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 Aug 2023

Smart money moves: Which stocks did mutual fund managers buy in July 2023?

By Shreesh Biradar

In July, the benchmark indices Nifty 50 and Nifty 500 surged by 2.9% and 3.8% respectively. The Nifty 50 hit an all-time high of 19,991 briefly, supported by an upbeat earnings season. However, the broad index retreated from its peak as weak IT earnings, India’s inflation imprint for July and China’s slowing economy weakened investor sentiments. India’s retail inflation in July reached a 15-month high of 7.4%.

Domestic institutional investors sold equities worth Rs 1,184 crore in July 2023. The volatility in large-cap stocks has brought back the focus on small-cap growth stocks. The Nifty Smallcap 100, which shot up by 8% in July, saw the highest interest from fund managers.

Bharat Heavy Electricals’ MF holdings increase to 1,934.8 lakh shares in July

BHEL: Order wins are key to growth

Bharat Heavy Electricals Ltd (BHEL) is a power plant equipment manufacturer engaged in the engineering, manufacturing, and construction of complex electrical equipment for the power, oil & gas, defence, and aerospace sectors.

BHEL won orders worth Rs 14,000 crore, including a Rs 13,000 crore order for Vande Bharat trains. BHEL and Titagarh Rail Systems, bagged an order to supply 80 Vande Bharat trainsets, along with a service contract of 35 years. BHEL is also expecting a naval gun order from the defence ministry, valued at around Rs 3,000 crore. With the expansion of thermal power plants, BHEL is expected to secure 15-20 GW thermal power plant contracts worth around Rs 1.5 trillion in the next couple of years. The company’s total order book stood at Rs 91,336 crore in Q1FY24.

Fund managers who bought shares of BHEL

Fund managers who added shares of BHEL to their portfolios include Pankaj Tibrewal and Arjun Khanna for Nippon India Vision Fund, and Harish Krishnan and Abhishek Bisen for Kotak Balanced Advantage Fund. Fresh buys were done by Sanjeev Sharma and Vasav Sahgal for Quant Mid Cap Fund, Dhaval Gala and Dhaval Joshi for Aditya BSL PSU Equity Fund, and Richard D'souza for SBI PSU Fund.

Engineers India: Order book hinges on execution quality

Engineers India (ENGINERSIN) is a public sector undertaking with interests in consultancy and engineering of turnkey projects, particularly oil, gas and petrochemical industries in India and abroad.

Engineers India is trying to diversify into new growth verticals like coal gasification, defence and transportation. Its network in the oil & gas industry has been key to winning new projects. The firm has an order book of Rs 8,100 crore and another Rs 1,590 crore in the pipeline. Its consultancy margins are at 25% and turnkey margins at 2%. The company is expanding into the Middle East to take advantage of the oil & gas project hub. Also, India's planned increase in refining capacity from 250 metric tonnes per annum (mtpa) to 400 mtpa by 2030 will help Engineers India bag new orders.

Fund managers who bought shares of Engineers India

Fund managers who added shares of Engineers India to their portfolios include Mehul Dama for Nippon India Nifty Smallcap 250 Fund, Swapnil Mayekar for Motilal Oswal Nifty 500 Fund, and Arun Agarwal and Nirman Morakhia for HDFC S&P BSE 500 Index Fund. Fresh buys were done by Sanjeev Sharma and Vasav Sahgal for Quant Small Cap Fund, and Manish Lodha and Fatema Pacha for Mahindra Manulife Multi Cap Fund.

Orient Electric: New products and advertising to drive revenue growth

Orient Electric (ORIENTELEC) specialises in the manufacturing of electric consumer durables like fans, home appliances, lighting, and switchgears. The firm holds a major presence in fans and lighting and is India’s largest fan exporter with a market share of 60%.

Orient Electric saw a setback in the second half of FY23 due to regulatory changes, distribution restructuring, and inflationary pressures. In Q1FY24, the firm almost emptied its non-rated fans inventory and saw an uptick in sales of rated fans. The softening of raw material prices has helped in margin expansion. Orient Electric’s expansion into South India, exploration of new overseas export destinations, new product launches and higher spending on advertisement and branding will aid revenue growth.

Fund managers who bought shares of Orient Electric

Fund managers who added shares of Orient Electric to their portfolios include Pankaj Tibrewal and Arjun Khanna for Kotak Small Cap Fund, Dhaval Shah and Bhupesh Bameta for Aditya BSL Multi Asset Allc, Yogesh Patil and Dikshit Mittal for LIC MF Small Cap Fund, and Arun Agarwal and Abhishek Mor for HDFC Nifty Smallcap 250 ETF. Fresh buys were done by Ihab Dalwai and Sharmila D’mello for ICICI Pru Large & Mid Cap Fund.

Aurobindo Pharma: US market aids top-line growth

Aurobindo Pharma (AUROPHARMA) is a key player in the manufacturing of active pharmaceutical ingredients (API), branded drugs and generic pharmaceuticals. US and European markets account for nearly 75% of its revenue. The firm has cumulatively received 613 drug approvals from the US Food and Drug Administration (USFDA) so far.

Aurobindo Pharma's Q1FY24 sales have been driven by the drug shortage in the US. Price erosion has also stabilised, leading to an improvement in the firm’s margins. Its newly launched injectables are gaining traction. In Q1FY24, Aurobindo Pharma launched five injectables and received approvals for 19 products, including 7 injectables. The firm is expected to grow at a 11% CAGR from FY24 to FY25, supported by healthy growth in the injectable business and biosimilars sector in the US and new product launches in the US and Europe.

Fund managers who bought shares of Aurobindo Pharma

Fund managers who added shares of Aurobindo Pharma to their portfolios include Chirag Setalvad and Priya Ranjan for HDFC Mid-Cap Opportunities, and Neelesh Surana for Mirae Asset Tax Saver. Fresh buys were done by Dwijendra Srivastava and Ravi Gopalakrishnan for Sundaram Flexi Cap Fund, Sanjeev Sharma and Vasav Sahgal for Quant Business Cycle Fund, and Daylynn Pinto for Bandhan Sterling Value Fund.

Kansai Nerolac Paints: Revival in automotive sector and lower raw material costs to aid bottom line

Kansai Nerolac Paints (KANSAINER) is into the manufacturing of paints for household and industrial applications. With nearly 45% of its revenue coming from Industrial clients, Kansai has a significant presence in this segment, particularly in the automotive sector. It has eight manufacturing plants and a 31,000-dealer network spread across India.

Under the leadership of the new MD, Anuj Jain, Kansai has made investments towards increasing its distribution network and customer outreach. The firm is also broadening its product portfolio in decorative paints. . In a bid to enhance brand visibility, Kansai is leveraging influencers and social media platforms. Revival in the automotive sector and lower raw material costs is expected to aid its growth.

Fund managers who bought shares of Kansai Nerolac Paints

Fund managers who added shares of Kansai Nerolac Paints to their portfolios include Kinjal Desai and Amar Kalkundrikar for Nippon India Vision Fund, Ekta Gala for Mirae Asset Nifty Midcap 150 ETF, Swapnil Mayekar for Motilal Oswal Nifty Midcap 150 Idx, and Arun Agarwal and Nirman Morakhia for HDFC NIFTY Midcap 150 Index. Fresh buys were done by Sankaran Naren and Priyanka Khandelwal for ICICI Pru Bharat Consumption.

CSB Bank's MF holdings stand at 215.1 lakh shares in July

CSB Bank: Diversification into retail segment key

CSB Bank (CSBBANK), owned by Fairfax, is one of the oldest private sector banks in India. Rooted in Kerala, the bank specializes in gold and small and medium enterprise (SME) lending. CSB Bank caters to 2.2 million customers through 654 branches. Around 58% of its branches have presence in semi-urban and rural areas. The bank has a major presence in South India and a loan book size of Rs 22,000 crore.

CSB Bank is trying to diversify itself from gold loans and SME lending into retail banking. Gold-based lending has seen intense competition from nationalised banks, eroding profit margins. SME lending has also slowed down due to higher interest rates. CSB Bank is seeing healthy growth in retail segments on the back of strategic capex for new branches. The bank plans to open 100 new branches in FY24.

Fund managers who bought shares of CSB Bank

Fund managers who added shares of CSB Bank to their portfolios include Mehul Dama for Nippon India Nifty Smallcap 250, Jaiprakash Toshniwal for LIC MF Banking & Fin Serv Fund, Kayzad Eghlim and Nishit Patel for ICICI Pru Nifty SmCp 250 Idx and Arun Agarwal and Abhishek Mor for HDFC Nifty Smallcap 250 ETF. Fresh buys were done by R Srinivasan and Mohit Jain for SBI Magnum Global.

CreditAccess Grameen Bank: Driving growth through branch expansion and new loan products

CreditAccess Grameen Ltd (CREDITACC) is a microfinance institution with a focus on women. It has its presence in 14 states and a branch network of 1,826. The NBFC has a gross AUM of Rs 21,814 crore, catering to 45.9 lakh customers. The firm has a strong rural presence and is expanding into non-microfinance businesses.

Higher customer additions and increasing ticket size are aiding its loan portfolio growth. CreditAccess reported AUM growth of 40% in Q1FY24. The firm's net interest margins are expected to moderate going forward. Its competitive lending rates (200-400 bps lower than its peers) play a key role in customer retention. Branch expansions have contributed to a wider outreach and customer additions. It plans to increase its AUM to Rs 50,000 crore in the next five years and expand its non-microfinance loan book to 25% from the current 10%. It also plans to add new categories like loan against property (LAP), vehicle loans and gold loans to non-microfinance loans.

Fund managers who bought shares of CreditAccess Grameen Bank

Fund managers who added shares of CreditAccess Grameen to their portfolios include Shreyash Devalkar and Vinayak Jayanath for Axis Small Cap Fund, Sailesh Raj Bhan and Ashutosh Bhargava for Nippon India Multi Cap Fund, and Yogesh Patil and Preethi S for UTI Banking & Fin Svcs Fund. Fresh buys were done by Pranav Gokhale for Invesco India Mid Cap Fund and Manish Gunwani and Sumit Agrawal for Bandhan Financial Services Fund.

CDSL: Non-market linked revenue streams to cushion volatility

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

In Q1FY24, CDSL saw a 20% 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. Although margins contracted by 183 bps to 53.9% in Q1FY24, revenue is anticipated to expand around 17% in FY24, with a projected EBITDA margin of 56.5%. The firm is also venturing into the insurance repository sector, subject to regulatory approvals.

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

Fund managers who added shares of Central Depository Services (India) to their portfolios include Vishal Mishra and Shridatta Bhandwaldar for Canara Robeco Equity Taxsaver Fund, and Mehul Dama for Nippon India Nifty Smallcap 250 Fund. Fresh buys were done by Pranav Gokhale and Taher Badshah for Invesco India Smallcap Fund, Mohit Jain and Milind Agrawal for SBI Banking & Financial Svcs Fund, and Manish Gunwani and Sumit Agrawal for Bandhan Financial Services Fund.

Sobha - Higher price realisation, launch pipeline and geographical expansion help revenue growth

Sobha (SOBHA), which operates from Bangalore, is engaged in real estate construction, development, and sales. Sobha has developed townships, housing apartments and commercial real estate. It has also ventured into interior works, metal works and concrete products, providing backward integration.

