Articles by Suhani Adilabadkar

Hindustan Unilever Ltd.    
16 May 2022
Bellwether HUL weathers the storm yet again. But how much will rising costs hurt?  
By Suhani Adilabadkar

With retail inflation rising to an eight-year high of 7.7% in April 2022, markets seem tetchy. The Nifty 50 fell 9% over the past one month and defensive bets like IT services and pharma are also not offering investors much refuge. Although the fast-moving consumer foods (FMCG) sector is a defensive space, high input and commodity cost could play spoilsport. 

FMCG companies’ stocks like Dabur, Marico, Nestle, Britannia, Tata Consumer and ITC fell in the range of 2-10% over the past 30 days. Hindustan Unilever  or HUL’s stock gained 2% over the same period. The company beat Trendlyne Forecaster estimates with revenues rising 11% YoY in Q4FY22, supported by aggressive price hikes. 

But how long will this price hike fueled revenue growth continue? 

Quick Takes:

  • HUL’s revenues rose 11% YoY to Rs 13,462 crore supported by price hikes in Q4FY22
  • Operating margin fell 30 basis points YoY to 24.1% in Q4FY22 amid high commodity cost inflation supported by price hikes and cost control measures
  • Home care revenues grew 24% YoY Q4FY22 driven by price increases in fabric wash and household categories
  • The management sees higher commodity price inflation in the next 2-3 quarters and expects operating margins to fall in the near term  
  • The company plans to launch bridge packs in the near term to shore up its volumes

Strong price led growth in Q4FY22

Mounting inflation, aggravated by geo-political pressures, weighed on overall consumption sentiment in the March 2022 quarter. FMCG volumes fell 8% YoY (according to Nielsen) in Q4FY22 as persistent inflation hurt consumer wallets across both rural and urban India.  HUL reported flat volume growth in Q4FY22. Close peers Dabur and Marico also moved on a similar low volume growth trajectory reporting 2% and 1% growth, respectively, during Q4FY22. Though HUL reported flat volumes, revenue growth was the highest. Revenues came in at Rs 13,462 crore in the Q4FY22, a 11% YoY rise, driven by aggressive price hikes.

Market leader HUL has been leading the FMCG pack implementing price hikes over the past three quarters to pass on crude, palm oil, logistics, and other agri-commodity inflation. The company has been raising prices consistently since October 2021 and hiked prices to the tune of 3-20% across product categories every month in Q4FY22. 

This high pricing power is on the back of strong market share expansion in FY22 amid high inflationary pressures. Operating margins came in at 24.1% in Q4FY22 compared to 24.4% a year ago. Higher revenues and restrained expenditure, employee benefit expenses (flat YoY) and advertising expenses (down 9% YoY) restricted operating margin contraction to 30 basis points (bps) YoY despite high commodity cost inflation. The management expects operating margins to fall in the near term as it expects high commodity inflation to continue unabated in the next 2-3 quarters

Supported by price-led double-digit revenue growth and stable operating performance, net profit grew 9% YoY to Rs 2,327 crore in Q4FY22. HUL increased prices by up to 20% in April, and 15% in May 2022 across various product categories. While net profit might report softer growth (due to operating margin compression) in the next few quarters, revenue growth in the near term is expected to be on a strong platform led by price hikes.  

Home care leads the way, foods & refreshment grow on a high base

HUL has three major business segments, home care, beauty & personal care and foods. Homecare reported revenues of Rs 4,750 crore, up 24% YoY in Q4FY22 driven by double-digit revenue growth in both fabric wash and household care categories. 

But as Brent crude oil (major input) remains above $ 100, up 60% YoY, calibrated price increases will be taken by the company at regular intervals. Thus home care’s five-quarter revenue growth outperformance is expected to continue, supported by the fabric wash category, as mobility is back to pre-Covid levels. Surf Excel with 18-20% market share in the Indian detergent segment and Wheel and Rin’s dominant position in the economy fabric wash segment will enable the company to increase prices in the near term. In the household category, market leader Vim and Domex performed well despite price hikes and are expected to maintain growth momentum.

Amid high inflation, consumers are tightening purchases and prioritizing essentials over discretionary consumption. Everyone’s hair gets a little less shiny - expenses on hair oil, shampoos, and premium soaps are curtailed and cheaper alternatives are being adopted by consumers. Regional competition and smaller companies offering lower-priced products come into play as consumers control their discretionary spending. 

Beauty & personal care revenue at Rs 4,712 crore reported muted growth of 4% YoY. While the soap category reported double-digit revenue growth driven by pricing, hair care and cosmetics were impacted by lower discretionary spending. In the near term, HUL’s wide soap portfolio - Dove, Pears, Liril, Rexona, Lux straddling across the entire price pyramid will stand in good stead despite price hikes, cosmetics, and hair care is expected to grow at a muted rate. Close peer Marico's Parachute volumes declined 1% YoY and Dabur too reported a 7% YoY volume decline in hair care in Q4FY22. 

Foods & refreshment segment revenues came in at Rs 3,698 crore, a strong rise of 5% YoY on an exceptionally high base of 96% YoY growth, a year ago. Tea, coffee, ketchup, jams, soups, and ice creams grew in double digits. HUL’s Brooke Bond controls almost 20% of the Indian tea segment, Bru Coffee is the second runner-up after Nescafe and Kissan Jams and Sauces are market leaders. Foods segment is expected to continue with its stable growth as consumers manage their household budgets to reduce volumes but stick to large established brands for tea, coffee or routine discretionary products like jams and sauces. 

Inflation through the roof, bridge packs to shore volume growth

Net material inflation increased 4.5x YoY for HUL. Crude, plastics, soda ash, and palm oil have spiraled up in the past year. The palm oil export ban by Indonesia in April created a furore globally. Indonesia accounts for about 60% of total palm oil output globally. Palm oil is used in processed foods like chocolates, jams, ketchups, noodles, and home care products like detergents, shampoos, soaps, and cosmetics. 

According to Sanjiv Mehta, Chairman and Managing Director at HUL, the palm oil issue is not long-term and he expects Indonesia to start exporting supplies after its domestic prices come under control. Mehta said that HUL uses palm fatty acid distillate (PFAD) which is not under the export ban and is obtained after refining crude palm oil. And he does not expect the company to face challenges in PFAD availability in the near term. 

As a high inflation scenario is expected to continue in the near term and the leverage of grammage reduction gradually wears off, the company is planning to improve its volumes. HUL is developing bridge packs, a middle price pack between a low unit price pack (LUP) and a large pack in terms of volume and price. For instance, introducing a Lifebuoy soap bar of Rs 20 between LUP of Rs 10 and Rs 35 large packs. The company might vacate certain LUPs and incentivize consumers for higher volume consumption. HUL is implementing a bridge pack strategy across all the impacted low volume growth product categories.

Waiting for rural recovery, HUL might be on an acquisition prowl

Rural India, which accounts for about 40% of total FMCG sales and two-thirds of retail stores reported a 10% fall in volume growth over the past three months (as per Nielsen). The FMCG sector is betting on rural recovery by H2FY23. Strong monsoons, a good rabi harvest, government capex spend of Rs 7.5 lakh crore and high agriculture prices are improving farmer incomes. If geopolitical crises settle down and commodity prices taper off, demand revival may be in the offing.

While inflationary winds blow hard, it may be essential to hold on to a deep-rooted FMCG tree trunk like HUL ( currently in Trendlyne’s potential Buy zone). It is a must-have stock during uncertain times, mainly due to its unrivaled robust product portfolio.  Surf Excel and Brooke Bond individually contribute more than Rs 5,000 crore annually and Vim, Rin and Dove are in the Rs 2,000 crore revenue club. Kwality Wall’s crossed Rs. 1,000 crore turnover mark in FY22. 16 brands with more than Rs 1,000 crore turnover comprise 75% of HUL’s top line.

The annual brand turnover of any of HUL’s top three brands--Surf Excel, Brooke Bond, and Vim would surpass the annual turnover of Dabur or Marico. For a behemoth like HUL, as high commodity inflation and low volume growth wreak havoc on smaller peers and regional players, the time might be ripe for an acquisition prowl.  With JioMart expected to disrupt FMCG turf in the near future, this seems to be a necessity for HUL.

Number of FII/FPI investors increased from 1837 to 2025 in Sep 2022 qtr.
“Maggi not built in a day”, Nestle India says when asked about rising costs
By Suhani Adilabadkar

Even as inflation eats at the FMCG industry’s margins, Nestle India’s March 2022 quarter was stable.

Nestle India’s stock fell 2% after the company announced its results, but has recovered some of its losses. Negative impact on the stock was mainly because of operating margin which fell two percentage points to 23.2%, and net profit fell 1.25% YoY to Rs 595 crore  during the quarter. This is despite a 10.2% YoY revenue growth, which beat the street’s estimates. 

The FMCG space is walking on a tightrope, balancing volumes and margins while operating under high commodity price inflation, reduced customer purchasing power, and slowing rural growth. While the management believes that the company has a long runway for growth, the street is keenly watching how urban-centric Nestle, with its premium product portfolio, navigates inflation pressures. 

Quick Takes:

  • Nestle’s domestic revenues at Rs 3,794 crore, grew 10.2% YoY aided by price hikes in Q1CY22
  • Operating margins contracted 252 basis points YoY to 23.2% due to sharp inflation in key raw materials in Q1CY22
  • Raw materials like edible oil, wheat, crude and coffee are witnessing 10-year high cost inflation
  • Maggi, KitKat, Nescafe and Nestle Munch reported strong growth momentum, milk product portfolio witnessed high competitive pressure
  • The company plans capex of Rs 1,900 crore for the next 3-4 years 
  • Nestle’s  e-commerce channel’s revenues grew 71% YoY, and contributed 6.3% to domestic sales

Strong revenue growth in Q1CY22, but margins falter

The maker of Maggi, Nescafe and Kitkat delivered a resilient March 2022 quarter performance. Domestic revenues at Rs 3,794 crore constituted 96% of total revenues and exports were stagnant at Rs 157 crore. The domestic revenue growth was supported by price hikes in Maggi, Nescafe and milk portfolio. Operating margins fell 252 basis points (bps) YoY to 23.2% as raw material costs surged 22% YoY in Q1CY22. The company is facing sharp price increases in edible oil, wheat, coffee, fuel and milk.

