Tag - rural

Expect reasonable revenue growth for the industry in FY21– M&M

Update on the Indian Equity Market:
On Wednesday, Nifty ended flat at 14,565 while PSU banks outperformed. The top gainers for Nifty 50 were M&M (+5.7%), SBI (+4.6%), and Adani Ports (+4.4%) while the losing stocks for the day were Bajaj Finance (-2.9%), Shree Cement (-2.8%), and HDFC (-2.8%). Top gaining sectors were PSU bank (+3.3%), Auto (+0.9%), and Bank (+0.7%) while Pharma (-0.9%), Financial Service (-0.6%), and Realty (-0.3%) were the losing sectors.

Edited excerpts of an interview with Mr Pawan Goenka, MD & CEO, Mahindra & Mahindra (M&M); dated 12th January 2021 from Economic times:

The demand is now no longer a pent-up demand, it is a structural demand that is coming back.

With the new product launches, all companies have plans for 2021. Many of the companies had held back on product launches and that is certainly going to spur demand now. On top of that, if the government comes in with some kind of stimulus to grow the auto demand, then the demand will really take off and will lead to a great year.
The Heavy Commercial Vehicle (HCV) industry which was lagging for the last several months has started showing signs of revival. There was good growth in November and December. Once HCV is also on the growth path, the auto industry overall should look pretty good in FY22E.

Mr Goenka said GST rate cuts may not be possible because of the need for tax revenues in these difficult times, but GST rates should be simplified. There are eight or nine different GST rates. He hopes that the government will just keep two rates – 28% and 43% and not have all of these different rates. Right now, a rate reduction is not expected. When the economy is fully back on track, the government could reconsider rate reduction.
The massive cost cuts in 1Q & 2Q for the Company is not cost cutting but removing the fat. That is where a lot of the cost reduction has happened in terms of travel. Use of digital media for meetings has resulted in a significant reduction in cost in 1Q & 2Q FY21 and this will never come back. Maybe travel will go up somewhat but probably 75-80% will continue. The reductions have happened in events, inventory costs and communication costs. These will not come back to earlier levels, according to Mr Goenka. He said that more than half of the reduction is for good and continue to aid in the Company’s bottom line.

In the auto industry, this year there has not been any significant price cut or increased incentives given to propel demand.

Compliance with BS-VI emission norms has led to prices going up, therefore per unit revenue has gone up which will lead to a top-line increase for the Company. Given that volumes are also going up and the Company does not expect 2021 to be any worse than 2020 there will be a revenue growth for most companies. There are some companies that will do better, some will not and competition will continue. But overall for the industry, he sees reasonable revenue growth in 2021E.

Many companies have not passed on the full BS-VI cost increase yet and as the companies become more comfortable with the continued volume or continued demand, the gap in the BS-VI cost increase will get passed on during this year.

The big thing looming ahead of the industry is the commodity price increase, which will also lead to a price increase. That is not desirable if the auto industry were to pass on all the cost increases, then there could be a significant increase in prices. So commodity price increases are a matter of concern right now for the auto industry.

Most companies are coming back to their core where they have a right to win and have strength in India and globally and this is automatically leading to capital allocation which is going more towards the core.
The Company is going to be working on multiple platforms for personal mobility.

The overall positive sentiment in the rural area, in the agriculture area, somewhat tempered because of the farm agitation right now but that will be soon resolved. Mr Goenka remains very bullish on the Agri sector and on the overall rural demand coming from the income of the Agri sector for durables that are sold in rural areas.
M&M is one of those who had very robust demand this year. As a result, a marginal increase in prices is possible and usually in January every year, prices have increased. So M&M has announced a 2% price increase. It should not be a dampener on demand.

A partial increase is very much doable for most companies. Companies will have to do it because nobody can absorb the kind of commodity price increases that we are seeing and one will have to simply get used to it. Not only auto but the effect of commodity price rise will also be felt by users of almost all sort of durable goods.

The auto industry overall has gone through some very difficult times because of the investments in BS-VI which led to increasing in costs, most of which could not be passed on. The cost reduction that happened during Covid outbreak has come to the rescue and therefore most companies have managed to maintain their profit margin.

On an average, before Covid, in the passenger vehicle segment, a 30-35 days’ inventory was considered to be good. Now, most companies are saying 30-35 days is too high and they need to learn to work with 20-25 days of inventories.

If all companies bring down the inventory level to 20-25 days and also do very good inventory control in their plants and to the suppliers, the auto industry could take out as much as Rs 50,000 crore from the working capital. This is a learning from Covid that will help the industry reduce working capital and improve the balance sheet of almost all the companies.

