Stock market analysis and stories by Ketan Sonalkar

Articles by Ketan Sonalkar

ICICI Lombard General Insurance Company Ltd.

28 Jan 2022

1791.80

-1.87%

ICICI Lombard has a tepid third quarter but retains leadership

By Ketan Sonalkar

The general insurance industry is going through some tough times over the last few quarters and Q3FY22 was no different. Slowing down auto sales and travel restrictions were dampeners this quarter. The silver lining was the rising sale of health insurance policies as uncertainty of the impact of the third wave loomed large. This quarter also saw the addition of another player in the listed space with Star Health, specializing in health insurance making its debut in December 2021.

The leading private general insurance player, ICICI Lombard offers a diversified range of products including motor, health, travel, personal accident, marine, fire and crop insurances. It commands a market share of 8.3% on a GDPI (gross direct premium income) basis as per Dec 2021 IRDA data.

Last year the company acquired the general insurance business of Bharti Axa and ICICI Lombard's results for quarters of FY22 reflect post-acquisition numbers. However, since last year's financials were not adjusted, YoY data is not strictly comparable. The merger also added the crop insurance segment that has a high loss ratio, impacting profitability.

ICICI Lombard is the first among the general insurers to declare Q3FY22 results. Listed on the stock exchanges in September 2017, its stock price saw a fall since the Q3FY22 results were declared and the stock has given negative returns over the last year.

Quick Takes

GDPI was at Rs 4,699 crore in Q3FY22 as against Rs 4,034 crore in Q3FY21
GDPI was at Rs 13,311 crore for 9M FY2022 as against Rs 10,525 crore for 9M FY2021
Covid claims of Rs 560 crore in 9MFY22 was much higher than Rs 150 crore in 9MFY21
Cyclone and flood losses of Rs 82 crore were recorded for 9M2022
Addition of 400 salesforce for retail health vertical in Q3FY22
Post-merger with Bharti Axa, crop insurance constitutes 5% of the product mix

Lacklustre quarter impacted by low auto sales and the third wave

The results for Q3FY22 see a nominal decline YoY in revenues and a nominal rise YoY in the profits of the company. While revenues declined marginally YoY to Rs 438.1 crore from Rs 452.1 crore, profits rose YoY to Rs 317.5 from Rs 313.5 crore. The management said it faced challenges in the motor insurance segment with four-wheelers sales impacted by the shortage of semiconductor chips and lower demand for two-wheelers in the festive season.

Underwriting losses increased during Q3FY22 to Rs 269.1 crore compared to Rs 100.7 crore in Q2FY22, and Rs 135.4 crore in Q3FY21. Consequently, the combined ratio of the insurer for the quarter stood at 104.5% as against 97.9% in Q3FY21, which is a measure of operating profitability.

The revenue mix for ICICI Lombard is dominated by the motor insurance and health insurance verticals. Within motor insurance, the revenues are equally distributed between OD (own damage) and TP (third party) segments.OD is an insurance cover that protects the owner against the loss and damage that occurs due to theft etc. and allows the owner to compensate for repair and replacement expenses. TP is the mandatory insurance cover for a vehicle as stipulated by law. This cover protects the owner against the loss and damage that occurs due to the owner’s vehicle.

Marine and fire insurance have a smaller share in the overall pie but with a market share of 13% and 18% in their respective segments. Crop insurance was not part of ICICI Lombard’s portfolio, but post-Bharti Axa’s merger with the company, it now constitutes 5% of the product mix.

Going deeper into each vertical, motor insurance has its strength in private car insurance with about 55% of the revenues from this segment. While there is pricing competition on the OD insurance from other players, TP policies pricing is decided by the regulator. The management is hopeful of a price hike for motor TP from the regulator in the next financial year. It expects this segment to do better in the next few quarters as sales of four-wheelers will pick up when the semiconductor shortage is resolved.

Similarly, the health vertical comprises health insurance, travel insurance, personal accident insurance products, and group insurance products. The employer group insurance products contribute more than 50% of revenues. ICICI Lombard has long-standing relationships with corporates for group insurance. The company leveraged these to offer revised or higher group cover against the backdrop of the first and second wave of Covid-19. The company also hired 400 salespeople for the health insurance vertical during the quarter. They are not agents, but company employees appointed to grow the health insurance agency channel by recruiting agents, who would be the point of sales.

New tech-driven competitors gaining market share

The industry trends point to a few encouraging signs for this sector. The GDPI for the majority of the insurers is rising for the 9MFY22 period as compared to 9MFY21.

ICICI Lombard also retains the top spot among private insurance players with a 26% YoY growth in GDPI for 9MFY22. Competition from newer companies is perceptible, particularly with players like Acko and Digit who have grown YoY by 151.9% and 91.8% for the same period respectively. They are more technologically focused on business models that are different from traditional models.

The management addressed this concern raised by an analyst about the age companies during the Q3FY22 earnings conference call. The management said they launched an app ‘IL Take Care’, an integrated digital platform, with a host of features so that customers can avail services digitally. These include booking teleconsultations with doctors, finding the nearest network hospital, renewal of motor and health policy directly via the app.

This app saw more than 11 lakh downloads till 9MFY22. The management is also working to make the customer experience better on this app. Another team is working parallelly to enhance the digital initiatives, including technology spends, to stay ahead of the competition. While new-age companies might be running into losses in a bid to capture market share, the management said ICICI Lombard is focused on profitability without losing market share.

In another tech-driven initiative, business sourcing from the company’s website resulted in a 20% rise in business sequentially in Q3FY22. The business sourced from the company’s website grew by 22% for health insurance, by 156% for travel insurance and by 11.9% for motor insurance.

Integration of Bharti Axa yet to play out

Post the merger of Bharti Axa with ICICI Lombard, it is still work-in-progress for seamless integration of both businesses. The process of integration of historical data is expected to be completed over the next two quarters, according to management. Once completed, the integrated data will be able to offer insights that can be leveraged and the benefits would play out from Q2FY23 onwards.

In the current quarter and through 9MFY22, ICICI Lombard has retained its leadership among private insurers. A number of factors that will play out over the next quarter will define its ability to lead the industry. Favourable among them include the resolution of semiconductor shortages and the third wave not being as harsh as the previous two. Travel is also expected to pick up in the coming quarters, which would drive demand for travel insurance. While it appears to be well prepared to take on new-age competitors, the next few quarters will be defining for its leadership position and market share.

ICICI Lombard General Insurance Company Ltd. is trading below its 30 day SMA of 1813.4

Mutual Funds News

TREND | 18 Jan 2022

Mutual fund monthly buys: Where is the smart money moving?

By Ketan Sonalkar

The monthly portfolio disclosures by mutual funds in December give investors insights into what the smart money is doing in the market. It also helps investors understand the sectors and companies that are currently in favour or have fallen off the radar for mutual fund managers.

This screener shows stocks where mutual funds increased holdings in December 2021. Fund managers had their eyes on a state-owned enterprise, a power exchange as well one of the largest IT services companies. They were also interested in an engine manufacturer and a white goods player.

Wipro - New leadership and acquisitions change its trajectory

Wipro is one of India’s leading IT services companies and is currently fourth in terms of market capitalization. It saw a turnaround in its performance over the last six quarters after the new CEO Thierry Delaporte took over in July 2020. This was also aided by the rapid digitalisation across industries since the onset of the pandemic.

It concluded several M&A deals over the past year, including Capco, its biggest-ever acquisition at $1.45 billion. The immediate impact of the Capco acquisition worked well with 22 joint deals for Wipro. It also closed 11 large deals with a total contract value of$600 million in Q3FY22. Significant deal wins saw $50 million accounts grow from 39 to 44 and $100 million accounts grew from 11 to 15 over the last four quarters.

Fund managers who increased their holdings in Wipro

Fund managers who bought shares of Wipro are Raviprakash Sharma for SBI ETF Sensex scheme, Shreyash Devalkar and Hitesh Das for Axis Bluechip Fund Growth scheme, Harsha Upadhyaya for Kotak ESG Opportunities Fund Regular Growth scheme, and Bhavesh Jain and Bharat Lahoti bought for Edelweiss Balanced Advantage Fund Regular Plan Growthscheme.

NMDC - Record output supported by strong steel demand

NMDC is India’s largest iron ore miner and is a state-owned enterprise.It is one of the lowest-cost iron ore producers in the world. As per data for December 2021, its iron ore production rose to 3.95 MT from 3.86 MT YoY. Its total sales of iron ore during April-December 2021 also increased to 28.36 MT from 22.27 MT in the corresponding period a year ago recording one of the highest numbers in recent times.

Another development for NMDC is the board approval for a proposal to demerge its under-construction steel plant in Nagarnar, Chhattisgarh. The steel plant is scheduled for commissioning over the next four to six months and the demerger process by Q4FY22. The demerger is also positive as it limits the liability of NMDC investors of any further investments and/or delay in commissioning the steel plant and would strengthen NMDC’s balance sheet.

Fund managers who increased their holdings in NMDC

Shares of NMDC were added by Bhavesh Jain and Dhawal Dalal to Edelweiss Arbitrage Fund Regular Growth scheme, Hiten Shah to Kotak Equity Arbitrage Fund Growth scheme, Harshal Joshi and Arpit Kapoor to IDFC Arbitrage Fund - Regular Plan - Growth scheme, and Bhavesh Jain and Bharat Lahoti to Edelweiss Balanced Advantage Fund Regular Plan Growth scheme.

Indian Energy Exchange (IEX) - Charging up India’s short term power markets

IEX is one of India’s two electricity exchanges and controls more than 95 percent of spot volumes. It is also planning to introduce short-term contracts lasting up to one year to tap buyers as opposed to traditional long-term contracts. The company’s monthly volumes are growing rapidly and registered a YoY growth of 24% with 9,035 million units (MU) traded in the month of December 2021, despite concerns of the Omicron virus. In Q3FY22, it recorded a 37% YoY growth with a total traded volume of 27,677 MU.

IEX is gearing up for the government’s plan to optimize electricity prices to lower the cost of power purchase to consumers, based on the implementation of Market-Based Economic Despatch (MBED) – Phase1. Power demand by all states is proposed to be met through a central pool allocating power at the optimal price. Currently, state power distributors source power from available sources within the states, invariably ending with a higher energy cost. MBED will allow more cost-efficient power plants to produce more, reducing costs for buyers.

