The Baseline    
27 Nov 2020, 12:26AM
Five Interesting Stocks Today
  1. JSW Energy: This power generation company’s promoters are back to pledging their holding. On 24 November 1.1 crore shares valued at Rs. 69.5 crores were pledged by promoters. Prior to this, between November 1 to November 17, 1.12 crore pledged shares were released for Rs. 67.9 crores. As of September 30, 44.5% of promoter holding was pledged.

  2. Future Consumer: This FMCG company’s CEO Rajnikant Sabnavis resigned from the company with effect from 27 November 2020. In Q2, the company reported a net loss of Rs. 146.8 crores against a net loss of Rs. 16.7 crores in the year-ago period, with quarterly revenue declining by 78.7% on a YoY basis.

  3. Aurobindo Pharma: This pharmaceutical company’s promoter disposed 3 lakh shares in the company valued at Rs. 25.3 crores via a market sale this week. Since November 10, its stock has climbed 13.9% on the back of strong quarterly results. In Q2, the company reported a 26% YoY increase in quarterly net profits at Rs. 805.6 crores with revenues increasing by 13% annually.  

  4. CCL Products: This coffee company’s stock price has increased by 12.8% since the month began and is 5.5% off its 52-week high. However, with a trailing twelve month (TTM) PE of 20.7 against an average PE of 23.9, it remains in the neutral zone. Mutual funds have also been accumulating the stock, doubling their position between January to October 2020.

  5. Gland Pharma: This pharmaceutical company only listed on bourses last week. Despite a big-money public offering of Rs. 6,480 crores at Rs. 1,500 per share, its retail portion was subscribed only 0.24 times. However, it listed at a premium of 14%, and in its first week of trading is up by over 40%.

ITC Ltd.    
26 Nov 2020, 12:26PM
ITC: Seeing a Growth Mirage in FMCG?

by Vivek Ananth 

A stock that many market participants love to deride is ITC. With the company’s shares declining in the past few years compared to the broader market, it is not hard to imagine why. In the past three years, ITC’s stock price has nearly halved from a high of Rs 331 while the Nifty 50 has risen nearly 30% in the same period.

Over the past decade, the company’s management has been using its cash cow cigarettes business to seed and grow other businesses and revenue streams like FMCG, hotels, agriculture, and paperboards, paper & packaging. Investors had hoped that ITC’s decision to scale up these businesses using the cash flows of its mainstay cigarettes business would lead to increased profits.

Key Takeaways

  • Cigarettes Business is still impacted by local lockdowns across states

  • FMCG business, through product launches, is performing well

  • Hotels business is still languishing under the cloud of the pandemic

  • FIIs have been exiting ITC over the past many months due to ESG and capital allocation concerns

Q2 Results Hint That ITC’s Bets Might Pay Off

The company’s consolidated net profit fell 18.1% YoY to Rs 3,419 crore. Helped by the opening up of the economy during the quarter, the company posted a 33% sequential rise in net profits helped in large part by rising margins in its ‘FMCG-Others’ segment. This segment consists of branded packaged goods, personal care products, education and stationery products, incense sticks and safety matches.

ITC Segment Revenue

ITC’s Q2 revenues were up 1.7% YoY at Rs 13,730 crore and on a sequential basis revenues were up 28.3%. The sequential improvement in ITC’s revenues were helped in large part by the ‘FMCG-Others’ segment and Agriculture. 

The FMCG-Others segment saw revenues rise by 15.4% year-on-year to Rs 3,795 crore. This was the highest quarterly revenue recorded by the segment. On a comparable basis, excluding education and stationery products and lifestyle retailing business which is under restructuring, the revenues rose 18.4% YoY. The segment’s EBIT margins also rose 300 basis points (bps) YoY to 6.7% during the quarter.

Revenues in the FMCG-Others segment were helped by new product launches by ITC during the lockdown period, and also movement to newer channels like e-commerce and tie-ups with companies like Swiggy, Dunzo and Domino’s to deliver staples to customers. Revenues from e-commerce have doubled and now make up 5% of revenues of the segment at the end of September 2020. 

Local lockdowns in various states continued to impact the FMCG-Others segment, and the growth in sales has come from staples and hygiene products. In May 2020, ITC had acquired Sunrise Foods--a spice maker--for Rs 2,150 crore. The company plans to use its supply chain prowess to scale up its acquisition of Sunrise Foods to drive profitable growth.

The Agriculture segment saw revenues rise 12.8% YoY to Rs 2,985 crore. On a sequential basis, revenues were down 20.3%, but this was due to seasonality in the business. EBIT margins came in at 8.6% compared to 9.4% a year ago. This segment is expected to benefit from recent reforms undertaken in the farm sector by the Central Government.

The mainstay Cigarettes showed recovery in Q2FY21 as the segment’s revenues grew on a sequential basis by 33% to Rs 5,121 crore. However, when seen on a year-on-year basis, the revenues are down 3.9%. There is still some way for this business to recover. Its EBIT margins rose 30 bps on a sequential basis to 63.4%,  but fell nearly 900 bps on a YoY basis. Like the FMCG-Others segment, this segment also continued to be impacted by localised lockdowns across states.

Paperboards, Paper & Packaging segment also saw revenues recover sequentially and rising by 42% to Rs 1,459 crore. This business segment too remains affected by the impact of lockdowns witnessed in the 6.8% fall in revenues on a YoY basis. Once the impact of lockdowns subsides on business activity, and the local lockdowns stop, this business will be able recover.

The hotels segment continues to reel under the aftermath of the pandemic led lockdowns. Travel remains restricted and will take time to pick up to normal levels. Revenues were at Rs 82 crore and it posted an operating loss (negative EBIT of Rs 185 crore) for a third consecutive quarter.

Factors Weighing On ITC

There are multiple factors weighing on ITC’s stock. FIIs have been exiting the stock steadily over the past two years. FII holding in ITC was 13% at the end of September 2020 compared to 17.3% two years ago. In the same period, domestic mutual funds have raised their holding in the stock by only 210 bps to 9.9%. This has coincided with ITC’s underperformance vis-a-vis the Nifty 50. 

