Asian Paints profit spurts, but margin pressures visible
It was a quarter of stellar profit growth for Asian Paints and the stock price impact was immediate. On 20 July, the stock shot up 7% to cross the covered Rs.3 trillion market cap level. That makes Asian Paints the twelfth most valuable company in the Indian market and a veritable FMCG player. However, there was also the story of margins being pressured by a sustained rise in input costs. We will come back to the margin pressures later, but first, let us look at the financial performance for the Jun-21 quarter.
Asian Paints reported 91% YoY growth in revenues at Rs.5,585 crore but COVID 2.0 pressures ensured that sequential sales revenues were lower by 16%. The top-line growth was driven by a 106% growth in the decorative paints segment in volume terms and 95% in value terms. Other segments like industrial paints and new products like adhesives, wood finish, waterproofing also showed good traction. Net profits for the Jun-21 quarter were up 160% at Rs 569cr, although profits fell 33% on a sequential basis.
Read : Paint Sector Stocks
Despite the ostensibly good results, the gross margins for the quarter fell by 500 bps to 39.6% sequentially. Against the 15% spike in input costs, only 3% could be passed on as price hikes. The input pressure was apparent as exports to Asia and Africa witnessed pre-tax losses for Jun-21 quarter. The big challenge remains the spike in material costs amidst a competitive market. Cost controls helped mitigate the input cost spike to some extent, but that will saturate.
Net margins of Asian Paints for the Jun-21 quarter came in at 10.88%. This is better than the 7.47% NPM in the Jun-20 quarter but lower than the 12.81% NPM recorded in the sequential Mar-21 quarter.
Rolex Rings IPO: An Indirect Automobile Play
The auto ancillary industry in India has been largely centered around NCR, Tamil Nadu and Maharashtra, which is obviously due to their proximity to auto manufacturing hubs. Rolex Rings manufactures hot-rolled forged and machine bearing rings and other auto components for the auto industry. Rolex Rings supplies to automotive and industrial consumers. Apart from auto companies, Rolex Rings also counts marquee names like Timken, SRF and Schaeffler among bearing manufacturing clients.
A quick look at the financials indicates that the company has been consistently profit-making, although revenues and profits came under pressure on account of COVID. For the six month ending Sep-20, the company reported net revenues of Rs.225 crore and net profits of Rs.25.3 crore giving a net margin of 11.25%. Net margins had fallen in previous years and only in the Sep-20 half year the net margins have got back to the 2018 levels.
The Rolex Rings IPO opens on 28 July and closes on 30 July and the book built issue will be a mix of fresh issue and offer for sale. The company is raising Rs.70 crore of fresh funds and will issue 65 lakh shares as offer for sale to existing owners. The funds raised via fresh issue will be used for working capital purposes and for general corporate purposes.
Equirus Capital, IDBI Capital markets and JM Financial are the lead manages to the issue. In terms of IPO performance of lead managers in 2021, Equirus has managed 3 issues with all 3 getting positive listing. IDBI Capital has managed 1 issue with positive listing. JM has managed 9 issues in 2021 with 7 getting positive listing.
Hindustan Unilever and Bajaj Auto; Good growth, but input costs spike
On 22 July, two long-term wealth creators and defensive bets; Bajaj Auto and Hindustan Unilever announced their quarterly results for the Jun-21 quarter. Here is a quick look at some unique points to ponder over.
Hindustan Unilever reported 12.83% sales growth YoY at Rs.11,915 crore while the net profit was up 9.6% at Rs.2,061 crore. The profits and sales were down compared to the Mar-21 quarter due to COVID 2.0 impact. Among key business segments; the homecare segment grew 12% YoY, beauty & personal care grew 13%, while the food & refreshments business grew 12%. Beauty and personal care contributed most to EBITDA followed by home care and foods.
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Strategically, Hindustan Unilever focused on investing in brands and portfolios with future fit as well as to manage cost inflation, which has been a real challenge. Cost controls helped HUL mitigate the spike in input costs. Let us turn to Bajaj Auto.
Bajaj Auto reported 140% growth in total sales yoy at Rs.7,386 crore while the net profits in the Jun-21 quarter grew 196% at Rs.1,170 crore. Like in the case of Hindustan Unilever, Bajaj Auto also saw a sequential fall in sales and profits due to COVID 2.0 impact. In a tough quarter, Bajaj reported vehicle volumes of over 1 million with 65% coming from exports.
If you look at Bajaj Auto, the big story is the growth driven by exports. Global markets were hardly impacted by COVID 2.0. Hence, weaker domestic demand was partially offset by the non-cyclical exports business. For the Jun-21 quarter, exports accounted for 65% of total sales of Bajaj Auto.
Like in the case of Hindustan Unilever, Bajaj also saw input cost pressures with higher raw material costs wiping out 220 bps from EBITDA margins.
