Stock market analysis and stories by Ketan Sonalkar

Articles by Ketan Sonalkar

TREND | 11 Apr 2022

The winners and losers among mutual funds in FY22

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FY22 was a roller coaster ride for Indian equity markets. Each quarter saw significant events impacting the markets, including some occurring out of the blue. It started out with the second wave of Covid-19 in Q1FY22, which was more severe than the first wave. We saw a repeat of lockdowns and restrictions bringing economic activity lower. The following quarters saw different sectors face challenges, like semiconductor shortages in the auto industry and rising freight costs for exports due to the limited availability of shipping containers. Commodity prices also saw sharp increases leading to margin pressure across industries on account of raw material inflation.

In Q4FY22, the impact of geopolitics played out with the Russia-Ukraine war. As we step into FY23, let us look at the mutual fund managers who generated superior returns for investors as well as those who underperformed their respective categories in FY22.

Data for actively managed equity funds considered for analysis encompasses all the AMCs (asset management companies) and schemes with a closing AUM (assets under management) of more than Rs 100 crore in FY22. The benchmarks considered are the benchmark indices for the respective category.

Quick Take

In the Large Cap category, only five funds outperformed the benchmark Nifty 100 TRI (total returns index) return of 20.6% in FY22
The top-performing schemes in the Mid Cap, Multi Cap, Small Cap, and ELSS categories outperformed their respective benchmarks by more than 20%, and all are managed by fund managers from one AMC, i.e Quantum AMC
Multi Cap was the best performing category with most schemes delivering higher than benchmark returns
In the Flexi Cap category, Parag Parekh Flexi Cap Fund scheme was the best performing scheme with returns of 30.2% in FY22
In the Value category, IDFC Sterling Value Fund scheme was the best performing in its category for the second consecutive year, with returns of 36.6% in FY22

Large Cap Funds - Nifty heavyweights deliver outperformance

By its very definition, the large-cap category invests in stocks that form part of the Nifty 50 index. Some of the companies with the highest market capitalisation which contributed alpha to outperforming funds include State Bank of India, Coal India, Reliance Industries , Infosys and Tata Consultancy Services.

Nippon India Large Cap Fund Growth scheme managed by Sailesh Raj Bhan and Kinjal Desai was the top performer in its category. The category beating returns came from heavyweights like Reliance Industries, banking stocks like ICICI Bank and State Bank of India, and IT services majors Infosys and HCL Technologies.

Other outperformers include Invesco India Large Cap Fund Growth managed by Nitin Gosar and Amit Nigam, and IDBI India Top 100 Equity Fund Growth managed by Alok Ranjan.

Laggards in this category include PGIM India Large Cap Fund Growth managed by Alok Agarwal and Ankur Murarka, DSP Top 100 Equity Fund Reg Growth managed by Jay Kothari and Vinit Sambre and ITI Large Cap Fund Reg Growth managed by George Joseph and Pradeep Gokhale

Mid Cap Funds - Power and IT services companies contribute to outperformance

In the mid cap category, stocks like Trident, JSW Energy and Tata Elxsi delivered more than 200% returns in FY22. Some of the IT services companies that delivered returns in excess of 100% include Mindtree and Persistent Systems. Funds which included these as part of their portfolio were outperformers.

The top performer in this category was Quant Mid Cap Fund Growth scheme managed by Sanjeev Sharma and Vasav Sahgal. This scheme delivered 48.9% returns in FY22, beating the benchmark Nifty Midcap 100 by 23.6% points. Some of the stocks in their portfolio that delivered more than 100% returns in FY22 include Linde India, Indian Hotels, and Tata Power.

Outperformers also include Motilal Oswal Midcap 30 Fund Reg Growth managed by Abhiroop Mukherjee and Niket Shah with 38.2% returns, and PGIM India Midcap Opportunities Fund Reg Growth, managed by Aniruddha Naha and Vivek Sharma with 35.3% returns in FY22.

Some of the schemes underperformed due to the sheer number of stocks in the portfolio. With a large number of stocks, some schemes were able to allot only 3.5% as maximum exposure to a single stock. This led to lower allocation to some high return stocks, ultimately lower overall portfolio return. Laggards in this category include IDBI Midcap Fund - Reg Growth managed by Alok Ranjan, Franklin India Prima Fund Growth managed by R. Janakiraman and Sandeep Manam and DSP Midcap Fund Growth managed by Vinit Sambre, Resham Jain and Jay Kothari.

Multi Cap Funds - Except for one, all other schemes outperformed the benchmark

Multi cap funds have a wider platform for fund managers to choose from. This category also had the advantage of many new stocks entering portfolios of various schemes, with new IPOs being listed in FY22. Funds that were judicious in the selection of such stocks outperformed. Only one fund in this category underperformed the benchmark Nifty 200 TRI returns of 21.4% in FY22.

The best performing Multi Cap scheme was Quant Active Fund Growth scheme managed by Sanjeev Sharma and Vasav Sahgal. Stocks delivering more than 100% return in FY22 that were part of its portfolio include Gokaldas Exports (392%), HFCL (207%) and TV18 Broadcast (157%).

Other notable schemes that outperformed their benchmark indices include Nippon India Multi Cap Fund - Growth, managed by Sailesh Raj Bhan and Kinjal Desai Baroda, and BNP Paribas Multi Cap Fund Regular Growth managed by Sanjay Chawla and Sandeep Jain, ICICI Prudential Multicap Fund Growth, managed by Priyanka Khandelwal and Prakash Goel, Invesco India Multicap Fund Growth managed by Pranav Gokhale and Amit Nigam.

The only scheme that underperformed the benchmark was ITI Multi Cap Fund Regular Growth managed by George Joseph and Pradeep Gokhale. A reported annual turnover ratio of 843% suggests that too much churning of the portfolio resulted in underperformance.

Small Cap Fund - High-risk category also delivers the highest return

Considered amongst the highest risk categories, the highest returns among all categories were delivered by two schemes returning more than 50%. The top-performing scheme was Quant Small Cap Fund Growth scheme managed by Sanjeev Sharma and Vasav Sahgal delivering 57.8% returns in FY22. Alpha was generated by textile stocks, Nahar Spinning Mills (402%), and Nitin Spinners (186%) along with Praj Industries (105%) and VRL Logistics (110%).

Other outperforming schemes in the Small Cap category were Canara Robeco Small Cap Fund Reg Growth managed by Shridatta Bhandwaldar and Ajay Khandelwal and L&T Emerging Businesses Fund Reg Growth managed by Venugopal Manghat and Vihang Naik

Laggards in the Small Cap category were SBI Small Cap Fund Growth managed by R. Shrinivasan, Aditya Birla Sun Life Small Cap Fund Growth managed by Kunal Sangoi, and Dhaval Gala, and ITI Small Cap Fund - Reg – Growth managed by George Joseph and Pradeep Gokhale.

Flexi Cap Fund - Some outperformers clearly stand out in this category

This relatively new category was defined by the regulator in November 2020. In a Flexi Cap scheme, minimum investment in equity and equity-related instruments should be 65% of total assets, irrespective of market capitalisation.

This category found favour in FY22, with AMCs launching new schemes in this category or aligning other Multi Cap schemes to fit this category. Delivering the highest returns in this category was the Parag Parikh Flexi Cap Fund Regular Growth managed by Rajeev Thakkar and Raunak Onkar. This was earlier a Multi Cap Fund but got recategorised as a Flexi Cap scheme to comply with SEBI guidelines. Before recategorisation, it was the best performing Multi Cap scheme for three consecutive years and is the best performer in the Flexi Cap category in the last two years.

One of the biggest advantages of this scheme was that it generated alpha from international equity investments. Even after running into a rough patch with regulatory issues in Q4FY22 which restricts it from further investment in international equities, it continues to be a consistent top ranking fund.

Other standout schemes from this category include IDBI Flexi Cap Fund Regular Growth managed by Alok Ranjan and HDFC Flexi Cap Fund Growth managed by Prashant Jain and Sankalp Baid.

Laggards in this category were DSP Flexi Cap Fund Growth managed by Atul Bhole and Abhishek Ghosh, LIC MF Flexi Cap Fund Growth managed by Yogesh Patil and Motilal Oswal Flexi Cap Fund Reg Growth managed by Abhiroop Mukherjee and Siddharth Bothra.

ELSS - Superior returns by some schemes add to the tax advantage of this category

ELSS (equity-linked savings scheme) is popular among investors as it offers tax benefits. Its three-year lock-in period also gives fund managers more flexibility as compared to other categories. There is less pressure on the scheme for redemptions due to the lock-in period and fund managers can deploy funds for longer time periods.

In this category as well, the highest returns were delivered by a scheme from Quant AMC, Quant Tax Plan Growth scheme managed by Vasav Sahgal and Ankit Pande. Data points out that this scheme is generated alpha by exiting some of the stocks which have delivered high returns, like Century Textiles (90.5%) and Nureca (135%) along with adding higher weightage to stocks like Vedanta (98%) and Adani Enterprises (86.6%).

Other notable outperformers include IDFC Tax Advantage (ELSS) Fund Regular Plan Growth scheme managed by Daylynn Pinto and PGIM India ELSS Tax Saver Fund Regular Growth scheme managed by Srinivas Rao Ravuri and Utkarsh Katkoria

Underperformers in this category were Aditya Birla Sun Life Tax Relief 96 Growth scheme managed by Ajay Garg, Aditya Birla Sun Life Tax Plan Growth scheme managed by Ajay Garg and ITI Long Term Equity Fund Regular Growth scheme managed by George Joseph and Pradeep Gokhale

Value Fund - Some schemes continue to deliver value to investors

Value fund is a category that follows the value investing philosophy. During FY22, many IT services stocks and energy companies turned out to be profitable value picks by fund managers.

