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

13 Sep 2024

Five Interesting Stocks Today - September 13, 2024

1. Suzlon Energy:

This heavy electrical equipment company has surged 9.4% over the past week and touched a new 52-week high of Rs 86 on Thursday. The rise comes after it secured a significant 1,166 MW order from NTPC's arm, NTPC Green Energy, making it the largest wind energy order in India. In addition, Morgan Stanley reiterated its ‘Overweight’ stance on the company after the order win. The brokerage noted this PSU contract as a major milestone for the company, as it was previously not allowed to bid because of its negative net worth.

The order requires Suzlon to install 370 S144 WTGs (wind turbine generators) with a rated capacity of around 3.2 MW each, which will generate electricity to power 30 lakh households. The project will be executed across three sites in Gujarat and also includes erection and commissioning, as well as operations & maintenance services post?commissioning. With this, the company’s order book nears 5 GW. As of June 2024, the company’s order book stood at 3.8 GW, 5x the FY24 WTG volume of 710MW.

In Q1FY25, Suzlon’s net profit had jumped almost 3X to Rs 302.3 crore, helped by lower finance costs and foreign exchange shifts. Revenue increased by 50.1% YoY to Rs 2,044.4 crore. The wind turbine generator segment (which contributes over 70% to the revenue) grew by 86.3% YoY during the quarter.

India's wind energy sector has been witnessing a recovery, due to rising power needs, wind-focused tenders, and growing industrial demand, offering opportunities for domestic players like Suzlon Energy. JP Chalasani, the Group CEO, said, “We anticipate an increase in wind installations in India between 5 to 5.5 GW in FY25, potentially reaching up to 9 GW in future years”.

Morgan Stanley believes the large contract from NTPC will enhance Suzlon's earnings visibility for FY26-27. It has a target price of Rs 73, which the stock has already surpassed. The company is trading in the Strong Sell Zone, indicating that it is currently trading above its historical PE.

2. Divi’s Laboratories:

This pharmaceutical manufacturer surged 7.4% over the past week after the US House of Representatives approved the Biosecure Act. The bill is yet to be cleared by the US Senate. The legislation bans American firms from partnering with certain Chinese biotech and drug manufacturers over the next eight years, in a bid to prevent the potential misuse of US genomic data. This will prompt a major shift in the pharmaceutical supply chain.

Analysts expect the introduction of the Act by the US to accelerate the growth of CDMOs (contract development and manufacturing organisations) and CROs (contract research organisations) in India. According to Mordor Intelligence, the contract manufacturing segment is estimated to be worth $22.5 billion in 2024 and is projected to reach $44.6 billion by 2029, growing at a CAGR of 14.7%.

In Q1FY25, the company reported an 18% YoY revenue growth to Rs 2,197 crore, with net profit rising 20.8% YoY to Rs 430 crore. Exports accounted for about 86% of the revenue, with 70% coming from Europe and the US. The product mix between generics and custom synthesis (contract manufacturing) stood at 51% and 49%, respectively.

CEO Kiran Divi said, “With the Biosecure Act, we are now seeing more orders for Phase-II and Phase-III molecules than before, along with significant interest on the generic side.” She also highlighted that the company is planning a capacity expansion, with an investment of Rs 650 crore to Rs 700 crore.

KR Choksey maintains a ‘Hold’ rating on Divi's Laboratories as its Q1 results came in slightly below estimates due to weakness in generic pricing. They expect growth in custom synthesis and new generics to drive margins, and forecast revenue and net profit CAGR of 11% and 23.1%, respectively, over FY25-26.

3. Tata Steel:

This iron and steel company jumped 2.4% to Rs 152.4 per share on Thursday after it secured a £500 million (approx. Rs 5,475.1 crore) grant from the UK government to support a £1.25 billion green steel project in Port Talbot, South Wales. The project involves installing an Electric Arc Furnace (EAF) at the Port Talbot steelworks. The EAF will significantly reduce carbon emissions, both for the UK as a whole and for the Port Talbot plant. The project is expected to preserve 5,000 jobs in the UK steel industry that were impacted when operations were halted in July 2024 due to the company’s initiative to transition to green steel production. Tata Steel is offering voluntary redundancy, support packages, and paid retraining programs for affected employees.