Its 15 million square feet launch pipeline for the next two years provides revenue visibility. The escalating value of real estate in metro cities contributes to higher price realization. Sobha reported the highest-ever price realization of Rs 10,506 per square foot in Q1FY24. The firm's expansion into cities like Kochi and Gurugram has helped in diversification and margin expansion. Notably, heightened demand from the premium luxury segment has seen an uptick

Fund managers who bought shares of Sobha

Fund managers who added shares of Sobha to their portfolios include Anand Sharma and Sharmila D’mello for ICICI Prudential Housing Opps Fund, Mehul Dama for Nippon India Nifty Smallcap 250 Fund, and Arun Agarwal and Abhishek Mor for HDFC Nifty Smallcap 250 ETF. Fresh buys were done by Abhinav Sharma for Tata Infrastructure Fund, and Mohit Jain and Bhavin Vithlani for SBI Infrastructure Fund.

Amara Raja Batteries: Industrial and export segments propel near term growth

Amara Raja Batteries (AMARAJABAT), headquartered in Hyderabad, specialises 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 Q1FY24 revenue growth was aided by 15-16% YoY growth in the industrial and export segments. The firm reported QoQ margin contraction on account of increased insurance costs and higher trading content. It has managed to secure a stronger position in the automotive sector, and gain market share. However, muted demand in the segment is hampering revenue growth. The firm is seeing high traction in its industrial segments and has clocked 96% capacity utilisation in the quarter. Amara Raja is also investing Rs 3,000 crore for 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 Pankaj Tibrewal and Arjun Khanna for Kotak Small Cap Fund, and Swapnil Mayekar for Motilal Oswal Nifty 500 Fund. Fresh buys were done by Sailesh Raj Bhan and Ashutosh Bhargava for Nippon India Multi Cap Fund, and Manish Gunwani and Kirthi Jain for Bandhan Emerging Businesses Fund.

The Baseline

17 Aug 2023

As Russia and Saudi Arabia cut production, where are oil prices headed?

By Shreesh Biradar

Oil is not a dependable bet. Like other commodities, its price seesaws in unpredictable ways, and many analysts who tried to predict the future price of oil have got their fingers burned (remember the $200 price per barrel predictions in early 2022?)

Oil-producing nations have also taken a hit recently from the price volatility.

For a time, things were good. The OPEC countries saw windfall profits from April 2022 to January 2023 due to the Russia-Ukraine war. But the trend has since reversed. Excess supply is sloshing around in the market, and the unexpected slowdown of China's economy has hit oil prices hard.

in response, OPEC cut oil production, which drove oil prices higher by 18% since June 2023. But the cuts didn't have the full price impact they had hoped for. The S&P had projected that oil prices would be around $90 in 2023, but the ramp-up in Iranian oil production has cut short the rally, pushing prices down to $84 from a recent peak of $88.

In the meantime, India and China have benefited from cheap Russian Ural. But the price gap between Russian Ural and Saudi crude on delivery has narrowed, from a $20 difference in the first quarter of 2023 to $8 in August.

In this week’s Analyticks:

Oil price dynamics: Oil prices are defying analyst predictions
Screener: Commodities stocks with the highest revenue and net profit growth in Q1FY24

Let’s get into it.

As oil consumption slows, OPEC makes production cuts to keep prices up

GDP growth hasslowed down for most countries this year, resulting in lower crude oil consumption. China, the largest crude oil importer, and other developed nations are consuming less oil than expected. The increasing adoption of electric vehicles across Europe, the US, and China has also limited the demand for crude.

The slowdown in consumption has resulted in higher inventory levels over the past four quarters.

Production cuts will lower inventory levels in the second half of 2023

To improve their revenue streams and get a better price for their oil, the OPEC cartel collectively reduced oil production by 1.2 million barrels per day. They are now looking to extend these cuts beyond September 2023.

Saudi Arabia faces a potential budget deficit

Saudi Arabia depends on oil and petroleum for nearly 75% of its budget revenue. The surge in oil prices in 2022 gave the Saudis a fiscal surplus of $27.7 billion. The country used the money to increase its defense spending. It also spent around $6 billion to acquire famous football players for its sports teams - including Portugal's Cristiano Ronaldo and Brazil's Neymar.

However, with oil prices below $80 in the first half of 2023 and exports falling to a 19-month low, Saudi Arabia has had to pause its spending spree. Now the country is staring at a possible fiscal deficit. It already saw a budgetary deficit of roughly $2.2 billion in the first half of 2023.

Saudi Arabia saw budget surplus in 2022, after eight years of deficit

According to the IMF, Saudi Arabia needs oil prices to be above $81 in 2023 to break even in its budget spending. TheIMFhas cut the Saudi economy's GDP growth forecast for 2023 from 3.1% to 1.9%, owing to lower oil prices and production cuts.

Saudi Arabia’s breakeven price of crude to meet its expenses stands at $81 per barrel in 2023

As India and China turn to Russian Ural, Europe has replaced Asia as the top destination for Saudi crude oil. But Europe has not entirely compensated for Asia’s demand decline. To boost oil prices, Saudi Arabia inJune 2023 announced a voluntary production cut of 1 million barrels per day till September, on top of OPEC’s production cut of 1.2 million barrels per day.

Russia's cash crunch is also forcing it to cut oil production

The other big oil producer, Russia finds itself in a tough spot due to its expensive military campaign in Ukraine, and price caps on Ural exports imposed by the US and its allies. The Russian Ural, which is trading at a significant discount to crude, is being snapped up by India and China.

But higher volumes sold have not been able to make up for the revenue loss due to the price cap. This has led to a fiscal deficit of $28.3 billion fir Russia in the first half of 2023.

Russia is expected to have a budget deficit of 2.6% in 2023

Russia sold its oil for around $50-55 per barrel in the first half of 2023, but higher Ural prices in the second half of 2023 (around $60) are expected to reduce its deficit. To increase its revenue, Russia raised taxes on oil exports by 8% in August 2023.

Russia is taking steps to raise its oil price. It has pledged to reduce its crude exports by 5,00,000 barrels per day in August and an additional 3,00,000 barrels per day in September. A recent drone attack by Ukraine on a Russian oil tanker has also raised concerns about Ural supply, causing Ural prices to breach the $60 cap.

India walks the line, buying Russian oil at rates above price caps

China and India have been vocally against the price cap on Russian oil. They argue that since they aren't involved in the Russia-Ukraine conflict, their economies shouldn’t suffer. Finance Minister Nirmala Sitharman insisted that India will buy Russian Ural above the $60 price cap as long as it is cheaper than the market rate.

Right now, there are ways to get around the price cap. Unlike the free on board (FOB) basis, India’s crude import price is decided on a delivery basis (which includes the price of crude, insurance, shipping and other handling charges). This limits the transparency on the final price India is paying to Russia.

India’s on-delivery price of Russian Ural for June stood at $68.2, while for Saudi crude oil it was $81.8. However, the latest data from Argus Media suggests that August's Ural crude delivered to India’s west coast is around $82.

Russian Ural prices are at a discount of 16.6% compared to Saudi crude on a delivery basis

With the Ural price now significantly above the $60 per price cap, freight cost adjustments will be too large to go unnoticed. India and Russia need to find financiers, insurance providers, and shipping lines unaffected by Western sanctions. China, on the other hand, can substitute Russian Ural with Iranian oil. For India discounted Russian oil is the only way out to soften the blow of rising crude prices.

India is now limiting its Russian imports

India depends on imports to fulfill 85% of its crude consumption, with Russian crude accounting for about 45% of these imports. India cannot buy more Russian oil because it has limited storage space (strategic reserves), which can hold only 9.5 days' worth of crude. And due to India's minimum purchase agreements with other traditional suppliers, it can't replace all of them with Russian imports.

As the discount on Russian oil narrows, it becomes less appealing to export refined oil to Europe. This and India’s limited refining capacity for Russian Ural has restricted Ural imports to 2 million barrels per day.

Russian oil imports to India peak at 2 million barrels per day

While India has maintained a steady supply of refined oil exports to Europe so far, rising Ural prices could pose a challenge in India avoiding sanctions. As Western scrutiny intensifies, it remains to be seen whether India will persist in purchasing Russian Ural above the $60 cap.

Screener: Oil, cement, utilities stocks with the highest revenue and profit growth in Q1FY24

HPCL shows strong growth in QoQ revenue and operating profit margin

As prices of raw commodities soften, margins for companies in key sectors have improved, resulting in increased profits. This screener shows stocks from the oil & gas, cement & cement products and utilities sectors with the highest growth in revenue and net profit in Q1FY24, along with an expansion in operating profit margin.

Significant stocks that appear in the screener are GMR Airports Infrastructure, Tata Power, Hindustan Petroleum Corp, JSW Energy, Bharat Petroleum Corp and ACC.

Hindustan Petroleum Corp’s revenue grew by 10.3% QoQ to Rs 1.2 lakh crore in Q1FY24, while its net profit improved by 87.5% QoQ to Rs 6,765.5 crore compared to a loss in Q1FY23. The oil & gas company has also posted an operating profit margin of 8.1% during the quarter. This was aided by a decline in the cost of raw materials due to an 8.7% decline in Brent crude oil to $72.7 per barrel.

Another oil & gas company, Bharat Petroleum Corp, also gained from the decline in crude oil prices. Its operating profit margin increased by 17.1% QoQ in Q1FY24. This contributed to a 54.9% YoY increase in net profit to Rs 10,644.3 crore during the quarter.

Cement company ACC’s revenue improved by 8.6% QoQ to Rs 5,278 crore in Q1FY24. Its net profit improved by 97.8% QoQ to Rs 466.1 crore, aided by a reduction in power & fuel and employee benefit expenses. This led to an improvement in margins, with the operating profit margin rising 5.3 percentage points to 14.8%.

You can find more screeners here.

Sugar

SECTOR | 11 Aug 2023

Sugar prices at an all-time high, but the Indian government has limited gains for the industry

By Shreesh Biradar

India, the world's second-largest sugar producer after Brazil, is seeing a surge in retail sugar prices shot up 40% in the past year, reaching an all-time high of Rs 44 per kg. However, the sugar industry faces challenges such as lower production, high diversion towards ethanol manufacturing, and export quotas. The sugar industry sees cyclical changes every 3 to 4 years, and the current scenario, meant to be a boom period, is not turning out quite as expected as sugar manufacturers are turning cautious. Vivek Sarogi, Managing Director of Balrampur Chinni says,” if El Nino plays out this year, it could impact sugar production and will lead to curtailment of exports”.

The last significant shift for the industry was in 2015-16, when El Nino adversely hit sugarcane regions, leading to a surge in sugar prices and substantial growth in the value of sugar stocks. For instance, stocks like Mawana Sugars and Dwarikesh Sugars rose 7X in 2016. The current year predicts a return of the dreaded El Nino, which may further impact global sugar production. The increased use of sugarcane for ethanol blending has also tightened the commodity supply.

Despite international sugar prices reaching an 11-year high, Indian millers are unable to capitalise on this. But the Indian government’s support price for ethanol and interest subvention schemes for distillery plants have been beneficial for the industry overall.

As global factors like El Nino impact production levels and the government's support measures continue to shape the industry, the sugar sector is at a critical point, navigating the delicate balance of supply, demand, and pricing dynamics.

Sugar production drops in India

India’s sugar production dropped by 8% in the 2022-23 sugar cycle. The decrease was due to unseasonal rains and lower yields across the country. Maharashtra (32%) and Karnataka (17%), which together contribute almost half of India's sugar production, were particularly affected. Maharashtra’s production declined by 13%, and Karnataka’s by 2%. However, the increased production in Uttar Pradesh (32%) partly offset the overall drop.

Sugar consumption has seen a steady increase of 2.6% YoY over the past five years. However, increased exports and diversion towards ethanol blending are limiting the otherwise excess sugar supply.

