Trendlyne Blog: The Baseline, Latest on stock market and finance in India and the world.

10 Oct 2024

Rubber prices puncture margins for tyre companies | Screener: auto parts stocks with rising profit margins

Once upon a time (meaning, when I was a teenager) talking about the weather used to be considered a boring conversation. Not anymore. We live in an age where wildfires are destroying entire towns in Greece, California and Australia. A 250 km/hour storm is hitting Florida's biggest cities as I type this.

Extreme weather has hit sugar crops in Brazil and rubber crops in Thailand. Thailand, the world's largest rubber producer, saw its production fall by 1-2% due to incessant rains and a fungal disease. This year, the situation got worse with Typhoon Yagi, which killed over 800 people across South East Asia, and caused flooding in Thailand just as the peak rubber tapping season started in September.

The typhoon also wiped out farms across China, the Philippines, Laos, Vietnam, and Myanmar - a crucial region accounting for 80-90% of the world’s output.

Even as supply is under threat, demand is up. Strong auto purchases globally and a stable US economy have driven rubber prices higher, by over 70% in international markets and 50% in India, in one year.

The tyre industry consumes 70% of all rubber, and has been reeling under these price increases. The industry is struggling with margins and profitability.

In this week's Analyticks:

A nail in the tyre: Soaring rubber prices hit margins for tyre companies
Screener: Auto parts players with rising operating profit margins

Rubber prices jump, as supply tightens

Tyre companies can't seem to catch a break right now. Even as rubber prices surged, crude oil prices jumped past $80 per barrel as well as Israel went on a war footing in the Middle East. Crude oil is the key raw material for synthetic rubber, an alternative to natural rubber.

The stimulus package in China, the world’s largest rubber consumer, is expected to drive demand up, pushing prices of rubber even higher. In India, domestic prices are at a 13 year high due to weak tapping activity in Kerala due to floods, and labour shortages.

Kotak Institutional Equities in a recent report, noted, “Overall, the stockpile of global natural rubber is expected to decline to 2.1 million tons in CY2024E from 2.8 million tons in CY2023, which may increase rubber prices unless the demand trend weakens.”

For tyre companies, margins are at risk

The margins of tyre manufacturers negatively correlate with the prices of natural rubber. Crisil estimates tyre raw material costs might increase by 4-6% in FY25, keeping margins subdued beyond FY25.

Demand is also not in full swing. The Indian auto sector is a mixed bag, despite the many new launches, with passenger car demand slowing down while two-wheelers register double-digit growth.

But the industry earns around 70% of its revenue from the replacement segment, which seems promising. Here’s what companies said recently:

“We expect FY25 volume growth in replacement segment to remain healthy.” – CEAT management

“Passenger car replacement should be doing well because overall replacement cycle is getting shortened.” - JK Tyre management

“So, the replacement demand overall should be at high single digits, so we will recover some of the lost ground.” – Apollo Tyre management

Tyre producers have increased prices by 2-3.5% this fiscal, offsetting some of the impact of raw material prices. Kotak highlights the need for 5% more in price hikes to reach Q4FY24 margins. That's not easy given the slowing demand in some segments and MRF’s aggressive pricing strategy in TBR (Truck, Bus and Radial), TBB (Truck Bus Bias) and two-wheeler segments. These account for 70% of industry revenue. So margins will likely stay under pressure.

A silver lining for tyre companies

A bit of good news for tyre company CEOs is that the link between company profitability and rubber prices is not as strong as it used to be. Price-indexed gross margins for tyre companies are now 4-5% higher compared to two years ago.

MRF's falling market share, better managed capex plans across competitors, premiumisation, rising import duties for boosting domestic production and better export opportunities have helped tyre margins hold up despite rising raw material costs.

Almost all major tyre companies right now have strong fundamentals and mid-valuation levels. Still, due to falling margins, brokers estimate a decline in FY25 profits, despite strong revenue growth.

The trees grow slowly, limiting supply

Rubber trees require 5-7 years to mature enough for tapping, which limits the supply in the short term. Even with some delinking of rubber prices from tyre margins, the high prices will take a toll.

While a big drop in global tyre demand could ease raw material costs, this is hardly the solution tyre companies want. Margins will remain under pressure for now, likely dragging on the bottom line for several quarters.

Screener: Tyre stocks lag the auto parts industry in operating profit margin growth

Auto tyres stocks lag the auto parts industry in operating profit margin growth

This week, we look at the impact of rising rubber prices on the operating profit margins of auto tyres & rubber products stocks and compare them to that of auto parts & equipment stocks. This screener shows stocks from the auto parts and tyres industries with the highest QoQ growth in operating profit margins in the latest quarter.

Of the total number of 36 stocks in the screener, only three stocks belong to the auto tyres & rubber products industry. The most notable stocks in the screener are Greaves Cotton, Banco Products (India), Sharda Motor Industries, Subros, SJS Enterprises, Pix Transmissions, JK Tyre & Industries, and Balkrishna Industries.

Greaves Cotton saw the highest growth of 6.6% QoQ in its operating profit margins in Q1FY25. This auto parts & equipment company’s operating profit margin improved on the back of lower raw material costs, employee benefits, and depreciation expenses. However, the company’s revenue declined by 4.3% QoQ to Rs 656.7 crore during the quarter due to a reduction in the engines and cables & levers segments.

Auto tyres & rubber products stocks, however, witnessed a slower growth in operating margins due to a sharp rise of 11.9% in rubber prices from April 1 to June 7. JK Tyre & Industries’ operating profit margin grew marginally by 1.4% QoQ in Q1FY25, helped by the company’s effort to offset the rise in rubber costs by reducing the cost of sales and product premiumisation.

You can find some popular screeners here.

The Baseline

09 Oct 2024, 05:50PM

Five stocks to buy from analysts this week - October 09, 2024

By Divyansh Pokharna

1. Polycab India:

Hem Securities initiates a ‘Buy’ rating on this consumer durables company with a target price of Rs 8,427, indicating a potential upside of 13.9%. In Q1FY25, Polycab had reported a revenue growth of 20.8% YoY to Rs 4,698 crore. The company’s fast-moving electrical goods (FMEG) segment grew 21% YoY, driven by increased demand for fans following a heatwave across several parts of the country. However, EBITDA margins decreased by 171 bps YoY to 12.4%, due to a decline in international business growth.

Analyst Mudit Jain said, “We expect the company to deliver strong numbers in the upcoming quarters, driven by rising demand from real estate and infrastructure activities.” He projects the share of organized players in the wires and cable business will increase from 78% in FY24 to 85% by FY28, fueled by premiumization. Polycab currently holds a 25% market share in the domestic organized sector. The company also aims to increase its international business share to 10% of total revenue by FY26 and is launching a distribution-based model in the US.

Jain anticipates the company’s revenue and PAT CAGR to grow at 16.5% and 15% respectively over FY25-26. He believes this growth will be driven by rising electricity demand in urban areas, fueled by industry, business, and housing.

2. Nazara Technologies:

Prabhudas Lilladher upgrades a ‘Buy’ rating on gaming company Nazara Technologies, with a target price of Rs 1,185, suggesting a 21.1% upside. Analysts Jinesh Joshi, Stuti Beria and Dhvanit Shah highlight the company’s strategic investment in Moonshine Technology (MTPL), which operates the online poker platform PokerBaazi, holding a 50-55% market share. Nazara acquired a 47.7% stake in MTPL for Rs 9.8 billion, paying Rs 5.9 billion in cash and issuing 2.5 million shares.

The analysts point out that MTPL reported a revenue of Rs 4.1 billion in FY24, with a 10% EBITDA margin. This acquisition is expected to strengthen Nazara’s presence in the growing real-money gaming market, with MTPL’s revenues projected to grow at a 30% CAGR over the next three years.

Joshi, Beria and Shah note that they incorporated MTPL's projections into their estimates, since Nazara holds a 47.7% non-controlling stake. Consolidation is expected once the conversion of compulsorily convertible preference shares (CCPS) occurs. They project a revenue CAGR of 23%, along with EBITDA and PAT CAGRs of 41% and 47.6%, respectively, over FY 25-27.

3. Petronet LNG:

Emkay initiates a ‘Buy’ rating on this oil distribution company with a target price of Rs 425, indicating an upside of 20.7%. Analysts Sabri Hazarik, Harsh Maru and Arya Patel highlight that the company’s Dahej terminal saw 110% utilization in Q1FY25, largely driven by the power sector, which has now cooled off. They expect Q2 to be seasonally weaker but project that utilization will approach 100%, suggesting a full-year run rate exceeding 100%.