On a sequential basis, price hikes implemented during the quarter led to operating margins improving mildly by 8 basis points. Other income down 28% YoY and lower operating margins led to net profit falling 1.25% YoY. Net profit was reported at Rs 595 crore in Q1CY22 compared to Rs 602 crore, a year ago. 

Maggi, KitKat, Nescafe perform well, milk products face challenges

Nestle has four business segments - milk products and nutrition, prepared dishes and cooking aids, confectionery and beverages. 

Prepared dishes and cooking aids constitute Maggi, Maggi sauces, Masala-ae-Magic and Maggi Pazzta. Maggi noodles reported strong growth momentum aided by a mix of volume growth and price hikes. Maggi volume growth received impetus after the commissioning of the Sanand facility in Q4CY21, which mainly caters to the instant Maggi noodles category.

Nestle’s market share stands at 60% in the instant noodles category. According to the management, Maggi Sauces and Maggi Masala-ae-Magic growth during Q1CY22 was impacted by a gradual shift from in-home to out-of-home consumption and opening up of schools and offices.

The confectionery segment is driven by KitKat and Nestle Munch, which reported double-digit growth supported by media campaigns, strong festive interventions and focused distribution drives. Nestle’s market share in the wafer chocolate category stands at 64% in India. In beverages, Nescafé Classic and Sunrise delivered double-digit growth aided by strong winter season consumption. Nestle is the market leader with 50% market share in the instant coffee segment. As out of home consumption increases, both confectionery and beverages (ready to drink) segments are expected to continue with their strong growth momentum.

Milk products and nutrition contribute nearly 40% of the total revenue mix. The segment comprises baby food products like Cerelac, Ceregrow, Lactogen, Lactogrow, Nangrow and milk products like Milkmaid, EveryDay and Nestle Nourish (milk, curd, slim milk, probiotic curd). While the nutrition category comprising baby food was well supported by price hikes, the milk products category faced challenges from competition in Q1CY22. Milk products and nutrition segment has grown in single digits only for the past seven years. The segment also reported lowest YoY revenue growth across all four segments in CY21.

Nestle is a dominant player in infant food (Cerelac) and infant formula milk (Lactogen) segments, with 96% and 74% market share respectively, in India. The company is also doing well in the baby food category with Ceregrow and Nangrow. 

Speaking on the milk product category’s muted growth, Suresh Narayanan, Managing Director at Nestle said, “We are not an empty calorie (low margin) business.” Nestle milk products like slim milk, yogurt and probiotic products are premium priced compared to close peers Amul, Mother Dairy and Godrej Jersey, which have given Nestle tough competition over the past few years. 

Premiumisation and innovation to combat inflation 

After a 1-3% price hike in Q4CY21, Nestle again raised prices of Maggi, Nescafe, KitKat, Nestle Milk during the January-March 2022 period. The company also indicated that further price hikes might be taken to combat raw material price inflation which is currently at a 10-year high. Unlike other FMCG players with high crude exposure in their home care (detergents) and personal care segments (soaps and shampoos), Nestle’s raw material basket is agriculture-based with wheat, edible oil, coffee and milk as its major constituents. 

Milk prices are seeing an uptick after a two-year period of low prices, driven by increase in animal feed (soyabean, maize etc) prices and high energy and logistic costs. Dairy farmers are expected to pass on high price hikes to end users in the coming quarters. 

The milk and nutrition portfolio is expected to witness  price increases in the near term. Wheat prices are up 15-20% YoY in April 2022 driven by high international prices (spillover effect of the Russia-Ukraine war) and also as wheat and corn commodities are diverted for ethanol production. High wheat prices are going to increase baby food and confectionary product prices. Coffee prices are on the rise due to adverse weather conditions in Brazil, the world's largest coffee producer and low productivity in Vietnam. International coffee prices increased more than 25% since August last year. Price increases in Nescafe, coffee premixes and ready to drink variants might be on the cards again, in case international coffee prices rise further. 

According to the management, edible oil (palm oil) prices increased 90% from its 10-year mean historical levels for Nestle. Palm oil prices are expected to increase further with the Indonesian ban on exports. Indonesia accounts for about 60% of total palm oil output globally. Palm oil is used in noodles, chocolates, sauces, and pasta categories. Thus Maggi, KitKat, Munch, Maggi sauces and pasta are expected to witness price hikes in the near term. And lastly high crude prices (up 80% YoY) will increase packaging costs. 

Impact of rising prices on consumer demand

The management is confident of navigating through the decade-high commodity cost inflation by taking judicious price hikes and maintaining its operating margins. But will these price hikes impact demand? 

“We are not a bar of soap or biscuits present in almost every household”, Narayanan said, adding that Nestle’s premium products are relatively lower penetrated compared to other FMCG companies and have a long runway of growth. 

Catering to its urban centric consumer profile which constitutes 75-80% of its revenue base, Nestle also firmed up its innovation pipeline. Nearly 100 new products have been launched since 2016. Various Maggi variants, coffee premixes, new KitKat and Munch flavours, Nesplus (breakfast cereals) to name a few and also a new health science portfolio with products like Optifast (low calorie diet) and Nestle Resource (high protein powder). 

There are twenty more new products in the pipeline and the company also plans to add new categories in its product portfolio.  The company expects its premiumisation strategy and innovation agenda will support its revenue growth in the current high inflation scenario. Nestle's capex plan is around Rs 1,900 crore for the next 3-4 years.

Nestle’s new products contributed 5% to the revenue base in CY21. With judicious pricing, a strong distribution network and ecommerce penetration, Nestle can take the competition head-on in all its product categories. Nesplus competes with Kelloggs, Nestle Resource combats large established brand, Ensure and Milo is fighting against Horlicks, Bournvita and Boost. 

The management is highly optimistic even in the weak demand environment, but it’s worth remembering that consumer buying calculations change rapidly when inflation keeps rising Regardless of brand appeal, all businesses are vulnerable to more frugal customers. 

For now at least, Nestle’s management is upbeat. “Maggi was not built in a day,” Narayanan said,  “nor was Nescafe or KitKat. We have the stomach, courage, and wherewithal to make it happen.”

Number of FII/FPI investors increased from 829 to 875 in Sep 2022 qtr.
Cipla Ltd.    
13 Apr 2022
Cipla’s India business drives growth, key product launches in pipeline
By Suhani Adilabadkar

Cipla had surprised analysts with a strong double-digit domestic formulation (DF) revenue YoY growth in Q3FY22 against expectations of a slowdown due to low Covid-19 revenue contribution. The US business also reported its highest ever quarterly revenues in the December 2021 quarter. 

The question is if the company can do it again. 

While the India business, which constitutes more than 40% of the revenue mix, is expected to benefit from Covid-19 tailwinds in Q4FY22, the street is awaiting Cipla’s key product launches in the US market to materialise in H2FY23. 

Quick Takes:

  • Three key product launches are expected in H2FY23, Revlimid, Abraxane and Advair in the US market
  • Cipla received approval of its major peptide asset, Lanreotide injection, expected to be launched in Q4FY22
  • Revenues at Rs 5,479 crore grew 6% YoY, supported by strong growth in India and the US formulation business in Q3FY22
  • US revenues grew 7% YoY to $150 million in Q3FY22, driven by respiratory franchise which grew 36% YoY
  • Operating margins contracted 100 basis points to 22.5% due to high raw material cost and lower contribution by Covid-19 portfolio
  • The recent Central Drugs Standard Control Organisation (CDSCO) nod to conduct local trials for Pfizer’s anti-Covid-19 pill Paxlovid has pleased investors 

Strong traction in trade generics business, consumer health yet to breakeven  

Cipla’s India business, known as ‘One India’ constituting trade generics, consumer health, and branded prescription, contributed 46% to total revenues in Q3FY22.

Cipla’s trade generics vertical (more than 150 brands) is the largest trade generics business in the country, focussing on patients in tier-3 and tier-4 towns with a robust supply chain of 5,500 stockists. The trade generics business is witnessing strong traction across flagship brands and key therapeutic categories. 

The company launched 10 brands in 9MFY22 across cardiology, thyroid and derma categories expected to gather strong momentum in the coming quarters. Speaking on trade generics, Umang Vohra, Managing Director and Global CEO at Cipla, said, “Some of our flagship generic brands in our trade generic business have grown past the Rs 100 crore mark and few others are crossing the Rs 50 crore mark.” The company plans to launch more than 60 products in FY23, which include high growth categories like anti-diabetic and injectables.

Cipla’s consumer health business, mainly in India and South Africa, is also shaping up strongly. The consumer health business contributed 8% YoY to the 9MFY22 topline. Consumer health is witnessing robust traction in anchor brands such as Omnigel, Cofsils, Clocip, Cheston, Nicotex, Maxirich during the December 2021 Quarter and 9MFY22 said Vohra. 

The management expects at least four of these brands to cross Rs 100 crore revenue in the coming quarters. While India branded prescription business is the most profitable followed by trade generics, consumer health (spun off as a separate subsidiary, Cipla Health in 2014) is expected to break-even in the coming quarters. According to the management, the consumer health business is expected to contribute 10% revenue share by FY25.

In-licensing deals support branded prescription business growth

Overall, the India business was driven by strong momentum in Q3FY22 across core therapies (respiratory, chronic, urology, anti-infectives) with robust traction in flagship brands. Branded prescription business constitutes 70-75% of total ‘One India business’ and trade generics and consumer health the remaining balance.

Branded prescription business is on track to achieve the one-billion-dollar mark, building a formidable franchise in India, said Vohra. The company expects in-licensing deals with global pharma companies to support growth and aid in diversifying and expanding its branded prescription business. According to the management, in addition to changing formulations and launching generic versions, Indian pharma needs to partner with global pharma companies to augment new product launch frequency. For more innovative products in India, which are patent protected, partnering with global multinational corporations (MNCs) is a must, said Vohra. 

Cipla licensed tocilizumab, trastuzumab and rituximab from Roche for oncology and sacubitril, Valsartan from Novartis for cardiology. The company has one of the largest cardiology and diabetes product portfolios in the industry. For diabetes, Cipla licensed products such as inhaled insulin from Mannkind, insulin glargine from EliLilly, vildagliptin from Novartis, and canagliflozin from Janssen. 

