Tag - margins

Travel returning to pre-pandemic levels – VIP Industries


Update on the Indian Equity Market:

On Thursday, NIFTY settled at 17,465 (-0.2%) near the day’s high of 17,334. FMCG (+1.2%), MEDIA (+0.8%), and PRIVATE BANK (+0.3%) were the top sectoral gainers. HEALTHCARE (-1.3%), PHARMA (-1.2%), and PSU BANK (-0.8%) led the sectoral losers. Among the NIFTY50 components, JSWSTEEL         (+2.2%), M&M (+2.1%), and BRITANNIA (+2.0%) led the gainers. HINDALCO (-4.8%), DIVISLAB (-2.5%), and APOLLOHOSP (-2.0%) led the losers.

Travel returning to pre-pandemic levels – VIP Industries

Excerpts of an interview with Mr. Dilip Piramal, Chairman, VIP INDUSTRIES (VIP) with CNBC-TV18 on 29th March 2022:

  • Demand has been good since Q3FY22, but it was still 8% lower than pre-pandemic levels. The company expects a significant bounce back in Q1FY23 owing to the lifting of COVID-19 induced international travel restrictions ending. There are signs of pent-up demand and revenge travel.
  • Marriages have been subdued due to COVID-19 which is now getting into full swing ahead of the wedding season. Another driver for volume growth for the company is that educational institutions have been opening up after almost 2 years, which has boded well for the backpacks segment.
  • 60% of the previous raw material supplies of the company earlier used to come from China, which has now come down to around 10%. The company is increasingly sourcing key raw materials for soft luggage from Bangladesh fulfilling about 50% of the requirement.
  • The demand for hard luggage is picking up and the company has enough in-house capacity in Sinnar, to provide for the increasing demand, it expects Q1FY23 to be a bumper quarter owing to seasonality. However, the company is wary about supply-side issues that are prevalent currently.
  • Margins have been topsy-turvy over the past year. Raw material cost escalation from China, as it is the largest supplier of the key raw materials to VIP’s suppliers, freight and logistics costs are at an all-time high, so it’s difficult for the management to give EBITDA margin guidance. However, it is targeting the margins to be in the mid-teens.
  • The company has taken a price hike in Q4FY22 of 5% over Q3FY22, following a price hike in October-21. As the input cost inflation persists due to extreme fluctuations in the pricing it’s difficult to take calibrated price hikes.
  • The company has currently a market share of 47%, the company has an aspirational target of crossing Rs. 20 bn in sales with mid-teen EBITDA Margins and increasing the market share to 50%.

Asset Multiplier Comments

  • Luggage being a proxy play to the travel & tourism industry was among the worst impacted sectors owing to pandemic in FY21, FY22. With school and offices re opening, travel resuming and wedding season around the corner we see demand visible. VIP Industries is well positioned to tap this opportunity due to increased movement of leisure and business tourist both domestically and internationally..
  • Strong manufacturing capabilities in Bangladesh (for soft luggage) gives VIP an edge over its peers. By reducing dependence on China and sourcing from Bangladesh, we expect VIP to be able to manage margin pressures effectively.

Consensus Estimate: (Source: market screener website)

  • The closing price of VIP was ₹ 745/- as of 31-March-2022. It traded at 57x/ 41x the consensus earnings estimate of ₹ 13/ 18/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 705/- implies a P/E Multiple of 39x on the FY24E EPS estimate of ₹ 18/-

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.”

Commodity price inflation? Not much of a worry for Hindalco

Update on the Indian Equity Market:

On Monday, Nifty ended at 16,843 (-3%), a fall of 531 points due to fear of rising inflation, oil prices and aggravating geopolitical uncertainties among Russia & Ukraine. Among the sectoral indices, PSU BANK (-6.0%), REALTY (-5.3%), METAL (-5.1%) were the top losers. In NIFTY 50, except TCS (+0.9%) all the other 49 stocks fell with JSWSTEEL (-6.5%), HDFCLIFE (-6.4%) & TATASTEEL (-5.7%) being the top losers.

