Fundamental News Analysis (FNA) for 8 July 2022
Alert: M&M’s EV business got BII as its first investor at valuation up to Rs 70,070 crore
M&M: British International Investment (BII), formerly known as CDC Group, has executed binding agreement with Mahindra & Mahindra (M&M) to invest up to Rs1,925 (US$ 250 million) into a wholly owned subsidiary of M&M that will be incorporated (EVCo). M&M will also invest Rs1,925 crore in the company. BII will invest up to Rs 1,925 crore in the form of compulsory convertible instruments at a valuation up to Rs70,070 crore for a stake of 2.75%-4.76% in the EVCo. BII and M&M will invest in two tranches, the first tranche of up to Rs1,200 crore each and it is expected to complete before 30th June 2023. The second tranche of investment would be up to Rs725 crore each from M&M and BII, which is expected to made post completion of certain milestone in FY24. The total capital infusion is expected to be ~Rs8,000 crore (US$ 1 billion) between FY24 and FY27. EVCo will focus on four wheel (4W) passenger electric vehicles. Both BII and M&M will bring other like-minded investors in the EVCo to match funding requirement in the phased manner.
View: The EV Co. will be leveraging manufacturing capabilities, product development, design organizations along with the ecosystem of suppliers, dealers, and financiers of M&M. The funds will be utilized primarily to create and market an electric SUV portfolio with advanced technologies. The company plans to lay down detailed plan for its born electric vehicle roadmap in August 2022. We believe M&M’s commitment for EV is taking a shape and will be a key growth driver and value unlocking for the company in future as well. The total investment in the EVCo is around Rs400 crore in FY22, which 1.03% of M&M’s networth. The valuation of BII’s stake in EVCo amounts to ~50% of M&M’s current market capitalization. We reiterate our Buy rating on the M&M, which has been our preferred pick in the automobile space.
Tata Motors: As per media, China is expected to extend and announce tax incentive to spur consumer demand electric vehicles and outline plans to build more charging stations and encourage lower charging fees. This is positive for Tata Motors, which has significant exposure in China. Also, Jaguar Land Rover reported sales volumes at 78,825 units for Q1FY23, down 37% YoY and flat compared to previous quarter. The JLR numbers are in-line with expectations. JLR continues to have a record order book of 2 lakh units. The supply constraints are on back of global chip shortage, run out of the prior model Range Rover Sport and the impact of Covid lockdowns in China.
Oberoi Realty: The company announced provisional numbers for Q1FY2023. The sales booking rose 4.4x y-o-y (down 23.5% q-o-q) at 4.01 lakh square feet for Q1FY2023. In value terms, the sales booked rose 4.4x y-o-y (down 18.7% q-o-q) at Rs. 752 crore. Positive for the stock
Coforge: Newgen Software announced its partnership with Coforge to empower leading insurance firms, public sector organizations, and others in the US, Europe, and the rest of the world. This this alliance brings together Coforge's expertise and implementation resources strength with Newgen's business insights and robust, secure, and scalable low code digital transformation platform—NewgenONE – positive read-thru as this partnership with Newgen will further strengthen its portfolio and provide value proposition to its clients worldwide
Tata Power: The company plans to invest over Rs75,000 crore in renewable energy (RE) in the next five years and aims to have an electricity generation capacity of 30 GW by FY2027 (from 13.5 GW currently with RE share of 34%) with 60% share of RE and aim to further increase the same to 80% by FY2030. The company’s solar EPC order book is at Rs13000 crore and we expect the same to remain strong with continued new order flows given India’s target to increase RE capacity to 450GW by 2030 versus 110 GW in FY22. Focus to shift towards RE would allay ESG concern and is positive for Tata Power. We have Buy rating on Tata Power.
Dr Reddys: The company formulations manufacturing facility FTO 11 in Srikakulam, under went an Pre Approval Inspection between 30th June 2022 to 7 July 2022. The inspection ended with a form 483 with two observations, which the company looks confident of addressing in the stipulated time frame. Receipt of form 483 with two observation is negative read thru.
Alkem Laboratories: USFDA had conducted a GMP and Pre-Approval inspection at the company’s Indore plant from 1 July 2022 to 7 July 2022. The inspection ended with a form 483 being issued with one observation for one of its ANDA which was filed from the plant. The observation from the USFDA is not relating to data integrity issue and the management is confident of submitting the response in the stipulated time frame. The receipt of form 483 is negative but the decline in stock prices factors in this and no data integrity issue provides respite.
Sector Update: Capital Goods and Power Q1FY2023 Results Preview- Pricing, low base to drive growth; stable margins eyed; Positive Outlook
· We expect our coverage universe of capital goods companies to report a ~26% y-o-y revenue growth (ex-L&T 36.7%). The growth will be driven by decent opening order book for project-based companies, while a low base and pricing would drive growth for product-based companies.