This gradual reduction in FII holding has been attributed to ESG related issues by market participants. However, the company points out that it has been ranked as the top among its peers having market capitalisation of $38 billion to $51 billion, according to ESG rating agency Sustainanalytics. It also states that in the foods products business it has been rated in the top three companies by the agency.

Then there is the always possible stake sale by the Central Government of the 7.9% stake held by Specified Undertaking of The Unit Trust of India. This hangs like a sword of damocles over the company’s valuation.

Even though the company generated free cash flows of over Rs 11,000 crore in FY20 (up 30% YoY), investors still don’t seem impressed. ITC’s past investment in capital intensive business like hotels has left investors worried over the management’s capital allocation policy. The management has now stated that it will only undertake management contracts for hotels and not undertake further capital expenditure (capex) in this business. The management also stated that the company as a whole will not undertake any further capex.

The original sin of being a cigarette company has also impacted ITC. The high tax incidence on cigarettes has led to slowing revenue growth -  rising taxes on ‘sin goods’ like cigarettes, especially in an environment where the government is falling short of revenues, leads to a rise in sale of illicit cigarettes. This hurts companies like ITC which is the sector leader.

Last, but definitely not the least, many investors are still not convinced that ITC can deliver on the promises of building a highly profitable FMCG business. This contention does divide the market though. While FIIs and other market participants fret over future returns from the FMCG portfolio, there are some domestic mutual funds like Parag Parikh, ICICI Prudential, Sundaram, among others that have been snapping up ITC shares over the past few months.

This is symptomatic of how the market views ITC as a conglomerate. The company has stated that it has completed its capex cycle to scale up its various businesses. Its capital allocation policy of returning 80%-85% of its profit after tax as dividends should ideally cheer investors. However, the stock price continues to languish below Rs 200 at the moment. 

Is ITC’s night darkest before a new dawn? Only time will tell. Till then, its high dividend yield of over 5% should offer some succour to investors

Geojit BNP Paribas decreased Buy price target of ITC Ltd. to 217.0 on 11 Nov, 2020.
Trendlyne Marketwatch    
26 Nov 2020, 09:46AM
Markets close higher, ICICI Lombard hits a lifetime high

Upbeat trading today. Nifty 50 closed at 12999.30 (140.9, 1.1%) , BSE Sensex closed at 44259.74 (431.6, 1.0%) while the broader Nifty 500 closed at 10681.95 (107, 1.0%)

Market breadth is ticking up strongly. Of the 1697 stocks traded today, 1090 were on the uptrend, and 507 went down.

  • GE Power India, TeamLease Services Narayana Hrudayalaya, and Sheela Foam are trading with rising delivery volume compared to the previous day.

  • Nifty Financial Services trades higher led by gains in ICICI Lombard General Insurance Company, Mahindra & Mahindra Financial Services, REC, and Power Finance Corporation.

  • Aster DM Healthcare's top management personnel dispose over 1.1 lakh shares in the company for Rs. 1.9 crores in four market sales.

  • Vakrangee is rising as the company's board withdraws the amalgamation of wholly-owned subsidiaries Vakrangee Logistics and Vakrangee Finserv.

  • Vardhman Special Steel receives a rating upgrade from 'Hold' to 'Buy' from ICICI Securities citing demand recovery in the auto-sector during Q2FY21.

  • Siemens, Tube Investments of India, and ABB Power Products and Systems are trading with volume at least 5 times the average weekly volume.

  • HDFC Securities initiates coverage on Sundram Fasteners with an 'Add' rating and a target price at an upside of 12.1% against its current price.

  • ICICI Lombard General Insurance Company hits a lifetime high. The insurance company's stock has risen by 19.3% since the beginning of the month.

  • The promoter group of Godrej Agrovet acquires over 54,000 shares in the company valued at Rs. 2.7 crores via three market purchases.

  • Nirmal Bang's top picks in the realty sector are Prestige Estate Projects and Brigade Enterprises, each with a 'Buy' rating, while Sobha and Phoenix Mills receive an 'Accumulate.'

  • Siemens reports net profit at Rs. 333 crores, a fall of 4.7% on a year-on-year basis. Revenue was Rs. 3,422 crores, a fall of 9.2% against the year-ago period.

  • RBI approves Lakshmi Vilas Bank's merger with DBS Bank India with effect from November 27, moratorium to be lifted.

  • Nifty 50 was trading at 12868.65 (10.3, 0.1%) , BSE Sensex was trading at 43885.46 (57.4, 0.1%) while the broader Nifty 500 was trading at 10586.70 (11.8, 0.1%)

  • Market breadth is in the green. Of the 1500 stocks traded today, 839 were on the uptrend, and 559 went down.

Riding High:

Largecap and midcap gainers today include Siemens Ltd. (1523.45, 11.67%), Steel Authority of India (SAIL) Ltd. (46.55, 8.13%) and JSW Steel Ltd. (359.85, 6.39%).


Largecap and midcap losers today include Future Retail Ltd. (86.95, -4.97%), 3M India Ltd. (20939.80, -3.60%) and Adani Green Energy Ltd. (1105.75, -3.42%).

Volume Rockets

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

Top high volume gainers on BSE included India Tourism Development Corporation Ltd. (279.30, 12.55%), Siemens Ltd. (1523.45, 11.67%) and Vakrangee Ltd. (34.40, 10.43%).

Top high volume loser on BSE was Tube Investments of India Ltd. (817.25, -2.34%).

Sheela Foam Ltd. (1512.00, 9.90%) was trading at 8.8 times of weekly average. ABB Power Products and Systems India Ltd. (1040.30, 6.05%) and Johnson Controls-Hitachi Air Conditioning India Ltd. (2170.00, 0.93%) were trading with volumes 7.3 and 5.5 times weekly average respectively on BSE at the time of posting this article.

BSE 500: highs, lows and moving averages

18 stocks overperformed with 52 week highs,

Stocks touching their year highs included - Adani Ports & Special Economic Zone Ltd. (410.50, 2.90%), Amara Raja Batteries Ltd. (892.65, 2.11%) and Chambal Fertilisers & Chemicals Ltd. (193.40, 1.87%).

10 stocks climbed above their 200 day SMA including Sheela Foam Ltd. (1512.00, 9.90%) and Alok Industries Ltd. (22.40, 4.92%). 4 stocks slipped below their 200 SMA including Bharat Petroleum Corporation Ltd. (378.10, -1.03%) and Motilal Oswal Financial Services Ltd. (606.00, -0.27%).