Policybazaar jumps on the digital IPO bandwagon
Policybazaar was touted as one of the big digital IPOs of 2022 along with other names like Zomato, Paytm, Nykaa and MobiKwik. The emphatic success of the Zomato IPO has forced the other digital candidates to fast-track their IPO plans. With Paytm and MobiKwik already filing for the IPO, Policybazaar could not be too far behind. On 21 July, Policybazaar announced a tentative plan for its proposed Rs.6,500 IPO.
The holding company that owns the Policybazaar franchise is PB Fintech. The holding company was undergoing the process of converting itself from a private limited company to public limited company. With the process completed, Policybazaar has gone ahead and filed for its Rs.6,500 crore IPO. Of course, filing the draft red herring prospectus (DRHP) with SEBI is the first step and after the SEBI approval, the IPO has to file the RHP with ROC. But, the Process of the IPO has surely been fast-tracked.
Policybazaar commenced operations in 2008 as a digital answer to the problem of selecting the right insurance policy. The Policybazaar platform facilitates research into various insurance policies, comparison on features, screening of comparative policies, zeroing in on the right policy and also doing the fulfilment of the policy through appropriate sales channels. For that, Policybazaar uses a combination of content, community and commerce to better inform customers and advise them on the right choice.
For FY20, Policybazaar reported net loss of Rs.218 crore on revenues of Rs.515 crore. The CEO in an interview had hinted at revenues crossing Rs.1,000 crore in FY21. Policybazaar has marquee investors like Softbank, Temasek, True North, Tiger Global, Bay Capital and Premji Finvest. Policybazaar is expected to be valued on listing at $4-5 billion.
Ultratech Q1 thrives on higher volumes and utilization
Most cement numbers were expected to do well in this quarter and we saw indications from ACC results. However, Ultratech Cements is the largest Indian cement company by a margin. It reported 54% sales growth but there was more to the Ultratech story in the Jun-21 quarter. Cement sales volumes were up 47% YoY while the cement capacity utilization ramped up from 46% to 73%. With cement production of 21.53 MT in the Jun-21 quarter, it made all the difference.
Let us now get to the specific top-line and bottom-line numbers. Ultratech Cement reported 54.21% growth in total sales revenues for the Jun-21 quarter at Rs.11,830 crore. During the same period, the net profits more than doubled to Rs.1,703 crore as the combination of higher volumes and higher capacity utilization became a force multiplier for profits. Like in the case of most industries, sequential sales and sequential profits were lower due to COVID 2.0, but that is a temporary phenomenon. What matters is that cement is having a whale of a time with the government spending heavily on infrastructure and Ultratech, being the market leader, is an obvious beneficiary of this trend.
Read: Cement Sector Updates
If you thought that higher volumes and higher capacity utilization must be a simple business, think again. Ultratech had to contend with 7% spike in raw material costs, 12% rise in power costs and 6% higher logistics costs. It managed to compensate for these costs through cost controls and inventory efficiency gains. For the quarter, Ultratech reported Rs.1,689 as EBITDA/ton, which is at par with the best in the industry. The best story of Ultratech came from the net margins at 14.39%; better than 10.35% in the Jun-20 quarter and 12.32% in the sequential Mar-21 quarter.
Government looks all set to hive off BEML
Going by the recent reports it looks like the BEML stock may be ripe for divesting by the government. As per the latest reports in the press, the government may have just about shortlisted the potential candidates for taking over the 26% stake in BEML. Whether the stake is handed over to 1 company or to multiple companies is a granular decision. The 4 companies shortlisted for the 26% stake in BEML are Tata Motors, Ashok Leyland, Bharat Forge and Megha Engineering. Megha Engineering is a Hyderabad-based player in infrastructure projects execution.
First, the background of this stake sale! DIPAM had originally set 01 March as the deadline for submission of expressions of interest (EOI). This was later extended to 22 March due to COVID 2.0. Now the bids have been analyzed and evaluated and as per reports, the four companies have been shortlisted. The government currently holds 54% in BEML and this stake sale of 26% will make the government of India a minority shareholder in BEML. While divestment price is not known, BEML currently has a market cap of Rs.5,350 crore so the 26% stake would be worth around Rs.1,390-1,400 crore.
BEML is one of the mini-ratna companies of the government and has a strong positioning in defence production, mining, aerospace, construction and even the manufacture of metro trains. Incidentally, BEML also manufactures critical military hardware like the launchers for the Prithvi Missile. Among the bidders, Tata Motors, Ashok Leyland and Bharat Forge have a strong defence franchise in their business models. BEML would help them add defence capabilities at a reasonable price. For the government, it will be one more small step towards its coveted Rs.175,000 crore divestment target for FY22.