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DMART reported a robust growth in Q2 FY22. Can the retail giant continue the trend?

by 5paisa Research Team 19/10/2021

The retail giant, DMart’s bullish momentum spills into Q2 and there seems to be no looking back. This is proved with the stock price zooming 94% in one year and outperforming the Nifty50 benchmark which only grew 54% in the same period.

The retail giant vows to its winning business model which has resulted in a whopping 46% sales growth in Q2, year on year basis, giving a tough competition to its competitors. The company successfully added 8 more stores in Q2, reaching a new total of 246 stores.

With such success, one may also question its high valuations. Is the high PE of 239 justifiable? Or is the 106x FY23e PE fair in correlation with its fundamentals? Can this affect the company’s ratings in the future?

So far, the company seems to have a clear positive outlook on the long-term view and would continue to do so.

DMart’s business model earning profits through scale and lower costs makes a strong case for its future valuations. This is evident with the company’s performance throughout the disruptive times caused by a deadly worldwide pandemic. While majority of the industries and companies suffered painful losses and shutdowns, DMart managed to rise above the crowd.

With its own pace of the network roll-out and increased in-store demand, DMart has managed to expand its business by opening 8 more stores. Since the grocery market is dominantly captured by “mom and pop stores” (about 95%), it gives immense space for the retailer to grow 10x than what it is today. 

To defy the argument of expensiveness, if the company continues to grow at the current pace, then the market would assign and price in a 16% long-term earnings compounding, which the company can successfully achieve over a decade’s time.

On the stock front, the stock behaves like a defensive stock when the bear market strikes and outshines when the bull market comes into play.

The above-mentioned points support the arguments for the expected higher valuations of the company and also justifies the potential high growth and an estimated revenue CAGR of 26-27% over a decade.

However, an investor must also factor in the drawdowns the company may face. The price-based competition from ecommerce competitors can put stress on the SSSG and gross margins, keeping up with the pace of network roll out each year and the effect of Covid-19 on the macroeconomics leading to the slowdown of demand.

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Liquidity - a boon or bust? RBI’s attempt to recover and stabilize the economy

by 5paisa Research Team 19/10/2021

With the economic recovery coming into play, there is a sense of mixed feelings looming over.

Increased activities showed the recovery tracker rising from 103 to 105, and the PMI long-term average rising up to 53.7 from 53.5. This change came from both increased exports and imports activities. Until September, exports proclaimed higher figures, however, since September imports picked up too which also signified the demand from the domestic market. Another signifier was the higher than budgeted Tax revenues, especially the Corporate Tax Collections. With a positive trend reversal and increased vaccination rates, the up-coming few months also seems to have a strong positive outlook.

The picture isn’t as rosy as it may seem. The recovery tracker has only moved 5% above the February 2020 levels, core industries remained 2% below pre-pandemic levels, exports were 17% above the pre-pandemic levels and domestic consumptions remained 7% below the pre-Covid Levels. The sluggishness may crop into the recovery at the cost of growing inequality. 80% of the informal sector population has felt the burn due to the pandemic and same was the case during demonetization.

The Balance of Payments will likely to be in surplus for the coming few years. However, this may reduce with the rising trade deficit amounts coming from the workplace mobility coming into force and higher oil prices. Even with this, the increased capital inflow coming from asset-monetization, private equity, IPO Funding for start-ups, and inclusions of global bond indices may mean that RBI would continue purchasing dollar for longer adding to liquidity.

The CPI heading Inflation was higher than RBI’s 4% target for 23 months while CPI core inflation was above 4% for 18 months. The cost push inflation showed the elevated energy prices with the prices of coal, crude and gas soaring globally. In India, core CPI has high correlation with the energy prices. The rising prices indicates worries looming over the CPI forecast. Another worry comes with inequality-driven inflation as large companies gain pricing power.

The liquidity is close to 12Trn which higher than FY21 when there was so much uncertainty regarding the pandemic and vaccines. Such high levels of liquidity may cause problems such Asset bubbles, lower returns to depositors (almost negative to pensioners) and striking inequality at firm and individual levels.

Looking at the increased liquidity and inflation, the issues will be addressed at the 8th October policy meeting. The meeting would focus on liquidity-neutral operation twist actions for OMO bond purchases, hiking reverse repo rate to 3.75% from 3.35%. These hikes would only be followed in H2FY22 and would later be reversed from accommodative to neutral. Hopefully, there would be steps taken by the RBI towards liquidity as well.

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Sri Lanka’s fight against the recurring COVID-19 waves

19/10/2021

Sri Lanka seems to be beaten down by the recurring Covid-19 waves. Even before it could recover from the third wave, it found itself fighting with infectious fourth wave. The mortality remained high with its positivity rate close to 15%, however, the reproduction rate lowered. The only way out of this viscous cycle would be vaccination. 68% of the Sri Lankan population has received at least one dose of the vaccine which is higher than the 45% global average. 

