Trendlyne Marketwatch    
05 Mar 2021, 03:45PM
Markets close lower, MTAR Tech's Rs 596 cr IPO subscribed 190 times

Indian markets slumped today. Nifty 50 closed at 14963.15 (-117.6, -0.8%) , BSE Sensex closed at 50405.32 (-440.8, -0.9%) while the broader Nifty 500 closed at 12559.70 (-129.2, -1.0%)

Market breadth is sharply down. Of the 1715 stocks traded today, 430 showed gains, and 1229 showed losses.

  • Quick Heal Technologies hits a 52-week high as the cybersecurity company's board will consider a buyback plan during its meeting on March 10.

  • MTAR Technologies' Rs 596 crore IPO is subscribed 190 times on the final day of the bidding.

  • Indoco Remedies, Mahanagar Gas, Gulf Oil Lubricants India, and Balrampur Chini Mills are trading with double the average weekly trading volume.

  • Life Insurance Corporation (LIC) of India sells 4.6 lakh shares of Axis Bank worth Rs 35 crore via an insider trade. This is LIC's third disposal in the private bank in March.

  • Ircon International's offer for sale to retail investors was subscribed 98% and 3.3 times to institutional investors. On an overall basis, the railway PSU's OFS is subscribed 1.4 times.

  • Tata Motors reports Jaguar-Land Rover UK sales of 2,171 units in February 2021, a 26% decline on a YoY basis.

  • Reliance Power forms a joint venture with Jera Co., a Japanese power company, to develop a gas-fired power project in Bangladesh. The Anil Ambani-led company expects to reduce debt Rs 3,000 crore by the end of the month.

  • Heranba Industries lists at Rs 900, a 44% premium to the issue price of Rs 627. The agrochemical company's IPO comprised of a Rs 565 crore OFS and a Rs 60 crore fresh issue.

  • Nifty Financial Services opens in the red pulled down by losses in Cholamandalam Investment & Finance Company, ICICI Bank, State Bank of India, and Power Finance Corporation.

  • IT-major Wipro will buy British consultancy company Capco for $1.4 billion (~Rs 10,200 crore) to boost its banking, financial services and insurance (BFSI) offerings.

  • Indian markets slumped today. Nifty 50 was trading at 14997.00 (-83.8, -0.6%) , BSE Sensex was trading at 50527.19 (-318.9, -0.6%) while the broader Nifty 500 was trading at 12636.25 (-52.6, -0.4%)

  • Market breadth is in the green. Of the 1596 stocks traded today, 947 were gainers and 573 were losers.

Riding High:

Largecap and midcap gainers today include Motilal Oswal Financial Services Ltd. (657.20, 5.96%), Emami Ltd. (472.00, 4.76%) and Adani Power Ltd. (74.35, 4.20%).


Largecap and midcap losers today include Bank of Baroda (80.65, -6.00%), Steel Authority of India (SAIL) Ltd. (72.10, -5.63%) and Apollo Hospitals Enterprise Ltd. (2879.50, -5.34%).

Volume Shockers

14 stocks in BSE 500 are trading on high volumes today.

Top high volume gainers on BSE included CSB Bank Ltd. (259.85, 9.78%), TV18 Broadcast Ltd. (34.00, 7.26%) and Blue Dart Express Ltd. (4802.80, 3.59%).

Top high volume losers on BSE were Wipro Ltd. (420.85, -4.09%), Indoco Remedies Ltd. (280.60, -3.66%) and Balrampur Chini Mills Ltd. (201.50, -3.61%).

Gulf Oil Lubricants India Ltd. (786.90, 3.04%) was trading at 5.0 times of weekly average. Mahanagar Gas Ltd. (1219.05, 1.49%) and KNR Constructions Ltd. (213.75, 2.86%) were trading with volumes 4.4 and 4.1 times weekly average respectively on BSE at the time of posting this article.

BSE 500: highs, lows and moving averages

39 stocks made 52 week highs,

Stocks touching their year highs included - ACC Ltd. (1824.45, -1.58%), Adani Power Ltd. (74.35, 4.20%) and Ambuja Cements Ltd. (284.80, -2.47%).