Hindalco released its 3QFY22 results on 10th February. Following are the excerpts from an interview with Mr. Satish Pai, MD of Hindalco Industries (HINDALCO) with The Economic Times on 11th February 2022:

  • On a standalone basis, Hindalco Industries’ India Aluminium business reported its highest ever EBITDA of Rs. 33,640mn and 41% EBITDA margin.
  • On the back of favorable macros, with commodity price inflation affecting it in both ways, the price of aluminum has been higher and the input cost inflation was kept under control by holding inventory and doing upfront procurement.
  • In 4QFY22, the company expects to maintain the margins as the aluminum prices are already at $3,000 per tonne, up from about $2,670 per tonne in Q3. Furthermore, the company expects cost inflation to flatten out in the second half of CY2022.
  • The company expects the prices of aluminum and copper to remain at the existing elevated levels at least for this calendar year. This is largely due to the European energy crisis driving up gas prices further resulting in a rise in aluminum prices.
  • On the demand side, the growth drivers for aluminum and copper will be electric vehicles, solar panels, the housing sector, packaging. Looking at the stronger demand, the company is planning to ramp up capacity. Novelis, the American subsidiary, which is in the business of aluminum, volumes will be around 4mn tons per year. India will be producing about 1.3mn tons of aluminum and about 500,000 tons of copper.
  • The company significantly reduced its consolidated debt from Rs.538bn last year to Rs.437bn as of December 2021 end. The company is not planning for further deleveraging, after the repayment of Rs.6bn worth of bonds in 1QFY23. It is focused on putting the cash to use by doing organic capex projects.

Asset Multiplier Comments

  • The price of aluminum is likely to remain elevated from a short supply due to carbon emission-related concerns in China and smelter disruptions. But a quick resolution to the European crisis may lead to a major correction in aluminum prices as a result of correction in energy prices in Europe.
  • Looking beyond the short-term uncertainties, the medium to longer-term structural demand for aluminum will remain strong on the back of good demand for aluminum automotive sheets, aluminum beverage cans, and pent-up demand from the aviation industry.
  • Hindalco being the largest secondary aluminum producer and the largest aluminum recycling company in the world, is likely to be better positioned to digest the input cost inflation without taking a substantial hit on the margins.

Consensus Estimate (Source: Marketscreener & TIKR websites):

  • The closing price of HINDALCO was Rs. 520/- as of 14-February-2022. It traded at 9.8x/9.1x/8.8x the consensus earnings estimates of ₹ 53/57/59 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 640/- implies a P/E Multiple of 10.8x on FY24E EPS estimate of ₹ 59/-

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.”

 

Focused on creating organic and inorganic business opportunities – IndusInd Bank


Update on the Indian Equity Market:

On Tuesday, NIFTY closed in the green at 17,266 (+0.3%) near its high of 17,300. Among the sectoral indices, PSU BANK (+0.8%), METAL (+0.8%), and PHARMA (+0.5%) were the top gainers and MEDIA (-1%), REALTY (-0.8%) and IT (-0.3%) were the sectoral losers. TATASTEEL (+3%), CIPLA (+2.0%), and RELIANCE (+1.7%) were the top gainers. ONGC (-2.8%), POWERGRID (-1.8%), and SBILIFE (-1.3%) were among the top losers.

Excerpts from an interview of Mr. Sumant Kathpalia, MD & CEO, IndusInd Bank (INDUSINDBK) with Economic Times dated 07th February 2022:

