Stock market analysis and stories by Shreesh Biradar

Shreesh Biradar

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Shreesh Biradar was a Senior Research Analyst at Trendlyne, specializing in the IT, banking and auto sectors.

Articles by Shreesh Biradar

Mutual Funds News

TREND | 18 Jun 2024, 06:51PM

Smart money moves: Which stocks did mutual fund managers buy in May 2024?

By Shreesh Biradar

In the run-up to elections, the Indian equity market saw increased volatility in May. Smallcap and PSU stocks saw the highest volatility. The broader Nifty 50 declined marginally by 0.3% in May, while sectors like Nifty Realty, Nifty Auto, and Nifty Consumer Durables gained by 4.7%, 4.2%, and 1.4% respectively.

Realty stocks rose on the back of higher sales in Q4FY24 and rising property prices across metro and Tier-1 cities. Higher volumes led by electric vehicle and premium segment sales drove auto stocks higher.

Indian equity mutual funds saw a net inflow of Rs 34,697 crore in May, with sectoral and thematic funds receiving the highest inflows of Rs 19,213 crore. Largecap and midcap funds recorded inflows of Rs 663 crore and 2,606 crore respectively. With institutional investors moving away from large caps, the Nifty Midcap 100 rose 1.7% in the month, while the broader Nifty 500 saw a growth of 0.5%. Around nine new open-ended schemes were also launched during the month, which attracted Rs 10,040 crore in investments.

Stocks with increasing MF holding - Ashok Leyland, ABFRL, Apollo Tyres, Exide Industries, Ujjivan Small Finance Bank

Ashok Leyland – Margin expansion aided by lower raw material cost

Ashok Leyland, part of the Hinduja Group, manufactures a wide range of commercial vehicles and engines for industrial and marine applications. It is the second-largest commercial vehicle manufacturer in India and the fourth-largest manufacturer of buses in the world.

Its volume growth in Q4FY24 has been robust at 20% YoY. However, revenues declined by 3.1% due to lower sales of M&HCV and LCV. The volumes were led by higher sales in the bus segment due to higher demand for school buses. Margins expanded by 310 bps YoY on account of lower steel prices. Ashok Leyland plans to add 16 new models in the M&HCV segment on its electric vehicle platform.

Fund managers who bought shares of Ashok Leyland

Fund managers who added shares of Ashok Leyland to their portfolios include Dhaval Gala and Dhaval Joshi for Aditya Birla Sun Life Transportation and Logistics Fund, Nitin Gosar for Bank of India Manufacturing & Infra Growth Fund, and Karthik Kumar and Mayank Hyanki for Axis Nifty Midcap 50 Index Fund. Fresh buys were done by Anish Tawakley and Vaibhav Dusad for ICICI Prudential Focused Equity Fund, and Pranav Gokhale and Pranav Gokhale for Canara Robeco Mid Cap Fund.

ABFRL’s cost control measures drive margin expansion

Aditya Birla Fashions & Retail (ABFRL) is a retail manufacturer of branded apparel and accessories. ABFRL has various clothing brands under it like Pantaloons, Louis Phillipe, Van Heusen, Peter England and Allen Solly. The firm operates through 2,679 stores spread across India. ABFRL’s lifestyle brand business contributes nearly 85% of the revenue.

ABFRL’s consolidated revenue grew by 18.3% YoY in Q4FY24. The growth was led by store additions and new brands (Reebok and ethnic business). EBITDA margins improved by 163 bps YoY to 8.3%. The margin expansion was driven by the premiumization of products and cost control measures. The cost control measures include rationalization of the network, lower discounting and lower advertisement spending. The firm also plans to cut down its debt from Rs 2,900 crore currently to Rs 700 crore by the end of FY25.

Fund managers who bought shares of ABFRL

Fund managers who added shares of ABFRL to their portfolios include Karan Doshi and Jaiprakash Toshniwal for LIC MF Value Fund, Swapnil Mayekar for Motilal Oswal Nifty Midcap 150 Index Fund, Himanshu Mange for Nippon India Nifty Midcap 150 Index Fund. Fresh buys were done by Sanjeev Sharma and Vasav Sahgal for Quant Small Cap Fund, and Manish Gunwani and Sumit Agrawal for Bandhan Balanced Advantage Fund.

Apollo Tyres: Premiumisation and exports to aid revenue growth

Apollo Tyres (APOLLOTYRE), is a Gurgaon-based automotive tyre manufacturer. The firm is among the top 20 global tire manufacturers and reported Rs 25,531 crore annual revenue in FY24.

Apollo Tyres’ saw flat revenue growth (0.2% YoY) in Q4FY24. The subdued growth was on account of price rationalization in trucks, buses, and radial tires. The lower volumes in aftermarket and weak demand from commercial vehicles have limited the revenue growth in Q4FY24. However, exports reported a volume increase of 30% in the quarter. With the start of agricultural activity and the end of election season, the firm expects to see an uptick in commercial vehicles. The firm is also working on the premiumization of tires and cutting down on advertising expenses. This is expected to help in margin expansion in the near term.

Fund managers who bought shares of Apollo Tyres

Additional shares of Apollo Tyres were bought by Sankaran Naren and Manish Banthia for ICICI Prudential Equity & Debt Fund, S. Bharath and Ratish Varier for Sundaram Mid Cap Fund and Arjun Khanna and Nalin Bhatt for Kotak Infrastructure & Economic Reform Fund. Fresh buys were done by Ankit Jain for Mirae Asset Midcap Fund, and Bhavesh Jain and Bharat Lahoti for Edelweiss Balanced Advantage Fund.

Exide Industries: Venturing into lithium-ion battery manufacturing

Exide Industries (EXIDEIND) is a Kolkata-based auto part & equipment manufacturer with expertise in lead-acid and lithium-ion storage batteries and inverters. Its batteries find applications in automobiles, industries, home appliances and submarines. The firm generates 74% of its revenue from the automotive space.

Exide Industries Q4FY24 revenues grew by 13% YoY mainly driven by volumes. The firm reported an EBITDA margin expansion of 250 bps on account of lower lead cost (down by 2%) and a better mix of high-margin products. As a market leader in the storage battery space, Exide is focusing on EV batteries to gain a first-mover advantage. The firm has invested Rs 5,000 crore In FY24 and plans another Rs 1,000 crore in FY25. The plant is scheduled for operation by Q4FY25. It currently has an order book of Rs 600 crore for lithium-ion batteries. Exide Industries has partnered with China-based SVOLT Energy to ensure a steady supply of raw materials for this venture.

Fund managers who bought shares of Exide Industries

Fund managers who added shares of Exide Industries to their portfolios include Venugopal Manghat and Cheenu Gupta for HSBC Small Cap Fund Fund, Hardick Bora and Gaurav Chopra for Union Midcap Fund, Nishit Patel and Kewal Shah for ICICI Prudential Nifty Auto ETF, and Himanshu Mange for Nippon India Nifty Smallcap 250 Index Fund. Fresh buys were done by Sachin Relekar and Nitin Arora for Axis Value Fund.

Ujjivan Small Finance Bank: Diversification towards secured lending might contract margins

Ujjivan Small Finance Bank (UJJIVANSFB), headquartered in Kolkata, is a banking and finance firm that specializes in microfinance and MSME loans. It is the third largest small finance bank in India with a loan book of Rs 26,883 crores. It caters to 8.6 million customers through 752 branches. Around 58% of its branches are located in metro areas. The bank has a strong footprint in West Bengal, Maharashtra, Karnataka and Tamil Nadu.

Ujjivan Small Finance Bank reported a 24% YoY growth in advances and a 23% growth in deposits for Q4FY24. The net interest margins have been stable at around 9% due to the repricing of the loans and the lower cost of funds due to the rating upgrade. However, in the near term, the bank is expected to see pressure on the margins as it moves towards the secured lending business. The bank has been slowly diversifying from mico-finance to housing, auto and SME segments. The bank plans to add 50 new branches in FY25.

Fund managers who bought shares of Ujjivan Small Finance Bank

Fund managers who added shares of Ujjivan Small Finance Bank to their portfolios include Himanshu Mange for Nippon India Nifty Smallcap 250 Index Fund, Harsh Sethi for SBI Nifty Smallcap 250 Index Fund, and Murthy Nagarajan and Sailesh Jain for Tata Dividend Yield Fund. Fresh buys were done by Ravi Gopalakrishnan and Rohit Seksaria for Sundaram Small Cap Fund, and Manish Lodha and Abhinav Khandelwal for Mahindra Manulife Small Cap Fund.

Stocks with increasing MF holding - Engineers India, Cyient, Berger Paints, Bharat Dynamics, Aegis Logistics

Engineers India - Diversification to help revenue growth

Engineers India (ENGINERSIN): This PSU specializes in consulting services and engineering projects in oil, gas and petrochemical industries. It derives nearly 54% of its revenue from turnkey projects. The firm has a presence in the Middle East, Africa, and South Asia.

Engineers India is trying to diversify into new growth verticals like coal gasification, defense and transportation. Its network in the oil & gas industry has helped drive new project growth. The firm has an order book of Rs 7,823 crore, with 59% of the order book comprising consultancy services. It has guided an EBIT of 27% for consultancy projects and 4% for turnkey projects. The firm is expanding its footprint in the Middle East to take maximum advantage of the oil & gas project hub.

Fund managers who bought shares of Engineers India

Fund managers who added shares of Engineers India to their portfolios include Sanjeev Sharma and Vasav Sahgal for Quant Small Cap Fund, Dhaval Gala and Dhaval Joshi for Aditya Birla Sun Life PSU Equity Fund, and Nimesh Chandan and Siddharth Chaudhary for Bajaj Finserv Flexi Cap Fund. Fresh buys were done by Rohit Shimpi for SBI PSU Fund, and Venugopal Manghat and Cheenu Gupta for HSBC Small Cap Fund.

Cyient impacted by slower decision-making in the US and Europe

Cyient (CYIENT), is a software and services firm headquartered in Hyderabad with interests in global digital engineering and technology solutions. It specializes in geospatial, engineering design, IT solutions, and data analytics. Cyient has over 300 customers and a presence in 19 countries. It has annual sales of around Rs 7,213 crore. The US accounts for 43.7% of the revenue.