7 stocks climbed above their 200 day SMA including IOL Chemicals and Pharmaceuticals Ltd. (661.30, 3.33%) and Fine Organic Industries Ltd. (2394.75, 1.23%). 7 stocks slipped below their 200 SMA including Mishra Dhatu Nigam Ltd. (194.10, -2.93%) and Rallis India Ltd. (270.65, -2.50%).

The Baseline    
05 Mar 2021, 12:07AM
Five Interesting Stocks Today
  1. EID Parry: This sugar producer’s stock is up by 11% in two weeks and is now 4.3% off its 52-week high and 8% off its lifetime high. Its valuation remains cheap relative to its historic average as its trailing 12-month (TTM) price to earnings (PE) ratio is 10.2 times, below the median PE ratio of 33.7 times. This puts it in the buy zone.

  2. Acrysil: This household appliances maker’s marquee investor has cut its stake. This week, Ashish Kacholia’s Everest Finance & Investment Co, sold 5.3 lakh shares, cutting its stake by 2%. The company also counts Sunil Singhania’s Abakkus Asset Managers as an institutional investor, holding a 6.4% stake.

  3. Indian Railway Catering & Tourism Corporation: This railway company has caught the eye of mutual funds. At the end of January 2021, mutual funds held 81.4  lakh shares in the company, up from 50 lakh shares in December 2020. In one month, its stock price has jumped 34%.

  4. Ajanta Pharma: This pharmaceutical company’s stock is falling and its delivery volume is rising. Its average delivery volume this week jumped to 56%, ranging from 29% to 70%. This is higher than the average monthly delivery volume of 41%. Its stock price is down by 5% in two weeks.

  5. State Bank of India: This public sector bank’s index outperformance has paused. In the past month and quarter, its stock beat the benchmark Nifty 50 by 14% and 40% respectively reaching a lifetime high. However, in the past week, it has underperformed the Nifty 50 by 4%.

Dabur India Ltd.    
04 Mar 2021, 12:59PM
Dabur India doubles down on healthcare for growth

By Suhani Adilabadkar

Dabur India is home to over 400 trusted products and more than 1,000 SKUs. Apart from being a strong domestic player in the fast moving consumer goods (FMCG) space, it has a footprint across 100 countries and overseas revenues make up 28% of its total turnover.

Dabur continued with its strong September double-digit revenue growth momentum by posting the strongest volume growth in the FMCG space in the quarter ended December 2020. It also posted its highest ever net profit (PAT) and revenue in Q3 FY21.

Quick Takes:

  • E-commerce channel now contributes to around 6% of Dabur’s business

  • As raw materials prices firm up, Dabur aims to manage operating margins through price increases and cost optimizations measures

  • Dabur Chyawanprash has 60% market share and Dabur Honey 40% market share in their respective segments

  • Healthcare business contributed 44% to total domestic FMCG revenues in Q3 FY21 doubling over the past 2-3 years

FMCG business sees strong growth in Q3

Dabur saw robust revenue growth of 16% YoY in the quarter ended December 2020, driven by healthcare and home & personal care (HPC) segments. Revenue from operations came in at Rs 2,728 crore compared to Rs 2,353 crore a year ago. Dabur’s domestic FMCG business reported stellar growth of 19.5% on the back of 18% volume growth. International business grew at 13% in Q3 FY21. Operating profit came in at Rs 574 crore rising 16.5% YoY. Margins were steady at 21% in quarter ended December 2020 aided by lower input and employee costs, and other expenses

FMCG volumes

Net Profit increased 24% YoY to Rs 492 crore in Q3 FY21. Mohit Malhotra, CEO at Dabur said that the strengthening of the company’s core healthcare portfolio with heavy investments behind power brands helped the company. This, coupled with investment in expanding Dabur’s rural footprint served the company well, he added.