  • INDUSINDBK had slowed down their microfinance business and hence the disbursements grew only by 3% sequentially. Disbursement growth came at 4.5% without microfinance as always guided by the company.
  • On deposits, they are as good as the industry and are very comfortable with the way the growth is coming back.
  • Microfinance currently holds 12.5% of INDUSINDBK’s portfolio. It has guided about the proportion being limited to 15% of the total portfolio. It has diversified the rural vertical into various other businesses and is growing rapidly in the merchant acquiring business.
  • The deep rural book that is of ₹ 1500 mn currently, is expected to reach a value of ₹ 5,000 mn by the end of FY23E.
  • INDUSINDBK has launched a new platform with a focus on five verticals. Out of these, easy credit for personal loans and credit cards are already launched. It is in the market since January and the company is seeing a rapid increase in disbursements as well as the experience the clients are getting in it.
  • They have launched ‘Indus Wheels’ which specifically focuses on vehicle finance and they expect to see a different used car experience in the market from February end or March onwards.
  • INDUSINDBK has launched one or two commercials about their merchant acquiring business and saw a good response to the same. They have a few launches lined up that will be millennial prepositions, hugely interactive offering personalized user experience.
  • They have created provisions of ₹ 3,328 mn as a protection against any future shocks. They have also done a ₹ 1,400 mn provision on the restructured book.
  • The company will now lend at 230 bps and believes that the credit cost should settle around 120 to 150bps.
  • INDUSINDBK has always been interested in para-banking. They are looking to add a fourth domain which can come out of affordable housing, wealth management, mortgage, or a business like a merchant acquisition. The main objective of this domain is to create a business opportunity that can be organic or inorganic.
  • The promoters of the bank are awaiting the operating guidelines on the 26% promoter limit allowed by the RBI. Once these guidelines are clear and if the bank needs funds, the promoters will be the first ones to infuse capital into the company.
  • Vodafone-Idea business has to start playing out for INDUSINDBK to reverse its provisions. Vodafone is expected to come back to the banker’s consortium wagon with a definitive business plan about how they will raise funds and how the business is going to grow. Once that is finalised, how Vodafone’s business gets executed over two or three quarters will decide if the provisions will start reversing.
  • MSME and SME sectors are growing. On the corporate and on the MSME side, the company is confident about being ahead of the market and not an outlier.
  • Kathpalia expects the central bank will continue to support growth and the increase in rates will not be passed on to the end consumers immediately.
  • Four things to look at in FY23 for INDUSINBK: 1) Now that the balance sheet is stable, they will be focused on the bank’s growth momentum, 2) PPOP margins have been highest or second highest in the industry around 5.9% to 6% and will be maintained between 5.75% to 6%. 3) Credit costs are expected to swing back and land between 120 and 150 bps and 4) The bank’s fourth domain should come into existence in the form of para banking or affordable housing or wealth management.

Asset Multiplier comments:

  • With economic activities picking up, the disbursements in vehicle finance and microfinance are expected to start gaining momentum.
  • The bank has sufficient provisioning which is expected to reduce credit costs and improve its margin trajectory in the subsequent quarters.
  • We expect healthy traction in the bank’s loan book and an increase in disbursements due to the introduction of technology-driven services.

Consensus Estimate: (Source: Market screener and investing websites)

  • The closing price of IndusInd Bank was ₹ 938/- as of 08-February-2022.  It traded at 1.5x/1.3x/1.2x the consensus book value per share estimate of ₹ 611/688/784/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 1,267/- which implies a P/BV multiple of 1.6x on FY24E BVPS of ₹ 784/-.

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.”

Inflationary headwinds reducing, topline growth outperforms – Asian Paints



Update on the Indian Equity Market:

On Monday, NIFTY closed in the red at 17,149 (-2.7%). Among the sectoral indices REALTY (-5.9%), METAL (-5.2%), and MEDIA (-4.6%) were top losers, and there were no sectoral gainers. CIPLA (+2.9%), and ONGC (+0.9%) were the only gainers. BAJFINANCE (-6.4%), JSWSTEEL (-6.9%), and TATASTEEL (-5.9%) were among the top losers.

Excerpts from an interview of Mr. Amit Syngle, MD & CEO, Asian Paints with Economic Times dated 21st January 2022:

  • In 1HFY22 the company had taken a 7% hike and in Q3FY22, they had already taken two hikes in November and in December totaling about 15%. Quarter on quarter, the company had a very strong volume growth at 18% and value growth of 26%.
  • With a healthy topline growth quarter on quarter, the margins have gone up because of the price hike which has been taken and so has the EBITDA margins being impacted in a very strong way.
  • The company is on a very good footing now because they have taken the pressure of inflation head-on and raised prices to the tune of about 22% for the year so far. The next quarter looks good from the point of view of addressing the inflation by the company.
  • The price increases have been unprecedented. Notwithstanding that, the company has seen quite a strong volume growth as well as value growth because October and November were very good for the company given the festive period.
  • The COVID-19 pressure was off to that extent, the consumer sentiment was quite good even in December. The company got a little bit hit in the second fortnight of December because of the third wave emerging but overall the company saw very healthy volumes, very good value growth. The company has gained a good quantum of market share in the third quarter as seen forward.
  • People have been experiencing COVID for the last year and nine months and the experience has been that there is an impact on consumer sentiment, which happens immediately when such a wave starts. But overall, there is only a little bit of a deferment of sales because people do not put off their painting or the renovation cycles.
  • The company’s outlook is that while in January there might see some impact of price hike and COVID-19, going forward, in February and March, it expects to see recovery with sales coming back strongly.
  • Going forward, it sees the environment as still inflationary. Despite taking price hikes or the crude hitting high prices and as prices of some of the crude derivatives go higher, some prices of select raw materials might come down. So overall, it expects the impact of Q4 over Q3 to be mild but the environment would remain inflationary.