The current year may be impacted by El Nino, even though the Indian Meteorological Department has predicted normal rainfall, with unseasonal rains interrupting the harvesting season. During the last El Nino event in 2015-16, India reported a 10% decrease in production.

Stable sugarcane FRP provides relief to mill owners

The government’s fair and remunerative price (FRP) of sugarcane for farmers plays a crucial role in deciding the margins of sugar mills. Typically, the government revises the FRP every year to accommodate inflation and the rise in agricultural input costs.

The government tends to increase the FRP by a significant percentage during election years. For instance, in 2018, the government raised the FRP by 10.9%. Such increases are especially influential in states like UP and Maharashtra, which together constitute 23.6% of Lok Sabha seats. However, the current year saw a more modest increase of 3.28% in sugarcane prices, bringing relief to mill owners.

Export restrictions are affecting sugar mills' profits

The government imposes caps on sugar exports to ensure domestic supply and control inflation. In 2021-22 (October-September) cycle, the government initially set the sugar export limit at 100 lakh tonnes. But due to pressure from the sugar mill association and surplus sugar in India, the government allowed mills to ship out 112 lakh tonnes.

The disparity between domestic wholesale and international prices is now above 15%. Restricting the export quota has hit the profitability of sugar mills. Despite having surplus sugar, India has set an export cap of 60 lakh tonnes for the 2022-23 season. The government assumed lower production due to the El Nino effect impacting domestic supply. The current exports have reached 61 lakh tonnes with two more months left in the season.

Even though the government has not yet announced the export quota for the 2023-24 cycle, it's widely believed that it will be initially capped at 40 lakh tonnes, with the possibility of an increase in February 2024. The diversion of more sugarcane to ethanol blending has led to a surge in sugar prices.

Sugar prices surge to multiyear high, millers restricted by quota system

Amid concerns of lower production, higher diversion towards ethanol blending, and increased FRP, millers have raised their prices. Domestic wholesale sugar prices have shot up to a multi-year high. However, the gap between these rates and International prices (which are trading at an 11-year high) is still very high.

Retail prices have skyrocketed to an all-time high as traders sell at higher rates. The wholesale price in July is around Rs 36-37 per kg, while the retail price is hovering in the range of Rs 42-45.

Mill owners are unable to fully capitalize on the high retail prices due to the government’s mill-wise monthly quota system, which it implemented in 2018. This prevents mill owners from selling beyond their quota in the domestic market, limiting their ability to benefit from higher price realisation. For instance, the quota for July 2023 is pegged at 24 lakh tonnes, a 14% YoY increase..

Ethanol emerges as a major revenue source for sugar mills

With the cap on sugar sales, mill owners are now turning to the more lucrative channel of ethanol production.Ethanol blending, an effective method to reduce emissions and make petrol more cost-effective, has gained traction in India through the Ethanol Blending Programme (EBP) introduced in 2003. Since 2016, the ethanol blending percentage has risen steadily, crossing 2% in 2014-15. This initiative helps the government reduce oil imports.

While ethanol can be produced from grains, it is costlier and poses challenges due to erratic availability of grains throughout the year. India, with its sugar surplus, finds it easier and cost-effective to produce ethanol from sugarcane.

In line with that, the government has laid out a road map to achieve 20% ethanol blending by the end of FY25. The ethanol blending percentage by oil manufacturing corporations stands at 11.7% as of June 2023, with a target of 12% by September 2023. The diversion of sugar towards ethanol blending in 2022 reached 40 lakh tonnes, resulting in a savings of Rs 20,000 crore in foreign exchange for the government. The increase in ethanol production has led to higher margins for sugar mills, with ethanol margins surpassing those of sugar by at least 300 bps.

The government initially targeted 15% ethanol blending in the 2023-24 cycle. However, it has recently revised its plans and rolled out a 20% blending program in 11 states. The national average is expected to reach 15% in the 2023-24 cycle, with a portion of the requirement being met by grain-based ethanol due to the insufficient distillery capacity among sugar manufacturers.

Government support boosts ethanol production

The government plays a crucial role in supporting ethanol production through various initiatives. It offers a fixed price for ethanol manufactured from different types of molasses, ensuring stability for distillery owners to assess profitability based on sugar market prices and input sugarcane prices.

To further help ethanol manufacturers, the government provides interest subvention of up to 6% per annum or 50% of the rate of interest charged by banks, whichever is lower, for a tenure of 5 years. This financial assistance has led to increased production of ethanol. Sugarcane-based ethanol production has jumped from 215 crore litres in 2014 to 811 crore litres in 2023.

Thanks to the government’s financial support and fixed ethanol price, many manufacturers are expanding their distillery capacities. For instance, Balrampur Chinni is increasing its distillery capacity by 33% to 23 crore litres per annum. This would help the firm realize 42% of its revenue from the distillery. Dalmia Bharat is also expanding its distillery capacity from 22 crore litres to 32 crore litres by September 2024. The new capacity is expected to contribute 45% of the firm's revenue.

The sugar sector has seen a transformative shift towards ethanol production, supported by the government's initiatives such as fixed ethanol prices and interest subvention. This is creating new opportunities for sugar manufacturers. However, challenges in terms of pricing, export restrictions, and lower production for the upcoming year could stunt the industry’s margins despite the high demand in international markets. As the sector adapts, stakeholders and investors in these stocks have to closely monitor government policies and market dynamics to negotiate and navigate the changing landscape.

The Baseline

26 Jul 2023

TCS, Infosys guidance cuts point to harder days ahead | Tech winners and losers screener

By Shreesh Biradar

The Indian investing community had high hopes for Nifty 50 reaching the 20,000 mark last week, but Infosys' results caused a pullback just before this milestone.

Indian IT 's earnings season began on a cautious note. TCS, a key player in the industry, noted that global macro headwinds "are affecting revenue and margins". Morgan Stanley had previously predicteda modest performance for Indian tech in Q1FY24, with improvement in the second half of FY24.

India’s software services has been a driving force in India's growth, contributing nearly 19% of overall exports and growing by 20% in FY23. However, the Q1FY24 earnings season has been underwhelming - the big four IT firms (TCS, Infosys, Wipro and HCL Technologies) reported tepid earnings and lower revenue guidance. The management is focusing on cost-cutting measures amid the slowdown.

Nifty IT rose by just 3% in the April-June 2023 quarter as investors re-evaluated what used to be a booming sector. The broader Nifty 50 rose by around 11% in the same period, so IT is now a clear laggard, as recessionary pressures, global financial turmoil, spending cuts, and the rise of technologies like AI raise questions about the growth outlook.

In this week’s Analyticks:

Losing Momentum?: Global headwinds slow IT sector growth
Winners and losers screener: IT stocks which outperformed and underperformed Trendlyne's Forecaster estimates in Q1FY24

Let’s get into it.

IT firms cut down their revenue guidance

The earnings season for the majority of Indian IT firms was not celebratory and was quite a mixed bag, with TCS and HCL recording a moderate performance, while Infosys' and Wipro's weak numbers underlined the slowdown. A major highlight of the season has been the cut in revenue guidance. For instance, Infosys revised its FY24 revenue guidancefrom its eariler estimate of 4-7% constant currency growth to 1-3.5%.

Commenting on the lower guidance, Infosys CEO Salil Parekh said, “In the short term, we see some clients reducing or even stopping work on transformational programs and projects. This is especially visible in financial services, mortgages, asset management, investment banking, payments, telecom, high-tech, and parts of retail.”

While Wipro hinted at -2% to 1% revenue guidance, HCL and TCS pegged their numbers at around 5% to 7%. A key driver for the lower revenue guidance has been the slowdown in the global BFSI (Banking, Financial Services and Insurance) sector. This vertical contributes nearly 30% of IT services revenue, and has seen a spending cut in discretionary tech services.

Except for HCL, all other firms have seen a drop in revenue from BFSI clients. Indian IT has in the meantime, diversified its exposure to retail, pharma, auto, and other sectors. The BFSI share has significantly decreased from the 40% it had three years ago.

The telecom sector has also seen its share of revenue drop. On the upside, the retail, energy and manufacturing sectors are moving towards technology adoption post-pandemic.

Slower decision-making clogs up deal pipeline for tech companies

As interest rates rose, the collapse of Silicon Valley Bank in the US and Credit Suisse in Europe spread cracks across the US and European banking sector. Banks and finance companies have decided to wait out the storm and delay new IT spending.

While large deals are still coming through, they are taking longer to finalize due to decision-making getting pushed all the way up to the CEOs and CTOs in client companies.

When interest rates were low and money was cheap, a lot of tech moonshot projects were getting funded by customers. Now that has changed. According to CEO of TCS, K Krithivasan, “Macro uncertainties have made clients more cautious. They are taking a month to month approach, and that means low visibility on their future spending. We will prioritize projects that are business-critical and offer faster ROI realization. Long-running discretionary projects are now coming back with reduced scope or pace.”

While the deal pipeline is holding steady, the conversion rate for new deals has decreased. So order inflow will likely slow down going forward.

The new deals already signed might see execution delays. However, regular spending on maintenance projects is expected to continue at the previous pace. It is discretionary spending, which involves smaller budgets and faster turnaround times, that is seeing the biggest cuts.

Retaining talent becomes key, as hiring slows down

The pressure on the sector's top-line growth has pushed the management to focus on margins. However, the margins of the IT pack have fallen since Q4FY23. The recent salary hikes have offset some of the gains from lower subcontractor costs and higher resource utilisation. According to TCS CFO Samir Seksaria, salary hikes have resulted in a 200 bps impact on the EBIT margins.

Lower attrition has controlled the decline in margins for the IT pack. However, the attrition rate continues to be above pre-pandemic levels of 10 -12%. Companies are responding by trying to retain and promote their new talent pool instead of hiring external replacements. This has led to a higher utilisation of the bench pool and lower net additions of employees.

If the attrition rate falls by another 300 bps, IT firms could see a margin expansion in the range of 75-100 bps. Currently, the net additions of employees for large IT firms have been negative or marginally positive.

The impact of the AI revolution is still undecided

With the rise of Chat GPT and Google Bard, generative AI has become the buzzword in IT circles.

But there are many uncertainties around AI right now - clients are unsure about how to use it. Client engagements for AI projects have revealed ever-changing requirements, and clarity is lacking on how to integrate AI into business processes. The high error rates, and the 'hallucinations' of chatbots, have made customers cautious about adoption. Indian IT firms are investing into in-house pilot projects to get a better understanding of AI's nuances and possibilities.

However, Infosys CEO Salil Parekh was clear on the promise, saying, “AI will not replace human jobs but complement them, and Infosys has seen a 10-30% productivity improvement using AI internally and with clients.”

Recognizing the significance of AI, Wipro has committed $1 billion to building AI technology, including acquiring established AI firms. Wipro CEO Thierry Delaporte believes that, “AI is a fast-moving field. Especially with the emergence of generative AI, we expect a shift in all industries. It’s meant to empower our talent pool and help clients”.

TCS is training 50,000 employees under its AI program, while Wipro has pledged to train its entire workforce of 2,50,000 employees in generative AI.

Overall, IT firms are focusing on steadying their revenue and margin growth amid the global slowdown. Deals are still happening, and there are no immediate threats from disruptive AI. The Indian IT sector is for now, well-equipped to handle the slowdown, so long as it's temporary.

Tech winners and losers screener: IT stocks which outperformed and underperformed Trendlyne's Forecaster estimates in Q1FY24

As the software & services sector releases its Q1FY24 results, we take a look at how these companies have performed compared to their revenue and net profit estimates.This screenershows tech stocks that have outperformed and underperformed analyst estimates.