The best performing scheme in this category in FY22 was IDFC Sterling Value Fund Regular Plan Growth scheme managed by Anoop Bhaskar and Daylynn Pinto. Alpha was generated by stocks like Persistent Systems (146%), Butterfly Gandhimathi (153%), and KPR Mills (210%).

Other schemes that outperformed were ICICI Prudential Value Discovery Fund Growth scheme managed by Priyanka Khandelwal and Sankaran Naren and Nippon India Value Fund Growth scheme managed by Meenakshi Dawar and Kinjal Desai.

Underperformers included Aditya Birla Sun Life Pure Value Fund Growth scheme managed by Milind Bafna, Tata Equity P/E Fund Regular Growth scheme managed by Sonam Udasi and Amey Sathe, Quantum Long Term Equity Value Regular Growth scheme managed by Nilesh Shetty.

Though this analysis is a point-to-point one-year return on schemes, it gives a broad sense of which funds generated wealth for investors. Some schemes have worked well and some may need to be reviewed by investors. The challenge for outperforming schemes is to continue beating benchmark returns in FY23.

Valiant Organics Ltd.

01 Apr 2022

297.55

-3.49%

Call with Valiant Organics - Does this beaten-down stock look like an opportunity?

By Ketan Sonalkar

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Valiant Organics is part of the Aarti Group of companies. This includes specialty chemicals player Aarti Industries and active pharmaceutical ingredient or API maker Aarti Drugs. The group companies have synergies for sourcing raw materials as well as forward integration of products that are used for processing by another group company. Valiant Organics sources one of its key raw materials, PNCB (para nitro chlorobenzene) from Aarti Industries. Around 35% of its total raw material need is sourced from Aarti Industries, and around 20% of its final products are sold to group companies.

Valiant Organics is present in the chemistry verticals of chlorination, ammonolysis, acetylation, hydrogenation, and methoxylation-based specialty chemical products in India. It manufactures a wide intermediates portfolio. The company derives 88% of its revenue from the domestic market and 12% from exports.

On an analyst call with the management last week, it was clear that there were many questions about the future of the company and its stock market performance. Management was represented by Chief Financial Officer Mahek Chheda and Senior Manager Finance Mihir Shah.

A major concern for investors was that Valiant Organics gave negative returns over the last one year. The stock fell 25% over the past year, while the Nifty 50 rose 22%. Investors are left wondering whether there is any chance of further declines, or if the stock is a buying opportunity at this valuation. The management outlined the current issues faced by them and presented future plans.

Quick Takes

Revenues rose for the fourth consecutive quarter in Q3FY22 at Rs 290.9 crore, a YoY increase of 40%, while profits saw a 5.7% decline in Q3FY22 to Rs 29.9 crore.
Three of the four verticals surpassed their respective FY21 revenues in 9MFY22
OAP (ortho Amino phenol) plant will be commissioned in Q4FY22 will have a capacity of 100 MT per month
Plant for pharmaceutical intermediates to be commissioned in Q4FY22 for forward integration with group company
The EBITDA margins for 9MFY22 stood at 18.3%, which was lower than the preceding three financial years

Rising revenues, but inconsistent profitability

The Q3FY22 results saw the company’s revenues rise for the fourth consecutive quarter to Rs 290.9 crore, up 39% YoY. In comparison, net profit fell for three straight quarters from Q3FY21 till Q2FY22. This trend reversed in Q3FY22, with net profits at Rs Rs 29.9 crore, which was still lower by 5.3% on a YoY basis.

Valiant Organics has a diversified portfolio across chemistries as well as end-user industries. Products derived from chlorination find application in agrochemicals, cosmetics, veterinary, and pharmaceuticals. Hydrogenation and ammonolysis find application in dyes, pigments, pharmaceuticals, and agrochemicals. Other processes like acetylation, sulphonation, and methylation supply the dyes and pigments industry.

Valiant Organics is the only Indian manufacturer of chlorophenol products and is a global leader with about 25% global market share. Exports form more than 50% of this vertical’s revenues. Valiant Organics entered the ammonolysis vertical as a result of two acquisitions i.e. Abhilasha Tex Chem in 2017 and Amarjyot Chemicals in 2019. It supplies its products to almost all the leading dye manufacturers and has a leadership position in manufacturing PNA (para nitro aniline) due to its raw material security of PNCB (para nitro chlorobenzene) from its group company Aarti Industries.

In the hydrogenation vertical, it began manufacturing two new products in FY21 of ortho anisidine (OA) and para anisidine (PA). It is also focusing on PAP (para amino phenol), which is a difficult product to make and is an import substitute product in India.

Mihir Shah said that Valiant Organics became one of the first companies in India to manufacture PAP in FY21, as well as a steady supply of PNCB (para nitro chlorobenzene) from its group company Aarti Industries. The majority of its PAP production will be sold to Valiant Laboratories, which is its subsidiary.

The majority of the revenues are driven by three verticals: chlorination, ammonolysis, and hydrogenation. During the 9MFY22 period, except for chlorination, all other verticals surpassed their respective FY21 revenues. Hydrogenation and ammonolysis surpassed the FY21 revenues by around 21%. Presenting the 9MFY22 numbers, CFO Chheda said, “During 9MFY22, we have seen topline growth as well as volume growth, but margins were compressed.”

The data for 9MFY22 also shows that the hydrogenation vertical consistently produces the highest volumes, followed by chlorination. This vertical, despite its high volumes, comes in third as far as revenue contribution is concerned. The other processes vertical delivered better margins. In response to an investor query, the management said the company isn’t seeing any fall in demand from the dyes industry.

The biggest challenge for Valiant Organics is its falling EBITDA margins. The EBITDA margins from FY19 to FY21 were above 26%. However, for 9MFY22 the EBITDA margins fell drastically to 18.4%. This is attributed to rising raw material and logistic costs.

Explaining the reasons for falling margins, CFO Chheda said that the company passes on the increase in raw material costs to the end-user, but with a lag. The contracts are typically short-term contracts for three months to long term contracts for 12 months of supply. The incremental cost is passed on only after the completion of the previous contracts, which results in the delay. This compresses the margins at the company's end for a particular quarter.

The management expects raw material prices to stabilise over the next two quarters. On this part, CFO Chheda said, “If prices stabilise over the next two quarters, we can expect to deliver normalised EBITDA margins in the range of 22-25%.”

New products lines will add to the topline from Q1FY23

Valiant Organics is expanding its product lines with its upcoming units due for commissioning in Q4FY22. The PAP (para amino phenol) unit with 1000 MT (metric tonnes) per month was commissioned in Q4FY21, but full production was delayed due to technical difficulties in achieving the desired specification. The management expects to ramp up production from Q1FY23 onwards. PAP will be an import substitute and an essential element for the manufacture of paracetamol.

Speaking on new projects on the conference call, Mihir Shah presented data on new projects including the unit for OAP (ortho amino phenol) and another for pharma intermediates. The OAP unit has a capacity of 100 MT (metric tonnes) per month and the company will be the first Indian firm to manufacture it. The pharma intermediates unit with a capacity of 20 MT per month will manufacture products for group companies and raw materials for APIs (active pharmaceutical ingredients). Mihir Shah informed investors that incremental annual revenues from the new lines are projected to be Rs 450-500 crore from PAP, Rs 35 crore from OAP, and around Rs 45 crore from pharma intermediates.

With the expectation of raw material prices stabilising over the next two quarters, and new units commencing production from Q1FY23 onwards, there is a possibility of improving margins along with incremental revenues from new product lines.

Valiant Organics Ltd. has lost -29.95% in the last 6 Months

Crompton Greaves Consumer Electricals Ltd.

28 Mar 2022

325.95

-2.22%

Butterfly acquisition is key to Crompton Greaves Consumer’s success in appliances

By Ketan Sonalkar

In February 2022, electrical consumer goods player, CG Consumer (Crompton Greaves Consumer Electricals) acquired South India-based kitchen appliances company Butterfly (Butterfly Gandhimathi Appliances). The acquisition of a listed company by another listed company creates a buzz because of the size of the deal. As part of this deal, CG Consumer will buy out the promoter's stake and will acquire a controlling interest in the company with an 81% stake for around Rs 2,077 crore.

Mergers and acquisitions are a growth strategy used by many businesses to target new markets, products, or services and even acquire established products that are complementary to their own. CG Consumer chose to acquire Butterfly to expand its appliances portfolio and expand its geographical reach. Butterfly has leadership in some of its products and a strong presence and brand recognition in South India. This deal will also help CG Consumer strengthen its presence in the south.

Apart from acquiring a 55% stake from the promoters, CG Consumer will make a mandatory open offer to the public shareholders of Butterfly to acquire up to 26% stake in Butterfly at Rs 1,433 per equity share, aggregating up to Rs 666 crore. The total consideration is expected to be around Rs 2,077 crore for a nearly 81% equity stake. The existing promoter’s stake will reduce to 9% in Butterfly and they will be classified as public shareholders. The new management from CG Consumer will take over key management positions in Butterfly. Rangarajan Sriram, Vice President of Crompton Fans will lead Butterfly as CEO.

Quick Takes

CG Consumer will acquire up to 55% stake from promoters of Butterfly Gandhimathi for a consideration of Rs 1,380 crore at a price of Rs 1,403 per share
CG Consumer will also acquire trademarks from promoters of Butterfly Gandhimathi for a consideration of Rs 30 crore
CG Consumer’s contribution from appliances is expected to increase to 24% of total revenues from current 10%
Butterfly will remain a listed entity and the final call on delisting/merger will be taken by the board of directors of both companies at a later date
CG Consumer to set up a manufacturing unit on 12 acres of land parcel in Tamil Nadu acquired as part of the deal from Butterfly Gandhimathi

What makes Butterfly a suitable target for acquisition?