Pandemic tailwinds help Dabur soar

One product that got a boost due to the pandemic is Dabur’s chyawanprash. The product’s pre-Covid penetration levels used to be as low as 2% in India. Nine months after the pandemic broke out, the product’s penetration has increased by more than 400 basis points. For Dabur, revenues from chyawanprash, which garnered roughly Rs 10 crore in Q1 FY20, rose seven-fold YoY in the quarter ended June 2020.FY21 This quarter is usually considered an off-season for the product.

Revenue trajectory

The chyawanprash brand is one of the nine power brands that make up 70% of Dabur’s total business. Chyawanprash, along with honey, is part of the company’s health supplement sub-segment of the healthcare vertical. Apart from the health supplements business, which grew 35% YoY, digestives, OTC and ethicals also form part of the healthcare vertical. Growth in OTC revenues was 34% YoY, which was driven by the Honitus, Lal Tail and Shilajit portfolio. Ayurvedic ethical revenues also rose 23% YoY.

Revenues from digestives were flat, impacted by lower out-of-home consumption. On an aggregate basis, healthcare revenues rose by a robust 28% YoY. Home & personal care saw 16% YoY growth in revenues in Q3 FY21. It comprises oral care, skin care, hair care, shampoo and home care segments. Oral care was the star performer with 28% revenue growth, driven by Dabur Red, Meswak and Babool franchises growing in double digits. Hair oils returned to positive growth in Q3 after three consecutive quarters, with revenues rising 12% YoY. The shampoo portfolio’s revenues jumped 27% YoY and its market share increased by 50 basis points to touch 6.5%.

While skin care revenues grew 9% driven by strong growth in Fem hand wash portfolio, home care reported a muted performance (1% fall in revenues). This is because the air fresheners and mosquito repellent cream category continued to be under pressure, reporting a high single digit decline. The foods segment reported 5% YoY revenue growth, despite HoReCa and CSD businesses operating at lower than pre-Covid levels. Excluding HoReCa and CSD, food business registered growth of 16%. Real, Real Activ and culinary range under the Hommade brand constitutes major brands under Dabur’s food segment.

Dabur’s new product strategy pays dividends

Like all companies, the pandemic has changed Dabur. The company has embarked on a journey of innovation, getting into categories much larger than its existing ones and launching a slew of new products. Moving away from its core strategy of catering to the high margin discretionary segment, the company has widened its product basket encompassing multiple demographics through product innovations and low unit price points (LUPs) to capture the downtrading trend across segments post Covid.

The company has been building its LUP portfolio for the last two years. Hair oil, shampoo, oral care now offers accessible price points up to Rs 10. Babool, Meswak and Dabur Red toothpaste are available in Rs 10 packs and so is the recently launched Koolerz brand. In fact, the company is also working on healthcare products. They will mostly be available in large packs.

Dabur’s innovation spree has taken analysts by surprise. After adding immunity boosters such as tulsi and haldi drops, as well as amla juice to its product stable, the company introduced ghee, which piqued analysts’ and customers’ interest alike. New products which formed a low 1.5% of total revenues till last year now account for about 6%. 

To promote these new launches, Dabur intends to increase its advertising and promotional expenditure to 12% from 7-8%. The rise in spending is similar to HUL. The company has also augmented its direct reach in general trade to 1.3 million by December quarter FY21 from 1.2 million outlets in March 20 .

Riding on the healthcare business

Dabur’s nine power brands– Dabur Chyawanprash, Dabur Honey, Dabur Lal Tail, Dabur Honitus, Dabur Pudin Hara, Dabur Red Paste, Dabur Amla Hair Oil, Vatika and Réal fruit juice account for more than 70% of its total sales. Five of these power brands—Chyawanprash, Honey, Lal Tail, Honitus and Pudin Hara belong to the healthcare segment. Dabur Chyawanprash has 60% market share in a Rs 1,000 crore category. And in the honey segment, the company has 40% market share in the Rs 1,500 crore category.