Notable stocks in the screener are Infosys, Wipro, HCL Technologies, Tata Consultancy Services (TCS), LTIMindtree, Coforge, Tanla Platforms, IndiaMart InterMeshand One97 Communications.

Tanla Platforms’ net profit grew by 12.6% QoQ to Rs 135.4 crore inQ1FY24, beating Trendlyne’s Forecaster estimates by 16.2%. Its revenue also rose 9.3% YoY to Rs 911.1 crore, surpassing estimates by 7.6%. The company’s revenue grew on the back of the enterprise and platform segments, aided by a recovery in transaction volumes and an international long-distance (ILD) rate hike.

Tata Consultancy Services is the only big four tech giant to beat Forecaster estimates for net profit, despite a 2.8% QoQ fall to Rs 11,047 crore in Q1FY24. However, revenue remains flat at Rs 59,381 crore, in line with estimates. This was caused by muted growth in the BFSI and retail segments, combined with delays in non-critical projects.

HCL Technologies missed the Forecaster estimates for revenue and net profit by the largest margin among the big four in Q1FY24. Its net profit declined 11.3% QoQ to Rs 3,534 crore, missing Forecaster estimates by 8.3%. Similarly, revenue fell by 1.5% QoQ to Rs 26,640 crore, missing Forecaster estimates by 1.9%. This decline can be attributed to the slowdown in revenue from the technology and telecommunications segments due to a cut in discretionary spending and decision delays.

You can find more screeners here.

Telecom Services

SECTOR | 20 Jul 2023

Bharti Airtel faces stiff competition from Jio, as 5G rollout takes centre stage

By Shreesh Biradar

India has made significant progress in the telecommunications sector, bringing connectivity to a significant portion of its population. While old challenges persist in many parts of rural India access to healthcare and reliable electricity, the majority of rural communities now have telecom services. Around 75% of rural households have a smartphone. According to Deloitte, the Indian telecom industry’s …

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As the second largest telecom market after China, India boasts a subscriber base of 1.1 billion and a teledensity of 84.5%. The growth in telecom services has picked up in the past five years, driven in part by the entry of Jio, which has spurred investments and reduced competition.

Technological advancements like 4G and 5G have improved the Indian user experience. India also boasts of affordable connectivity - the average cost of 1GB of wireless data in India is around Rs 14, much lower than around Rs 460 in developed nations like the US.

Increase in income levels, access to cheaper handsets, and better coverage have made telecom services popular in the country. The volume growth in the sector has mostly saturated at 1,140 million subscribers as of last year. However, two major service providers, Bharti Airtel and Reliance Jio, have been gaining market share at the expense of others.

Reliance Jio gains Vodafone’s share and adds new customers

Reliance Jio has been attracting customers from Vodafone and BSNL by offering better accessibility. In rural areas, it has gained many new customers, while in urban areas, customers switching from Vodafone India and BSNL/MTNL have opted for both Jio and Airtel. Jio has been adding an average of 2.25 million customers per month for the past 13 months, while Airtel has added 0.81 million customers per month. Vodafone, on the other hand, lost 2.07 million customers per month in the same period.

The result of this can be seen in Jio’s market share, which increased from 35.6% in April 2022 to 38% by April 2023. In contrast, Vodafone’s market share declined by 220 bps in the same period.

Vodafone’s limited investments (Vodafone bid for only 11.8 MHz 4G network compared to Airtel’s 355 Mhz and Jio’s 488 Mhz in FY21) have worsened service quality, resulting in the loss of its customer base. News of its financial woes has also led to a customer exodus.

Airtel keeps its hold on premium customers and commands pricing power

Airtel’s customers are reluctant to shift to other service providers despite higher tariffs. For instance, Airtel's annual plan offering unlimited calls and daily 2.5 GB data costs around Rs 3,359, while Jio offers a similar plan with 388 days validity for Rs 2,999. Airtel has consistently undertaken price hikes while holding on to its customer base. This premium and loyal customer base has helped Airtel’s pricing power. The Average Revenue Per User (ARPU) for Airtel increased by 8.4% in the past year, compared to Jio’s 6.5%.

Telecom service providers avoided major tariff hikes in the second half of FY23 as they focused on maximizing the 5G rollout and attracting more customers. However, the increased expense from the 5G rollout forced them to undertake a tariff hike in Q1FY24.

Margin expansion anticipated owing to tariff hikes

The increase in customer base and rate hikes are likely to improve the margins of telecom operators. Airtel’s tariff hike is expected to increase its ARPU by 3.1% QoQ in Q1FY24, leading to a margin improvement of 30 bps QoQ.

In contrast, Reliance Jio's increase in ARPU has remained stable, resulting in minimal margin impact. However, Airtel’s net profit margin is expected to decline QoQ to 6.5% (from 8.3% in Q4FY23) due to higher finance costs. Reliance Jio is expected to maintain the net profit margin levels at 20.2%.

Reliance Jio leads Bharti Airtel in 5G rollout

Since the initiation of the 5G rollout in October 2022, the data usage levels of Jio and Airtel customers have increased by 4% and 2.7%, respectively, between October 2022 and March 2023. The growing data consumption and penetration of 5G will aid telecom operators' efforts to raise tariffs and increase customers who are under the 5G network.

Airtel’s 5G rollout has been slower compared to Jio. Jio's users are connected to 5G 37% of the time, against just 14% of Bharti Airtel. Jio’s 5G network connectivity is rated at 4.2, surpassing Airtel’s 3.4. Jio is leading the penetration in 21 circles.

The higher capex for the 5G rollout requires service providers to raise ARPU to around Rs 250-275. However, based on previous trends where ARPU dropped to Rs 100 from Rs 190 during the 4G rollout (FY17-19), the ARPU is not likely to increase significantly in the near term.

5G spectrum spend will add more debt to the books

The 5G auction conducted in August 2022 generated record revenues of Rs 1,50,173 crore for the government. However, this will add more debt to the books of service providers. As per initial estimates, the debt in the telecom sector is pegged at Rs 6 lakh crore by the end of FY23. The telecom sector accounts for 3-4% of Indian banking sector debt.

Fortunately, the industry has gotten some relief with relaxed terms for spectrum payment. The spectrum charges will be a deferred payment spread over 20 years, with an annual interest rate of 7.2%. Service providers invested Rs 5 lakh crore in capex during the 4G rollout (FY17-FY21).

The annual payments for spectrum charges are projected to be around Rs 13,365 crore in 2023, increasing to Rs 19,600 crore for both 2024 and 2025, and escalating to Rs 65,500 crore from 2026 onwards.

Reliance Jio adds more revenue verticals

Reliance Jio is trying to export its indigenously developed 5G stack technology to the US. Jio has developed a complete ecosystem for 5G, including a radio access network, cloud infrastructure, platforms, related hardware, and technology solutions. However, it needs to be first implemented in India and is still waiting for necessary clearances.

Jio’s recent launch of entry-level and 5G phones will add another layer of revenue for the company. These budget-friendly smartphones are specifically targeted towards rural households. It partnered with Qualcomm, Samsung and other players in China and Korea to reduce the cost of these devices. This strategic move will also attract customers to its 5G network.

The telecom sector is now dominated by a duopoly consisting of Reliance Jio and Airtel. They are playing a different game of balancing revenue streams and customer acquisition. The complete 5G rollout will give them an upper hand, but it will also require significant capex.

According to Jefferies, the telecom sector is expected to grow at a 13% CAGR, with an estimated revenue collection of $35 billion in FY25. This is enormous potential for growth, but both Jio and Airtel will have to spend significantly to outcompete each other in getting a slice of the pie.

Mutual Funds News

TREND | 17 Jul 2023

Smart money moves: Which stocks did mutual fund managers buy in June 2023?

By Shreesh Biradar

In June, benchmark indices Nifty 50 and Nifty 500 surged by 3.5% and 4.2% respectively. The Nifty 50 hit an all-time high of 18,890, supported by moderating inflation and increasing GDP growth. India’s industrial production index rose by 5.2% in May.

Domestic institutional investors turned into net buyers in the Indian markets, making investments of Rs 4,458 crore in June. The upbeat market brought back interest in small-cap growth stocks. The Nifty Smallcap 100, which shot up by 6.6% in June, saw the highest interest from fund managers.

Exide Industries expands into lithium-ion battery manufacturing

Exide Industries (EXIDEIND): This Kolkata-based firm is a manufacturer of 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.

As a market leader in the storage battery space, Exide is focusing on EV batteries to build a first-mover advantage. The firm has a capex of Rs 6,000 crore planned for developing 12 MWh lithium-ion batteries. 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 effort. Its debt-free balance sheet and Rs 5,000 crore investment in HDFC Life will provide its capex plans the cushion they need.

Fund managers who bought shares of Exide Industries

Fund managers who added shares of Exide Industries to their portfolios include Pankaj Tibrewal and Arjun Khanna for Kotak Emerging Equity Fund. Fresh buys were done by Rohit Singhania and Charanjit Singh for DSP Tax Saver Fund and DSP Equity Opportunities Fund, Shiv Chanani for Baroda BNP Paribas Value Fund, and Niket Shah and Ankush Sood for Motilal Oswal Midcap 30 Fund.

Manappuram Finance faces challenges in shift to non-gold loans

Manappuram Finance Ltd (MANAPPURAM): Manappuram Finance is a leading gold loan NBFC in India. It operates through a network of 5,000 outlets, managing a consolidated AUM of Rs 35,500 crore. Gold loans account for 56% of the AUM.

The recent enforcement directorate raid on the MD & CEO of Manappuram, VP Nandakumar, raised concerns among investors on the health of the business. Reports also suggest that the company collected deposits worth Rs 150 crore, which goes against the rules set by the Reserve Bank of India. In response, the company clarified that the deposit allegations are linked to Manappuram Agro Farms (MAGRO), a former proprietor. The company claims to have repaid the money.

Increased competition from nationalised banks in the gold loan space has pushed Manappuram towards non-gold loans. Consequently, the NBFC’s gold loan AUM has dropped from 67% in Q1FY23 to 56% in Q4FY23. This might result in margin contraction and an increase in NPAs. However, its track record of managing NPAs (under 3%) provides some relief.

Fund managers who bought shares of Manappuram

Fund managers who added shares of Manappuram to their portfolios include Harish Krishnan and Abhishek Bisen for Kotak Balanced Advantage Fund, Laukik Bagwe and Atul Bhole for DSP Dynamic Asset Allocation Fund, and Abhishek Bisen and Devender Singhal for Kotak Equity Savings Fund. Fresh buys were done by Dwijendra Srivastava and Ravi Gopalakrishnan for Sundaram Balanced Advantage Fund, and Ritesh Jain and Neelotpal Sahai for HSBC Balanced Advantage Fund.

Coromandel International focuses on margin expansion through product launches and cost optimisation

Coromandel International Ltd (COROMANDEL): Coromandel International is a manufacturer of farm inputs like fertilisers, crop protection, specialty nutrients, and organic compost. The firm is a leading producer of NPK and SSP-grade fertilisers.

Raw material prices are volatile in fertilisers, and the company is planning capex for backward integration. It has acquired a Rock Phosphate mining company and started in-house development of sulphuric acid to enhance cost optimisation. The firm is also launching new products in high-growth specialty chemicals to improve its margins. Notably, the company had a record production of DAP and complex fertilisers in FY23 and achieved capacity utilisation of 90% across its plants. The softening of raw material prices and increased operational efficiency will drive margins in FY24.