Cipla expects annualised non-Covid business of Rs 500 crore from in-licensed deals and partnerships in the near future.

Cipla also maintains a robust Covid-19 portfolio by partnering with global pharma majors like Gilead (Remdesivir), Roche (Covid antibody cocktail), Merck (Molnupiravir) and Eli Lilly (Baricitinib). The recent CDSCO approval to conduct local trials on Pfizer’s anti-Covid-19 pill Paxlovid is another growth opportunity for Cipla. Though Paxlovid’s revenue potential might be low with the receding Covid-19 pandemic, tailwinds from the third wave will be witnessed in Q4FY22 for Cipla’s India business. 

India business grew 13% YoY to Rs 2,518 crore in the December quarter on a higher base and with low Covid-19 contribution. Cipla’s core prescription business in India excluding Covid grew strongly at 16% YoY in December 2021 Quarter lending strong confidence to investors. 

Speaking on India business growth, Vohra said that the Indian pharma market is expected to grow by 10-12% YoY excluding Covid-19 contribution. Cipla expects to beat market growth in the coming quarters. The recent 10% price increase of essential drugs (over 800 drugs) under the National List of Essential Medicines (NLEM) allowed by India’s drug price regulator is another strong tailwind for Cipla. The company’s exposure to NELM stands at 25-30% of its total India business.  

US business – street awaits key product launches

Cipla’s US business was range-bound between $135-$140 million over the past seven quarters. It reported a new, and highest-ever revenue base of $150 million for its US business in Q3FY22. While Cipla’s US portfolio includes drugs like Diclofenac (pain), Sertraline and Escitalopram (antidepressants), and Esomeprazole (esophagitis), its respiratory franchise is the major growth driver. US revenue growth was at 7% YoY in Q3FY22 driven by respiratory franchise which grew 36% YoY. Cipla received USFDA’s first generic approval for the commonly used Albuterol Inhaler in May 2020. Cipla’s market share currently stands at 15.9% in the total US Albuterol market. Another star drug, Arformoterol Tartrate inhalation solution also continues to do well with a market share of 26.8% in overall Arformoterol market. According to the management, $150 million sales is the new quarterly run-rate for its US business in the coming quarters.

The management guided three product launches in H2FY23, Revlimid, Abraxane and Advair. While Advair (asthma) will further boost the respiratory portfolio, Abraxane (breast and lung cancer) and Revlimid (blood cancer) are other high-value product launches with expected incremental revenue of $300-500 million annually in the next two years. Cipla’s robust respiratory pipeline also includes two more programs in advanced stage and another five programs under early stages of development. The management expects its respiratory products to cross the $150 million revenue mark in FY22.

Cipla also received approval of its major peptide asset, Lanreotide injection (neuroendocrine tumors), expected to be launched in Q4FY22. Market size of Lanreotide injection is estimated to be around $860 million. Cipla has two more peptide assets under approval and expects a complex generics injection in FY24. The share of injectables currently 5% of US revenue mix in FY22 is expected to touch 25% in the next five years.

According to the management, while strong launch momentum is a key tailwind, commodity inflation is a major headwind for Cipla. And also, the pending USFDA’s Goa facility inspection for new drug approvals for the past two years. Investors are hoping for a timely inspection as key product Abraxane will be manufactured from the Goa facility. 

Geojit BNP Paribas downgraded Cipla Ltd. to Hold with a price target of 1230.0 on 10 Nov, 2022.
Specialty segment drives growth, India business shines for Sun Pharma
By Suhani Adilabadkar

Sun Pharmaceuticals reported its highest ever quarterly revenues in Q3FY22. Strong quarterly numbers were supported by broad-based growth across India, US and the emerging markets, steady margins, and strong specialty business ramp up. Sun Pharma stock was up 5% post its quarterly result announcement as investors were thrilled with consistently strong performance in the December 2021 quarter, for the third quarter in a row. This comes after a muted FY21. 

While the impact of the Russia-Ukraine conflict might be a short-term challenge for the company, Sun Pharma investors are awaiting the Halol plant’s clearance from the USFDA, which has been an overhang on growth since 2020. 

Quick Takes:

  • India formulation revenues grew 15% YoY to Rs 3,166 crore in Q3FY22 driven by chronic and semi-chronic therapy segments
  • US formulation revenues rose 7.5% YoY to Rs 2,972 crore aided by robust specialty segment performance in Q3FY22 
  • Global specialty revenues at $183 million rose 24% YoY and 16.5% sequentially in Q3FY22
  • Subsidiary Taro recently acquired Alchemee, a 25-year-old global acne-care brand, from global dermatology major Galderma for $90 million
  • Sun Pharma is working on a biosimilar product expected to be launched after 2030

Sun is shining on India business as chronic segment recovers

Sun Pharma reported its highest ever quarterly revenues of Rs 9,863 crore in Q3FY22, an 11.6% YoY rise which was also the highest YoY revenue growth in the top pharmaceutical (formulations) quartile in Q3FY22. 

While close peersCipla,Dr Reddy’s Labs (DRL), andLupin underperformed in more than one of their key markets, Sun Pharma reported strong broad-based performance across all geographies - India revenues grew 15% YoY, US (up 7.5% YoY), emerging markets (up 18% YoY) and rest of the world (up 14% YoY). 

Speaking on India business growth, Kirti Ganorkar, CEO – India Business at Sun Pharma said, “The growth was driven by improved demand for non-Covid treatments, which led to higher growth in the chronic and semi-chronic segments.” He also added that strong revenue growth was also due to increased healthcare awareness and better patient flow to doctor clinics. India business revenues came in at Rs 3,166 crore in Q3FY22 compared to Rs 2,753 crore a year ago.

The chronic segment, constituting 33-35% of the Indian pharma market, focuses on cardiac or cardiovascular (CVS), diabetes, oncology, and neuro/central nervous system (CNS) related diseases. Semi-chronic (21% of pharma market) constitutes vitamins, derma, and gynecology. The acute segment (40-44% of the Indian pharma market) includes anti-infectives, respiratory, and gastrolenterology. Sun Pharma is the market leader in the most profitable chronic therapy segment, which constitutes 50% of its revenue mix. 

The company grew at 12% YoY and 7.5% YoY in the cardiovascular and central nervous system segment,  outperforming industry growth in Q3FY22. Chronic therapy is the fastest-growing segment driven by rising sedentary lifestyles with high-risk factors like obesity, hypertension, diabetes, cholesterol, etc. Cardiac, gastrology, and anti-infectives are three major therapies in the Indian pharma market. Cardiac therapy constitutes 14% of the Indian pharma market compared to anti-infectives and gastrology at 13% and 11%, respectively. Sun Pharma is the market leader in the cardiac/CVS segment in India.

While Sun Pharma’s Covid-19 portfolio is on a weaker footing compared to close peers like Cipla, DRL, andZydus Lifesciences, the company’s strong focus on its India business over the past two years is bearing fruit. The company maintained its market share by focussing on volume growth and new prescription generation from doctors. This was achieved through brand building, launching new products, and increasing its sales force. Sun Pharma launched more than 120 new products over the past five quarters and expanded its field force by 10% in FY21 in the domestic market. Sun Pharma increased its total market share to 8.6% in Q3FY22 from 7.8% in Q2FY21 in the Indian market. 

Muted chronic segment growth expected in Q4FY22

The Covid-19 third wave started subsiding from the second fortnight of January 2022.  While the December 2021 quarter saw insignificant Covid-19 revenue contribution, Q4FY22 is expected to bear tailwinds of the third wave for companies like Cipla and DRL. Due to relaxed restrictions, higher mobility and home quarantine opted by a large number of omicron patients, the acute therapy segment is expected to dominate Q4FY22. 

The chronic segment is expected to be muted and respiratory, gastrology, and Covid-19 therapies like anti-infectives, pain management, and vitamins are expected to report strong growth in the March 2022 quarter. This might impact Sun Pharma’s India business revenues, but stable US performance aided by strong specialty segment growth is expected to maintain growth momentum in Q4FY22.

Specialty segment drives US revenue growth 

US formulation revenues rose 7.5% YoY to Rs 2,972 crore in Q3FY22. In dollar terms, revenues at $397 million grew 6% YoY. The US business comprises generics business, which includes subsidiary Taro (mainly dermatology) and the specialty segment. According to the management, the specialty segment was the major growth driver for Sun Pharma’s US business in Q3FY22.

Sun Pharma has commercialized 13 specialty products. The company diversified into specialty products to counter high pricing pressure and vendor consolidation in its core US generic business. Specialty medicines are the latest generation products for treating chronic, complex, and rare diseases. 

Specialty revenues in Q3FY22 were mainly driven by Ilumya (plaque psoriasis), Cequa (dry eye disease), Levulan (actinic keratosis),and Absorica (severe nodular acne). Clinically administered products Ilumya and Levulan performed well despite lower patient flow to doctor clinics as Covid-19 cases spiked in the December 2021 quarter in the US. 

The company is also able to maintain its 7% market share for Absorica in the US acne market despite facing tough competition from Teva’s generic which was launched in April 2020. Competition is also heating up for Cequa as the USFDA approved its first generic on February 2, 2022. Amid high competitive intensity and Covid-19 impact, Sun Pharma’s specialty segment reported robust numbers over the past three quarters. Speaking on this, Dilip Shanghvi, Managing Director at Sun Pharma said, “Our global specialty revenues for the first nine months have already crossed previous full year’s revenues”. Specialty segment’s revenues in 9MFY22 at $488 million exceeded full-year revenues of $473 million. Global specialty revenue contribution to total revenue mix doubled to about 14% in Q3FY22 from about 7% in FY18. 

Global specialty revenues at $183 million rose 24% YoY, and 16.5% sequentially, in Q3FY22. Boosting the strength of derma specialty products, Sun Pharma commercialized Winlevi in the US and Canada in Q3FY22. Winlevi, in-licensed from Cassiopea SpA, a new class of topical medication in dermatology complements Sun Pharma’s existing anti-acne segment led by Absorica. According to the management, the positive impact of Winlevi will be seen in Q4FY22.  

