TOP NEWS
Steel Sector: Domestic steel companies has lowered domestic steel price for July 2022 due to weak demand environment. We highlight here that SAIL cut its steel price by Rs. 2000-7000/tonne while JSW Steel lowered price by Rs. 4500-5000/tonne and expect other players to also cut domestic steel price. Weak domestic steel price remains a concern on margin of steel companies and is negative for JSW Steel, Tata Steel, JSPL and SAIL. WE have Hold rating on JSW Steel, SAIL and NMDC.
Tata Power: The company has inked a pact with the Tamil Nadu government to invest Rs 3,000 crore for setting up a new facility to manufacture 4 GW solar cells and 4GW solar modules. The investment in the plant will be made over a period of 16 months. This is well known in the market and solar cell and model unit would help reduce margin volatility in solar EPC business. We have Buy rating on Tata Power.
TCS: In TCS-Epic Systems case, a US court in the western district of Wisconsin passed an order reducing the jury award of punitive damages to $140 million on TCS. Epic Systems filed a lawsuit against TCS in 2014 alleging TCS had taken its intellectual property. In 2016, Epic won a jury award of $940 million. In 2017, the Wisconsin court judge lowered the amount of the award to $420 million to comply with caps on punitive damages in such cases. TCS had filed appeals in the higher court. In August 2021, a US Court of Appeals held that the punitive damages award of $280 million was excessive, and reduced damages to $140 million. TCS had provisioned Rs 1,218 crore ($165 million) towards this legal claim – sentimentally positive for TCS given the successful reduction in the punitive damages from $940 million to $140 million. Further, we believe TCS may appeal in the court again to reduce the punitive damages amount further.
Cipla: The Indore plant underwent a pre approval inspection between 27th June 2022 to 1st July 2022 and the inspection ended with a form 483 being issued with 2 observations, none of which are related to data integrity issues. The company would be submitting its responses in the stipulated time frame. The receipt of Form 483 with 2 observations is negative
HDFC Bank: Bank receives RBI nod for merger of HDFC Ltd with Bank. RBI`s approval is a big step in merger process. The merger proposal now remains subject to approvals from the Competition Commission of India (CCI), National Company Law Tribunal (NCLT), other applicable authorities and the respective shareholders and creditors of the companies.
RK Forgings: The credit agency, India Research and Ratings, has revised the company’s outlook upwards to positive from stable and the rating is affirmed at IND A/A1. The revision reflects improving scenario automotive business across segments and the company’s robust order book. Positive
Restaurants; Hotels: The Central Consumer Protection Authority (CCPA) barred hotels and restaurants from levying service charge automatically or by default in food bills and allowed customers to file complaints in case of violation. Restaurants/ hotels have to inform customers that service is voluntary, optional at consumer’s discretion. Restaurants and hotels generally levy a service charge of 10 per cent on the food bill - notification by CCPA is negative for fine-dine restaurant/QSRs/hotel companies as it will have impact on margins in the near term. However, we expect restaurants and hotels to increase the menu prices to deal with inflation.
Britannia, Nestle, United Spirits: Russian wheat export prices fell last week due to pressure from the new crop, which farmers have just started harvesting, a reduced export tax and a decline in Chicago prices. The average yield was 2.73 tonnes per hectare, up from 2.35 a year earlier. Prices for the new wheat crop with 12.5% protein content and for supply from Black Sea ports fell by $25 to $375 per tonne free on board (FOB) at the end of last week.
View: Fall in the Russian wheat prices augurs well food and liquor companies such as Britannia Industries, Nestle India and United Spirits as the input cost is expected to reduce and would support the margins in the quarters ahead.
MACRO WRAP
§ China`s June Services PMI at 54.5 better than expected vs 41.4 in May
§ India`s June Trade deficit at record high of $25.63 bn, while India's exports rose by 16.8% yoy to $37.94 bn in June a monthly record high; Imports expanded by 51% yoy to $63.58 billion in June. Cumulative exports in April-June 2022-23 rose by 22.2 % to $116.77 billion while imports increased by 47.3% to $187.02 billion during the period. The trade deficit during the first three months of this fiscal year widened to $70.25 billion from $31.42 billion in the year-ago period.
INVESTMENT CALL
Sector update: IT sector Q1FY23 earnings preview: Mixed bag quarter ahead, uncertainties abound
Q1FY2023 is expected to be a steady quarter in terms of sequential revenue growth for IT services firms amid an adverse macroeconomic environment. Resurgence of USD against global currencies will dent USD revenue growth rate.
