Articles by Aakash Athawasya

Cipla Ltd.    
03 Nov 2021
Cipla: With the Covid-19 drugs boost gone, can this pharma giant still shine?
By Aakash Athawasya

Pharmaceuticals have taken a back seat as pandemic concerns wane, and economic activity ramps up. This is evident in drug maker Cipla’s Covid-19 treatment drug sales which fell by 60% QoQ in Q2FY22. Even with lower demand for Covid-19 drugs, Cipla’s management is heading into the second half of FY22 expecting revenue growth to pick up.

The respiratory drug maker’s …

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Cipla Ltd. is trading above it's 200 day SMA of 1014.1
Tapping into the female demographic: Nykaa is profitable, cheaper than peers
By Aakash Athawasya

As the festive season kicks off, a wave of internet startups are expected to hit the markets. Following the success of Zomato, FSN E-Commerce Ventures, the company behind the cosmetics e-commerce retailer Nykaa is set to launch its initial public offering (IPO) on October 28.

The Falguini Nayar-led company stands out from the pack of internet startups, turning …

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1 Comment
ajit961 2-3 years its reach by 5000+ by result. No compitition. In lady cosmetics/ fashion dresses. Alloted pl keep it
12 Nov 2021
Number of FII/FPI investors increased from 245 to 254 in Sep 2022 qtr.
The Baseline    
13 Oct 2021
An uptick in investor activism puts management in the hot seat
By Aakash Athawasya

Over the past few months, a simmering issue for India’s public market investors burst out into the open. Minority and institutional investors are pushing back against company promoters and the management by voting against shareholders’ resolutions, and in some cases defeating some. 

In a sign that the Indian equity market is slowly maturing, investor activism against high-profile companies has picked …

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Spicejet Ltd.    
05 Oct 2021
SpiceJet Management Call: “Profits on the horizon” despite rising fuel costs and competition
By Aakash Athawasya

Domestic airlines have suffered since the Covid-19 pandemic began due to hesitancy around taking a crowded flight, the government’s travel restrictions, and soaring crude oil prices. But as travel recovers right on the cusp of the festive season, SpiceJet, the second-largest domestic airline, expects the worst is over.

'We are less concerned about the competitiveness of the airline industry …

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Spicejet Ltd. is trading below all available SMAs
Escorts Management Call: Growth for agrimachinery while construction and railways struggle
By Aakash Athawasya

Escorts, one of three listed tractor makers in the country, had a good Q1FY22 as tractor sales remained stable amid the second wave. This was despite a poor showing from its two smaller segments — construction machinery and railway components. The company’s smaller segments continue to face issues, and the company expects some of these to recede by the end of 2021.

Heading into FY22, the momentum of infrastructure activities was strong, but it was interrupted because of the second wave. Thankfully for the company, tractor sales performed well, which helped revenues increase YoY. But some problems remain especially in the company’s smaller segments, said Prateek Singhal, Deputy General Manager of Corporate Finance at Escorts during a call with analysts on September 21. Construction activity is expected to be muted in Q2, tenders from the Indian Railways are low due to the public’s hesitancy in using trains, and raw material expenses are increasing. Can the tailwinds in the tractor business make up for the headwinds in the construction machinery segment over the rest of FY22?

Call Takeaways:

  • Monsoon revival bodes well for tractor sales growth in Q3FY22

  • Escorts’ tractor sales underperformed peers Mahindra & Mahindra and VST Tillers Tractors in FY22 so far

  • Partnership with Kubota is key to reaching the target of exporting 33% of total sales volume

  • Tractor prices hiked in July to pass on higher input costs

  • Construction revenue growth pegged at 15% with EBITDA margins of 4%

  • Railway segment’s orders inflows trails execution, order book at Rs 300 crore

  • Revenue growth for railways revised to 9-11% from 13-14% due to low tenders from the Indian Railways

Tractor outlook turns positive as the monsoon revives

The December quarter is the most important for companies catering to the agricultural demand, like tractor makers and agrochemical producers. Singhal said heading into Q3, the on-ground sentiment has turned positive because of strong rains in September, after weak rains in August and July.

Based on data from the India Meteorological Department (IMD) the country saw 29% higher than average levels of rainfall in September. This was after rains were 24% and 7% less than normal levels in August and July.

Escorts rainfall

The IMD said above-average rainfall in September makes for a normal monsoon season for the rest of 2021. Normal monsoon rainfall in the coming months can likely lead to higher demand from farmers for tractors, Singhal said. 

Historically, Escorts records its highest quarterly tractor sales in the December quarter. On average, the Q3 tractor sales are roughly 4-5% higher than the other quarters. Singhal added that another catalyst in Q3FY22 could be haulage. Nearly 25% of Escorts’ tractor demand is for haulage, or to transport crops to markets and between cities. He expects this demand as well as replacement demand to pick up in Q3FY22.