Fund managers who increased their holdings in Indian Energy Exchange

Ratish Varier and Rohit Seksaria bought shares of IEX for Sundaram Small Cap Fund - Regular Plan - Growth Option scheme, Karthikraj Lakshmanan and Mayank Prakash for BNP Paribas Arbitrage Regular Growth scheme, Neeraj Kumar for SBI Arbitrage Opportunities Fund Regular Growth scheme, and Rajeev Bhardwaj for Invesco India Arbitrage Fund Growthscheme.

Kirloskar Oil Engines (KOEL) - Growth in demand aided by infrastructure push

Kirloskar Oil Engines is one of the world’s largest generator set manufacturers, specializing in both air-cooled and water-cooled engines (2.5HP to 740HP) and diesel generating sets across a wide range of power output from 5kVA to 3,000kVA.

Revenues are rising for each of the last four quarters with revenues in Q2FY22 at Rs 1,008.8 crore. Commenting on Q2FY22 results, the management said that they are witnessing good traction in the healthcare segment, infra development, and schemes like Jal Jeevan mission. During Q2FY22, with the new product launch 'i-land', it expanded into allied businesses in the water management solutions business.

Fund managers who increased their holdings in Kirloskar Oil Engines

Anand Radhakrishnan and R. Janakiraman bought shares of KOEL for two schemes, Franklin India Flexi Cap Fund Growth scheme and Franklin India Taxshield Growth scheme, Saurabh Pant for SBI Large & Midcap Fund Regular Payout Inc Dist cum Cap Wdrl scheme and Anand Radhakrishnan and Ajay Argal for Franklin Build India Fund Growth scheme.

Granules India - Mitigation of raw material disruption would be a long term cure

Granules India is a leading generic player in the Indian pharmaceutical industry, with two-thirds of its revenues coming from North America and Europe. Granules sources part of its raw materials from China and due to the Chinese dual energy policy, and increase in logistics cost and procurement prices, the company’s margins were hit in the past few quarters.

Granules plans to re-allocate its capex spending for backward integration in order to reduce its dependency on imports, especially from China. The benefits of this exercise are expected to accrue from FY24 onwards.

It has 68 ANDA (abbreviated new drug application)filings and has launched 19 ANDAs to date. The company is focused on investing primarily in large- to medium-volume products. Some low-volume and high-value products such as controlled substances and niche molecules for the development pipeline form part of its product portfolio.

Fund managers who increased their holdings in Granules India

Shares of Granules were added by Krishan Kumar Daga and Arun Agarwal to HDFC Arbitrage Fund Wholesale Plan Growth scheme, Harshal Joshi and Arpit Kapoor to IDFC Arbitrage Fund - Regular Plan - Growth scheme, Rajeev Bhardwaj to Invesco India Arbitrage Fund Growth scheme, and Sailesh Jain to Tata Arbitrage Fund Regular Growth scheme.

Whirlpool - Expected to ride out the growing demand for premium products

Whirlpool of India is a leading white goods manufacturer with a sizable market share in refrigerators and washing machines. It was one of the few stocks which gave negative returns to investors in FY21. With the consumer durables sector picking up demand, FY23 is expected to bode well for this sector. Demand for this sector is coming from customers upgrading their white goods as people are working from home. Premium products across categories are witnessing higher demand as compared to entry-level products.

Whirlpool has expanded its product portfolio in recent years. It entered the water purifiers segment in 2018 and recently added cooktops with the acquisition of Elica PB India. The complete range of products is manufactured in-house at its three factories with 95% components sourced locally. This sets it apart from peers that are dependent on contract manufacturers.

Fund managers who increased their holdings in Whirlpool

Buyers for Whirlpool this month included Anand Radhakrishnan and R Janakiraman for Franklin India Flexi Cap Fund Growth scheme, R. Janakiraman and Mayank Bukrediwala for Franklin India Prima Fund Growth scheme Mahesh Patil for Aditya Birla Sun Life Frontline Equity Fund Growth scheme and Anand Radhakrishnan and R. Janakiraman for Franklin India Taxshield Growth scheme.

Siemens - Rising government infrastructure spending opens up new opportunities

Siemens India, is an integrated technology provider and a leading powerhouse in electronics and electrical engineering. Siemens’ strength lies in energy and infrastructure including transmission and distribution, automation, urban infrastructure, and other business. Siemens’ revenues in Q2FY22 stood at Rs 4.358 crore and are the highest in the last ten quarters.

The announcement of increased government spending on Indian infrastructure and the revival of key sectors such as construction, mining, capital goods and automobiles are opportunities going forward. One such project recently bagged by the company in December 2021 is Pune Metro project with an order size of Rs 900 crore. Siemens will provide project management, turnkey electrification, signalling, and communications for the project.

Fund managers who increased their holdings in Siemens

Shares of Siemens were added by Hiten Shah to Kotak Equity Arbitrage Fund Growth scheme Milind Bafna toAditya Birla Sun Life Pure Value Fund Growth scheme, Rajeev Bhardwaj to Invesco India Arbitrage Fund Growth scheme, and Abhiroop Mukherjee and Siddharth Bothra to Motilal Oswal Flexicap Fund Regular Plan Growth scheme.

Graphite India - Riding the commodity cycle with higher steel demand

Graphite India is the largest Indian producer of graphite electrodes by total capacity. Its manufacturing capacity of 98,000 tonnes per annum is spread over three plants at Durgapur and Nashik in India and Nuremberg in Germany. While it manufactures a full range of graphite electrodes used in the production of steel, it stays focused on the higher-margin, large diameter, ultra-high power (UHP) electrodes.

The steel demand outlook in India for the remaining part of the year is expected to be positive with a pick-up in the infrastructure. Higher demand was witnessed in graphite electrode prices but needle coke prices continued to rise in tandem impacting margins.

Graphite India has approved a capex proposal for a 35 MW hybrid (wind and solar) renewable power plant to supply captive power to the electrode plant in Nashik. The estimated project completion period is a year from the award of the construction contract.

Fund managers who increased their holdings in Graphite India

Shares of Graphite India were bought by Aniruddha Naha and Vivek Sharma for PGIM India Midcap Opportunities Fund Regular Growth scheme, Aniruddha Naha and Ravi Adukia for two schemes, PGIM India Flexi Cap Fund Regular Growth scheme and PGIM India Small Cap Fund Regular Growth scheme, Gopal Agrawal and Sankalp Baid for HDFC Multi Cap Fund Regular Growth scheme.

Mahanagar Gas - A utilities play on clean energy

Mahanagar Gas(MGL) is a city gas distribution company and operates in Mumbai, its adjoining areas, and Raigad district of Maharashtra. CNG (compressed natural gas) sales contribute more than 70% of its total sales volume.

MGL’s CNG sales volume surpassed pre-Covid levels in Q2FY22 and is expected to grow further. However, margins are likely to reduce from higher levels in the medium term owing to the high gas cost. MGL hiked its gas prices twice in Q3FY22 due to the substantial increase in the prices of imported RLNG. MGL's input gas cost has also gone up considerably and the hike for consumers is expected to partly offset its costs.

MGL converted 2,500 commercial vehicles to CNG in Q2FY22. It plans on offering schemes to incentivize growth in this segment. MGL is in talks with Mumbai’s municipal corporation regarding retrofitting 185 BEST buses to CNG.

Fund managers who increased their holdings in Mahanagar Gas

Buyers in Mahanagar Gas included Krishan Kumar Daga and Arun Agarwal for HDFC Arbitrage Fund Wholesale Plan Growth scheme, Bhavesh Jain and Dhawal Dalal for Edelweiss Arbitrage Fund Regular Growth scheme, Karthikraj Lakshmanan and Mayank Prakash for BNP Paribas Arbitrage Regular Growth scheme, and Harshal Joshi and Arpit Kapoor for IDFC Arbitrage Fund - Regular Plan - Growth scheme.

IIFL Wealth Management - Rising client base of wealthy individuals

IIFL Wealth Management is one of the leading wealth management franchises in India. Products under its umbrella include mutual funds, AIF (alternative investment funds), and loans.

The company delivered stellar results in Q2FY22. It posted its highest revenues in the last 10 quarters at Rs 503 crore and highest profits in 10 quarters of Rs 142.5 crore during Q2. With more wealthy individuals looking for wealth management solutions, IIFL Wealth Management is gaining traction in this investor segment.

Fund managers who increased their holdings in IIFL Wealth Management

The addition of shares of IIFL Wealth Management was done by Priyanka Khandelwal and Roshan Chutkey for ICICI Prudential Banking and Financial Services Fund Growth scheme, Gopal Agrawal and Sankalp Baid forHDFC Multi Cap Fund Regular Growth scheme, Ankit Agarwal for UTI Small Cap Fund Regular Growth scheme and Taher Badsah and Pranav Gokhale for Invesco India Growth Opportunities Fund Growth scheme

Consumer Durables

SECTOR | 10 Jan 2022

Changing preferences are driving growth in consumer durables

By Ketan Sonalkar

The consumer durables space is one of the largest and fastest-growing segments within India’s consumer market. It consists of two main categories, home and household appliances, and consumer electronics. Major and small appliances, like air conditioners, refrigerators, washing machines, microwave ovens and vacuum cleaners are broadly classified as home appliances or white goods.

The consumer durables sector has been in the limelight ever since the government announced the production linked incentive (PLI) scheme for white goods under the ‘Make in India’ initiative. The scheme is to be implemented over a seven-year period, from FY22 to FY29 and has an outlay of Rs. 6,238 crore. This scheme has received a good response from manufacturers with a commitment of more than Rs 4,500 crore. Many OEMs (original equipment manufacturers) and contract manufacturers are gearing up to make the most out of the opportunity as well as taking steps towards reducing their dependency on imports to make products more affordable.

Provisionally selected scheme applicants include Daikin, Amber Enterprises, PG Technoplast, Hindalco Industries, Mettube India, Blue Star, Havells India,Johnson Controls, Voltas, IFB Industries, Dixon Technologies, Panasonic India, Syska LED Lights and Haier Appliances.

Changing trends in consumer demand

The consumer durables industry was doubly hit by the pandemic in FY21. Not only did demand get impacted, but gross margins also came under pressure due to rising raw material prices. However, a shift in consumer behaviour was observed from price consciousness towards technologically advanced premium products.

With work from home becoming the new norm, a lot of people operated out of their homes/hometowns and upgraded their refrigerators and washing machines. The preference for higher capacity refrigerators to store more and minimise trips to the supermarket, and an increasing focus on sanitization led to consumers purchasing washing machines with in-built heaters which can effectively remove germs.