Butterfly Gandhimathi is among the top three kitchen and small domestic appliance players in India. Butterfly’s product portfolio includes a complete suite of kitchen appliances including mixer grinders, wet grinders, pressure cookers, stainless steel vacuum flasks, LPG stoves and non-stick cookware. In South India, Butterfly leads the market in wet grinders and LPG stoves and occupies second place in the mixer grinders category.

The last five years saw Butterfly’s sales increase consistently YoY ending FY21 with a revenue of Rs 871.2 crore. The 9MFY22 revenues stood at Rs 807.1 crore, a 21.5% increase over the previous period of 9MFY21. Over the last five years, it has improved its profitability from bearing a loss of Rs 51.8 crore in FY17 to generating net profits of Rs 36.2 crore in FY21.

CG Consumer’s revenues were at least five times greater than Butterfly Gandhimathi's in FY21. CG Consumer recorded revenues of Rs 4,825.6 crore in FY21 along with net profits of Rs 604.7 crore. Butterfly’s product will help CG Consumer expand its range of small domestic appliances and a complete kitchen-focused portfolio gets added to CG Consumer.

CG Consumer’s product mix is fairly diversified. Fans constitue 41% of revenues, followed by pumps with 25%. Currently, appliances constitute only 10% of revenues, and CG Consumer expects the Butterfly acquisition to help it grow this segment’s revenues.

CG Consumer is the leading seller of fans in India, but its market share is shrinking with aggressive competition from players like Havells, Bajaj Electricals, and Polycab. Similarly, its ability to grow the pumps and lighting segments is limited due to competition, pricing pressure, and the presence of many organised and unorganised players.

On the other hand, Butterfly’s product mix is completely focused on kitchen appliances. More than half of its revenues are driven by two products–mixer grinders contributing 29.1% and LPG stoves contributing 25.7%. The rest comes from products like pressure cookers, wet grinders, and other kitchen utilities.

CG Consumer's current range of appliances includes geysers, coolers, irons, room heaters, and mixer grinders. The acquisition of Butterfly is a favourable option for CG Consumer to grow its appliances segment. There is an overlap of only one product (Mixer grinders) between the two, which gives CG Consumer access to a new set of established products. (LPG Stoves, wet grinders, pressure cookers, etc).

According to CG Consumer’s investor presentation, it expects the appliances segment to contribute to 24% of the revenues, up from the existing 10%, post the acquisition. Taking the base of FY21 revenues, this means there could be an 18% increase in total revenues to Rs 5,670 crore for the combined entity in FY23.

Prior to the acquisition, CG Consumer's plans included adding dealers for its products in areas with a population of 10,000-100,000 in the next five years. Post the acquisition Butterfly would also benefit in penetration in these smallest towns as the dealers would offer Butterfly products also.

Synergies due to respective geographical strengths

Butterfly has a strong presence in South India with 76% of sales from this region. This gives CG Consumer a strong foothold in the region where it can expand its other segments through Butterfly Gandhimathi’s dealerships.

Apart from this, CG Consumer also gets a 12-acre land parcel in Tamil Nadu as part of the deal. This can be utilised either for appliances or for putting up a manufacturing plant for any other segment in South India. Also, CG Consumer’s pan India presence will help Butterfly appliances scale faster in the rest of India.

Immediate actions are needed in certain operational areas

Butterfly’s EBITDA margin was much lower at 9% in FY21 against CG Consumer’s 15%. The lower EBITDA margin is on account of rising raw material costs, higher advertisement, and other expenditures. Streamlining costs at Butterfly Gandhimathi would be a priority for CG Consumer. However, the EBITDA margin of Butterfly is likely to remain under pressure in the near term due to higher raw material prices.

CG Consumer can benefit from the deal by leveraging Butterfly’s manufacturing facilities, R&D capabilities and capitalising on distribution strengths in the dealer network as well as across e-commerce platforms. Depending on the actions taken in the next few quarters, this deal can potentially result in a successful diversification of product lines and a win-win situation for both companies.

Crompton Greaves Con.. has an average target of 498.83 from 6 brokers.

Dr. Lal Pathlabs Ltd.

21 Mar 2022

2775.30

-2.70%

Dr Lal Pathlabs - Flat quarter but expanding pan India presence

By Ketan Sonalkar

Investor interest in the diagnostics space is growing, and the past few years saw plenty of action in the sector - takeovers and inorganic expansion by larger diagnostic chains buying out regional players. In addition, we witnessed the entry of pharma players like Lupin and Mankind Pharma. There were listings of two diagnostic companies in the last year, and the impending IPO of Pharmeasy’s holding entity API Holdings.

Dr Lal Pathlabs is the leader in the diagnostics industry and is also amongst the first to get listed on the stock exchanges. In Q3FY22, it completed the acquisition of the Mumbai-based Suburban Diagnostics, which bolsters its presence in the western region. However, declining profitability in Q3 is a signal that diagnostic companies need to focus on regular or non-Covid revenues as the pandemic wanes and life gets back to normal.

Quick Takes

The company completed the acquisition of Suburban Diagnostics in an all-cash deal for an enterprise value of Rs 925 crore
Revenues grew 9.8% YoY to Rs 496.9 crore in Q3FY22
Revenues from non-Covid business stood at Rs 438 crore with ‘Swasthfit’ contributing 15% to total revenues
Covid and allied contributed 11.8% to revenue in Q3FY22 with 5.8 lacs RT-PCR tests
Net profits dropped sharply by 39% YoY to Rs 57.3 crore in Q3FY22

Diagnostic services companies were quick to capitalise on the opportunity in adversity since the onset of the pandemic in Q1FY21. Surging healthcare spending and demand for Covid-19 tests led to multifold gains for pathology firms. Dr Lal Pathlabs recorded its highest ever annual net profits in FY21 at Rs 280.1 crore along with highest ever annual net profit margin at 18.8%. Similarly, Metropolis Healthcare and Thyrocare too recorded highest ever annual net profits in FY21 at Rs 197.6 crore and Rs 119.8 crore respectively. These gains have started to fade as outbreaks have eased, testing for air travel is not mandatory anymore, and most of the states have completely opened up. Dr Lal Pathlabs follows this pattern with net profits falling sharply in the last two quarters.

Falling profitability sounds the alarm bell

The Q3FY22 results for all the diagnostic companies display a significant fall in profitability. Dr Lal Pathlabs saw a steep fall of 39% in its YoY net profit growth.

The story was the same for Metropolis Healthcare as well as Thyrocare saw net profits decline by 29.9% and 33.6% respectively. The major reason for the drop in profitability was the reduced number of Covid related tests. Over the last two years, Covid testing played a crucial role in pandemic management. With the third wave receding, diagnostic companies need to rejig their models in order to improve profitability in other verticals. Dr Lal Pathlabs has not increased its non-Covid test prices over the past four years and a price increase in coming quarters will aid profitability.

Regular testing picks up as Covid related testing declines in Q3FY22

Consolidated revenues in Q3FY1 stood at Rs 509 crore, a YoY increase of 9.2%. Net profits stood at Rs 57.3 crore, a YoY decline of 39%. Revenues declined marginally on a sequential basis, but profits declined drastically to Rs 57.3 crore, nearly half of the Q2FY22 profits of Rs 95 crore.

A closer look at the split between Covid and non-Covid revenues shows that there is a gradual recovery in the non-Covid business. In quarters when the spread of the Covid was high like Q1FY22, besieged by the second wave, Covid related revenues were the highest. In Q3FY22, with the third wave of the Omicron variant receding, the Covid related revenues are down 75% from their peak levels.

Within the Covid related business, there is a split between Covid-19 business which encompasses RT PCR tests and antibody tests. Covid allied revenue includes IL-6 & D-Dimer, CRP, Ferritin & LDH tests.

Expanding presence from North India to across the country

Acquisition of city-specific and regional diagnostic chains is a growth strategy adopted by two of the leading players in the diagnostics chain space–Dr Lal Pathlabs and Metropolis Healthcare. Both companies bid for the Mumbai-based Suburban Diagnostics and Dr Lal Pathlabs acquired it. The acquisition gives it access to 44 laboratories, diagnostics centers and around 150 collection centers.

The management said that the western India region is a strategic priority. It plans to leverage the brand recognition of Suburban Diagnostics, wide network and professional management team to accelerate its growth trajectory. With this acquisition, 44 laboratories of Suburban got added to its existing 230 labs, taking the total to 274. During the Q3FY22 earnings call, the management estimated western India to contribute 28% of total revenues post the acquisition against the existing 10%. They expect the Delhi NCR region, their highest contributing region to contribute 34% in the expanded network.

The company is also scouting for suitable acquisition targets in South India and is keen to expand its presence in the region. While Dr Lal Pathlabs completed the Suburban Diagnostics acquisition, close peer Metropolis Healthcare bought Hitech Diagnostic Centre in South India in October 2021.

Integration of Suburban is critical to improving synergies

While prima facie the Suburban acquisition gives Dr Lal Pathlabs a strategic advantage in western India, there are many loose ends that need to be tied up in order to harness the full potential of the deal. Suburban was awarded the contract for RTPCR testing at Mumbai airport and this was its major income for the past few quarters. These tests were charged at around Rs 4000 per test and were later capped at Rs 1900 by the government. This is expected to taper off with testing norms being relaxed for international travel. Suburban’s costs per test/set of tests is higher than Dr Lal Pathlabs by 10%-20%, which may lead to patients gravitating towards Dr Lal Pathlabs for cost efficiency. Suburban’s margins are also lower than Dr Lal Pathlabs. The management has indicated that it would continue using the Suburban brand for now and look at integrating the brand at a later date, but is willing to evaluate an option of dual branding for Suburban centres.