The Baseline    
24 Nov 2020
Five Interesting Stocks Today
  1. Narayana Hrudayalaya: This hospital chain operator’s stock hit its lifetime high despite weak Q2 performance. It reported a net loss of Rs. 3.4 crores against a profit of Rs. 45.3 crores in the year-ago period, with revenue declining by 26.9% yearly. In the past two weeks, its price has risen by 15%.

  2. CESC: This power-utility company’s stock price is falling with rising delivery volume. The average weekly delivery volume (66.7%) is higher than its monthly weekly delivery volume (43.2%) and 6-month weekly delivery volume (27.5%). Since mid-September, it has lost 13.3%.

  3. InterGlobe Aviation: Thie airline company’s stock is being offloaded by top management. On November 21, its senior vice president and CSO disposed over 21,000 shares at Rs. 3.6 crores via two market sales. In November, over 38,700 shares at Rs. 6.3 crores were disposed by top management personnel via 9 market sales.

  4. Blue Star: Brokers have changed their tune on this airconditioner company following its Q2 results. Nirmal Bang and Dolat Capital have downgraded the stock to ‘Accumulate’ and ‘Sell’ with an average broker target price at a downside of 16.9% against its current price.

  5. Aavas Financiers: This housing finance company recently saw a big shareholding change. Au Small Finance Bank divested its 4.5% stake, while Nomura India Investment Fund and SBI Life Insurance acquired 9 lakh and 6.6 lakh shares for a 1.1% and a 0.8% stake in the company respectively. Since late September 2020, this housing finance company’s stock has risen by 16.5%.

1 Comment
24 Nov 2020  Like
With resilient margins, LTI management is bullish on growth

by Suhani Adilabadkar

Larsen & Toubro Infotech (LTI) reported robust numbers for the September quarter FY21, driven by BFSI and manufacturing verticals along with strong margin performance. The management’s optimistic commentary bodes well for future growth. The stock has gained 149% from the 52-week low of Rs 1,293 it touched in March 2020.

Quick Takes:

  • Operating revenues stood at Rs. 2,998 crores in Q2 FY21 compared to Rs. 2,571 crores in the same period a year ago, rising 17% YoY.

  • EBIT came in at Rs. 596 crore during the quarter against Rs. 399 crore in the same period a year ago, soaring 49% YoY, with operating margins coming in at 19.9%.

  • Apart from margin resilience and a healthy deal pipeline, LTI reported the highest constant currency growth in YoY terms in the industry of 10.5%. This is higher than HCL TechTech MahindraWipro, and even TCS, except Infy.

  • The management reinstated the practice of giving PAT margin guidance for FY21 and expects it to be in the 14%-15% range.

September Quarter Results

LTI’s stock price jumped 5% after the company came out with healthy September quarter numbers. It reported industry-leading double-digit growth in revenues, EBIT, and net profit.

Driven by robust performance at the operating level, net profit grew 27% YoY to Rs 457 crores, and 10% sequentially. This was the strongest net profit growth in the past six quarters. Operating revenues stood at Rs. 2,998 crores in Q2 FY21 compared to Rs. 2,571 crores a year ago, rising 17% YoY. In dollar terms, revenues came in at $ 404 million rising 11% YoY, and 3.6% sequentially. 

Revenues from digital services made up 43% of LTI’s revenue mix, growing 18% YoY and 5% QoQ. The company’s EBIT during the quarter was Rs. 596 crore against Rs. 399 crore in the same period a year ago. Operating margins came in at 19.9%, expanding by 440 bps YoY, and 250 bps sequentially. The margin expansion was driven by improvement in onsite-offshore mix, employee utilization, higher working days and operational efficiencies. 

LTI – Powering the Breakaway

After a challenging H1 FY20, ridden with account specific issues, LTI saw some recovery in Q3 FY20. The company was cruising towards a strong finish to FY20, before COVID19 struck in March 2020. 

Though the quarter ended March 2020 (which saw the highest dollar revenues in FY20) had no Covid impact per se, the subsequent June 2020 quarter saw a 4.8% sequential decline in dollar revenues. On a year-on-year basis, revenues grew 10% during the June 2020 quarter and the management guided for a flat September quarter, with a positive bias. Although the quarter ended September 2020 came with a modest large deals TCV, LTI’s performance managed to beat it's top and mid-IT services peers. 

LTI’s double-digit revenue growth in Q2 FY21 was driven by strong performance in many verticals. The banking and financial services vertical (30% of revenues), helped by its top client, grew 11.7% sequentially and 22.5% YoY. 

Manufacturing (16% of revenues), which was the hardest hit in the June quarter with 17% sequential decline, recovered strongly with revenues growing 6.4% QoQ and 10.2% on a YoY basis. Growth from manufacturing clients rebounded in both US and Europe with the resumption of factories, supply chains and clients moving to new customer-centric operating models. 

CPG, retail & pharma, which makes up 11% of LTI’s revenues, saw revenues grow 6.3% YoY. LTI has a minimum footprint in this vertical, but the management expects it to grow above the company average in FY21.

High-tech, media & entertainment (10.6% of revenues) saw revenues fall 5% sequentially, but on a YoY basis, revenues rose 9.5% during Q2. Reprioritisation of work in a specific account led to sequential decline in revenues. 

The Energy vertical (10.6% of revenues) saw modest 2% revenue growth QoQ and a 2.2% YoY decline. The management says, though a comeback is visible in the energy space, client spends continue to be impacted and recovery is expected only from Q4 FY21. 

The insurance vertical (16% of revenues) continues to struggle due to covid related insured losses and declining premium volumes. This vertical saw revenues fall 3.4% QoQ and 5% YOY.

Optimism In The Air

Large deal TCV was muted in both June and September quarters at $ 20 Mn and $ 40 Mn, respectively. LTI reported large deals TCV of more than $ 300 Mn in FY20, with the quarter ended March 2020 seeing large deals worth $ 113 Mn. 

But the management does not see only large deals moving the growth engine, especially in the present volatile business environment. Speaking on this, Sanjay Jalona, CEO and Managing Director of LTI said, “Large deals alone don't drive growth. We drive growth based on four things, growth accounts, investment accounts, new accounts, as well as large deals. 