The country’s growth started on a positive note but come June, it plummeted back into the red zone. The onset of third wave, the recovery momentum weakened. Port activity, IP growth and electricity demand all went down.  However, this only lasted until June when their PMI came out of consolidation. But again, this didn’t last long as the fourth wave restricted further growth. The country announced 6-week nationwide curfew, although this time around garment, construction and export industries were permitted to function. For now, the economic growth would rely on the increasing export with increasing global recovery. Tourism would still be shunned upon due to the recurring waves. The overall GDP is expected to grow at 3.5%

The inflation seems to be rising. In August the Core Inflation breached the 4% target for the first time, while the headline inflation is expected to grow at 5.8% in H2FY21. Higher oil prices, pandemic-related supply disruptions, and currency depreciation are some other pressures mounting on inflation.

With the global recovery and higher import bills, both the exports and imports have been performing well and have crossed the pre-pandemic levels. Remittances income coming from abroad played a vital role in the current account. After sluggish years of 2018 and 2019, the country saw a stronger inflow in 2020 and the same momentum is expected to continue in 2021. However, the inflow has dropped in the past 3 months.

After a shortfall in May 2021, the tourism has significantly increased in August. However, the increase is only 5% in the recent months as compared to the normal times. Even if the tourism doubles in December in comparison with August, the tourism economic contribution would still remain low. For the tourism to really pick up, the country would have to control the recurring pandemic waves, increase the vaccination drives and wait for the international travel demand to recover.

During a policy meeting held in August, the central government unpredictably increased the policy rates by 50bp and the statutory reserve ratio by 2ppt. This caused increased inflationary pressure and external sector imbalance. The official reserves of Sri Lanka have gone up to $3.8 bn from $2.8bn with little help from IMF. There is also undue pressure on the exchange rate due to increasing trade deficit caused by higher imports, limited conversion by exports and some speculative activities.

Given the concerns and to tackle them accordingly, the central bank may hike policy rates again by 50bps in H1FY22 and later another 50bps in H2FY22.

The recurrence of the Covid-19 waves has cost the $80b Sri Lankan economy to deal with an amplified amount of debt of $47bn and the fiscal outlook remains uncertain. The high fiscal deficit level is expected to remain the same at the 202 levels. The public debt has touched 100% of the GDP.

Only in the recent has the Sri Lankan government decreased its dependency on the foreign funding. The country has high pressure of repaying the public debt of 4bn each year until 2025. Even though the government is making all possible arrangements to repay the debt, there is an urgency to find a long-term solution to roll over debt at a reasonable cost. Until the government finds a solution, uncertainty looms over debt repayments and external sector which may scare the investor and keep them away which is desperately require for the sustainability and growth of the economy.

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Will Oberoi Realty really enjoy the festive season?

by 5paisa Research Team 19/10/2021

After a rather grim start of the year with only Rs. 1.7bn worth sales booking in Q1FY22, Oberoi Realty (Market Cap: Rs. 341bn) reported a stellar Q2FY22 performance with sales bookings worth Rs. 8.3bn across 200 units with no new launches in the quarter. This performance can be compared to the Q4FY21 sales bookings worth Rs. 9.7bn which came from sustenance sales excluding the Rs. 9.9bn worth sales that came from Elysian Goregaon alone. Hence, beating the Q4FY21 performance totaling to Rs. 19.6bn still seems like a distance journey.

The company is gearing up for new launches in Thane, Borivali, Mulund and multiple other locations across the city in H2FY22. However, the timing and quantum is still undisclosed. The expected future sales of these are projected at Rs. 35bn and Rs. 45bn in FY22E and FY23-24E respectively on the basis of new launches near completion or completion of the existing inventory. The company expects to win Occupation Certificate (OC) for their 360 West project in Worli in, the next quarter, Q3FY22.

On the annuity business side, the company is pacing steadily towards its target of Rs. 10bn from exit rental income and anticipation of commencement of Commerz III office and Borivali mall by March’24. Although, FY22 maybe serve as a speed breaker in this race to reach the end goal with Work-from-Home still in play and repeated shutdowns for malls. While the expected development properties sales value is projected at Rs. 53.28bn in FY23E and Rs. 48.39bn in FY24E.

In the list of future plans for the company, Oberoi Realty prepping to step into the society redevelopment projects in Mumbai city. The company is eyeing projects that would generate a revenue worth Rs. 5-7bn each and is already in talks with few key persons for the initiative to materialize. The company is working on an agreement with Shivshashi Society in Worli and make it their first project in this market.

On the stock front, broking houses have downgraded stock recommendation to “HOLD” from “BUY” as the stock price has zoomed 43% in the past 3 months. The target price has been revised from Rs. 938/share from Rs. 792/share on the assumption of a robust growth in sales and increasing premiums on NAV (20% vs 10%) on growth opportunities basis. The shareholding pattern of the promoters and institutional investors remain pretty much the same while FIs/Banks and MFs marginally increase their stake and FIIs and others marginally decrease their stake in the stock.

On the financial front for FY22E, the net sales are expected to report ~13% growth, PAT is expected to increase from 7.2% to ~38.6% and EBITDA is expected to increase from -4.5% to ~18.0%. However, the expected RoE and RoCE show a negative growth. Expected RoE declining to 6.9% from 8.2% and expected RoCE declining from 11.8% to ~11.6%. Total assets and total liabilities are expected to increase by ~12%.