This also helped increase sales of air conditioners as people wanted a comfortable environment for working efficiently as many were accustomed to working in air-conditioned offices. Strong demand for premium segment products was witnessed not only from the developed metro markets but also from smaller cities and towns.

Recent results resonate with growing demand in the sector

Results from companies in the sector in Q2FY22 and H1FY22 were characterised by steady top-line growth, driven by demand. The lockdown in Q1FY22 impacted the overall industry. Operating profit margins in the sector came under pressure owing to raw material inflation, particularly in Q2FY22, and it was partially offset by price increases implemented by companies.

Dixon Technologies stands out for its rising YoY revenues. It is also one of the beneficiaries of the PLI scheme. It is a contract manufacturer for Samsung, Xiaomi, Panasonic, and Philips, producing televisions, washing machines, smartphones, LED bulbs, battens, downlighters and CCTV security systems. The revenue growth is attributed to the company signing multiple agreements for contract manufacturing of consumer electronics.

Along with revenue growth, profits have also increased for companies in this sector. They have reported higher profits in Q2FY22 as compared to Q1FY22, indicating signs of recovery in the sector.

While Whirlpool’s profits appear to have soared in Q2FY22, part of it comes from a one-time gain of Rs 324 crore from the transaction where it increased its stake to 87% from 49% stake in Elica, a manufacturer of kitchen cooktops. Even discounting this gain, it delivered YoY profits in Q2FY22, as compared to a loss reported in Q2FY21.

Air conditioners - Voltas maintains its leadership

The market for air conditioners is highly competitive and Voltas is the market leader of the segment. The third place is occupied by another listed company, Blue Star.

Typically the demand for air conditioners picks up in the months of March to June every year with the onset of summer. Due to this, Q4 and Q1 contribute higher revenues as compared to the other quarters.

Both Voltas and Blue Star have bettered their revenues and profits on a YoY basis in Q2FY22. Voltas revenues grew to Rs 1,737.3 crore from Rs 1,650.8 crore, and profits grew to Rs 103.6 crore from Rs 78.3. Blue Star’s revenues grew to Rs 1,103.5 crore from Rs 811.6 crore and profits grew to Rs 21.2 crore from Rs 7.6 crore.

Voltas registered a growth of 40% in Q2FY22 for its energy-efficient inverter AC models. The contribution of inverter ACs within overall ACs increased to 54% against 46% in Q2 FY21.

Amber Enterprises, is a contract manufacturer of AC units and components and it caters to the top ten brands in the market. Its two verticals include room air conditioners and air conditioners for mobility applications such as buses and trains. It witnessed a significant shift in revenue contribution to higher contribution by room ACs. This grew to 52% in H1FY22 from 46% in H1FY21.

Along with air conditioners, air coolers have seen a rise in demand due to people working from home. Air coolers also follow similar sales patterns as air conditioners and demand for these products picks up in Q4 and Q1. Symphony is a player in the air coolers business and in Q2FY22, its revenues grew YoY to Rs 149 crore from Rs 120 crore, while profits grew YoY to Rs 32 crore from Rs 27 crore.

Refrigerators - Higher capacity and products with premium features in vogue

More than 50% of the market share in refrigerators is dominated by two South Korean multinationals, LG and Samsung. Among the listed players, Whirlpool and Godrej together account for about 30% of the market.

In line with the trend for premium products, Whirlpool launched its 4-door 665-litre refrigerators in Q2FY22 with features such as fast freeze and ozone emitter, which reduces odour and prevents bacterial multiplication inside the compartment.

Voltas is also present in the refrigerators category with its Beko range but has a negligible market share. While Godrej is one of the oldest players in this category, it lost its market share due to its models lacking premium features and is perceived more as a mass market brand. To catch up with changing consumer preferences, it recently added premium products with ‘nano disinfection technology’ to its range of frost-free refrigerators. This technology, according to the company, uses a ‘special anti-germ nano coating’ in the air flow duct of the refrigerator, which disinfects it and controls microbial activity in the enclosed refrigerator compartment.

Contract manufacturers also play a key role in this segment. Dixon Technologies manufactures refrigerators for Panasonic and Haier along with other brands. They recently announced that they are ready to start manufacturing refrigerators (direct cool technology) with an initial capacity of 6 lakh units per annum in FY23.

Washing Machines - Trends towards advanced features and automatic machines

Like refrigeration, washing machines are also dominated by Korean multinationals. Whirlpool has the third-highest market share in this category. This is a category that is seeing upgrades from semi-automatic to fully automatic machines and machines with advanced features.

Godrej manufactures fully automatic and semi-automatic washing machines of the top-loading type. These are popular with cost-conscious customers. Recently, it added more advanced automatic front load machines catering to the premium segment.

Dixon Technologies has forayed into contract manufacturing of washing machines. It set up a new capacity in Dehradun in Q2FY22 for washing machines with a capacity of 15 lakh units per annum. The company plans to augment this capacity in FY23 taking it to a total of 24 lakh units per annum.

Will the festive season show its sparkle in Q3FY22?

The trends from the first two quarters indicate a recovery in the sector aided by the demand for technologically advanced products and the use of digital medium to acquire a customer. Ecommerce channels are observing a rise in sales of these products, which before the pandemic were mostly purchased through physical stores.

In its annual report for FY21, the Managing Director of Whirlpool, Vishal Bhola said that with people spending more time at home, they see a fundamental shift in their relationship with their home and a growing desire to improve the home environment. Home appliances are no longer seen as luxuries or a discretionary spend but as basic necessities to ensure the safety and comfort of the family.

Among the companies in this sector, Voltas has demonstrated its leadership in air conditioners and Whirlpool has a substantial market share in both refrigerators and washing machines. Contract manufacturers who received approval under the PLI scheme can be explored by investors as potential investment options. They enjoy the advantage of multiple brands and can scale up accordingly. Two new facilities for the AC component business are approved for Amber Enterprises, and consumer electronics for Dixon Technologiesunder the PLI scheme.

As per a report by Emkay Global, sustained offtake in premium products after the festive season and volume recovery in entry-level products are critical for revenue growth in Q3FY22. The industry had seen robust 30-50% volume growth across categories in Q3FY21.

As the results for Q3FY21 start coming in, the effect of festive season sales will be reflected in posted numbers. In the consumer durables sector, the trends and growing consumer preferences indicate that investors might be in for some pleasant surprises in the coming days.

SRF Ltd.

31 Dec 2021

2952.80

-3.37%

SRF - Chemicals catalyze growth for this diversified conglomerate

By Ketan Sonalkar

SRF is part of one of India’s oldest industrialist groups, the Shriram Group, headed by Arun Bharat Ram. The company was incorporated in January 1970 under the name Shriram Fibres Ltd, and renamed SRF only later, in 1990. It has a diversified business portfolio that covers fluorochemicals, specialty chemicals, packaging films, technical textiles, and coated and laminated fabrics.

SRF’s chemicals …

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SRF’s chemicals business is a beneficiary of the surging demand for specialty chemicals and has seen its star rise alongside other specialty chemical companies like Deepak Nitrite, Vinati Organics, Navin Fluorine, and Aarti Industries. The primary driving factor is the China+1 sourcing by international customers over the last two years. What sets SRF apart from other specialty chemical companies is its leadership within segments of the industry along with its strong R&D focus. Eleven new process patents were granted to SRF in H1FY22, taking the tally to a total of 104 global patents. Along with chemicals, SRF’s other diversified verticals are profitable and positive contributors to the company's top line.

Quick Takes

New BOPP (Biaxially Oriented Polypropylene) film production line in Thailand was commissioned during Q2FY22
BOPP capacity addition in India will be commercialized by Q3FY23
Capex of around Rs 4,500-5,000 crore would be spent on specialty chemicals and fluorochemicals business over the next 3-5 years
Consolidated revenues grew 35% YoY from Rs 2,101 crore to Rs 2,843 crore in Q2FY22
Earnings before Interest and Tax (EBIT) increased 19% YoY from Rs 480 crore to Rs 570 crore in Q2FY22

Consistent growth in revenues over the last few years

SRF has been listed on the stock exchanges for more than two decades, and it traded below Rs 100 (adjusted for splits/bonus) until 2014. It now trades above Rs 2,300 per share. The stock has delivered stellar returns to its shareholders, with more than 7X returns in the last five years. Analysing the key metrics for the last five years, revenues grew at 14.6% CAGR and net profits at 23% CAGR.

While it is diversified, products in each vertical display a distinct competitive advantage. Under the chemicals vertical, it is the largest manufacturer of Difluoro & Trifluoro Alkyl intermediates globally. It is also one of the few manufacturers of Pharma grade HFA 134a/P in the world, which is used in metered-dose inhalers as a propellant. It also commands a 50% share of refrigerant chemicals in India.

It is a leading exporter of BOPP films from India under the packaged films vertical and, in the technical textiles vertical, it is the world's second-largest manufacturer of Nylon6 tyre fabrics and the world's third-largest manufacturer of conveyor belt fabrics.

A manufacturing business that beat the Covid-19 blues

The Covid-19 pandemic caused disruptions across industries in FY21, and while some industries like IT services were able to adapt swiftly by working from home, manufacturing companies were hit hard. SRF stands out for its performance even during FY21 where revenues increased consistently for every quarter from Q1FY21 till the latest quarter Q2FY22. The profits have followed the revenues, rising consistently for four quarters from Q1FY21 till Q1FY22, but the trend broke in Q2FY22, due to rising raw material and transportation costs.

Though diversified into different verticals, the chemicals vertical is the largest revenue contributor followed closely by the packaging films vertical. The chemical vertical itself is split into two parts, the specialty chemicals, and the fluorochemicals businesses. The seeds of growth in the last few years were sown earlier with a strategy to build leadership in certain segments of specialty chemicals and fluorochemicals aided by a dedicated R&D team.

SRF’s management expects the specialty chemical business to grow steadily by 15-20% per annum in the next 3-5 years, while the fluorochemicals business would benefit from higher refrigerant prices and rising demand from the US. Multiple international customers in the agrochemical sector are looking to tap opportunities in the Indian market, which may prove to be a positive development going forward.