“There are four pillars to our strategy,” he continued. “Growth accounts, these are large accounts, that we need to continue mining. Invest accounts, which could become growth accounts for the future, so we need to continue to throw the kitchen sink at them. New account openings, which could become invest accounts and growth accounts in the future, and large deals”. 

Put simply, the focus is on the top 5-20 clients that earn LTI more than half its revenues, adding new clients, participating in growth accounts and enhancing its service mix to augment client mining. And lastly, a strong focus on signing large deals. In addition to this growth strategy, a higher focus on M&A (4 acquisitions in 2019), aggregation of Fortune 500 clients, and continuous improvement in margins for the past 6-7 quarters that has helped LTI achieve industry-leading growth. 

The management feels current margin levels (19.9%) are sustainable driven by higher operational efficiencies, higher utilization, and improved offshore mix (80.6%). In certain specific deals, the company is able to pitch 90-95% offshore ratios to its clients. 

It is also optimistic about future growth. Jalona says, “We have enough pipeline that gives us the confidence that we are setting ourselves for a strong FY22 as well”. 

The overall deal pipeline is up 22% YoY in September quarter FY21. With respect to the outlook for the third quarter FY21, Jalona said, “We have already surpassed our Q3FY20 revenues this quarter, and we will surpass our Q4FY20 revenue in Q3 itself. We remain committed to delivering top quartile growth in FY21 as well”. 

The management has also reinstated its PAT margin guidance for FY21, to be in the 14%-15% range, despite a salary hike in January 2021. The management’s confidence seems to have rubbed off on FIIs, who have increased their holding in LTI by 350 bps over the past one year.

Number of FIIs/FPIs holding stock rose by 28 to 275 in Sep 2020 qtr.
Trendlyne Marketwatch    
24 Nov 2020
Markets close at record highs, HDFC Bank, Axis Bank lead rally

The market closed on an upbeat note. Nifty 50 closed at 13069.55 (143.1, 1.1%) , BSE Sensex closed at 44523.02 (445.9, 1.0%) while the broader Nifty 500 closed at 10742.75 (106.8, 1%)

Market breadth is in the green. Of the 1703 stocks traded today, 962 were on the uptrend, and 648 went down.

  • Future Consumer, GE Power India, IDFC, and JSW Energy are trading with rising delivery volume compared to the previous day.

  • Motherson Sumi Systems receives a 'Buy' from Motilal Oswal, and Edelweiss, while Chola Wealth maintains a 'Hold.' The average broker target price is 14.3% higher than the current price.

  • Eicher Motors, Mahindra & Mahindra, Maruti Suzuki, and Tata Motors trade higher, as Nifty Auto is in the green despite losses in MRF and Balkrishna Industries.

  • Solar Industries is trading in the green with volume 60 times its average weekly volume. Alembic, General Insurance Corporation of India, and IDFC are also trading with volume at least 5 times the weekly average.

  • ICICI Prudential Mutual Fund disposes of over 47,000 shares in Engineers India. Since June 2020, mutual funds have disposed 2.6 lakh shares in the PSU.

  • Nifty Bank is in the green led by strong gains in HDFC Bank, Axis Bank, ICICI Bank, and Kotak Mahindra Bank.

  • JK Tyre & Industries is rising following its agreement with Kia Motors to supply radial tyres for the SUV Seltos. Since the beginning of the month, its stock price has climbed 25.7%.

  • Axis Trustee Services sells 28.6 lakh shares in Reliance Infrastructure for Rs. 5.8 crores. Exactly a month ago, it sold 31 lakh shares in the power and infrastructure company for Rs. 7.1 crores.

  • HDFC Securities' top picks among banks to benefit from the recent suggestions by the RBI working group on banking ownership are DCB Bank and IndusInd Bank.

  • Nomura India Investment Fund and SBI Life Insurance purchase 9 lakh shares and 6.6 lakh shares valued at Rs. 136.3 crores and Rs. 100 crores in Aavas Financiers.

  • AstraZeneca Pharma India is rising as the pharmaceutical company reports 90% efficacy in late-stage trials of its COVID-19 vaccine developed by Oxford University.

  • Markets opened high. Nifty 50 was trading at 13014.75 (88.3, 0.7%) , BSE Sensex was trading at 44429.88 (352.7, 0.8%) while the broader Nifty 500 was trading at 10712.30 (76.4, 0.7%)

  • Market breadth is surging up. Of the 1527 stocks traded today, 1122 were on the uptick, and 333 were down.

Riding High:

Largecap and midcap gainers today include Future Retail Ltd. (87.15, 9.97%), Bosch Ltd. (12979.35, 9.81%) and Shriram Transport Finance Company Ltd. (1033.60, 6.05%).


Largecap and midcap losers today include Bajaj Holdings & Investment Ltd. (3099.70, -4.53%), GMR Infrastructure Ltd. (25.55, -3.40%) and Jubilant Foodworks Ltd. (2539.05, -3.10%).

Crowd Puller Stocks

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

Top high volume gainers on BSE included Sunteck Realty Ltd. (318.90, 11.60%), Nava Bharat Ventures Ltd. (51.80, 10.33%) and Bosch Ltd. (12979.35, 9.81%).

Top high volume losers on BSE were GE Power India Ltd. (317.60, -5.00%) and Indoco Remedies Ltd. (273.50, -0.73%).

Solar Industries India Ltd. (1033.40, 3.08%) was trading at 62.5 times of weekly average. General Insurance Corporation of India (136.85, 4.83%) and Gujarat Pipavav Port Ltd. (97.50, 3.23%) were trading with volumes 9.9 and 9.7 times weekly average respectively on BSE at the time of posting this article.

BSE 500: highs, lows and moving averages

37 stocks hit their 52 week highs,

Stocks touching their year highs included - Adani Ports & Special Economic Zone Ltd. (391.55, 4.37%), Amara Raja Batteries Ltd. (891.50, 1.96%) and Apollo Hospitals Enterprise Ltd. (2317.60, -2.43%).