The risks associated with the company is higher than expected share price on the upside and declining demand for the residential projects on the downside.

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Will the Paint companies lack luster or shine come the festive season?

by 5paisa Research Team 19/10/2021

With Covid restrictions easing and economic revival, the paint industry is gaining steady demand for paints from project business sector. This is concluded from the conversations held with various paint dealer hailing from UP

According to the dealers’ statements, the quality of the paints of organised paints is more commendable and superior over the unorganized paints. Akzo Nobel seems to be gaining more popularity, loyalty and traction from its audiences majorly because of the quality their paints offer. It is rated with the “Best” quality tag.

Covid restrictions easing and economic revival has sent cheers to project business sector. Both organized and unorganized paint companies are facing a good momentum as builders and developers are looking for more cost efficacy in their spending in anticipation of higher revenues eventually. On this stance, Asian Paints, enjoying a rather higher revenue share, beats Akzo Nobel as the latter offers comparatively more expensive products.

Velvet”, a brand of Akzo Nobel, led the victory for the company with strong off-take in sales. With such commendable performance from the brand, the company plans to launch new range under in it in the coming months. SmartChoice along with Velvet brought in more business, while Weathershield and Ambience brands had a weaker support of the company.

With increased number of players and increased competition, it is not easy for everyone to achieve turnover targets or get higher commissions for the dealers even if the schemes all of them offer are mor or less similar. For instance, Asian Paints benefits from their higher revenue share which makes it easier for them to attain turnover targets while it becomes difficult to do the same for its competitors especially ones like Akzo Nobel that offer products at premium rates

The prices of the products were increased in 2-3 tranches in Q2FY22 by all companies. The market approved of this change as the volumes did not seem to be affected with raised prices. However, this may affect the premium product segment more as compared to the economy products. One of the reasons the company may face some heat for demand in September quarter would be delayed Diwali.

The sector appears to lack some stability in standard policy making. As a result, the smaller paint companies constantly make changes in their policies which has a domino effect on hurting the business. The dealers are affected which the attrition in key salesmen and eventually affecting the customers too.

The risks that the companies may enjoy on the upside are higher than expected gross margins due to dip in the input prices while on the downside the companies may face challenges coming from increased competition and decreased demand.

 

The valuations and rating of the companies are calculated on the basis of DCF methodology and are mentioned as below:

Company

Market Cap (Rs. Bn)

CMP

TP

Rating

PE x (FY22E)

CAGR %

 (FY21-23E)

RoE % (FY22E)

RoCE% FY22E

PAT

REVENUE

Akzo Nobel

101

2,247

2,800

BUY

36

26

17

22

21

Asian Paints

3,217

3,212

3,400

ADD

80

17

17

28

25

Berger Paints

813

821

800

HOLD

92

19

17

24

21

Indigo Paints

123

2,499

2,800

ADD

90

59

30

19

22

Kansai Nerolac

329

646

680

ADD

55

18

18

15

14

 

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Piramal Enterprise and Piramal Pharma: The most awaited demerger.

by 5paisa Research Team 19/10/2021

The multi-sector conglomerate gets the final approval for the demerger of the company into two segments Pharma and Financial services. The demerger will birth two new entities namely, Piramal Enterprises Limited (PEL) and Piramal Pharma Limited (PPL). The two companies will operate as separate entities with its own dedicated Board members and management that will strengthen the governance architecture, create optimal revenue, empower and grow (organically and inorganically) independently and create greater value for their shareholders.
In the Pharma business, PPL will be amalgamated with the existing two subsidiaries, Hemmo Pharma Private Limited and Convergence Chemical Private Limited. While on the financial Service business side, PHL Finvest Private Limited will be amalgamated with PEL and be turned into a listed NBFC. However, DHFL will remain as the wholly-owned subsidiary of PEL.

Both PEL and PPL will be separately listed on NSE and BSE. On the shareholding pattern front, PEL shareholders will get 4 shares of PPL for every 1 share of PEL in addition to their existing PEL holding. There would not be any cross-holdings and minority stakes.

Post the demerger, PPL will have Equity of Rs. 68bn allocated to it while Rs. 110bn will remain with PCHFL. PEL would have a Balance equity of Rs. 170bn against which is would be holding assets worth Rs. 90bn - 100bn. Even post the merger, PEL will continue holding cash and cash equivalent worth Rs. 70bn which it did even before. PCHFL’s net debt to equity ratio will be 3.5x in near term post the integration with DHFL.

On the tax front, there will be no incremental tax liability with the merger and demerger of companies.

Cash worth Rs. 125bn from DHFL balance sheet will be used to pay off its creditors. DHFL’s network will be leveraged for cross-selling of existing retail products in the future

PCHFL will also inherit the life insurance from DHFL which is under scrutiny and the firm is analysing various options available.

However, this demerger plan is yet to get approvals from the shareholders, creditors and regulatory bodies. This process is expected to take 9-10 months to come to completion. The target price has been revised to Rs. 2933/share from Rs. 2797/share as the demerger will boost the valuations of the enterprise.

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