Petronet LNG is facing concerns about possible changes in tariffs for its buyers, known as offtakers. However, the company’s management says that any tariff changes will be minor and won't affect the interests of minority shareholders, as “offtakers are also company stakeholders”.

Hazarika, Maru and Patel note that Exxon’s second contract for 1.2 million tonnes per annum (mmtpa) will begin in FY26-27, along with a 5 mmtpa expansion of Dahej terminal. This is expected to drive volume growth for Petronet, benefiting from higher Kochi terminal tariffs.

4. V2 Retail:

Edelweiss maintains a ‘Buy’ rating on this department stores chain with a target price of Rs 1,754. This indicates an upside of 24.8%. V2 Retail added 12 new stores during Q2FY25, bringing the total store count to 139. The management plans to add 60 new stores in FY25 while maintaining double-digit same-store sales growth (SSSG) for the rest of the year. Analyst Palash Kawale expects 50 store additions and 20% SSSG for FY25.

The company aims for a 30-40% sales CAGR over the next three to four years, which is expected to drive margin expansion and improve store performance. V2 Retail also aims to maintain a 20% return on equity (RoE) and achieve Rs 1,800 crore in sales by FY25.

The company is focused on improving revenue per square foot, which grew by 30% YoY during Q2FY25. Kawale notes that value retailing in India is changing as consumers become more selective and aim for higher-quality products. This shift highlights the need for better shopping experiences, fashionable products, affordability, and larger wardrobes, with organized retail replacing unorganized formats.

5. Jindal Steel & Power:

Motilal Oswal maintains a ‘Buy’ rating on this iron and steel products company with a target price of Rs 1,200, indicating an upside potential of 20.1%. Analysts Alok Deora and Sonu Upadhyay highlight the company’s Rs 310 billion capital expenditure plan, which will increase steel production capacity to 15.9 million tons (mt) annually. A significant portion of this investment (75%) will be directed towards the expansion of the steel production plant in Angul, Odisha, with the remainder allocated to coal mines and other projects.

The analysts note that the company has already spent Rs 150 billion and plans to invest the remaining amount funds over the next three years. Post completion of these new projects, flat steel products will represent 55% of the total output, up from the current 35%.

Deora and Upadhyay are optimistic about the company’s financial health as the company has deleveraged its balance sheet from Rs 391 billion of net debt in FY19 to approximately Rs 104 billion as of Q1FY25. They expect steel production volumes of 9 mt in FY25 (an 18% YoY increase) and 11 mt in FY26 (a 25% YoY increase).

Note: These recommendations are from various analysts and are not recommendations by Trendlyne.

(You can find all analyst picks here)

The Baseline

08 Oct 2024, 05:34PM

Chart of the Week: DVM screener delivers CAGR of 43% over 11 years 7 months

By Aditi Priya

Humans tend to focus on short-term rewards, and this shows up in the stock market as well, where investors often hunt for quick gains, the easy buck. But lasting success in the market comes from patience. Investor Peter Lynch said, "The real key to making money in stocks is not to get scared out of them." Instead of chasing short-term wins, and getting spooked by down cycles, staying committed for the long haul with a steady strategy is what typically leads to better returns.

One way to maximize returns is by using screeners that search for stocks that outperform on not one or two but multiple metrics. The DVM score, for example, looks at metrics across management quality, financial health, valuation, as well as several dozen technicals, to identify high-scoring stocks. These scores help shortlist quality stocks for investing.

In this edition of Chart of the Week, we analyze one particular DVM screener: the ‘DVM - High Performing, Highly Durable Companies’ screener. This screener selects stocks from the ‘all stocks’ universe and Nifty 500 universe, that have strong financial durability, reasonable valuation, and positive momentum scores. It is optimized to highlight the top five stocks with the highest durability scores.

High DVM stocks from the all-stocks universe outperformed those from the Nifty 500 universe

We ran screener backtests for both the Nifty 500 universe and the all-stocks universe from March 2013 to September 2024. These backtests evaluated the strategies’ quarterly performance against the Nifty 500 benchmark. The screeners delivered cumulative returns of 5,118.5% and 6,197.2% over 11 years and 7 months, with a CAGR of 40.7% and 42.7%, for the Nifty 500 and all stocks universe, respectively. In contrast, the benchmark’s CAGR stands at 16.3%. The portfolio review frequency chosen for this backtest is quarterly.

The heatmaps present a period analysis, showcasing the strategies’ quarterly returns from Q1FY14 to Q2FY25. The data reveals that this approach delivered positive returns in 32 out of 46 quarters for the Nifty 500 universe. It also outperformed the Nifty 500 index in 30 of these 46 quarters. For the all stocks universe, the data reveals that this approach delivered positive returns in 29 out of 46 quarters whereas it outperformed the Nifty 500 index in 30 of these 46 quarters.

The strategy experienced a maximum drawdown of 27.6% in Q2FY23 in the case of Nifty 500 universe. For the ‘all stocks’ selection, the strategy experienced a maximum drawdown of 27.1% in Q2FY22. The term "maximum drawdown" represents the largest observed loss from a portfolio’s peak to its lowest point before a new peak is attained. This strategy is automated and does not have a set stop loss, so the drawdowns show the maximum loss potential under this approach. Introducing a stop loss can reduce periods of negative returns and lower maximum drawdowns.

The DVM screener for the all stocks universe currently includes stocks like Jindal Saw, ITD Cementation, Kriti Industries, Arrow Greentech and Visco Trade Associates. Meanwhile the screener for Nifty 500 universe currently has stocks such as Bombay Burmah Trading Corp, Elecon Engineering, Alembic Pharmaceuticals and MRF.

In the course of the backtest, for the Nifty 500 universe, Ceat gave the highest returns of 428.8%. On the other hand, Triveni Engineering & Industries’ stock price had the highest fall of 48.8%. In the all stocks universe, Aegis Logistics gave the highest returns of 199.2%, while Butterfly Gandhimathi Appliances’ stock price had the highest fall of 51.8%.

Let’s look at stocks with the highest returns over the past two years from the DVM screener’s backtest. Electrical equipment maker Apar Industries was part of the screener from March 31, 2023, to June 28, 2024. During this period, it delivered a return of 238.3%.

Apar Industries tops momentum screener performance over two years

Similarly, EIH, a hotel company belonging to the Oberoi Group, was active in the screener a quarter ago from December 29, 2023, to March 28, 2024. In these three months, the company gave a return of 80.2%. The jump came as the hotel stock saw its financials improve as domestic tourism boomed. In FY24, EIH witnessed a 103% YoY rise in its net profit to Rs 639 crore, aided by growth in the luxury hotel segment, which boosted average room rates.

Great Eastern Shipping Company, which provides shipping and offshore business services to primarily oil & gas companies, was active in the screener for a year. The stock delivered returns of 65% during the period starting June 30, 2023, to June 28, 2024.

The tobacco major, Godfrey Phillips remained in the screener for two quarters, from September 30, 2022, to March 31, 2023. During this period, the company gave 58.5% returns. The company's decision in October 2022 to sell its chewing tobacco business and other trademarks allowed it to concentrate on the cigarette business. Consequently, its net profit surged by 57.6% YoY in FY23 to Rs 690.5 crore.

Lastly, JK Tyre & Industries, an Indian tyre manufacturer that makes radial tyres for an entire range of vehicles including trucks, buses, and passenger cars among others, was active in the screener from September 30, 2023, to March 28, 2024. During this period, the stock delivered a return of 55.4%.

Bombay Burmah leads in one-year gain among active stocks

Moving to the quarterly and yearly price change percentages of stocks currently active in the screener. Packaged foods company Bombay Burmah Trading Corporation’s stock price rose by 31.8% in the past quarter and 123.2% in the past year. The company’s net profit increased by 147.3% YoY in Q1FY25.

Industrial products manufacturerJindal Saw witnessed its share price surge by 31.1% in the past quarter with gains of 99% in the past year. The company revenue increased by 15.3% YoY while net profit saw a surge of 61.2% YoY in Q1FY25.

Meanwhile, Elecon Engineering, which designs, develops and supervises the manufacture of electrical equipment, witnessed a 70.3% YoY increase in the share price. Alembic Pharmaceuticals, on the other hand, saw a 30.8% uptick in its stock price in the past quarter and 57.2% in the past year.