18 stocks climbed above their 200 day SMA including Nava Bharat Ventures Ltd. (51.80, 10.33%) and Bosch Ltd. (12979.35, 9.81%). 1 stock slipped below their 200 SMA including Vakrangee Ltd. (30.80, 0.98%).

The Baseline    
20 Nov 2020
Five Interesting Stocks Today
  1. Thyrocare Technologies: This diagnostic chains operator’s delivery volume has doubled since November 11 from 27.5% to 58.2%. The delivery volume is higher than its weekly average (46.7%), monthly average (38.5%), and 6-month average (26%). This rise in delivery is coupled with its share price dropped by 17.4% since October.
  2. KNR Constructions: Brokers remain bullish on this construction company despite Q2 PAT declining by 29% y-o-y. ICICI Securities, HDFC Securities, Motilal Oswal, and Dolat Capital maintained a ‘Buy’ on the company and raised the target price. The average broker target price is 37.2% higher than the current price.
  3. PTC India: This energy company has seen mutual funds continue to cut their holding. On 17 November, Aditya Birla Sun Life Mutual Fund disposed of 60 lakh shares in the company via a market sale. This is the second disposal after it sold 59.2 lakh shares on October 20. In total, the mutual fund disposed of a 4% stake in the company. Its mutual fund holding has dropped for 8 consecutive quarters, from 14.5% in September 2018 to 6.4% in September 2020.
  4. Gulf Oil Lubricants of India: This oil company under the Hinduja Group’s share price has jumped by 18.6% in the past week to a 6-month high and is 10% off its 52-week high. However, with a trading twelve months (TTM) PE ratio of 23.8, against an average PE of 30.6, it’s still in the ‘buy zone.’
  5. Dixon Technologies: On November 18, this consumer electronics company’s insiders have disposed of over 3,400 shares at Rs. 3.5 crores via 12 separate market sales. Its price has surged by 20% in one month.
Hindustan Unilever Ltd.    
19 Nov 2020
A well-timed acquisition drives growth for HUL

by Suhani Adilabadkar

After 125 years, Lifebuoy is still going strong. And so is its maker, Hindustan Unilever. With a good understanding of the pulse of the market and consumer behavior, HUL has since 1957 evolved into a dominant Indian player and FMCG behemoth. 

India’s largest FMCG business reported resilient September numbers amid Covid related uncertainty, cautious consumption and unpredictable consumer behavior. With over 44 brands spanning 14 distinct categories, HUL brands are part of the daily lives of millions of consumers across India, and often serve as a good consumption proxy. Starting with Lifebuoy launched in 1895 by the Lever brothers, HUL is behind well known names, including Pears, Lux, Brooke Bond, Close Up, Dove, Sunsilk, Lakme, Bru, Surf, Rin, Vim and the recent inclusions Horlicks, Boost and VWash. The FMCG major has almost trebled investor wealth over the past five years. 

Quick Takes:

  • Operating revenues stood at Rs. 11,683 crore rising 15.6% YoY and operating profit jumped 16.6% YoY and PAT at Rs. 1974 crore grew 8.6% YoY in Q2 FY21.
  • Food & refreshment was the star performer with 83% YoY growth in revenues while home care revenues fell 2%, and beauty & personal care reported flat numbers.
  • Excluding the GSK nutritional business, quarterly revenue growth stands at 19% YoY for the foods & refreshment segment in Q2 FY21.
  • 80% of HUL’s revenues  come from health, hygiene and nutrition which altogether grew 10% in Q2 FY21.
  • Through the GSK consumer health acquisition, HUL has forayed into the health food drink category. This category is worthRs. 8,000-10,000 crore. 

July-September Quarter FY21 

HUL showed resilience in the July-September quarter helped by the food & refreshment segment, while home care and beauty & personal care revenues were flattish. Operating revenues came in at Rs. 11,683 crore in Q2 FY21 against Rs. 10,105 crore in the same period a year ago. That is a 15.6% YoY rise in operating revenues. 

PAT grew 4% sequentially and 8.6% YoY at Rs. 1974 crore in Q2 FY21 against Rs. 1818 crore same period last year. The company witnessed unprecedented inflation in tea at, roughly 50-70% along with elevated palm oil prices during the quarter. Operating profit jumped 16.6% YoY to Rs 2925 crore in Q2 FY21. Margins expanded by 22 bps to 25% despitespite high raw material costs, aided by cost cutting measures and lower advertising and promotional spends. 

Commenting on the Q2 results, Mr. Srinivas Phatak, CFO and Executive Director, Finance and IT, HUL said, “The operating environment has improved progressively during the quarter as lockdowns eased and economic activity picked up.” 

Powering Through Multiple Crises

HUL has the distribution strength and financial muscle to weather multiple crises like demonetization, GST, and the current Covid predicament. The company launched more than 100 SKUs over the last 6 months. Coming to the September quarter FY21, while the food & refreshment segment accelerated its growth pace, home care and beauty & personal care segments stabilized. Home care which earns HUL 30% of its revenues, saw revenues fall 1.5% YoY due to lower fabric wash consumption. This was due to consumers living and working from home. However,household care reported double digit revenue growth. 

The company  had a number of new launches, including Surf Excel Anti-Germ Wash Booster, Vim Antigerm Bar, Vim scrubbers, Domex wipes, and expanded the Domex range pan India in September quarter FY21. Beauty & personal care segment (40% of revenues) after dipping 12% in the June quarter, regained some of its lustre, rebounding slightly in Q2 FY21. 

Skin cleansing, oral care and hair care performed well with double-digit growth. Lifebuoy continued with its stellar performance, Lux reported good numbers while Close Up saw double-digit growth in oral care. The foods & refreshment segment (30% of revenues) rose 83% YoY, growth without ice creams or any out of home consumption.  It was instead the Kissan and Knorr range, Tea with its stellar performance, and Coffee with its volume led growth, that aided growth in revenues of the food & refreshment segment. Even Boost and Horlicks, and the nutritional business bought from GSK aided revenue growth.

GSK Acquisition Drives Growth

The GSK Consumer Healthcare (India) acquisition could not have happened at a better time for HUL. In Q2 FY21, while reported revenue growth stood at 15.6% YoY excluding nutritional business (GSK) and VWash acquisition impact, business grew at just 3% with underlying volume growth of 1%. 