Asset Multiplier comments:

  • Asian Paints has been an undisputed market leader in the paints category, despite inflationary near-term headwinds. We believe the company is likely to outperform based on its strong brand image and execution capabilities.
  • The expected boom in real estate augurs well for the company as we are entering a multi-year cycle of developmental activity that’ll help the top line of the company.

Consensus Estimate: (Source: Market screener website)

  • The closing price of Asian Paints was ₹ 3,155/- as of 24-January-2022.  It traded at 93x/67x/55x the consensus Earnings per share estimate of ₹ 34/47/57/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 3,380/- which implies a PE multiple of 59x on FY24E EPS of ₹ 57/-.

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.”

 

EBIT margin of 17-17.5% sustainable – Wipro

 

 

 

 

 

 

 

 

 

 

 

Update on the Indian Equity Market:

On Thursday, after a volatile session the benchmark index NIFTY50 ended at 18,258 (+0.3%). Among the sectoral indices, METAL (+3.5%), PHARMA (+1.6%), and PSU BANK (+0.6%) led the gainers while REALTY (-0.7%), BANK (-0.7%), and PRIVATE BANK (-0.6%) led the laggards.

Among the NIFTY50 components, TATASTEEL (+6.3%), JSWSTEEL (+4.3%), and SUNPHARMA (+3.6%) led the gainers. WIPRO (-6.0%), ASIANPAINT (-2.4%), and HCLTECH (-1.9%) were the top losers.

Wipro recently announced 3QFY22 earnings, which were lower than street estimates. But the fourth-quarter guidance seems to provide some relief to investors.

The top management, MD & CEO Mr. Thierry Delaporte, CFO Mr. Jatin Dalal, and President and CHRO, Mr. Saurabh Govil discussed the highlights of 3QFY22 and their outlook for the upcoming quarters with CNBC-TV 18 on 13th January 2021. Following are the excerpts:

  • Wipro had guided for 2-4% sequential revenue growth in constant currency term for 3Q. The company delivered 3% QoQ revenue growth. There weren’t any one-offs or client loss or massive delivery issues. This is the normal volume of business.
  • The 3% sequential revenue growth is 28% YoY growth. The 3QFY22 revenue growth is the continuation of the growth seen over the last 5 quarters.
  • The CEO does not expect a significant contribution to revenues from the recently concluded acquisitions of Edgile and LeanSwift.
  • The reported EBIT margin was 17.6%, ahead of the guidance of 17-17.5%. The margin delivery has been despite 2 months of salary increment to 80% of its employees. The utilisation is such that there is some headroom for subsequent quarters.
  • The EBIT margin band of 17-17.5% is sustainable for the company in the long term.
  • The attrition for LTM was 22.7% in 3QFY22 and remains a concern industry-wide. It has taken certain measures to cope with higher levels of attrition. First, the company onboarded 10,000 plus employees every quarter and continues to onboard new people. Wipro has increased campus hiring by 70% in FY22. The company is looking at 30,000plus hiring in FY23E. Second, the company continues to laterally hire all skill sets across the globe based on demand. Some of the high-demand areas are cyber security, data, cloud, and newer areas like Salesforce. The company believes the attrition has peaked and expects to see moderate attrition going forward.
  • The company closed the biggest quarter in terms of bookings in 3QFY22. It reflects Wipro’s ability to win in the market. It has the biggest pipeline it ever had as it begins 4QFY22. It has a better win rate compared to previous quarters.
  • The CEO believes the clients’ budgets across industries will continue to increase. The win rate has improved by 300bps over the previous two years.
  • Improvement in price realisation is seen due to the move to high-value services such as cyber security, cloud, and digital. Wipro had made investments in certain skill sets and improved visibility, for which clients are willing to invest.