The board of SRF approved capacity expansion for a key product catering to the agrochemical industry at its Dahej facility at a capex of Rs 27.5 crore. The same is scheduled to be completed in Q1FY23. The company is also planning a capex of Rs 550 crore in the current financial year for the expansion. About 60% of planned capex will go towards the expansion of capacity in the chemicals business, which is growing at a faster pace and yielding a higher margin. The management has envisaged a capex of Rs 4,000-5,000 crore that could be spent on the chemicals business over the next 3-5 years.

In a conference call with investors post its Q2FY22 results, the MD, Ashish Bharat Ram said that there was an increase in prices of key raw materials and logistic costs due to domestic and international factors. Despite various challenges linked to Covid-19 and supply chain disruptions, they were able to deliver good numbers.

Growth in the specialty chemical business in Q2FY22 was driven by the increase in sales in both domestic and international markets. This quarter also marked a temporary loss of production at one of the plants at Dahej on account of an accident at the plant.

The fluorochemical business saw large demand coming in from the US and pent-up demand from the domestic market leading to near-optimal utilization of HFC capacities. Pharma propellant, under the brand Dymel, witnessed a significant increase in its sales. Automotive refrigerant 134a is expected to have an impact in the short term due to the semiconductor shortage in the automotive industry, but the demand in domestic and international markets is positive.

In the packaging films business, new capacities in Hungary and Thailand have started showing traction. New products were also added in H1FY22 to the packaging films portfolio.

In the technical textile business, higher demand for Tyre Cord Fabric (TCF) was seen from the domestic tyre industry, while the opening of mines led to increased demand for belting fabric.

Along with the growth of the past few years, profitability metrics have shown a rising trend. It is credible that in a challenging FY21, the company registered its highest-ever annual EBITDA and net profit margins.

The company is expanding its presence in specialty chemicals and fluorochemicals over the next few years with a large capex plan in place. Going forward the chemicals vertical is likely to have a much larger pie of the revenues. The other verticals also have distinct competitive advantages and would be positive contributors to the company.

Despite increasing raw material and logistic costs, the company delivered favourable numbers in H1FY22. If this combination of growth and profitability across multiple verticals can continue, investors in this company can look forward to higher returns in the future

SRF Ltd. is trading above all available SMAs

Mutual Funds News

TREND | 20 Dec 2021

Following the fund flows – What’s the smart money buying?

By Ketan Sonalkar

The monthly portfolio disclosures by mutual funds give investors insights into what the smart money is doing in the market and the sectors and companies that are currently in favour or have fallen off the radar for fund managers.

Even as FIIs have been pulling funds out of the Indian market, with flows turning negative in the past month, domestic institutions have still been betting on Indian equities. But they have become more selective.

This screener shows stocks where mutual funds increased holdings in November 2021. The data indicates growing interest from fund managers in a leading conglomerate, auto manufacturers as well a large bank. There is also increasing interest in companies that debuted on the stock exchanges in November 2021.

Axis Bank - Banking on technology and digital initiatives to drive growth

Axis Bank is India’s fifth-largest bank in terms of market capitalisation. The bank saw a 64% increase in recoveries from written-off retail accounts in Q2FY22, making it the best quarter in terms of recoveries in the last 18 months. The gross NPA (non-performing assets) ratio has been reducing since the last few quarters and stands at 3.5% in Q2FY22.

As part of its strategy, the bank is focusing on broadening its low-cost deposit base and growing the retail assets loan book. The bank is enhancing technology investments and digital initiatives to ready itself for the next leg of growth in retail and SME segments.

Fund managers who increased their holdings in Axis Bank

Axis Bank shares were added by Manish Banthia, Sankaran Naren, and Priyanka Khandelwal to ICICI Prudential Equity & Debt Fund Growth scheme, Priyanka Khandelwal, Sankaran Naren, and Dharmesh Kakkad to ICICI Prudential Value Discovery Fund Growth scheme, Sankakaran Naren, Ihab Dalwai, and Anuj Tagra to ICICI Prudential Multi-Asset Fund Growth scheme, and Sailesh Jain to Tata Arbitrage Fund Regular Growth scheme.

Reliance Industries - Focusing on renewable energy for the future

Reliance Industries (Reliance) is one of India’s biggest conglomerates with a presence in oil refining and marketing along with petrochemicals, oil & gas exploration, retail, telecom, and media.

Its telecom subsidiary, Reliance Jio raised prepaid tariffs by about 20% across the board in November 2021. Even after raising the tariffs, the tariff of popular packs is still at a 7-14% discount to peers like Bharti Airtel and Vodafone Idea. The retail business is seeing strong revival across categories during the festive season. The addition of new stores and scale-up of its digital platform are factors expected to drive growth from Q3FY22 onwards.

Reliance’s next big bet seems to be in the renewable energy space. Through its subsidiary, Reliance New Energy Solar, it acquired 100% shares of REC Solar Holdings AS from China National Bluestar (Group) Co.

Over the next three years, Reliance plans to invest Rs 60,000 crore to construct four 'giga factories' to make integrated solar photovoltaic modules, allied components, and batteries to store energy from the grid. The site identified for one of these will be located at the new 5,000-acre Green Energy Giga Complex in Jamnagar.

Fund managers who increased their holdings in Reliance Industries

R. Srinivasan and Dinesh Ahuja added shares of Reliance to SBI Equity Hybrid Fund Regular Payout Inc Dist cum Cap Wdrl scheme, Ajay Garg to Aditya Birla Sun Life Tax Relief 96 Pyt of Inc Dis cum Cap Wdrl scheme, Sohini Andani to SBI Bluechip Fund Regular Growth scheme, Neelesh Surana and Ankit Jain to Mirae Asset Emerging Bluechip Fund Growth scheme.

Mahindra & Mahindra - Slew of launches in conventional and electric vehicles

Mahindra & Mahindra manufactures automobiles, farm equipment, and automotive components. The company’s new SUV XUV 700 received an impressive response, witnessing over 50,000 bookings within three hours of its launch.

The company plans to launch one more SUV in FY22, an upgraded version of its most successful vehicle Scorpio. It also intends to launch 13 new products in the auto segment and 17 new products in the commercial vehicle (CV) segment over the next 5 years. Out of this planned portfolio, there will be a strong presence of EV products (8 new products).

Mahindra and Mahindra sold 2,500 units of electric three-wheelers in September alone higher than the 1,600 sold in August. It has a 68% market share in this segment.

Fund managers who increased their holdings in Mahindra & Mahindra

Rajat Chandak and Priyanka Khandelwal bought shares for ICICI Prudential Flexicap Fund Regular Growth scheme, Manish Banthia, Rajat Chandak and Priyanka Khandelwal for ICICI Prudential Balanced Advantage Fund Growth scheme, Rohit Singhania and Charanjit Singh for DSP Tax Saver Fund Regular Plan Growth scheme, and Rohit Singhania, Charanjit Singh and Jay Kothari for DSP Equity Opportunities Fund Growth scheme.

Ipca Laboratories - Capacity addition for APIs are catalysts for growth

Ipca Laboratories is a fully integrated pharmaceuticals company, manufacturing over 350 formulations and 80 active pharmaceutical ingredients (APIs).

It acquired a 26.5% stake in Lyka Laboratories in November 2021 for Rs 97.8 crore. This acquisition is expected to provide inroads into the lyophilized injectables business in India and the rest of the world, which is the key area of operation for Lyka Laboratories.

The new unit for APIs at Devas is expected to be operational in FY23, while the Ratlam facility will be operational by Q3FY22. The total API capacity will increase by 20% post-completion of both projects.

Fund managers who increased their holdings in Ipca Laboratories

Shares of Ipca Labs were added by Neelesh Surana and Ankit Jain to Mirae Asset Emerging Bluechip Fund Growth scheme, Rajeev Thakkar, Raunak Onkar and Raj Mehta to Parag Parikh Flexi Cap Regular Growth scheme, Sankaran Naren, Ihab Dalwai, and Anuj Tagra to ICICI Prudential Multi-Asset Fund Growth scheme, Priyanka Khandelwal, Sankaran Naren, and Dharmesh Kakkad to ICICI Prudential Value Discovery Fund Growth scheme.

Zensar Technologies - Driven by new leadership and major acquisition

Zensar Technologies is a leading digital solutions and technology services company that specialises in digital transformation for global organizations. It is part of the RPG Group. The management is optimistic about its strategy under the new CEO, Ajay Bhutoria who took over in January 2021.

In May 2021, Zensar acquired M3bi, a US-based data, and digital engineering firm. M3bi will augment Zensar’s capabilities in data engineering, analytics, artificial intelligence, machine learning, and advanced engineering services. The acquisition will add marquee clients to Zensar's portfolio in banking, financial services, and insurance and expand its set of offerings to global firms.

During Q2FY22, the company won six significant deals and reported a robust total contract value of $187.5 million worth of deals. The largest deal worth $122 million is with the City of San Diego smart city project.

Fund managers who increased their holdings in Zensar Technologies

Vaibhav Dusad and Priyanka Khandelwal bought shares of Zensar for ICICI Prudential Technology Fund Growth scheme, Priyanka Khandelwal and Harish Bihani for ICICI Prudential Smallcap Fund Growth scheme, Sailesh Raj Bhan and Kinjal Desai for Nippon India Multi Cap Fund - Growth scheme, Manish Gunwani, Kinjal Desai and Nikhil Rungta for Nippon India Flexi Cap Fund Regular Growth scheme.

Pidilite Industries - Leadership bond across adhesives

Pidilite is a market leader in the adhesive and sealants business, identified with its flagship brand Fevicol. Aided by a rebound in construction activity and higher pent-up demand, the company posted a 40% YoY growth in revenues at Rs 2,626 crore in Q2FY22.

Price hikes of about 10% across the product portfolio mitigated the impact of increasing the cost of raw materials. The management expects that the raw material prices will remain firm for the next six months due to various supply disruptions.

Pidilite acquired the brand Araldite in October 2020 for Rs 2,100 crore. This further strengthened the adhesives portfolio. Along with India, the deal includes the license for ASEAN and MENA countries.

Fund managers who increased their holdings in Pidilite Industries

Additions to the portfolio were made by Hiten Shah to Kotak Equity Arbitrage Fund Growth scheme, Shreyash Devalkar and Hitesh Dasto Axis Bluechip Fund Growth scheme, Neeraj Kumar to SBI Arbitrage Opportunities Fund Regular Growth scheme, and Jinesh Gopanito Axis Long Term Equity Fund Growth scheme.

