in the months of April and May due to lockdown restrictions. It restricted the movement of samples to various cities.
  • The movement of patients was also impacted due to lockdown. There was a steep fall in walk-in customers.
  • The company also witness a sharp fall in OPD.
  • Recovery started in late part of May as lockdown restrictions started to get lifted.
  • They witnessed a sharp recovery in June but the trends are early as there may be pent up demand coming up.
  • The company witnessed some gains as competitors were not able to serve some markets.
  • On impact of covid on diagnostic space, Mr. Manchanda said the government has built capacity in the recent past and 60% of business is coming from the government side. The company will be working in a supporting role to the governments.
  • Tests for Covid-19 will become a part of company’s portfolio, but the trend line is not yet clear.
  • Q1 was a bad quarter for the company, non covid business had shown recovery in June. Company expects that the growth will come back in later part of the year by Q3FY21E.
  • Business related to covid is a new business for the company.
  • Historically the company had grown organically. The model is urban based.
  • The company picks up a geography and tries to cater all diagnostic needs in that area.
  • Mr Manchanda said the company is neither a wellness company nor a diagnostic company but a full-service model.
  • There are close to 215 labs as of now.

Consensus Estimate: (Source: market screener website)

  • The closing price of Dr Lal Path Labs was ₹ 1,850/- as of 5-August-2020.  It traded at 71x/50x/44X the consensus earnings per share estimate of ₹ 25.9/37/42 for FY21E/FY22E/FY23E respectively.
  • The consensus average target price for Dr Lal Path Labs is ₹ 1,769/- which implies a PE multiple of 42x on FY23E EPS of ₹ 42/-.

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.”

 

Slow and steady recovery over the next 2-4 years – Info Edge

Update on the Indian Equity Market:

On Tuesday, amid rising coronavirus cases and fresh lockdowns being imposed in some of the Covid-19 hotspots in India, the Nifty50 ended 1.8% lower at 10,607. PRIVATE BANK (-3.3%), PSU BANK (-3.1%), and BANK (-3.2%) dragged the index lower. PHARMA (+0.5%) was the only sectoral index to end in the green. Among the Nifty50 stocks, DRREDDY (+1.9%), TITAN (+0.9%), and BHARTIARTL (0.3%) were the only gainers. INDUSINDBK (-5.5%), AXISBANK (-4.9%), and EICHERMOT (-4.5%) led the laggards.

Edited excerpts of an interview with Hitesh Oberoi, MD & CEO, Info Edge India with Economic Times on 13th July 2020:

  • The months of April and May witnessed lockdown and a halt in all business activities. The JobSpeak Index published monthly is closely linked to revenue on their platform and it has gone up by 33%. The activities on all the platforms- 99acres, Naukri, Shiksha, and Jeevansathi are almost back to normal.
  • They are growing 25-30% in the emerging markets already. The big cities like Mumbai and Delhi, which are more impacted by Covid and lockdown, they are still down 25-30%.
  • Revenue in Naukri and all the verticals will follow with a lag, that’s how it always works. Green shoots in sectors like IT, healthcare, pharma, and tech can be seen. Other sectors like travel, tourism, hospitality, and auto things continue to be 70-80% below where they were last year.
  • The company is a cash-rich company, with Rs 1,500 crore cash with a 50% EBITDA margin and they see a lot of opportunity going ahead. There are four verticals from an internal business standpoint: jobs, real estate, matrimony, and education.
  • Although the company is a clear leader in jobs, they want to do many things in that vertical, which will require investment over time. They already have a play in recruitment automation which they want to scale up. They invested in an HR services company, createHR, and are looking at what can be done in adjacent spaces.
  • Things are only getting started right in the real estate vertical. They are currently in the residential buy segment and plan to get into rentals and commercial real estate. Even in the residential buy segment, the plan is to break away from the rest of the pack and investment will be required in multiple areas, going forward.
  • On the matrimony portal, Jeevansathi volumes have doubled or tripled in the last couple of years. There is still a long way to go as it is still the number three player.
  • In all the verticals, investments will be made in the product development, branding, and innovation. A lot more strategic investing will be done in adjacent areas.
  • They have invested in three education companies in the last year and are open to the idea of acquiring companies and doing more M&A in the categories they operate in. To be able to do these activities, the cash they currently have won’t be sufficient, hence the board has enabled QIP to raise more money.
  • Capital raising is not something which is done every year, it is done maybe once in five to seven years. Hopefully, the capital raised will last for a couple of years. Info Edge has never done a large M&A but done a bunch of strategic investments. At the same time, to buy any company in the internet space, a lot of money is required. They do not want to risk all the money they have in the bank on an M&A. Should an opportunity arise to buy a distressed asset or something that will help gain market share, they want to be ready and that is why they are raising funds.
  • About a year ago, Zomato was losing $ 40 million a month which was brought down to $ 20 million a month before Covid. April and May were bad for all companies, including Zomato and Swiggy. Due to Covid, the volumes have fallen and the business is down to about 50% levels. The crazy discounting, spend on customer acquisition which companies were doing is now over and companies are focusing on fixing their supply chains and other issues. As a result, Zomato which was losing ₹ 30-40 an order till some time back, is now making ₹ 30 an order.
  • Zomato is now very comfortable on cash and has enough money in the bank to last them a couple of years. There are a lot of investors interested in investing in Zomato and talks with a few are going on right now.
  • People not being able to go out and dine anymore like they used to, is probably a big opportunity for all the delivery companies. Since dining out can be very expensive, people were doing that maybe once or twice a month. For that kind of money, they can order in food maybe twice or thrice. Consumers do not want to just eat home food all the time and since going out to dine is unsafe, ordering in will therefore increase.

Consensus Estimate: (Source: market screener website)

  • The closing price of Info Edge (India) was ₹ 2,899/- as of 14-July-2020. It traded at 112x/ 81x the consensus earnings estimate of ₹ 25.8/ 35.9 per share for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 2,557/- implies a PE multiple of 71x on FY22E EPS of ₹ 35.9/-.

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.”

 

Resurgence of demand across India, exports to take a little longer – Bajaj Auto

Update on the Indian Equity Market:

On Friday, the Indian market ended higher, making it the third straight week to end with gains. The Indian government’s approval of the acquisition of missiles, ammunition, and weapon systems worth Rs 38,900 crores led to the rally in defense stocks’ shares. Nifty ended 0.5% higher at 10,607. EICHERMOT (+4.2%), ADANIPORTS (4.1%), and BHARTIARTL (+4.1%) were the top gainers, while JSWSTEEL (-1.8%), TATASTEEL (-1.8%), and INDUSINDBK (-1.5%) were the top losers. Among the sectoral indices, IT (+1.1%), REALTY (+1.0%) and AUTO (+0.9%) ended in the green, while PSU BANK (-0.9%), PRIVATE BANK (-0.5%) and BANK (-0.5%) ended in the red.

Mr. Rakesh Sharma, Director, Bajaj Auto discussed the June auto sales data with CNBC TV18 on July 2nd, 2020. Here are the edited excerpts of the interview:

  • A lot of pent-up demand was witnessed in the past month wherever the dealer network was opening up.
  • In the last couple of weeks, they have noticed even spread of resurgence in demand. Initially, it was thought to be a semi-urban, and rural area phenomenon. Now, it is the urban areas that are responding and coming back extremely well.
  • There is optimism in the rural areas driven by the agricultural sector. In the urban areas, there is a revaluation of the mode of transport and a lot of the urban areas are driven by the need to adopt a safer mode of transport. In the last 10-15 days, demand has returned on both, the urban and rural sectors. Bajaj Auto is hopeful that this will continue into the next quarter.
  • Talking about production, he said there was a little bit of turbulence towards the end of June. Otherwise, production including their vendors and plants is completely geared up. In the niche areas of high-end bikes and electric scooters, their response rate was lower. Overall, they have responded to 90-95 percent of the market demand.
  • Had the logistical disturbances not existed in the last days of June, they could have catered to about 100 percent of the demand, except for the niche products.
  • The June story is a ramp-up story of the vendors, of the plant and of the dealers. Bajaj Auto has been able to increase their market share and share of exports. It can be said the June story is not so much of the demand coming up but the supply side coming up to speed to a very different situation.
  • Taking into consideration the fact that more Covid cases could break out, in the dealerships, and at the back end, Bajaj Auto is much better prepared and would not face any restraining issue going forward.
  • At the Aurangabad pant, there have been 40 cases and 3 casualties and there is no escalation. There is a constant effort for testing and contact testing. Production had gone way down to ensure rigorous contact testing, reporting, and sanitization. Now, production is back to normal, people are reporting to work.
  • Moving to exports, Africa has come back well and running at about 80 percent levels. ASEAN is slightly behind, at about 65 – 70 percent. Latin America is a bit of a concern as the recovery is only at 50 percent level. From shipment point, the return to normalcy will most likely be by August or September, as in transit stocks in exports are much higher and have to be calibrated with the low demand of the first quarter. Now that calibration is continuing to occur and is expected to be completed by August and expect to see some kind of normalcy in shipments coming back.

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

  • The closing price of Bajaj Auto was ₹ 2,935 on 03-07-2020. It traded at 20x/ 17x/ 15x the consensus EPS estimate of ₹ 147/175/198 for FY21E/ FY22E/ FY23E respectively.
  • The consensus target price of ₹ 2,774/- implies a PE multiple of 14x on FY23E EPS of ₹ 198/-.

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.”

 

Capping test prices unviable for private labs – Metropolis Healthcare

Update on the Indian Equity Market:

On Wednesday, the indices ended lower after four straight sessions of gains amid fears of a rise in defaults due to the pandemic. The Nifty ended 1.6% lower at 10,305. Among the sectors, FMCG (+0.5%) was the only one that ended higher. PRIVATE BANK (-4.0%), BANK (-3.8%), and FINANCIAL SERVICES (-3.0%) led the losers. ASIANPAINT (+3.8%), ITC (+3.4%), and EICHERMOT (+3.1%) closed in the green while ICICIBANK (-7.1%), INDUSINDBK (-6.6%), and POWERGRID (-5.1%) dragged the index lower.

Edited excerpts of an interview with Ms Ameera Shah, Managing Director (MD), Metropolis Healthcare with Business Standard on 23rd June 2020:

  • There are three approved tests for conducting the confirmatory test for COVID 19: TruNAT, GeneXpert (CBNAAT), and RT PCR test. Both TruNAT and GeneXpert incur high costs and the price per test is expensive. Due to the high costs, many of the 195 private labs approved for RT PCR testing are conducting less than 100 tests per day. Increasing volumes can help reduce the analytical cost of an RT PCR test, the servicing cost will continue to be high and will increase as the test load goes up.
  • Those unable to afford testing are well-supported by the 723 approved government laboratories.
  • All private labs who have been at the forefront in the pandemic would be forced to incur losses, should the government cap the prices at a very low level. This will not only impact the capacity of Covid testing but also impact non-Covid tests because of the losses incurred.
  • Only large private lab chains have a high throughput in conducting the RT PCR tests. However, investments in infrastructure in terms of test kits, bio-safety cabinets, RT PCP machines, skilled manpower for conducting the test, trained phlebotomists for sample collection, and documentation for compliance all together tend to increase the cost. Metropolis is stretching its resources to ensure good quality testing is undertaken and also reducing the turnaround time to get the reports to the doctors and patients.
  • With the government intent on providing the services independently, rules are different for public labs as compared to private labs. The highly manual nature of tests and increased ancillary costs has led to private lab players conducting less than 100 tests per day because they lack the resources to scale up.
  • The business was down 90 percent in the last two weeks of March and all of April. In May, recovery of about 50 percent was seen and June has been slightly better. The second quarter of fiscal 2021 is expected to be better than the first one and the industry will see greater consolidation once normalcy returns in the next 2-3 quarters.
  • Metropolis has good cash reserves and does not foresee the need for working capital loans right now.
  • They request the government to provide forecast numbers to enable labs to provide best capacity and also to look at private healthcare providers as equal partners in the fight.
  • Labs are approved by ICMR but governing the function of labs has been left to the states. This has been a big hurdle as the guidelines keep changing. With ICMR governing all private and public labs with the same guidelines, it is possible to scale-up testing over the next few weeks, which could help flatten the curve.
  • Going forward, the focus will be to provide the highest quality services keeping safety and hygiene as the top priority.