Fund managers who bought shares of Coromandel International

Fund managers who added shares of Coromandel International to their portfolios include Sohini Andani and Mohit Jain for SBI Magnum Midcap Fund, Pankaj Tibrewal and Arjun Khanna for Kotak Emerging Equity Fund, Dinesh Balachandran and Mohit Jain for SBI Contra Reg IDCW Fund, Sanjay Chawla and Prashant Pimple for Baroda BNP Paribas Balanced Advantage Fund, and Harish Krishnan and Arjun Khannal for Kotak Bluechip Fund.

Kalyan Jewellers India plans higher market penetration with store additions

Kalyan Jewellers India Ltd (KALYANKJIL): This Thrissur-based leading gold retail chain operates through 150 outlets and has a major presence in GCC nations like UAE, Qatar, Kuwait and Oman. The firm reported a consolidated revenue of Rs 14,000 crore in FY23.

Kalyan Jewellers is committed to increasing its retail footprint YoY, with plans to open 50 stores across India in FY24. The increased penetration is expected to boost revenue from the Indian market. The GCC market witnessed 28% growth in Q4FY23. The firm is planning to expand its margins by adding more products under studded jewellery. It also plans to reduce its debt by 10% in FY24 and increase cash flow.

Fund managers who bought shares of Kalyan Jewellers

Fund managers who added shares of Kalyan Jewellers to their portfolios include R Janakiraman and Sandeep Manam for Franklin India Smaller Companies Fund, and Dwijendra Srivastava and Ravi Gopalakrishnan for Sundaram Aggressive Hybrid Fund. Fresh buys were done by Manish Gunwani and Kirthi Jain for Bandhan Emerging Businesses Fund, Anand Radhakrishnan and Umesh Sharma for Franklin India Equity Hybrid Fund and Anand Radhakrishnan and R Janakiraman for Franklin India Flexi Cap Fund.

Blue Star capitalises on rising summer temperatures and increased affordability

Blue Star Ltd (BLUESTARCO): As India's leading heating, ventilation, air conditioning, and commercial refrigeration firm, Blue Star boasts an annual revenue of over Rs 7,977 crore. It has five manufacturing plants and operates through 7,500 stores and 1,172 associates.

Blue Star has long established itself as a premium brand in the air conditioning segment. The firm plans to venture into Tier-II and Tier-III cities to capture the untapped market. Its investment in distribution and capacity expansion will help increase the top line. The intense summer conditions and rising affordability are driving the air conditioning market. Also, the increased demand for commercial refrigeration is contributing to improved margins.

Fund managers who bought shares of Blue Star

Fund managers who added shares of Blue Star to their portfolios include R Srinivasan and Mohit Jain for SBI Small Cap Fund, Shreyash Devalkar and Vinayak Jayanath for Axis Small Cap Fund, Pankaj Tibrewal and Arjun Khanna for Kotak Emerging Equity Fund, Samir Rachh and Kinjal Desai for Nippon India Small Cap Fund and R Janakiraman and Sandeep Manam for Franklin India Smaller Companies Fund.

Shriram Finance faces challenges with higher interest rates and goodwill amortisation

Shriram Finance Ltd (SHRIRAMFIN): With a focus on financing commercial vehicles, passenger vehicles, two-wheelers, construction equipment, and farm equipment, Shriram Finance also serves micro, small and medium enterprises, and offers gold and personal loans. The NBFC has an AUM of Rs 1.86 lakh crore and a customer base of 7.32 million.

The merger of Shriram Transport Finance and Shriram City Union Finance in FY23 has expanded the company's reach into multiple geographies, facilitating growth in its MSME loan book. The merger also created a Rs 1,513 crore intangible asset, which will be amortized over the next four years. The firm has been efficient in managing its borrowing costs amid rising interest rates. Even a 25 bps increase in the repo rate will result in a 10 bps rise in borrowing costs for Shriram Finance. However, the yield on its advances will remain under pressure, leading to margin contraction.

Fund managers who bought shares of Shriram Finance

Fund managers who added shares of Shriram Finance to their portfolios include Pankaj Tibrewal and Arjun Khanna for Kotak Emerging Equity Fund. Fresh buys were done by Rohit Singhania and Jay Kothari for DSP Equity Opportunities Fund, Samir Rachh and Kinjal Desai for Nippon India Smallcap Fund, Mahesh Patil and Dhaval Joshi for Aditya BSL Frontline Equity Fund, and Sailesh Raj Bhan and Ashutosh Bhargava for Nippon India Multicap Fund.

Credit Access Grameen expands margins with softening input costs

Credit Access Grameen Ltd (CREDITACC): This women-centric microfinance institution has its presence in 14 states, with a branch network of 1,786. The NBFC has a gross AUM of Rs 21,031 crore, catering to 42.6 lakh customers. The firm has a strong rural presence and is expanding itself into non-microfinance businesses.

The addition of branches in new geographies and higher customer retention are aiding its loan portfolio growth. The firm’s competitive lending rates (200-400 bps lower than its peers) are helping retain customers . It plans to increase its AUM to Rs 50,000 crore in the next five years and expand its non-microfinance loan book to 25% from the current 10%. It plans to add new categories like loan against property (LAP), vehicle loans and gold loans to non-microfinance loans.

Fund managers who bought shares of Credit Access Grameen

Fund managers who added shares of Credit Access Grameen to their portfolios include Shreyash Devalkar and Vinayak Jayanath for Axis Small Cap Fund, and Ratish Varier and Sudhir Kedia for Sundaram Multicap Fund. Fresh buys were done by Shridatta Bhandwaldar for Canara Robeco Emerging Eqs Fund, Gopal Agrawal and Priya Ranjan for HDFC Large and Midcap Fund, and Shreyash Devalkar and Vinayak Jayanath for Axis Midcap Fund.

Varun Beverages sustains growth amid challenge

Varun Beverages Ltd (VBL): This bottler and distributor of PepsiCo’s beverages in geographically pre-defined territories currently has franchisee agreements across 27 states and 7 union territories in India, apart from a presence in Sri Lanka, Nepal, Morocco, Zambia and Zimbabwe. India contributes nearly 80% of its revenue.

The company plans to expand the distribution of its high-margin energy drink, Sting, as its sales volumes have been rising in double digits. Energy drinks have significant room for expansion in the market as consumer awareness is still in the nascent stage. The next key growth drivers for VBL will be juices, sports drinks and value-added dairy products, for which two production facilities are being set up and likely to be commissioned in 2024. The management also plans to expand its distribution network by 10%, with a focus on rural India.

Fund managers who bought shares of Varun Beverages

Fund managers who added shares of VBL to their portfolios include Rupesh Patel and Dhrumil Shah for Nippon India Growth Fund, Chandraprakash Padiyar and Meeta Shetty for Tata Large & Midcap Fund, Vinay Paharia and Puneet Pal for PGIM India Flexicap Fund, Sachin Relekar for Bandhan Flexicap Fund, and Venugopal Manghat and Vihang Naik for HSBC Value Fund.

Aether Industries increases growth prospects with client additions and R&D investments

Aether Industries (AETHER): This Surat-based firm operates in the specialty chemical business. Its products find applications in sectors like pharmaceuticals, agrochemicals, material science, and oil & gas. The company generates 77% of its revenue from pharmaceutical and agrochemical segments. The firm also offers contract research and manufacturing services (CRAMS), and has a production capacity of 6,000 MT.

Aether Industries recently received a letter of intent from Saudi Aramco Technologies to manufacture and commercialize Converge Polyols. This will give Aether access to other product lines developed by Saudi Aramco Technologies. After the addition of 13 new customers in Q4FY23, the company's business is expected to further expand in FY24. The firm is also increasing its R&D investments to boost its CRAMS revenue over the next three years.

Fund managers who bought shares of Aether Industries

Fund managers who added shares of Aether Industries to their portfolios include Shreyash Devalkar and Vinayak Jayanath for Axis Small Cap Fund, R Srinivasan and Mohit Jain for SBI Magnum Global Fund, and Rama Srinivasan and Mohit Jain for SBI Multicap Fund. Fresh buys were done by Sachin Relekar for Bandhan Flexicap Fund, and Bhavesh Jain and Bharat Lahoti for Edelweiss Balanced Advantage Fund.

CDSL anticipates revenue growth in a rising stock market momentum

Central Depository Services (India) Ltd (CDSL): This key player in facilitating securities transactions and holding securities in dematerialized form acts as an intermediary for exchanges, clearing corporations, depository participants, and investors. CDSL currently has 8.43 crore investor accounts.

CDSL faced an 11.6% YoY decline in Q4FY23 revenue due to a drop in transaction charges and IPO-related activity. Margins also narrowed by 460 bps to 55.7% during the same period. However, the management has given a guidance of 12% revenue growth for FY24, with an expected EBITDA margin of 60%. IPO activity and market transactions tend to align with market movements. As the market shows positive momentum with indices making record highs, an increase in IPO activity is expected.

Fund managers who bought shares of CDSL

Fund managers who added shares of CDSL to their portfolios include Taher Badshah and Dhimant Kothari for Invesco India Contra Fund and Samir Rachh and Kinjal Desai for Nippon India Smallcap Fund. Fresh buys were done by Vaibhav Dusad and Sharmila D’mello for ICICI Pru Technology Fund.

The Baseline

06 Jul 2023

India looks for opportunity in the US-China chip war | Screener for outperformers ahead of results

By Shreesh Biradar

In the last few decades, the way countries wage war has changed. The world has mostly shifted from traditional battles involving soldiers and tanks, to more sophisticated weapons - economic sanctions.

China's growing dominance in the chip manufacturing sector raised alarms in the US. In response, the US is trying to put the brakes on China's technological rise by imposing sanctions and bans on chip exports to China.

The chip war has led to cascading effects globally, creating supply chain issues. Most of the global manufacturing industries, including automobiles and mobile phones, faced chip shortages post-pandemic. As a result, the costs for specialized hardware jumped. The chip supply has now increased as Korea and Japan boosted their production, while countries like India are trying to create a chip manufacturing ecosystem from scratch, via incentives to manufacturers.

In this week’s Analyticks:

The chip war creates risk and opportunity: As China and the US clash over semiconductors, countries like India look to take advantage
Screener: Stocks outperforming their sectors and Nifty 500, with high broker upside and increasing MF buying

Let’s get into it.

US, the dominant chip manufacturing country, defends its territory

The US has been at the epicentre of chip manufacturing since the early 1980s, with a market share of 50%, followed by Japan (40%). Over the years, the US has maintained its market share, and currently holds 48%. In contrast, Japan’s market share has dropped to 9%.

The US accounts for nearly $275 billion of the global market size of $574 billion. The country is home to technologically advanced chip manufacturing companies such as Nvidia, AMD, Intel, and Qualcomm, making it a powerhouse of chip technology. It is followed by China, which has rapidly caught up and now has a market size of $181 billion.

Semiconductors are the fifth largest exports for the US, after refined oil ($146.2 billion), crude oil ($116.8 billion), natural gas ($96.5 billion) and aircraft ($93.8 billion).

When it comes to investment in chip manufacturing, the US spends nearly $50 billion in R&D, surpassing the combined spending of approximately $40 billion by the rest of the world.

The US Department of Commerce recently announced a $52.7 billion package in August 2022 to further strengthen its semiconductor industry. The US has also passed the CHIPS Act to increase chip manufacturing and counter the rise of Taiwan, South Korea, and China.

These eye-popping investments in chip technology and its dominant position in the market give the US a strong bargaining chip.

China wants to dominate chip manufacturing, by fair means or foul

The stakes are high in the semiconductor market - the significance of chips in electronic equipment cannot be overstated. Nearly 56% of chips manufactured worldwide are used to power computers and smartphones. While the assembly cost of a mobile phone is relatively low, the chip inside costs hundreds of dollars.