Lastly, MRF saw its share price surge by 3.5% in the past quarter, with over 23.2% gains in the past year. This tyre manufacturer saw a 48.2% QoQ increase in their net profit in Q1FY25.

In summary, the screening criteria identify stocks that offer potential for medium to long-term gains with moderate risk. Despite uncertainties like the COVID-19 pandemic and volatile election periods, the Nifty 500 screener delivered a mean quarterly return of 10.4%. It consistently maintained an average of 4.7 stocks, indicating diversified investment, except for Q1FY21 when no stocks were held. Comparing both universes, the Nifty 500 stocks achieved positive returns in 32 out of 46 quarters, while stocks in the all-stocks universe posted positive returns in 29 out of 46 quarters.

The Baseline

04 Oct 2024

Five Interesting Stocks Today - October 04, 2024

1. Marico:

This FMCG company touched its all-time high of Rs 719.8 on Thursday following its business update. Q2FY25 volume growth shows signs of recovery, with mid-single-digit (around 5-6% YoY) growth. The company attributes this uptick to improved performance in its flagship Parachute coconut oil brand (contributing around 37% of the total revenue), recovering from a weaker 2% YoY volume growth in the previous quarter. The brand recorded double-digit revenue growth, helped by price hikes taken at the start of the year and falling inflationary pressures.

The company also highlighted that its consolidated revenue grew by high-single-digits (around 7-9% YoY) during the quarter. International business witnessed double-digit growth in the MENA (Middle East and North Africa) and South African regions. In Q1, Marico’s revenue had risen by 6.7% YoY to Rs 2,643 crore, driven by improvements in the Indian and international markets. According to Trendlyne’s Forecaster, the company’s revenue is expected to grow by 6.9% YoY In Q2FY24. Marico is set to declare its Q2 results on October 29.

In the business update, the FMCG giant also highlighted stable demand trends with rural outperforming urban on a YoY basis for the third consecutive quarter. In contrast, its peer Dabur reported a sharp revenue decline due to weak demand in its food and beverage segment, impacted by floods and heavy rain across different regions. However, it hopes to bounce back starting in October.

Marico expects revenue growth to move into double digits in the second half of this year, driven by improving rural demand and pricing actions, despite ongoing inflationary pressures on raw materials. The company remains optimistic about managing competition from unorganised players and believes that recent price increases will drive future growth. The Parachute oil maker took another round of price hikes at the end of the quarter, as copra prices increased higher than expected.

According to analysts, Marico’s business update offers reassurance amid a generally weak performance in the sector. Nuvama expects sustained growth in the international markets and a gradual improvement in the domestic business. The brokerage maintains its ‘Buy’ rating on the stock with a target price of Rs 780.

2. Angel One:

Thisbroking firm surged 7.5% over the past week after it announced that it willincrease brokerage charges for equity delivery transactions. Effective November 1, Angel One will charge Rs 20 or 0.1% with GST (whichever is lower) per executed order compared to the zero brokerage levied earlier. Analysts expect this move to increase revenue per user but could potentially affect the company’s market share if other discount brokers continue to charge zero brokerage.

Of the gross broking revenue of Rs 920 crore in Q1FY25, 84% came from the derivatives segment. This is a growing business risk, considering the recent F&Ocurbs proposed by SEBI like allowing only one weekly expiry of index derivatives per exchange and increasing the value of contract size to above Rs 15 lakh (up by around 2.5 times) is expected to negatively impact derivative volumes in the coming quarter. Zerodha CEO, Nithin Kamathsays this move by SEBI could impact 60% of their overall trades and 30% of overall orders, assuming that those trading weekly don't move on to trading monthly.

As ofQ1FY25, the total client base of the company increased 11.2% QoQ to 24.7 million. This led to a higher market share of 18.9% in the overall equity segment, up from 18.1% a quarter ago. Revenue from operations increased 74.1% YoY to Rs 1,405.5 crore in Q1, while net profit jumped 32.6% YoY to Rs 293 crore. Forecasterestimates revenue growth of 5.8% YoY, with net profit growth of 39.5% YoY in Q2FY25.

Chairman and Managing Director, Dinesh Thakkar,said, “Customers don't mind paying a few rupees extra per order or paying for cash segment. What is important for them? They should get the best service on this platform.” If volumes are intact, analysts expect around an 8% increase in overall revenue from all the fee changes.

Motilal Oswalmaintains a ‘Buy’ rating on Angel One as their analysis highlights zero impact on earnings in FY26. They expect the hike in brokerage fees to offset the decline in volumes. They also highlight that new product categories such as distribution of loans and fixed income instruments, wealth management and AMC, will start contributing meaningfully over the next couple of years, adding to the firm’s profitability.

3. ITD Cementation India:

This construction & engineering company rose by over 19% over the past week. On October 3rd the company won an order worth Rs 1,937 crore to construct a multi-story commercial building in Uttar Pradesh. The acquisition of the contract is expected to strengthen the company's growth trajectory and expand its portfolio of completed projects.

In Q1FY25, the company’s net profit had surged by 91.9% YoY to 100.2 crore, while its revenue rose by 30.2% YoY driven by a 30.3% QoQ rise in order book to Rs 1,053 crore. The firm beat Trendlyne’s Forecaster estimates for revenue by 8.1% and net profit estimate by 6%. The stock appears in a screener for stocks with strong momentum.

Until FY24, 49% of the company’s order book consisted of government orders, followed by 33% in private sector orders and the remaining 18% from PSUs. The current government approved Rs 3 lakh crore worth of infrastructure projects in the first 100 days of its third term. Major initiatives include the Rs 76,200 crore Vadhavan port in Maharashtra, which is projected to be among the world's top 10 ports, and construction of 62,500 km of roads under PMGSY-IV. These projects offer significant opportunities for the company in road, bridge, tunnel, railway, and port construction, aligning with the company’s expertise.

India's infrastructure sector is estimated to reach $204.1 billion (Rs 17.2 lakh crore) in 2024 and $322.3 billion (Rs 26.7 lakh crore) by 2029, growing at a CAGR of 9.5%. Projections suggest the sector could hit $1.4 trillion by 2025, driven by government initiatives, changing consumer preferences, and tech advancements.

Reports indicate that both the Adani Group and RPG Group’s KEC International are interested in acquiring the 46.6% stake that its promoter Italian-Thai Development Public Co. holds in ITD Cementation. However, the company’s management has stated that no decision has been reached yet regarding the proposed divestment. The management has reassured its stakeholders that there are no significant technical deficiencies, reinforcing their capacity to operate independently.

Asit C Mehta Investment has initiated an ‘Accumulate’ rating on ITD Cementation with a target price of Rs 758. The brokerage is optimistic about the company's growth story and guides a revenue CAGR of 17% for FY25-26 and a forward P/E multiple of 27X based on FY26E EPS of Rs 28.08.

4. Alembic Pharmaceuticals:

This pharma stock has risen by 3.9% in the past week, after the USFDA issued an establishment inspection report (EIR) for its oral solid formulation facility, following an inspection in July 2024. The company now has EIRs for all its facilities approved by USFDA.

The company also got final approval from the USFDA for its Lamotrigine tablets in 200 mg, 250 mg, and 300 mg doses. These tablets are used to treat certain types of seizures in patients and have an estimated market size of $268 million. Alembic now has 216 abbreviated new drug application (ANDA) approvals, including 188 final approvals. It also received approval for its Albendazole tablets, which are used for treating parasitic infections. This drug has an estimated market size of ~$200 million.

Trendlyne’s Forecaster projects the company’s net profit will grow 27.2% YoY in the upcoming Q2FY25 results, while revenue will increase 3% YoY during the quarter. In Q1FY25, the company had reported a revenue growth of 5% YoY to Rs 1,563 crore, thanks to strong performance in the US and high single-digit (9% YoY) growth in India. Alembic has faced a double-digit price erosion on some of its products. To counteract this pressure, it intends to sell certain products at higher prices than its competitors.

The company’s US business, which accounts for ~30% of the total sales, grew by 18% YoY in Q1FY25, with the launch of two new products in the US market. Managing Director Pranav Amin said, “We expect the US business to grow by about 10% - 12% in FY25, factoring in both increasing competition and ongoing price erosion.” He also noted that the API segment, which declined by 15% in Q1 due to pricing pressure, is expected to return to growth, with a projected 10% YoY increase in FY25.