EBIT margin of most IT service companies to decline sequentially, owing to higher retention costs, wage revision, visa costs, and rising travel expenses. Rupee depreciation is expected to offset headwinds partially.
We believe reduction of tech budget would be last in the enterprises’ priority list to lower cost base in a recessionary environment as technology investment drives near-term ROI and provides competitive advantage.
We stay Positive on the IT sector, given continued strength in the demand environment. Preferred picks - Infosys, HCL Tech, and TCS among large caps; Persistent Systems, Coforge, L&T Tech, and Birlasoft among midcaps.
Viewpoint update – Medplus Health Services: On a strong growth path
CMP: 756 View: Positive Potential Upside: 25%
We re iterate positive view on Medplus and expect an upside of 25%. Over the past three months, the stock price has corrected by ~26% and this provides a good opportunity for investors.
Medplus is likely to benefit from the shift towards the organised retail pharmacy, with the organised sector set to stage a much higher growth.
Focus on strengthening its market position by doubling store count over 3 years, increasing the store penetration in densely populated area, efforts to develop the omni-channel presence would be the key drivers.
Thrust to increase the share of lucrative private label business and maturing store network and plans to tap the healthcare / diagnostics space are the positives that would support the growth
Valuations (Consolidated - Rs Cr)
Particulars
FY2021
FY2022
FY2023E
FY2024E
Total Sales
3069.3
3779.3
4894.1
5879.1
Operating Profits
238.2
303.7
392.4
493.1
OPM (%)
7.1
7.2
7.3
7.7
Reported PAT
63.1
94.7
97.7
134.8
EPS (Rs)
5.3
7.9
8.2
11.3
PER (x)
142.9
95.2
92.4
66.9
EV/Ebidta (x)
39.6
32.0
25.3
20.1
P/BV (x)
12.3
6.4
6.0
5.5
ROCE (%)
12.7
10.5
10.0
12.2
RONW (%)
10.0
8.8
6.7
8.5
Tata Motors: Tata Motors held its 77th Annual General Meeting (AGM) held on 4th July, 2022 and discussed the future prospects and plans for the company. The key takeaways of the meeting are as follows,
· The performance of the company in FY22 was notable strong and has outpaced the industry growth. Against the overall industry volumes growth of 15% in FY22, the company's domestic business grew by 49% by volumes and 11.5% by revenues. The standalone business’ free cash flow for the year stood at Rs1,879 crore, despite margins being impacted by supply constraints and commodity inflation. Also, the company re-iterated its commitment towards becoming a near zero debt company by 2024.
· The companies gave a positive outlook for H2FY23 in terms of the performance, led by gradual improvement in the overall supply situation and stabilisation in commodity prices. The management is committed to restore profitability of the business.
· Tata Motors is eyeing a 5x growth in sales of electric vehicles (EVs) from the current levels by the end of 2023-24. The company targets to cross 50,000 cars in FY23 and 100,000 cars in FY24. EVs currently account for 7.5% of the company's passenger vehicle sales, which it envisages to go up to 50-60% in future. Further, the company expects its overall passenger vehicles sales (including EVs) to cross 500,000 units in FY23E versus 370,372 units in FY22.
· The company aims to get net zero emissions (Scope 1, 2 and 3) by 2039 for JLR, 2040 for PVs and 2045 for CVs. In this regard, the company has created a clear roadmap and has already taken several steps towards delivering the same.
· On the semiconductor supply situation, the company expects the supply constraints to improve progressively going forward.
· The demand for vehicles in each of the businesses, viz. Jaguar and Land Rover (JLR), commercial vehicles (CV) and passenger vehicles (PV) remain robust, despite the ongoing geopolitical tension, supply constraints and inflationary concerns.
· The management is taking concerted actions to be future ready and create value of shareholders through growth and returns.
· For the JLR business, the company is making rapid progress in its plans for developing a new generation of electric vehicles with our all-electric Jaguar strategy and BEV first EMA platform for new Land Rover products
· The management has shifted towards sustainable and mobility and it will remain company’s focus to remain leaders of green mobility.
View: We maintain a Buy on TAMO with a revised PT of Rs.516, driven by an expected recovery in volumes and operational improvement across its business verticals and geographies. Stocks currently trades at 12.9x P/E and 4.6x EV/EVBITDA on FY24E estimates.