Taro underperformance continues, Halol clearance awaited

While the high margin specialty segment is on a strong growth trajectory, the ex-Taro US generics business is also doing well amid high price erosion. While the US generic business continues to be competitive, the Sun Pharma ex-Taro generics business has stabilized, said Abhay Gandhi, CEO (North America Business) at Sun Pharma. Taro, impacted by intense competition, high pricing pressure, and vendor consolidation has been reporting uneven and lackluster growth for more than twenty quarters now. In Q3FY22, Taro’s revenues were flat YoY and net profit fell 20% YoY. 

Taro recently acquired Alchemee, a 25-year-old global acne-care brand from global dermatology major, Galderma. Alchemee is expected to complement Taro’s dermatology business, strengthen its over-the-counter segment, and has access to Canada and Japan markets. Sun Pharma needs to go in for more such strategic buyouts and launch new products to revive Taro revenues which constituted 35% of US revenues in Q3FY22.

On the Russia-Ukraine impact on Sun Pharma’s performance. Rouble depreciation and uncertain production in Russia’s manufacturing plant is a concern. Russia business, part of the emerging market segment (18% of revenue mix), is present in about 80 countries across Africa, the Americas, Asia, and Europe. The Russia-Ukraine impact will be better estimated only after Sun Pharma’s March 2022 quarterly numbers come out. Investors right now, are more concerned about the Halol Plant which contributed nearly 4-5% of Sun Pharma’s revenue mix before the USFDA ban in 2020. 

Sun Pharmaceutical Industries Ltd. has gained 32.05% in the last 1 Year
Divi's Laboratories Ltd.    
10 Mar 2022
Custom synthesis business drives growth for Divi’s Laboratories
By Suhani Adilabadkar

After a muted September 2021 quarter, Q3FY22 was a relief forDivi’s Labs investors. The company posted its highest YoY revenue growth in Q3FY22 over the past seven quarters. There was also a more than three percentage point operating margin expansion during the quarter. 

Divi’s Labs’ stock jumped 4% post the quarter results being announced. While the custom synthesis segment is now the major growth driver for Divi’s Labs amid Covid-19 disruption, the management is also confident of long-term growth prospects for its generic active pharmaceutical ingredient (API), sartans, and contrast media API segments. Divi’s Labs’ long-term growth levers are strongly intact, but investors are keenly waiting for the Kakinada plant capital expenditure (capex) to unfold. 

Quick Takes:

  • Divi’s Labs reported revenues of Rs 2,493 crore, a rise of 47% YoY, driven by robust custom synthesis revenue growth of 120% YoY in Q3FY22
  • Custom synthesis revenue is also up 70% YoY in 9MFY22 and is expected to report healthy growth in the medium term
  • Backward integration, revamping and upgrading of utilities over the past two years is supporting strong operating margin performance 
  • Operating margins might be impacted by rise in prices of solvents (crude derivatives) in the coming quarters
  • The company is still awaiting possession of land for Kakinada plant to start construction, capex is expected to be around Rs 1,000-2,000 crore in the next two years

Stellar Q3FY22 performance, operating margins improve

Divi’s Labs is the best play on the Indian contract research and manufacturing services (CRAMs) and API spaces.  It reported strong numbers in the December 2021 quarter as revenues rose to Rs 2,493 crore, a growth of 47% YoY, the highest since the June 2020 quarter. Revenue growth was driven by robust custom synthesis revenue growth (up 2.2x YoY). Sequentially, revenues grew 25% in Q3FY22. 

Exports constituted 92% of total revenues, with Europe and the US contributing 79% to the total revenue mix in the December 2021 quarter. Operating margins came in at 44%, the best in the industry expanding 340 basis points (bps) YoY in Q3FY22. Operating margins improved 280 bps sequentially in December 2021 Quarter.

Divi’s Labs maintained its operating margins despite a significant increase in raw material prices due to the energy crisis in China over the past three quarters. Power outages in China impacted the raw material supply leading to shortage and volatility in prices of basic chemicals, commodities, raw materials such as solvents. Operating margins in the coming quarters might be impacted due to an increase in the price of solvents (crude derivatives) with galloping crude prices (up 60% YoY).  

Speaking on raw material cost pressures, Dr Murali K. Divi, Managing Director at Divi’s Laboratories said, “We were able to mitigate some of these cost pressures due to geographical diversification of procurement along with existing long-term contracts with key suppliers.” Net profit nearly doubled to Rs 902 crore in Q3FY22 supported by higher revenues and robust operating performance. Net profit was up 49% sequentially in the December 2021 quarter.

Molnupiravir logs in strong growth numbers

Divi’s Labs stock gained 23% over the past year, even with a 16% fall in the last three months of 2021. The stock slipped 8% intraday on November 5, post-Pfizer’s announcement of its anti-Covid drug, Paxlovid, with higher efficacy compared to Merck’s Molnupiravir. Divi’s Labs is the authorized manufacturer for Molnupiravir API in India for Merck. Investors were disappointed as the Molnupiravir opportunity seemed uncertain and unclear in the near term. But the opportunity does seem to have paid off for Divi’s Labs. As per Merck’s Q4CY21 result press release, Molnupiravir was the fourth-largest drug by sales in Q4CY21. Molnupiravir sales were $952 million in December 2021 quarter and Merck expects the star anti-Covid drug to touch roughly $5-6 billion sales in CY22. 

Divi’s Labs received fast-track projects of anti-Covid drugs from big US and European pharma companies in Q2FY21. Molnupiravir-Merck project was one of them. The company is bound by a confidentiality agreement with Merck and cannot disclose Molnupiravir sales. However, the management indicated that the Molnupiravir project started contributing to the top-line from Q2FY22. Custom synthesis anti-Covid fast track projects (essentially contract manufacturing services) has been a strong growth opportunity for the company, boosting revenues over the past three quarters.

Will growth driven by custom synthesis be sustainable?

While generic API revenue growth has moderated over the past three quarters due to high FY21 base and Chinese companies back in business, the custom synthesis segment maintains the growth tempo. 

The custom synthesis segment constituted 60% of total revenues in Q3FY22 followed by generic API and nutraceuticals contributing 33% and 7% respectively.

Custom synthesis revenues at Rs 1,496 crore rose 120% YoY in Q3FY22. Generic API revenues came in at Rs 831 crore (down 5% YoY) and nutraceuticals revenues at Rs 166 crore (up 14% YoY) in December 2021 Quarter. Custom synthesis contribution increased from 40% in Q3FY21 to 60% in total revenue mix in December 2021 quarter.

Speaking on higher custom synthesis revenue contribution, Divi said, “In API generics, we decide what to produce, how much to produce, when to produce. In custom synthesis, the customer demands how much quantity we need to produce and supply at the required time”. Custom synthesis segment performance depends on product movement and sales performance of clients rather than products offered by the company, said Divi. Custom synthesis revenues grew 70% YoY in 9MFY22 mainly driven by anti-Covid-19 fast track projects. But will this growth momentum be maintained? 

The Covid drug arena is dynamic and has evolved over the past two years. New Covid-19 strains led to the development of varied therapies like antiviral vaccinations and recently launched oral anti-viral Covid-19 pills. According to Divi, “Requirement of the newer drugs is probably coming much faster to work on the variants.” The order of the day is how quickly we accommodate a new product, develop, manufacture and supply to the customer, said Divi. The SARS-CoV-2 virus continues to evolve leading to the emergence of variants that require aggressive vaccination drives across the world and the development of newer drugs. As per World Health Organization (WHO), in addition to Omicron BA.1 and BA.2, a new sublineage of Omicron, BA.3 has emerged. According to various scientific groups, drug combinations might be a more effective treatment for newer strains of Covid-19 rather than a single antiviral medication. 

Divi’s Labs is favorably placed in the global CRAMs industry to exploit the fast-evolving anti-Covid-19 drug market. The company is associated with 12 out of the top 20 global Big Pharma companies for contract manufacturing services for more than 10 years. Divi’s Labs is currently working at 80-85% capacity and out of a total 1,700 reactors, 300 reactors are available to accommodate 2-3 new Covid-19 drugs, said Divi. 

Long-term growth for generic API looks promising

According to the management, the company lost neither volumes nor clients in its generic API business. We would like to maintain the generic and CS revenue mix at around 50:50, but it is wishful thinking, said Divi. Higher demand for CRAMs services led to higher custom synthesis revenues in 9MFY22. Divi said that preference is first given to Big Pharma custom synthesis clients and generic API production is adjusted to attain maximum productivity. 

The company is working to boost its generic API business. In addition to its 30 commercialized APIs, additional 10 APIs are in various stages of research & development. The company intends to add new products going off-patent between FY23-24, a $ 20 billion opportunity. Divi’s has also ventured into sartans, a $20-25 billion opportunity and contrast media APIs, a $4-6 billion opportunity growing currently at 15-25%. The US government recently banned a few Chinese API manufacturers in February 2022. And US and EU pharma companies de-risking their API supplies is more good news for Indian API manufacturers like Divi’s Labs.

Capacity needs to be augmented to accommodate upcoming Covid/non-Covid growth opportunities. Awaiting possession of the Kakinada plant, Divi said, “We have about 200 acres of land at Unit-I (Hyderabad) and 150 acres of land at Unit-II (Visakhapatnam), we can invest here and will never lose an opportunity”. 

Divi's Laboratories Ltd. is trading below all available SMAs
Maruti Suzuki India Ltd.    
25 Feb 2022, 07:28PM
After several weak quarters, Maruti Suzuki gears for recovery
By Suhani Adilabadkar

Maruti Suzukireported flat YoY revenue growth in Q3FY22, with a high double-digit YoY fall in net profit.Amid high raw material cost inflation, operating margin expanded 250 basis points YoY. This unexpected surprise pleased investors, leading to a 7% jump in Maruti Suzuki’s stock post the result announcement.  Maruti Suzuki aims to get back its 50% market share in the Indian passenger vehicle (PV) market which it lost in 2019. 

While robust exports and growth in the CNG segment indicate a healthy growth trajectory, a lot will depend on Maruti Suzuki’s new sports utility vehicle (SUV) models which are expected to launch in FY23. With intense competition fromMahindra & Mahindra (M&M),Tata Motors, and Hyundai Motors, Maruti Suzuki has a tough fight on its hands. 