Dr Lal Pathlabs is on its way to become a truly pan India diagnostic chain. Its focus on the non Covid tests and efficient integration of Suburban hold the key for growth in the next few quarters. Within the diagnostics space, this market leader is one that may pique investor interest.

Dr. Lal Pathlabs Ltd. is trading above its 100 day SMA of 2734.9

Mutual Funds News

TREND | 17 Mar 2022

MF Buys: What did the smart money buy in February 2022?

By Ketan Sonalkar

Markets have grown volatile with inflation, rising crude prices and the Russia Ukraine war, putting some sectors back on the radar of MF investors as valuations start looking attractive again. During February 2022, Indian mutual fund managers made a few bets, and domestic mutual funds have continued to buy stocks in sectors that have growth potential.

Thisscreener shows stocks where mutual funds increased holdings in February 2022. Fund managers had their eye on a housing finance company, a few pharmaceutical firms, an insurance company as well as an energy exchange.

HDFC (Housing Development Finance Corporation) - Affordable housing gives lending a boost despite low interest rates

Demand in the real estate sector is reviving, with strong traction in property sales, falling inventory levels and new project launches driving home loan growth. In Q3FY22, it recorded its highest quarterly consolidated net profits in the last eight quarters at Rs 5.837 crore.

HDFC is one of the largest NBFCs in the housing finance business. In December 2021, it recorded its second highest monthly individual disbursements ever. During 9MFY22, 30% of home loans were availed by customers from the Economically Weaker Section (EWS).

Around 2.7 lakhs of home loan customers availed benefits under the Cdit Linked Subsidy Scheme (CLSS), with cumulative disbursements of Rs. 45,914 crore and a subsidy amount of Rs. 6,264 crore.

Fund managers who increased their holdings in HDFC

Buyers in HDFC include Hiten Shah for Kotak Equity Arbitrage Fund Growth scheme, Anish Tawakley, Manish Banthia and Priyanka Khandelwal for ICICI Prudential Business Cycle Fund Regular Growth scheme, Raviprakash Sharma for SBI ETF Sensex scheme and Milind Agrawal for SBI Banking & Financial Services Regular Growthscheme.

M&M (Mahindra & Mahindra) - Success of new launches drives growth

Mahindra & Mahindra manufactures automobiles, farm equipment and automotive components. Its recent automotive launches XUV 700 and Thar have received a very positive response. The XUV 700 alone registered more than 100,000 bookings since its launch four months ago. In Q3FY22, it also sold its highest ever number of EV 3 wheelers in a quarter.

The company also witnessed the highest sales revenue in the last ten quarters at Rs 23,785.5 crore in Q3FY22. The net profits too were the highest in the last ten quarters at Rs 1.987.4 crore. One roadblock faced currently is the shortage of semiconductor chips for vehicles, which has led to a delay in delivery of vehicles. The management expects an improvement in availability of semiconductors, and this would aid the volume growth in Q4FY22.

Fund managers who increased their holdings in Mahindra and Mahindra

Shares of M&M were added by Manish Banthia, Rajat Chandak and Priyanka Khandelwalto ICICI Prudential Balanced Advantage Fund Growth scheme, Sankalp Baid and Roshi Jain to HDFC TaxSaver Growth scheme, Hiten Shah to Kotak Equity Arbitrage Fund Growth scheme and Sailesh Jain to Tata Arbitrage Fund Regular Growthscheme.

IEX (India Energy Exchange) - Unleashing the power of “One Nation One Grid”

IEX is one of two energy exchanges in India. IEX is leading the energy sector transformation by enhancing efficiency through competitive power prices and flexible power procurement for the distribution utilities as well as for the industrial consumers. IEX power price is a function of demand and supply and serves as a benchmark for the entire power sector value chain.

During Q3FY22, volumes on the exchange grew by 37% YoY with 27.6 BU volumes traded versus 20.1 BU in Q3FY21. Revenue for the quarter increased by 32.4%, to Rs 126.7 crore from Rs 95.7 crore in Q3FY21.

The company is awaiting approval to launch the LDC (load dispatch centre) consisting of fortnightly, quarterly, monthly and yearly contracts which will significantly boost volumes on the platform. With the launch of LDC and successful implementation of MBED Phase-1, a multifold increase in the traded volumes on the company’s platform are expected.

Fund managers who increased their holdings in IEX

Shares were purchased by Hiten Shah for Kotak Equity Arbitrage Fund Growth scheme, Harshal Joshi and Nemish Sheth for IDFC Arbitrage Fund - Regular Plan - Growth scheme, Sailesh Jain for Tata Arbitrage Fund Regular Growth scheme and Krishan Kumar Daga, Arun Agarwal and Sankalp Baid for HDFC Arbitrage Fund Wholesale Plan Growthscheme.

Cipla - Gaining market share globally in respiratory drugs

Cipla is a leading Indian pharmaceutical company. It has a strong focus on chronic and acute therapies and complex products. It caters to the branded and generic markets of India, US and South Africa. It leads in respiratory categories such as gAlbuterol and gAfrometro

Cipla’s respiratory products continue to report strong growth traction in US generics. It has garnered a 15.9% share of the total gAlbuterol market and a 26.8% share in the overall gArformoterol market.

In Q3FY22, the India business grew by 13% YoY led by sustained momentum across core therapies and traction in flagship brands and South Africa private business grew 16% YoY. The key generic drug launches namely Abraxane, Revlimid, and Advair are the main growth drivers for the company going ahead.

Fund managers who increased their holdings in Cipla

Buyers in Cipla included R.Srinivasan, Dinesh Ahuja and Mohit Jain for SBI Equity Hybrid Fund Regular Payout Inc Dist cum Cap Wdrl scheme, Rajeev Thakkar, Raunak Onkar and Raj Mehta for Parag Parikh Flexi Cap Regular Growth scheme, Neeraj Kumar and Arun. R for SBI Arbitrage Opportunities Fund Regular Growth scheme and Manish Banthia, Rajat Chandak and Priyanka Khandelwal for ICICI Prudential Balanced Advantage Fund Growthscheme.

HDFC Life - Rapidly gaining market share within private insurance companies

HDFC Life is amongst the fastest growing private sector insurance companies in India. The value of new business (VNB) grew 22% to Rs 694 crore in Q3FY22 from Rs 570 crore in Q3FY21. The company has posted a 27% surge in total premium collection to Rs 12,254.8 crore, driven by a 33% jump in new business premium (NBP), while the renewal premium income also moved up 21%.

It saw the highest market share amongst private insurers with a 21.7% market share of NBP in Q3FY22. Due to a revision in the reinsurance costs, the prices of policies in the protection category saw an increase of 15-25%. Demand in individual term insurance is expected to remain buoyant given under-penetration of the market and increasing product awareness.

Fund managers who increased their holdings in HDFC Life

Shares of HDFC Life were added by Milind Agrawal to SBI Banking & Financial Services Regular Growth scheme, Sailesh Jain to Tata Arbitrage Fund Regular Growth scheme, Hiten Shah to Kotak Equity Arbitrage Fund Growth scheme and Kinjal Desai, Anand Gupta and Anju Chhajer to Nippon India Arbitrage Fund Growthscheme.

Lupin - Expanding vertical into diagnostic space

Lupin is an Indian pharmaceutical MNC with manufacturing facilities and R&D centers across the globe. The company's key focus areas include pediatrics, cardiovascular, anti-infectives, diabetology, asthma and anti-tuberculosis.

Lupin recently forayed into the diagnostics space. It is ramping up collection centers/labs for the diagnostics business. It currently has about 3-4 owned/managed labs each in the Diagnostics business. It expects to launch an additional eight in Q4FY22. About 200 collection centers have already been commercialized. The management expects FY23 to be a ‘defining year’ for the diagnostics business.

Fund managers who increased their holdings in Lupin

Shares of Lupin were added by Sankaran Naren, Priyanka Khandelwal and Dharmesh Kakkad to ICICI Prudential Value Discovery Fund Growth scheme, Hiten Shah to Kotak Equity Arbitrage Fund Growth scheme, Gopal Agrawal and Sankalp Baid to HDFC Large and Mid Cap Fund Growth scheme and Priyanka Khandelwal, Anish Tawakley and Vaibhav Dusad to ICICI Prudential Bluechip Fund Growthscheme.

Cummins - Global demand drives up a record quarter

Cummins is a leading capital goods manufacturer. Its mainstay is the manufacture of diesel engines used in diesel generators, automobiles and farm equipment. Demand for diesel engines is at an all-time high around the world currently, possibly on account of cleaner diesel technology. In Q3FY22, the company recorded its highest quarterly revenues and net profits in the last ten quarters. Revenues stood at Rs 1.804.7 crore and net profits stood at Rs 249.5 crore.

The company saw good demand across key end sectors – data center, healthcare, commercial real estate and manufacturing. Demand in key end export markets - APAC and the Middle East is continuing to pick up, while LatAm is lagging behind. Europe is doing very well, whereas Africa remains a concern as demand remains very subdued. The management is working towards achieving an EV economy via its battery companies, companies with battery integration into vehicles, and companies with hydrogen base products.

Fund managers who increased their holdings in Cummins

Buyers in Cummins include Anil Shah and Vinod Bhat for Aditya Birla Sun Life Flexi Cap Fund Growth scheme, Harsha Upadhyaya, Abhishek Bisen and Devender Singhal for Kotak Multicap Fund Regular Growth scheme, Anil Shah for Aditya Birla Sun Life Mid Cap Fund Growth scheme and Aniruddha Naha, Vivek Sharma and Kunal Jain forPGIM India Midcap Opportunities Fund Regular Growthscheme.