China has been trying hard to build its chip manufacturing capability and the US has previously accused it of cheating to do it. For example, Micron, a chip maker based out of the US, found itself the target of a heist by Chinese company Fujan Jinhua in 2018, when more than 900 confidential Micron designs and documents were copied onto USB drives and phones to be smuggled out of Micron's Taiwanese office. Chinese companies have also been found selling chip designs very similar to manufacturers like Samsung.

The US has reacted by hitting China where it hurts the most. American restrictions on chip exports have slowed down China’s electrical and electronic manufacturing. China is the biggest exporter of electrical and electronic equipment in the world, and according to United Nations Comtrade, its exports in this segment was $955 billion in 2022.

By disrupting the chip supply, US will force China to move down the value chain in exports.

US companies control nearly 53% of China's semiconductor market, easily the biggest consumer market worldwide:

Although US chip manufacturers will lose access to the China market with the restrictions, the blow to China will be even greater.

The semiconductor value chain is dominated by the US, followed by Japan, South Korea, Taiwan and the Netherlands. These nations are more aligned with the US even though China is the biggest customer. Following the US, Japan and the Netherlands have also imposed export restrictions on high-end chips (below 14nm size). Companies like Intel, Foxconn, TSMC, NXP, and Qualcomm are increasingly moving their units out of China.

China is a big exporter of rare earth metals crucial for chip manufacturing. According to the US Geological Survey, China supplies over two-thirds of global rare earth metal consumption. So in retaliation, China this week imposed restrictions on the export of Gallium and Germanium, which are necessary for chip manufacturing. It has also banned chip manufacturer Micron and other US players from entering its market.

Why can’t China scale up without the US?

China’s retaliatory measures may impact US revenue in the short term, but in the long run, China is depriving itself of the free flow of technology.

The US has long expressed concerns about unfair trade practices in China. China has always spent less on R&D (7% of its revenue) compared to the US (18.75%), and is trying to take advantage of the US technology, via IP theft and copycat chips.

One key limitation for China is in advanced processor chips below 14nm. With the restrictions in place, China only has access to chips sized 14nm or greater. Even China’s largest chip manufacturer, Huawei, is limited to producing 14nm and above chips. Developing expertise on par with the US will take years.

The technology involved in the chip manufacturing process is controlled by a handful of companies. For instance, Advanced Semiconductor Materials Lithography Holding (ASML) based out of the Netherlands has a 100% market share in advanced lithography tools used for chip manufacturing. Taiwan’s TSMC (Taiwan Semiconductor Manufacturing Company) controls 90% market share for advanced processor chips (5nm and 7nm chips) used in smartphones and computers. The few companies which purify the metals needed for chip manufacturing are located in Japan, a US ally, and the US.

The restrictions imposed by the US, Japan, Netherlands and Taiwan will significantly slow down China's participation in the AI and smartphone race.

India is pushing hard to overcome its challenges in chip manufacturing

The Indian semiconductor market is expected to reach around $55 billion by 2026 and $85 billion by 2030, a big jump from the current $27 billion. Currently, India relies on imports to fulfill nearly 90% of its semiconductor requirements. However, the recent trade war and supply chain issues have highlighted the need for domestic chip manufacturing. The Indian government is trying to incentivize chip manufacturing by allocating Rs 76,000 crore to the sector.

As a late entrant to the industry, India faces multiple challenges. Chip manufacturing requires skilled labour, ultra-specialized software (which is usually licensed), and precise machine tools to lay down thin films of semiconductors (where thickness is measured in atoms). India currently lacks the necessary infrastructure and access to such processes and systems.

Investments in chip manufacturing run into billions of dollars, while the market size is only around $27 billion. This has been a major barrier for Indian manufacturers. Ideally, an Indian player should partner with a technological provider to scale up operations. Vedanta-Foxconn is currently the only such proposal on the government’s table. However, the JV is still looking for a suitable technological partner that could license them with 28 nm chip technology.

In a positive development, Micron has announced a $2.5 billion investment in India for chip manufacturing. UK-based SRAM & MRAM has also pledged a Rs 30,000 croreinvestment for a semiconductor fabrication unit in India.

These investments also align with the China +1 policy, where global companies are finding alternate manufacturing locations to reduce their dependence on China. India needs these foreign firms to establish plants, source raw materials from China, and drive exports.

While building the industry from the ground up is a difficult task, it's not impossible. India's journey toward chip manufacturing will require coordinated effort, strategic partnerships, and a robust ecosystem. It has the potential to emerge as a significant player in global chip manufacturing if it manages to beat these early roadblocks.

Screener: Stocks outperforming their sectors and Nifty 500, with high broker upside and increasing MF buying

As the Nifty 50andSensexhit record highs, we take a look at the outperformers. This screener shows stocks that have outperformed their sectors and the Nifty 500 in the past month, with more than 20% upside in the broker target price, and with mutual fund holdings increasing in the past two months.

The screener has 11 stocks from the Nifty 500 index, including Suzlon Energy, Shyam Metalics & Energy, Kennametal India, Piramal Pharma, KPR Milland Star Health & Allied Insurance.

Suzlon Energy has grown 66.4% over the past month, outperforming the Nifty 500 by 61.7 percentage points. The stock has an average broker target price upside of 20.2%. According to ICICI Securities, the general industrials company is well-positioned to take advantage of policy changes in the industry after booking orders worth 750 MW for its newly launched 3 MW turbine. However, the stock has been volatile over the past decade due to low industry volumes and high debt after the acquisition of Repower in 2008.

Shyam Metalics & Energy comes in next with a 17.6 percentage point outperformance of the Nifty 500. The metals & mining company also has the second-highest average broker target price upside of 58.1%. ICICI Securities predicts growth in revenue driven by increased volume of aluminium foil and LC ferrochrome, and growth in rebar sales despite weak demand.

Piramal Pharma has risen 11.4% over the past 30 days, outperforming the Nifty 500 by 6.7 percentage points. The pharmaceuticals & biotechnology stock has the highest average broker target price upside of 111%. Motilal Oswal expects growth in sales in the medium term owing to rising purchase orders in the contract development and manufacturing operations (CDMO) and complex hospital generics (CHG) segments.

You can find more popular screeners here.

Signing off this week,

The Trendlyne Team

Metal and Mining

SECTOR | 30 Jun 2023

Indian steel makers brace for impact amid China's uncertain growth story

By Shreesh Biradar

The steel industry has been under pressure in recent months, thanks to a slowdown in the global economy, rising interest rates, and geopolitical tensions. Notably, China, the largest steel producer (accounting for 54% of global production), is also facing a slowdown.

Indian steel manufacturers had benefited from higher steel prices and lower exports from China over the past 18 months. …

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Indian steel manufacturers had benefited from higher steel prices and lower exports from China over the past 18 months. The Nifty Metal rose 33% in the past year, while the broader Nifty 50 increased by 20%. India, the second-largest steel producer with a 6.6% share of world production, is also seeing increased demand. Overall, lower fuel costs, cheap Chinese imports, the government’s infra push, and taxes on the import/export of steel determine the margins of Indian steel manufacturers.

India’s steel consumption increasing at a slower pace

India has one of the lowest per capita levels of steel consumption in the world at 81.1 kg per person, while the global average stands at 233 kg. In comparison, major exporting economies like China, Germany, Japan, and South Korea have per capita consumption above 300 kg per person.

The lower per capita steel consumption in India is due to its higher population, relatively lower spending on infrastructure development, and the limited export of machinery. As a result, the growth of steel consumption in India has been slower. The National Steel Policy 2017 plans to increase steel consumption to 160 kg per person by 2030, a growth rate of 10.5% CAGR from the current levels.

Looking at the trend since 2018, India's steel consumption has a growth of 3.5% CAGR. The recent pick-up in the manufacturing and real estate sectors has driven steel consumption in India.

Government initiatives to boost steel demand in FY24

The Indian government has taken significant steps to increase steel demand in FY24. The budgetary allocation for infrastructure rose by 33% to 10 lakh crore in FY24, with nearly 50% of the budget earmarked for road and railway projects. The new production-linked incentive scheme will further aid steel consumption in India.

Recent investments in the real estate sector, mining, and pick-up in the automotive space have provided a much-needed buffer for the steel sector in FY24. As the rural economy gradually returns to normalcy, urban consumption is expected to play a major role in driving steel demand in the retail segment.

India’s steel consumption grew by 13.3% in FY23. According to the Indian Steel Association, steel consumption is expected to grow by around 7.5% in FY24. Steel consumption is closely linked to GDP growth, and all sectors that utilize steel are expected to grow above 6% in FY24. According to the Ministry of Steel, India’s production capacity will increase to 300 million tonnes per annum from the current 150 million tonnes by 2030.

While the majority of India’s steel production is dedicated to captive consumption, around 5-10% is exported. However, the global slowdown and declining steel prices have led to lower Indian steel exports. China, with its increased exports, is also posing challenges to India’s prospects in steel export.

China’s production key to maintaining international steel prices

China commands a staggering 54% of global steel production. But its production has been facing challenges over the past five years due to changes in emission norms and the impact of Covid-19. China maintained its steel production at around 1 billion tonnes in FY23, after peaking at nearly 1.05 billion tonnes in FY20. The sector accounts for nearly 15% of China’s emissions, and the country is moving towards electric arc furnace manufacturing methods to tamp that down.

Stricter Covid regulations and production cuts have also limited China’s steel exports. The increased production is focused mainly on meeting pent-up domestic demand due to the Covid pandemic. However, as manufacturing activity slowed down and the real estate market experienced a slump in China, Chinese steel manufacturers have turned to international markets to offload their excess steel production. May 2023 saw the highest steel exports in the past 29 months.

The excess influx of Chinese steel into the international market has caused international steel prices to decline from $670/tonne in March 2023 to $545/tonne in June 2023. As China ramps up its exports, steel prices are expected to fall further.

In contrast, prices in India have seen an uptick from $545/tonne in May 2023 to $604 in June 2023. The difference between international and domestic prices will make way for higher imports if the government doesn't intervene. This could impact the price realization of domestic manufacturers.

Local manufacturers are hopeful that the Chinese government’s efforts to revive the real estate and manufacturing sectors of China will aid steel consumption in the country. This, in turn, should reduce the supply to the international market and help boost international prices.

Government interventions restrict steel exports in FY23

Higher international steel prices from lower Chinese exports led Indian manufacturers to increase steel exports in FY22. As the international prices peaked in H1FY23, domestic manufacturers further ramped up their exports, causing a surge in domestic prices.

To stabilize the domestic market, the government imposed a 15% export duty from May 2022 to November 2022. As the price gap between domestic and international markets narrowed, local manufacturers once again focused on the domestic market.

To prevent the influx of cheap Chinese steel into the Indian market, the Indian Steel Association has asked the government to consider raising the basic customs duty on steel from 7.5% to 12.5%. However, the government is not keen on doing this, since this would raise prices of finished goods across several segments. Nearly 23% of India’s steel imports are dedicated to automobiles and components.

Lower exports impact profitability for Indian manufacturing

The run-up in steel prices during H2FY22 provided an opportunity for domestic manufacturers to increase their exports. At the time, the difference between international and domestic prices reached around $150/tonne. However, as the difference declined with the imposition of export tax, domestic prices shot up. Consequently, manufacturers shifted their focus to the domestic market due to higher domestic prices compared to international prices.

However, the profitability of Indian manufacturers in Q4FY23 took a hit YoY, considering that international and domestic prices peaked at $900 and $770 per tonne, respectively, in Q4FY22 and fell since then. On average, the lower pricing in Q4FY23 resulted in margin/tonne declining by 25%.