KR Choksey maintains a ‘Hold’ rating on the firm, noting that despite challenges like price erosion in the US market and rising costs, it expanded profitability margins. The brokerage expects the company to drive growth through new US product launches, improved capacity utilization, and continued outperformance in the Indian market.

5. SJVN:

Thiselectric utilities company rose 6.2% on September 27, following theannouncement of two memorandums of understanding (MoUs) with the Government of Maharashtra for the development of energy projects in the state.

The first MoU was signed with the State's Department of Water Resources to develop five Pumped Storage Projects (PSPs) with a combined capacity of 8,100 megawatts (MW). The second MoU was inked with Maharashtra State Power Generation Company (MAHAGENCO) for a 505 MW Floating Solar Project at the Lower Wardha Dam in Amravati district.

The total estimated investment for these projects is around Rs 48,000 crore, which is expected to generate approximately 8,400 direct and indirect employment opportunities. Sushil Sharma, Chairman and Managing Director of SJVN,highlighted that these MoUs will facilitate the company to undertake survey, investigations, and the preparation of detailed project reports (DPRs).

SJVN reported strong financial results inQ1FY25, with net revenue growing 29% YoY, driven by a 56% YoY increase in power generation, which reached 3,292 million kilowatt-hours. The company has set an ambitious target of achieving 50,000 megawatts (MW) of installed capacity in renewable energy by 2040. In the near term, SJVN plans to expand its renewable energy capacity, aiming to add 2,638 megawatt (MW) in FY25 and a further 5,673 MW in FY26.

Monarch Networth Capital hasmaintained its ‘hold’ rating on SJVN, with a target price of Rs 144. The brokerage noted that while delays in the commissioning of SJVN’s projects are typical risks in this sector, the current delays were not unusually long. Analysts expect the company’s capacity to reach 9.3 gigawatt (GW) in FY26 and 11.3 GW in FY27.

Trendlyne's analysts identify stocks that are seeing interesting price movements, analyst calls, or new developments. These are not buy recommendations.

The Baseline

03 Oct 2024

The big winners: Five stocks expected to stand out in the September results

By Tejas MD

China and Hong Kong just delivered the best weekly performance for their indices in 16 years, fueled by Beijing’s boldest stimulus package since the pandemic. It was rolled out just ahead of the Golden Week holidays. The surge has investors buzzing—but what does this mean for Indian markets? Is what is good for China, bad for India?

India and China are seen as the two great rising rivals of this century. Much ink has been spilled on comparing the two. The Dragon versus the Tiger, etc etc. In recent months, China's star had dimmed somewhat, with a recession, a real estate bust, and US sanctions. The stimulus however has put China back in the spotlight - for now.

With many analysts seeing Indian stocks as overvalued, there’s growing concern that global money managers might trim Indian holdings to make room in their portfolios for surging Chinese stocks. DBS Bank predicts that Indian equities could face headwinds, underperforming their Chinese counterparts in the near future.

One game-changer for investors eyeing India would be a strong set of Q2FY25 earnings. An upbeat earnings season would boost valuations, easing concerns that the Indian market is too pricey right now. So all eyes are on the upcoming results season.

Which stocks are poised to shine brightest in Q2FY25? We pick five contenders that could deliver a strong performance.

In this week’s Analyticks,

Q2 pre-results special: Five companies that could deliver high growth in the September quarter
Screener: Stocks where Q1FY25 revenue growth outperformed their sectors, with high Forecaster estimates for revenue growth in Q2FY25

The big winners: Five stocks expected to stand out in the Q2FY25 results season

Heading into the Q2FY25 results, we shortlisted five stocks from the Nifty 500 that are predicted to post high revenue and net profit growth YoY and QoQ in Q2FY25, according to Trendlyne’s Forecaster. What’s more? These companies already set the bar high with strong results in Q1FY25.

Zomato and Kaynes Tech’s revenue and net profit to rise sharply in Q2FY25E

All five stocks in focus, Zomato, Kaynes Technology India, Kalyan Jewellers India, KEC International and Bharat Electronics are from different industries. All these stocks have not only risen sharply over the past year but have also outperformed the Nifty 50 by a huge margin.

Only Bharat Electronics lags Nifty 50 in the past quarter

As a result of the share price rise, Trendlyne’s Momentum scores for these companies have ranged from neutral to high, indicating buying interest in the market. However, low Valuation scores (except KEC International) signal that they may be expensively priced. But these companies boast of high earnings growth.

All stocks in focus have good Durability scores with strong fundamentals

These companies have high durability scores, thanks to strong financials and management stability.

Zomato zooms in the past year, but will Swiggy spoil the party?

Zomato’s net profit and revenue have risen QoQ every quarter since it posted profit for the first time five quarters ago. Analysts expect the company’s top line and bottom line to rise 64% and 657.8% in Q2FY25.

Zomato’s revenue and net profit on consistent growth track

Blinkit, Zomato’s quick commerce platform, remains the fastest-growing vertical for the company. Blinkit’s gross order value jumped 130% YoY in Q1, while the food delivery segment rose around 26%.

Axis Securities believes Zomato has built a resilient business model by securing multiple strategic verticals across food delivery, dining out, Blinkit and Hyperpure. Zomato acquiring Paytm’s entertainment and ticketing business has added to this.

This food delivery company is in focus after its rival Swiggy filed its updated DRHP for a Rs 3,750 crore fresh issue. Zomatos shares closed 2.3% lower on the same day. While Zomato recorded a profit of Rs 351 crore in FY24, Swiggy reported a loss of Rs 2,350.2 crore in the same period. However, Swiggy managed to reduce its losses by 43% in FY24.

Kaynes Tech on the growth track, enters the semiconductor industry

Kaynes provides design solutions and manufactures advanced electronic modules. Kaynes’ revenue and net profit have been on the rise for the past seven quarters and analysts expect this streak to continue in Q2FY25.

Industrials (including EVs) and automotive are the two major revenue segments driving the company’s top line. These two segments contribute to 85% of the total revenue. Revenue from Industrials (including EVs) and automotive jumped 2.7 times and 56% YoY respectively in Q1FY25.

Industrials (including EVs) and automotive segments drive revenue higher

Management expects revenue to surpass Rs 3,000 crore in FY25 and exceed the previous guidance of 60% YoY growth driven by rising orders from these two major segments.

The company has also forayed into the semiconductor space by setting up a manufacturing unit in Gujarat with an investment of Rs 3,300 crore. Chief Financial Officer Jairam Sampath said, “We get 75% subsidies on plant and machinery from central and state governments. For every rupee of capex, the revenue potential is between Rs 1 to Rs 1.5”. The management expects the first revenue from this plant by Q4FY26.

Kalyan Jewellers’ expansion push drives revenue jump

This gems and jewellery stock has jumped over 10X in the past three years. In 2022, the company started to expand its footprint rapidly in the industry through the Franchise Owned Company Operated (FOCO) model.

Kalyan Jewellers has outperformed its competition by gaining market share on the back of aggressive consumer offers (discount on making charges), higher ad spending and faster retail expansion. Analysts expect the company’s revenue and net profit to rise 31.5% and 44.3% respectively in Q2FY25.

New store additions to drive Kalyan Jewellers’ revenue in Q2

In Q1FY25, its Indian business revenue growth came in at 26.5% YoY, driven by an acceleration in store expansion and same-store sales growth (SSSG) of 12% YoY.

The company added 24 stores in Q1, taking the total count to 241 stores in India. It plans to open 35 Kalyan and 20 Candere stores before Diwali to capitalize on the festival season this year.

T&D emerges as the star segment for KEC International

This engineering, procurement and construction (EPC) company has been on the rise thanks to the capex push by the Centre. The company’s transmission and distribution (T&D) vertical is the major revenue driver. In Q1FY25, the T&D segment grew 17% YoY with its new orders doubling to Rs. 5,000 crore.

T&D and civil segment expected to improve KEC’s profitability

The T&D segment is experiencing significant traction driven by the energy transition. The management anticipates Rs 70,000 to 80,000 crore in opportunities from the integration of 500GW of renewable energy. This segment is projected to grow 25% YoY revenue CAGR over the next 4-5 years.

On September 25, KEC rose 3.7% after the company launched its qualified institutional placement (QIP) issue to raise Rs 4,500 crore.

High order inflows, better execution drive Bharat Electronics’ revenue

Bharat Electronics Ltd. (BEL) is a Navaratna enterprise that has a 37% market share in Indian defence electronics. This stock debuted on the headline Nifty 50 index on 30 September as part of the benchmark index’s rejig.