Cyient’s revenue growth moderated to 6.2% YoY in Q4FY24 due to lower revenue from (Digital Engineering and Technology) DET segment (1.7%). The revenue was impacted due to slower decision-making in the US and Europe. However, its design-led manufacturing (DLM) segment, reported 30.4% YoY growth. This surge was attributed to increased order intake from the aerospace and defense segments. The company reported 140 bps YoY EBIT expansion due to a drop in its attrition rate and increased resource utilization. Cyient won orders worth $200 million in the quarter. The firm's commentary indicates green shoots in the US, higher cost optimization deals with the UK and subdued demand in Europe.

Fund managers who bought shares of Cyient

Fund managers who added shares of Cyient to their portfolios include Arjun Khanna and Harish Bihani for Kotak Small Cap Fund, Meenakshi Dawar and Dhrumil Shah for Nippon India Flexi Cap Fund, Meeta Shetty and Kapil Malhotra for Tata Focused Equity Fund. Fresh buys were done by Abhishek Bisen and Arjun Khanna for Kotak Technology Fund, and Roshi Jain and Dhruv Muchhal for HDFC Flexi Cap Fund.

Berger Paints: Industrial and automotive paint drive growth

Berger Paints (BERGEPAINT), is a diversified consumer service firm with expertise in the manufacturing and retailing of paint and its allied products. The Kolkata-based firm is the second largest paint manufacturer in India with a manufacturing capacity of 1.27 million metric tonnes. The firm’s annual revenue stands at Rs 11,263 crores.

In Q4FY24, Berger Paints revenue increased by 3.1% YoY even though its volumes increased by 13.9%. The lower revenue was on account of higher sales of low-value products like adhesives and admixtures. The firm also reduced prices by up to 5% on its value products. The firm intends to gain market share by adding new outlets and increasing ad spend. The firm saw increased demand from the automotive and industrial paint segments. The firm expects the housing paint demand to pick up in Q3FY24 post-monsoons.

Fund managers who bought shares of Berger Paints

Fund managers who added shares of Berger Paints to their portfolios include Nemish Sheth for Bandhan Nifty100 Low Volatility 30 Index Fund, Arun Agarwal and Nirman Morakhia for HDFC NIFTY Next 50 Index Fund, and Nishit Patel and Priya Sridhar for ICICI Prudential Nifty Next 50 Index Fund. Fresh buys were done by Sonam Udasi and Aditya Bagul for Tata India Consumer Fund, and Neeraj Kumar and Nidhi Chawla for SBI Equity Savings Fund.

Bharat Dynamics: Order book execution key to growth

Bharat Dynamics (BDL), is a PSU defense manufacturing firm with expertise in guided missile systems, underwater weapons and allied defense products. The firm has four manufacturing plants with three units located in Telangana and one in Andhra Pradesh. Bharat Dynamics has an annual revenue of Rs 2,731 crore.

Bharat Dynamics saw revenue growth of 16.4% YoY in Q4FY24. The superior execution in the quarter was attributed to the healthier supply of key components for its products. The firm's order book is around Rs 19,500 crore. The management plans to execute the order book in the next five years. The firm has guided a revenue growth of 25% in FY25 with margins around 20%. The defense firm is expected to get a revenue boost from export orders for Akash Missile systems. It has also tied up with various foreign manufacturers like Thales, and Dassault to benefit from India’s defense offset policies.

Fund managers who bought shares of Bharat Dynamics

Fund managers who added shares of Bharat Dynamics to their portfolios include Harsh Sethi for SBI Nifty Midcap 150 Index Fund, Dhimant Kothari for Invesco India PSU Equity Fund and Sanjay Chawla for Baroda BNP Paribas Focused Fund. Fresh buys were done by Ashish Naik and Pratik Tibrewal for Axis Multi Asset Allocation Fund and Mihir Vora and Aakash Manghani for TrustMF Flexi Cap Fund.

Aegis Logistics - new storage terminals to boost topline

Aegis Logistics (AEGISLOG) is an oil & gas logistics firm with expertise in the import, distribution and storage of LPG and petrochemicals. The firm operates via designated terminals at Indian ports. Aegis Logistics has an LPG storage capacity of 1.14 lakh metric tonnes. The company also distributes autogas via its retail outlets.

In Q4FY24, its revenue declined by 14.3% YoY to Rs 1,900 crore. The lower revenue was on account of lower LPG sourcing (-7%) and distribution (-8%) volumes. However, the firm reported a margin expansion of 730 bps mainly on account of the lower cost of raw materials. The firm has also acquired storage terminals (41,000 Kilo liter) at Mangalore port. This is apart from the 2,31,000 kilo liter storage terminals Aegis Logistics is building across India. It also plans to spend Rs 500 crore constructing a storage terminal for Ammonia (36,000 MT) in Gujarat.

Fund managers who bought shares of Aegis Logistics

Fund managers who added shares of Aegis Logistics to their portfolios include Sanjeev Sharma and Vasav Sahga for Quant Small Cap Fund, Himanshu Mange for Nippon India Nifty Smallcap 250 Index Fund, Nishit Patel and Priya Sridhar for ICICI Prudential Nifty Smallcap 250 Index Fund, and Vasav Sahgal and Ankit A. Pande for Quant Infrastructure Fund. Fresh buys were done by Sanjeev Sharma and Vasav Sahgal for Quant Flexi Cap Fund.

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Adani Enterprises Ltd.

06 Jun 2024

2339.30

0.89%

Adani Group - growing stronger amid a political slugfest

By Shreesh Biradar

The recent volatility of stocks as the Lok Sabha election results came in has resurrected the debate of the alignment of Indian businesses with political parties. As the ruling party’s projected seat share fell, the highest volatility was seen in Adani Group stocks. Adani stocks had swung to 52-week highs with the release of exit polls projecting large majorities for the BJP and fell hard when the results fell short.

While the Adani Group has flourished under the BJP-led government in the past decade, it has had its share of problems. From opposition parties alleging favoritism, to the Hindenburg report alleging fraud in the conglomerate. Amid all this drama, Adani Group firms have strengthened their balance sheet and increased their profitability.

The allegations, remediation and clean chit

In January 2024, Hindenburg came out with reports alleging that Gautam Adani and his associates had done a series of frauds. The allegations included stock manipulation, flouting regulatory norms, siphoning money through a web of shell companies and inflating valuations. The report also mentioned shady deals undertaken by Vinod Adani (Gautam Adani’s brother) as a promoter. While the high debt levels were questioned in the report, high pledged shares were also flagged.

The immediate aftermath was a massive $150 billion wipeout for Adani stocks in the next two months. The management went into firefighting mode and brought in foreign investors like GQG Capital, Qatar Investment Authority and Bain Capital to boost investor sentiment. It also launched roadshows to ensure the offshore bondholders of the conglomerates were convinced of financial stability. Vinod Adani stepped down from the managerial post, while the promoter group raised capital to reduce its pledged shareholding.

SEBI gave a clean chit to Adani Group in the 22 allegations it investigated in May 2023. A petition was then filed in the Supreme Court, and the Court in its order stated, “Any third party cannot question SEBI’s credentials. The allegations can be used as inputs for investigation, but not as conclusive evidence”. This clarification helped investor sentiment. Adani Group has also been working behind the scenes to lower its pledged shares and debt levels and increase its profitability. The positive sentiment around the group companies have led the price to earning (PE) expansion for the Adani Group stocks.

Most Adani Group companies have seen PE expansion since March 2023

Adani Group reduces pledged shares post-Hindenburg event

According to the Hindenburg report, “a portion of promoter equity in Adani Group listed entities is pledged for loans, effectively leveraging the group to the hilt”. While promoter pledging is common, higher pledging is a risk factor. Problems with the promoter can lead to banks forfeiting the pledged shares and dumping them in the open market. Initially, in the first three months of the Hindenburg saga, Adani Group promoters sold stakes in Adani Green (4.5%), Adani Enterprises (4.9%), Adani Ports (2.2%), and Adani Power (3.2%). Over the next 12 months, the promoters infused capital and increased their stake in Adani Ports (3%), Adani Enterprises (4.9%), Ambuja Cements (3.7%) etc. Adani promoters raised around $2.15 billion via stake sale to pare promoter pledging.

Promoters sell stakes in Adani group companies to release pledged shares

The reorganization of promoter holdings helped generate surplus cash to release pledges across Adani’s listed firms. Most of the stakes sold by the promoter entity have been bought by Rajiv Jain-led GQG partners. Apparently, GQG partners have invested roughly Rs 21,660 crore in Adani Group firms.

Consolidated net debt of Adani Group firms drops by 10% in the past year

Investors had many questions about the debt levels of the Adani Group after the Hindenburg report. Most of the debt on its books has been due to the massive capex it undertook in the past ten years. Adani Group had a net debt of Rs 1,72,000 crore at the end of FY23 and has reduced it by around 10% in FY24 to Rs 1,55,000 crore. The group has repaid the debt held by Indian banks and domestic bondholders. It simultaneously raised capital from the offshore bond market, which is comparatively cheaper.

The overall net debt of Adani Group declines in FY24

The conglomerate halted its expansion spree in FY24 due to difficulty in raising debt. Now the group plans to slowly increase its capex spending, with plans to spend around $90 billion in capex over the next ten years. At the end of FY23, Adani Group’s Net Debt to EBITDA ratio was at 3.2; it has come down to 1.9 at the end of FY24.

EBITDA and net profit of Adani firms increase by over 50% in the past year

The conglomerate reported an EBITDA increase of 55% YoY in FY24. While Adani Power, ACC, and Ambuja Cements EBITDA grew on the back of the lower cost of fuel, Adani Port’s margin growth was driven by volumes. Adani Enterprises on the contrary reported lower inventory helping boost the overall margins. Adani Ports has been vital in shipments of coal to its group companies. The vertical integration of group firms has helped in building significant synergies. For instance, the Adani Group plans to use its ports for the transportation of cement from Gujarat to South India.

EBITDA increases for Adani Group firms in FY24

The profit growth has been led by lower finance costs. The group has shifted significant debt from rupee to dollar denominations. The resulting lower cost of funds has driven the overall profitability. The group’s firms reported a profit growth of 68.1% in FY24.

Adani Group companies see rising profitability in FY24

Political uncertainty is the biggest threat to the group

The surge in Adani group firms has been backed by rising investor confidence. Foreign institutional investors' holdings have gone up post the Hindenburg event. For instance, Adani Power’s FII holding has increased by 300 bps to 15.9% from December 2022 to March 2024. Most of the Adani Group stocks have beaten the broader Nifty 50 in the past years.

Most Adani Group companies beat Nifty 50 returns in the past year

Adani Group’s joint venture partner Total Energies has agreed to invest in a port development in Sri Lanka. The project is partly financed by the US government-backed Development Finance Corporation (DFC). While the US government's backing move was primarily driven by politics, it indicates that the Hindenburg report is in the rear-view mirror for most governments and investors.