Quick Takes:

  • Operating margins at 6.7% improved 250 bps sequentially due to lower discounts, cost efficiency efforts and low raw material cost inflation in Q3FY22
  • Exports constituted 15% of total volumes and more than doubled YoY in December 2021 quarter 
  • Maruti Suzuki’s order backlog stands at 2,64,000 in Q3FY22 of which CNG vehicles constitute 44% of total bookings
  • Thecompany is expected to launch 3-4 new SUV models within two years
  • Maruti Suzuki’s parent Suzuki Corporation is expecting 3% volume growth in FY22 from its India business as semiconductor chip shortage recedes
  • Capex of Rs 3,000 crore to be incurred in Q4FY22

High average selling price aids revenue and operating margin performance

Maruti Suzuki hiked prices 5-6 times over the past year. Average selling price (ASP) increased 14% YoY, supporting revenue growth in Q3FY22. Thus, even with a 13% YoY volume fall in the December 2021 quarter, revenues were flat. 

Revenues came in at Rs 23,253 crore in Q3FY22. Operating margins at 6.7% were down 280 bps YoY, but improved 250 bps sequentially in Q3FY22 due to cost efficiency efforts, lower discounts and receding raw material price inflation. 

Maruti Suzuki’s raw material cost as a percentage of sales moderated over the past three quarters. 

Steel prices fell significantly in November and December 2021 and precious group metals (PGM) prices stabilized further in Q3FY22. But steel prices are firming up again and are expected to impact margins in the March 2022 quarter. Net profit was down 48% YoY at Rs 1,042 crore impacted by lower non-operating income (down 67% YoY) and fall in volumes in the December 2021 quarter.  

Exports on a strong growth trajectory

Maruti Suzuki exported 2,05,450 vehicles in CY21, the highest ever exports in any calendar year by the company. Exports constituted 15% of total volumes and more than doubled YoY in the December 2021 quarter. Exports revenues at Rs 3,343 crore grew 154% YoY in Q3FY22. Rahul Bharti, Executive Director at Maruti Suzuki said, “A three-pronged strategy, more number of products, more markets and more network density within those markets, generated good dividends for us.” According to the management, global partner Toyota’s distribution network also aids Maruti Suzuki’s export growth. Strong growth in South Africa (contributing one third of export volumes), Chile, Bolivia, Colombia, and North African countries aided by recovery from Covid-19 led to a strong export trajectory for Maruti Suzuki over the past 5-6 quarters.

Maruti Suzuki is expected to become the largest car exporter in CY22 after a gap of 11 years. Semiconductor chip shortage impact was also lower on exports with volumes rising consistently over the past five quarters. Bharti said, “We were able to largely meet export market demand because those particular semiconductors were not used in export models.” While exports are on a strong growth trajectory, Maruti Suzuki’s domestic volumes give a different picture altogether. 

Semiconductor challenges ease, new SUV models awaited by the street

Maruti Suzuki reported a domestic volume fall of 22% YoY in Q3FY22. Maruti Suzuki’s mini and compact car volumes fell 29% YoY, midsize was down 26% YoY and utility vehicle (UV) volume growth was up 5% YoY in Q3FY22. 

The company could not produce 90,000 vehicles due to semiconductor chip shortage in the December 2021 quarter. According to management, chip shortage is now gradually receding, evident from the improving wholesale volumes over the past three months.

Though the semiconductor chip shortage impact was visible across the entire auto industry, players like M&M and Tata Motors are on better footing. M&M’s passenger vehicle (PV) domestic wholesale volumes fell 3.5% YoY and Tata Motors reported stellar 44% YoY growth in Q3FY22. Unlike Maruti Suzuki, which is highly dependent on the mini and compact car segment which together constituted 63% of total volume mix in Q3FY22, Tata Motors and M&M are major SUV players which aided their wholesale and retail volume growth.

Maruti Suzuki’s volume growth challenges are not new. Lower customer preference for entry level cars, lack of new product launches (the last product launch S-Presso was in 2019) and low presence in the SUV segment diminished Maruti Suzuki’s market share in the PV market. Entry-level cars are no longer the bread and butter segment for car manufacturers - SUVs and premium hatchbacks are now the key revenue contributors. Entry level segment (Alto 800 and S-Presso) reported lower volumes in Q3FY22 as customers conserved money for health emergencies due to Covid pandemic-related uncertainty. The company has been losing volumes in this segment since 2015. Entry level car segment constituted 16.6% of Maruti Suzuki’s total domestic volumes in FY21 down from 36% in FY15.

SUV market share in the PV market grew from 26% in 2019 to 38% in Q3FY22. The SUV segment is expected to touch 42-43% market share in the next five years. Customers are preferring SUVs for their high ground clearance, spacious interiors, style and improved safety standards. According to Shashank Srivastava, Senior Executive Director, Marketing and Sales at Maruti Suzuki, Maruti’s market share without the SUV segment stands at 65%. Maruti Suzuki’s SUV segment consists of just two SUVs, Vitara Brezza (compact) and S-Cross (mid-size SUV) among 45 SUV brands in the PV market. In the last two years, more than 20 SUVs were launched by various OEMs.

It's the SUV space which has pulled the company down, Srivastava agreed. The  Vitara Brezza is seeing good volumes in the compact SUV segment. The lone Maruti Suzuki SUV competes with the likes of Hyundai Venue, Mahindra Thar, Tata Punch, Mahindra XUV700 and Kia Sonnet to name a few. In the highly competitive mid SUV segment, Maruti Suzuki’s presence is low as S-Cross is not a strong competitor to Hyundai Creta, Kia Seltos, MG Hector, Tata Safari and Mahindra Scorpio which rule the roost. Maruti Suzuki’s overall market share in the SUV segment is low at 13%. 

The management is working to fill up these white spaces in its product portfolio. Maruti Suzuki is expected to launch the compact SUV Jimny; another SUV being developed with Toyota, a 7-seater utility vehicle, a compact SUV on the Baleno platform and upgrading Alto and Vitara Brezza in the next two years. The upgraded Baleno is expected to be launched immediately with the goal of competing with Hyundai i20, Honda Jazz and Tata Altroz in the premium hatchback segment.

Maruti Suzuki’s cheapest car is Alto 800 available below Rs 3 lakh, and the most expensive is Maruti XL6 at Rs 12 lakh. The company successfully captured customer loyalty in the mini and compact car segment by providing popular models like Alto, Swift, WagonR, Celerio, Ignis and Baleno at various price points to customers. This needs to be replicated in the SUV segment. The company needs to increase its volumes in the SUV segment by launching strong aspirational products. High share of SUV cars (priced between Rs 8-20 lakh) in the product mix will help increase Maruti’s average selling price and improve operating margins. 

CNG growth to make up for lost diesel volumes

Compressed natural gas (CNG) vehicles constituted 15% of sales in Q3FY22 and the company has 80% market share in the CNG PV market. Maruti has been steadily capturing the CNG market and has 8 CNG models in its product mix. CNG market growth is attributed to high petrol-CNG price differential which currently stands at roughly Rs 30 and the government's aggressive CNG pump expansion. Petrol prices, stagnant for the past 100 days, are expected to rise significantly after the conclusion of assembly elections in March, increasing the petrol-CNG price differential further. Brent crude breached the $100 mark, the highest level since 2014 after Russia invaded Ukraine. 

The government plans to increase CNG pumps from the current 3800 to 9,500 pumps by 2025. Maruti stopped manufacturing diesel vehicles from March 2020 which contributed 25% to total volumes in FY19. Hopefully, CNG contribution should move ahead of diesel volume levels of FY19.

While Tata Motors is betting big on electric vehicles with 67% of its vehicle portfolio electrified, Maruti Suzuki is more focused on CNG and Hybrid electric vehicles (HEV). The company is developing a HEV in collaboration with Toyota, to be launched in the next 2-3 years. After reporting a volume fall of 7% and 16% YoY in FY21 and FY20 respectively, parent Suzuki Corporation is expecting 3% YoY volume growth in FY22 from its India business as chip shortages recede. Maruti’s stock went up 2% after this news reached the street. Investors are hoping Maruti Suzuki can beat this target

Maruti Suzuki India .. has an average target of 8845.81 from 17 brokers.
Hindustan Unilever Ltd.    
11 Feb 2022
The giant wakes up: HUL’s market share jumps
By Suhani Adilabadkar

The street was expecting Hindustan Unilever (HUL) to post double-digit YoY growth in revenue and net profit accompanied by low single-digit volume growth in Q3FY22. HUL’s stock gained 2% after December 2021 quarter results came in line with the street’s estimates. India’s largest fast-moving consumer goods (FMCG) company reported resilient Q3FY22 numbers despite a rural slowdown and high raw material cost inflation. 

While the company’s calibrated price hikes have impacted volume growth, HUL’s market share gains were the highest in a decade across all its divisions in the December 2021 quarter. HUL sacrificed volume growth to conserve its consumer franchise. It will be interesting to see how long this will continue amid unprecedented raw material price inflation and bottom of the pyramid consumer not contributing to revenue growth.

Quick Takes

  • HUL’s revenues increased 10.4% YoY in Q3FY22 aided by product price increases undertaken to mitigate high raw material cost inflation
  • Volume growth was muted at 2% YoY impacted by grammage reduction and rural growth moderation
  • Operating margins at 25% in Q3FY22 expanded 100 bps YoY supported by calibrated price increases and lower advertisement spends
  • As palm oil and crude oil prices remain elevated, operating margins are expected to remain under pressure in Q4FY22
  • The management expects the raw material cost curve to flatten and taper off in the second half of CY22
  • HUL’s premium portfolio is growing at 1.5-1.7x the normal growth rate of the company

Hindustan Unilever scores on all significant parameters vs peers  

Investors and analysts usually wait for HUL’s results to gauge consumer sentiment and consumption growth across both rural and urban India. HUL’s revenue came in at Rs 13,092 crore in Q3FY22, a 10.4% YoY rise, aided by product price hikes. 