However, this is the only company among the five that has fallen in the past quarter. But, it has still managed to outperform its industry (Defence) by 4.2%.

Analysts are positive about the company on the back of high order books and revenue visibility. The current order backlog is at Rs.76,705 crore (3.3x FY25E revenue), providing strong visibility for the next 3 to 4 years.

Bharat Electronics’ revenue and net profit to rise in Q2FY25

The company maintains its order inflow guidance of Rs 25,000 crore annually in FY25E & FY26E. This defence electronics manufacturer’s revenue and net profit are expected to rise due to better execution & improving profitability.

Screener: Stocks where Q1FY25 revenue growth outperformed sector averages, with high Forecaster estimates for revenue growth in Q2FY25

Forecaster expects banking & finance stocks’ revenue to grow the most in Q2

As Q2FY25 comes to an end, we look at the best-performing stocks that are expected to continue the growth trend. This screener shows stocks where Q1FY25 revenue growth outperformed sector averages, with high Forecaster estimates for revenue growth in Q2FY25. These stocks have also risen in the past quarter.

The screener is dominated by stocks from the banking & finance, software & services, consumer durables, and pharmaceuticals & biotechnology sectors. Most notable stocks that feature in the screener are BSE, Dixon Technologies (India), ICICI Securities, Multi Commodity Exchange of India, Trent, Eris Lifesciences, 360 One Wam, and Jubilant Foodworks.

BSE appears in the screener with a 158.3% YoY rise in revenue to Rs 674.3 crore in Q1FY25, outperforming the banking & finance sector by 140 percentage points. This helped the stock price to surge by 49.1% in the last quarter. Forecaster expects this exchange company’s revenue to grow by 86.6% YoY in Q2FY25. Analysts at Motilal Oswal believe that the company’s market share will continue to grow, driven by continued momentum in its MF business, and improvement in the cash & derivatives segment.

Trent’s revenue increased by 56.2% YoY to Rs 4,150.1 crore in Q1FY25, outperforming the retailing sector by 42.6 percentage points. Forecaster expects this department stores stock’s revenue to grow by 48.2% YoY in Q2FY25. Axis Direct expects Trent’s sales growth to continue, owing to its focus on rapid store expansion and plans to add new products to its portfolio for the winter season.

You can find some popular screeners here.

The Baseline

01 Oct 2024

Chart of the Week: Direct growth mutual funds deliver bumper returns amid India's market growth

By Aditi Priya

Veteran Emerging Markets investor Mark Mobius said on Friday, "We are now in a long-term bull market for India. And I see the Sensex going up to 100,000 probably by the end of the year provided that the measures taken by SEBI do not put a big damper on the market." This bullish outlook on India's equity market has driven the rapid growth of mutual funds.

Mutual funds have become an increasingly popular investment option in India, due to their simplicity and diversification. Among the various types, direct mutual funds have become especially popular, particularly direct growth mutual funds. These funds allow investors to bypass intermediaries and brokers, resulting in lower expense ratios compared to regular mutual funds.

The mutual fund industry is witnessing exceptional growth in assets under management (AUM). According to data from the Association of Mutual Funds in India (AMFI), assets managed by the mutual fund industry increased by 40.7% from Rs 46.9 lakh crore in August 2023 to Rs 66 lakh crore in August 2024. The jump in mutual fund assets is also attributable to the increase in Systematic Investment Plan (SIP) contributions. More than 3 crore people have registered for SIP between April and August 2024 and the total number of outstanding SIP accounts has increased by 14.4% to 9.6 crore in August 2024 from 8.4 crore in March 2024.

Sridharan Sundaram, Founder of Wealth Ladder Direct,said, “There are two key reasons for this surge in mutual fund assets in the past year. One is that small and mid-caps jumped anywhere between 30-40% in the past year, and the second is the continuous inflow into mutual funds via SIPs to the tune of around Rs 20,000 crore every month.”

Mutual funds’ performance rebounds after falling in 2022

In this edition of the chart of the week, we examine the performance of equity mutual funds from three different angles. The first representation, a heatmap, shows the yearly returns of the major mutual fund categories over the past four years. It indicates that equity mutual funds have been doing well over the past two years. However, in 2022, these funds were under pressure due to rising inflation, interest rate hikes, and global conflicts disrupting the global supply chain.

In 2021, the lifting of Covid-19 lockdowns helped mutual funds post stellar returns, with small-cap funds leading the way with 63.3% returns. In March 2020, equity mutual funds saw significant declines due to COVID-19-induced lockdowns and economic uncertainty. However, by the end of 2020, there was a remarkable recovery driven by government stimulus measures and liquidity infusion by central banks. Equity mutual funds, particularly multi-cap funds, rebounded strongly, delivering returns of 37.32%.

Sectoral/thematic funds emerge as top performers based on one-year and five-year return

If we look at the second chart, sectoral/thematic, particularly infrastructure funds, dominate the top-performing mutual funds over the past year. Bandhan Infrastructure Dir Gr had the highest returns of 75.2% over the past year, while the five year compound annual growth rate (CAGR) of the fund is 32.9%. Also, certain mid-cap equity mutual funds, like Motilal Oswal Mid Cap Dir Gr, have also been at par with the infrastructure mutual funds, mainly because they offer a balance between growth potential and stability, attracting investors seeking diversification with the chance for higher returns compared to large-cap funds.

How has performance been over the long term?

The third chart shows that Quant Small Cap Dir Gr has the highest five-year annualized returns of 49.5%, outperforming the small-cap funds category average by 22 percentage points. Quant Mid Cap Dir Gr returned 38.5% over the past five years, enabling the fund to outperform its category average by 16 percentage points over the same period.

Within mutual fund houses, Quant Mutual Funds has seen impressive growth in AUM between August 2021 and August 2024. The mid cap fund experienced a remarkable increase of 5,340%, expanding from Rs 172 crore to Rs 9,367 crore. Similarly, the small cap fund's AUM grew by 2,342%, growing from Rs 1,045 crore to Rs 25,534 crore.

The Baseline

27 Sep 2024

Five Interesting Stocks Today - September 27, 2024

1. Firstsource Solutions:

Thissoftware & services firm surged 6% on Tuesday after announcing that its arm, Firstsource Solutions UK, had acquired a UK-based customer service company, Ascensos, for Rs 469 crore. Chairman, Sanjiv Goenka, said, “This acquisition will help us expand in the retail segment which is a $28 billion market globally.” On September 16, the company alsoannounced a collaboration with Microsoft to provide digital transformation services using Azure OpenAI services.

Revenue in Q1 rose 17.1% YoY to Rs 1,793 crore, beating Forecaster estimates by 2.1%. While net profit surged 7.4% YoY to Rs 135 crore, it missed estimates by 4.8%. Trendlyne’s Forecaster estimates revenue growth of 18% on a YoY basis in Q2FY25, with net profit growth of 8.7% YoY. The company appears in ascreener of stocks where mutual funds increased their shareholding in the last quarter.

The miss in net profit was mainly because of marginal growth in its banking & financial services (BFS) segment, which is around 36% of the total revenue.Revenue mix shows that its healthcare services segment has outperformed other segments over the past year, contributing 36% to the revenue in Q1FY25, compared to 32% a year ago during the same period.

The healthcare vertical was the best-performing segment in the past quarter with revenue growth of 26% on a YoY basis. MD & CEO, Ritesh Idani,said, “Medicare utilisation has been on the rise in the US, putting pressure on the margins of healthcare insurers.” He highlights that this has led to insurers seeking optimizations in their cost structure, resulting in a stronger deal pipeline for Firstsource.

ICICI Securitiesmaintains a ‘Buy’ rating on Firstsource, with an upgraded target price of Rs 360, which implies a potential upside of 12.8%. This comes as management forecasts higher annual revenue growth of 11.5% to 13.5% for FY25, which is 8.7% higher growth than their previous guidance. The brokerage is optimistic as the company is diversifying from the BFS segment, and looking forward to broad-based growth in healthcare, communications and other segments.

2. Vodafone Idea:

Thistelecom service provider plunged 19.5% on September 19 following the Supreme Court’srejection of its petition seeking a re-evaluation of its adjusted gross revenue (AGR) dues. The ruling mandates that the company must pay the full amount of its AGR liabilities, approximately Rs 70,320 crore, as per the Department of Telecommunications (DoT). This adds to the company's existing burden of Rs 1.4 lakh crore in deferred spectrum payment obligations, bringing the total outstanding dues to Rs 2.1 lakh crore.