Eicher Motors - Rising motorcycle exports and revival in CVs drives Q2FY22

Eicher Motors owns the iconic motorcycle brand Royal Enfield and has a joint venture with Swedish auto company Volvo to manufacture commercial vehicles under Volvo Eicher Commercial Vehicles (VECV).

Motorcycles registered their best performance ever in international markets, with total exports at 17,922 units, up 132.2% YoY. VECV business reported an overall sales volume of 15,134 units in Q2FY22. This was almost double the 8,167 units sold in Q1FY22, driven by pent-up replacement demand and pick-up in infrastructure projects.

In the international market, it added nine exclusive stores taking the number to 149 outlets in total. It also added three new multi-brand outlets, fourteen new studio stores, and twenty large stores in the domestic market.

Fund managers who increased their holdings in Eicher Motors

Priyanka Khandelwal and Rajat Chandak bought shares for ICICI Prudential Bluechip Fund Growth scheme, Hiten Shah for Kotak Equity Arbitrage Fund Growth scheme, Sailesh Jain for Tata Arbitrage Fund Regular Growth scheme, Kayzad Eghlim and Priyanka Khandelwal for ICICI Prudential Equity Arbitrage Fund Regular Growth scheme.

Hero MotoCorp - Maintaining domestic leadership and plunge into electric vehicles

Hero MotoCorp is India’s leading two-wheeler manufacturer selling higher units than its peers in a calendar year. It is set to launch its electric vehicle by March 2022, manufactured at its plant in Chittoor.

The demand for motorcycles picked up in Q2FY22 as the second wave of Covid-19 waned and rural markets started opening up. Sales of two-wheelers are rising continuously over the last three months, with Hero MotoCorp selling more than 5.3 lakh units in November 2021. However, this was lower than both November 2020 and the pre-Covid November 2019 period.

The company is gaining in the export markets like Nigeria, Colombia, Bangladesh, and Mexico. Among the overseas markets, 7-8 countries have started to witness market share gains. Yet, Hero MotoCorp lags far behind Bajaj Auto in exports, who exports more than twice as much as Hero.

The partnership with Harvey Davidson is expected to add high-margin premium bikes to its portfolio in FY23. Hero MotoCorp will retail high-end bikes under its own brand which is being made for Harley-Davidson. These will be the middleweight bikes with engine capacity ranging from 500cc onwards.

Fund managers who increased their holdings in Hero MotoCorp

Hero MotoCorp was added by Rajeev Thakkar, Raunak Onkar, and Raj Mehta to Parag Parikh Flexi Cap Regular Growth scheme, Jay Kothari and Vinit Sambre to DSP Top 100 Equity Fund Regular Plan Growth scheme, Rohit Singhania and Charanjit Singh to DSP Tax Saver Fund Regular Plan Growth scheme, and Venugopal Manghat and Praveen Ayathan to L&T Arbitrage Opportunities Fund Regular Growth scheme.

FSN Ecommerce Ventures (Nykaa) - A profitable e-commerce platform lists on the bourses

Incorporated in 2012, Nykaa has a diverse portfolio of beauty, personal care, and fashion products, including their own brands. Nykaa established itself not only as a lifestyle retail platform but also as a consumer brand.

Nykaa was listed on the Indian stock exchanges on November 10, 2021, and stands out from other internet startups, turning profitable in FY21. However, while Q1 and Q2FY22 were profitable, profits fell drastically in the latter. Time will tell whether the remaining quarters of FY22 stay in the green. Apart from its digital presence, it is also adding physical stores across the country.

Nykaa plans to triple its brick-and-mortar stores from 84 to about 300. Though the timeline for the rollout is not yet clear, the company is targeting 100 cities, adding to the 84 retail outlets it already operates in 40 cities.

Fund managers who increased their holdings in Nykaa

Nykaa was added by R.Srinivasan to SBI Focused Equity Fund Growth scheme, Shridatta Bhandwaldar to Canara Robeco Emerging Equities Growth scheme, Harsha Upadhyaya to Kotak Tax Saver-Scheme- Growth scheme, and Samir Rachh and Kinjal Desai to Nippon India Small Cap Fund - Growth scheme.

Fino Payments Bank - Leveraging fintech to penetrate underserved markets

Fino Payments Bank (Fino) is a growing fintech company offering a diverse range of financial products and services that are primarily digital and have a payments focus. It was listed on the stock exchanges on November 12, 2021.

Fino operates an asset-light business model that principally relies on fee and commission-based income generated from its merchant network and strategic commercial relationships.

Its network is mainly concentrated in Uttar Pradesh, Bihar, and Madhya Pradesh. Fino Payments Bank serves the underserved population in India, which is the rural-focused mass market that is now moving towards digital transactions.

Fund managers who increased their holdings in Fino Payments Bank

Shares of Fino were purchased by Abhiroop Mukherjee and Siddharth Bothra for Motilal Oswal Flexicap Fund Regular Plan Growth scheme, Mahesh Patil, Dhaval Shah, and Vinod Bhat for Aditya Birla Sun Life Multi-Cap Fund Regular Growth scheme, Pranav Gokhale and Amit Nigam for Invesco India Multicap Fund Growth scheme and Kunal Sangoi, Dhaval Gala and Nitesh Jain for Aditya Birla Sun Life Small Cap Fund Growth scheme.

Hindware Home Innovation Ltd.

16 Dec 2021

185.52

-4.19%

Somany Home Innovation – Will diversifying the product portfolio pay off?

By Ketan Sonalkar

Somany Home Innovations (SHIL) was carved out as a separate entity in August 2019, after it was demerged from its parent company HSIL (Hindustan Sanitaryware and Industries). HSIL is a leading sanitaryware company commonly identified by the brand Hindware.

HSIL spun off its consumer products distribution and retail division to Somany Home Innovation (SHIL). The marketing and distribution business in the building products division was transferred to Brilloca, which is a wholly-owned subsidiary of SHIL.

SHIL operates in three verticals that cover different product types. The building products vertical has the Hindware brand for sanitaryware like water closets, faucets, washbasins, showers, etc. Building products also include plastic pipes and fittings under the brand Truflo.

The consumer appliances vertical has products marketed under the brand name Hindware along with another brand name Moonbow for premium products. These include kitchen appliances like hobs, gas stoves, chimneys, geysers, etc. The third vertical deals with furniture retail and uses the brand name Evok.

SHIL listed on Indian stock exchanges on December 26, 2019, and delivered stellar returns to investors with the stock rising more than 2X in that period.

Quick Takes

Total revenues for H1FY22 increased 56% YoY to Rs 959 crore.
Building products revenues stood at Rs 704.1 crore in H1FY22, constituting 78% of the total revenues
The furniture vertical is an area of concern with much lesser revenues than other verticals, and virtually no profitability since inception in 2008
Prices were hiked in Q2FY22 across product categories to mitigate commodity price inflation
New partnerships with Groupe Atlantic to enter geysers segment with production from a new factory in Telangana to commence from FY23

Going beyond sanitaryware to kitchen appliances and furniture

After two consecutive quarters of growth in revenues after Q2FY21, sales declined in Q1FY22. This can be attributed to the second wave of the pandemic and successive lockdowns restricting the movement of people and goods. Net profit in Q1FY22 was boosted by a one-time gain of Rs 66.1 crore on its investment in HPL (Hintastica Private Limited).

The Q2FY22 numbers show signs of optimism with revenues and profits rising on a YoY basis. With renewed demand in the real estate sector, the next few quarters are expected to deliver better numbers.

Hindware is the leader in the sanitaryware space. Parryware, Hindware and Cera, control about 45% of the total sanitaryware market. While a large part consists of unorganised players, this is expected to shrink in the future with organised players expanding their reach even into smaller cities and towns. SHIL is planning to expand its dealer and distributor network to tier-3 and tier-4 cities.

SHIL is diversifying into other associated products in its industry. Until 2012, sanitaryware was the only segment it operated in. In 2014, SHIL added taps and faucets to its product portfolio. It forayed into consumer appliances with kitchen appliances like hobs and chimneys in 2015. It further ventured into plastic pipes and fittings in 2018 and added fans and kitchen fitting hardware under consumer products in 2020.

Even after diversification into other products, the majority of SHIL’s revenue comes from building products. At the end of H1FY22, building products contributed 78% and furniture retail only 3% to total revenues. The contribution of consumer products also declined in H1FY22 to 19%, lower than FY20 and FY21.

The Q2FY22 results indicate a substantial YoY rise in revenues from the consumer appliances vertical to Rs 112 crore from Rs 83.1 crore. Building products revenues also rose YoY to Rs 483.8 crore from Rs 291.7 crore. The furniture retail vertical showed negligible growth YoY and rose to Rs 20.9 crore from Rs 19.7 crore.

The revenues from plastic pipes and fittings grew more than 50% YoY to Rs 158.1 crore. This is a segment with competition from well-entrenched players like Astral, Finolex, and Prince Pipes. SHIL is leveraging its network of dealers and distributors of sanitaryware, including those associated with the company for a few decades, to gain market share in the pipes segment. It is also banking on institutional orders from government projects with products approved by various government authorities. Pipes and fittings are also exported to countries in ASEAN and the Middle East.

The furniture brand Evok offers a range of products across categories like furniture, home decor and furnishing, modular kitchen, wardrobes, and engineered wood furniture. This vertical is not yet profitable even after eight years. It contributes very little to the revenue as compared to other verticals.

The furniture retail vertical saw numerous setbacks through this period. The company began by opening up many large format stores across India but ended up shutting down the majority of them in a couple of years of operations due to losses.

In its latest annual report, the company said that it has changed its strategy from company-owned stores to franchise stores and online-driven businesses. Now the company owns only two stores, while another twenty-nine are franchise stores. Apart from its own e-commerce platform evok.in, it also sells products on platforms like Amazon, Flipkart, and Pepperfry.

More product additions are in the pipeline

SHIL has partnered with Groupe Atlantic, which will invest Rs 68.3 crore for a 50% stake in Hintastica (HPL), the water heater business subsidiary of Somany Home Innovation. HPL is setting up a manufacturing plant in Telangana and all components will be indigenously manufactured. This will come up by Q4FY22, and manufacturing is set to commence from May 2022.

All products under this subsidiary will be marketed and sold under the brand name Hindware Atlantic. This will be a premium brand and will also include value-added products which are connected with IoT (internet of things). These products include geysers and water purifiers that can be controlled by your mobile phone.