HUL is an all-weather company. While close peerDabur is seeing a moderation in its healthcare revenues over the past two quarters after a stellar FY21, HUL’s revenue growth resilience continues with its wide product portfolio of more than 50 brands across home care, beauty & personal care, and foods & refreshment segments. While health, hygiene, and nutrition (85% of product portfolio) stood the test of time during the initial Covid-19 disruption, the remaining discretionary and out-of-home consumption growth is also now above pre-Covid levels.

To pass on high raw material cost inflation, the company hiked prices by reducing grammage in Rs 1, Rs 5, and Rs 10 price points which account for 30% of its business. This led to low volume growth of 2% YoY in Q3FY22. Thus, even with the same number of units sold, volumes fell. The volume growth story is the same for the rest of the peer group.

Despite high input cost inflation, operating margins were healthy at 25%, expanding 100 bps YoY driven by calibrated price increases and lower advertising and promotion spend. 

HUL’s robust operating performance led to strong net profit growth. And HUL tops the table on the net profit front too.

Home care drives growth, beauty & personal care, and foods resilient

While the third wave is still in progress, fear and anxiety have declined. This is evident from lower sales of sanitizers and multivitamins and other healthcare products. Robust vaccination drives contributed to lower anxiety and higher mobility among the general public. The increase in mobility led to higher sales of fabric wash, skin cleansing, hair care, color cosmetics, and discretionary spending on foods for HUL in Q3FY22.

Supported by a lower base and price increases, home care revenues (Rs 4,193 crore) grew 23% YoY driven by strong double-digit growth in fabric wash (Surf Excel, Rin, Wheel) and household products (Vim and Domex). Beauty & personal care revenues (Rs 5,175 crore) were up 7% YoY driven by double-digit growth in skin cleansing, color cosmetics, and hair care. 

While Lifebuoy sales moderated over the past few months, the beauty & premium soaps portfolio is on a strong growth trajectory. Lux, Dove, and Pears grew in the high teens and the company maintained its market share in hair care at a 15-year high. Even with a high base of 80% YoY growth in Q3FY21, foods & refreshment revenues (Rs 3,466 crore) grew 3% YoY in the December 2021 quarter aided by tea and coffee. Horlicks and Boost witnessed a soft Q3FY22. Though growth in the December 2021 quarter is stable and encouraging across all three segments, the March 2022 quarter growth is expected to be moderate due to the high base effect.   

FMCG sector faces rural slowdown and raw material cost inflation headwinds

The March 2022 quarter is going to be a tough one for the entire FMCG pack. FMCG companies will have to beat a high base (Q4FY21) in the backdrop of a rural slowdown. FMCG sector volumes declined 2% YoY in the December 2021 quarter. Accounting for about 40% of total FMCG sales and two-thirds of retail stores, rural India is slowing down over the past two quarters. This is evident from lower fertilizer sales and also tractor sales falling consistently over the past four months on a YoY basis, according to data from the Federation of Auto Dealers Association. 

Rural sales which were growing at 25-26% in Q1FY22 are now contracting. Urban sales are flat. Salary cuts, job losses, high food, and fuel inflation, coupled with Covid-19 health emergencies took a toll on consumer spending in both rural and urban India. With reduced spending power, consumers purchase low-value packs, switch brands, and resort to buying cheaper brands from smaller regional FMCG players.

In addition to lower demand, the FMCG sector is also facing high raw material cost inflation impacting margins and profitability. Crude and its derivatives are key inputs for laundry and household care for HUL. Brent crude is up 60% YoY. High prices of palm oil and its derivatives used in skin cleansing and hair care categories have also risen considerably. According to the management, prices of packing material, plastics, paper boards also continue to be at high levels. Speaking on inflation impact, Sanjiv Mehta, CEO and Managing Director at HUL said, “In addition to palm oil, crude, freight inflation, and supply chain disruptions have also impacted certain raw materials. All of these put together impacts two-thirds of our portfolio.” Keeping this in mind, it will be tough for the FMCG sector to increase its top-line and sustain profitability amid multi-year high commodity inflation and low demand. 

Price increases, premiumization, and digitisation to boost top-line and margins

HUL increased prices over the past few quarters to maintain its top-line growth. The company increased the prices of soaps and detergents up to 30% in November and 7-10% in December 2021. HUL is also applying innovation, premiumization, and digitisation growth levers to boost its top-line. The company is widening its product basket every quarter by adding innovations like Bru Beaten Coffee, Sensitive Mineral Active Pepsodent to name a few.

Under the premiumization growth strategy, the company is focussing on nutrient-rich food products, body washes, liquid detergents, fabric conditioners, skin serums, and hair serums. HUL is also augmenting its digital efforts through D2C channels for Lakme and Indulekha, smartpick (free trial of 25 HUL brands), UShop multi-brand D2C webstore, and digital beauty platform, BeBeautiful. Digital sales now account for about 15% of total sales providing a strong headroom for growth. Improving share of innovations, premium portfolio and digital sales will boost revenue growth and healthy margins. Over the past three quarters, expenditure was curtailed by controlling other expenses and advertising & promotion to maintain margins. 

HUL’s operating margins were in a healthy range over the past five quarters, but with the consistent rise in raw material costs, operating margins are going to be under pressure in Q4FY22.

The recent budget will trigger consumption revival in rural and urban India, but in the long term. In the near term, lower disposable incomes at the bottom of the pyramid are a major worry for consumption growth. Putting more money in the hands of people and lower raw material costs aiding in lower prices would drive growth. And not to forget the benevolence of the rain gods.

Hindustan Unilever L.. has an average target of 2706.92 from 13 brokers.
Asian Paints Ltd.    
01 Feb 2022
Asian Paints looks ready to take on rising costs
By Suhani Adilabadkar

The street was expecting mixed results for Asian Paints. The company declared strong volume and sales growth, lower net profit, and heavy margin contraction YoY basis: Q3FY22 results in line with street expectations. The double-digit volume and sales YoY growth was tempered by an eight percentage point contraction in operating margin YoY (due to high raw material costs)  and double-digit net profit YoY fall in Q3FY22. But investors are not too disappointed. Bowing down to high raw material inflationary pressures, the company took a 15% price hike in Q3FY22.  With Brent crude price touching $90 per barrel, will these price hikes be able to nullify raw material cost inflation in the coming months? Or will these price increases smother down demand amid Omicron uncertainty? 

Quick Takes

  • Operating margins contracted by 820 bps to 18.1% in Q3FY22 mainly due to rise in raw material costs
  • Asian Paints increased prices by around 7% in H1FY22, and 15% in Q3FY22, to shore up its margins
  • With 22% YTD price hikes, Asian Paints’ operating margin performance is expected to improve sequentially in Q4FY22
  • Paint demand in January 2022 might be impacted by the third wave, but pent up demand in February and March is expected to improve overall volumes
  • Kitchen and bath business are expected to constitute 8-10% of overall business by March 2025 
  • Asian Paints’ current capacity utilization is around 70–75% and fresh round of capex is expected within 2–3 years 

Margins fall despite a healthy volume and revenue growth in Q3FY22

Asian Paints’ volumes grew 18% YoY which helped revenues expand 26% YoY during Q3FY22 (to Rs 8,527 crore), despite a high base in the December 2020 quarter. The high base was due to pent-up and festive demand. .

Revenue growth in Q3FY22 was aided by strong demand in metro, tier I & II cities, and waterproofing and projects business. 

Due to a 41% YoY rise in raw material costs, 17% in employees costs, and 29% in other expenses, operating margins contracted by 820 bps to 18.1%.To counter this rise in costs, the company hiked prices by 15% in Q3FY22, which led to a 540 bps improvement in operating margins on a QoQ basis. As a result, although net profit was down 18% YoY to Rs 1,016 crore in Q3FY22, it improved by a whopping 70% sequentially.

Unprecedented raw material price inflation and price hike

The company hasn’t seen this kind of raw material price inflation over the past four decades, Amit Syngle, Managing Director and CEO at Asian Paints said. Though Syngle noted that the raw material cost is not directly correlated to crude price movement (Brent crude is up 60% YoY), the paint industry uses crude derivatives (price increases with a lag) such as polymers, solvents, monomers, and resins for manufacturing paints. 

In addition to that, another significant raw material, titanium dioxide, witnessed a strong price increase over the past year. Titanium dioxide is a naturally occurring ore with its deposits mainly in China, Canada, Australia, and South Africa. Used as an additive in paints, titanium dioxide is also used in various industries like plastics, chemicals, aerospace and the shipping industry. With the recovery in the global economy by the end of 2020, titanium dioxide demand surged leading to a rise in prices. Asian Paints’ raw material costs constituted 56.5% of total expenditure in Q3FY22. According to management, the rise in shipping costs, freight, and supply chain bottlenecks also accentuated the impact of rise in costs over the past few quarters.

Asian Paints increased prices by around 7% in H1FY22 and later by 15% in Q3FY22, to shore up its margins and maintain profitable growth. A price hike of about 22% YTD is the highest ever by a company in the Indian paints industry in a single year. It was an unprecedented decision by Asian Paints which never implemented price hikes of more than 2-5% in any given year. Close peer Berger Paints undertook a price hike of 18% YTD in FY22. 

With the price hikes in December 2021, Asian Paints’ operating margin performance is expected to improve sequentially in Q4FY22. Analysts are relieved with the price hikes, but this will dent Asian Paints’ volumes, which have grown at double digits for five consecutive quarters now.

Will volume growth be sustained?

Asian Paints’ strong focus on volume growth and market share gains meant price hikes were deferred in FY21. The company gained a 2.7% market share gain in Q2FY22 and the trend continued in the December 2021 quarter. Asian Paints garnered significant market share gains from both unorganized players and organized peers during the Covid-19 pandemic. The company has a nearly 50% market share in the Indian paint industry. Organized players own 75% of the domestic paint industry with unorganized players cornering the remaining 25%. 

In Q3FY22, volume growth was mainly led by metro and T1 and T2 cities while T3 and T4 regions registered relatively lower but healthy growth. Thus, luxury and premium products mainly demanded in metro, T1 and T2 cities witnessed strong growth compared to economy products used in rural and T3 and T4 regions. 