CCL Products - Optimising operations for improved profitability and efficiency

CCL Products is the largest manufacturer and exporter of instant coffee in India. With increasing shipping costs, the cost of exports from India has gone up considerably and impacted profitability. The company has processing plants in Vietnam and sources its green coffee from there. To mitigate the increase in logistic costs and in order to maximize the profitability and optimize operating costs, it will service domestic markets from domestic plants and use its Vietnam plants for exports.

The company has expanded its domestic retail outlets distribution network to 100,000 plus from 70,000 plus by the end of Q3FY22 with 300-350 distributors across the regions. Out of this 75% of the outlets are in South India. The online business accounts for 10% of overall retail business with scope for further expansion.

Fund managers who increased their holdings in CCL Products

Addition of CCL Products to portfolios were made by Mohit Jain and R. Srinivasan to SBI Magnum Global Fund Regular Payout Inc Dist cum Cap Wdrl scheme, Shreyash Devalkar and Hitesh Das to Axis Flexi Cap Fund Regular Growth scheme, Anupam Tiwari and Sachin Jain to Axis Multicap Fund Regular Growth scheme and Venugopal Manghat, Vihang Naik and Sonal Gupta to L&T India Value Growthscheme.

Laurus Labs - Expanded capacities to play out in FY23

Laurus Labs is a pharmaceutical and biotechnology company that has been on the radar of investors for the past few years on account of its acquisitions and expansion of production facilities. Its FDF (fixed dose formulation) brownfield expansion is nearing completion and is expected to be operational in H1FY23. Management expects full utilisation of the 10bn tablet capacity by Q1FY24.

In the bio division, two fermenters have been commissioned, taking the total operational capacity to 180KL as on December 21. Benefits of the full operational capacity will reflect from Q4FY22 onwards. The company is acquiring an additional land parcel to build 1mn litres of fermentation capacity.

Fund managers who increased their holdings in Laurus Labs

Shares of Laurus Labs were purchased by Hiten Shah for Kotak Equity Arbitrage Fund Growth scheme,Aniruddha Naha, Vivek Sharma and Kunal Jain for PGIM India Midcap Opportunities Fund Regular Growth scheme, Vrijesh Kasera for Mirae Asset Healthcare Fund Regular Growth scheme and Mahendra Kumar Jajoo, Harshad Borawke and Vrijesh Kasera for Mirae Asset Hybrid Equity Fund -Regular Plan-Growthscheme.

Metropolis Healthcare - Expanding presence in South India as well as smaller towns

Metropolis Healthcare is a leading diagnostic chain. Q3FY22 saw the completion of its acquisition of Hitech Labs, a South India based chain. This deal was pending for nearly a year on account of Covid-19, and finally achieved closure with 31 laboratories and 68 collection centers being added to Metropolis tally.

Metropolis reported a contraction in operating margin to 26.2% in Q3FY22 due to investments in digital infrastructure and increase in employee cost on account of additions in leadership team and front-end staff. The margin is expected to improve in Q4FY22, with the increase in volume from government contracts and benefits from digitisation.

The management said that they are also working towards expanding capabilities in molecular diagnostics, oncology, cytogenetic etc. They have also evaluated and invested in a separate health tech business so that it creates a growth engine for the organisation in future. Over the next three years, they plan to focus on expansion in tier-II and tier-III cities in India, by adding 90 more labs and about 1,800 service collection centers in 100 to 150 more cities in India.

Fund managers who increased their holdings in Metropolis Healthcare

Additions of Metropolis Healthcare were made to portfolios by Priyanka Khandelwal and Harish Bihani for ICICI Prudential Long Term Equity Fund (Tax Saving) Growth scheme and ICICI Prudential Smallcap Fund Growth scheme, Priyanka Khandelwal and Prakash Goel forICICI Prudential Multicap Fund Growth scheme,and Mahesh Patil and Kunal Sangoi for Aditya Birla Sun Life Focused Equity Fund Growthscheme.

Godrej Consumer Products Ltd.

07 Mar 2022, 04:24PM

1240.60

-0.51%

Godrej Consumer Products – Heading for revival under new leadership?

By Ketan Sonalkar

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Godrej Consumer Products is the second largest FMCG (fast-moving consumer goods) company in India by annual revenue. The last two years saw the company’s performance decline as compared to its peers. A part of this can be attributed to the exit of its erstwhile CEO, Vivek Gambhir in June 2020, who resigned citing personal reasons. For a company with multiple brands and businesses spread across many countries, the absence of a stable leadership and a professional CEO was a setback. The management found a replacement in Sudhir Sitapati, who took over in October 2021 as the CEO and investors are banking on the change of guard to alter its declining fortunes.

Quick Takes

Brand restructuring with the sale of Bblunt to Honasa Consumer for a consideration of Rs 84.5 crore in February 2022
Consolidated revenues grew 8% YoY to Rs 3,325 crore in Q3FY22
EBITDA for India business stands at Rs 476.1 crore in Q3FY22 down 1.53% YoY
Latin America and SAARC delivered highest growth of 19% in constant currency terms with sales of Rs 198 crore in Q3FY22
The personal care segment in India grew by 12% in Q3FY22

Performance improving over the last three quarters

Consolidated revenues for Q3FY22 grew 8% YoY to Rs 3,325 crore and net profit grew 5.2% YoY to Rs 527.6 crore. The company increased its product prices in response to the rising raw material costs, which helped the company maintain its higher sequential net profit streak for the third quarter in a row.

The Q3FY22 results saw a sequential rise in the consolidated revenues and profits of the company for the third consecutive quarter. While it operates in several geographies across the globe, each with its own set of challenges, the consolidated numbers point to an overall recovery for the company.

Commenting on the results, Sudhir said that they are on a journey to reduce inventory and wasted cost and deploy this to drive profitable and sustainable volume growth across the portfolio through category development.

While the business is spread across multiple categories across many countries, the India business is the highest revenue contributor with more than 50% in Q3FY22. This is followed by Africa, US and Middle East countries at 22%, while Indonesia contributed to 16% of revenues this quarter.

The YoY sales for respective regions also differ. In Q3FY22, while India business sales grew by 8% YoY, the Africa, US and Middle East business grew by 12% YoY. Latin America and SAARC were the best performing regions with a 19% YoY sales growth. Indonesia was a laggard registering a negative growth of 2% YoY. Apart from India, growth for all other regions is considered in constant currency terms.

In Indonesia, during the first wave of Covid-19 in mid-2020, Saniter, a disinfectant brand was launched. While the brand did very well during the Covid period, too much focus on Saniter came at the expense of the core portfolio. With the pandemic impact waning and increased investment in the core portfolio, the core volumes are starting to grow, but the Saniter base is pulling down overall results. According to the management, Indonesia results will take a few quarters to improve.

The revenue growth in the Africa, US and Middle East business is on account of dry hair and wet hair care products and the encouraging response to Goodknight Power Shots aerosol in Nigeria.

Along with the sales growth in respective geographies, it becomes pertinent to note the EBITDA margins from each of the regions. The India business delivered the highest EBITDA margin of 25.2% in Q3FY22 though lower by 3% as compared to Q3FY21. Similarly the EBITDA margins also reduced in the Indonesia business to 21.2% from 25.3% in Q3FY21. The margins nominally improved in the Africa, US and Middle East as well as LatAm and SAARC regions.

The India business not only contributes highest to Godrej Consumer’s revenues, it also earns the highest in terms of operating margin. LatAM and SAARC earn the lower margin for the company.

Coming to the categories that make up the total product suite for the India business, household insecticides and hair colour are the dominant categories with 39.5% and 31.9% respectively. Soaps follow with a significant contribution of 13.4% of the sales.

In Q3FY22, the overall home care category (household insecticides, room fresheners and fabric conditioners) grew 4% YoY with sales of Rs 908 crore. In household insecticides, a new product, Jumbo Fast Card was received well by customers. The company plans to leverage digital channels in order to further penetrate these categories.

In the personal care category (soaps, handwash, sanitisers and hair colour) soaps and hand wash continued to deliver double digit growth, thanks to the change in customer habits of frequently washing hands since the outbreak of the pandemic. Hair colour did not grow at the same pace as soaps but the management expects to improve this with new product launches.

Among the issues identified in the India business, are the large number of SKUs. While the total SKU count is around 500, each store keeps only 12. The management intends to reduce these over time. Inflation of key raw materials, crude oil, palm oil and tin is another factor that will continue to be an issue over the next few quarters.

Maintaining its runner up position in the FMCG sector

Over the last two years, most FMCG players have seen a two-year net profit CAGR growth of more than 25% and Godrej Consumer products lags here with a two-year net profit CAGR growth of 18.5%. Hindustan Unilever continues to be the undisputed leader of the sector with more than 3X sales of its next competitor, Godrej Consumer Products. However, the Q3FY22 results see Godrej Consumer emerge with YoY revenue and profit growth metrics that are better than most other competitors.

In the fiercely competitive FMCG sector, Q3FY22 results saw Marico and Procter and Gamble delivering negative YOY growth on profitability. Dabur’s profitability grew nominally by 2.3% YoY, and Godrej Consumer Products was the runner up with a 5.1% YoY profitability growth. Hindustan Unilever led the pack with 18.6% YoY growth in profitability.

The YoY rise in both revenue and profitability can be attributed to hike in prices, in response to the raw materials and logistic costs. Price plays an important role in the FMCG sector and price wars are frequently seen across categories by rivals. Godrej Consumer Products has stayed ahead of the pack, in this quarter despite hiking prices of its products. Though volumes for categories like soap and hair colour were flat, the hike in prices added to the margins.