With the BJP-led NDA gaining a thin majority in the general elections, the government will be in a less comfortable position in the next five years. The Congress-led INDIA alliance has been vocal about Adani’s relationship with Modi and the ruling party. If Congress-led INDIA topples the incumbent government, then a political witch-hunt might hamper Adani’s growth story. This was quite evident in investor sentiments before and after the election counting process. The group will have to navigate the changing political landscape in India over the next few years.

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Adani Enterprises Ltd. is trading below its 100 day SMA of 2435.5

The Baseline

22 May 2024

Should we worry about foreign investors exiting markets?| Screener: stocks where FIIs have cut stake

By Shreesh Biradar

The election this year has come with much nail-biting. It’s not just political parties that are having the jitters – investors are also facing sharp market swings and volatility. The Nifty VIX rose to a 15-month high of 22.3 points as of Tuesday, while the Nifty 50 has been range-bound since the start of the polling season.

Foreign institutional investors in particular have grown wary of the volatility. They are at their most pessimistic level since 2012, shorting Indian stocks significantly, and have withdrawn around $3.5 billion from Indian equities in May alone. For now, foreign outflows have not dented valuations much, as inflows from domestic institutions have jumped.

Rising bond yields in the US have also contributed to FII withdrawal. Bond yields are up as the timing of likely rate cuts by the US Fed keeps getting postponed, shifting from June-July to September-October. And despite tensions between the US and China, cheaper valuations of Chinese and Hong Kong equities (currently trading at 10 PE) have been tempting foreign investors.

Mihir Vora, Chief Investment Officer of Trust Mutual Fund, says, “ FII outflows are on account of election uncertainty. India in the longer term will see FII inflows, as it is one of the fastest growing countries among large economies”.

Historically, FIIs have returned to Indian markets post elections. Will this year be different?

In this week’s Analyticks:

FIIs exit stocks: How is the exodus impacting Indian markets?
Screener: Stocks where FII/FPIs are decreasing shareholding, with falling stock prices over the past month

Let’s get into it.

Election-led volatility, rising US bond yields trigger FII outflows

Volatility – a good measure of risk in the market – has risen significantly over the past month for India. But this is not the first time an election has driven the Nifty VIX up. The volatility index shot up during the 2014 election (a change election), to 38 points. In 2019, when the BJP won reelection, it rose to 29 points. Comparatively, the current rise of the Nifty VIX is on the lower side.

But foreign investors hate uncertainty, and net outflows are likely to persist until the results are announced. If a single party wins, FIIs might return quickly to Indian equities.

Nifty VIX on the lower side so far, compared to the past two general elections

The strengthening US dollar has also fuelled FII outflows since a depreciating rupee eats into investor gains. Another reason for the outflow has been rising bond yields in the US.

Sticky inflation and a strong American job market have put the US Fed in a tight spot as far as cutting interest rates is concerned. Rate cuts are now expected only in September, and the expected rate cut size has gone down from 90 bps at the start of 2024 to around 44 bpsnow. As a result, US treasury yields shot up from 3.8% at the start of 2024 to 4.7% by the end of April. The rising yield has attracted foreign investors.

Historically, Indian indices fall with a rise in US treasury bond yields, due to FII outflows. Recent DII inflows have buffered the fall, as domestic institutions invested Rs 2,50,903 crores from April 2023 to April 2024.

Rising US bond yields have triggered FII selling

Largecaps impacted by FII outflow, DIIs protect the fall

Since the start of 2024, FIIs have withdrawn nearly Rs 84,318 crore worth of equity from the Indian market. In the same period, DIIs invested around Rs 1,52,620 crore.

DIIs sustain Indian markets amid FII outflows in the past 12 months

The Nifty 50 has risen 3.3% from the start of 2024, while Nifty Midcap 100 and Nifty Smallcap 100 have gained 11.5% and 11% respectively. FII money has mainly been in largecap and midcap stocks, while DIIs have invested in midcap and smallcap.

As a result, the FII outflow from largecaps has been cushioned only a bit by DIIs. The midcap and smallcap rallies have been backed by DII inflows, despite concerns about their expensive valuations.

Telecommunication and consumer services sectors get maximum inflows, while FMCG and financial services see an exodus.

The telecom services sector saw the highest inflows from FIIs in 2024. The inflows were driven by Vodafone Idea’s FPO. The Vodafone issue saw FIIs buying 65% (Rs 11,700 crore) of the Rs 18,000 crore FPO. The sector also saw FII investments in Bharti Airtel, which has gained significant market share in the past year, even as it raised overall tariff rates.

The capital goods (general industrial) sector saw investments in the defence industries. The defence industry was aided by large orders from the government – Indian defence firms won orders of more than $7 billion in FY24. Capital goods firms involved in infrastructure and real estate also saw increased volumes, due to higher election spending by the government and an uptick in real estate activity.

The telecommunication sector has led FPI inflows since January 2024

The financial services sector on the other hand, saw the highest selling in 2024. Most of the selling came in private banks and NBFCs, which have faced liquidity concerns and stiff competition from public sector banks. HDFC Bank – usually an FII favourite – saw the biggest exodus. HDFC Bank’s margins are under pressure, while merger woes continue.

The FMCG sector also saw pressure as rural consumption slowed. The premiumization of products led to lower offtake in price-sensitive rural geography. However, higher consumption in urban areas has offset this a bit.

FIIs may choose India over China in the long run

Chinese stocks are now at at an attractive valuation compared to India. The government stimulus in China (around $138 billion) and the recent pick-up in industrial production have driven foreign inflows up. But the economic woes in the country and the rising threat of a US-China trade war may dent enthusiasm for the Chinese market in the longer term.

The International Monetary Fund (IMF) has guided India’s GDP growth of 6.8% for 2024, which is the highest among emerging economies. In comparison, China is expected to slow down to 4.6% GDP growth in 2024, from 5.2% in 2023. India’s inflation, currently at 4.8%, is also predicted to decline post-monsoons due to an expected fall in vegetable prices.

While most emerging economies are struggling with price rises, slowdowns and geo-political tensions, India has so far not seen a major dent in growth. Increased tariffs on Chinese goods from the US and EU have impacted its growth prospects, and India is being seen by the world as a good alternative.

In this scenario, current FII outflows are not a big worry. DIIs have been actively investing without any signs of slowing down. Foreign investors are expected to return in two phases, first, post-election, and then after the Fed starts rate cuts in the second half of 2024. Until then, DIIs will run the show.

Screener: FII/FPI decreasing shareholding QoQ with falling stock prices over the past month

Banking and finance stocks see highest FII outflows in Q4FY24

As the shareholding data for the final quarter of FY24 has come out, we take a look at stocks that saw a decline in their foreign institutional investor (FII) holdings during the quarter. This screener shows stocks where FII decreased their stake QoQ, where share prices declined over the past month.

The screener is dominated by stocks from the banking & finance, software & services, textiles, apparels & accessories and diversified consumer services sectors. Major stocks that appear in the screener are Aster DM Healthcare, Route Mobile, Kalyan Jewellers, PVR INOX, HDFC Bank, Star Health and Allied Insurance, Indus Towers and Indiabulls Housing Finance.

Aster DM Healthcare’s FII holding contracted the most by 7.5 percentage points in Q4FY24, while its stock price also plunged by 30.8% over the past month. The fall in stock price is mainly due to the company giving out a special dividend of Rs 118 per share on April 23. Olympus Capital Asia Investments was the largest seller in the healthcare stock with a sale of an 8.9% stake in the company. The sold shares were picked up by mutual funds like Nippon Life India Trustee Ltd-A/C Nippon India Small Cap Fund (2.1% stake) and Franklin India Smaller Companies Fund (0.6% stake), and retail investors (1% stake).

FIIs sold a 5% stake in PVR INOX in Q4FY24, the stock has also fallen 5.3% over the past month. Funds like Plenty Private Equity Fund I and Multiples Private Equity Fund II LLP, among others sold a total of 2.3% stake in the movies & entertainment company. The sold stake was picked up by mutual funds like Nippon Life India Trustee Ltd-A/C Nippon India Mul (1.5% stake), HDFC Trustee Company Ltd. A/C Hdfc Capital Builder (3.8% stake and ICICI Prudential Multicap Fund (1.4% stake).

You can find more screeners here.

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Software & Services

SECTOR | 17 May 2024

A difficult market for IT players is likely to persist in FY25

By Shreesh Biradar

The IT services industry is at a crossroads, with the rise of new technology like artificial intelligence, and a slowdown in traditional spending from banking and financial clients. The Q4FY24 earnings of five major IT firms - Tata Consultancy Services (TCS), Infosys, HCL Technologies (HCL Tech), Wipro, and Tech Mahindra have shown a marked slowdown in their topline. …

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Clients have cut spending significantly in BFSI, communication, and Hi-Tech verticals. Manufacturing, utilities, and automobiles are making new tech investments, partially offsetting the loss of revenue from traditional streams for IT companies. Higher interest rates, delayed decision-making and impending elections in the US have also taken a toll on BFSI spending.

K Kritivasan CEO of TCS said, “Clients are seeing rapid changes in technology – in artificial intelligence, cybersecurity, and multi-cloud systems. Geopolitical tensions have also led clients to reevaluate their IT spending in core areas. So there is a delay in decision making as clients want to build their technology systems which sustain these changes”.

While the industry has expressed cautious optimism, things are expected to pick up only post Q3FY25, after elections and expected interest rate cuts. Major IT firms have narrowed their guidance. Infosys slashed the revenue growth guidance for FY25 from 4-7% a year ago to 1-3% amid a challenging macro environment. TCS and HCL Tech are expected to grow around 4-5% in FY25, while Wipro is expected to increase its revenue by 1-1.5%.

While the revenue guidance has been lowered, IT giants are seeing traction with big deals. Tech firms are also working on improving margins by consolidating vendors, negative employee additions, and higher productivity.

Infosys beats profit estimates, while Tech Mahindra and HCL Tech disappoint

In the face of current challenges in the IT sector, Indian software companies have seen negative returns in the past quarter. Infosys and HCL Tech have underperformed benchmark indices over the past quarter. The sectoral Nifty IT index dropped by 13.6% and the broader Nifty 50 gained by 1.3% in the same period.

Only Tech Mahindra gives positive returns in the past quarter

Most of the IT firms reported revenues in line with Forecaster estimates, but Infosys has been an outlier. The outperformance of Infosys is on account of higher than expected other income. Infosys received a tax refund of Rs 1,935 crore in the quarter helping it to beat the Forecaster estimates.