Escorts volumesAgrimachinery revenues decline in Q1, tractor sales growth underperform peers

In FY21, this segment’s revenue grew sharply by 28% to Rs 5,732 crore which resulted in a 20% growth in Escort’s FY21 total revenue. Higher tractor sales were because of rural India’s resilience during the first wave, relaxed lockdowns, normal monsoon, and higher disposable income due to government programmes. In FY21, agrimachinery sales contributed 82% of Escorts’ FY21 revenue, up from 77% in FY20.

Escorts revenue share

In Q1FY22, the second wave hit rural India worse than the first wave, and tractor sales of listed companies were expected to take a hit. However, due to the rallying prices of agricultural commodities like copra, palm oil, tea, coffee, and pepper, demand for tractors remained robust. This helped tractor companies post strong domestic wholesales and exports in June 2021 as lockdowns were eased.

However, Escorts fared poorly compared to Mahindra and Mahindra and VST Tillers Tractors’ tractors sales. 

Escorts tractor versus peers\

In Q1FY22, lower tractor volumes resulted in a 19% QoQ decline in agrimachinery revenues to Rs 1,411 crore. Due to higher raw material expenses, the segment’s EBITDA margins dropped by 140 basis points to 15.6%. 

Escorts agri revenues

Input costs pressure outpaces price hikes

To tackle rising costs, Escorts began Q2FY22 by hiking prices across its three segments — agrimachinery, construction materials, and railway components, Singhal said. This is because the cost of key inputs like fuel (crude oil), freight fuels (petrol and diesel), and metals (copper, aluminium, and steel) have been on the rise in 2021. This is the third price hike the company has taken in the past year, after hiking prices in April 2021, and November 2020.

Collectively, the price hikes have increased prices by 7-8% he said. However, as input cost pressures increased expenses by 12%, the company’s EBITDA margins fell for three consecutive quarters from Q2FY21 to Q1FY22.

Escorts marginsThe company does not expect the July price hike to aid Q2FY22 margins as raw materials expenses are up by 2% in the quarter, Singhal added. But the company might hike prices again in Q3FY22. Escorts will wait till after the end of the festive season till late November (after the festive season) to hike prices as raw material costs may moderate.

JV with Kubota key to exports growth

Export growth is a key target for the company in FY22, said Singhal. The company began exporting tractors only four years ago, and exports form less than 5% of its total sales volumes. Compared to listed tractor makers, Mahindra & Mahindra and VST Tillers Tractors, Escorts’ exports to total sales is the lowest.

Escorts exportsIn order to increase exports, the company will rely on its joint venture with Kubota. Under the terms of the JV, Escorts will produce and sell Kubota tractors domestically and Kubota will export Escorts’ tractors. Kubota exports tractors to 70 countries including the United States, Thailand, Malaysia, Indonesia, among others.

The aspirational target, according to Singhal, is to export 33% of its total volume by FY23 with the help of Kubota’s extensive distribution network. To increase exports, Escorts earmarked Rs 275 crore (85% of annual capex) to increase its tractor production capacity by 8,000-10,000 units a year in FY22.

Railway revenues hold firm in Q1, but outlook for FY22 looks grim

The railway segment had a difficult time in Q1FY22, said Singhal as tenders from the Indian Railways dried up due to the second wave. When lockdowns were eased in June 2021, its order book was Rs 300 crore, a 40% decline since April 2021. Singhal said only by December 2021 will the order inflows from the Indian Railways reach pre-Covid levels as trains are operating at 65-70% of pre-Covid levels. 

In Q1FY22, with a decent order backlog from FY21, order executions continued. Revenue for the segment was Rs 119.4 crore, a decline of 18.4% sequentially. The segments’ EBITDA margins were 15%, a four percentage point decline sequentially. 

Escorts railway revenueDue to the poor outlook for the railways segment in Q2 and Q3, Singhal said the FY22 growth rate for the railways segment would be around 9-11%. This was a reduction from the 13-14% growth rate that the management guided for in its Q1FY22 earnings call,

As the railways segment is expected to remain muted in Q3FY22, Escorts is looking to introduce new products to help increase revenue. Singhal said Escorts’ railway segment will introduction 6-7 new products in FY22. Motilal Oswal in a note said these new products could lead to a compounded annual growth rate (CAGR) of 15% between FY 22-23. The management expects these products to help push the segments’ margins up to 17-20% from 15% in Q1FY22.

Escorts railway margins

Construction equipment revenues decline, infrastructure momentum to return in Q3

Singhal expects a rebound in Escorts’ construction business in the second half of FY22 due to the government’s emphasis on infrastructure activities. Escorts’ construction equipment segment makes material handling, earthmoving, and road construction vehicles. 