With such robust brands in its fold, the healthcare business contributed 44% to total domestic FMCG revenues in Q3 FY21, doubling over the past 2-3 years. As consumption patterns shifted towards immunity boosters and preventive healthcare products, Dabur is in a win-win situation. The healthcare segment has grown 29%, 50% and 28% YoY in the first three quarters of FY21. Majority of Dabur’s new product launches have also been in the healthcare space, ranging from vedic suraksha tea to ayurvedic nasal drops, giloy-neem-tulsi juice and cow ghee. And currently, 50% of its healthcare portfolio is made up of immunity boosters.

Revenu mix

Covid-19 has been a growth catalyst for Dabur, and with strong momentum in healthcare, the company is leveraging this tailwind to strengthen its business further through innovation, distribution enhancement and higher visibility.

Dabur India Ltd. is trading above it's 200 day SMA of 501.7
The Baseline    
03 Mar 2021
Chart of the week - High valuations of commodity chemical companies

Commodity chemical companies have rallied in 2021. This has pushed their valuations above historic averages. Of the top-4 commodity chemical companies, four are trading with the trailing 12-month (TTM) price-to-earnings (PE) ratio above historic averages. Only one company is in the buy zone

The Baseline    
03 Mar 2021
Five Interesting Stocks Today
  1. JK Lakshmi Cement: This cement manufacturing company’s stock is up by 24% in one month, going past a two-year high. Its valuation remains historically cheap as its trailing 12-month (TTM) price to earnings (PE) ratio is 13.2 times, below the median PE of 45.4 times. This puts it in the potential buy zone.

  2. Mahindra & Mahindra: This automobile manufacturer reported a 41% YoY increase in the sales of passenger vehicles in February 2021, and a 25% YoY rise in tractor sales. In January 2021, it announced a price hike in its PVs and commercial vehicles (CVs). Even with the price rise and higher sales, its stock is down by 12% in one month.

  3. Amara Raja Batteries: Brokers are bearish on this auto-parts and equipment manufacturer’s stock. Two brokerages  - ICICI Securities and Motilal Oswal have given a recommendation of ‘Reduce’ and ‘Neutral’ respectively. The brokerages expect the rise of electric vehicles to eat away the company’s lead-acid business. The average broker target price is at a downside of 3% against the market price despite a decline of 8.8% in one month.

  4. Axis Bank: This private sector lender’s promoter Life Insurance Corporation of India (LIC) which holds an 8.5% stake is decreasing its holding. Last week, LIC sold 16.2 lakh shares for Rs 125.5 crore via a market sale.

  5. Godrej Agrovet: This agricultural company’s promoters are buying the company’s shares via market purchases. Last week alone, the promoters purchased over 77,000 shares for Rs 3.7 crore via six market purchases. In 2021, the promoters have purchased 1.5 lakh shares worth Rs 7.6 crore.

1 Comment
vak_1969 Will Amara Raja not diversify into electric batteries
03 Mar 2021  Like
MTAR Technologies Ltd.    
02 Mar 2021
MTAR Technologies’ pricey IPO is a sign of our times

By Vivek Ananth

Hyderabad-based MTAR Technologies is a precision engineering solutions company that serves customers in strategic sectors like nuclear, space & defence and clean energy. The company’s initial public offering of up to Rs 596 crore consists of a fresh issue and an offer for sale by promoters and an investor. This issue will hit the markets ...

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HDFC Securities released a IPO Note report for MTAR Technologies Ltd. on 03 Mar, 2021.
Deepak Nitrite Ltd.    
26 Feb 2021
Deepak Nitrite - Will the phenomenal growth continue?

by Aakash Athawasya

“We got lucky and unlucky because of the pandemic,” said Maulik Mehta, the CEO of Deepak Nitrite during the Q3 earnings call. Mehta was discussing the commodity chemicals company’s performance in Q1, but these words may continue to be true.

Deepak Nitrite is one of the success stories of 2020. It took over the vacuum created by the Chinese chemical supply running dry and diversified across product segments to take advantage of the growing need for certain chemical products in India. But unlike most companies attempting to diversify, Deepak Nitrite didn’t burn through its cash doing it.  The company’s top line, bottom line, and balance sheet were better for it. But now with these extraordinary demand drivers gone, will the phenomenal growth rate continue?

