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Interview with Tourism Finance Corporation of India (TFCI)

Interview with TFCI
by 5paisa Research Team 19/10/2021

"TFCI wants to play the role of an investment catalyst for Indian tourism sector"

In conversation with Anirban Chakraborty, Managing Director and CEO, Tourism Finance Corporation of India Ltd(TFCI).  

TFCI’s Q1FY22 net profit stood at Rs 21.20 crore, up by 27.96% from Rs 16.57 crore in Q1FY21. What factors have contributed the most to help you outperform?   

At TFCI, we have focused on expanding our well-diversified portfolio, which has continued to yield good results over the years. Our Net Interest Income increased by 10% YoY to Rs 32 crore from Rs 29 crore with an additional income of Rs 2.4 crore during the quarter, which had mainly driven the net profit of the company. A combination of a broad-based economic revival, substantial decline in active Covid-19 infections and a large segment of the population getting vaccinated across the country has helped in significant recovery for the hospitality sector. Though Q1FY22 was a challenging quarter, owing to partial lockdowns due to the second wave, the gradual reopening saw improvement due to pent-up demand, especially in leisure destinations during the latter part of the quarter.   

Can you throw some light on your plans to utilize the funds (Rs 65.18 crore) recently raised via preferential allotment to marquee investors?  

TFCI being a specialized institution and an industry leader in its segment, is well-positioned to witness a multi-year credit growth. Hence, the raising of Rs 65 crore via preferential allotment to promoter group and marquee investor entities led by Anurag Bagaria (Chairman & CEO, Kemwell Biopharma Private Limited) and P.S Jayakumar (ex-MD & CEO, Bank of Baroda) will go a long way in the strategic expansion of the company. This displays the confidence of the investor community in the business model of TFCI. These funds will be utilized to boost the company’s strong position in the lending ecosystem and to accelerate its strategic priorities. TFCI provides a long-term line of credit to projects in the hospitality segment and the company has the vision to play the role of an investment catalyst for the Indian tourism sector, while also diversifying into other promising segments.   

What are your top strategic priorities for business expansion?  

With the help of large-scale vaccination programs and relaxations being rolled out, the tourism sector is inching its way back to recovery. Various segments of the tourism sector are witnessing a surge in bookings due to pent-up demand from travellers. Also, events like weddings, etc, which were postponed due to lockdown are also driving revenues in a big way. Our foremost priority is to lend to those businesses which have a strong asset cover and steady cashflows which helps us to avoid delinquencies and ensures recovery, even during unexpected events like this pandemic. Also going ahead, the company plans to further diversify its book by lending to the education and healthcare sector as these sectors usually tend to face lesser disruptions in a situation like COVID. These initiatives will help TFCI in building a well-diversified loan book.  

What are your growth levers?  

As per the JLL’s Hotel Momentum India report, the hospitality industry in India witnessed a growth of 84.7% in terms of Revenue Per Available Room during Q2 2021 (April-June) as compared to Q2 2020. With several states across the country adopting relaxed lockdown measures and no quarantine requirements, we expect a further boost in demand for domestic travel.

During the last year, we have also witnessed a structural shift in demand from unorganized hoteliers to larger organized institutions. This was mainly driven by their inability to sustain their operations due to the long Covid-19 induced lockdown, a shift in consumer preferences towards better hygiene, and unavailability of extended credit lines to carry business as usual. These factors have created a demand-supply mismatch in the sector. We expect this supply gap to be met by the larger and steady players, and TFCI being one of the largest lenders to such organizations is poised to grow in the coming future.   

Furthermore, going forward, with economic activities gradually getting back to pre-covid levels we expect improved disbursements activity in various sectors. As of June 30, 2021, our CRAR stood at 41.95% and our recent fundraise will help us to boost our adequacies and aid in further credit dissemination.  

 

 

 

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Future shines bright for Divis Labs on the possibility of production of first ever oral COVID-19 drug

by 5paisa Research Team 19/10/2021

Merck, also widely known as MSD, and its partner Ridgeback Biotherapeutics reported robust results for Molnupiravir Phase 3 trials from the interim analysis. The drug is said to reduce the risk of hospitalization or death by 50% in patients suffering from Mild to Moderate Covid-19. The study gave viral sequencing data which showed its consistent efficacy across viral variants Gamma, Delta and Mu.

The companies plan to get approval from FDA EUA (Emergency Use Authorization) and other global regulatory agencies for the drug. If it succeeds in this, Molnupiravir will the first ever oral COVID-19 drug which can be taken from home without any healthcare facility support.

This would play a vital role in Divi’s Labs’ growth as it is the authorized manufacturer of Molnupiravir API for MSD in India. It has a completely fully integrated manufacturing process, hence could be one of the key suppliers, effectively impacting the company’s revenue growth.

With global players looking to diversify their suppliers and reducing dependency on one sole source for generic APIs, provides a positive outlook for Divi’s Labs. Divi’s has proven itself to address any growth concern positively and has highlights its six growth engines.

Upon EUA approval, MSD wins a supply contract worth of $1.2 Bn with the US government to produce 1.7m course of Molnupiravir at a price of $700 per course. It is believed that both the companies have begun stockpiling of the drug in anticipation. MSD expects to deliver a quantity of 10m courses by 2021 end and Divi’s Lab is expected to produce 1M courses in FY22e and 0.7M in FY23e for the US.

Divi’s Lab would generate a whopping revenue of $53M and $44M in FY22e and FY23e respectively. An ROE of 23%-25% can be expected for FY22-23e, EPS estimated to increase by 0.4-4.4% and adjust the operating costs and items below the EBITDA line. These estimates are in respect to the contract with the US Government alone and would likely to increase if the companies can sign supply agreements from other countries.

With the Voluntary License agreement between Divi’s and MSD, Divi’s labs would supply Molnupiravir in India and other low-middle-income countries (LMICs) while MSD retains its API supply rights in the US, EU and other regulated markets. Divi’s Labs received a custom synthesis project for Molnupiravir API in 2QFY21 with incentives for expedited completion and invested CAPEX of 4bn for three supply streams (two for exports and one for MSD’s VL partners in India). It has started operations of one of the export streams while the other two are assumed to start soon. A strong net cash position of cINR21bn and consistent cash generation allow it to comfortably invest for future drivers.

With such impressive future business expansion plan, some drawbacks may spurt out. Risk such as delay in pick-up of supplies which would impact the revenues, higher input costs and operating expenses, failure of compliance at the plants and weakening demand.

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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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