Asset Multiplier Comments

  • We believe revenue growth will be driven by strong demand, strong pipeline, and order book. The company’s order pipeline has a mix of small, medium, and large deals with the company seeing expansion in mid-sized deals.
  • There is a massive opportunity in the cloud business over the next five years. The Company has been making investments in cloud technology. Cloud opportunity, higher offshoring, and synergies from acquired business are expected to drive profitability for Wipro in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of Wipro was ₹ 650/- as of 13-January-2022. It traded at 30x/ 25x/ 22x the consensus earnings estimates of ₹ 22/ 26/ 29/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 703/- implies a P/E Multiple of 24x on FY24E EPS estimate of ₹ 29/-.

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.”

Investments in EV Business a priority – Mahindra and Mahindra

Update on the Indian Equity Market:

 

On Thursday, Indian benchmarks declined for the third consecutive session with NIFTY closing at 17,874 (-0.8%). Among the sectoral indices, METAL (+0.4%),  CONSUMER DURABLES (+0.3%) were the only gainers. REALTY (-2.3%), PSU BANK (-1.8%), PHARMA (-1.4%) led the laggards. Among the stocks, TITAN (+1.7%), HINDALCO (+1.1%), and JSWSTEEL (+0.6%) led the gainers, while SBIN (-2.8%), ONGC (-2.6%), and SBILIFE (-2.5%) led the laggards.

 

Excerpts of an interview with Mr. Manoj Bhat, CFO, Mahindra and Mahindra (M&M) with CNBC-TV18 on 10th  November 2021:

  • Raw Material Inflation has been a key headwind for the industry due the commodity cycle turning, However the company is taking a calibrated approach to passing on the costs to consumers through price hikes as the commodity cycles are transient in nature.
  • The company already has taken 3 price hikes in the farm segment and 2 in the auto segment, and there’s still robust demand and thus the company plans to adopt a wait and watch policy.
  • The entire auto industry has seen margins getting contracted severely and the company thinks that the margins have bottomed out at these levels. However the impact was seen in this quarter due to volume loss as a result of semiconductor issue and new product launches which are margin dilutive in the first few quarters.
  • The Company expects margins to improve over 2HFY22 due to scale benefit from volume recovery as the semiconductor situation improves, and calibrated price hikes if necessary.
  • The semi-conductor issue is a global one and it peaked in Q2FY22, but there’s signs of improvement across the world with improving visibility and the company expects normalcy in 1HFY23.
  • Tractor volumes were impacted due to erratic monsoons, however even on an inflated base of FY21, the company expects high single digit growth in FY22. The demand fluctuation is short term the company expects demand to stabilise in 4QFY22 led by market share gain by the company.
  • EV Three Wheelers segment has shown tremendous growth of 317% YoY in Q2FY22 with a 63% market share. The company expects 20% of current 3 wheeler segment to shift to EV by FY25, and the company has plans to invest Rs 30 bn over FY23-25 to expand its dominant position.

Asset Multiplier Comments

  • We expect the raw material inflation to impact the bottom line in the medium term.
  • Notwithstanding the semiconductor shortage, it has received a positive response for its new launches such as Thar, XUV 300, and Bolero Neo. The company has indicated its loyal customers are willing to wait as long as 9-12 months to get the new cars. We like the customer loyalty and expect the company’s top line to benefit in the medium to long term.
  • While its revamping its SUV portfolio, the company has ambitious plans to launch electric varients in its UV and 3W portfolio. This may help improve the product penetration.

 

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

  • The closing price of M&M was ₹ 925/- as of 11-November-21. It traded at 24x/ 20x/ 17x the consensus EPS estimate of ₹ 39/ 46/ 54 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,050/- implies a PE multiple of 19x on FY24E EPS of ₹ 54/-.

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.”

 

Best Demand Environment in a Decade – Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY closed lower at 18,211 (-0.3%) dragged by MEDIA (-2.0%), METAL (-1.5%) and PRIVATEBANK (-1.4%). PSU BANK (+2.1%), IT (+1.0%) and PHARMA (+0.9%) were the gaining sectors. The top gainers in NIFTY50 were ASIANPAINT (+4.1%), UPL (+3.8%), and DIVISLAB (+2.3%). The top losers were AXISBANK (-6.5%), BAJFINANCE (-4.8%), and ONGC (-3.5%).