Consensus Estimate: (Source: market screener website)

  • The closing price of Metropolis Healthcare was ₹ 1,401/- as of 24-June-2020. It traded at 58x/ 33x the consensus earnings estimate of ₹ 24/ 42.2 per share for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 1,566/- implies a PE multiple of 37x on FY22E EPS of ₹ 42.2/-.

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.”

 

Full impact assessment after clarity on stimulus – Mr Uday Kotak, Kotak Mahindra Bank

Update on the Indian Equity Market:

On Thursday, Indian shares erased the gains of the previous day after the initial stimulus announced by the government to aid Covid-19 hit businesses was poorly received. The gloomy outlook from the head of the U.S. Federal Reserve did not help the market sentiment either, as Nifty ended 2.6% lower at 9,143. Among the sectoral indices, IT (-3.5%), Financial Services (-3.4%), and Bank (-2.9%) led the losers. FMCG (+0.7%) and Pharma (+0.3%) were the only sectoral gainers. INFRATEL (+4.9%), HEROMOTOCO (+2.9%), and ZEEL (+2.2%) led the gainers. TECHM (-5.4%), INFY (-5.2%), and HINDALCO (-4.8%) ended in the red.

Full impact assessment after clarity on stimulus – Mr. Uday Kotak, Kotak Mahindra Bank

Excerpts from an interview with Mr. Uday Kotak, Executive Vice Chairman & MD, Kotak Mahindra Bank published in Financial Express dated 14th May 2020:

  • Kotak Mahindra Bank (KMB) recently declared its 4QFY20 results. The bank has divided the stress tests to assess the full impact of Covid-19 into two sets- up to March 31 and after March 31. Gross provisioning done toward a specific account gives a net NPA of 0.71%. A look at standard provisioning plus Covid provisioning and others independent of direct provisioning led to total provisioning being greater than the total net NPA.
  • Starting FY21 with a clean slate in terms of the balance sheet and from the point of view of all provisioning, which was felt necessary.
  • In terms of FY21, the bank is in uncharted territory. While work has been done in different sectors, a lot will depend on how the lockdown opens up, and how the stimulus is given. Impact assessment of the virus’ impact on the bank’s loan book will be possible after there is some clarity on government fund flows to various sectors.
  • In regard to unsecured retail lending, the bank had become conservative on advances well before the pandemic started. Thus, growth in advances was more calibrated in design. He believes that retail unsecured is where pressure is going to come at some point in time. Hence, KMB’s portfolios on unsecured consumer retail have been far more conservative than earlier.
  • The post-Covid era will help reduce the impact of the potential burden which may come out of stress, particularly in unsecured retail which is pretty sensitive to the lockdown and the slowdown in the economy. So, they are waiting for the stimulus.
  • Talking about the credit growth, they have received wide estimates by expert economists on growth for FY21. KMB will be getting out there and supporting the economy provided they are comfortable with the risks.
  • They will continue to be cautious on unsecured consumer lending to make sure that the consumer is well-protected. He is of the opinion that if many companies start retrenching people, which is something we can assume may happen, then even unsecured lending to salaried customers will come under pressure.
  • They will watch out for sectors directly affected by Covid like tourism, hospitality, or retail malls.

Consensus Estimate: (Source: market screener website)

  • The closing price of Kotak Mahindra Bank was ₹ 1,177/- as of 14-May-2020. It traded at 3.0x/ 2.6x the consensus book value estimate of ₹ 398/450 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 1,399/- implies a PB multiple of 3.1x on FY22E BV of ₹ 450/-.

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.”