Only Infosys significantly outperforms Forecaster’s profit estimates

Tech Mahindra’s profit was lower than Forecaster estimates as one of its clients reported bankruptcy. Tech Mahindra incurred losses due to the abrupt closure of the client account.

BFSI slowdown dampens growth, Wipro underperforms peers

IT services firms have reported muted growth in Q4FY24, due to the slowdown in key sectors like BFSI, communications, and retail. Sectors like manufacturing, utilities, and automobiles have seen increased spending activity. However, most of the IT spending has been towards high-return and cost cost-efficiency projects.

The US in particular has scaled back IT spending, while Europe has seen spending in the manufacturing segment. UK projects are primarily in cost optimization. Indian IT majors are also exploring new markets in Africa and Asia to reduce their dependence on the US.

Revenue growth slows as tech spending remains weak

To help revenue growth, IT firms with large cash on their balance sheets are looking at acquisitions. For instance, Infosys acquired In-Tech (for Euro 450 million), an engineering R&D service provider with clientele in the European automotive sector. Wipro also acquired a 60% stake in US-based insurance technology firm Agnee for $66 million. The acquisitions are expected to provide a platform for deal wins in these segments along with added revenue growth.

Deal pipeline remains steady backed by large orders

Deal wins for the quarter have been strong for the quarter. Q3 was a dull quarter due to furloughs, and most orders got postponed to Q4. The quarter saw many large deal signings. Nearly 40 - 45% of deals signed are new deals, while the remainder are towards extension/renewal of the old deals. According to Infosys CEO Salil Parekh, “Most of the large deals have been towards cost reduction, increasing efficiency, and product consolidation”.

Deal pipeline steady for large IT firms in Q4FY24

TCS secured deal wins through vendor consolidation in the BFSI and communication segment, while Wipro gained new orders from its recent acquisitions, including Capco, Rizing, and Designit. Infosys deal wins have been in services like SAP S4 and Hana implementation.

Lower attrition rates and negative employee additions help in margin expansion

As revenue streams tighten, firms are looking at cutting down on costs. The attrition rate which was a major concern at the start of FY24, has seen a significant drop in the second half of FY24. Firms are retaining in-house talent by offering them added benefits and promoting them to newer positions.

Attrition rates decline for top tech players

This quarter saw a notable drop in attrition rates across most firms, with an average decline of around 36 bps QoQ. Firms like Infosys have seen a net negative employee addition in FY24 for the first time in the past 23 years. Infosys and Wipro have seen a decline in campus placements in FY24.

HCL tech sees positive employee addition in Q4FY24

While lower attrition rates and negative additions can benefit margins, they also highlight the underlying problem of constrained revenue streams in the industry.

Firms stress margin expansion and cost optimization measures

As the topline slows down, IT firms are working towards increasing profitability by margin expansion. Firms are undertaking vendor consolidation and lowering subcontractor costs to help margin growth. However, these measures may have reached optimum levels, with limited room for further cost cuts. Some margin expansion is expected from higher resource utilization and improved on-site mix. Infosys has improved its resource utilization from 80 bps QoQ to 82.5% and is expected to reach around 84-85% in FY25.

EBIT margins improve for TCS, Wipro, fall for HCL Tech

Infosys margins were impacted by 100 bps due to the renegotiation of a large deal. HCL Tech margins saw contraction on account of seasonality and wage hikes.

Firms like Infosys and Wipro expect margins to expand further by another 100 - 200 bps, while TCS expects it to be range-bound. Tech Mahindra is expected to double its margins in the next three years.

The first half of FY25 will be challenging amid weak macros

Earnings for top IT firms in Q4FY24 have indicated a slowdown in the top line. The trend is expected to continue further into the first half of FY25 until the rate-cut cycle begins. The BFSI segment is expected to see traction after the rate cuts. Firms are looking at alternative business segments but the momentum has been in terms of small deals.

According to Mohit Joshi, CEO of Tech Mahindra, “It's important to look for other sub-verticals that are doing good at the moment. Asset management, wealth management, digital payment systems, etc are expected to be new growth drivers”

Even TCS is looking at new segments like generative AI, cybersecurity, embedded finance, and green transition to offset the slowdown witnessed in its BFSI segment. They are also tapping into newer markets in Asia, Africa, and the Middle East for projects.

While a focus on new verticals might not result in any immediate relief, it may help in scaling revenues in the longer term. Operational efficiencies may boost margins as well. But the sector is clearly in cost control mode as its traditional cash cows are not delivering as much as they used to. The players are hunkering down amid rising interest rates, impending elections, geopolitical tensions, and the emergence of new technologies like AI.

Mutual Funds News

TREND | 15 May 2024

Smart money moves: Which stocks did mutual fund managers buy in April 2024?

By Shreesh Biradar

As the world economy battled geo-political tensions and an economic slowdown, the International Monetary Fund (IMF) upgraded India’s GDP growth forecast for FY25 from 6.5% to 6.8%. However, the market saw increased volatility due to the election season. The broader Nifty 50 gained by 1.2% in April, while sectors like Nifty PSU Bank, Nifty Consumer Durables, and Nifty Auto gained by 8.5%, 7.1%, and 4.9% respectively.

Banking stocks rose on the back of higher deposit growth, improved CASA, and better liquidity positions in recent results. Higher volumes in the auto sector led by electric vehicle and premium segment sales drove auto stocks higher.

Indian equity mutual funds saw a net inflow of Rs 18,917 crore in April, with smallcap funds receiving the highest inflows of Rs 2,209 crore. Largecap and midcap funds recorded inflows of Rs 358 crore and 1,793 crore respectively. With institutional investors focusing away from large caps, the Nifty 500 rose 3.6% in the month, while the Nifty Smallcap saw a growth of 11.4%. Around nine new open-ended schemes were also launched during the month, which attracted Rs 1,532 crore in investments.

Stocks with increasing MF holding - SAIL, Crompton Greaves, City Union Bank, Jubilant Foodworks, RBL Bank

SAIL eyes growth with capacity expansion

Steel Authority of India (SAIL) is in the business of making steel and is one of the Maharatnas among India’s Central Public Sector Enterprises. The company owns five steel plants at Bhilai, Rourkela, Durgapur, Bokaro and Burnpur (Asansol) and three special steel plants at Salem, Durgapur and Bhadravathi. It also owns a Ferro Alloy plant at Chandrapur.

The firm posted volume growth of 5% YoY in FY24, to 19.2 million tonnes (MT). Coking coal prices have dropped by around 9% in Q4FY24, which is expected to help margin expansion. Falling steel prices due to rising Chinese imports, however, are likely to hurt the top line. The firm is operating around 95% capacity utilization and is planning additional capex in phases, starting with an expansion of 4.5 MT in its IISCO plant, and by 3 MT at Bokaro. Capex guidance for FY25 stands at Rs 6,000 crore.

Fund managers who bought shares of SAIL

Fund managers who added shares of Steel Authority of India to their portfolios include Richard D'souza for SBI PSU Fund, Abhishek Bisen and Hiten Shah for Kotak Equity Savings Fund, and Dhaval Joshi and Kunal Sangoi for Aditya Birla Sun Life Pure Value Fund. Fresh buys were done by Vasav Sahgal and Sanjeev Sharma for Quant PSU Fund, and Laukik Bagwe and Dhaval Gada for DSP Dynamic Asset Allocation Fund.

Crompton Greaves prioritizes growth avenues rather than margins

Crompton Greaves Consumer Electricals (CROMPTON) is a home appliances manufacturer with a focus on the fans business, which generates around 45% of its revenue. The pump business contributes 22%, while Crompton’s appliance and lighting business constitutes around 16% each. Its Butterfly Gandhimathi acquisition and other new products add 13% and 15% respectively to the total sales.

Crompton Greaves plans to focus on revenue growth by investing in newer products, expanding the distribution network, and increasing advertisement spending. The firm with its current market share at 27-28%, plans to gain further market share by focusing on its premium & super premium fans, and better channel mix. The firm undertook a price hike of around 3% in H2FY24 for its products. The price hikes will partially offset the margin losses due to higher advertisement spending. The firm is diversifying into the pump business, with a focus on agricultural and solar pumps.

Fund managers who bought shares of Crompton Greaves

Fund managers who added shares of Crompton Greaves Consumer Electricals to their portfolios include Rohit Singhania and Charanjit Singh for DSP ELSS Tax Saver Fund, Sandeep Manam and R. Janakiraman for Franklin India Smaller Companies Fund, Sailesh Raj Bhan and Kinjal Desai for Nippon India Multi Cap Fund. Fresh buys were done by Satish Ramanathan and Chaitanya Choksi for JM Flexicap Fund and Yogesh Patil and Dikshit Mittal for LIC MF Multi Cap Fund.

City Union Bank: Credit growth to pick up in FY25 on a low base

City Union Bank (CUB), one of India’s oldest private sector banks, has around 772 branches and is headquartered in Kumbakonam, Tamil Nadu. It specializes in micro, small and medium enterprises (MSME) loans and has a loan book of Rs 44,017 crore.

City Union Bank is diversifying its loan book to build up its asset quality. While traditionally focused on MSME loans, CUB is now shifting its focus towards newer products like personal loans, loans against property, housing loans, etc. The regulatory issues in its gold loan portfolio and higher NPAs in its MSME loans have hindered loan book growth, and the bank's loan book growth has been limited to below 5% for FY24. The bank's cost of capital has increased due to higher credit costs and a lower deposit base. However, loan growth is expected to pick up in FY25, as the firm has addressed regulatory issues in the gold loan portfolio and NPA slippages have moderated in its MSME portfolio.

Fund managers who bought shares of City Union Bank

Additional shares were bought by Abhishek Bisen and Arjun Khanna for Kotak Banking & Financial Services Fund and Trideep Bhattacharya and Sahil Shah for Edelweiss Small Cap Fund. Fresh buys were done by Samir Rachh and Kinjal Desai for Nippon India Small Cap Fund, Abhishek Bisen and Devender Singhal for Kotak Multicap Fund, and Rohan Korde and Nilay Dalal for ITI Banking and Financial Services Fund.

Jubilant Foodworks focuses on quick delivery and customer rewards

QSR player Jubilant Foodworks (JUBLFOOD) owns a wide portfolio of restaurant brands, including Domino’s Pizza, Popeyes, Dunkin, and Hong’s Kitchen. Despite recent diversification efforts, it relies heavily on Domino’s, which contributed 69.7% of revenue in Q3FY24. The firm has exclusive rights to develop and operate Domino’s Pizza in India, Sri Lanka, Bangladesh and Nepal. Jubilant Foodworks has 2,007 Domino’s stores across 407 cities.