The path ahead - Roadmap set by new leadership

Investor expectations from the new CEO can be judged from the fact that merely on the announcement of his appointment in May 2021, the stock price gained 10%. Expectations are also high as he was earlier part of the leadership team at the FMCG leader Hindustan Unilever. What has made his task slightly easier is that the company started showing signs of revival two quarters prior to his taking charge.

Immediately after taking over, during a strategy meet in December 2021, Sudhir spelled out the direction and broad goals for the company. He emphasised that the company will continue to focus on three existing categories - Household Insecticides, Air Care, and Hair Colours - in both domestic as well as international markets for growth, as it believes there is "plenty of opportunity" in these areas. The company as per its retail strategy would remain channel-agnostic and follow the consumer first policy and be present whether online or offline, wherever shoppers shop.

Another key highlight was the identification of the high complexity of multiple SKUs leading to a lack of focus on the core business. Its inventory is 1.7x higher than ideal levels and hence SKU reduction would be a key focus area. A step in this direction was the sale of BBlunt brand to Honasa Consumer Pvt Ltd for Rs 84.5 crore in February 2022. Honasa Consumer is the owner of the Mamaearth brand of consumer products.

Post Q3FY22 results, Sudhir in a press release said that as the next year progresses, he expects volume growth to gradually recover but the EBITDA journey and the margin journey to go up continuously. For investors with an eye on the FMCG sector, Godrej Consumer Products is one to watch out for, particularly if new leadership is able to drive the FMCG behemoth towards narrowing the gap with the market leader.

Godrej Consumer Products Ltd. is trading below its 200 day SMA of 1244.8

Mutual Funds News

TREND | 21 Feb 2022

What did the smart money buy in January 2022?

By Ketan Sonalkar

With markets volatile, some sectors or the other can come on investors’ radar in case they can find value in it. The smart money tries to do that in turbulent markets. Before this turbulence in the markets, the markets seemed to have some legs. During this period in January 2022, Indian mutual fund managers made a few bets. Even though FIIs (foreign institutional investors) sold their holdings in January 2022, domestic mutual funds continued to buy stocks in sectors that have growth potential.

Thisscreener shows stocks where mutual funds increased holdings in January 2022. Fund managers had their eyes on a state-owned infrastructure player, a pharmaceutical firm, a ceramic tiles company as well as a chemical company. An underlying theme for investment is two companies that are likely to benefit from the growing market for electric vehicles.

IDFC - Restructuring to strengthen the balance sheet of bank

IDFC is the holding company of IDFC First Bank and IDFC AMC (asset management company). The company recently announced a restructuring plan which involves the merger of the holding company and the bank, and the sale of the AMC business.

After selling the AMC business, IDFC will be merged into IDFC Bank with proceeds from the sale to be ploughed back into the bank. This is expected to strengthen the bank's balance sheet as well as reduce the complexity and create a single entity.

Fund managers who increased their holdings in IDFC

Fund managers who increased stake in IDFC are Chirag Setalvad and Sankalp Baid who bought for two schemes, HDFC Small Cap Fund Growth scheme and HDFC Childrens Gift Fund scheme, Neeraj Kumar and Arun. R for SBI Arbitrage Opportunities Fund Regular Growth scheme and Hiten Shah for Kotak Equity Arbitrage Fund Growthscheme.

Ipca Labs - Acquisition aids entry into new segments and markets

Ipca Labs is a pharmaceuticals maker with over 350 formulations and 80 APIs (active pharmaceutical ingredients). In November 2021, it acquired a 26.5% stake in Lyka Labs for Rs 98 crore to strengthen its portfolio. Lyka makes and markets injectables, lyophilized injectables, and topical formulations. A significant part of its business is from the rest of the world (ROW) markets. This acquisition is expected to mark its entry into the lyophilized injectables market.

On February 3, 2022, one of the two greenfield manufacturing plants for APIs set up at Dewas with a capex of about Rs 250 crores commenced trial production.

Fund managers who increased their holdings in Ipca Labs

Shares of Ipca Labs were added by Vinit Sambre, Resham Jain, and Jay Kothari to DSP Midcap Fund Growth scheme, Pankaj Tibrewal to Kotak Emerging Equity Scheme Growth scheme, Harsha Upadhyaya to Kotak Equity Opportunities Fund Growth scheme and Chirag Setalvad and Sankalp Baid to HDFC Mid-Cap Opportunities Fund Growthscheme.

NBCC - Infrastructure push by government and entry into airport segment

NBCC’s business verticals include PMC (project management consultancy), EPC (engineering procurement and construction) and real estate. It is a government-owned entity and a beneficiary of a number of infrastructure projects undertaken by the Centre.

Since the last two quarters, the company received many orders including its largest international contract of Rs 1,000 crore for social housing from the Maldives, a Rs 400 crore project from a sports university at Imphal, and the construction of a medical college at Sonipat for Rs 285 crore. The company also entered the segment of airport engineering services, with a contract from Jaipur International airport. The management sees future potential in this segment with the government keen on adding and modernising airports across the country.

Fund managers who increased their holdings in NBCC

Shares of NBCC were added by Hitesh Shahto Kotak Equity Arbitrage Fund Growth scheme,Venugopal Manghat and Praveen Ayathan to L&T Arbitrage Opportunities Fund Regular Growth scheme,Harsha Joshi and Arpit Kapoor to IDFC Arbitrage Fund - Regular Plan - Growth scheme and Rajeev Bhardwaj to Invesco India Arbitrage Fund Growthscheme.

Kajaria Ceramics - Real estate sector driving growth and expansion plans on track

Kajaria Ceramics manufactures glazed as well as unglazed ceramic tiles and sanitaryware. The company sells its products domestically and also exports them to other countries.

The company’s Q3FY22 results are also encouraging. It delivered the highest quarterly revenue in the last 10 quarters at Rs 1,075.7 crore. With the pick-up in demand for real estate and resumption of construction activity, the next few quarters hold potential for the company.

The company is undertaking capacity expansion at three sites in Rajasthan, Gujarat and Andhra Pradesh to add around 12.4 million square metres to its total capacity with an overall capex of Rs. 250 crore. All three expansion projects are expected to be completed in Q1FY23.

Fund managers who increased their holdings in Kajaria Ceramics

Fund managers with growing interest in Kajaria ceramics include Pankaj Tibrewal for Kotak Emerging Equity Scheme Growth scheme, Gopal Agrawal and Sankalp Baid for HDFC Large and Mid Cap Fund Growth scheme, Vineet Maloo and Vinod Bhat for Aditya Birla Sun Life Business Cycle Fund Regular Growth scheme and Pranav Gokhale and Amit Nigam for Invesco India Multicap Fund Growth scheme.

Havells - Powering up segments, expanding FMEG product range

Havells India is a leading player in the electrical cables industry and also an FMEG (fast-moving electrical goods) manufacturing company. The Q3FY22 results saw it generate the highest consolidated revenues in the last ten quarters at Rs 3,713.1 crore. The revenue growth came from all of its operating segments including cables, switchgears, lighting and FMEG products.

The company is also expanding products offered under the Lloyd brand it acquired in 2017. A new washing machine factory at Ghiloth, with a capacity of 3 lakh units per annum commenced operations in December 2021. These machines manufactured would be marketed and sold under the Lloyd brand.

Fund managers who increased their holdings in Havells

Havells India saw buying from Hiten Shah for Kotak Equity Arbitrage Fund Growth scheme, Gaurav Misra and Gaurav Khandelwal for Mirae Asset Large Cap Fund Regular Growth scheme, Neelesh Surana for Mirae Asset Tax Saver Fund -Regular Plan-Growth scheme, and Neelesh Surana and Ankit Jain for Mirae Asset Emerging Bluechip Fund Growthscheme.

NIIT - Restructuring to result in two distinct identities

NIIT provides training services for global corporations. These training services are provided under the CLS (corporate learning segment) vertical and contribute around 88% to the overall revenues of NIIT. The other vertical is the SNC (skill and career group) which is focused on emerging markets, imparting training through a digital learning platform.

The company has proposed a restructuring through which CLS and SNC will become two separately listed companies. The management said that while both CLG and SNC businesses have strong growth ambitions, they have slightly different characteristics. The plan is to transfer the CLG business undertaking to NIIT Learning Systems Ltd (NLSL), a wholly-owned subsidiary of NIIT Ltd. Shareholders holding one share of NIIT will get one share of NLSL.

Fund managers who increased their holdings in NIIT

Shares were added by fund managers, Priyanka Khandelwal and Lakshminarayanan KGto ICICI Prudential ESG Fund Regular Growth scheme, Meeta Shetty and Venkat Samala to Tata Digital India Fund Regular Growth scheme, Samir Rachh, and Kinjal Deasai to Nippon India Small Cap Fund - Growth scheme and Hardick Bora and Vinay Paharia to Union Small Cap Fund Regular Growth scheme.

Minda Corporation - Getting ready to gain larger share of EV components

Minda Corporation is an auto component manufacturer that makes mechatronic components for two and four-wheelers. It is expanding its product offerings in the EV (electric vehicle) space and plans to increase its components per EV going forward. EV orders are for products such as battery chargers, telematics, wire harness and key systems, etc.

The company is focused on two wheelers, three wheelers and CVs (commercial vehicles). It added Hero Electric and BMW as new customers for EV chargers in Q3FY22. The content per vehicle in ICE two-wheelers is just Rs 4,000-6,000 as compared to Rs 14,000-16,000 in the case of EVs. The company expects EVs to contribute 15-20% revenues in the next 4-5 years.