OTHER NEWS
Consumer Goods: Indonesian government has announced an increase in export quotas in an attempt to cut bloated domestic inventories. The government will allow producers to export volumes at rate of the seven times their domestic sales obligation, which was five times earlier. The increase in the supply from one of the largest exporters of palm oil and lower demand in the global markets due to recessionary fears led to drop in the palm oil prices. September,22 future prices are down by 10%. The same is lower by 7% from its December,2021 high.
View: Decline in the palm oil prices is Positive for consumer goods companies, especially for soaps manufacturers such as HUL and Godrej Consumer Products (GCPL), as decline in the palm oil prices would release pressure on the margins. Further it is also positive for food companies such as Britannia Industries and Nestle India as the drop in refined edible oil will benefit them. Further drop in the palm oil prices will also lead to some softness in the other edible oils. Stocks such as HUL and Godrej Consumer products saw 4% jump in their respective stock prices. In last few days some of the key commodities such as Wheat, palm oil, sugar and other edible oil prices are witnessing softness which augurs well for entire FMCG basket. However, benefits of fall in the commodity prices would start flowing in from H2FY2023.
Marico: The company acquired additional 4.14% stake in Apcos Naturals to 56.12% from 52.18% earlier. The strategic investment in Apcos Naturals will lead to Marico participating in the premium, natural and ayurvedic beauty segment and capitalising on the growing direct to consumer (D2C) sales channel. The company is targeting digital brand revenue contribution to around Rs400-500crore over the next two to three years. Digital brands have premium brands and hence margins are expected to be higher compared to overall profitability of the company.
Emami: The company has acquired additional 5.51% stake in Brillaire Science Pvt. Ltd to 77.53%; Brillaire is into premium hair care brand, which largely sales products on the D2C platform – This is line with its strategy to build strong D2C portfolio.
Logistics: The value of non-petroleum and non-gems and jewellery exports in June 2022 was USD 26.75 billion, registering a positive growth of 4.0% y-o-y. The value of non-oil, non-GJ (gold, silver & Precious metals) imports was USD 36.7 billion in June 2022 with a positive growth of 31.71%- y-o-y. Positive for Gateway Distriparks, Container Corporation of India, Transport Corporation of India.
Adani Enterprises: As per media reports, the company has emerged as the lowest bidder in Coal India's tender for imports of the dry fuel with quoting over Rs 4,000 crore for supply of 2.416 million tonne, even though coal India is likely to 'negotiate the price.' Positive for the stock.
NTPC Limited: The company has registered a 21.7% y-o-y growth in electricity generation at 104.4 billion units in Q1FY23. Though directionally positive for NTPC but it's earnings growth is primarily driven by rise in regulated equity base given regulated RoE model.
Kotak Bank: RBI has imposed a monetary penalty of Rs. 1.05 crore on Kotak Mahindra Bank Ltd for contravention of the provisions of banking regulations related to non-compliance with customer protection guidelines. The penalty imposed is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers. Inspection report revealed that the bank failed to credit the eligible amount to the Depositor Education and Awareness Fund within the prescribed period.
IndusInd Bank: RBI has imposed a monetary penalty of Rs. 1 crore on IndusInd Bank Ltd for non-compliance with certain directions issued by RBI on Know Your Customer (KYC) directions. The penalty imposed is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.
Cholamandalam Investment and Finance Company Ltd: The company has entered into MoU with Kinetic Green Energy and Power Solutions Ltd to offer easy and smart financing for a range of battery-operated three-wheelers and electric two-wheelers. Cholamandalam has network of 1,145 branches across India. Vehicle Finance book contributes to ~69% of the AUM of the company. Its AUM and disbursement had registered a growth of 10% y-o-y and 36% y-o-y in FY22.
Tata Steel and NMDC: Tata Steel has completed acquisition of 93.71% stake in Neelachal Ispat Nigam Ltd (NINL) through its subsidiary Tata Steel Long Products at a consideration of Rs12,100 crore. NMDC also successfully offloaded its 10.10% stake in NINL and the same be shown as exceptional income in NMDC’s Q2FY23 results.
Aurobindo: The board of directors on 28th March 2022 had announced the approval for acquisition of business and certain assets of Veritaz Healthcare Limited, which is an India focused pharmaceutical company selling branded formulations. The acquisition is done for a consideration of Rs 171 crore and is within the purview of a related party transaction. Now Aurobindo has announced the closure of the transaction
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