Edited excerpts of an interview with Mr. C P Gurnani, MD, and CEO of Tech Mahindra with CNBCTV18 on 26th Oct 2021:

  • The company is committed to the high growth trajectory over the full year of FY22, which resulted in its highest ever sequential growth in a decade. Every business segment has reported sequential growth in Q2FY22.
  • The Company has a best-in-class geographic mix with North America contributing less than 50%, Europe contributing 25%, and the Rest of the World Contributing 25%, with a geographical presence in 90 Countries. The company is well diversified in terms of geography.
  • The Company increased its guidance of around 500-600 Mn USD in Deal wins to 750 Mn to 1 Bn USD over the next few quarters, on the back of a robust deal pipeline and sustained growth in the demand environment.
  • The Company plans to improve its margins by keeping control on sub-contracting costs which are at historically high levels. Utilisation has reduced due to fresher intake in the last quarter, which the company expects to improve over time.
  • Cloud Migration and 5G are the biggest drivers of growth in new deal wins. There’s a huge movement in the legacy to digital business which is expected to continue over the next few quarters.
  • The company made two acquisitions during the quarter- Loadstone and WeMake website. Loadstone has revenue of about 35 Mn USD and is EPS accretive, the other acquisition was IP Driven and is insignificant to the topline.
  • Current levels of attrition are hurting the demand fulfillment of the company and the company plans to reduce attrition by shifting to tier-2 cities and new HR Policies.

 Asset Multiplier Comments

  • The management commentary of continued strength in end demand aided by significant deal wins, and healthy deal pipelines driven by 5G and cloud will help the company sustain its revenue growth guidance.
  • Attrition and supply-side issues are the biggest headwinds for IT Companies. The company’s bottom-line can only see sustained growth if these challenges are dealt with in the upcoming quarters.

Consensus Estimate (Source: market screener website)

  • The closing price of Tech Mahindra was ₹ 1,568/- as of 26-October-21. It traded at 25x/22x/19x the consensus EPS estimate of ₹ 64/73/81 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,703/- implies a PE multiple of 21x on FY24E EPS of ₹ 81/-.

 

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.”

Organic growth to sustain as guided, no big bang acquisitions planned– HCLTECH

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended its 7-day winning streak to close at 18,419 (-0.3%), dragged down by REALTY (-4.7%), PSUBANK (-3.7%), and FMCG (-3.2%). The sectoral gainers were IT (2.2%), and FINANCIAL SERVICES (0.2%). Among the stocks, TECHM (+4.3%), LT (+3.3%), and INFY (+1.8%) led the gainers while ITC (-6.3%), TATAMOTORS (-4.9%), and EICHERMOT (-4.5%) were the top laggards.

HCLTECH missed the street estimates in the declared earnings for the quarter ended 30th September 2021. Mr. C Vijayakumar, Chief Executive Officer, and Mr. Prateek Aggarwal, Chief Financial Officer at HCL Technologies discussed the quarter gone by and reaffirmed its annual FY22 guidance in an interview with CNBC-TV18 on 18th October 2021:

  • The Products and Platforms business has been a laggard in FY22, with quarterly slippages affecting the guidance of the segment but the impact is immaterial to the top-line growth, where the company has reaffirmed its EBIT margin guidance of 19-21%.
  • Q2FY22 was the best quarter for the company with unprecedented growth in client mining, large deal wins, and total headcount. The company has introduced a formal dividend pay-out policy on the back of its commitment to rationalise capital allocation.
  • The Company has rolled out the first tranche of wage hikes in Q2FY22 and expects the second tranche to be rolled out in Q3FY22. It expects the slippages in the Products and Platforms business to be recovered in the upcoming quarter.
  • The company had a track record of a high dividend pay-out until FY20. With a significant outflow due to an acquisition, the pay-outs were subdued over the past few quarters. With a recovery in free cash flows and demand from investors, the company has decided to come up with a formal dividend policy with higher pay-outs.
  • The current demand environment has established momentum in the organic business. The company plans to focus on executing current demands rather than go all-in after a major acquisition. The company may add small tuck-ins to expand capabilities or geographies.
  • In Q2Fy22, the company had a strong deal win rate. The pipeline in Q1FY22 was at the highest level ever, it slightly moderated because the company closed a lot of deals.
  • The pipeline has a good mix of mid-size and large deals. There is also a lot of momentum in existing accounts, where customers are ramping up on several digital initiatives, with smaller ticket transformational projects are being taken up by the company.
  • The company expects to exceed its initial guidance on hiring 20,000-22,000 freshers on the back of robust demand and backfilling attrition in the recent quarters.
  • Momentum is seen across all verticals with BFSI and Manufacturing being the leaders. The manufacturing vertical is seeing an uptick in engineering services with various transformational deals and projects being undertaken.