Phenolics’ phenomenal growth

On a standalone basis, Deepak Nitrite manufactures three products - basic chemicals, fine and specialty chemicals, and performance products. Basic chemicals like sodium nitrite and nitro toluene are supplied to the rubber products industry. Specialty chemicals like cumidines and xylidines are used in agrochemicals and pharmaceuticals. Performance products refer mainly to whitening agents used in textiles and paper products. These three segments contributed 40% of Deepak Nitrite’s Q3FY21 revenue. 

Deepak Nitrite Product Revenue

The lion’s share of 60% of Q3 revenue came from its wholly-owned subsidiary - Deepak Phenolics, which primarily produces phenol and its byproduct acetone. These chemicals are used in the automotive, FMCG, and industrial packaging industries.

In 2018, 80% of India’s phenol was imported from Southeast Asian countries like Thailand and South Korea, and China. Deepak Nitrite wanted to pivot to domestic phenol manufacturing as an import substitute for the Indian market. This is why, in November 2018, Deepak Nitrite set up the largest phenolics plant in the country at its facility in Dahej, Gujarat. This was funded through a capital expenditure (capex) of Rs 1,400 crore entirely through debt financing.

Deepak Nitrite Revenue Share

During the launch of the phenolics plant, Deepak Mehta, the Chairman, and Managing Director of Deepak Nitrite set a turnover target of $1 billion (~Rs 7,400 crore) within a four-year period. In his words, this was an “ambitious and challenging target.” 

In Q4FY19 (the first full quarter of phenolics production) Deepak Phenolics contributed Rs 910 crore in revenue, 40% of the company’s total revenue. In the quarter ended December 2020, Deepak Phenolics’ revenue was Rs 726 crore, 60% of total revenue for the quarter. Since setting up the plant, Deepak Phenolics has recorded revenues of Rs 4,500 crore, 61% of Deepak Mehta’s ambitious target. It is a year away from achieving Mehta’s four year target.

Deepak Phenolics’ contribution to the overall revenue has been increasing.

Deepak Phenolics Revenue Share

Capacity and margin expansion

Deepak Phenolics began phenol and acetone production in November 2018 at the Dahej plant. By July 2019, the capacity utilization reached 80%. At the end of FY20, the plant was operating at 100% capacity, till the pandemic stopped all economic activity. 

In Q1FY21, several industrial companies opted to coordinate their plants’ maintenance shutdown with the national lockdown. Deepak Phenolics did the same. This allowed the phenolics subsidiary to increase capacity in future quarters. And they did.

For the quarter ended December 2020, the phenolics plant operated at 115% capacity. Maulik Mehta, during the Q3 earnings call, said that there is “more gas in the tank” referring to a possible additional capacity expansion. He said that the 115% capacity mark will be a baseline going forward. This means that phenolics, which accounts for nearly two-thirds of Deepak Nitrite’s revenues, will ramp up its production capacity soon.

This efficient use of the phenolic capacity has boosted the margins of Deepak Phenolics. 

Deepak Phenolics Margins

Growth capex and stable cash

Even with the strong operating margins, and capacity utilisation already above 100%, Deepak Nitrite is pushing the envelope, forecasting even more revenue growth.

One of the chemicals Deepak Phenolics produces is isopropyl alcohol (IPA). IPA is a key chemical intermediate in the production of hand sanitizers. Due to the pandemic and prioritization of hygiene and sanitation, several FMCG companies began manufacturing sanitizers. In order to cater to this demand, in April 2020, Deepak Nitrite commissioned an investment of Rs 200 crore to set up a dedicated IPA plant at its Dahej site with a capacity of 30,000 metric tonnes (MT). 

In 2021, the demand for hygiene products still remains. Hence, Deepak Nitrite is expanding its IPA production capacity as well. This will be part of a brownfield expansion and will be commissioned by March - April 2021. With the supply of Deepak Nitrite’s IPA increasing and the demand for hand sanitizers sustaining, this could provide another boost to its phenolics revenue going forward.