In Q1FY25, the company had reported a 51.4% YoY increase in consolidated net profit, reaching Rs 959.6 crore, as operations in the Netherlands returned to normal levels. The profit growth was also supported by lower expenses and reduced raw material costs. Consolidated total revenue stood at Rs 54,771.4 crore, a 7.9% decline YoY due to subdued steel demand across many regions. Both revenue and net profit fell short of Trendlyne’s Forecaster estimates by 2.7% and 32.2%, respectively.

The management reported a buildup in working capital during the quarter, mainly driven by stock accumulation in the UK ahead of the closure of heavy-end facilities, as well as seasonal factors in India. Koushik Chatterjee, Executive Director and CFO of Tata Steel said, “We are focused on optimizing working capital. The net debt stands at about Rs. 82,162 crores and our group liquidity remains strong at about Rs. 36,460 crores, which includes about Rs. 10,799 crores of cash and cash equivalents.”

BOB Capital Markets maintains a 'Hold' rating on Tata Steel but has raised the target price from Rs 170 to Rs 175, indicating an expected upside of 7%. They believe the stock to be overvalued now, however, they are confident in the company's ability to grow its earnings.

4. Global Health:

This healthcare facilities company rose by 3.8% over the past month. However the company had announced last month that they are set to construct a 500-bed super specialty hospital in Mumbai with a Rs 1,200 crore investment. The project, financed equally by debt and internal funds, is expected to be completed in 3-4 years. In July 2024, the land for the hospital was acquired in Oshiwara through a public auction. Once finished, it will become the second largest private hospital, following the 750-bed Kokilaben Dhirubhai Ambani Hospital & Medical Research Institute (KDAH).

For Q1FY25, the company’s net profit rose by 4.2% YoY to 106.3 crore, while its revenue rose by 11.1% YoY due to improved traction in matured hospitals. The firm beat Trendlyne’s Forecaster estimates for revenue by 2.1% but missed the net profit estimate by 11.7% due to a flat Average Revenue per Occupied Bed (ARPOB) and a slight increase in occupancies. ARPOB increased to Rs 64,035, up 1.4% YoY, while occupancies improved by 70bps YoY. The low occupancies were primarily due to under-development hospitals. The stock appears in a screener for stocks with broker upgrades.

Analysts report that the company’s established hospitals are experiencing healthy annual volume growth of 7-8%, with a particularly strong performance over the past 2-3 months. While volume growth might slow after FY26 due to limited bed expansion, opportunities for bed optimization could still boost overall sales and EBITDA for these mature hospitals. The company, with a robust presence in northern and central India, currently has approximately 3,440 beds as of Q1FY25. by the end of FY25. The company’s management aims to grow their capacity to ~5,173 beds over the longer term. Area wise they plan to add 50 beds in Gurugram and Lucknow each, 150 beds in Patna, and 300 beds in Noida by the end of FY25.

Motilal Oswal has maintained a “Buy” rating on Global Health, with a target price of Rs 1,380. The brokerage anticipates an 18% earnings CAGR from FY25-26. It notes that, while MEDANTA's ongoing efforts like expanding its operations in Lucknow and Patna, increasing bed capacity, and hiring additional clinical talent may lead to moderate earnings in FY25, robust earnings growth will follow from FY26 onwards.

5. JSW Infrastructure:

This port operator rose 7.4% over the past week after it approved a capital expenditure of Rs 2,359 crore for expanding capacity at its Jaigarh and Dharamtar ports. The expansion will boost the company's total cargo-handling capacity from 170 million tonnes per annum (MTPA) to 400 MTPA by 2030, with Jaigarh's capacity increasing to 70 MTPA and Dharamtar's to 55 MTPA. The Dharamtar port expansion focuses on handling increased cargo volumes from an anchor customer associated with a new 5 MTPA steel plant in Dolvi, Maharashtra.