Escorts sold 56% fewer construction vehicles in Q1FY22 than the previous quarter as lockdowns halted construction activities. This led to a 55% QoQ decline in the segment’s revenues to Rs 141 crore.

Escorts construction revenueEscorts is expecting infrastructure work to rebound in October 2021. The Ministry of Road Transport and Highways upped its target to build 40 kilometers per day for the rest of FY22 from 37 kilometers per day in H2FY21. Road construction machinery contributes 60% of Escorts’ construction machinery revenue. Based on this expectation, Singhal guided for a 15% growth rate in the segment’s revenues in FY22. 

Another concern for this segment is the rising input costs. The construction sector has been hit hard because of rising prices of crude oil, steel, rubber, packaging materials, etc. Due to these rising input costs, Escorts’ construction machinery margins slipped into the negative in Q1FY22. Singhal expects these costs to weigh heavily till the end of FY22 and hence guided for an annual EBITDA margin of  4% for the segment.

Escorts construction marginsThe long-term growth outlook for the segment, Singhal believes, is still intact. Infrastructure spending by the government is expected to rise as economic activities ramp up, but so are input costs. The low margins of this segment will likely not add much to Escorts’ overall bottom line. For that, the company will look to its core agrimachinery segment. Tractor sales will be in focus in Q3FY22, helped by a strong expected monsoon. But, it seems the company is looking beyond FY22 to enhance tractor exports through its partnership with Kubota, and ramp up its other businesses.

Escorts Kubota Ltd. has gained 26.16% in the last 1 Year
Chemicals & Petrochemicals    
SECTOR | 22 Sep 2021
Specialty Chemicals: Multiple growth levers for this industry
By Aakash Athawasya

Specialty chemicals has been a star sector for investors over the past 18 months. Companies in this space make chemicals like alkalis, isobutyl benzene, phenol, sulfonic acid, and other base and performance chemicals. Since the onset of the pandemic, this industry saw significant growth in FY21.  

During the initial stages of the pandemic in early FY21, many companies grew increasingly …

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22 Sep 2021
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ICICI Securities Limited released a Sector Update report for Chemicals & Petrochemicals on 23 Nov, 2022.
Pharmaceuticals & Biotech.    
SECTOR | 08 Sep 2021
Where does the Indian pharma industry stand, post the second Covid-19 wave?
By Aakash Athawasya

Quite chaotically, the Indian pharmaceutical industry was thrust back to prominence in Q1FY22. With the second Covid-19 wave and soaring infection rates, pharmaceutical companies acted fast. Some abandoned regular operations and focused on vaccine production, while others focused on drugs to treat Covid-19 and ancillary respiratory diseases.

In the midst of it all, the important revenue-generating market of the United …

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Trendlyne Analysis released a Sector Update report for Pharmaceuticals & Biotech. on 17 Nov, 2022.
Vijaya Diagnostic: Consistent revenue growth, cheap valuations, and a differentiated business model
By Aakash Athawasya

When it rains, it pours, goes the old saying. This is certainly true for this IPO season. Following Krsnaa Diagnostics and Krishna Institute of Medical Sciences’ (KIMS) stellar subscription and listing, another healthcare services company is set to launch its initial public offering (IPO) — Vijaya Diagnostic Center (Vijaya Diagnostic).

Vijaya Diagnostic is an integrated diagnostic services provider. It …

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ICICI Securities Limited decreased Buy price target of Vijaya Diagnostic Centre Ltd. to 585.0 on 14 Nov, 2022.
Marico Ltd.    
23 Aug 2021
Marico's market share gains bode well, but price hikes are not off the table
By Aakash Athawasya

When India entered another lockdown in Q1FY22, FMCG companies were optimistic as packaged goods consumption was expected to rise with people stuck at home. One such company was Marico, the maker of Parachute hair oils, Saffola edible oils, and a range of other FMCG products. However, Marico received a bigger boost from the lockdown than expected.

In Q1YF22, Marico …

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Geojit BNP Paribas decreased Hold price target of Marico Ltd. to 538.0 on 10 Nov, 2022.
UPL Ltd.    
16 Aug 2021
UPL: Weather problems cloud expectations for the agrochemical giant
By Aakash Athawasya

Heading into FY22, India’s largest agrochemical company UPL was looking up at the sky - not in hope, but in expectation of favourable weather, particularly in its Indian and Latin America (LATAM) markets. The weather gods were good to UPL in some geographies but in others, they were less kind.

As India dealt with the second wave, agricultural activities carried …

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Institutional Investors have increased holdings from 52.91% to 59.96% in Sep 2022 qtr.