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Solar Industries India bags order Rs. 14.7bn from Coal India amid power crisis and coal shortage in the country

by 5paisa Research Team 19/10/2021

The country-wide coal shortage from the power industry has served as a boon for Solar Industries India. Looking at the current scenario, the sudden increase in coal demand and power generation, the company anticipates a stronger future outlook, beyond what they expected in 1QFY22.

The company won a Rs. 14.7bn order from its largest customer, Coal India. It is assumed that Coal India is increasing its inventory. The order is expected to be completed over the span of next 2 years and generating more than double revenue. Coal India is turning to domestic players as coal imported from foreign players is subjected to higher global coal and freight prices. This, in turn, affects the power plants revenue and productivity and serves as a positive notion for Solar Industries India.

The company in the past generated an average revenue of Rs. 3.2 bn (1% CAGR from FY2016-2020) over the past 5 years from CIL. From the recent order, the company expects to generate sales worth Rs. 8bn in FY22, Rs 10Bn in FY23 and Rs. 11.4bn in FY24. Apart from this, the rising price of ammonium nitrate (increased by 20%) also factors in for the revenue growth of the company as it generally passes the cost onto the customers. The sales growth is presumed to stand at 24%, EBITDA at 24% and EPS at 28% for FY24. The expected RoE in FY22 stands at 25.3% and in FY23 at 27.4%

Taking these two factors into consideration, the management firmly believes a ~15% price growth during FY22 which may revise upwards. The target price may be revised to ~Rs. 3342 with a ~20% growth in price and 40% revenue growth from Coal India in FY23. However, these assumptions do not take correction into consideration which may lead to some cut in the earnings. The stock is already 35% in the last one month. It is trading at 12-month forward PE of ~36x (+1 SD) and has the potential to trade at +2 SD on the basis of robust business growth potential.

On the whole, the revenue CAGR is expected to register at 34% and the earnings at 47%. These valuations are backed by higher entry barriers, healthy growth, domestic scale up s (pick-up in mining activities and revival in housing and construction sectors), exports and expansion in global markets, defense scale up (commencement of MMHG shipments and a healthy order pipeline) and margin prospects.

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A brief overview on Equitas Small Finance Bank gained public traction

by 5paisa Research Team 19/10/2021

Equitas Small Finance banks ranks the best amongst its peers in the Small Finance Business space with a diversified asset mix and a largely secured portfolio. It is the first bank to waive off NMC charges in January’21 and offered no minimum deposit limits.

With an experience of 8-10 years, the bank is victorious majorly because of the segments it operates in. These segments attract very little competition from its tradition peers and are scalable as they can provide tedious services such as credit assessment and underwriting process to the bottom-of-the-pyramid segment. The key identified segments of the bank are Small Business Loans, Home Loans and Vehicle Finance which are growing in a calibrated manner. While other Small Finance banks serve in MFI Lending, Equitas Small Finance Banks has an under-writing process set up which gives it an advantage over others. The underwriting process was built from the years of assessment of developed metrics of self-employed customers. The bank as successfully gained the secured loan book share to 81% in 2021 from 24% in 2013. The expectation is for the bank to grow to ~85% as MFI business share would steady at ~15% over the next 3 years.

The bank has been successful targeting and gaining semi-urban and urban audiences to source deposits, of more than 0.1mn, by offering a higher interest rate (7%). This strategy has outperformed its parameters as the CASA deposits increased to Rs. 82bn which portrayed a 153% YoY growth and 45% QoQ growth. The share of CASA deposits on YoY basis has increased as it stood at 25% in Q2FY21 and now stands at 45% in Q2FY22. To attract more potential clients, the bank has tied up with Aditya Birla Capital to offer broking and DEMAT account services.

The improvement of Equitas’ Collection Efficiency (CE) was estimated at 105% in July’21 with covid restrictions easing after dropping to 78% in May’21. The bank saw a good response in its CE from Dec’20, after the first wave when all the customers opted for moratorium as most of them belong to the earn and pay segment. The restructured book increased by 7.4% (RS. 13.3bn) till July’21 vs 2.4% (Rs4.3bn) increase in 4QFY21. In Q2FY22, another Rs. 5-8bn have been awarded for restructuring. Along with these, the reduction in unsecured loan business reduced which also aided in improving the asset mi quality. The banks hold a decent PCR of 51.2%. The expected losses are estimated at 2.1% for FY22E and 2% FY23E and FY24E each.

The operating profit CAGR of 25% is estimated on the terms of NIMs dropping to 8.2% (by 40bps), translating NII to 19% CAGR and operating leverage between FY21-24E. Interest yields are protected as 90-95% of advances carry fixed rate of interest while this may be revised as the bank moves up the value chain in the customer selection process and share of the micro finance bank tethers lower. With worst of the economy failures in the past, the improving CE, and the secured nature of loans should contain credit costs at ~2%, resulting in strong earnings growth.