The current outlook indicates that higher domestic prices and healthy steel demand will aid the domestic steel sector. Foreign counterparts like Tata Steel UK may face difficulties, owing to lower prices and economic slowdown.

Lower fuel costs to offset lower price realizations

The recent downtrend in coking coal prices has helped steelmakers cushion the impact of lower price realizations. Fuel accounts for nearly 40% of the total production cost of steel. Coking coal prices have declined by more than 60% since its peak in September 2021.

Coking coal prices are expected to remain at their current levels due to lower demand, and stabilizing steel production globally. The reduction in fuel costs will help improve profit margins; however, this benefit will be offset by the decline in steel prices.

India's steel industry shines amid global challenges

Amid a global economic slowdown and rising interest rates, steel consumption has taken a hit. The World Steel Association predicts a 2.4% increase in steel demand in 2023 and 1.7% in 2024. However, the world's largest steel consumer, China, is expected to grow at a rate of 5.2% in 2023 due to a slowdown in its real estate and manufacturing activity.

India’s GDP growth rate for FY24 is projected to be around 6.5% by the Reserve Bank of India, with an improvement of around 7.5% in the domestic steel sector. Higher domestic steel prices and lower fuel costs will provide a buffer for the Indian steel industry against the global slowdown.

However, if China continues its steel production during the economic downturn, it will hurt the prospects of Indian steel manufacturers. The policy changes aimed at boosting steel consumption in China hold the key to global steel prices.

Axis Direct released a Sector Update report for Metal and Mining on 07 Apr, 2025.

Mutual Funds News

TREND | 16 Jun 2023

Smart money moves: Which stocks did mutual fund managers buy in May 2023?

By Shreesh Biradar

In May, benchmark indices Nifty 50 and Nifty 500 surged by 2.6% and 3.6% respectively. This rally was fueled by India’s promising growth prospects and softening inflation, as the International Monetary Fund projected a GDP growth of 5.9% in FY24.

Foreign institutional investors also turned into net buyers in the Indian markets, making an investment of Rs 27,856 crore in May. The upbeat market brought back interest in midcap growth stocks. The Nifty Midcap 100, which shot up by 6.2% in May, saw the highest interest from fund managers.

FSN E-Commerce - Focus on cost optimization and private label growth to drive margins

FSN E-Commerce Ventures Ltd (NYKAA): FSN E-Commerce Ventures, commonly known as Nykaa, is an e-commerce platform involved in the online sale and distribution of personal care, health care and fitness products.

While Nykaa has demonstrated efficiency in its beauty and personal care segment, its expansion into the highly competitive fashion industry remains a concern. Improvement in private label sales and better product mix is expected to drive the top line and improve margins. Nykaa’s management is also committed to cost optimization measures, including reducing advertising and marketing expenses, to positively impact the bottom line. The company announced losses in Q4FY23, and lower profits in FY23 compared to the previous year.

Fund managers who bought shares of Nykaa

Fund managers who added shares of Nykaa to their portfolios include Neelesh Surana and Ankit Jain for Mirae Asset Emerging Bluechip Fund, Rajat Chandak and Sharmila D’mello for ICICI Pru Flexicap Fund, Chanchal Khandelwal and Dhaval Joshi for Aditya BSL India GenNext Fund, Saurabh Pant and Mohit Jain for SBI Large & Midcap Fund, and Gaurav Khandelwal and Gaurav Misra for Mirae Asset Large Cap Fund.

Exide Industries - Fresh investments in lithium-ion battery manufacturing

Exide Industries (EXIDEIND): The Kolkata-headquartered firm is a manufacturer of 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 has been a market leader in the storage batteries space. However, increased competition and higher market penetration have pushed the company to explore emerging technologies like lithium-ion. With a planned outlay of Rs 6,000 crore, Exide aims to establish a 12 GWh plant for lithium-ion battery production, which is expected to be operational within the next 2-3 years. The firm has a battery pack assembly unit for lithium-ion batteries, which has received orders worth Rs 600 -700 crore, scheduled to be executed in the next 12-15 months.

Fund managers who bought shares of Exide Industries

Fund managers who added shares of Exide Industries to their portfolios include Pankaj Tibrewal and Arjun Khanna for Kotak Emerging Equity Fund, Harsha Upadhyaya and Arjun Khanna Kotak Equity Opportunities Fund, and Manish Gunwani for Bandhan Core Equity Fund. Fresh buys were done by Sailesh Raj Bhan and Ashutosh Bhargava for Nippon India Multi Cap Fund and Sonam Udasi and Amey Sathe for Tata Equity P/E Fund.

Kalpataru Projects International - Diversification into other EPC businesses key for order book growth

Kalpataru Projects International (KPIL): Kalpataru Projects, commonly known as Kalpataru Power Transmissions, is a global EPC (engineering, procurement, and construction) player with a diversified play in power transmission and distribution, oil and gas pipelines, railways and biomass-based power generation.

To mitigate risks associated with the transmission and distribution business, Kalpataru is actively expanding into new geographies and segments. The company has ventured into water, railways, civil, and industrial construction businesses. Also, the merger with JMC and its specialized civil business in FY23 has enabled it to undertake large orders. The firm currently has an order book of Rs 14,400 crore, with nearly 90% originating from the international segment. As a result, Kalpataru has become the second-largest listed EPC player in terms of the order book.

Fund managers who bought shares of Kalpataru Projects International

Fund managers who added shares of Kalpataru Projects to their portfolios include Sankaran Naren and Manish Banthia for ICICI Pru Equity & Debt Fund, Harish Bihani and Sharmila D’mello for ICICI Pru Smallcap Fund, and Kunal Sangoi and Dhaval Joshi for Aditya BSL Pure Value Fund. Fresh buys were done by Atul Penkar and Dhaval Joshi for Aditya BSL Equity Advantage Fund, and Mahesh Patil and Chanchal Khandelwal for Aditya BSL Equity Hybrid '95 Fund.

Engineers India - Execution quality remains key for huge order book

Engineers India (ENGINERSIN): This public sector undertaking with interests in consultancy and engineering of turnkey projects is focused on oil, gas and petrochemical industries in India and abroad.

Engineers India is trying to diversify into new growth verticals like coal gasification, defence and transportation. Its network in the oil & gas industry has helped drive new projects. The firm has an order book of Rs 7,690 crore and another Rs 1,590 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 Rohit Singhania and Jay Kothari for DSP India T.I.G.E.R Fund, and Vinit Sambre and Jay Kothari for DSP Small Cap Fund. Fresh buys were done by Atul Bhole and Dhaval Gada for DSP Flexi Cap Fund Fund, Vikram Chopra and Atul Bhole for DSP Equity & Bond Fund and Laukik Bagwe and Atul Bhole for DSP Dynamic Asset Allocation Fund.

CIE Automotive India - Seeks synergies by realigning itself with the parent firm

CIE Automotive India (MAHINDCIE): This subsidiary of CIE Automotive Spain is a tier-2 component supplier to the automotive industry. CIE Automotive’s expertise lies in forgings, castings, gears, composites, and magnetic components.

Mahindra and Mahindra exited CIE Automotive by selling their entire stake of 3.2% in May 2023. This has aligned CIE India’s goal with its European parent. This is expected to generate enhanced synergies between the two entities. New orders from Bosch, Royal Enfield and Stellantis have solidified CIE’s position in the Indian automotive industry. The firm is betting on the EV wave by adding more products to its portfolio. The firm expects 50% of its new business to come from the EV segment in 2-3 years.

Fund managers who bought shares of CIE Automotive India

Fund managers who added shares of CIE Automotive to their portfolios include Shreyash Devalkar and Vinayak Jayanath for Axis Flexi Cap Fund, and Ashish Naik and Vinayak Jayanath for Axis Business Cycles Fund. Fresh buys were done by Shridatta Bhandwaldar and Ajay Khandelwal for Canara Robeco Small Cap Fund, and Gopal Agrawal and Priya Ranjan for HDFC Large and Mid Cap Fund and HDFC Multi Cap Fund.

Vedant Fashions - Newer brands in women's clothing hold potential

Vedant Fashions (MANYAVAR): Manyavar specializes in the Indian wedding and celebration wear segment. The firm operates a network of 640 franchise-owned exclusive brand outlets.

By implementing data-driven demand forecasting and tech-enabled supply chain management, the company effectively optimized costs. Manyavar is nurturing its emerging brands like Mohey, Twamev and Manthan to cater to different segments with varying price points across geographies. The Mohey brand caters to women's traditional wear and contributes 10% of the total revenues. It is a potential game-changer for Manyavar. The women’s celebratory clothing market pegged at Rs 74,000 crore, is roughly 5x bigger than the men’s segment.

Fund managers who bought shares of Manyavar

Fund managers who added shares of Manyavar to their portfolios include R Srinivasan and Dinesh Ahuja for SBI Equity Hybrid Fund, Pankaj Tibrewal and Arjun Khanna for Kotak Emerging Equity Fund, Vinay Paharia and Puneet Pal for PGIM India Midcap Opps Fund, and Rajat Chandak and Sharmila D’mello for ICICI Pru Flexicap Fund. Fresh buys were done by Anil Shah and Dhaval Joshi for Aditya BSL Flexi Fund.

Balkrishna Industries - Softening input costs to expand margins

Balkrishna Industries (BALKRISIND): This prominent manufacturer in the off-highway tire market specializes in agricultural, industrial and off-road tires. The company is an OEM vendor for John Deere, JCB and CNH Industrial. It has a major presence in the US and Europe, apart from India.

The recent headwinds, including an increase in raw materials and freight costs, have compressed margins. However, as supply chain issues ease-out, Balkrishna Industries is in the process of destocking. With the added import duties on Chinese tires, the firm has gained a competitive advantage. It plans to increase its market share in global off-road tires from the current 6% to 10% in the next 4-5 years. To enhance its competitiveness, Balkrishna Industries is maintaining a lower price gap of around 12-15% compared to its European counterpart.

Fund managers who bought shares of Balkrishna Industrie

Fund managers who added shares of Balkrishna Industries to their portfolios include Siddharth Bothra and Niket Shah for Motilal Oswal Flexicap Fund, Niket Shah and Ankush Sood for Motilal Oswal Midcap 30 Fund, Vinay Paharia and Puneet Pal for PGIM India Midcap Opps Fund, Taher Badshah and Dhimant Kothari for Invesco India Contra Fund, and S Bharath and Ratish Varier for Sundaram Mid Cap Fund.

Coforge - Sustaining growth in a challenging environment

Coforge (COFORGE): Formerly known as NIIT Technologies, Coforge is a global digital services and solutions provider. With a presence in 21 countriesm and 25 delivery centres, the firm derives nearly 48% of its revenue from America. The firm’s BFSI vertical has a revenue share of 53%.

While many Indian software giants are facing a slowdown in BFSI spending, Coforge has been strengthening ties and winning new deals. It currently has an order book of $869 million, with contributions of $300 million each from the BFSI and travel verticals. The firm has increased its utilization levels and lowered its attrition rate. It is also seeing margin expansion.

Fund managers who bought shares of Coforge

Fund managers who added shares of Coforge to their portfolios include Niket Shah and Ankush Sood for Motilal Oswal Midcap 30 Fund, and Meenakshi Dawar and Dhrumil Shah for Nippon India Value Fund. Fresh buys were done by Siddharth Bothra and Niket Shah for Motilal Oswal Flexicap Fund, Neelesh Surana and Ankit Jain for Mirae Asset Emerging Bluechip Fund, and S Bharath and Ratish Varier for Sundaram Mid Cap Fund.