The government calculates this amount based on the total revenue of telecom companies, including income from non-telecom activities. The companies contend that this calculation is unfair and that they should be liable only for revenue directly related to telecom services. While Vodafone Idea seeks relief measures, such as the correction of calculation errors and reduction of penalties, the Indian government insists on its position on the full payment of the dues.

Akshaya Moondra, chief executive officer (CEO) of Vodafone Idea,said, “We've initiated new talks with the government to resolve AGR dues. While a favorable outcome would ease our liability, our long-term plans and revival strategy remain unchanged. This result doesn't affect our cash flows or business plans.” These ongoing discussions with the government are crucial, as a positive outcome could potentially influence how similar AGR dues issues are addressed for other telecom operators within the industry.

Despite these challenges, on September 22 Vodafone Idea announced adeal worth $3.6 billion (approx. Rs 26,784 crore) with global equipment vendors Nokia, Ericsson and Samsung. This investment, part of the company's three-year capital expenditure plan, aims to expand its 4G population coverage, launch 5G services, and improve network capacity.

Goldman Sachsmaintains a 'sell' rating on Vodafone Idea with a target price of Rs 2.5. The brokerage expressed concerns about Vi's ability to raise tariffs to address its free cash flow gap and predicted larger market share gains for competitors like Bharti Airtel and Jio at Vodafone’s expense.

3. Power Grid Corp:

This electric utilities company has risen by 5.8% over the past week, and touched a new 52-week high of Rs 366.2 on Wednesday. The rise comes after it secured an order to establish an inter-state transmission system at Khavda Pooling Station 1 (KPS1) and Khavda Pooling Station 3 (KPS3) in Gujarat on a build, own, operate, and transfer (BOOT) basis. In addition, Goldman Sachs reiterated its ‘Buy’ stance on the company with a target price of Rs 370 per share. This is the highest target in the consensus – the average target from analysts on Power Grid according to Trendlyne’s Forecaster is Rs 328.

Khavda is the world’s largest renewable energy park, and is expected to significantly contribute to India's target of achieving 500 GW of installed renewable energy capacity by 2030.

Analysts predict that the Indian power sector will see significant investments exceeding Rs 40 lakh crore, driven by modernisation, growing energy demand and a transition towards renewable sources. Meanwhile, Goldman Sachs notes that the Centre has upgraded the transmission capex estimate to $110 billion and believes Power Grid is poised to benefit from this. The company derives significant revenue (over 98%) from its transmission segment.

During Q1FY25, the total value of transmission projects under execution rose sharply to over Rs 1.1 lakh crore from around Rs 50,000 crore in Q1FY24. As a result, the company raised its capex target for FY25 to Rs 18,000 crore. RK Tyagi, CMD of the company said “Last time we said that our capex plan is, say, 15,000 crore but we have since added six more projects. The completion schedule for these projects is 18-21 months, so we have increased the capex target to meet the deadlines”. The company reported a 3.5% YoY increase in net profit to Rs 3,723.9 during Q1FY25, while revenue declined marginally by 0.4% YoY to Rs 11,006.2.

Over the past year, Power Grid has risen over 78.6% outperforming the benchmark index Nifty 50 index which has gained around 33.2%. The company is currently trading the Strong Sell Zone, indicating that it is currently trading above its historical PE.

4. Bharat Heavy Electricals:

This heavy electrical equipment manufacturer has risen 11.8% in the past week after receiving a Rs 6,100 crore engineering, procurement, and construction (EPC) order from NTPC for an 800 MW unit at the Sipat Supercritical Thermal Power Project in Chhattisgarh. The company appears in a screener of stocks outperforming their industry over the past week.

Bharat Heavy Electricals (BHEL) signed an agreement in August worth Rs 11,000 crore with Adani Power and its subsidiary Mahan Energen to set up three 2x800 MW supercritical thermal power projects in Rajasthan and Madhya Pradesh, expected to be completed in 49 to 55 months.

BHEL has recorded an order inflow of Rs 34,100 crore in FY25 so far and appeared as the lowest bidder for another 3GW project worth Rs 21,000 crore, leading to a bulging order book of Rs 1.6 lakh crore, up from Rs 1.3 lakh crore in FY24. Despite this, there has been no major improvement in delayed orders, with its outstanding order book remaining at Rs 1,35,000 crore as of Q1FY25. Chairman and Managing Director, K. Sadashiv Murthy, mentioned that to ramp up execution, BHEL plans to revise its policies to attract new vendors and re-engage those who had left. This effort, if successful, is expected to help improve gross margins as well, which declined by 32% over the past six years.

The company has a 70:30 order distribution ratio, receiving 70-75% of orders from the power segment and 25-30% from the industry segment. In FY24, it secured a Vande Bharat order worth Rs 23,500 crore, partnering with Titagarh Wagons to supply 80 trainsets, of which BHEL's share is Rs 15,000 crore, and it anticipates a rise in orders from this industry segment in the future. Murthy said, "We expect more Vande Bharat orders in the next two to three years and aim for a long-term distribution of 50% from each segment."

ICICI Securities maintains a ‘Buy’ rating on BHEL, anticipating an order inflow of Rs 80,000 crore in FY25. The brokerage is optimistic about the outlook for coal-based capacity addition from the government and NTPC.

5. Trent:

This department stores company rose by over 6% in the past week as it is set to be included in the NIfty 50 on September 30th in the index’s semi-annual rejig. Analysts expect the company to attract a total of $495 million ( Rs 4,141.5 crore) inflows due to this inclusion. In May 2024, the company entered into a joint venture (JV) with Singapore-based MAS Amity for designing, developing and manufacturing intimate apparel and other related products in India.

For Q1FY25, the company’s net profit had surged by 126.3% YoY to 392.6 crore, while revenue rose by 54.8% YoY, driven by increased footfalls and strong performance across brands, concepts, categories, and channels. The firm beat Trendlyne’s Forecaster estimates for revenue by 7.6%, but missed the net profit estimate by 0.1% due to subdued market sentiment and heightened competitive intensity. The stock appears in a screener for stocks with strong momentum.

In Q1FY25 the company opened 6 new stores in Westside and added 14 stores in Zudio on a QoQ basis. Trent now operates 228 Westside stores and 559 Zudio stores across 178 cities in India. It has increased the average store area by approximately 16% and 19% YoY, reaching 19,400 sq. ft. for Westside and 9,200 sq. ft. for Zudio. Revenue from Star Bazaar, the company's grocery store brand, grew by 21% YoY to Rs 2,200 crore, primarily driven by a 27% like-for-like (LFL) growth. Zara's revenue increased by 8% YoY, supported by a 15% rise in store count (+3 new stores). Average revenue per Zara store also rose by 3% YoY.

Analysts estimate India's retail market size to grow 18% YoY to $4.5 trillion (Rs 37,639.6 crore) by 2030 vs. $1.4 trillion (Rs 11,710.1 crore) in 2023. Along with this they estimate India's fashion and lifestyle market to be Rs 6.5 lakh crore in 2024, with organized players accounting for 40% of this total. Trent's market share in the organized segment was 4.6% in FY24. Analysts observe that retailer-owned brands have gained significance recently, as they provide shoppers with better value for money while allowing retailers to achieve higher margins. These brands have the potential to evolve into self-sustaining propositions.

Citi has initiated a ‘Buy’ rating on Trent with a target price of Rs 9,250, citing growth from transformation to a multi-format and commodity player. The brokerage notes the company is utilizing its supply chain and turning around its Star Bazaar business. It believes the company is well-placed to grow its other pilot projects, including MISBU (the company’s fashion brand) and its JV with MAS Amity. The brokerage sees a revenue/EBITDA/PAT CAGR of 41/44/56% in FY25-27.

Trendlyne's analysts identify stocks that are seeing interesting price movements, analyst calls, or new developments. These are not buy recommendations.

The Baseline

26 Sep 2024

Cut-throat competition in India's cement industry | Screener: Stocks with strong revenue estimates for Q2

By Swapnil Karkare

On May 15, 2022 - a Sunday - Adani did not have a cement business. On Monday, he was India's second biggest cement player. The announcement by the Adani Group of a massive $10.5 billion deal to buy Swiss company Holcim's India business, changed the industry overnight.

When India's richest billionaire makes eye contact with a sector, the existing players get nervous. Adani's entry has set off an intense fight between him and the industry leader, Aditya Birla's Ultratech Cement, for market share.