The company also sells premium and super-premium tiles under the brand Neom. The portfolio consists of glass vitrified, ceramic, full-bodied vitrified, cladding, and parking tiles.

Even after diversification, SHIL remains a strong player in the building products vertical, maintaining its leadership in sanitaryware, which is also its biggest revenue contributor. The pipes business holds potential for higher revenues, but this would take a few more quarters as there is fierce competition from existing established players.

The company is introducing premium products and technology-enabled consumer appliances to propel future growth. The furniture retail business is still struggling to make profits after many years and the challenge is to ensure profitability for a few consecutive quarters.

HSIL is seeing interest from star investors. Superstar investors Ashish Kacholia and Sunil Singhania added shares of SHIL to their portfolios over the last year. The company is an interesting case study of diversification. After foraying into many different verticals, some have worked well and some have yet to make any difference to the company’s revenue mix. Whether it can transform itself into a fully diversified building products company profitable across verticals is something investors should track in coming quarters.

Hindware Home Innova.. has an average target of 250.00 from 1 broker.

Solar Industries India Ltd.

03 Dec 2021

13118.00

-1.33%

Solar Industries – An explosion of opportunities in the defence sector

By Ketan Sonalkar

On hearing the name Solar Industries, one expects a company that is active in the clean energy space and represents increasing adoption of solar energy.

But this is the largest manufacturer of industrial explosives and explosive initiating systems in India and owns the world’s biggest manufacturing facility for packaged explosives. It is emerging as one of the biggest private-sector …

Subscriber exclusive for you. Click here to read.This is a premium article. Click here to read.

On hearing the name Solar Industries, one expects a company that is active in the clean energy space and represents increasing adoption of solar energy.

Solar Industries has a licensed explosives capacity of about 290,000 MT (metric tonnes) per year, with a 28% market share in India. It also leads exports from India in industrial explosives and initiating systems, with around 70% market share of exports from India. In recent years, Solar Industries expanded its manufacturing base to Nigeria, Zambia, South Africa, Turkey, Ghana, and Australia. It also has stakes in coal mines (in Chhattisgarh) through two JVs (joint venture).

Quick Takes

Solar Industries’ H1FY22 revenues at Rs 1,613 crore were the highest ever for the first half of any financial year
The order book of Rs 2,842 crore for H2FY22 includes a new Coal India order worth Rs 1,471 crore
Buoyed by the H1FY22 results, management revised its guidance for revenue growth to 40% from 25%, and volume growth of 20-25%
The company delivered the first batch of grenades to the Indian armed forces in August 2021 from the order for one lakh grenades from the Indian armed forces.
Among international projects, Tanzania is expected to commence production by November 2021, and the Australia project by end of Q1FY23

First mover among the private sector to secure defence orders

Over the past five years, the company’s annual revenues grew at 7% CAGR and the profits grew at 7.5% CAGR. One of the prime factors behind this growth is the opening up of defence production to private companies. Till 2015, defence production was exclusively the domain of government-owned companies. Solar Industries is one of the first private sector companies to get orders to supply grenades to the armed forces. All defence related orders are executed via Economic Explosives Limited, a wholly-owned subsidiary of Solar Industries.

Solar Industries is also the beneficiary of the ToT (transfer of technology) from DRDO (Defence Research and Development Organisation) for mass production of a crucial solid propellant booster of missiles. This is part of the government initiatives for self-sufficiency in defence. The propulsion system for the Brahmos missile currently imported from Russia is being replaced with an indigenous one.

The company generated revenues of Rs 1,613 crore in H1FY22, its highest for the first half of any financial year. The management revised its guidance for revenue growth from 25-40%, and for volume growth in the region of 20-25% in FY22.

Government policies related to housing and infrastructure, private coal mining and push for ‘Make in India’ defence products are triggers that the company is banking on for better performance in coming quarters. Coal mining requires a continuous supply of explosives in mines, and new private coal mines present an opportunity for the company. Explosives find application in housing construction for breaking hard rock for foundations and basement excavations in hard terrains. Similarly in infrastructure projects, explosives are extensively used for making tunnels and road construction in hilly areas.

Though revenues grew YoY in Q2FY22, profits were impacted due to high commodity prices, disruption in supply chains, foreign currency exchange prices and fear of the third wave of Covid-19. The management in a conference call with analysts said that it was not possible to fully pass on the price rise to its customers. However, going forward, the company will pass on some part of the price rise to customers with a lag of one to three months.

The price of raw materials like ammonium nitrate has increased 38% YoY and 11% sequentially. The company expects the price of raw materials to subside in the coming quarters. Due to an increase in raw material prices, the EBITDA was lower in Q2FY22 as compared to the previous four quarters.

Diverse verticals contribute to revenues

The revenues are fairly diversified with exports contributing to almost half of the revenues. Among the others, Coal India as a customer contributed 15%, for the supply of bulk explosives.

The current order book for FY22 stands at Rs 2,842 crore with Coal India contributing Rs 1,471 crore and defence segment orders worth Rs 576 crore due to the recent order of multi-mode hand grenades.

The order book from the defence segment is expected to grow due to orders for rocket launchers. Solar Industries is expanding its capacity, product mix and presence both domestically and internationally. The company is planning to set up two new plants in India. Out of the planned capex of Rs 315 crore in FY22, Rs 137 crore has been utilized in H1FY22.

International operations in Turkey are normal, while Africa is facing logistics disruption and raw material price hikes. In Tanzania, the new project is almost complete and production is expected to commence from November 2021. The Australian project is running late due to the pandemic and heavy monsoons, but it is expected to be completed in FY22 with production starting from Q1FY23.

The Gati Shakti Master plan announced by the government of India is expected to expedite projects across the country. Under this project, the government has got sixteen ministries like roads, railways, power, gas, shipping, etc. on one platform for coordination of various projects between ministries as well as the central and state governments. Solar industries is expected to benefit from many infrastructure projects under this plan for the explosives vertical.

In August 2021, Solar Industries handed over the first batch of one lakh indigenously designed and manufactured modern hand grenades to the Indian Army. The first consignment of 40,000 multi-mode hand grenades (MMHG) will replace the British era design of hand grenades being used by the country’s Army to date. Armed Forces in many Commonwealth Nations, including India, are still using the vintage hand grenades designed by the British way back in 1915. This is the first instance of ammunition being manufactured by the private industry in India.

Apart from current orders, Solar Industries is also making inroads in space technology with rockets. The company has successfully developed prototypes for armed drones for the Indian Army.

While the developments in the last few years are positive for the company, there are several risks associated with the business. With products such as explosives and ammunition, a lot of information is not available in the public domain due to confidentiality agreements. With arms and explosives being a sensitive products, even one incident of misuse can blow up the company’s reputation. These risks should be considered before investment.

With current orders across different verticals, potential orders from defence, expanding international operations and exports, Solar Industries is on the verge of being one of the leading private sector arms suppliers to the armed forces and one stock that might interest investors looking for a unique theme.

Solar Industries Ind.. has an average target of 16000.00 from 1 broker.

Polycab India Ltd.

26 Nov 2021

5765.00

-2.06%

Polycab - Wired up to hold on to its number one spot

By Ketan Sonalkar

Polycab India is the largest manufacturer of wires & cables in India. The company also entered the fast-moving electrical goods (FMEG) space in 2014 and is growing through new product launches and dealer additions across the country.

Since its listing on stock exchanges in April 2019, the stock has delivered 4X returns for investors, and comparing data for the past …

Subscriber exclusive for you. Click here to read.This is a premium article. Click here to read.

Since its listing on stock exchanges in April 2019, the stock has delivered 4X returns for investors, and comparing data for the past one year, it has delivered returns higher than its peers in the electrical wire and cables industry.

The Q2FY22 results saw a resurgence in demand post a subdued quarter impacted by the second wave of the pandemic.

The wires and cables industry is a beneficiary of the recent development of power generation, distribution infrastructure, urbanisation, and smart cities, and comprises nearly 40 percent of the electrical industry in India.

Quick Takes

Highest ever quarterly revenues of Rs 3,016 crore in Q2FY22
Wires and cables business grew 63% YoY to Rs 4,134 crore in H1FY22 from Rs. 2,534.3 crore in H1FY21 due to improved demand
FMEG business grew 40% YoY to Rs 534.8 crore in H1FY22 from Rs. 381.8 crore in H1FY21 with growth across product categories
Polycab acquired 100% stake in Bengaluru-based automation company, Silvan Innovation Labs for Rs 18.2 crore in June 2021
The company signed an agreement for hiving off its underutilised subsidiary Ryker Base with Hindalco Industries in November 2021

Resurgence in demand in Q2FY22 after a tepid quarter

Polycab reported its highest ever quarterly revenues in Q2FY22 at Rs 3,016 crore. This assumes significance with the background of the previous quarter which was severely impacted by the second wave of the pandemic. Polycab is the market leader in the wire and cable space with a market share of 22% in the organised market. The results reflect the growing demand of the company’s products across segments and geographies.

Input cost pressures hemmed in the growth in profits as prices of the majority of Polycab’s raw materials prices saw inflation. This has been a growing concern across the industry, largely affecting unorganized players who were unable to absorb the input costs resulting in increasing market share of large organised players like Polycab.

Wires and cables continue to contribute to the majority of the revenues. The growing demand across sectors like energy, real estate and demand for reliable, efficient energy as well as data communication is driving this industry. Polycab supplies cables across industries like power, oil and gas, construction, railways, telecom and real estate, and most of these sectors are seeing recovery post the second wave of the pandemic.

The contribution of the FMEG segment which was 5.5% about five years ago, has now doubled to 11.5%. The revenues from this segment have consistently increased over the last five years and crossed Rs 1,000 crore in FY21. The FMEG business segment revenue grew by 40.6% YoY to Rs 342.9 crore in Q2FY22. Seasonality factor has affected the performance of fans business while lights, switches, conduit pipes and pumps posted healthy growth. Other businesses including switchgear, solar, and water heaters grew 2X on last year’s low base.

Since its foray into the FMEG segment in 2014, Polycab focused on products based on upcoming trends. It introduced products like energy efficient fans, and modular switches. It added LED lighting products in 2017 which are being actively promoted by the government as well as being adopted with rising consumer awareness of energy efficient lighting.

Key factors for growth of the FMEG segment include inhouse manufacturing and strong distribution network for FMEG products covering geographies across India. About 20% of distributors sell wires and cables along with FMEG products, while 52% of distributors exclusively sell FMEG products. Apart from this, branding exercises have helped in brand recall with the use of cine actors for campaigns across print, television and social media. The advertising and sales promotion is now focused on increased advertising on social media and sales promotion.