The bank has a CAR of 24.1% with Tier 1 capital of 22.6% for it to sustain growth over the next 3 years. The estimated AUM stands at 22%, NII at 19% and PAT CAGR at 32% over FY 21-24E. The ROE and ROA are estimated 17.8% and at 2.3% respectively for FY24E. All these parameters with the strong momentum witnessed in n CASA mop-up while disbursements reached all-time high in 2QFY22, the future outlook for the banks looks strongly positive.

However, beyond the rosy picture hangs the risks associated with the bank. RBI has permitted Equitas Bank to apply for amalgamation with its Holdco - Equitas Holdings Ltd. RBI also published a guideline paper stating no more requires promoters to reduce their stake to 40% within 5 years. The interim dilution targets of ~5-15 years are proposed to be removed. However, the same has not yet been implemented. The onset of third wave which may affect the borrowing cash flows.

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TCS’ growth shines bright in Indian markets but loses its shine in global markets

by 5paisa Research Team 19/10/2021

The IT giant great recorded a phenomenal recorded a strong performance in India but faltered overseas. While Indian market grew by 14.1% QoQ, it declined by 2% in Continental Europe. While the dollar revenue grew 15.5% YoY and 4% QoQ on CC basis the INR revenue grew by 16.8% YoY and 3.2% QoQ. The key growth drivers were increased outsourcing, investment in building a digital core and growth & transformation agendas of clients. The industry level inflationary headwinds drove the EBIT margins to 25.6% (up by 10bps QoQ and down by 60bps YoY). Net Margin stood at 20.5% (up by 70bps QoQ and down by 50bps YoY). Negative currency impact and increase in sub-contractor expenses were two of the reasons that strained the margins.

All TCS verticals witnessed a double-digit YoY growth CC basis with Manufacturing leading the pack with 21.7% growth and Technology & Services showing the lowest numbers (14.8%). Manufacturing ran the show for TCS as there was a sharp growth due to increasing demand within the auto industry, specifically the EV segment. BFSI was a stellar performing vertical achieving quarterly run-rate of US $2bn alone by gaining momentum in winning large insurance deals. BFSI’s such outstanding performance makes TCS one of the largest providers of IT Consulting services & solutions in the BFSI industry globally.

Geographically, TCS gained maximum revenue in North American by 17.4% YoY CC basis across all the markets and while India led the show with revenue growth of 20.1% YoY CC basis in the regional markets.

The growth in North America was due to strong demand in BFSI, which is likely to continue. The growth in India was driven by demand in the insurance sector, banks in need of digital transformation, enhancement of payment infrastructure by the RBI and newly launched services to help market infrastructure institutions such as exchanges and depositories. Europe showed a muted growth as a large project came to completion, customers offshored more due to supply-side challenges that led to value compression, some issues surrounding demand and continent is expected to get better post vaccination drives. Q2FY22 witnessed various sizes of deals. Vertical wise, BFSI bagged deals worth US $2.1bn, Retail bagged deals worth US$1.2bn. Country wise, North America won deals worth US $3.9Bn

With their expertise in aviation industry over the years and their belief in the resilient behavior of the industry, TCS anticipates another 12-18 months for the industry return to normalcy. Hence, they believe to revive Air India, the perfect time would be now. With this vision, they successfully bought out the airline for US $2.4bn.

TCS’ Ignio, its cognitive software, also showed great performance over the quarter signing up 22 new customers and 8 go-lives. Ignio has helped one of the largest mid-western consumer banks of USA in reducing downtime of critical applications besides significantly improving operational resilience.

Along with this, TCS has successfully gained deals under their Horizon 1 initiative, many of which have turned to Horizon 2 and/or 3. The company has applied for 6,169 patents, including 180 applied during 2QFY22 and has been granted 2,100 patents

TCS seems to feel the heat of talent acquisition as it has the lowest LTM attrition rate (11.9%) in the industry even though it has increased compared to its previous quarters. Surely, the company will catch up on this front as Employees logged over 14.3mn learning hours in 2QFY22, 496,000 employees have been trained in agile methods, over 417,000 employees have been trained in multiple new technologies and would hire a total of ~78,000 freshers in FY22. By the year-end, TCS plans to resume 80-85% working from office with hybrid model and desired level of flexibility.

TCS continues to sound confident, not only about FY22 but also about the medium term with great performance across markets.

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India VS UK – who rules, who wins? How the tables turn!

by 5paisa Research Team 19/10/2021

Indian Equity Market has shown an aggressive growth even after the economy was beaten down by the pandemic. The Indian equity market has soared from its lows of March 2020, edging to beat the UK equity market in terms of market value and cut the chase to be among the top 5 world equity markets.

                 

 

As per the Bloomberg data of the combined value of companies with a primary listing alone, the Indian equity market value stands at $3.46 trillion, representing a 37% surge this year. While the UK market value stood at $3.59 trillion representing only a 9% surge for the same period of time. These numbers exclude the secondary listings and depositary receipts, which could show a far larger divergence between the two markets.

The boom seen in the Indian Equity Market was led by the higher growth potential of the Indian market, and IPO rush in the tech sector, with ample Indian startup companies going public. The latter has fueled the growth more, giving the developed markets a good competition, as the sentiment towards the Chinese markets seem to turn sour. Indian equity market strikes as a promising domestic stock market from among the developing nations. This potential was realised and backed by a stable and reformist political base.

