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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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FMCG being the star sector of FY21, bleeds in FY22

by 5paisa Research Team 19/10/2021

Macro Environment overview of FY22 so far

- With layoffs and salary cuts, majority of the households have felt the pressure so much so that their spends on the daily essentials dramatically reduced. No new household have been formed with a deceleration seen in the household sales. Hence, no new consumption sales have seen any demand either.

- The trend of spending towards need-based consumption over discretionary consumption still continues in FY22. As buying daily essentials is wiser than buy a piece of furniture (worth a week’s or month’s grocery) as we survive through the Pandemic.

What has led to such muted performance in FMCG sector in FY22 so far?

  • The consumption rate of various daily essential products has been capped at present. Going forward, the FMCG companies must achieve equal or greater than equal sales growth numbers in order to remain profitable. Else, profits made by some would be at the cost of others.
  • The demand trend in private consumption, which makes up ~60% of Indian economy, continues to underperform. Such laggard performance, directly affects the GDP growth. Technopak estimates 9.5% GDP growth in FY22.
  • The Indian commodity prices trend to hold their high guard and would refuse to get any cheaper before December 2021 or January 2022
  • With Covid restriction easing, allowing wedding celebrations, malls, restaurant, etc. to operate, the demand and spending is diverted from core FMCG services.

Food & Non-food FMCG perfomance:

With food services being suspended by COVID-19 regulations, demand drove from food services towards packaged foods. This boosted the Food-FMCG sales and would continue to do so, if the demand for food services do not rampant upon restrictions easing.

The non-Food FMCG products are gaining tractions with D2C brands offering products that are of premium quality but at reasonable rates. Such companies become favourite acquisition targets of FMCG majors

Technopak estimates Food-FMCG to grow to ~11.5% and Non-food FMCG to grow to ~7.6% in FY22 

Inflation crisis

For the remaining of FY22, the Inflation is expected to be around ~5% levels and does not seem drop 5%. It is assumed that the Inflation trajectory will rather be gradual than a sudden increase depending on various economical factors and the stability to be achieved by FY23

Inflation directly affects the FMCG sector as it affects the raw material prices and income. Prices increasing is a common phenomenon in this sector, however this happens when its understood that the inflation is not temporary.

Business strategy to abide by:

The bigger FMCG players are speeding up to gain and consolidate their market share in their core markets. In turn, causing a relatively heavy effect on the smaller players in the same market.

  • With increasing inflation and possible decline in sales, the FMCG players will be more focused on maintaining their margins. The only way to attain this is scrapping the distributors cut and selling the product directly to the customers.
  • The D2C strategy works well for the bigger players to stay relevant, gain online presence and get secondary data to provide last mile delivery. The strategy works simply acquisition of a D2C brand once it achieves a certain level of success in the market.

Why D2C Brands? D2C brands are quick in capturing a niche market, lesser rigidity and more efficient operations, transparent in service and prices, have an omnichannel (online & offline) of selling and to grow beyond a certain level strategic investment is required which the bigger FMCG player can easily provide with.

  • The regional players have a strong grip on their market share and continue to do so.
  • Some of the FMCG companies have also learned to diversify their catalogue. These companies support innovation of products beyond their traditional products and have achieved organic growth. ITC is being the prime example.

Growth inhibitors of FMCG major players

- The traditional FMCG players are getting a tough competition from new private labels in FY22. DMart gains ~30-35% sales alone from its private players.

- The increasing inflation and decreasing demand, will lead to a stunned growth. The decreasing demand especially from rural and semi-urban areas affects the growth on a larger scale.

- FMCG players face certain limitations in regards to innovations. These limitations come from scarcity in number of quality retail shelves. For example, innovating temperature-controlled products would not feasible if the retail shelves are not available for them.  

- The FMCG sector has seen a robust growth in emerging players who now capture new demand worth Rs. 30-40bn. This trend is celebrated and is expected to continue in the future.

Festive season expectations

With festive season around the corner, Covid restriction easing and the rumor of third wave fragmenting, the FMCG players are hopeful of a good performance Q3FY22.

The expectation of increase in demand is expected to be good in areas where malls and food services are now operational. The sales growth targets may be achieved in anticipation of with various products bundled together and offered as gifts.

Digital operations are also expected to continue with trade operations operating at full speed.

Advertisement & Sales Promotion
It is predicted that the companies may spend on their sales and marketing strategies little more than they did in FY21. This is due to the increased competition among the market players. 30-35% of the spending is expected towards digital marketing to reach larger crowds. Companies with single products might be impacted more than companies with diversified product portfolios.

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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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