HUL has been following an age-old strategy for the past several years, where it identifies white space in its product portfolio and fills it up by acquiring profitable businesses with strong brands. Ponds, Lakme, Brooke Bond, Lipton, Indulekha have all been brought into HUL through a string of acquisitions. 

In the recent scenario, its nutritional business has come to its rescue. So even if people do not go out, do enough laundry, use cosmetics or deodorants, or eat ice cream, the recent focus on  health and immunity has made the acquisition of Boost, Maltova, Viva and Horlicks look fortuitous. 

Horlicks is the market leader owning almost half of the HFD segment. The entire GSK portfolio included from 1st April 2020 is running through its second quarter and has pushed the food & refreshment growth trajectory to 83% YoY in Q2 FY21. 

Excluding the GSK nutritional business, quarterly revenue growth stands at 19% YoY for the foods & refreshment segment in Q2 FY21. This looks strong in the present scenario, and top brokerage houses and analysts have either retained their buy calls or upgraded HUL, as the HFD segment has further diversified and strengthened its resilience. The full synergistic benefits of the purchase of GSK’s nutritional business will start accruing from January-February 2021 onwards.

But what has also impressed the analyst community is recovery in HUL’s discretionary and out of home consumption segments. Discretionary products constitute 15% of revenues and out of home consumption 5%. These two segments saw revenues fall 45% and 69%  in the June quarter FY21. Both are now on the mend with revenues improving sequentially with a lower decline of 25% in Q2 FY21.

As the economy recovers, lockdown restrictions loosen and operations normalize, discretionary and out of home consumption recovery will further gather pace. And with 80% of the  business constituting health, hygiene and nutrition which altogether grew by 10% this quarter, HUL is cautiously optimistic. Speaking on growth prospects, Mr Phatak said, “Looking ahead, while the outbreak of COVID-19 has disrupted businesses massively, we believe that the worst is possibly behind us from an economic standpoint. And therefore, we are cautiously optimistic about the business”.

Hindustan Unilever Ltd. is trading above it's 150 day SMA of 2137.7
The Baseline    
18 Nov 2020
Five Interesting Stocks Today

1.     JSW Energy: The promoter groups of this power company received a total of 1.1 crore shares valued at Rs. 67.9 crores as revocation of pledged shares. The company’s pledged shareholding is 44.5% of promoter holding.

2.     Shree Cements: This cement manufacturing company’s price has jumped by 17.8% since October, reaching a new 52-week high. It’s now 3.4% off its lifetime high. Its peers in the cement industry, ACC, Ambuja Cement and UltraTech Cement, each made record-highs in the past month.

3.     Gujarat Gas: This natural gas distribution company’s Q2FY21 net profit stood at Rs. 475 crores, an 8-fold jump against the year-ago period. Following its strong earnings, brokers were upbeat. BOB Capital Markets and ICICI Securities upgraded their recommendations to ‘Buy’ each. The average broker target price following the Q2 results is an upside of 16% against the company’s trading price.

4.     Divi’s Laboratories: This pharmaceutical company promoter and board members are disposing of its stock. In the past week, the company’s whole-time director and promoter disposed of over 10,600 shares at Rs. 3.5 crores. In total, insiders have disposed of over 13,900 shares at Rs. 4.6 crores since the beginning of the month, with the stock price rising by 12.6%.

5.     Siemens: Mutual funds have turned cold on this power distribution company. In February 2020, mutual funds held over 1.2 crore shares, and by October, their holdingdropped by 60% to 50 lakh shares. The company saw mutual funds disposing shares in each of the past 8 months. 

Pharmaceuticals & Biotech.    
SECTOR | 13 Nov 2020
Will COVID-19 and China de-risking continue to be Indian pharma firms 'magic pill'?

by Aakash Athawasya

The pharmaceutical industry has seen a rollercoaster of a year. The pandemic looked to be tailwinds for Indian drug manufacturers. But with global lockdowns causing supply-side problems, border tensions with a key raw material provider country, regulatory uncertainties in western markets, and margins tightening, the tide was turning.

As quarterly results came in, Indian pharmaceutical companies were not just notching recoveries from the lows seen in March, but posting record numbers. Several top pharma companies saw significant net profit jumps, despite problems. However, with a second-wave of COVID-19 infections likely, countries going back into lockdown, and jittery markets, pessimism is in the air. Can the resurgent pharmaceutical industry continue its growth, or will it face headwinds heading into H2FY21?

Broad numbers

While the results of some heavyweight companies are awaited, the sense within the larger pharmaceutical market is clear. The first quarter of the FY21 was one of a ‘bounce back,’ but the second quarter will see either consolidation or reversal.

Sun Pharmaceutical Industries, the country’s largest pharma company by market capitalization, had a strong quarter. Net profits rose by 70% on a yearly basis beating street estimates, with total revenues rising by 5.3%. Torrent Pharmaceuticals reported net profits of Rs. 310 crores, a 27% jump on a yearly basis while revenues remained flat at Rs. 2,017 crores. Dr. Reddy’s Laboratories, which is working with Russia’s sovereign wealth fund to develop the COVID-19 vaccine--Sputnik-V, saw a 30% fall in net profits to Rs. 760 crores, revenues rose marginally by 2%. 

Other smaller, albeit key API manufacturers like Neuland Labs, and Granules India, saw strong numbers for Q2 despite broad-based challenges like supply disruptions, and product recalls. Pharma companies that saw the highest net profit growth in Q2 were Laurus Labs and Cadila Healthcare (Zydus Cadila) reporting four-fold increases at Rs. 242.7 crores and Rs. 473.4 crores.

Pharma companies net profits

Data source: Company financials

Resurgent margins

With the previous quarter's stocks still in inventory, and revenues recovering with every passing month, margins were slated to increase in Q2. However, the focus was measured keeping in mind spends in R&D and CAPEX, while leaving enough free cash flows.

Granules India highlighted its key focus on improving free cash flows at the start of the fiscal, despite a drop in the same between the quarters ending March and June 2020. Receivables amounted to Rs. 158 crores, and blocked inventory at Rs. 184 crores due to supply constraints, however, the company’s management said it will clear up in 3 to 5 months.