Fund managers who increased their holdings in Minda Corporation

Buyers for Minda Corporation include Anupam Tiwari and Sachin Jain forAxis Multicap Fund Regular Growth scheme, Fatema Pacha and Manish Lodha for two schemes, Mahindra Manulife Multi Cap Badhat Yojana Regular Plan Growth scheme and Mahindra Manulife Flexi Cap Yojana Regular Growth scheme, while Anupam Tiwari and Hitesh Das bought for Axis Small Cap Fund Regular Growth scheme

Larsen and Toubro Infotech (LTI) - Strong performance driven by consistent growth

LTI is an IT services company that offers application development, digital solution services to BFSI, retail, health, media & hi-tech verticals. The company’s revenues are consistently growing sequentially over the last six quarters with highest ever quarterly revenues in Q3FY22 at Rs 4.237.5 crore.

In Q3FY22, LTI signed a large deal of $31 million with one of the major pharma companies in the US to upgrade their legacy IT infrastructure. The management also indicated that this account has scope for expansion.

The company plans to add 5,000 new entry-level employees by the end of FY22. LTI had hired 1,000 employees in the first two quarters, who were being trained on new technology, and will be deployed in projects.

Fund managers who increased their holdings in LTI

Growing interest in LTI saw buying from Anupam Tiwari and Sachin Jainfor Axis Multicap Fund Regular Growth scheme, Hiten Shah for Kotak Equity Arbitrage Fund Growth scheme, Shreyash Devalkar and Hitesh Das for Axis Flexi Cap Fund Regular Growth scheme and Sailesh Raj Bhan and Kinjal Desai for Nippon India Large Cap Fund - Growth scheme.

Rain Industries - Riding out the metal demand growth cycle

Rain Industries is one of the world's leading producers of calcined petroleum coke, coal tar pitch and other high-quality basic and specialty chemicals. It operates in three key business verticals–carbon, chemicals and cement.

The company registered its highest consolidated quarterly revenues in Q2FY22 at Rs 3,907.7 crore. It is a beneficiary of the rising demand for metals globally. Its key product CPC (calcined petroleum coke) contributes 50% of its revenues and is a key product for metal production.

Fund managers who increased their holdings in Rain Industries

Rain Industries saw portfolio additions by Hiten Shah to Kotak Equity Arbitrage Fund Growth scheme, Venugopal Manghat and Praveen Ayathan toL&T Arbitrage Opportunities Fund Regular Growth scheme, Harsha Joshi and Arpit Kapoor toIDFC Arbitrage Fund - Regular Plan - Growth scheme and Bhavesh Jain and Dhaval Dalal to Edelweiss Arbitrage Fund Regular Growth scheme.

Neogen Chemicals - Expanding to capture EV battery market share

Neogen Chemicals manufactures specialty organic bromine-based chemical compounds as well as specialty inorganic lithium-based chemicals compounds. It listed on the stock exchanges in May 2019 and has since then delivered more than 4X returns to its investors.

In Q3FY22, the company posted its highest ever quarterly revenues at Rs 132.7 crore and highest ever net profits at Rs 10.5 crore. It is also increasing its capacity for electrolyte for lithium-Ion batteries and advanced chemistry cells at its Vadodara facility with a capex of Rs 35 crore. The management envisages a growing potential for the lithium-ion batteries as the adoption of EVs (electric vehicles) gains momentum.

Fund managers who increased their holdings in Neogen Chemicals

Buyers for Neogen include Saurabh Pantfor SBI Large & Midcap Fund Regular Payout Inc Dist cum Cap Wdrl scheme, Ashish Naik and Hitesh Das for Axis Special Situations Fund Regular Growth scheme and Rama Iyer Srinivasan, Dinesh Ahuja and Mohit Jain for SBI Magnum Children's Benefit Fund- Investment Plan Regular Growthscheme.

Astral Ltd.

15 Feb 2022

1282.50

-0.38%

Astral expands its horizons - from pipes to a building materials company

By Ketan Sonalkar

Astral is well on its way to becoming a building products company. From being a producer of plumbing pipes, it has over time expanded its product range into adjacent categories like drainage pipes, fire sprinkler pipes, adhesives, and storage water tanks. It announced its entry into sanitaryware and faucets in October 2021. This will be keenly watched by investors, given its track record of successful expansion into new product categories in the past. The Q3FY22 results also illustrate the company’s ability to hang on to its leadership position despite roadblocks.

Quick Takes

Astral’s consolidated net profit grew 3.3% YoY to Rs 127.3 crore
Consolidated revenues grew 22% YoY to Rs 1,105.1 crore from Rs 903.6 crore
Piping vertical grew YoY by 25% to Rs 838 crore and adhesives vertical grew YoY by 16% to Rs 261 crore
Delayed projects at Bhubaneswar, Hosur and Ahmedabad are complete and will start operations in Q1FY23
Price hikes of 10% in Q3FY22 cushioned the company’s margins against higher raw material costs, leading to an EBITDA margin of 18%
Entry into the sanitaryware and faucets segment from Q1FY23 onwards

Revenues grew across verticals, but profits dipped with rising raw material costs

Astral experienced challenges in Q3FY22 with the spread of the Omicron variant. This affected economic activity and limited movement with localized lockdowns and curfews. The price of key raw materials PVC (polyvinyl chloride) and CPVC (chlorinated polyvinyl chloride) were also higher during the quarter. The company was able to pass some of the rise in costs through price hikes and maintain its margins.

The consolidated revenues grew 22% YoY to Rs 1,105.1 crore in Q3FY22, but the rise in raw material prices led to net profit growth of barely 3.3% YoY to Rs 127.3 crore during the quarter.

The management during the post-earnings conference call said that they have existing relationships for the supply of PVC, with Reliance Industries a key supplier. The availability of these raw materials is currently erratic and there are a limited number of suppliers. Given the rising demand, the management expects that suppliers would increase production. However, their suppliers have no stated expansion plans at present.

Astral asserts itself as the industry leader

Astral in this quarter also remains the growth leader. Among peers in the PVC and UPVC pipes segment, Astral’s YoY revenue growth for Q3FY22 was the highest at 22.4% followed by Prince Pipes at 20.9%.

In terms of profit growth, while Supreme Industries and Finolex Industries had a negative growth rate, Prince Pipes grew by only 0.8%. While the net profit YoY growth number of 3.3% for Astral may not be impressive, it speaks to how Astral has outpaced the competition with operational efficiency despite rising raw material prices.

Pipes clock higher YoY revenue growth in Q3FY22

Astral has two verticals–pipes and adhesives. In Q3FY22, pipes registered a higher YoY growth of 25% as compared to 16% YoY growth for adhesives. The management said that lower growth in adhesives was on account of a shortage of silicon, due to which production was hampered for it’s UK subsidiary. They expect the supply of silicon to improve in Q4FY22, and adhesives would see a higher growth rate as raw material availability improves.

The company also put out the 9MFY data for 9MFY22 as well as the preceding three years. There is sharper growth substantially across both the verticals in 9MFY22. The management, during the earnings call post Q4FY21 results, had guided for a target of Rs 1,000 crore revenue from the adhesives vertical for FY22. The management is confident that with the easing of raw material supplies in this quarter, they will be able to meet the revenue guidance for the adhesives business.

A pick-up in housing projects this quarter was a key driver for growth in the pipe vertical. The company also increased the prices of some CPVC products by as much as 10%, aiding higher revenues.

Along with the growth in the last few quarters, the operating margin of the company dropped significantly to 18% in Q3FY22 compared to 21.4% a year ago. The company expects these to improve in the coming quarters with raw material prices cooling off from their peak levels.

Astral also completed its expansion projects at its Bhubaneswar, Hosur and Ahmedabad units. These projects were delayed due to Covid-19 and will be operational from Q1FY23 onwards. These include capacity expansion as well as new product lines. The management said that there are currently no new expansion plans and it would wait for new products and supply chain from these plants to stabilize over FY23. It expects the benefits of these capacity expansion projects to accrue from FY24 onwards.

The company currently holds Rs 300 crore cash on its books and would take a decision in the next quarter on going forward with a share buyback, higher dividends, or fresh capex in FY23.

Entry into the sanitaryware and faucets segment

The major development this quarter is the announcement of Astral’s product expansion into the sanitaryware and faucets segment. The designs are complete and the company will be outsourcing the manufacturing till it is able to gauge the market response to the product. The vendors for outsourcing have been identified and the company plans to launch the product range in Q1FY23. Astral has roped in an experienced hand - former executive director and CEO of Cera Sanitaryware, Atul Sanghvi to head this venture.

The management took a cautious stance on plans for this venture. They are expected to comment on the capex and growth strategy for this venture in the conference call for Q4FY22. Astral plans to double its revenues over the next five years. Its new product direction will be critical to that goal.

Astral Ltd. has an average target of 2088.50 from 8 brokers.

Havells India Ltd.

09 Feb 2022

1537.20

-2.65%

Havells goes higher, but profitability hit by rising raw material costs

By Ketan Sonalkar

The third quarter is one that typically witnesses higher sales of electrical appliances due to festive demand for FMEG (fast-moving electrical goods) products. This year was different however with a muted festive season, and the onslaught of the Omicron wave in December 2021, impacting sales for Q3FY22. Havells India, a leading player in electrical appliances and electrical cables was able to improve its revenues on a YoY basis supported by higher demand for cables and switchgears from infrastructure projects which picked up in Q3FY22.

Quick Takes

Consolidated revenues grew 15% on a YoY basis to Rs 3,713.1 crore in Q3FY22
Cables vertical saw highest YoY growth of 33% at Rs 1,206 crore in Q3FY22 among all the verticals
EBITDA margin declined 12% YoY to Rs 440 crore, due to an increase in raw material cost and delayed price hikes
The company is planning a price hike of 5-10% for Q4FY22 to offset higher raw material costs
New washing machine factory at Ghiloth, with a capacity of 3 lakh units per annum commenced operations in December 2021

Infrastructure projects drive revenue growth in Q3FY22

Q1FY22 saw the second wave of Covid-19 and subdued numbers, but revenues and profits have been rising since then. However, higher raw material costs meant the growth in revenues did not translate into a commensurate rise in profits.

