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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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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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