Consensus Estimate: (Source: market screener website)
The closing price of M&M was Rs 838/- as of 13-January-2021. It traded at 31x/ 22x/ 20x the consensus EPS estimate of Rs 27.3/37.4/42.0 for FY21E/ FY22E/ FY23E respectively.

The consensus target price of Rs 762/- implies a PE multiple of 18x on FY23E EPS of Rs 42.0/-.

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.”

Demand momentum could stay for 6-9 months – Britannia

Update on the Indian Equity Market:

On Tuesday, Nifty ended 1.3% higher at 11,170. The top gainers for Nifty 50 were Power Grid (+6.4%), IOC (+5.7%), and BPCL (+5.4%) while the losing stocks were Bajaj Finance (-4.0%), Bajaj Finserv (-3.5%), and Britannia (-2.4%). Sectoral gainers for the day were PSU Bank (+2.1%), Bank (+2.1%) and Financial Services (+2.0%) while the losers were Pharma (-1.5%) and FMCG (-0.8%).

Edited excerpts of an interview with Mr Varun Berry, MD, Britannia Industries Ltd; dated 21st July 2020 from Economic Times:

  • Britannia started completely on the back foot. They were not sure where they were going because factories were closed, and distribution systems were in a disarray.
  • It was everyone with their shoulder to the wheel, executing at a rate which was outstanding.
  • The demand for food that human beings eat is about the same. It is just that there was no out of home or on-the-go consumption happening during this time. It was all home consumption and that gave them an advantage, he added.
  • There was some amount of larder stocking but that was at the beginning of this pandemic. Thereafter, it has been regular consumption for most consumers.
  • The demand momentum is going to continue, albeit at a slightly slower pace as they go through the year.
  • In the last seven years, Britannia has done a lot of work in rural areas and that is keeping them in very good stead as far as the numbers are concerned. The rural trends are a lot more aggressive than urban trends. Even the pandemic has not hit the rural consumers as much as what they are seeing in the urban centres. From 21,000 rural distributors in February, they have been able to take this up to 22,000 distributors in June.
  • He doesn’t think that 21% margin is sustainable but they are going to make sure that they try and see whatever they can get out of it, there will be almost 50% of this will go right back because advertising and sales promotion will get back to normal as soon as they have a full product out in the market. Similarly, there are certain other costs which will get back but Britannia is looking at every possibility of getting as much out of this period so that it can get as many savings out of this.
  • Britannia is not seeing inflationary trends as far as the raw materials are concerned. On all of the raw materials, it has been a very reasonable level of inflation at about 3% and Britannia sees that to continue through the year.
  • The distance travelled by Britannia’s biscuits has come down from 370 km to 320 km during the last quarter so shortening supply chains, getting products domestically all of that is becoming important.
  • There was a huge surge in modern trade in the past three-four years, modern trade was growing at almost 2-2.5 times the growth of the traditional trade business but during this pandemic, people are depending more on their neighbourhood stores and hence traditional trade has started to see a huge rebound. Britannia has to make sure that it takes that into its plans as well.
  • Their bread business has outgrown its overall bakery business, not just in terms of top-line but also in the bottom-line sense. Similarly, their cheese business has grown almost two times the overall growth. He is of a strong opinion that these are not sustainable growth numbers because they are one-off, but it is just giving them a very clear outlook about the opportunities and areas they can concentrate on.
  • There is down-trading happening as people are not going out and eating in restaurants. Biscuits are the cheapest form of the snack and it comes from a highly trusted company and a highly trusted brand. Within the category, for Britannia, there has been no downgrading. He has heard from a competitor that there is serious down-trading in their portfolio but from Britannia’s product portfolio, it has been the premium products which are holding sway.
  • The R&D centre is working overtime on the kind of products that the consumers are looking for. The first objective for Britannia was to match the core but beyond that, they have gotten into categories and a lot of work is happening in those categories. Market research, insights work, could not happen during the four-month period of lockdown and that has delayed the rollout of some of their products. But they are going to be back with a bang as far as category growths and new innovation of products are concerned. Britannia is also working on some immunity products and is doing research to make sure that it brings in absolutely the right products which give the consumers the genuine results they are looking for.

Consensus Estimate: (Source: market screener website)

  • The closing price of Britannia Industries was ₹ 3,883/- as of 21-July-2020. It traded at 50x/47x/41x the consensus EPS estimate of ₹ 78/82/95 for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 4,064/- implies a PE multiple of 43x on FY23E EPS of ₹ 95/-.

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.”