The company is not expecting the volume growth trajectory to be derailed by recent price hikes. According to management, even with a 10% price increase in the first fortnight of November, demand was healthy and a 5% price increase on December 5, 2021, did not impact volume growth. Syngle said that if the third wave had not hit in the second fortnight of December 2021, total volume growth in Q3FY22 would have been even better. He further added that while labour constitutes 60-70% of the cost of painting, material cost is lower at 30-40% and the overall price increase will be nullified when translated into a per square feet price. Thus, the company expects healthy volume growth especially in the premium and luxury segment while economy products might witness price increase impact. 

As crude prices inch higher, Asian Paints’ management might have to take further price hikes in Q4FY22 to mitigate the raw material price increase. According to the management, while January 2022 paint demand might be impacted by the third wave, pent-up demand in February and March will help. This may spill over into Q1FY23 as seen in the past two Covid-19 waves. The Omicron wave is peaking faster and is expected to ebb by March 2022. But with the persistent high raw material costs and festive demand out of the picture, it will be interesting to see how volumes perform in Q4FY22 and beyond.

Rural and semi-urban network expansion, home improvement segment’s strong performance

While the rural slowdown noise intensifies, Asian Paints is confident of the continued growth of rural, T3, and T4 regions. Continuous progress with upgrading at the bottom of the pyramid is aiding rural growth. Customers are also upgrading from basic painting material to purchases of emulsions and other premium products. With the increase in consumption capacity and population expansion in smaller towns and cities, rural growth is on a stronger footing not only in the near term but for the next 20 years. On an overall demand scenario, Syngle said, “I would say that if the GDP is remaining in the healthy zone of 6-8% going forward. I don't see that, growth would be a problem.” Paint industry volume growth is usually double that of the GDP growth rate.

The adjacencies are also performing well with a strong demand outlook. Waterproofing grew 50% YoY in Q3FY22. Asian Paints projects business is witnessing strong demand since last July-August 2021 which continued in Q3FY22. Kitchen and bath businesses initiated in FY14 achieved breakeven. Both businesses reported Rs 100 crore revenue individually in Q3FY22. And the company expects these business units to constitute 8-10% of the overall business by March 2025. 

Asian Paints has successfully captured customer mindshare by being not just on the walls but also being present within four walls of a home. But it needs to sharpen its skills further to combatGrasim Industries which is expected to enter the domestic paint industry in CY22.

Asian Paints Ltd. has an average target of 3420.36 from 13 brokers.
HDFC Bank Ltd.    
21 Jan 2022
HDFC Bank Q3FY22 results - A mixed bag for investors
By Suhani Adilabadkar

With the RBI ban on credit card issuance behind them and sustained loan book momentum, HDFC Bank delivered a stable December 2021 quarter with lower provisions and improved asset quality. The stock price fell 1.5% post the bank’s Q3FY22 results. Though the overall results look good, suboptimal net interest income (NII) growth, flat net interest margin (NIM), and lower core fees disappointed analysts and investors alike. The bank lost some of its sheen in FY21 and Covid-19 turbulence displayed the chinks in its armor. Investors are keenly watching how the largest private sector bank maintains asset quality and augments its retail loan book growth amid the Omicron wave.

Quick Takes:

  • The bank issued its highest-ever credit cards in a quarter at 9.5 lakh in Q3FY22
  • Credit costs are expected to be around 100-120 basis points in the near future
  • The impact of the restructured book will not be more than 10-20 bps on NPAs
  • Slippage ratio (fresh NPAs) improved to 1.6% in Q3FY22 compared to 1.8% in Q2FY22
  • Loan book was up 16.5% YoY, driven by commercial & rural banking and retail loan segments in Q3FY22

Stable December 2021 quarter - healthy loan book growth and improved asset quality 

HDFC Bank came in with stable Q3FY22 results, aided by strong growth in commercial and rural banking and retail loan segments, and lower provisions. The bank reported net interest income (interest earned less interest expended) of Rs 18,443 crore in the December 2021 quarter compared to Rs 16,318 crore, a year ago. NII growth moderated to 13% in Q3FY22 from a high of 18% Q1FY21.

Srinivasan Vaidyanathan, CFO at HDFC Bank said that moderating NII growth reflects a shift from unsecured lending towards higher rated loan segments during the pandemic. As the pandemic induced a cautious stance among customers, leading to slow consumption and high savings, HDFC Bank shifted its focus from high-yielding unsecured retail loans towards its low-yield wholesale/corporate loan book. This has also impacted net interest margin (interest earned-interest expended/average earning assets) which is stagnant within a range of 4.1-4.3% over the past seven quarters. NIM was flat on a QoQ basis at 4.1% (down 10 bps YoY) in Q3FY22.

The drop in provisions at Rs 2,994 crore (down 12% YoY) aided net profit growth of 18% YoY to Rs 10,342 crore. 

The bank also saw collections improve and lower slippages during the quarter, which helped in a sequential improvement in its asset quality. Gross NPA ratio (percentage of gross NPAs to gross advances) and Net NPA ratio (percentage of net NPAs to net advances) came in at 1.26% (up 9 bps QoQ) and 0.37% (up 3 bps QoQ) in Q3FY22.

The bank’s total deposits rose 14% YoY to Rs 14.4 lakh crore. CFO Vaidyanathan said retail deposits constituted about 83% of total deposits and contributed to the entire deposit growth for the bank since last calendar year. Current account and savings deposits (CASA) ratio surged to 47.1% in the December 2021 quarter compared to 43% a year ago. Advances (Rs 12.6 lakh crore) rose 16.5% YoY supported by retail loan book (up 13.3% YoY), commercial & rural banking (up 30% YoY) and corporate loan book (up 7.5% YoY) in Q3FY22.

The retail loan mix needs a rejig

After HDFC Bank released its December quarter 2021 business update on January 4, 2022, its stock price rose 2% due to the strong double-digit loan growth of 16.5% YoY. The market was also enthused by strong CASA growth and retail loan book maintaining September 2021 quarter double-digit growth momentum.

Retail advances constituting 40% of the total loan book grew 13.3% YoY. But retail loan growth is still a cut below industry standards. ICICI Bank has been clocking 20% retail loan growth since the March 2021 quarter. Overly cautious Kotak Mahindra Bank too surpassed HDFC Bank in Q2FY22 in terms of retail loan book growth (up 17% YoY). Speaking on HDFC Bank’s retail loan book, Vaidyanathan said, “It's starting to take its own legs and grow. But it needs time to grow back to where it was two years ago. The journey has started.” As the bank gets its focus back on the high yield retail engine, net interest income and NIMs will hopefully be favourably impacted in the coming quarters.

While private sector banks are expected to log in strong retail loan growth aided by economic recovery and festive demand in the December 2021 quarter, the third wave of the pandemic will weigh on Q4FY22. HDFC Bank’s retail mix mainly consists of personal loans, payment products (credit cards), auto, two-wheeler, and home loans.

Except for two-wheeler segment loans, all other retail segments reported YoY positive growth. High cost of ownership, poor rural sentiment, work from home, and the Omicron uncertainty have impacted two-wheeler sales leading to lower loan disbursals. Till the economic recovery is felt across economic segments, domestic two-wheeler growth will remain muted. Two-wheeler loans (Rs 9,288 crore) fell 11% YoY in Q3FY22, while passenger vehicle (PV) loans (Rs 96,426 crore) were up 8% YoY in Q3FY22, but growth is expected to be adversely impacted in the coming months.

According to the Federation of Auto Dealers Association (FADA) press release, passenger vehicles saw a double-digit fall in retail over the past three months. While entry-level car demand is subdued as customers conserve money for healthcare emergencies, the SUV and luxury segments are hurt by semiconductor chip shortages as these cars have a higher content of semiconductors due to high-end features. 

Personal loans (Rs 1.3 lakh crore) and payment products (Rs 0.7 lakh crore) reported 15% and 11% YoY growth in Q3FY22, respectively. Discretionary expenditure will take a hit, as air travel and tourism face regulatory curbs, marriages and events are postponed and shopping malls witness lower footfalls. Thus personal loans and credit cards are expected to log soft growth in the next quarter. To augment its consumer finance business amid Omicron disruption, HDFC Bank signed memorandums of understanding (MOUs) with India Post Payments Bank (IPPB) and Paytm to scale up its business in rural and semi-urban areas. The bank also took steps to enhance the digital experience for its customers through a fully revamped payment offering. 

Though growth remains uncertain for auto, personal loan, and payment products segments (25% of HDFC Bank’s loan mix), the mortgage segment is a bright spot for HDFC Bank and the banking sector as a whole. High margin and low-risk mortgages, which include home loans, office premises loans, loans against property, are currently a major growth driver for the banking sector. HDFC Bank’s mortgage share in the total loan book stands at 10.7% in Q3FY22 and 13% in FY21. Mortgages contribute 25% of total advances for Kotak Mahindra Bank and ICICI Bank tops the chart with 35-40% mortgage share in FY21. While the street awaits HDFC Bank’s return to the 2018-era level of 20%+ retail growth, the bank needs to rejig its retail loan mix to adapt to the uncertain Covid-19 scenario.

Asset quality Improves, muted growth in operating profit and core fee income 

Brokerage houses have increased their target prices for the industry benchmark on the back of strong key positives in Q3FY22. The commercial and rural banking (CRB) loan book has grown above 25% over the past three quarters. Vaidyanathan said that HDFC Bank aims to focus strongly on the CRB segment which contributes about one-third of the country's GDP. Asset quality parameters are also improving. Slippage ratio (fresh NPAs) stood at 1.6% (Rs 4,600 crore), in Q3FY22 compared to 1.8% in Q2FY22.

Provisions fell 12% YoY and 24% sequentially in the December 2021 quarter. Consequently, credit costs at 95 bps fell 30 bps YoY and 35 bps QoQ. Credit cost is the percentage of provisioning against total advances. The restructured book also moderated to 1.4% of loans in Q3FY22 compared to 1.5% in the September 2021 quarter. 

But there are two major concerns. A key efficiency indicator - the operating profit growth rate has been on a decline for the past three quarters.

Lower operating profit in Q3FY22 was due to muted core fee (Rs 5,075 crore) growth at 2% YoY. The muted core fee was due to lower fees on card products, lower over-limit fees, revolver rates and lower credit line utilization by customers which reflected the cautious approach of customers. And all this is intertwined with retail growth and the economy regaining its pace.