Price increase in raw materials especially for API players is proving a negative for margins. Torrent Pharmaceuticals said last quarter that a few APIs saw a “substantial price increase,” but the same was expected to fall later in the fiscal year. On an overall basis this would eat up 1% to 1.5% of gross margin. The management of the Ahmedabad-based company said that gross margins will sustain at 72% to 73%, as the demand drop will be compensated by the price increase.

Sun Pharmaceuticals saw improving margins, particularly in the specialty products of Ilumya and Levulan, mainly administered through clinics, which have gradually opened in Q2. However, the company stated that margins have not recovered to pre-COVID levels. Overall, due to the aforementioned specialty sales and cost optimization, gross margins improved by 282 basis points on a yearly basis and 87 basis points sequentially.


For pharmaceutical majors especially, China is a large source of raw materials. In Q2, many pharmaceutical companies made strong efforts to decrease their reliance on China. Back in June, pharma companies were given a scare when their consignments from China worth Rs. 200 crores were stuck at ports and airports.

Neuland Laboratories, for instance, faced logistical issues sourcing its raw materials from China. The Hyderabad-based API manufacturer previously sourced 45% to 50% of its raw materials from China, which dropped to 20% to 25% this fiscal year. The management is aiming to bring this down to less than 15% in the next 12 to 18 months, with the eventual target being lowering it to single digits. In the past, the company faced difficulties in restocking the anti-seizures drug Levetiracetam which resulted in a financial impact. Since then Neuland began de-risking away from China and looks to backward integrate key raw materials to avoid dependence.

Even Aarti Drugs intends to move away from being dependent on Chinese supplies. Citing the same raw materials sourcing problem, Aarti Drugs stated that generic players do not want to buy intermediates from China if the same is available in India. This is especially true among American and European customers. The company itself does not have any import reliance from China. In the quarter gone by, Aarti Drugs has been investing in import substitute products (ISPs) within R&D and has been looking for partners in Latin America, Africa, Asia, Canada, and Europe, in order to move away from China. 

API-heavyweight Divi’s Laboratories is also looking to move away from China. At the start of Q2, the management stated that part of the CAPEX at Rs. 1,800 crores were dedicated to backward integrate intermediates to avoid raw materials supply dependency from China. Within this dependency, Dr. Murali Divi, the MD of the company said that India is positioned to get more opportunities from countries de-risking away from China in the custom synthesis segment, and generic products.

The sentiment in Indian pharma is to find a substitute, rather than import from China, due to the global tensions, supply issues, and volatile prices. Granules faced this issue sourcing its key starting material (KSM) para-aminophenol (PAP) for its API paracetamol.

Granules, similar to Neuland, is instead looking at alternative technology to backward integrate the raw material to avoid sourcing from China. However, no clear CAPEX or R&D spends were given for this. The management of Jubilant Life Sciences is hopeful of capitalizing on the demand that shifts to the Indian-pharmaceutical industry from the west in order to ‘de-risk’ from China. As Pramod Yadav, the CEO of Jubilant Pharma said,

‘Any movement in the US to de-risk them from the China dependency will be beneficial to the Indian industry. And within the Indian industry, the players like us who already have a large presence and the setup, will get more benefit.’

CAPEX ramp-up

Owing to higher demand expected in H2, supply-issues clearing, a global shift away from China, and returning margins, pharmaceutical companies have ramped up CAPEX spends. Most companies reiterated their guidance from Q1, while strategically investing on other growth fronts. 

The anti-retroviral API and intermediate supplier Laurus Labs earmarked a CAPEX to spend of Rs. 600 crores for FY21 and FY22. In the first quarter of the current fiscal year, the company used over 30% of the annual CAPEX budget of Rs. 91 crores. The company’s CFO V Ravikumar said the annual CAPEX spend would be via brownfield expansion projects, and the same will become operational in Q2 and Q3 of the next fiscal. The CAPEX spend is expected to increase the API capacity by 20% in the next 12 months, and the formulations (FDF) capacity by 80% in the next 18 months. In Q2, the API and FDF wings generated Rs. 571 crores and Rs. 452 crores in revenue, respectively, amounting to 90% of the company’s quarterly revenue.

Forecasting a rising demand over the next few years, Laurus Labs doubled its CAPEX guidance to Rs. 1200 crores for FY21 and FY22 from Rs. 600 crores. This increase will be used for an FDF site in Hyderabad, via a greenfield project, and an API manufacturing plant in Vizag.

Similarly, Neuland Laboratories, which set aside Rs. 90 crores for the current fiscal year’s CAPEX, has seen growing opportunities. With 63% of the CAPEX budget exhausted in H1, the company’s management said in the recent earnings call that “there may be need for additional CAPEX.” However, no injection was provided in the quarter gone by. To add to this, Unit III, an API and intermediate manufacturing facility in Hyderabad, which was acquired in April 2018, began commercialization in Q2. The facility is spread across 12 acres, with 197 kiloliters (Kl) capacity, and can boost Neuland’s API capacity by 40%. 

Continued R&D focus

In addition to CAPEX, R&D continues to be a focus for pharmaceutical companies. While the need to re-source raw materials and import substitutes from China through backward integration will take a few quarters to bear results, investments into R&D have already been rising among domestic pharmaceutical companies.

Sun Pharmaceuticals, the country’s largest pharmaceutical company by market capitalization, in Q1 saw Rs. 421 crores, which amounts to 5.6% of revenue cut out for R&D specifically in advancing its specialty and generic products pipeline. In the quarter gone by the R&D spend increased by 45% to Rs. 613 crores, contributing 7.2% of sales, with 37% of the same accruing to specialty products.

Mumbai-based Lupin intends to cap R&D at 10% of sales, which at the beginning of Q2 stood at 8.7%. The management previously stated that the R&D team had been resized, and are focusing on injectable and complex products, with an expected increase in the specialty front.  However, they did not give any numbers. Another pharma major which decreased R&D focus was generic-giant Torrent Pharmaceuticals, recording R&D expenses at Rs. 119 crores for Q2, representing 6% of sales. This is a drop of 8.5% in R&D spending, compared to Rs. 130 crores in the year-ago period. 