For the six months ended September 2020, Deepak Nitrite had Rs 428 crore in free cash flow and Rs 82 crore as cash in hand. This is after accounting for the Rs 200 crore for the IPA plant commissioning. With this stable cash position, it plans on further increasing its capacity. For FY22, The management earmarked a total capex of Rs 700 crore divided between Rs 400 crore for Deepak Nitrite, and Rs 300 crore for Deepak Phenolics. 

Deepak Nitrite Free Cash Flow

In addition to these expansion plans, Deepak Nitrite also has a new subsidiary that hasn’t started production yet. In October 2020, it set-up Deepak Clean Tech, to manufacture chemical intermediates. This was at a time when the specialty chemicals industry was shifting its focus to the pharmaceutical sector. In September 2020, Maulik Mehta said, “We are evaluating other chemical intermediates for the pharma segment.” 

However, in the Q3 earnings call, he said that Deepak Clean Tech has not started production yet. Mehta mentioned that the company is waiting for “steel prices to moderate.” Providing no other details on the subsidiary or the products it will manufacture, he said, “This [Deepak Clean Tech] is also one of the key channels through which we are able to improve our profitability.” A board announcement on Deepak Clean Tech is expected in the next two months.

While in Q1 production was curtailed due to the lockdown and the maintenance shutdown, Deepak Nitrite’s net profits and profit margins have been increasing.

Deepak Nitrite Profit Margins

Consolidated debt declines

A key worry for Deepak Nitrite’s investors was the rising debt of the company. However, the company is using its increasing cash flows to steadily reduce debt. This is also helped by the strong operational performance of the company. Since this debt is under Deepak Phenolics, it shows up on Deepak Nitrite’s consolidated books, and on a standalone basis at least, the company is net debt-free.

For the six months ended September 2020, Deepak Nitrite’s total borrowings were Rs 34.7 crore, a decrease of 96% on a YoY basis, and 86% since the beginning of FY21. Its debt has been steadily decreasing. At the end of the December 2020 quarter, Deepak Phenolics’ total debt to equity ratio stood at 0.78 times, while Deepak Nitrite’s total debt to equity ratio was 0.28 times.

Deepak Nitrite Debt

Strong demand and robust operations to drive phenomenal growth

Chemical companies were initially helped by the Chinese government’s crackdown on pollution-causing industries in 2017. This led to the closure of several chemical plants in China. As India was dependent on several chemicals from China, especially phenolics, Deepak Nitrite plugged the short-supply by setting up Deepak Phenolics. This move into phenolics was further helped by the Indian government’s potential move to hike import duties on Chinese products in Q1FY21. These two factors gave an initial demand impetus to Deepak Nitrite as its customers wanted to de-risk away from China. The company used this impetus and made its phenolics division a priority.

From 40% of total revenues when it began phenol and acetone production, to 60% at the end of Q3, Deepak Nitrite’s pivot towards phenolics is evident. Given the phenolics division’s strong revenue growth and robust margins between 45-48%, the chemicals company is putting its weight behind it. With capacity already above 100%, capex, and brownfield expansions in store, this division is only going to grow. This growth will be to cater to the increasing demand for phenolics products.

Deepak Nitrite versus peers Stock Price Change

On the other hand, its standalone chemicals business does have a sleeping giant. The performance product division is yet to witness a demand resurgence from the paper, oil, and textile industry. Because of the muted demand in FY21, due to these sectors still reopening, its share in the total revenue has dropped to 7% in Q3FY21, from 15% in the same period a year ago. The management expects this segment to revive only in early FY22.

With this outlook in place, its current cash and debt position are also strong. Since FY19, free cash flows are positive and growing. This allowed the company to spend on capex and decrease debt. This is why Deepak Nitrite’s stock has jumped by 250% since March 2020 outpacing the rest of the chemicals industry. And by the looks of it, its phenomenal growth will continue. 