Hiving off an underutilized subsidiary will reduce debt on the books

As part of its backward integration strategy, Polycab bought Ryker (Ryker Base Pvt Ltd) in May 2020 for the supply of copper rods, a key raw material for all its products. Ryker's total annual capacity is 225,000 MT (metric tonnes), while Polycab’s current demand is in the range of 70,000 - 75,000 MT, leading to underutilisation of the plant. Considering the suboptimal utilisation of capacities and its decision to focus on its core business, Polycab decided to exit this venture.

Polycab signed an agreement with Hindalco Industries, via its wholly-owned subsidiary, Renuka Investments and Finance Limited to divest the entire stake in Ryker at an enterprise value of Rs 323 crore. The cash received from this deal will help Polycab reduce debt.

In order to ensure the continued supply of copper rods, the company entered into a multi-year tolling arrangement with Hindalco where Ryker will continue to process and supply high-quality copper rods on mutually beneficial commercial terms. Polycab expects this merger transaction to complete by December 2021, subject to fulfillment of certain conditions by both parties.

Acquisition of home automation company to widen FMEG portfolio

Polycab entered the home automation space with its brand ‘Hohm’ in 2020. It has taken a step further in strengthening this segment with the acquisition of Silvan Innovation Labs in June 2021.

Polycab has signed an agreement to acquire 100% stake in Bengaluru-based automation company, Silvan Innovation Labs for Rs 18.2 crore. Founded in 2008, Silvan is one of the pioneers in the concept of home automation in the Indian residential market with a proven track record with many real estate developers.

Polycab’s acquisition of Silvan gives it a boost in the home automation segment, augmenting its FMEG offerings. Silvan’s internet of things (IOT) based automation products and solutions portfolio includes lighting management systems, room automation, temperature control devices, contactless controls, curtain control, security devices among others.

On this acquisition, Chairman of Polycab Inder T. Jaisinghani said that the company's ambition is to become a consumer-centric company and the addition of the IoT portfolio aligns with a strategy to address evolving consumer needs.

Polycab laid out its five-year roadmap with the project ‘Leap’ in FY21 annual report. Under this project, it aims to achieve a revenue of more than Rs 20,000 crore by FY26. This project covers an all round development of the operations in terms of operational efficiency, market reach, increase in capacity, wider distribution network, digital transformation, and strong ESG compliance. It aims to grow its retail wires business by more than 1.5x and FMEG business by 2x over the next five years.

Polycab is well positioned with leadership in wires and cables. The FMEG segment is gaining market share over the past few years. Decisions like hiving off the copper rod production subsidiary and expanding FMEG with futuristic IOT products is bound to have an impact on the topline as well as bottomline in coming quarters. Among the players in this segment, Polycab looks currently poised to retain its leadership position in the sector.

Polycab India Ltd. is trading above its 50 day SMA of 5280.4

Mutual Funds News

TREND | 18 Nov 2021

Following the fund flows this month – What is the smart money buying?

By Ketan Sonalkar

The monthly portfolio disclosures by mutual funds give investors an insight into what the smart money is doing in the market and the sectors and companies that are currently in favour or have fallen off the radar for fund managers. This screener shows stocks where mutual funds increased holdings in October 2021. The monthly data indicates growing interest from fund managers in a leading technology company, cement as well a general insurance company. Real estate, pharma as well as financial services companies are also seeing fund managers’ interest piquing in October 2021.

HCL Technologies – geared up for new order wins

HCL Technologies is among India’s top five IT services companies. It recorded its highest ever quarterly revenues in Q2FY22 at Rs 20,895 crore. The management guided for revenue growth of 22-23%, and EBIT margin in the range of 19-21% for FY22.

In Q2FY22, HCL Technologies secured multiple and high-value long-term contracts with the world’s leading brands. The new deals include the addition of 18 new clients in the $ 20 million deal category, 18 new clients in the $ 50 million deal category, and 1 new client in the $ 100 million deal category. A strong deal pipeline and diverse service mix across sectors will help the company attain growth in FY22 as well as in FY23

Anticipating strong demand in the coming months, the company is on a hiring spree and hired around 11,135 employees during Q2FY22. Over the last three quarters, the company has so far hired a combined total of around 32,000 employees.

Fund managers who increased their holdings in HCL Technologies

Fund managers who added HCL Technologies to their portfolio are Priyanka Khandelwal, Sankaran Naren and Dharmesh Kakkad toICICI Prudential Value Discovery Fund Growth scheme, Sailesh Jain to Tata Arbitrage Fund Regular Growth scheme, Hiten Shah to Kotak Equity Arbitrage Fund Growth scheme, and Manish Banthia, Priyanka Khandelwal and Sankaran Naren to ICICI Prudential Equity & Debt Fund Growth scheme.

Ambuja Cements – Capacity expansions lay foundation for future growth

Ambuja Cements is a leading cement company in India. It is part of the LafargeHolcim Group, the global leader in the building materials industry.

The company commissioned its new greenfield project at Marwar Mundwa, Rajasthan in September 2021. This plant has a production capacity of 1.8 MT (million tonnes) cement, 3 MT clinker. This is expected to boost cement sales by about 5 MT. With this, the company’s installed cement capacity now stands at 29.7 MTPA (million tonnes per annum) with four captive ports.

In keeping with the company’s target to reach 50 MT capacity in the next few years, the company has already embarked upon a new brownfield expansion of 1.5 MT cement grinding unit at Ropar, Punjab.

Fund managers who increased their holdings in Ambuja Cements

Gaurav Misra and Gaurav Khandewaladded Ambuja Cements to Mirae Asset Large Cap Fund Regular Growth scheme, Priyanka Khandelwal, Rajat Chandak and Anish Tawakley to ICICI Prudential Bluechip Fund Growth scheme, Harsha Upadhyaya, Abhishek Bisen and Arjun Khanna added the company to Kotak Multicap Fund Regular Growth scheme and Dinesh Ahuja, Dinesh Balachandran and Mohit Jain added the stock to SBI Balanced Advantage Fund Regular Growth scheme.

ICICI Lombard General Insurance – Ensuring profitability in a post-pandemic world

ICICI Lombard General Insurance is a leading private general insurance company that offers various insurance products like travel, home, health and motor covers.

In Q2FY22, net premium earnings grew 32.0% YoY to Rs. 3,250 crore. PAT increased by 7.4% YoY to Rs 447 crore. To maintain its profitability, the company raised prices on group health policies by 15-20% due to an increase in health insurance claims arising due to the pandemic.

Another positive development is the completion of the merger with Bharti AXA. The company received the final approval from the IRDAI (Insurance Regulatory and Development Authority of India) on September 3, 2021.

Fund managers who increased their holdings in ICICI Lombard

Fund managers who added ICICI Lombard GI to their portfolio are R Srinivasan to SBI Focused Equity Fund Growth scheme, Priyanka Khandelwal, Sankaran Naren and Dharmesh Kakkad to ICICI Prudential Value Discovery Fund Growth scheme, R.Srinivasan and Dinesh Ahuja purchased shares for SBI Equity Hybrid Fund Regular Payout Inc Dist cum Cap Wdrl scheme and Dinesh Ahuja, Dinesh Balachandran and Mohit Jain purchased for SBI Balanced Advantage Fund Regular Growth scheme.

Oberoi Realty – Unprecedented response to new launches piques investor interest

Oberoi Realty is a Mumbai-focused real estate developer with a presence in the premium residential, commercial, and hospitality segments.

In October 2021, the company witnessed a phenomenal response to its new project Elysian in Goregaon, Mumbai. It recorded gross bookings of Rs 787 crore for 3.9 lakh sq ft within days of the project launch.

The cumulative gross booking value from January 2021 to date for ongoing projects stood at about Rs 2,705 crore, which is higher than the annual revenues for any year in the past five years. With demand for premium projects picking up and an expansive lineup of projects, Oberoi Realty is on the radar of many fund managers.

Fund managers who increased their holdings in Oberoi Realty

Hiten Shah purchased shares for Kotak Equity Arbitrage Fund Growth scheme, Sailesh Raj Bhan and Kinjal Desai purchased shares for Nippon India Multi Cap Fund - Growth scheme, while Shridatta Bhandwaldar added to Canara Robeco Emerging Equities Growth scheme and Aniruddha Naha and Ravi Adukia added to PGIM India Flexi Cap Fund Regular Growth scheme.

Glenmark Pharmaceuticals - new US facility and consumer healthcare to drive growth

Glenmark Pharmaceuticals is a research-driven pharma company with a global presence. The September 2021 quarter was an important quarter for the company as it posted its highest-ever quarterly revenues of Rs 3,134.4 crore and highest quarterly operating profit at Rs 590.2 crore.

The company commissioned a new facility at Monroe in the US, which will bolster the US business. It is the company’s first manufacturing site in the US. Another product expected to gain substantial market share is Ryaltris, (nasal spray for allergic rhinitis) which has been launched in the US as well as global markets.

In India, Glenmark Pharma forayed into the consumer health segment focusing on dermatology products led by two brands, Candid and Scalpe plus.

Fund managers who increased their holdings in Glenmark Pharmaceuticals

Fund managers who added Glenmark to their portfolios are Anil Shah and Vinod Bhat to Aditya Birla Sun Life Flexi Cap Fund Growth scheme, Anil Shah to Aditya Birla Sun Life Mid Cap Fund Growth scheme. Shares were purchased by Hiten Shah for Kotak Equity Arbitrage Fund Growth scheme and Sailesh Jain for Tata Arbitrage Fund Regular Growth scheme.

ABB India - New sectors open up doors for future growth

ABB India is a multinational corporation headquartered in Zürich, Switzerland, operating mainly in robotics, power, heavy electrical equipment, and automation technology areas.

InQ2FY22, the company bounced back with revenues of Rs 1,803 crore, the highest in the last seven quarters and profits of Rs 119.9 crore, a YoY increase of 50%

The company received new orders of total of Rs 19,100 crore, contributed by Motion (42%), Electrification (37%), Process Automation (19%). New high growth sectors such as renewables, water, data centers, railways, metro and F&B (food and beverage) are the sectors driving the order book.

Sanjeev Sharma, Managing Director at ABB India, said, “the strong demand for ABB products, solutions and services portfolio in many of our targeted market segments along with our continuous focus on operational efficiency and cost control ensured improvement in profitability despite the sharp increase in commodity prices during the quarter.”