In May 2020, Laurus Labs announced the incorporation of Laurus Synthesis, the company’s wholly-owned subsidiary that will provide a dedicated R&D focus to its pharmaceutical wing. In Q2, the company’s management intimated that the Laurus Synthesis' R&D plant will be set up in Genome Valley, Hyderabad, and will cost the company Rs. 60 crores. The plant will be operational at the end of Q3FY22.

Aurobindo Pharma in Q1 planned on a CAPEX spend of $49 million (~Rs. 365.8 crores), with an estimate for FY21 at $200 million (~Rs. 1,493.6 crores). However, this number will increase as the company looks to partner with COVID-19 vaccine developers offering contract manufacturing. In the Q2 call, the management stated that Rs. 250 to Rs. 275 crores will be used to build a new facility by Q1FY22 to manufacture and distribute the vaccine. Aurobindo’s own vaccine development, through Auro Vaccines, its US-subsidiary in the preclinical phase.

Jubilant Life Sciences signaled an R&D spend of Rs. 500 crores for FY21, and has exhausted 14% of this amount in the first quarter. Given the larger pharmaceutical trend of increasing R&D as margins recover, and pent-up demand rises, the company expects new opportunities in contract development and manufacturing organization (CDMO), generics, and specialty. In light of the same, the management announced the strategic partnership with US-based SOFIE Biosciences through its wholly-owned subsidiary Jubilant Pharma, which will take a 25% equity stake in the company for $25 million (~Rs. 185.2 crores). The acquisition will allow Jubilant Life to grow production capacity in the theranostic pipeline and support PET manufacturing and distribution within the United States.

Another company which increased R&D based on tailwinds in the quarter gone by was Cipla. In Q1, the company recorded Rs. 200 crores in R&D expenses and the management wasn’t looking to increase the same. However, in Q2, R&D increased to Rs. 226 crores or 4.5% of revenue, as clinical trials for g-Advair, a respiratory drug, were completed. The management’s guidance for R&D spend has increased to 6%-7%, compared to 4.5% in Q2 as more clinical trials are scheduled for H2.

Pipeline expands

Several products that were expected to launch in the last quarter were pushed to Q2 due to regulatory uncertainties, and ongoing development. This coupled with product recalls saw an increase in product filings sequentially, but the guidance set forth in June was maintained. 

Cadila Healthcare (Zydus Cadila), in August 2020, launched Remdesivir, a COVID-19 antiviral drug under the brand name Redmac. In June, the Ahmedabad-based company entered into a non-exclusive agreement with Gilead Sciences to manufacture and sell Remdesivir. Further, Cadila received the USFDA approval to launch Doxycycline to treat respiratory infections. In total, the company launched 6 new products in the US in Q2, filed 5 ANDAs, and received 10 approvals (2 tentative). For FY21, the guidance is 30-35 ANDA filings and 45 filings in the next year.

Sun Pharmaceuticals’ US business accounts for roughly 30% of its total sales, hence ts American pipeline bears importance. The company had 92 ANDAs awaiting approval, (20 tentative) and received 4 approvals. Further, it has 55 approved NDAs and 6 NDS awaiting approval. Sharekhan, in its report on the company, said Sun Pharma’s US specialty business, led by its product pipeline, will be a key growth driver for the company.

In Q2, Dr. Reddy’s Laboratories began work on the Sputnik-V vaccine, and it will soon start phase 2 and 3 clinical trials. For the quarter, the company launched 9 and filed 2 ANDAs with the USFDA, with the intention of launching 25+ products in the US for the year. The European business will launch 7 products, which includes 3 in Germany and 1 each in the UK, Italy, Spain, and Austria, with emerging markets pegged for 28 product launches.

Torrent Pharmaceuticals, a late entrant into the US market, will face headwinds due to issues at the Indrad and Dahej plants and hence launches will be delayed. As a result, its focus will shift to the German business following the upgrade of the quality management systems, with analysts expecting an 11% CAGR in the next three years. Its field force is back to 75% to 80% of pre-COVID levels and is expected to return to 90% by the close of Q3. It's India business which accounted for 57% of revenue had 9 launches in H1, with 4 - 5 additional launches in H2. The US business declined by 13% y-on-y and had 47 ANDAs pending approval, 1 filed with 6 receiving tentative approvals, and Levitown to launch in March 2021.

Another Indian company which licensed Gilead Sciences’ Remdesivir is Cipla, under the brand name Cipremi. This was launched in July 2020 for around $50 per 100mg vial. Speaking to Reuters, Kedar Upadhye, the company’s global CFO said, monthly volumes of Remdesivir is seeing a sharp increase since October, with no supply-side constraints. Over 3 lakh vials of Cipremi were sold in India alone by September, with Cipla looking to export the drug as well.  Cipla is awaiting a response from the USFDA on its Goa manufacturing plant, following the regulator’s September 2019 inspection, and a warning letter received in February 2020. Beyond this, as of September 2020, Cipla filed 250 ANDAs with 165 approved and 19 tentatively approved with the FDA.

Analyst outlook

Before the Q2 earnings season started, analysts expected domestic pharmaceutical companies to continue from their strong performance in Q1. This was expected to be aided by the recovery in the US market, and domestic market recovery, as the economy opened up. Growing API sales due to stockpiling in the previous months were also expected to support strong topline numbers.

Nirmal Bang estimated cost optimizations to decrease on the SG&A front as doctors returned to work, expecting clinical activity to reach 50% to 75% of pre-Covid levels. This is represented in the gradual recovery of drugs supplied through doctor’s clinics. ICICI Securities expected traction in specialty chemicals, and injectables, towards which Lupin has dedicated future R&D The brokerage also expected recovery in Sun Pharmaceuticals’ dermatology segment and a 2.2% growth in the domestic formulations business. 

Following the results, most brokers were positive heading into H2. Among the pharma companies mentioned above, 50 broker reports were published, with 7 recommendation upgrades against 4 downgrades. However, target prices (TP) were raised in 38 reports against 5 TP reductions. Among the companies upgraded were Sun Pharma, Torrent Pharma, Divi’s Laboratories, Cadila Healthcare, and Laurus Labs. 

Below is how the broker target prices changed in rupee and percentage-terms between Q1 and Q2 reports.

Pharma broker report target price
Data source: Broker reports

Nirmal Bang Institutional released a Sector Update report for Pharmaceuticals & Biotech. on 20 Nov, 2020.