The firm has launched free delivery for orders above Rs 149, rewards programs and Rs 99 meals. This is expected to increase the traction of its orders and help gain market share against Pizza Hut. However, higher incentives and lower footfalls at restaurants overall are expected to hit margins. The firm is undergoing store expansions in its foreign subsidiaries. The company expects moderating inflation, industry expansion and store additions to drive its bottom line.

Fund managers who bought shares of Jubilant Foodworks

Fund managers who added shares of Jubilant Foodworks to their portfolios include Neelesh Surana and Ankit Jain for Mirae Asset Large & Midcap Fund, Sailesh Raj Bhan for Nippon India Multi Cap Fund, and R. Srinivasan and Mohit Jain for SBI Focused Equity Fund. Fresh buys were done by Sumit Agrawal and Ritika Behera for Bandhan Large Cap Fund, and Aishwarya Agarwal and Kinjal Desai for Nippon India Vision Fund.

RBL Bank: Unsecured loans sustain margins

RBL Bank Ltd (RBLBANK), headquartered in Mumbai, is a banking and finance firm that specializes in retail loans and credit cards. It is one of the largest credit card issuers in India with a 5% market share. It caters to 15 million customers through 545 branches. Around 58% of its branches are located in metro areas. The bank has a strong footprint in Maharashtra, Karnataka and Tamil Nadu, with a loan book size of Rs 83,987 crore.

Credit cards are the key revenue driver for RBL Bank, making up nearly 20% of its loan book. The bank has a credit-to-deposit ratio of 81%, which it plans to increase further. The average CASA ratio improved by 140 bps QoQ and advance yields increased by 12 bps. However, increased term deposits have offset the gains in CASA. The bank has lowered its net NPA significantly to 0.7%. Higher provisioning has impacted profitability but has enhanced its provision coverage ratio to 72.7%.

Fund managers who bought shares of RBL Bank

Fund managers who added shares of RBL Bank to their portfolios include Sanjeev Sharma and Vasav Sahgal for Quant Small Cap Fund, Dhimant Shah and Rohan Korde for ITI Small Cap Fund, and Sandeep Jain and Miten Vora for Baroda BNP Paribas Banking and Financial Services Fund. Fresh buys were done by Hardik Shah and Ashish Naik for Axis Balanced Advantage Fund, and Amit Modani for Mirae Asset Multi Asset Allocation Fund.

Stocks with increasing MF holding - Engineers India, CDSL, Angel One, Amara Raja Energy, MGL

Engineers India - Execution quality remains key for huge order book

Engineers India (ENGINERSIN): This PSU specializes in consulting services and engineering of turnkey projects in oil, gas and petrochemical industries in India and abroad.

Engineers India is trying to diversify into new growth verticals like coal gasification, defense and transportation. Its network in the oil & gas industry has helped drive new projects. The firm has an order book of Rs 7,991 crore and another Rs 1,700 crore is in the pipeline. It has guided an EBIT of 27% for consultancy projects and 4% for turnkey projects. The firm is expanding its footprint in the Middle East to take maximum advantage of the oil & gas project hub.

Fund managers who bought shares of Engineers India

Fund managers who added shares of Engineers India to their portfolios include Sanjeev Sharma and Vasav Sahgal for Quant Small Cap Fund and Venugopal Manghat and Gautam Bhupal for HSBC Infrastructure Fund. Fresh buys were done by Sanjeev Sharma and Vasav Sahgal for Quant Value Fund, Gargi Banerjee and Deepak Ramaraju for Shriram Hybrid Equity Fund, and Anuj Kapil for Taurus Ethical Fund.

CDSL: Non-market linked revenue streams to cushion volatility

Central Depository Services (India) Ltd (CDSL) is a banking and finance firm that facilitates the holding of securities in dematerialized form and enables securities transactions. It is an intermediary for exchanges, clearing corporations, depository participants and investors. CDSL has more than eleven crore investor accounts.

In Q4FY24, CDSL saw an 85.9% YoY increase in revenue, driven by higher annuity income and equity delivery volumes. Annuity income is non-market linked and helps maintain revenue streams in the down cycle. Margins expanded by 580 bps to 61.4% in Q4FY24 driven by high margin depository services. The firm is expected to maintain margins of around 60% in FY25. CDSL’s venture into the insurance repository sector is also likely to add new revenue streams.

Fund managers who bought shares of Central Depository Services (India)

Fund managers who added shares of Central Depository Services (India) to their portfolios include Viral Shah and Dhaval Patel for NJ Balanced Advantage Fund and Shridatta Bhandwaldar and Amit Nadekar for Canara Robeco Emerging Equities. Fresh buys were done by Manish Lodha and Abhinav Khandelwal for Mahindra Manulife Small Cap Fund, Sachin Jain and Shreyash Devalkar for Axis Multicap Fund, and Hardick Bora and Sanjay Bembalkar for Union Flexi Cap Fund.

Angel One: Increased competition eating away at margins

Angel One (ANGELONE), is a capital markets firm with expertise in the brokerage business of stocks, currency, commodities and derivatives. It also earns revenue by providing margin facilities, depository services, mutual fund distribution, etc. The firm also has portfolio management services.

In Q4FY24, Angel One’s net profit increased by 27.4% YoY to Rs 339.9 crore, while revenue rose by 64.4% YoY to Rs 1,357.3 crore on the back of increasing gross client acquisition and average daily turnover (ADTO). The firm's EBITDA margin contracted by 770 bps YoY to 39% during the quarter. The company spent heavily on client acquisition and technological upgrades to fend off competition from online brokers such as Zerodha, Groww, and Upstox.

Fund managers who bought shares of Angel One

Fund managers who added shares of Angel One to their portfolios include Ankush Sood and Niket Shah for Motilal Oswal Flexicap Fund, Rupesh Patel for Nippon India ELSS Tax Saver Fund, and Manish Gunwani and Rahul Agarwal for Bandhan Core Equity Fund. Fresh buys were done by Anand Laddha and Dhruv Muchhal for HDFC Capital Builder Value Fund, and Sandeep Manam and R. Janakiraman for Franklin India Smaller Companies Fund.

Amara Raja Energy & Mobility: Auto division propels near-term growth

Amara Raja Energy & Mobility (ARE&M), headquartered in Hyderabad is an auto component manufacturer specializing in manufacturing lead-acid and lithium-ion storage batteries, and inverters. Its batteries find applications in the telecom sector, railways, automobiles, power control and home appliances. The firm is also into manufacturing lithium-ion batteries, contributing 4% of the total revenue.

Amara Raja's Q4FY24 revenue growth is expected to be around 15-16% YoY, aided by higher demand in the auto sector. The industrial division is also expected to see an uptick due to 5G expansion by telecom players. The firm is expected to see margin expansion on account of lower lead prices in the past two quarters. It is also seeing high traction in its industrial segments and is expected to clock more than 90% capacity utilization in the quarter. Amara Raja is also investing Rs 3,000 crore in building a 500 MWh lithium-ion plant.

Fund managers who bought shares of Amara Raja Batteries

Fund managers who added shares of Amara Raja Batteries to their portfolios include R. Janakiraman and Sandeep Manam for Franklin India Smaller Companies Fund, Rajat Chandak and Priyanka Khandelwal for ICICI Prudential Transportation and Logistics Fund and Manish Gunwani and Kirthi Jain for Bandhan Small Cap Fund. Fresh buys were done by Satish Ramanathan and Gurvinder Wasan for JM Flexicap Fund and Dhawal Dhanani and Paras Matalia for Samco Active Momentum Fund.

Mahanagar Gas to benefit from rising CNG adoption

Mahanagar Gas (MGL) is a city gas distribution utilities firm operating in Mumbai, its adjoining areas, and the Raigad district of Maharashtra. The company distributes CNG for use in motor vehicles, and PNG for domestic households and commercial/industrial use. Nearly 70% of the company’s revenue is from CNG sales. The firm has 347 CNG stations under its banner.

In Q4FY24, its net profit declined by 6.1% YoY to Rs 252 crore despite a 1% YoY growth in its revenue. Margins contracted on account of higher power and fuel costs, transportation, and dispensation expenses. Higher vehicle conversion to CNG along with an increase in piped gas connections are expected to drive future growth. The firm has a capex plan of Rs 1,000 crore for FY25. The government plans to raise the share of natural gas in India’s energy mix to 15% by 2030, up from the current 6%. This should boost MGL’s prospects.

Fund managers who bought shares of Mahanagar Gas

Fund managers who added shares of Mahanagar Gas to their portfolios include Dhaval Gala and Dhaval Joshi for Aditya Birla Sun Life PSU Equity Fund, Shreyash Devalkar and Mayank Hyanki for Axis Small Cap Fund, Anil Ghelani and Diipesh Shah for DSP Nifty Smallcap250 Quality 50 Index Fund, and Himanshu Mange for Nippon India Nifty Smallcap 250 Index Fund. Fresh buys were done by Harshal Joshi and Daylynn Pinto for Bandhan Multi Cap Fund.

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The Baseline

03 May 2024

India’s rising military exports boost defence stocks | Screener: Defence stocks with strong estimates

By Shreesh Biradar

After the Russia-Ukraine war, PM Modi, in a conversation with Vladimir Putin, said, “This is not a time of war”. But while global leaders welcomed the statement, military spending has shot up worldwide.

Military spending has jumped on the back of rising 'tensions' - the word we use for worsening relationships between heavily armed states. Russia-Ukraine and Israel-Gaza have already caused thousands of deaths. Risky face-offs have been happening between China and its East Asian neighbours, between India and China, and between Israel and Iran.

Each time, these countries backed off from the cliff's edge, before these fights could blow up into a bigger war. But heads of state have recently exchanged increasingly aggressive statements. When Phillipines President Ferdinand Marcos Jr congratulated the winner of Taiwan's election (who the Chinese disliked), China summoned the Filipino ambassador and warned him, "don't play with fire". After China's renaming of various parts of Arunachal Pradesh, Defence Minister Rajnath Singh asked recently, "What if we rename parts of China? Don't try to hurt our self-respect."

As the situation grows more volatile, countries are busy forming military alliances and building in-house defence systems. Heads of state continue to say that peace is crucial, but money talks: global military spending has increased to $2,443 billion in 2023, a 6.3% rise from 2022. This is the highest jump since 2009.