JSW Infrastructure acquired a 70.4% stake in Navkar Corp for Rs 1,012 crore during Q1FY25. The company plans to become a complete logistics solutions provider by leveraging Navkar's existing resources, without requiring additional capital expenditure. CFO Lalit Singhvi said, "While the return on capital employed (ROCE) may see a temporary decline due to these investments, we expect it to recover to 18-19% in the long term as asset utilization improves and synergies with other group businesses come into play over the next 2-3 years.”

The company has outperformed the marine port services industry by 9.5% over the previous quarter. JSW Infra’s volumes grew 9% YoY to 27.8 million tonnes, despite its Dolvi plant shutdown. Singhvi explained that the 9% YoY growth was largely due to new acquisitions that were not part of the business last year. He also expects overall growth to be around 10-12% as the impact of these new assets fully reflects and existing operations continue to grow.

Jefferies initiates a ‘Buy’ on the firm with a target price of Rs 375, implying a potential upside of 13%. The brokerage believes the company’s recent entry into logistics through Navkar’s acquisition will drive significant growth. It expects JSW Infra's growth over 20% from current levels, with existing volumes showing strong capacity use.

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

The Baseline

12 Sep 2024

Between Nifty Smallcap, Midcap and Nifty50, one index comes on top | Screener: Stocks with PE lower than longer-term averages

By Tejas MD

On September 3, the Nifty 50 recorded its longest winning streak (14 days) since its inception in 1996. There have been other, shorter rallies like this before, and an analysis of the past six such events reveals a pattern: the index usually fell by 3% on average in the 30 days after a rally, according to Trendlyne's share price history and Samco. Whether this pattern will repeat this time around, is still an open question.

Nifty 50 has delivered negative returns historically after a long gaining streak

Indian indices have surged over the past year, driven by robust economic growth and lower inflation. While India’s growth story looks strong, current market valuations are beginning to worry both investors and analysts.

The Nifty 50 soared 26.3% over the past year. But the star performer has been the Nifty Smallcap 100, which posted a remarkable 50.8% gain in the same period.

Nifty Smallcap 100 remains the top gainer in the past year with a 50.8% rise

With such a rise across all three indices, is the stock market valuation a balloon about to burst?

In this week’s Analyticks,

Valuation check: We look into the Nifty Smallcap, Midcap and Nifty50
Screener: Stocks which have risen over the past quarter, with PE TTM lower than 3-year, 5-year, and 10-year averages

The winner in the middle: Nifty Midcap beats Smallcap and Nifty 50 indices

While the smallcap index has outperformed its peers over the past year, the longer-term view tells us a different story. When looking at 3, 5, and 10-year time frames, the Nifty Midcap 100 is the stronger performer by far, outshining both the Nifty Smallcap 100 and Nifty 50.

Nifty Midcap 100 outperforms peers in 10, 5 and 3 year gains

The Nifty Midcap 100 has historically commanded a higher price-to-earnings (PE) ratio due to its stronger growth potential. Currently, it has the highest PE among the three major indices, at 44.2. This elevated PE is also a result of a sharp drop in its earnings per share (EPS) following the Q4FY24 results.

Nifty Midcap 100's EPS falls in the past year, Nifty 50 on top in EPS growth

Q1FY25 results did not help the Nifty Midcap’s EPS to recover to March 2024 levels. This was due to companies like HPCL (Oil & Gas), Bharat Dynamics (Defence), Tata Chemicals(Commodity Chemicals) and BSE (Exchange) reporting a significant fall in their EPS. As a result, the Nifty Midcap continues to trade at a high PE.