Steel consumption up in sectors linked to rural economy – Tata Steel

Update on the Indian Equity Market:

On Wednesday, Nifty ended 1.2% higher at 10,430. The top gainers for Nifty 50 were Axis Bank (+6.3%), UPL (+5.3%), and Bajaj Finserv (+5.2%) while the losing stocks were NTPC (-2.1%), Nestle (-2.1%) and LT (-2.0%). Sectoral gainers for the day were PSU Bank (+3.6%), Bank (+2.8%) and Financial Services (+2.7%) while the losers were Pharma (-1.0%), Realty (-0.7%) and IT (-0.2%).

Edited excerpts of an interview with Mr TV Narendran, CEO & MD, Tata Steel Ltd; dated 30th June 2020 from Economic Times:

  • The Company had tough six-seven months of the financial year starting from April last year till maybe October or November. Things started looking up after November. The demand started picking up. January to June is a peak season for steel consumption in India. So the steel demand was picking up. Apart from the auto industry, other industries were looking better and the steel prices were moving up. The Company started sensing things were going wrong because of the pandemic. It impacted them in Europe in February and they knew it was going to come to India as well. Tata Steel started taking some precautions by the end of February in India.
  • Prices in India were static because there were no sales but the fact that inventories were building up meant that all Indian producers were trying to export. So the export markets were crowded with Indian suppliers towards the end of March and early April.
  • By the end of April, China started pulling in quite strongly so a lot of steel exports started going to China. The Company saw a recovery of the international markets starting in April.
  • Between April, May, and June, steel prices have gone up by about $50 a tonne. The fact that Indian steel producers could export and had an export option, kept the domestic prices quite stable.
  • There was some pricing pressure because the prices have been trending upwards till March. There were some price corrections in May when the transaction started but the international prices were quite strong.
  • Consumption growth was seen in sectors which are linked to the rural economy.
  • In the automotive business, the tractors business has been reasonably strong. Motorcycles have been stronger than scooters because they are both dependent on the rural economy.
  • Rural infrastructure spending by the government has been positive. Tata Steel sells a lot of steel i.e., about 20% of their revenues, to the rural economy. The roofing sheets and reinforcing steel for the individual house builders segments are panning out strong.
  • The non-tractor and non-motorcycle automotive commercial vehicle, passenger vehicles are still quite a weak sector. There is some sign of improvement. Any improvement is only going to get them back to where they were last year and not where they were a year before last. So, it is a long haul back for them, according to Mr Narendran.
  • Tata Steel saw an EBITDA improvement in Kalinganagar and Jamshedpur of about Rs 2,000-2,500 a tonne Quarter on Quarter (QoQ) which was on the back of cost takeout and price hikes. Tata Steel would have sold at least half a billion tonnes more had there been no lockdown. This would have helped them in cost as well as realisations. They have lost half a billion tonne of March sales which was at the highest price.

Consensus Estimate: (Source: market screener website)

  • The closing price of Tata Steel Ltd was ₹ 324/- as of 01-July-2020. It traded at 6.8x the consensus EPS estimate of ₹ 47.8 for FY22E.
  • The consensus target price of ₹ 376/- implies a PE multiple of 7.9x on FY22E EPS of ₹ 47.8/-.

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.”

COVID-19 impact: Have requested RBI that moratorium sought by consumers should be given, says M&M Fin Services

Update on the Indian Equity Market:

On Thursday, NIFTY continued gains for the 3rd day and ended at 8,641 (+3.9%). Among the sectoral indices, Pvt Bank gained the most while no sector index ended negatively. Pvt bank (+8.3%), Realty (+7.3%) and BANK (+6.4%) were the top gainers. Out of the NIFTY50 stocks, IndusInd bank (+46.0%), L&T (+10.0%) and Bajaj Finance (+9.3%) rallied the most, while GAIL (-3.3%), HCL Tech (-2.6%) and Sun Pharma (-2.5%) were the worst performers for the day.

Edited excerpts of an interview with Mr Ramesh Iyer, Vice Chairman & Managing Director of Mahindra & Mahindra Financial Services Ltd; dated 25th March 2020. The interview aired on CNBC-TV18.

  • Original equipment manufacturers (OEMs) have shut down production due to COVID-19, which obviously have an impact on vehicle financiers.
  • For OEMs at the beginning of 4Q FY20, the volumes started to shrink because everybody was preparing for BS-VI transition and therefore the inventory levels started to come down. Now with the COVID-19 scare – even the little possible sales that were likely to happen have come to an end, according to him.
  • He added the month of January-February was average; March has been absolute no-number kind of a month, so he thinks that it would be a low single-digit growth in loan book or for some it may not even be that.
  • The Company has told the RBI about consumers asking them for a moratorium and has requested RBI to provide the same.
  • They have also told RBI that these are the times where maybe the non-performing assets (NPAs) norms itself will have to be rewritten to say it is not 90-days delinquent but 180-days kind of a delinquent and it is more to protect the good customers who have been paying so far.
  • There is uncertainty about tomorrow. So people had started becoming cautious but even more important is that the overall activities have started to reduce and therefore people’s earnings will start to reduce but these are times where instead of worrying about what is going to happen to the growth and things like that – the Company will be looking at ‘how do they help out the consumers’.
  • The current situation is still not as impactful in the rural market as seen in urban according to him. People will have to figure out after things get normal. They will start relooking at what else to do, how else to do. So the real impact will be known only three months down the line.
  • If consumers need some kind of temporary short-term loan after things get to some normal then the Company will look at what could be that short-term small-ticket loans to the existing consumers whom they may want to support and partner them to come out of this situation as things start to improve.