Mankind Pharma - India-specific business eliminates competition

Mankind Pharma (MANKIND): Mankind is a leading player in the Indian pharmaceutical market, with 91% of its revenue derived from branded formulations. The firm has a presence in the anti-infectives, cardiac, gastro, and respiratory segments. It is also into consumer healthcare, offering products like condoms, emergency contraceptives and pregnancy tests.

Mankind Pharma launched its IPO in April 2023 and was subscribed 15.3 times its issue size. As the fourth-largest pharmaceutical firm in India, Mankind Pharma's focus on the domestic market provides a barrier against intense competition in highly regulated international markets. It also shields the company from challenges like policy changes, currency risks and economic slowdowns. The firm has outperformed the Indian pharmaceutical industry over the past three years and is expected to scale its operations further.

Fund managers who bought shares of Mankind Pharma

Fund managers who added shares of Mankind Pharma to their portfolios include Tanmaya Desai and Mohit Jain for SBI Healthcare Opportunities Fund, Siddharth Bothra and, Niket Shah for Motilal Oswal Flexicap Fund, and Chirag Setalvad and Priya Ranjan for HDFC Mid-Cap Opportunities Fund. Fresh buys were done bySailesh Raj Bhan and Kinjal Desai for Nippon India Pharma Fund, and Aditya Khemani and Rakesh Shetty for Motilal Oswal L/T Equity Fund.

Safari Industries - Premium range to aid top line and margins

Safari Industries (Safari): Safari manufactures and markets luggage and luggage accessories. The company operates production facilities in Mumbai and Halol, Gujarat, where it manufactures injection-molded and vacuum-formed plastic articles. However, the majority of its fabric products are imported.

The recent increase in tourism activities following the easing of COVID-19 restrictions has provided Safari Industries with an opportunity to capture a larger market share. The firm is undertaking price hikes and lowering discounts, increasing-price realizations. Also, the increase in retail footprint and its venture into the premium segment has led to the firm outperforming its industry. The company also plans to expand its capacity by 25% in FY24, in line with its demand outlook.

Fund managers who bought shares of Safari Industries

Fund managers who added shares of Safari Industries to their portfolios include Chirag Setalvad and Priya Ranjan for HDFC Small Cap Fund, Amit Nigam and Dhimant Kothari for Invesco India Tax Plan Fund, Manish Lodha and Abhinav Khandelwal for Mahindra Manulife Small Cap Fund, Sachin Relekar and Harshal Joshi for Bandhan Midcap Fund, and Amit Nigam and Pranav Gokhale for Invesco India Multicap Fund

The Baseline

14 Jun 2023

India's electric vehicles are facing speedbumps | Screener for stocks in the PE buy zone with rising momentum

By Shreesh Biradar

In 1908, the Ford Model T set off a transportation revolution as the first mass-produced car with an internal combustion engine (ICE). It had no seatbelts or windows, 20 horsepower (hp) and a top speed of 72 km/hr.

ICE vehicles have evolved a lot since that first car - the modern Ford GT MK IV has 40 times the power, with 800 hp and a top speed of 472 km/hr.

Before the Model T, roads across cities had to be cleaned every day of huge amounts of horse manure, because people were mostly travelling in horse carriages. The car was a relief to everyone who had to walk around while trying not to step into horse poop. Now more than a hundred years later, electric vehicles are emerging as a cleaner, better alternative to traditional cars.

Elon Musk, the poster boy worldwide for electric cars, made EVs a disruptive force against ICE cars with Tesla. Several auto manufacturers before him had tried to sell electric vehicles without success - small, cramped cars that nobody wanted to be seen in. Tesla paved the way for EVs to become both competitive and a status symbol.

But so far, the Indian story has been different. Despite India introducing its first domestically manufactured electric car, the Reva, in 2001, the country has lagged behind major markets in increasing electric vehicle usage.

In this week’s Analyticks:

Facing speedbumps: EVs in India need an ecosystem boost
Screener: Stocks in the PE Buy zone with reasonable durability score, rising momentum score and strong Q4FY23 performance

Let’s get into it.

Tata, Mahindra, Ola, Hero, and TVS have become leading electric mobility manufacturers in India. In FY23 alone, the country saw a hockey-stick change in demand, with 11,71,944 electric vehicle sales - more than the total EVs sold in India over the past decade.

Fortune Business Insightsexpects India's electric vehicle market to grow from $3.2 billion in 2022 to $114 billion by 2029 – a CAGR of 66.5%.

Norway has the highest EV penetration in the world right now, with 79.2%. The Norwegian government has passed legislation requiring that all cars sold in 2025 be zero-emission (electric or hydrogen-powered) vehicles. In comparison, the Indian government is far behind and is targeting to achieve 30% EV penetration by 2030.

Station shortage: 2,577 for EVs vs 80,000 for ICE

To promote electric vehicles, the Indian government has adopted a three-pronged approach by subsidizing EV consumption, building charging infrastructure across the country, and incentivizing local EV manufacturing.

Under the National Electric Mobility Mission Plan (NEMMP), the goal is to set up one charging station every three kilometres in cities and one every 25 kilometres on highways. However, only 2,577 charging stations have been installed so far, a stark contrast to the nearly 80,000 fueling stations India has for ICE vehicles.

The government's Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme offers subsidies for electric vehicles. To qualify, the vehicle must have at least 70 km of range and a minimum speed of 40 km/hr. Additionally, the government has set norms requiring 50% of the vehicle’s manufacturing to be done in India. These initiatives have led to a price decline of Rs 10,000 - 15,000 for electric two-wheelers.

Data source: moneycontrol

To make lithium-ion battery packs more competitive in terms of pricing, the government has reduced the Goods and Services Tax (GST) on these batteries from 18% to 5%. The new Production Linked Incentive (PLI) programme for this industry is also expected to promote domestic battery manufacturing.
Government initiatives have shown positive results for the electric two-wheeler segment, which registered sales of 1 lakh units in the month of May 2023, double the average during FY23. However, problems such as the lack of charging infrastructure on highways and battery limitations continue to hinder the growth of EV passenger vehicle sales.

Two-wheeler startups, auto equipment manufacturers lead the EV revolution

Electric two-wheelers account for nearly 61.5% of all EVs sold in India, followed by three-wheelers (34%) and passenger vehicles (3.4%). As two-wheelers are designed for traveling a shorter distance, the technology makes them more attractive.

Electric two-wheeler sales have captured 3.2% of India's two-wheeler market, while the share for passenger vehicles stands at 1.6%. As of December 2022, EVs accounted for 16.8% of all vehicle sales in Delhi, marking a YoY growth of 86%.

Startups like Ola Electric (21.9%), Okinawa Autotech (15.6%), Hero Electric (12.9%) and Ampere Vehicles (12.1%) account for nearly 50% of the total two-wheeler electric vehicle sales in India.

The simplicity of electric vehicles, with fewer than 20 moving parts compared to the 2,000+ parts in IC engines, has put traditional OEM manufacturers at a disadvantage. Consequently, their focus has shifted towards technological development like sensors, software, wiring and batteries.

OEM manufacturers are signing joint ventures with electric vehicle startups to update their product portfolio. Uno Minda, for instance, has signed a JV with foreign firms to manufacture battery packs, smart plugs, residual current device (RCD) cables and motor controllers. This will enhance its kit value from the currentRs 8,000 per vehicle to Rs 50,000 per vehicle.

In the hunt for technology neutrality, Igarashi Motors is developing motors that can be used for both IC engines and electric vehicles. The firm, through a third party, supplied motor parts to Tesla for a short while.

Bosch has also been investing in the development of electric mobility solutions like battery management systems, electric axles and vehicle control units. While these have fewer takers in India, there has been a noticeable global uptick in the sales of such technology.

India struggles in battery manufacturing, lags behind China

Battery manufacturing has a crucial role in the electric vehicle industry, accounting for nearly 30-40% of the total vehicle cost. India lags behind in this key aspect, with China controlling around 75% of the battery manufacturing market. The United States, Hungary and Germany also have a significant presence in this space.

Indian firms have not made big investments in battery technology, unlike global players who are working on improving the energy density of batteries to give EVs more travel range. Some of the highest-performing battery cells – Tesla’s upcoming 4,680 cells and LG Energy Solutions’ Ultium cells – can reach energy densities of over 300 Wh/kg, up from around 100-150 Wh/kg a decade ago.

Major economies are making rapid progress in setting up giga-factories. China has an installed capacity of 5,462 GWh for lithium-ion battery manufacturing, followed by Europe (1193 GWh) and North America (1047 GWh).

Indian firms are yet to make much headway here. Some Indian companies are taking steps now in battery manufacturing - Tata Group is developing a 20 GWh plant in Gujarat, Exide Industries plans to invest Rs 6,000 crore in a 12 GWh plant, and Amara Raja Batteries is investing around Rs 9,500 crore to set up a 16 GWh plant along with a 5 GWh plant for a battery pack assembly unit. Many non-technical players like Reliance, Amperex and OLA are betting on lithium-ion battery manufacturing by acquiring or investing in new plants.

However, the current trend suggests that battery manufacturers may struggle to scale up production to meet the rising demand for EVs. Many Indian auto manufacturers instead import battery packs from China, assemble them domestically, and sell them under different brand names.

India's electric vehicle ecosystem has witnessed significant growth and government support in recent years. But it still relies heavily on imports, and India needs to ramp up its battery manufacturing capabilities a lot faster. Building out manufacturing and improving charging infrastructure is essential to reduce oil imports and unlock the full potential of electric mobility for India.

Screener: Stocks in PE Buy zone with reasonable durability score, rising momentum score and strong Q4FY23 performance

To find promising stocks, investors often look for a combination of factors that indicate a good investment opportunity. This screener looks for automobile & auto componentsstocks in the PE Buy zone with reasonable durability and rising momentum scores, all while delivering strong YoY growth in net profit and revenue in Q4FY23. A stock is in the PE Buy Zone if it is trading at a PE lower than its historical PE average.

Major stocks in the screener include Titagarh Wagons, Eicher Motors, Maruti Suzuki, Banco Products and Mahindra & Mahindra.

Titagarh Wagons has traded below its current PE only 1.7% of the time. This commercial vehicles manufacturer posted a 102.6% YoY revenue growth in Q4FY23, while its net profit improved by 293.3% YoY, supported by strong demand and the government’s increased budgetary allocation for railways. This has helped the stock to grow by 20.7% over the past month, boosting its Trendlyne Momentum score by 5.6 points to 74.7 in the same period. The company also plans to increase its wagon manufacturing capacity from 8,400 units to 12,000 units per annum.

Eicher Motors, known for its two and three-wheeler vehicles, has traded for 22.8% of the time below its current PE. The company witnessed its revenue increase by 19.1% YoY in Q4FY23, while its net profit grew by 48.4% YoY, backed by a higher-than-estimated average selling price (ASP) and falling input costs. The stock has a high Trendlyne durability score of 60 and saw a 5.9 point increase in its momentum score to 56.6 over the past month. The company also plans to launch multiple new products in the next 18-24 months.

Car manufacturer Maruti Suzuki India has traded 26% of the time below its current PE. It posted a 19.9% YoY rise in revenue and a 42.4% YoY growth in its net profit in Q4FY23, backed by increased demand for SUVs in the domestic market, higher sales volume and product prices. The stock has a Trendlyne Momentum score of 64.6, an improvement of 12.3 points MoM, and a high Durability score of 80.

You can find more popular screenershere.

Signing off this week,

The Trendlyne Team

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