 

Asset Multiplier Comments

  • COVID-19 pandemic has unmistakably created a paradigm shift in the ITES Industry, with a strong focus on digitisation around the world across both size and verticals will result in a high growth period for the industry.
  • HCL Tech like its peers will also continue to face supply-side crunch and attrition problems. The situation is expected to improve over the next few quarters which will help to reduce the margin pressures.

Consensus Estimate: (Source: market screener website)

  • The closing price of HCLTECH was ₹ 1,232/- as of 19-October-2021. It traded at 25x/ 22x/20x the consensus earnings estimate of ₹ 49/ 56/ 63. for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1360/- implies a PE multiple of 22x on FY24E EPS of ₹ 63/-.

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.”

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.”

 

Price hikes neutralised material price increase – Berger Paints

Update on the Indian Equity Market:

On Wednesday, Indian stocks recovered from sharp declines and closed the session almost unchanged. The Nifty50 ended marginally higher at 16,282 led by TATASTEEL (+4.0%), JSWSTEEL (+3.5%), and IOC (+2.5%). SHREECEM (-2.1%), KOTAKBANK (-1.9%), and SUNPHARMA (-1.8%) led the laggards. Among the sectoral indices, METAL (+3.1%), OIL & GAS (+1.2%), and PSU BANK (+0.5%) led the gainers. PHARMA (-1.5%), PRIVATE BANK (-0.7%), and BANK (-0.6%) led the laggards.

Excerpts of an interview with Mr. Abhijit Roy, MD & CEO, Berger Paints (BERGEPAINT) with Economic Times on 10th August 2021:

  • April and May months were impacted due to the lockdown restrictions. In June and July, demand bounced back to normal. Demand is likely to remain strong in the subsequent months.
  • The Company has taken price hikes in the water-based paints which contribute to a bulk of their sales. This hike neutralised the entire raw material price increase. In solvent-based enamel paints, they are yet to pass on the entire price increase. In industrial paints, negotiations are ongoing and expected to be finalised soon.
  • Some erosion in terms of gross margin is expected to be made up by cost savings and BERGEPAINT expects to retain the current level of margins.
  • The price increase is about 5-6%, taken in stages. Despite the discretionary nature of their products, demand hasn’t really been affected.
  • The revenue from new construction projects declined in FY21. With the easing of restrictions, there has been a surge in new construction projects. New construction projects and repainting are contributing to overall growth in the business.
  • The inventory levels are low at the company level. With every price increase, there was an increase in dealer-level inventory.
  • BERGEPAINT has always welcomed competition. The company has its own strengths and built its own network over time. Brand building takes a long time in the paints category, and BERGEPAINT continues to maintain its market share.

Asset Multiplier Comments

  • BERGEPAINT 1QFY22 results beat street estimates as the impact of lockdowns was not as severe as anticipated. Most companies have been bearing the brunt of higher crude oil prices. BERGEPAINT was no exception and reported margins were lower sequentially.
  • Though near-term headwinds remain due to higher raw material prices, we believe BERGEPAINT to benefit from rising distribution reach, a strong presence in urban markets, and calibrated pricing.

Consensus Estimate: (Source: market screener website)

  • The closing price of BERGEPAINT was ₹ 820/- as on 11-August-2021. It traded at 88x/ 71x/ 59x the consensus earnings estimate of ₹ 9.3/11.5/13.8 for FY22E/ 23E/ 24E.
  • The consensus target price of ₹ 696/- implies a PE multiple of 50x on FY24E EPS of ₹ 13.8/-.

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.”