Over the past several months, the top two players have been busy filling their concrete shopping bags. Ultratech Cement acquired over 50% of India Cements in July 2024. Meanwhile, Ambuja Cements, part of the Adani Group, has fully acquired Penna Cement and is reportedly eyeingITD Cementation.

Since 2016, there have been 21 significant deals totalling at least Rs. 1.6 trillion. This surge in acquisitions is rapidly reshaping the sector. While such consolidation excites financial markets, it poses challenges for both the industry players and investors.

In this week's Analyticks:

Adani versus Birla: Growing pains in the Indian cement industry
Screener: Rising stocks with strong Forecaster revenue estimates for Q2FY25

Trying to find the shortest route to the top

The Adani Group is in a hurry. It became the second-largest cement player after it acquired Swiss-based Holcim’s India business, which included Ambuja Cements and ACC. It has also reportedlyset aside $3 billion for more acquisitions.

Its production capacity has jumped from 68 million tonnes per annum (mtpa) in 2022 with the Holcim acquisition to 89 mtpa today with the addition of Sanghi Industries and Penna Cement. It plans to reach 140 mtpa by 2028.

Meanwhile, Ultratech Cement, once known for its organic growth strategy, is also in acquisition mode. In the last few months, it has acquired Burnpur Cement, Kesoram Industries and India Cements. From 115 mtpa, its capacity has reached 155 mtpa today with a target of reaching 200 mtpa by FY27.

CareEdge Ratings estimates that the top four cement companies’ share of India's capacity has increased from 35% in FY12 to 50% in FY24, with projections to hit 60% soon. Their share in cement demand has jumped from 47% to 65% over the same period. Smaller players have lost ground, and could see their market shares fall further.

Acquisition fever has South India in focus

The cement industry is not homogenous; it varies by region. Regional dynamics define pricing as well as market leadership.

In South India for instance, the market is more fragmented, with the top five players holding 47% of the market share compared to 83% in the North. The capacity utilisation level is lower (60-65%) than the North (85%). This complicates acquisition strategies.

However, the competitive landscape has intensified in the last few years as large players seek to expand their market share.

The acquisition spree is not over yet. Southern companies such as Deccan Cement, Chettinad Cement, MyHome Industries and Bharthi Vicat, holding 9% of India’s capacity, could be prime targets for acquisition, according to an Emkay Securities report. Higher capacities, fragmented markets, and rising cement demand have made the region an attractive hunting ground.

Large players are pricing to the bottom as they fight for market share

While demand usually drives up prices, rising competition has disrupted this in cement.The big companies are using aggressive pricing strategies to undercut smaller, regional players. For instance, leading companies have sold cement cheaper by Rs.10-15 a bag to compete with Orient Cement in the South.

Orient Cement’s management explained how this strategy has hurt them. “We see that their goal is to sweat the asset, and sell more volume in the market. But their aggression in driving volumes is pushing pricing lower, while demand is not robust enough."

"So the only option for people like us is to either succumb to the pressure of very low pricing and start losing money, literally losing money, or to follow our own strategy and make sure that the business being done is not at a loss”, Deepak Khetrapal, Orient's MD & CEO, saidrecently.

As a result, smaller companies are facing lower margins, and if their financial position isn’t healthy, they risk becoming acquisition targets.

Are cement companies overvalued?

The acquisition wave has inflated valuations for cement players. As the market anticipates more M&As, the large companies are seeing their valuation multiples soar. Stock prices of smaller companies tend to spike even on rumours about potential acquisitions, as seen recently with ITD Cementation.

Although most experts are positive about the sector, analysts at Kotak Institutional Equities have flagged valuation concerns. Cement is a capex-heavy commodity business, with a low fixed asset turnover ratio (around 1x). A ratio of 1x means that if the company adds Rs. 100 in assets, it generates Rs. 100 in sales. If that ratio is higher, then it can generate more revenue with low investments.

But the low ratio of cement companies means that capex drags free cash flows (FCF) down, resulting in a low FCF to profit-after-tax (PAT) ratio. Kotak analysts believe that FCF to PAT is a better metric than the price-to-earnings (P/E) ratio for such sectors. That number suggests the sector is overvalued at 30-40x PE.

Trendlyne scores do not suggest overvaluation as the scores are still above 30. Larger players are a bit pricey compared to the smaller ones, but they are fundamentally strong.

Capex plans stay ambitious, thanks to manageable debt

Despite the buzz around acquisitions, companies are not neglecting organic growth. The industry has plans for an overall capex of Rs. 1.5 trillion in the next 2-3 years, almost 1.4X the amount spent in the last five years.

Analysts from Crisil note that this expansion will largely be funded through internal resources and operating cash flows, thanks to the healthy balance sheets and low debt levels of these cement firms.

The focus on both organic growth and acquisitions has made the race to the top a fierce one. It also reflects confidence in India’s economy, as the government’s infra push and a robust real estate market is driving cement demand. India right now, has lots of room to grow.

The future? Mostly sunny, with some clouds

Trendlyne forecasts suggest moderate revenue growth for cement companies in FY25. In the first half of this fiscal year, elections and monsoons dampened demand. Higher raw material costs and a weak pricing environment could impact profitability too.

However, analysts are predicting a demand uptick from Q3 this year, especially as government infrastructure projects kick off after the Diwali festival. Whether this increase in demand will translate into pricing power remains uncertain, amid fierce competition for market share.

The cement sector is going through a major transformation. The big companies are on top right now, dictating prices and turning smaller players into acquisition targets. Once the dust settles in a few quarters, the industry will look very different.

Screener: Rising stocks with strong Forecaster revenue estimates in Q2FY25

Forecaster expects construction and cement stocks’ revenue to grow in Q2FY25

As we enter the last week of Q2FY25, we take a look at stocks that have risen over the past quarter, and where Forecaster expects YoY revenue growth. This screener shows stocks in the cement & construction sector rising over the past quarterwith strong Forecaster estimates for quarterly revenue YoY growth in Q2FY25.

Stocks from the construction & engineering and cement & cement products industries dominate the screener. Notable stocks in the screener include Capacit’e Infraprojects, ITD Cementation, Kalpataru Projects International, Grasim Industries, Larsen & Toubro, Ahluwalia Contracts (India), Dalmia Bharat, and UltraTech Cement.

Forecaster expects ITD Cementation’s revenue to grow by 32.6% YoY in Q2FY25. This construction & engineering stock has also risen by 16.8% over the past quarter, after reports emerged that the Adani Group is planning to buy a 46.6% stake in the company for Rs 5,888.7 crore. Analysts at Asit C Mehta Investment Intermediates expect the company’s revenue to grow, driven by the government push in the infrastructure sector, and strong order inflows. The brokerage expects the company’s revenue to grow at a CAGR of 17% over FY25-26.

Kalpataru Projects International, another construction & engineering company, shows up in the screener as Forecaster expects its revenue to grow by 17.7% YoY in Q2FY25. Its stock price rose by 12.9% in the last quarter. ICICI Direct believes the company is well positioned for revenue growth owing to its strong order pipeline in the transmission & distribution (T&D), buildings & factories (B&F), and water segments in the domestic market. It expects the company’s T&D business to win orders in the international market. The brokerage anticipates the company’s revenue to grow at a CAGR of 23.5% over FY25-26.

You can find some popular screeners here.

The Baseline

25 Sep 2024

Five stocks to buy from analysts this week - September 25, 2024

By Ruchir Sankhla

1. Yatharth Hospital & Trauma Care Services:

Edelweiss initiates a ‘Buy’ rating on Yatharth Hospital & Trauma Care Services with a target price of Rs 740, suggesting a 30.4% upside. Analysts Thakur Ranvir Singh and Pawan Bhatia highlight that this healthcare facilities provider aims to increase its bed capacity from 1,605 in Q1FY25 to around 3,000 beds by FY28 through organic and inorganic growth.

Yatharth Hospital recently acquired a 200-bed hospital in Faridabad and announced expansions in Noida, boosting total capacity to 1,300 beds by FY27. The company plans to acquire one hospital annually and improve occupancy rates, which rose to 61% in Q1FY25. Yatharth's focus on specialty care like oncology and cardiology is expected to increase average revenue per occupied bed (ARPOB), while its healthy balance sheet supports expansion plans.

Singh and Bhatia project a CAGR of 31% in revenue, 30% in EBITDA, and 31% in net profit over FY 25-27. They highlight that the stock trades at 14 times its FY26 EV/EBITDA, about 39% lower than its peers like Max Healthcare, Fortis, and Global Health.