Military spending by the US ($916 billion) and China ($296 billion) account for nearly half of global spending. India spends around $83.6 billion, making it the fourth largest. But unofficial numbers of China's military spend are even higher. According to the American Enterprise Institute, China spent $710 billion - more than twice its official figure - on its military.

To counter the threat of a China that is busy arming itself with long-range drones, nuclear warheads and AI systems, smaller Asian countries are partnering with India, the US and key regional powers like Japan and South Korea. Over the past decade, India has shifted from a non-aligned player to a strategic ally for the US, Japan and Australia. Australian PM Anthony Albanese noted, “China has amassed the greatest military build-up of any nation since World War II. So the regional defence cooperation of India, Japan and Australia is key to bringing stability to the South China Sea”.

While India’s defence manufacturing is small compared to the G20 countries, our defence exports have already risen by 32% to Rs 21,083 crore in FY24. These exports are boosting domestic defence players.

In this week’s Analyticks:

Defence sector boom: India’s rising defence exports are a win for the domestic industry
Screener: Rising defence stocks with high Forecaster growth estimates for revenue and EPS in FY24

Let’s get into it.

India’s military expenditure is rising in an uneasy world

India’s skirmishes with China in the Galwan Valley, and the Balakot strikes in Pakistan brought India close to war-like scenarios. As the borders become uneasy, India is ramping up military expenditure by modernising its weapon systems. Most of the spending has been towards procuring more fighter aircraft, unmanned capabilities, helicopters, tanks and artillery guns.

India’s military spending is 28% of China’s official military spending, and just 11% of unofficial numbers. China has also been spending (nearly $43 billion) on R&D and in-house systems.

China’s military expenditure has increased almost 3 fold in the past 14 years

China has developed 5th generation J-20 fighter planes, which are far superior to India’s indigenous Tejas (developed by HAL). To counter China, India is buying foreign aircraft like Rafael along with existing MIGs.

Pakistan's military expenditure of around $8.5 billion has been constrained due to its economic crisis. Pakistan is spending around 14.5% of its GDP towards its military, and has strengthened its China relationship by increasing defence imports from China by 43%.

Pakistan is spending nearly 15% of its GDP on military

Old relationships are also fraying and countries are finding new friends. India’s military partnership with Russia has weakened as China, Pakistan and Russia have grown closer, especially after the Russia-Ukraine war. Russia has been supplying defence systems to both Pakistan and China, which is a serious threat as major Indian defence systems are Russian.

So India is quickly changing its defence strategy - Russia accounted for 76% of India’s procurement in 2014, but only 36% today. Indian defence deals are now being signed with France, the US, Israel, Spain and Germany.

India is building military alliances while increasing defence exports

India is no longer a 'non aligned' country. It has been building alliances with key players and providing military assistance to countries in distress.

The Quad group, comprising India, the US, Japan, and Australia is working for security in the South China Sea. The group is conducting maritime exercises with smaller nations like the Philippines and Taiwan.

India has also increased defence exports to allies. It dispatched the first batch of its supersonic Brahmos missiles to the Philippines in a $375 million deal. Brahmos missiles are known for their high range and precision with a striking capability range of 500 km, speeds up to 3.5 Mach and are capable of evading radar systems.

India’s defence exports rise 32% in FY24

To beat back the Turkey-Pakistan alliance, India is supplying Akash missiles to Armenia in a Rs 6,000 crore deal. Countries like Singapore, Egypt, Sri Lanka, UAE, Turkmenistan, and Malaysia have shown interest in buying the indigenously developed Light Combat Aircraft (LCA) Tejas.

Defence firms are seeing big opportunities with offset policies

India’s defence budget increased by 4.7% YoY to Rs 6,21,450 crore in FY25. Most of the spending is toward buying foreign-manufactured fighter aircraft. The government's clause in the defence offset policy (foreign firms need to invest a certain percentage of the deal value in India) is a big boost for domestic manufacturers. The offset policy has resulted in $7.9 billion in new orders for domestic firms. Defence stocks have outperformed the broader indices owing to an uptick in new orders.

Defence stocks outperform the Nifty 50 in the past year by huge margins

Zen Technologies Chairman Ashok Atluri expects the firm's revenue to grow by 50% CAGR for the next four years. Zen Technologies has bagged orders for Tank simulators and anti-drone systems. The firm has an order book size of Rs 1,500 crore with an export order book of Rs 437 crore.

PSU defence firms like Hindustan Aeronautics and Bharat Electronics have also been winners of the offset scheme. HAL has delivered two Hindustan-228 aircraft to Guyana Defence Forces and has made tie-ups with General Electricals USA for the manufacturing of aircraft engines. HAL expects to double its revenue in FY25 due to order execution of 83 Tejas aircraft.

PSU defence firms have the largest order books in the industry

Bharat Electronics has reported a 13.7% growth in its revenue for FY24. The firm has benefited from export orders of Akash missile systems, communication systems for naval ships, radars, night vision devices and so on. The firm is expected to win orders of around Rs 50,000 crore in FY25 and FY26, and is expected to grow its revenue by 20% CAGR in the same period.

Mazagaon Dock Shipbuilders supplies ships and submarines to the Indian Navy. It has recently won orders for the supply of patrol vessels (Rs 1,612 crore) and hybrid-powered vessels (Rs 350 crore). Its current order book stands at Rs 35,000 crore. It has formed a JV with Germany’s Thyssenkrupp to bid for Rs 45,000 crore worth six P-75 class submarines for the Indian Navy. The firm is also looking at exports to countries like Sri Lanka, Brazil and South America.

While Indian firms are benefiting from increased global military spending, India still lacks key technology and depends on foreign counterparts. Defence tech has been seeing rapid innovations in unmanned systems, drone warfare, deep tech and now artificial intelligence. We need to step up our game by investing in R&D and scaling up domestic manufacturing in these areas, to truly gain an edge in both exports and on the battlefield.

Screener: Rising defence stocks with high Forecaster growth estimates for revenue and EPS in FY24

Defence stocks boast double-digit growth forecasts from analysts

As the result season is ongoing, we take a look at the booming sector of defence and stocks which are touted for growth in FY24. This screener shows defence stocks that have risen over the past year with high durability and Forecaster growth estimates for revenue and EPS in FY24.

Major stocks that appear in the screener are Data Patterns, Bharat Dynamics, Mazagon Dock Shipbuilders, Bharat Electronics and Astra Microwave Products.

Data Patterns has the highest Trendlyne Forecaster estimates for YoY revenue growth at 26.7% in FY24, Forecaster also expects the company’s EPS to grow 32.7% YoY. The company rose by 78.6% over the past year. Nirmal Bang is positive on the stock on the back of high demand from the armed forces for defence electronic systems, and the company’s diversified ability to design and develop in multiple domains – space, air, land and marine.

Bharat Dynamics also features in the screener with Trendlyne Forecaster estimates for revenue and EPS YoY growth at 16.3% and 49.5% for FY24. The company has risen 94.3% over the past year. Analysts believe that the company’s large order book will provide headroom for growth over the next 3-4 years with order execution picking up in H2FY24 and FY25. Analysts also expect the company to receive an influx of orders as it is the primary provider of guided missiles and torpedoes to the Indian Armed Forces.

You can find more screeners here.

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FMCG

SECTOR | 25 Apr 2024

FMCG sector growth to be led by premium products, but rural demand is missing

By Shreesh Biradar

The FMCG sector is considered to be consumer-defensive, and expected to be resilient in an economic downturn. However, the industry is facing headwinds from slowing rural consumption. The rural economy contributes nearly 40-50% of the revenues for the sector. That 50% is under pressure – erratic rains, lower harvest, high inflation, and premiumization of products have hurt rural consumption in …

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The changing, increasingly premium tastes of the urban Indian consumer were a lifeline for FMCG companies. Growth in the first half of FY24 was driven by premium product sales.

The second half of the year however, has been hit by lower volume offtake. Weak rural demand has pushed volumes down. According to Rohit Jawa, the MD and CEO of Hindustan Unilever (HUL), “Rural growth continues to be subdued. But we expect a gradual recovery with increased government spending, higher crop sowing, and better crop yields this season.”

FMCG CEOs are counting on cooling inflation and lower commodity prices to drive price cuts and volume growth. This, alongside a normal monsoon and election spending are expected to help the FMCG sector in FY25, but the near-term outlook until Q1FY25 remains bleak.

Higher crude prices are also expected to impact players like HUL, Godrej Consumer Products, and Tata Consumer Products which use high-density polyethylene (HDPE, plastic) for their products. This has resulted in some of the biggest FMCG companies underperforming the Nifty 50 index in the past quarter.

Major FMCG firms underperform the Nifty 50

Only Godrej Consumer Products managed to outperform the Nifty 50 and Nifty FMCG index. Nifty FMCG has given negative returns in the past quarter.

Premiumization driving growth as volumes stay muted

The divide in disposable income between urban and rural populations has become more obvious, with premiumization trends catching up in urban areas, while rural areas are still price sensitive. Consumers are less price-sensitive in urban areas and are ready to spend higher on better-quality products. For instance, premium products of Tata like Tata Sampann, Tata Soulfull, Tata SmartFoodz, etc have seen 40% growth in Q4FY24, while non-branded foods have seen growth of 4%.

Nestle India’s CEO and Managing Director stated “There is a polarity of booming premiumization and tepidness in the mainstream. However, premium products have lower impact of macro factors, while mainstream products come under stress with changing economic conditions.”

Lately, the demand environment in rural areas has been a concern. Erratic rains, rising inflation (higher in rural areas compared to urban areas) and lower harvest in FY24 have impacted consumption. Mainstream products which typically see higher consumption in rural areas are under pressure.

In Q4FY24, Nestle India is expected to drive revenue growth on the back of rising coffee prices. Tata Consumer Products has reported a 9% growth in its revenue for FY24 led by its premium product portfolio.

Forecaster estimates see around 4% revenue growth for the top six FMCG firms

While volumes have been tepid, firms like Tata Consumer Products are achieving growth via the inorganic route by acquisition route. For instance, Tata Consumer Products acquired Organic India for Rs 1,900 crore and Capital Foods for Rs 5,100 crore. The firm has also added one new product every week in FY24.

Cooling inflation and lower commodity prices have driven price cuts

Food prices have driven inflation in India. Vegetables, pulses, and cereals are the major reasons behind the sticky inflation of the past 6 months. The erratic rains have led to late harvesting and lower yields. For instance, wheat yields and procurement have been at the lowest in the past five years. Wheat forms an important ingredient for FMCG players like Marico, Britannia, Nestle, etc.