1 Comment
ashvin18 Dear sir,
Present situation in market is very
decisive and most worry is BUDJET
For a person desires to earn from
short term trading,not daily but at
least five transaction in a month to
earn breakfast in his eighty, the
present time from Jan,2022, has
become difficult.
23 Jan 2022
Number of MF schemes decreased from 507 to 499 in Sep 2022 qtr
Bajaj Auto Ltd.    
11 Jan 2022
Bajaj Auto’s business is getting an electric boost
By Suhani Adilabadkar

The fact that Bajaj Auto (BAL), which has built a robust export business for motorcycles is also feeling the pain in its monthly wholesales, tells you a lot about the present state of the Indian two-wheeler industry. BAL’s two-wheeler wholesale volumes for November 2021 (1,44,953 units) and December 2021 (1,27,593 units) fell 23% YoY and 1% YoY respectively.The ailing two-wheeler industry has been ravaged by the pandemic and is now reeling under weak domestic demand, slowing exports, and persistent semiconductor chip shortage. 

While Bajaj Auto’s dependence on the domestic market is low compared to close peer Hero MotoCorp, investors are keenly watching how BAL, the market leader in the premium motorcycle segment, will overcome shortages and fine-tune its export strategy amid disruptions caused by Omicron. 

Quick Takes

  • With a 20% fall in two-wheeler wholesale volume (4,71,284 units), the  top line is expected to be muted and operating margins will be under pressure in Q3FY22 
  • The management expects exports to cross the $2 billion mark in FY22 vs $1.65 billion in FY21
  • The co-developed Bajaj – Triumph product will be launched by the end of FY22-23
  • The company  announced an investment of Rs 300 crore to set up an electric vehicle (EV) facility in Akurdi, near Pune
  • The EV facility will have a manufacturing capacity of five lakh units per annum catering to both domestic and export markets 

Exports drive the world’s favourite Indian

While the launch of Bajaj Pulsar in 2001 infused a fresh lease of life in the legendary two-wheeler manufacturer, it was Bajaj Boxer that initiated its journey to become the largest Indian two-wheeler exporter. Boxer dominates African markets with nearly 40% market share in 2021. While close peers like Hero MotoCorp (HMCL) and Honda were busy garnering domestic market share at low margins in the early 2000s, BAL focused on new geographies for its premium motorcycles. 

From exporting 15,800 motorcycles in 2001-02, BAL exported over  2 million units in CY2021. The company exports its premium motorcycle, KTM to North America, Europe, and Australia. Pulsar, Dominar 250, Discover are hugely popular brands in Columbia, Mexico, Brazil, Peru, Guatemala, Nepal, and Bangladesh. The company took advantage of the growing middle class in Latin America, South East Asia, and African countries to expand its export business. In addition, Bajaj Auto’s strong partnership with local distributors and the ability to meet service and spare parts requirements contributed to its success. BAL currently exports to 79 countries which contribute nearly half of its revenue mix.

The company reported the highest revenue (Rs 8,762 crore) and net profit (Rs 1,275 crore) in the listed two-wheeler space in Q2FY22. BAL’s top-line was 4% higher compared to Hero MotoCorp (with domestic volumes 2.5x higher than BAL) in Q2FY22.

Despite lower domestic volumes (5.3 lakh units), BAL’s topline was powered by resilient exports (6.12 lakh units) in Q2FY22 and a high share of premiumisation in the product mix. BAL is the market leader in the premium motorcycle segment (150cc and above) with more than 50% market share, HMCL is at 4%. This helps BAL maintain a higher realisation per unit as premium motorcycles are priced nearly double or even higher than commuter (entry-level) bikes. HMCL is the market leader in the entry-level motorcycle segment.

Thus, even with a market share of 20% in the overall two-wheeler industry, BAL’s revenue and net profit is higher than HMCL (more than 50% market share).  

Bajaj Auto’s net profit was 1.6x higher than Hero MotoCorp in Q2FY22. 

Semiconductor shortage impacts premium portfolio, retail volumes hit by Covid-19

Though it is worse for four-wheelers, the semiconductor chip shortage over the past year also took its toll on premium motorcycle manufacturers. As original equipment manufacturers (OEM) reduced production due to the Covid-19 pandemic in mid-2020, semiconductor manufacturers diverted supplies to the consumer electronic/consumer durable segment witnessing a huge demand upsurge. With the rise in demand from both auto and electronics/consumer durable segments, semiconductor producers are currently unable to smoothen out the demand & supply mismatch. 

In two-wheelers, semiconductor chips are used in high-end premium motorcycles for features like bluetooth connectivity, immobilizers (anti-theft), digital LED screens, anti-lock braking (ABS) systems, and navigation features. According to BAL’s management, chip shortage impacted 20% of its premium motorcycle portfolio in the September 2021 quarter. For TVS Motor, chip shortage impact was to the tune of 25000 units of Apache premium motorcycles. Speaking on the semiconductor issue, Rakesh Sharma, executive director, Bajaj Auto said, “We have seen gaps of up to 50% in demand and supply, causing stock-outs across overseas markets and affecting the KTM, Dominar, and Pulsar brands.” The management expects the chip issue to continue for the next 3-4 quarters. Sharma said that the company was preparing for the worst-case scenario and taking countermeasures like rejigging its portfolio and marketing programs in overseas markets and India to mitigate the impact of shortages.

The chip shortages have led to slower deliveries and production delays for BAL’s premium portfolio, impacting both exports and domestic production. Exports, after hitting a peak in July (103% YoY growth), started slowing in August-September 2021, driven by shortages, disruptions from the third wave, and increased competitive intensity in overseas markets. Chinese manufacturers have made a comeback in African countries while dealership changes in Columbia impacted sales. The Columbia dealership changed hands from Auteco to the UMA group in 2021. According to the management, it is also increasingly tough to raise prices in overseas markets. Competitors are not ready to increase product prices due to lower demand which is impacting BAL’s global realisations. Two-wheeler export volumes (22.3 lakh units) increased 33% YoY in CY2021 and 36% YoY jump over the first nine months (16.7 lakh units) of FY22.  

Bajaj Auto’s domestic two-wheeler wholesale volumes (4,71,284 units ) in the December 2021 quarter fell 20% YoY. TVS Motor is also at the same level. HMCL wholesale numbers fell by 33% YoY. 

In addition to weak demand, OEMs dispatching a high number of vehicles to dealers in anticipation of similar 2020 festive zeal in 2021 also contributed to a double-digit wholesale volume fall in Q3FY22. 

With a 20% volume decline on a high base of Q3FY21, Bajaj Auto’s top line will be hit in the December 2021 quarter. Lower volumes and cost increases will also impact operating margins in Q3FY22. According to management, costs are expected to increase by 2% QoQ in the December 2021 quarter.

Federation of Automobile Dealers Associations (FADA) two-wheeler retail volumes for December 2021 are also out. This shows a double-digit fall in retail volumes indicating persisting poor consumer sentiment. People are less inclined to spend on discretionary products and are conserving cash for health emergencies. Compared to its peer group, Bajaj Auto’s retail volume fall was the lowest in December 2021.

According to the management, BAL’s 60% domestic volumes come from 45% of the top half of the demand pyramid, mainly the 125 cc segment, where Pulsar 125 market share is at 25%. BAL is planning to launch a new product in the 125cc segment, but the timeline is not defined by the management. As the 125 cc segment becomes crowded with the entry of TVS Raider 125, BAL needs to consolidate its position in the fastest-growing motorcycle segment. 

EV investment to start off from Chetak facility

Among the top two-wheeler manufacturers, Bajaj Auto will be the last one to be disrupted by electric scooter start-ups. With no ICE scooter portfolio, electric scooter sales are incremental for BAL. Chetak, BAL’s electric scooter, launched in 2021 already has a 40% market share in Pune, according to the management. The company plans to reach 30 cities by March 2022. 

Electric scooter demand is currently just 1% of the total two-wheeler industry. All top three OEMs have recently announced dedicated EV divisions and subsidiaries, and defined investment plans. Electrification is definitely the future of mobility, but the EV segment will take another 4-5 years to garner a respectable market share in two-wheelers. Bajaj Auto is working on a number of products ranging from scooters, motorcycles, and three-wheelers for  EV mobility. The company is also working with KTM in the EV space. Bajaj Auto recently announced the setting up of a Rs 300-crore EV facility in Akurdi, near Pune. The first EV is expected to be rolled out by June 2022. Akurdi is the famed original ‘Chetak’ facility. For context, the company had earlier stopped taking orders for its Chetak EV because it couldn’t meet the surge in demand.

Commercial vehicle segment revives, CNG three-wheeler to spur growth

Bajaj Auto’s commercial vehicle (CV) segment comprises three-wheelers, good carriers, and quadricycles. The CV segment constituted 11% of BAL’s total volumes in Q3FY22. CV volumes are up 18% YoY and 16% sequentially in Q3FY22. The three-wheeler segment is the major constituent of its CV product mix and BAL is the market leader with more than 50% market share in 2021. The domestic three-wheeler market recovered strongly after the second wave as restaurants, offices, and shopping malls re-opened. Even though Covid-19 infections are rising, commercial traffic and inter-city mobility is not expected to be as impacted this time around. Three-wheelers being a high margin product, a favourable impact on operating margins is expected in the coming quarters with rising volumes. 

The company also sees strong opportunity in the compressed natural gas (CNG) three-wheeler segment which constitutes 45% of the total three-wheeler market in India. Currently, there are 1500 CNG pumps and the government plans to open another 9,500 pumps by 2025. According to the management, a single CNG pump creates a market for 10,000 CNG three-wheelers in the industry of which 90% demand is garnered by Bajaj Auto. The company is also foraying into electric three-wheelers and will launch its product by May 2022. But according to the management, electric three-wheelers are on a weaker wicket.

Even after recent CNG price hikes, the difference between CNG and petrol/diesel is around Rs 40. And with the strong government backing for CNG, electric three-wheelers (with high acquisition costs compared to CNG three-wheelers) will find it difficult to gather momentum

Bajaj Auto Ltd. is trading below all available SMAs