2. Senco Gold:

Emkay reiterates its ‘Buy’ rating on this Bengal-based jewellery company with a target price of Rs 1,600, indicating a potential upside of 10.1%. Analysts Devanshu Bansal and Vishal Panjwani say, “We expect a strong pick-up in jewellery retail as recent cooling in gold prices rushed consumers to stores.” They highlight that the firm’s price-to-earnings (PE) ratio is currently trading at a 45-55% discount to its peers Titan and Kalyan, and ~25% lower than the recent IPO, PN Gadgil.

Senco plans to expand its footprint in non-eastern regions, focusing on Delhi-NCR and Uttar Pradesh. Bansal and Panjwani anticipate the initial expansion coming from company-owned stores, with plans to transition towards asset-light franchisee stores once the brand is established. They estimate a lower investment of Rs 2 crore in inventory for franchisee-owned, franchisee operated (FOFO) stores, compared to Rs 25 crore for company-owned, company-operated (COCO) stores.

Senco's revenue per store is lower due to reduced gold consumption in eastern India (200g/wedding compared to 350g in the south). However, it benefits from higher margins on handmade jewellery and lower inventory needs, maintaining a competitive return on capital compared to peers.

3. Pitti Engineering:

Axis Direct maintains its ‘Buy’ rating on this electrical equipment manufacturer with a target price of Rs 1,572, indicating a potential upside of 22.3%. Analysts Sani Vishe and Shivani More note that the company is expanding its production capacities from 56,000 tonnes per annum (TPA) to 90,000 TPA, with plans to reach 100,000 TPA by Jan '25. The company is expanding its Aurangabad facility with new capacity, while closing its lamination operations in Hyderabad. In Hyderabad, it will now focus on machining, while Aurangabad will handle lamination, machining, assemblies, and shaft manufacturing.

Analyst highlights that the company is upgrading to 4 & 5 Axis computer numerical control machines and importing advanced machinery from Germany and Taiwan. In terms of the value chain, lamination and copper winding each represent 25% of motor manufacturing. Additionally, to reduce logistics costs, it is restructuring operations and building a new manufacturing unit in Hyderabad alongside a large plant in Aurangabad, supporting a multi-year deal with Wabtec.

Analysts Vishe and More expect the company's revenue, net profit, and EBITDA to grow at a CAGR of 36.6%, 42.2%, and 38.6% respectively, over FY 25-26.

4. HEG:

ICICI Direct continues to recommend a ‘Buy’ on this industrial goods company, setting a target price of Rs 2,520, which suggests a possible upside of 3.5%. Analysts Shashank Kanodia and Manisha Kesar note that the company is well-positioned for growth, driven by the global steel industry's transition to Electric Arc Furnace (EAF) technology, which reduces carbon emissions by 75% and cuts production costs. EAF’s share in crude steel production (excluding China) is projected to grow from 50% to 55% in the next 3-4 years.

The analysts note that the company expects demand recovery by the second half of FY25. The company is also entering the graphite anode business by setting up a 20,000 ton capacity at an investment of Rs 1800 crore, driven by the increasing demand for Li-ion batteries, with production starting in FY27.

Kanodia and Kesar are optimistic on HEG, driven by the global shift towards the EAF route and expansion-led volume growth. They project a revenue CAGR of 11.8% and an EBITDA CAGR of 35% for FY 25-26.

5. Transport Corporation of India:

Sharekhan maintains a ‘Buy’ rating on this logistics solutions provider with a target price of Rs 1,400. This indicates an upside of 26.2%. Transport Corporation of India (TCIL) reported a 12.9% YoY growth in daily average e-way bills and a 6.8% YoY increase in FASTag volumes for August 2024. The company’s management anticipates revenue and net profit growth of 10-15% YoY for FY25, aligning with analysts' projections of 10% and 12.5% respectively.

The company has signed a contract to purchase two cellular container vessels, each with a 7,300 MT capacity, for Rs 324 crore. The delivery is expected in late 2026 or early 2027, with each vessel projected to generate Rs 80 crore in FY28. The analyst expects TCIL to benefit from an improving domestic trade environment from the end of July, thanks to the end of the monsoon and early inventory stocking for the festive season.

Note: These recommendations are from various analysts and are not recommendations by Trendlyne.

(You can find all analyst picks here)

The Baseline

24 Sep 2024

Chart of the Week: Global interest rate cuts drive markets higher

By Aditi Priya

The Indian stock market’s obsession with the US Federal Reserve is a long-standing saga. Every time the Fed meets to announce its domestic macroeconomic data and interest rates, Indian markets and participants closely scrutinize the proceedings amid considerable volatility.

However, over the past few years, it's not just the US that has adjusted interest rates multiple times. China, the EU, and Japan have also made several changes, impacting the Indian economy whenever significant global shifts in financial flows occur—from increases or decreases in major economies' interest rates.

The Fed's first rate cut in four years boosts global markets, paves way for potential RBI cuts

On September 18, the US Federal Reserve delivered what global markets had eagerly anticipated—a substantial rate cut, the first in over four years. The US central bank reduced its benchmark rates by 50 basis points, providing a significant boost to markets worldwide by reducing borrowing costs for global investors. Prior to this, the Fed had been raising rates at an unprecedented pace since March 2022.

After announcing the rate cut, Fed chair Jerome Powell said in a statement, “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress." The current US inflation rate is 2.5%, which is the lowest it's been since February 2021.

From the perspective of the Indian market, a decreasing interest rate is positive in two key ways:

Developing economies like India stand to benefit from such rate cuts, as foreign investors are drawn to the high returns the Indian economy offers. With US rates expected to drop by over 200 basis points in the next two years, India is likely to experience sustained foreign capital inflows, driven by investors seeking the country’s robust economic growth.

Secondly, the Fed’s move could pave the way for the Reserve Bank of India (RBI) to implement rate cuts in the coming months. The Fed's rate cut reduces pressure on capital outflows in India and boosts foreign inflows. This can create favorable conditions for the RBI to implement rate cuts by aligning with global trends.

Japan ends its negative interest rate policy, affecting global investments

On another front, the Bank of Japan (BOJ) recently concluded its eight-year policy of negative interest rates. On March 19, 2024, the BOJ raised its benchmark rate to 0.25% from the previous range of 0-0.1%, marking its second rate hike in 17 years. While this increase seems modest, it can have implications for global economies, including India.

A member of the policy board of BOJ, Junko Nakagawa said, "Given real interest rates are currently very low, we will adjust the degree of monetary support, from the standpoint of achieving our 2% inflation target, if our economic and price forecasts are met.” Japan's consumer inflation accelerated to 3% in August, surpassing the Bank of Japan's 2% target and up from 2.8% in July. This rise was fueled by increased prices for food and household durable goods.

Japan has been a key source of global capital because of its very low interest rates, which pushed investors to seek higher returns in other countries. A move to positive interest rates, even if small, could lead to Japanese investors bringing their money back home. This could cause them to adjust their investments in places like India, where they've been active in both equity and debt markets. With domestic Japanese investments becoming more attractive, foreign direct investment (FDI) and foreign portfolio investment (FPI) from Japan into India could slow down.

Indian companies, particularly in sectors such as infrastructure and automobiles, often borrow from international markets, including Japan, due to lower interest rates. A rise in Japanese rates could increase the cost of borrowing for Indian firms, making it more expensive to finance projects and expansions. A hike in Japanese interest rates could also lead to the appreciation of the yen against the Indian rupee. This would make Japanese exports more expensive and Indian imports from Japan pricier, potentially widening India’s trade deficit with Japan.

Why has India not cut rates despite global trends?

India’s inflation in 2023 exceeded the target range of 4-6%, primarily due to rising food prices and supply-side challenges. Although inflation figures have improved in 2024 and are now well within the target range, the Reserve Bank of India (RBI) has maintained its key interest rate at 6.5% to prevent demand-driven inflation from escalating.

RBI Governor, Shaktikanta Das said, "It is not so much how the inflation is now; we have to look at, for the next six months, for the next one year, what is the outlook on inflation. So I would like to step back and look more carefully at what is the future trajectory of inflation and growth. Based on that, we will make a decision.”

Moreover, with aggressive rate hikes, in the past 2-3 years, in advanced economies such as the US and EU, cutting rates in India could have led to capital outflows, weakening the rupee. A depreciating rupee would have increased import costs, adding more inflationary pressure to the economy.