However, the wholesale price index inflation is still lower at 0.5% in March 2024. Commodity prices for Barley (-25.5%), Mentha Oil (-18.4%), Palm Oil (-7.1%) and Skim Milk Powder (-1.6%) have fallen significantly YoY. The prices of wheat (2.5%) and palm fatty acids (3.8%) have seen a marginal increase.

CPI inflation in March-24 is lowest in the past nine months

FMCG firms are passing on the benefits of lower input costs in mainstream products to end consumers, by cutting down on prices. This is expected to drive the volume offtake in highly price-sensitive rural markets and limit competition from unorganized players. Categories like biscuits, personal care, laundry and food products have seen increased competition from unorganized players. According to Axis Securities, price cuts are expected to impact revenue growth by 2% for Hindustan Unilever.

While the price cuts are expected to hit revenues from mainstream products, premium products are expected to reap the benefits of lower input costs.

Gross margins are expected to rise as inflationary pressures ease

As the inflationary pressure is set to ease further in the first half of FY25, FMCG firms expect to see significant margin expansion.

Advertising and brand spending increase to push falling volumes

FMCG firms are expected to see their EBITDA margins moderate as they spend more on advertisement and branding. The spending on promotions has increased significantly in FY24. Larger firms with deeper pockets are pushing their premium brand product portfolio, while smaller firms tend to spend on their mass-market product portfolio.

Many firms have been vocal about launching new products to compensate for the volume of offtake losses in rural regions. Tata Consumer’s new products are increasingly on the premium side to drive margins. According to Vikas Gupta, Global Head for R&D at Tata Consumer Products, “ To achieve the balance between margins and volumes we are trying to increase the premium products by incorporating a 50:50 split between premium and mass products.”

FMCG firms have increased ad-spends significantly in 9MFY24

While the spending might have helped in an upbeat market, at the current juncture promotional spending is constricting margins.

Nestle and Dabur India are expected to drive profitability in the FMCG pack. Tata Consumer Products reported a 19.4% drop in net profits for Q4FY24. A one-off expense of Rs 216 crore related to the acquisition has led to lower profits.

Nestle India expected to lead YoY net profit growth

Normal monsoons and post-election spending to drive the growth in FY25

Heightened competition in the FMCG space due to low entry barriers and price-sensitive nature limits players from taking price hikes. But the trends look locked in: FY25 is expected to see an uptick in volume growth in rural areas, while urban areas will see higher consumption of premium products. Godrej Consumer Products CFO, Aasif Malbari stated, “ Normal monsoons should help increase agricultural output and bolster the rural economy. Rural sector volume offtake will be the key pivotal growth factor in FY25”.

According to NielsenIQ, the FMCG industry is expected to grow around 5.5% in 2024, which is nearly 40% lower than in 2023. Rural sector volume offtake will be the key pivotal growth factor in FY25”. Election-led spending coupled with lower inflation is expected to further push consumption patterns across the board.

Although FY24 looked challenging for the industry with changing market dynamics, the sector is seeing green shoots with cooling inflation and the rising popularity of premium products, indicating a changing urban Indian consumer. The resumption of government spending post a full budget in June is also expected to enhance consumption patterns. However, the industry needs to make further investments in the sector in terms of newer products, higher penetration, e-commerce, etc. The industry needs to evolve according to changing times.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.

Aviation

SECTOR | 18 Apr 2024

Indian airline industry poised for growth, but grounded aircraft pose a serious challenge

By Shreesh Biradar

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The Indian airline industry is soaring – passenger volume growth has exceeded pre-covid levels and has grown around 13% in FY24. This comes as Indians have shown a growing appetite for air travel. The industry is seeing a duopoly with InterGlobe Aviation (Indigo) and Air India with nearly 70% market share. The pricing discipline and volume growth by top players are expected to cut losses in FY24. Indigo’s share price has surged 37.6% in the past six months, a clear sign of optimism, but recent issues with aircraft engines (Pratt & Whitney), flight cancellations and strikes by pilots and ground staff have limited the industry’s growth momentum.

Government’s infrastructure push has helped passenger volume growth

The Indian government has developed 74 airports in the past 10 years and expects another 14 airports to be inaugurated in 2024. A higher number of airports have been developed in Tier-2 cities while ramping up the number of terminals in large airports. According to Indigo Airlines, nearly 87% of India’s population is within 100 km of an operational airport. The construction time of an airport has also come down significantly, from 5 years to 20 months. Airport privatization has also helped increase investments by private players. For instance, Adani Airports is expected to invest around $7 billion in airport development across India.

India’s passenger volume is expected to grow by around 12% CAGR over the next six years. Aircraft carriers like Indigo and Air India have ordered 500 and 470 aircraft from Airbus and Boeing to cater to the growing demand and replace the aging fleet.

Indigo leads the pack in volume growth

The rise of low-cost carriers in the airline industry has led to volume growth. The rise in income levels of the middle class and increased connectivity to smaller cities has also given the industry a boost. According to ICRA, India’s airline industry is expected to grow around 8-13% in FY25.

An increase in leisure travel and corporate activities has driven up passenger volumes. Big events like the G20 summit, World Cup, and IPL have also pushed up demand in otherwise dull seasons. Indian airline carriers are increasingly adding new domestic and foreign destinations to attract customers.

According to Indigo’s CEO Pieter Elbers, “ Indian customers are eager for air travel but are price sensitive. Whenever we add a new destination, a huge demand uptick is seen for that route.” Most of the recent foreign destinations added by airlines are in the Middle East, Southeast Asia and parts of Africa.

Indigo dominates India’s airline passenger volume growth

Indigo has gained volumes after Go First declared bankruptcy, as it ramped up its operations to take advantage. SpiceJet, faced with a liquidity crunch, was unable to use this opportunity – it was Air India that cashed in, instead. The weaker players are being weaned out, while stronger firms are gaining ground.

With higher ticket prices and a volume uptick, the airline industry’s net losses are expected to contract from Rs 17,000 crore in FY23 to Rs 3,000 crore in FY24. Higher passenger load should also boost profitability

The passenger load factor (PLF) of the industry has consistently remained above 85% for the past year. The peak holiday seasons (December and January) have seen PLF levels above 90%. While high PLF is good for the industry, this has led to higher ticket prices, constraining the price-sensitive industry’s volume growth.

Indigo’s passenger load factor has consistently underperformed the industry averages.

Lower numbers of operational aircraft due to persistent Pratt & Whitney engine issues have been a major reason for the elevated load factor, as planes get grounded due to engine issues. The pilot strikes at Vistara and Air India coupled with flight cancellations due to weather also increased the load factor in recent months.

Engine issues have troubled Indian airlines, made headlines

The engine issues with Pratt & Whitney have already claimed one victim, with the closure of Go Air. Other major airlines are grounding their aircraft periodically to check engine issues, and operational fleet size has been hit. Despite new destinations being added and new aircraft deliveries, India’s seat capacity (measured in available seat kilometers - ASK) has been range-bound around 14 million ASK on account of grounded aircraft.

According to travel portal Cleartrip CEO, Ayyappan Rajagopal, “Due to ongoing supply chain and engine issues, capacity addition has taken a hit. This will lead to higher fares for domestic travel”.

Lack of new aircraft additions is limiting growth in available seat kilometers

Indigo currently has more than 70 aircraft grounded, while SpiceJet has grounded 25 planes due to engine issues. Overall, more than 200 aircraft are expected to be grounded this year due to engine issues.

Capacity addition has been a core focus area for major airlines

Airlines are focusing on capacity additions to meet rising passenger traffic. Indigo (500 aircraft), Air India (470 aircraft), and Akasa Air (150 aircraft) together have put an order with Boeing and Airbus for 1,120 planes. The delivery is spread across the next five years, with nearly 150 aircraft scheduled to be delivered in 2024. Indigo and Air India are expected to see one delivery every week this year.

Indian airline industry is expected to add around 150 planes to fleets in 2024

Commenting on the underserved Indian market, Air India’s CEO Campbell Wilson stated that “India had 43 wide-body aircraft at the time of Air India’s privatization, while Dubai had 250, Singapore had 150, and Qatar had 175. That highlights the subscale nature of Air India and the opportunity it has to grow”.

The new aircraft additions will help enhance the capacity of Indigo by around 17% (current fleet size 342 aircraft) and Air India by around 56% (current fleet size 124 aircraft).

New-gen aircraft and lower fuel prices to aid margins

New aircraft additions are also expected to help save fuel expenses. For instance, the newly inducted Airbus A320 neo aircraft are 15-20% more fuel efficient than their previous versions. The newer aircraft also have lower maintenance and operational costs.

Fuel costs, which account for around 35% of the airline expenses, are the major driver behind profitability. Aviation turbine fuel (ATF) is closely linked to crude prices, which the government and OMCs like the Indian Oil Corporation monitor.

Aviation turbine fuel prices have moderated despite rising crude prices in the past five months

ATF prices have dropped by around 14% in the past five months, which is expected to help expand margins. This comes despite crude prices remaining range-bound around $80- $85 in the two quarters.

The Indian airline industry has been buoyed by increased travel and rapid growth in airport infrastructure. Higher ticket prices and lower fuel prices should give airlines a margin boost. However, grounded flights, pilot strikes and slower delivery of new aircraft are speed-breakers in a growing industry, even as it has opened up new revenue sources via international destinations. But higher travel standards of foreign players and intense competition in the global market mean that domestic players don’t have an easy ride ahead.

Oil and Gas

SECTOR | 03 Apr 2024

Under pressure: Indian oil marketing companies face crude price rise, government cuts to diesel, petrol prices

By Shreesh Biradar

Economies worldwide have been fire-fighting inflation, but a multiplicity of crises have fuelled price increases in a key input – crude oil. The Red Sea attacks, Ukraine drones targeting Russian refineries, and OPEC production cuts have strained crude supplies. Meanwhile, the expected recovery in Chinese and European oil consumption has boosted prices.

Brent crude prices have consequently recovered from December …

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Brent crude prices have consequently recovered from December lows of $73 per barrel to $87 per barrel. Indian oil marketing companies (OMC) stocks previously benefitted from the two-year freeze in fuel prices, and cheaper Russian Ural. The Nifty Oil & Gas surged by 21.6% in the past quarter, while benchmark index Nifty 50 has risen by 3.2%.

For the past month however, OMCs have faced difficulties in sourcing cheaper Russian oil amid tightening sanctions, and are expected to see their margins contract as they buy pricier crude and absorb cuts in petrol and diesel prices by the Indian government.