Havells' revenue mix across products is spread across its different verticals. Cables, the core business of the company, contributes the highest to its revenue mix at a third of the total revenues. The company’s strategy to enter the FMEG space a few years ago is bearing results with this vertical being the second-highest revenue contributor. Lloyd, a consumer electricals company acquired by Havells in 2017, also contributed significantly at 13.7% of revenues. It enabled Havells to gain a foothold in the air conditioners segment with an 11% market share. The company also manufactures white goods like washing machines, refrigerators, dishwashers etc., under the Lloyd brand.

Havells is a diversified player in the electrical industry with products ranging from wires, cables, and switchgear. The company is aggressively increasing its market share in the consumer durables/FMEG (fast-moving electrical goods) space. It has a significant presence in light fitting and fixtures.

In Q3FY22, the company’s revenues grew on a YoY basis across its verticals, with the exception of Lloyd. The cables vertical saw a spike in orders due to the revival of infrastructure projects. New product launches in the FMEG segment like water heaters, fans, mixer grinders played their role in generating higher YoY revenue. The Lloyd vertical saw a decline in revenue due to the competitive pricing in the air conditioners segment, where the company chose not to hike prices this quarter. The company is expanding its capacity under the Lloyd brand with the new in-house washing machines manufacturing facility at Ghilod.

The margin contribution of most verticals shows a healthy trend, with switchgears contributing the highest margins at 39.8% followed by lighting at 33.8%. The laggard here again is the Lloyd vertical, with only 3.6% contribution. One reason for the low contribution by Lloyd is that Havells chose to not increase air conditioner prices in a competitive market. The company expects to hike prices in the next quarter and is also expecting higher demand for air conditioners with the onset of summer.

One cause for concern that investors should note is the continuous decline of operating profit margins. These have steadily declined to 12.1% in Q3FY22 from 16.1% in Q3FY21. The increase in raw material prices over the past year has dented margins and profitability. Commenting on the matter, Managing Director Anil Rai Gupta said the company is seeing an unprecedented rise in raw material prices over the last one year or so. They are expecting to pass on the rise in costs to consumers over the next couple of quarters. As a result, margins should normalize over a period of time. The company expects the rise in raw material prices to taper down or at least stabilize over the next couple of quarters.

When compared to peers, Havells' growth numbers are lower in Q3FY21. V-Guard and Polycab India are Havells’ competitors in both the FMEG and cables vertical. V-Guard saw similar YoY growth in revenues as Havells but its profit growth saw a sharper decline. Polycab registered a YoY growth in both revenues and net profits and this is attributed to a rise in cable sales which contribute 81% of its sales. Similarly, KEI Industries, a pure cable and wire manufacturing company, grew faster than others in the industry.

Havells’ Q3FY22 sales growth was supported by infrastructure projects. Passing on the raw material costs to customers and stabilization of their prices is expected to improve profitability in the next quarter. Aggressive expansion of product categories in the FMEG space, gaining market share in the lighting segment is likely to play out over the next quarters. A favorable combination of these factors might see higher profitability coming back to Havells next quarter

Havells India Ltd. is trading above its 50 day SMA of 1523.0

HDFC Life Insurance Company Ltd.

03 Feb 2022

722.95

-0.13%

HDFC Life holds on to profitability in third quarter, despite higher reinsurance costs

By Ketan Sonalkar

The dynamics of the life insurance industry changed over the last two quarters as the second wave drove rising claims and increased provisions to take care of future claims. In the life insurance industry, Q3 is the weakest quarter in terms of business. Against this backdrop, Q3FY22 results for HDFC Life reflect rising profitability and substantial YoY growth with higher …

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Quick Takes

VNB (value of new business) grew 26% on a YoY basis for the 9MFY22 period to Rs 1,780 crore from Rs 1,410 crore.
APE (annual premium equivalent) for 9MFY22 grew 34% to Rs 12,255 crore
The company hiked prices of term insurance products by 15-25% in Q3FY22
Individual WRP (weighted received premium) two-year CAGR at 14% vs. 5% for industry
Exide Life became a subsidiary of HDFC Life from January 1, 2022, post approval by IRDAI
Persistency ratios improved across time periods with 13^th month persistency at 92% for 9MFY22

A buoyant quarter post the second wave

HDFC Life sawa YoY improvement in revenues in the last two quarters after a YoY decline in Q1FY22. Its gross premium income in Q3FY22 remained healthy with a 27% YoY increase with higher renewals and new business premium. Sequentially, premiums increased by 5.9% to Rs 12,255 crore from Rs 11,445 crore in Q2FY22. On an APE (annualised premium equivalent) basis, premiums increased by 20.4% YoY to Rs 2,576 crore. APE is a metric used to map premiums received in the insurance industry. It is the sum of the regular annualized premium from the new business plus 10% of the first single premium in a given period.

Several life insurance companies recently raised the premiums for their products due to higher reinsurance costs. HDFC Life raised prices of its term plan by 15–25% and ICICI Prudential increased by 10%. Managing Director Vibha Padalkar said that they continue to expect pricing and underwriting norms to evolve over time in line with expanding geographic and demographic coverage.

The APEs for new business premiums (NBP) point to a balanced mix of product offerings, each having a significant share of the total NBP. The premium earned from the new policies issued in a given time period (quarter/financial year) is referred to as the NBP for an insurance company. The share of premiums is not only driven by existing products, but also by the addition of new products.

Newly launched ‘Sanchay FMP’ in the deferred annuity segment has generated sales of more than Rs 300 crore since its launch. Another product in the deferred annuity segment, ‘Systematic Retirement Plan’ launched in Q3FY22 is receiving a good response. With increasing life expectancy and inflation in India, the need for retirement planning is growing and this product caters to this segment.

Bancassurance is the strongest distribution channel for HDFC Life, backed by its linkage with group company HDFC Bank. The bancassurance channel also gains its strength from relationships with other bancassurance partners like ICICI Securities, IDFC First Bank, Bandhan Bank, and Yes Bank who onboarded during the last year.

Data for the past four years points to the fact that the bancassurance channel has contributed more than 50% of revenues. Apart from the bancassurance channels, proprietary distribution channels viz. direct and online witnessed 25% growth in revenues, and agency channels witnessed a 35% growth based on individual APE.

Each channel has its strength in a particular type of product. While the bancassurance channel’s strength lies in sales of unit-linked policies, its sale of annuities at 2% is negligible. The direct channel gets the highest contribution from annuities and a miniscule share of term policies at 4%. This is in stark contrast to online channels where term plans form a significant 22% of sales. The online channel also includes sales by online insurance aggregators and is gaining traction over the last two years. The direct and online channels contribute higher margins than agency and banca channels which have a higher commission structure.

Technology aids higher persistency ratios

Persistency ratio is an important metric in the life insurance business and a measure of the percentage of customers continuing to pay premiums. One of the challenges across life insurance companies is to ensure customers renew their premiums on time and HDFC Life has addressed this by increasing persistency for all time periods with the aid of technology.

The company has extensively used AI (artificial intelligence) and ML (machine learning) to understand when customers are likely to make their payments. Cloud telephony based systems ensure that renewal reminders via phone calls are not given randomly but based on renewal dates and more importantly based on how many days before the renewal date a particular customer is likely to make the payment. Acknowledging this, Padalkar said that they were able to increase the persistency for the 61st month, which is more challenging than the others, and expect higher renewals in the future across time periods.

Exide Life merger on track with swift approvals from regulators

One of the biggest developments in Q3FY22 was the acquisition of Exide Life Insurance, announced on September 3, 2021. Approvals from regulators IRDAI (Insurance Regulatory and Development Authority of India) and the CCI (Competition Commission of India) were obtained in record time. Exide Life became a 100% subsidiary of HDFC Life with effect from January 1, 2022.

The management expects the integration to complete by Q2FY23, post which the synergies from the acquisition would play out. The Q3FY22 numbers for Exide Life are not part of the consolidated numbers for HDFC Life, but would be integrated from next quarter onwards. According to the management, Exide Life numbers were in line with their expectations with a YoY growth of 30%.

Covid-19 related claims expected to taper off from Q4FY22

HDFC Life was holding a Covid claims reserve of Rs 204 crore at the end of Q2FY22. Out of this, around Rs 150 crore was utilised to settle Covid-19 claims during Q3FY22. An addition of Rs 55 crore was made to this reserve, which now stands at around Rs 105 crore. This addition was done in December 2021 at the start of the third wave of the Omicron variant, as a provision towards any claims arising out of the third wave. The management said that they are tracking the situation and do not foresee as many claims in the third wave as compared to the first two.

The management remains optimistic on future business growth. Credit protect and annuity are expected to witness healthy momentum ahead. Demand in individual term insurance is expected to rise due to the under-penetration of this segment. Increasing awareness and expectation of a hike in premium rates is likely to spur demand.

This quarter saw HDFC Life retain its VNB margins, and complete the acquisition of Exide Life. A balanced product and channel mix augur well for the company. The last quarter (Q4) is traditionally the one that generates maximum business for insurance companies. Integration of Exide Life, reduction of covid related claims, and introduction of new products promise to make Q4FY22 a keenly watched quarter one by HDFC Life’s investors. It will be interesting to see if the company ends FY22 on a high note like the last financial year.

HDFC Life Insurance Company Ltd. is trading above all available SMAs