· OPM is likely to improve by ~55 bps y-o-y on account of operating leverage and price hikes. We envisage margin improvement of 35 bps/ 206 bps y-o-y for project/product based companies but expect a q-o-q decline. Net profit growth is likely to be strong at 45%/144% for both project/ product-based companies.
· Power sector would benefit from higher electricity demand and we expect strong earnings growth for NTPC (rise in regulated equity & lower tax), Tata Power (boost from higher coal profit) and CESC (rise in power sales volume). Power Grid is likely to post modest earnings growth on reflect muted asset capitalisation.
· Preferred Picks - Among project-based companies, we prefer L&T, Bharat Electronics (BEL), Thermax, KSB Ltd and Cummins India while in the consumer electronics space, we prefer Polycab India, Blue Star, Symphony, KEI Industries. In power we prefer NTPC, PowerGrid and Tata Power.
Sector Update – Pharmaceuticals Preview Q1FY2023: Weak quarter, cost pressures to sustain
The pharmaceutical companies under sharekhan’s universe are expected to report a moderated topline growth for Q1FY23 as the US sales are expected to be under stress, while India sales is expected to stage healthy growth
The Growth is expected to reflect pressures in US business on account of lack of new product approvals, higher competitive pressures. On the other hand growth in India business is expected to stage a healthy growth. Further High margins base and increasing cost pressures are expected to result in a 8.8% yoy decline in earnings for Q1FY23
Factors such as improving growth prospects in the US, expected healthy growth in the IPM, emerging opportunities in the API space and strong capabilities developed by the Indian companies leading to a shift in preference towards complex generics / biosimilars would be the key growth drivers
Preferred Picks: Large Caps - Divis Labs, Cipla, Dr Reddy’s, Sun Pharma, Biocon, Gland Pharma; Mid-caps: Laurus Labs, Sanofi India, Abbott India, Caplin Point Laboratories, Alembic Pharmaceuticals.
Sector update: Consumer Goods sector Q1FY23 earnings preview: Price led revenue growth; margins to stay stressed
· Sharekhan’s consumer goods universe would register a 17.3% revenue growth as price hikes will take the lead amid muted volume growth owing to demand slowdown. Excluding Asian Paints (APL), the universe revenue growth is expected at 13.7%.
· Significant increase in commodity prices will keep margins stressed. However, price hikes and control advertisement/media spends would help mitigate margin pressure. Our consumer goods universe would witness a 40 bps y-o-y decline in OPM. PAT to grow by just 15.7% y-o-y (excluding APL, growth would be 12.4%).
· Recent correction in global commodity prices (including those of palm oil, wheat and crude oil) augurs well for consumer goods companies as the companies can pass on correction to consumers through price cuts, which will help volumes recover in the quarters ahead. Margins set to be better in H2FY2023.
· Preferred Picks: : Asian Paints, Nestle India, Marico, Dabur India, Tata Consumer Products (TCPL) and Zydus Wellness.
Stock update: Titan - Strong growth across businesses in Q1
Rating: Buy Reco price: Rs. 2,128 Target Price: Rs. 2,900
· Titan Company Limited’s (Titan) consolidated revenue grew by 3.0x y-o-y, close to Rs. 9,200 crore in Q1FY2023, driven by strong 3x sales growth in the jewellery business, 2.6x growth in the watches business, and 2.8x growth in the eyecare business.
· Jewellery business outperformed street’s expectation because of strong sales during the auspicious day of Akshay Tritiya, strong recovery in footfalls, and higher ticket purchases.
· The company reiterated strong growth outlook for its jewellery business in the medium term through its multi-pronged strategy of gaining shares in the wedding segment, improving reach in tier 2/3 towns, improving momentum behind gold exchange scheme, and improving penetration of Tanishq brand in international markets.
· The stock has corrected by ~20% from its recent high and is trading at 47x its FY2024E earnings with limited downside risk. We retain our Buy recommendation on the stock with an unchanged PT of Rs. 2,900
Kalpataru Power Transmission: Kalpataru Power Transmission Limited (KPTL) completed the acquisition of the remaining 15% stake in Sweden-based engineering procurement and construction company - Linjemontage i Grastrop AB for USD 11.5 mn (around Rs 91 cr). The Swedish firm has been engaged in power transmission and distribution, substation and O&M (Operation & Maintenance) of electricity network service. The acquisition will further strengthen KPTL's position in the Nordic market as Sweden and Norway are very attractive markets for transmission line infrastructure since both have the oldest grid network. Positive read thru for KPTL.