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

  • The closing price of M&M Financial Services Ltd was Rs 169/- as of 26-March-2020. It traded at 0.9x / 0.8x/ 0.7x the consensus book value estimate of Rs 190/ 211/ 238 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of Rs 394/- implies a PB multiple of 1.7x on the FY22E book value of Rs 238/-

Godrej Consumer confident of ramping up production when required says CEO Gambhir

Update on the Indian Equity Market:

On Friday, NIFTY closed 2.6% lower at 10980 because of the coronavirus scare and the Yes Bank crisis. RBI’s action of seizing control of Yes Bank and the possible consequences on the financial system weakened the market sentiments. The top losers for the day were Yes Bank (-54.9%), Tata Motors (-9.5%) and Zee (-7.3%). The few gaining stocks included Bajaj Auto (1.5%), GAIL (0.8%) and Maruti (0.4%).  All the sectors were in the red. The top losing sectors were Nifty PSU bank (-5.3%), Nifty Media (-4.8%) and Nifty Metal (-4.4%).

Excerpts from an interview of Mr. Vivek Gambhir, Managing Director and CEO, Godrej Consumer Products Ltd published in Live Mint dated 06th March 2020:

  • The surge in demand for hand sanitizers and soaps in the wake of fears of the COVID-19 epidemic will not have any significant impact on earnings for GCPL since it constitutes a small business segment.
  • The rabi harvest has been good and the demand from the rural market is expected to start picking up in the next one or two quarters.
  • The market is seeing a temporary demand in hand soaps, hand sanitizers, small soaps, and handwashes as well. GCPL has enough production capacity and will be ramping up the same to fulfill the demand.
  • According to Mr. Gambhir, the Company will definitely see some temporary spikes in demand mainly in April- May timeframe.
  • GCPL is rolling out some new digital campaigns to educate consumers about the coronavirus and what they can do to protect themselves.
  • The hand sanitizers and Rs 10 soaps are around 30% of the entire soap segment for the company. The company will see an uptick in demand but will not be material enough at this stage.
  • In regard to ramping up the production capacity, Mr. Gambhir said that they have enough production capacity to meet the increased demand and don’t see any challenges in meeting those demands. GCPL is also seeing some request for export orders from other parts of the world but these are relatively small numbers and won’t be material.
  • For the soap business in India, GCPL has seen strong volume growth in Q3 and has continued to gain market share in both their brands Godrej No 1 and Cinthol. There has been some value degrowth in this particular segment but the imbalance between volumes and value is expected to be corrected over the next couple of quarters. GCPL has taken a 5% hike in soap prices given some of the increases in palm oil derivatives. The Company will evaluate if there is a need for further increase in prices. With some price increases, the Company will be able to drive a better balance between volume growth and value growth. At the same time GCPL is intensifying some of its cost reduction programs and is hoping to maintain the margins. However, if it is required to take a dip in the margins for a quarter or two to drive the volumes, they are prepared for it.  Next year, the Company is expecting a better performance from both India and international business and on the margin front, they hope to sustain the levels if not improving.
  • FMCG sector has been experiencing challenges over the last few quarters with regards to a weakening consumer sentiment, sagging rural demand and liquidity pressures in the channel still continue.
  • GCPL expectation is that over the next one-two quarters, the industry will start seeing a recovery in demand particularly led by the rural sector which has been a big cause of concern.
  • The rural sector has been growing at 0.5x the growth rate which was 1.2x or 1.3x a few quarters ago. The deterioration in growth has been significantly fair. Recently there has been some gradual recovery because the rabi crops have been good. The rural inflation also augurs well for rural consumers. It is putting more money in the hands of farmers.

Consensus Estimate: (Source: market screener website)

  • The closing price of Godrej Consumer Product Ltd was ₹ 640/- as of 06-March-2020.  It traded at 41x/ 35x/ 32x the consensus earnings estimate of ₹ 15.6/18.1/20.0 for FY20E/FY21E/FY22E respectively.
  • The consensus target price is ₹ 754/- which implies a PE multiple of 38x on FY22E EPS of ₹ 20.0/-.