01 Mar 2021  Like
The Baseline Hi Vamsi, The graphs have been made for the article, so they are not available on the stock overview page.
02 Mar 2021  Like
Deepak Nitrite Ltd. is trading above all available SMAs
The Baseline    
26 Feb 2021
Five Interesting Stocks Today
  1. Aarti Industries:  This chemicals company’s promoters are selling shares via market sales. This week alone nearly 45,000 shares were sold for Rs 5.4 crore. Since the year began, promoters have sold 1.6 lakh shares worth Rs 19.7 crore, and directors sold 5,400 shares worth Rs 65 lakhs across 14 market sales.

  2. GMM Pfaudler: This glass-lined equipment manufacturer’s stock is up by 13% in two weeks. This jump has pushed its price over the 200-day exponential moving average (EMA), 100-day EMA, and 50-day EMA. The stock price has still not recovered from its heavily discounted offer for sale (OFS) in September 2020.

  3. Cochin Shipyard: Mutual funds are selling this shipbuilders shares in droves. In April 2020, mutual funds held 94 lakh shares in the company. Between April to January 2021, they disposed of 97% of their stake, holding just 2.4 lakh shares in the company in January 2021.

  4. Page Industries: Brokers have turned cold on this innerwear company. In the past month, two brokers - Geojit BNP Paribas and Chola Wealth have downgraded their recommendations on the stock while ICICI Securities and Axis Direct have maintained a ‘Hold’ rating. Its average broker target price is still at a downside of 4% despite its stock dropping by 10% in three weeks.

  5. Burger King India: This quick-service restaurant’s insiders have pledged shares for the first time since it listed in December 2020. This week, 1.4 lakh shares worth Rs 2 crore were pledged by insiders. Its stock price has dropped by 25% since its first week of trading.

Tech Mahindra Ltd.    
25 Feb 2021
Tech Mahindra surprises in Q3FY21, but all eyes on 5G rollout

By Suhani Adilabadkar

From earning most of its revenues from the telecom sector, Tech Mahindra has expanded its service offering over the years. The acquisition of Satyam helped, but the company has also been trying to reduce its reliance on the communications vertical.

In the recently concluded December 2020 quarter, its results were better than expected. Tech Mahindra’s stock has more than doubled after touching its 52-week low in March last year.

Tech Mahindra’s service portfolio constitutes infrastructure and cloud, network services, data analytics, cyber security, business process services (BPS), digital supply chain, telecom product engineering and enterprise business solutions.

Quick Takes:

  • Net new deal wins stood at $4.5 billion and Tech M has a robust deal pipeline

  • The company has won a $50 million communications deal in Q3 FY21, adding to traction witnessed in small and medium-sized deals

  • The street expects strong recovery in communications business spurred by 5G rollout which has been delayed by Covid19 outbreak

  • 5G is a medium-to-long term opportunity and Tech Mahindra is expected to be the largest beneficiary when the technology is rolled out across the world

December 2020 quarter results surprises

Tech Mahindra (TechM) registered consolidated net profit of Rs 1,309 crore for Q3 FY21, a 14% rise from a year ago. This is ahead of what the street estimated. The outperformance from the street’s expectations was led by strong operating leverage, offshoring and higher utilization of employees. This helped its earnings before interest and tax (EBIT) margin expand by 170 basis points (bps) to 15.9%. This is TechM’s highest reported EBIT margin over the past four quarters.

Driven by healthy demand in communication and enterprise verticals, dollar revenues rose 3.5% sequentially to $1.3 billion. Consolidated revenues in rupee terms were flattish YoY at Rs 9,647 crore with a sequential increase of 3% in the December 2020 quarter.

CP Gurnani, MD and CEO at Tech Mahindra said the company saw all-round growth, particularly in Europe. The communications group, network services group and manufacturing have performed well this quarter. 