The failure of the UK market to keep up with its stellar performance and hold its high horse is stained with the uncertainties with the Brexit concerns looming over it.

The BSE index, S&P BSE Sensex, has outperformed the major national benchmarks and surged more than 130% since its March 2020 lows. The investors were handsomely rewarded with ~15% (in dollar terms) annualized RoE over five years which is more than double of U.K.’s benchmark FTSE 100 Index returns that clocked at 6%.

According to Goldman Sachs Group Inc., India will attain the $5 trillion dollar share market capitalization milestone by 2024. The IPOs introduced in the next 2-3 years, alone, would add a whopping $400 billion to the market value.

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As Paytm’s IPO gains momentum, it attracts more and more foreign bidders.

19/10/2021

In 2009, Paytm was launched by One 97 Communications as their first digital mobile payment platform. The platform has found popularity among the crowds and now has a brand value of $6.3 billion. The platform allows cashless transactions at stores, mobile data recharge and top-ups, digital money transfers, bill payments, digital banking services, purchase tickets, play games, make investments and lots more. The platform also serves merchants’ needs such as advertising, loyalty solutions, offer products, etc.

The company has 333 million total customers, 114 million annual transacting users, and 21 million registered merchants.

Paytm is seeking to raise funds worth $2.2 billion through this IPO making it the largest ever Indian IPO over a decade. The IPO seems to gain traction since it was announced as it has been receiving demand from sovereign wealth funds (SWFs) and foreign institutional investors (FIIs) who value the company at $20-22 billion. There have also been talks of a SWF offering an investment of $500 million of shares as it expects the valuation of the company to grow to $30billion.

At present, the IPO has gained new investors on their list of bidders such as US-based Alkeon Capital, funds managed by Morgan Stanley, Goldman Sachs and Canada's CPPIB continues to be in talks with the firm’s anchor investment slot. Potential European companies who were looking to invest in, now scrapped off, Ant Group’s IPO, may invest their funds in Paytm’s IPO.

Paytm is hoping for a pre-Diwali IPO launch and waiting for the final green signal from SEBI, which should come through soon.

The $2.2bn IPO will be divided between fresh issuance of share and OFS (Offer For Sale) by its existing shareholders each worth $1.1bn, allowing Pre-IPO round to raise ~$270mn (approx. Rs.2000cr). The details of Pre-IPO round are not written in stone as they would depend on investor requirements, tax implications and the lock-in period.

Founder Vijay Shekar Sharma, and firm’s key shareholders such as SoftBank, Ant Group and Elevation Capital will sell a part of their stake in OFS.

Paytm IPO’s draft red herring prospectus said 75% of public issue will be reserved for qualified institutional buyers (QIBs) out of which Up to 60% may be allotted to anchor investors, 15% is for non-institutional investors and the balance 10% for retail investors.
 

 

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Tata Motors wins binding agreements worth US$1Bn with TPG and ADQ for expansion in the EV industry.

by 5paisa Research Team 19/10/2021

Tata Motors won a binding agreement with PE firm, TPG, and ADQ worth US$1Bn for an 11-15% stake in its newly formed subsidiary, TML EVCo. Post money, the valuation of the new company would stand at ~US $9.1Bn.

The investment will be down in two phases. First 50% will be done by March 2022, post completion of setting up of the EVCo and second 50% by 3QCY22 on accomplishing “Go Live” actions. The investment will be in compulsory preference shares which will later convert to Equity, generating revenue threshold for 11-15% stake.

With this valuation, the revenue and EV penetration estimation would stand at ~9.8x EV/Sales ratio for FY24E. Such high EV/Sales valuation makes the company at par with world EV leaders such as Tesla which commands an EV/Sales of 10x.

However, the right valuation of an EV would be on the basis of strong correlation between EV OEMs’ valuation (EV/Sales) and their revenue growth expectations with the OEMs' market share. Even though Tata Motors does suffice this criterion, it might not be a “winner” just yet in India EV reason being its low volumes and the markets demands hierarchy changes as many players enter the market. Also, the valuation may also stand the test of low public charging infra roll out and low range of cars on sale as the popularity for EV is yet to gain traction from the general masses.

The new venture investment would serve as a boon to the new subsidiary. The company focuses to infuse excess of US$ 2.2 bn over the next 5 years and launch 7 new EV models, EV platform and transitioning from pure conversion models to an adapted platform for EVs gradually. In the 5-year road plan, the company aims to 20% sales from the EV division EV penetration of PVs in double digit. The management aims to achieve EBITDA break even by next year as the contribution margin of EVs is close to rest of PVs for Tata Motors.

The key concerns for Tata Motors still remain with revival of JLR and tackling with the competition in luxury end EV market players such as BMV, Tesla, Merc and Audi. Thus, if the demand persists and grows, it will get more difficult to keep up.

Additional concerns that the company have to tackle would be Brexit, US tariffs, higher than expected incentives, and slowdown of key auto markets its caters to such as US, China and Europe.

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