India’s crude imports shift from Russia to Saudi Arabia and the US

After the Western sanctions on Russia, India benefited from heavily discounted Russian oil. However, the narrowing price discount of Russian Ural and Brent crude in recent months, coupled with increased scrutiny on vessels carrying Ural crude have limited Indian imports. Saudi Arabia, the major crude supplier to the Asian market, also cut crude prices by $2 per barrel for the Asian market to compete with cheaper Russian oil. India has increased its crude imports from Saudi Arabia to tide over shortages in Russian oil.

India’s crude imports from the US and Saudi Arabia rise to a 4-month high

Ramped-up US crude production amid the production cuts announced by OPEC+ has pushed India to diversify its crude purchases. According to Bloomberg India’s top refineries Bharat Petroleum, Indian Oil and Reliance Industries together have purchased about 7 million barrels from the US for April loading. This will be the highest US crude imports in the past 10 months. However, Russia remains India’s major supplier of crude with nearly 28% market share in February 2024.

Rising crude prices hurt refining margins

Recent attacks by Houthi rebels in the Red Sea have led to a build-up of 100 million barrels of oil in international waters. As a result, the cost of freight and risk premiums have increased on the route. A rising number of tankers have also been sanctioned by the US for violating the G7 price cap and shipping Russian oil. According to Goldman Sachs, these events have led to crude prices increasing by $4 per barrel. Higher manufacturing activity in China for March has also hinted at a recovery in China’s oil consumption. Reduced oil inventory levels in the US have also aided in the recovery of oil prices.

Brent crude on delivery (free on board) prices rise in Q4FY24

The Brent crude free-on-board (FOB) price has increased by 9.1% from $77.4 in December 2023 to $84.5 in March 2024. India, which meets 85% of its oil requirement via imports, has been adversely impacted.

OMCs’ gross refining margins expected to drop in Q4FY24

Higher crude prices are expected to hurt gross refining margins. GRMs have been buffered due to the drone strikes by Ukraine on Russia, which has wiped off Russia’s 15% refining capacity. However, gross GRM is not expected to drop significantly in Q4FY24. As a result, the benchmark Singapore GRM has risen to $8.2 per barrel in March 2024 from $5.5 in Q3FY24.

The impact of high crude prices on Indian OMCs is partially offset by increased exports of refined oil to Europe. The low-cost inventory from Q3FY24 might help in sustaining margins in Q4FY24. Indian OMCs are expected to see a drop in GRM of around $1-2 per barrel QoQ in Q4FY24. The drop in GRMs might extend by another $1-1.5 per barrel in Q1FY25 as new high-cost inventory comes into play.

Singapore's gross refining margins are lower than Indian refiners

Indian refineries' gross margins are currently higher than the standard Singapore gross refining margins. If oil prices stabilise around $85, GRMs are expected to moderate around $7-8 per barrel for major OMCs.

Price cut due to elections will hurt retail margins

The retail margins of the OMCs are expected to rise from the Q3FY24 lows. Even though crude prices dropped in Q3FY24, high-cost inventory from the previous quarter has resulted in lower retail margins. The rising crude prices in Q4FY24 will constrict retail margins in Q1FY25.

Retail margins are expected to drop post the Rs 2 price cut in diesel and petrol

Even though the retail prices of diesel and petrol have been regulated, the Indian government announced a price cut of Rs 2 per litre on both petrol and diesel effective from 15 March 2024, ahead of the Lok Sabha elections. OMC stocks plunged around 8% on 15 March, after the announcement. The announcement has impacted investors’ belief in the deregulation of OMC's pricing mechanisms. The price cuts will add pressure to retail margins, and at current prices, the Q1FY25 retail margins on petrol and diesel are expected to drop to Rs 5.2/litre and Rs 1.5/litre on petrol and diesel respectively.

Strategic changes India has made to its oil suppliers have so far limited the impact of high crude prices. However, with constraints on Russian oil and rising prices, Indian OMCs will see a significant contraction in margins. Government intervention and high debt levels of the OMCs will further limit profitability.

Pharmaceuticals & Biotech.

SECTOR | 25 Mar 2024

Volume-led growth, price stabilization and new US launches boost Indian pharma

By Shreesh Biradar

India’s pharmaceutical industry, which caters to around 20% of the global supply chain, has been gaining traction in the past couple of quarters. Indian pharmaceutical industry, the recovery in prospects and prices, which began in earnest in June 2023, is a welcome one, after several quarters under pressure due to declining volumes and price erosion in the US.

The …

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The Q3FY24 earnings saw industry trends stabilize further. The price erosion in the US moderated, while new drug launches provided a cushion. Input costs declined, reducing the pressure on margins. Domestic formulations saw volumes tick up along with price increases. The Nifty Pharma gained 15.1% in the past quarter outperforming the benchmark Nifty 50 index by 11.5%.

India business drives volumes, while limited price erosion in the US helps margins

The US market has been critical for Indian manufacturers – it's a high-margin business that accounts for 30-35% of the total revenue. Since the start of FY23, pharma firms have seen price erosion and contracting margins. However, prices stabilized in Q3FY24, with US revenues for Indian pharma expected to grow at 11-13% in FY24. Zydus Lifesciences reported 18.7% growth in the US market in Q3FY24, while Sun Pharmaceuticals reported 13.9% growth. According to Pranav Amin, MD of Alembic Pharmaceuticals, “Supply shortages in the US market have boosted demand and limited price erosion”

Operating profits in the pharma industry improved in the past three quarters

The Indian market is also looking up. The domestic formulation business has revived on higher volumes and an increase in domestic prices. Manufacturers are developing flagship brands to facilitate the premiumization of products. The increased penetration in Tier II and rural areas along with wellness products is helping drive the volumes. According to HDFC Securities Indian pharma market is expected to to grow at around 8-10% in FY25.

Product diversification and ANDA approvals to help scale revenue

Indian drug formulations are facing intense competition in the US genetic space, leading to price erosion. Firms are instead focusing on new product launches and exclusivity. For instance, Revlimid (used for Cancer treatment) is expected to generate $372 million and $165 million in FY24 revenue for Dr Reddy’s Laboratories and Cipla. However, exclusivity is expected to end FY26 January and other big players like Aurobindo Pharma are in the fray to win exclusivity. Thus the launch pipeline of new drugs is essential. Aurobindo Pharma has the highest number of pending approvals on abbreviated new drug application (ANDA) with the US Food & Drug Administration

Indian pharma’s pending ANDA & NDA approvals to help product launches

Cipla’s launch pipeline includes respiratory drug Advair and cancer drug Abraxane, both commanding a $700 million revenue opportunity each to make up for the loss of Revlimid sales. Sun Pharmaceuticals is expected to launch Deuruxlitinib (used to treat a specific type of hair loss) in FY25 with a potential revenue of $200 million.

The Indian pharma industry needs to be self-reliant with input chemicals

India depends on China for key starting materials (KSM) and active pharmaceutical ingredients (API) for drug manufacturing. India’s KSM imports from China account for nearly 50% of India’s demand. For instance Aurobindo Pharma sources 55% of its raw ingredients from China.

To cut down on this dependence, the Indian government implemented the PLI scheme for bulk drugs and API manufacturing in FY21. Under the scheme, Rs 25,813 crore investments have been made and Rs 1,16,121 crore in sales recorded (including Rs 75,141 crore exports). However, to compete with China, India requires consistent investments over the next 4-5 years. For now, India depends on China for even common antipyretic drugs like paracetamol.

Major input APIs for pharma industry have seen declining prices in the past two quarters

The top 15 APIs imported from China as raw materials to the Indian pharma industry saw a price decline of 13% YoY in Q3FY24. The decline in prices has been on account of lower chemical production in China, and oversupply in Indian markets due to the PLI scheme for chemicals. For instance, Meghmani Organics has set up an installed capacity of 13,500 tonnes for paracetamol manufacturing under the PLI scheme.

Indian manufacturers unable to benefit from lower raw materials cost

Indian manufacturers have been unable to take advantage of lower raw material costs in Q3FY24. Lower input costs in the past two quarters have not translated into operating margin expansion. Pharma firms have instead been passing on the benefits to end-customers resulting in price erosion in major markets like the US and EU. However, price erosion has moderated in the Q3FY24.

Freight cost in Q3FY24 also declined below $1,500 (per 40-foot container). However, post-January 2024, freight prices have more than doubled to $3,000. This might increase the logistical cost for pharmaceutical exporters.

Pharma industry did not benefit from declining raw material cost

Domestic drug prices in India are regulated by the National Pharma Pricing Authority (NPPA). The NPPA announces the ceiling of drug prices based on wholesale price inflation (WPI). Considering WPI has been negative (-1.1%) for 9MFY24, the price increase in FY25 should be marginal (roughly 0.01% increase).

Contract development and manufacturing to pick up pace with China +1 policy

China has been the preferred destination for contract development and manufacturing organization (CDMO) due to its cheaper costs. However, the escalating US-China trade war has given India a golden opportunity. US pharma majors are looking at India, to avoid the supply chain constraints caused by trade wars. India has the largest number of US FDA-approved manufacturing sites outside of the US. This makes it easier for outsourcing for US majors.

However, quality concerns with Indian manufacturers, with deaths In Africa and Central Asia due to contaminated Indian-origin cough syrup, and blindness caused by India-manufactured eye drops, have raised flags with the FDA. The regulator said that it plans to ramp up unannounced inspections on India-based manufacturing units.

The Indian CDMO business is currently at $15.6 billion (China at $27.1 billion )and is expected to grow at 11% CAGR (9.6% for China) for the next two years. However, the individual firms expect the growth to be above 15%. India’s largest listed CDMOs, Piramal Pharma and Syngene International have reported increased interest in contract manufacturing and are expecting major order inflows in FY25.

Nifty Pharma is trading at high valuations

Nifty Pharma has gained 60.7% in the past year, beating the benchmark index by 32.1%. The rise in Nifty Pharma has sparked a debate around its valuation. The pharma sector’s earnings have grown around 21% YoY in Q3FY24. However, the current PE valuation at 35.1 is higher compared to its short-term and long-term averages.

Nifty Pharma PE trading higher than historical averages

Nifty Pharma’s 1-year forward PE of 27.8 offers some comfort. The future growth in pharma is looking upbeat, thanks to a reversal in price erosion trends, and a focus on new products. Also, the volume-led growth in the Indian market will help in maintaining the topline. The increasing API and bulk drug production in India will be key in lowering input costs.

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