Communications vertical sees decent growth

If we look at TechM’s Q3 segmental performance, the communications vertical still dominates its revenues contributing 40% to revenues. Revenues from the vertical rose 4.4% sequentially, but saw a 9.7% YoY decline. The vertical’s performance was powered by robust network business and 5G related projects. Network services business encompassing complete lifecycle from design, planning and engineering, rollout, operations and maintenance of networks grew in double digits in Q3 FY21.

Manufacturing vertical, which makes up 16.3% of total revenues, is now on a stable growth trajectory as it posted a 4.4% QoQ rise in revenues in the December 2020 quarter. This is after the company saw a 11% sequential revenue decline in the June quarter from manufacturing clients. Manufacturing growth was led by engineering services in the auto segment and revival of the autonomous driving segment, electric vehicles, and other industrial projects.

Usually, banking financial services and insurance (BFSI) is the largest revenue earner for most IT services companies, but for TechM it’s the third largest in terms of revenues. Nearly 16% of TechM’s total revenues come from BFSI. Although growth was stagnant sequentially, YOY rise was a robust 17% for revenues from BFSI clients.

Revenues from technology, media & entertainment (9% of total revenues) rose 19.5% YoY.  Retail segment, (8% of revenues) is primarily segmented into e-commerce and fixed retail business.

 Revenue mix

5G rollout the next trigger for revenue growth

Even after 10 years of Satyam acquisition, TechM is still the largest telecom IT service provider. But with muted growth rates over the past few years from communications, it’s the enterprise segment driving the growth wagon since FY15. The enterprise segment encompassing BFSI, manufacturing, media and retail has been growing in strong double digits over the past five years, except FY20.

On an overall basis, the company has grown its revenue and PAT at a CAGR of 10% and 9% between FY15-20. TechM is far ahead ofWipro’s low single digit growth, almost moving in tandem with TCSInfy and HCL Tech.

Growth could have been faster and stronger, had it not been impeded by TechM’s inherent structural weaknesses due to higher client concentration, less diversified revenue mix and delayed investments in the digital landscape.

Margins vs peers

Even though Q3 FY21 performance has not been stellar compared to its peers, TechM has re-ignited interest among investors and analysts alike. Net new deal wins stood at $4.5 billion and robust deal pipeline, which is one of the best in the enterprise segment over the last six quarters.

The street is expecting a strong recovery in communications business spurred by the 5G rollout, which has been delayed by Covid19 outbreaks. While there has been speedy progress on 5G coverage expansion in the US and China, Europe has been lagging behind. In the US, 75-80% of the country's population will be covered with 5G by June-July 2021.

For India, though leading telecom Airtel demonstrated its 5G readiness in January 2021, commercial rollout is expected only by early 2022.  For the Indian IT space, 5G is roughly $ 8-10 bn opportunity. IT companies witness revenue accretion only after the cycle of spectrum auction is completed, post which hardware and software installation is completed by the telecom service provider. The upcoming 5G spectrum auction continues to be a structural uncertainty for telecom players, considering past controversies.

Apart from catering to telecom companies, TechM also sees a big opportunity in the enterprise segment. The company is witnessing a strong deal pipeline as Internet of Things, manufacturing, health and education requirements pour in. 5G helps in reducing costs, unifying supply chains, higher automation and boost productivity for the manufacturing sector.

In healthcare, 5G technology has made remote monitoring of patients possible, expanded telemedicine and enhanced augmented reality and virtual reality for less invasive treatments. 5G helps in providing higher capacity, aiding IoT and improving remote learning opportunities, while changing the dynamics of the education system. TechM is also designing 5G-enabled handsets for 4 well-known brands. 

As per the management, IT spends from telecom space will start accruing from FY22. While communication revenues were 12% for Infosys in Q3 FY21, for TCS, Wipro and HCL Tech contribution falls between 5-9% of total revenue mix.

Telecom revenues

TechM will be the largest beneficiary of the 5G rollout with 40% of its revenues accruing from the telecom sector. The company expects its enterprise business to grow in double digits and communications in mid-single digits. Investors and analysts seem optimistic, as the street hopes that 5G will pan out effectively.

Tech Mahindra Ltd. is trading below it's 30 day SMA of 970.1
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