Fund managers who increased their holdings in ABB India

Aniruddha Naha and Vivek Sharma added to PGIM India Midcap Opportunities Fund Regular Growth scheme, Manish Gunwani, Kinjal Desai and Dhrumil Shah to Nippon India Growth Fund - Growth scheme, while Abhiroop Mukherjee and Herin Visaria added to Motilal Oswal Flexicap Fund Regular Plan Growth scheme and Shreyash Devalkar and Hitesh Das to Axis Midcap Fund Growth scheme.

Gokaldas Exports - Capacity addition and favourable policy to aid future revenues

Gokaldas Exports is one of India’s leading apparel exporters with an annual capacity of 30 million pieces. The Q2FY22 results are significant, with the highest quarterly revenues in the last six quarters of Rs 1,803 crore and operating profit of Rs 165.4 crore.

Production is currently running at peak utilisation levels, with a robust order book for the next six months. Demand from the US apparel market continues to remain healthy. The company has planned a capex of Rs 340 crore over the next four years (till FY25) which will help generate additional revenues worth Rs 1,350 crore.

Government policies like the PLI (production linked incentive) scheme for textiles and textiles parks policy is set to boost apparel exports from India. In addition, China+1 strategy of global brands provide long-term growth opportunities for players like Gokaldas Exports.

Fund managers who increased their holdings in Gokaldas Exports

Gokaldas Exports found buyers in fund managers Samir Rachh and Kinjal Desai for Nippon India Small Cap Fund - Growth scheme, Sohini Andani for SBI Magnum Midcap Fund Regular Growth scheme, Chandraprkash Padiyar and Satish Chandra Mishra for Tata Small Cap Fund Regular Growth scheme and Saurabh Pant for SBI Consumption Opportunities Fund Regular Plan Payout Inc Dist cum Cap Wdrl scheme.

Escorts - Collaboration paves the way for increased export potential

Escorts is the third-largest tractor manufacturer in India. It has a strong presence in northern and western India. It is present in construction and material handling equipment, such as cranes, compactors, and forklifts.

The collaboration with Japanese tractor maker Kubota helped expand the products and technology upgrades in tractors, which resulted in improved numbers both in the domestic market, as well as exports.

Growth in the construction equipment segment is likely to drive sales in H2FY22 due to the thrust for massive infrastructure projects in India.

Fund managers who increased their holdings in Escorts

Fund managers purchasing shares of Escorts include Taher Badshah and Dhimant Kothari for Invesco India Contra Fund Growth scheme, Kinjal Desai, Anand Gupta and Anju Chhajer for Nippon India Arbitrage Fund Growth scheme, while Sajeev Sharma, Vasav Sahgal, and Ankit Pande added shares to two schemes, Quant Active Fund Growth scheme and Quant Mid Cap Fund Growth scheme.

Prince Pipes and Fittings - New partnership set to increase production and sales

Prince Pipes is a manufacturer of PVC and UPVC pipes for plumbing, agriculture, and sewage disposal. The company listed on the stock exchanges in December 2019 and its stock saw a stellar rise since. In the 22 months since listing the company’s stock rose nearly 6X returns till October 2021. The Q2FY22 results were encouraging as the company posted its highest-ever quarterly revenues of Rs 762.5 crore.

A major development for the company in Q2FY22 was the partnership with Lubrizol for supply of Corzan CPVC processors to manufacture and sell Corzan CPVC material and piping solutions in India. This can significantly boost the sales of CPVC products in coming quarters.

Fund managers who increased their holdings in Prince Pipes

Neelesh Surana and Ankit Jain purchased shares for Mirae Asset Emerging Bluechip Fund Growth scheme, Mahendra Kumar Jajoo, Harshad Borawke and Vrijesh Kasare for Mirae Asset Hybrid Equity Fund -Regular Plan-Growth scheme, Neelesh Surana for Mirae Asset Tax Saver Fund -Regular Plan-Growth scheme and Ankit Jain for Mirae Asset Midcap Fund Regular Growth scheme.

Motilal Oswal Financial Services - Growth across verticals in a competitive space

Motilal Oswal is a diversified financial services company. Its verticals include capital markets, asset management, housing finance, and fund-based investments. Since the onset of the pandemic, the company was an unexpected beneficiary of the exponential growth in new demat accounts and investors in the capital markets.

The company’s Q2FY22 results indicate the growing stickiness of customers. It posted its highest ever quarterly revenues of Rs 1328.8 crore. Revenues grew across verticals, with capital markets revenues of Rs 604.8 crore, an increase of 44% YoY, asset management revenues of Rs 147.2 crore, an increase of 27% YoY and private equity revenues of Rs 151 crore, an increase of 463% YoY.

Fund managers who increased their holdings in Motilal Oswal Financial Services

Fund managers who added to their portfolios are Rajeev Thakkar, Raunak Onkar and Raj Mehta to two schemes, Parag Parikh Flexi Cap Regular Growth and Parag Parikh Tax Saver Fund Regular Growth, Prasanna Pathak also added to two schemes Taurus Flexi Cap Fund - Growth and Taurus Tax Shield-Growth Option.

HDFC Asset Management Company Ltd.

11 Nov 2021

4287.80

-3.20%

HDFC AMC battles rising competition in the asset management industry

By Ketan Sonalkar

In the last one and a half years, the asset management industry is witnessing fundamental changes in operations, digital disruptions, new product categories and in its challenge to capture the exponential number of customers who have opened new demat accounts in the same period.

HDFC Asset Management Company or HDFC AMC is one of the earliest entrants in the asset …

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HDFC Asset Management Company or HDFC AMC is one of the earliest entrants in the asset management business and has one of the largest AUM (assets under management) of Rs 4.4 lakh crore. Though the overall size of the asset management business is increasing, HDFC AMC’s market share is down over the last few years.

In February 2021, the company saw a change of leadership with the new CEO Navneet Munot taking charge. He takes over from Milind Barve, who was the Managing Director of the fund house for the last twenty years. Munot, in his earlier role was the CIO (chief investment officer) of SBI Mutual Fund for 12 years, and during this period, the fund house soared to leadership position in terms of AUM and market share.

The stock is underperforming since the past two years. On the day of Q2FY22 results, its returns stood at 21% as against Nifty 50’s returns of 54% for the preceding year.

Quick Takes

Overall AUM (assets under management) YoY growth of 23% in Q2FY22 to Rs 4.35 lakh crore
Despite a declining market share, HDFC AMC had a market share of 12.1% in Q2FY22, second to SBI MF.
HDFC AMC is planning to launch nine new passive funds including ETFs (exchange traded funds)
Equity MF (mutual funds) continue to be the strongest segment with 50% YoY growth and highest AUM contribution at Rs 15.6 lakh crore
Other funds category which includes ETFs (exchange traded funds) and international funds have grown 60% YoY at Rs 4.9 lakh crore

Adapting to shifting trends and investor preferences

Investors’ preference for new and differentiated mutual fund products is changing the landscape of the mutual fund industry. A notable change in investor behaviour is allotment of a portion of investments to international funds via the FoF (fund of funds) route or the ETF route. A lot of investors' funds also got distributed among a slew of NFOs (new fund offerings) by several AMCs. HDFC AMCs market share of the overall AUM has declined YoY from 13.6% to 12.1% in Q2FY22.

Commenting on these trends, the CEO of HDFC AMC, in a conference call with analysts said ”Our redemption share has been more or less constant over the last three years or so. The impact that you see in market share is due to lower share in gross inflows. And the lower share in gross inflows may be attributed to a couple of reasons, one is that a large part of inflows in the recent past has been through as you would know NFOs.”

He added that there are times when one must be more prudent rather than just be part of what is happening in the market. HDFC AMC has been selective in launching NFOs. The last launch was for the dividend yield category in Q3FY21 and they plan to launch another multi cap fund post approval from the regulator.

Direct investing gains popularity with investors

There are many changes in the channels that contribute to inflows contributing to AUM. The ‘direct’ channel now commands about 45% of the share, followed by MFDs (mutual fund distributors).

The banking channel contributes to less than 10%, with a 5.3% contribution by group company, HDFC Bank. The large percentage of direct channels hints at increasing awareness among investors, as a result of which they are carrying out transactions independently.

Equity MF schemes have historically been the strength of HDFC AMC. This is reinforced with the contribution of equity AUM up to 45% QoQ in Q2FY22 from 43% . Similarly SIP (systematic investment plan) flows rose to Rs 1,080 crore in Q2FY22 from Rs 980 crore in Q1FY22. The management indicated that HDFC AMC will continue to focus on active fund management and focus on adding value for investors.

The company’s new fund launches included a banking sector fund and an international fund in Q2FY22. The total amount raised via the NFO for the international fund was Rs 1,100 crore. Apart from equity schemes, the ‘others’ funds category (which includes ‘fund of funds and ETFs) is growing faster than debt and liquid fund schemes. In Q2FY22, the other funds category surpassed the quarterly AUM of liquid funds.

High margins and underpenetrated markets brings in lots of competitors

Asset management is a high-margin business and this is one of the primary reasons for the growth of the industry. In addition, data confirms that financialisation of savings is very low in India at present. This is expected to grow exponentially over the coming years. Not to miss out on this opportunity, at last count as many as ten new players have filed applications for new AMCs with the regulator and some of these have got a green signal to launch operations since the beginning of the CY21.

Many of the new entrants are planning to offer investors passive schemes. In order to offer similar products, HDFC AMC in Q2FY22 applied to the regulator to launch nine passive funds. These include ETFs on Nifty Growth Sectors 15, Nifty IT, Nifty Next 50, Nifty Private Bank, Nifty 100 Low Volatility 30, Nifty 100 Quality 30, Nifty 200 Momentum 30 and NV 20.

Replying to a question on new schemes during an analyst call, the CEO said, ”Over the last couple of quarters, we have launched a few products. We are going to have some more products over the next several quarters. We believe that all of these efforts, including the performance improvement, would be noticed by the market and we should be able to see a gradual improvement in the market share.”

With rising competition and changing investor preferences, the task for the new leadership is cut out towards regaining lost market share. The next few quarters will be exciting for the asset management industry with new entrants trying to wrest market share. How well-entrenched players like HDFC AMC respond to the competition is something that will be keenly watched.

HDFC Asset Management Company Ltd. is trading above all available SMAs