Bhaskar Laxminarayan, chief investment officer for Asia at Julius Baer says, “Every investor understands India's growth story, but valuation is a worry. Valuation of largecaps is not as much of a worry as with small and midcaps.”

Nifty 50 is analysts’ top pick, backed by historical data

When examining the valuations of the three indices, the Nifty Smallcap 100 stands out with a current PE of 30.3, well above its historical average. But this elevated valuation is somewhat supported by its strong performance in Q1FY25, where it posted the highest year-on-year (YoY) net profit growth among the three indices.

1 Yr Forward PE of indices below current PE

According to Trendlyne’s results dashboard, the revenue and net profit of the Nifty Smallcap 100 rose 11.9% and 50.9% YoY in Q1FY25 respectively.

The big jump in net profit was mainly due to Raymond’s net profit rising 591% YoY due to income from discontinued operations. After excluding this, net profit growth for Nifty Smallcap comes to 15%. Nifty 50 and Nifty Midcap’s net profit increased by 6.8% and 9.2% respectively.

The strong growth in smallcaps is expected to continue, boosted by India's GDP growth. This is reflected in the smallcap index's much lower forward PE of 21, compared to its current PE of 30.3. The lower forward PE suggests that high profit growth is expected to continue for these smallcap companies, potentially justifying the current valuation. But a major earnings miss could trigger a sharp correction in the index.

In comparison, the Nifty 50 appears more reasonably valued. Its current PE is below its 5 and 10-year historical averages. It has a forward PE of a very modest 20.5, which makes it even more appealing valuation wise. Goldman Sachs’ Asia-Pacific strategist Sunil Koul said, “One of the key views we have is that you should see a rotation in the Indian market. It was the year of mid and small-caps, but that seems to be changing already over the past month.”

PSUs, auto and banking & finance sectors dominate the top gainer lists

Public sector units (PSUs) have had a great year, and it is not surprising to see some of these becoming star stocks in the Nifty 50, Nifty Midcap 100 and Nifty Smallcap 100 indices. Sectors that stand out are Banking and Finance and Auto.

Banking and finance stocks are in focus with interest rate cuts on the horizon. The US Federal Reserve is expected to lower rates this month, and India’s RBI Monetary Policy Committee (MPC) will meet on October 9 to decide on its rate action.

Lower interest rates drive loan demand, benefiting banks. However, the top banks will face the challenge of keeping margins up as rates decline. Despite this, the banking and finance sector is attractively valued, with a relatively low PE ratio of 20.1, and the sector is up 10.1% over the past quarter.

Of the top five highest gainers in the Nifty 50, two are from the auto sector – Bajaj Auto and Hero Motocorp. The auto sector has been on the rise with strong demand in the rural segment driving sales in the past quarter. The sector is also up 59.4% in the past year, according to Trendlyne’s sector dashboard, and has a PE ratio of 36.4 as opposed to Nifty 50’s 23.5.

Banking and auto stocks outperform in the past year

The other three top gainers in the list include Bharat Petroleum Corp, Coal India and Adani Ports & Special Economic Zone.

Among the Nifty Smallcap 100, Banking and Finance sector stocks appear twice. Housing and Urban Development Corp (HUDCO) and Multi Commodity Exchange of India (MCX) are from this sector.

Other top-performing stocks include Rail Vikas Nigam (RVNL), Oil India, Suzlon Energy, Cochin Shipyard, NBCC, Prestige Estates Projects, Oracle Financial Services and Tata Investment Corp.

Screener: Low PE stocks which have risen over the past quarter with PE TTM lower than 3-year, 5-year, and 10-year averages

Auto stocks’ TTM PE is lower than their 3yr average PE

PE ratio shows the stock price of the company relative to its earnings per share (EPS). It is widely used by investors and analysts reviewing a stock's relative valuation. This screener shows stocks with trailing twelve months (TTM) PE values less than average three-year, five-year and ten-year PE values.

The screener is dominated by stocks from the automobiles & auto components, and pharmaceuticals & biotechnology sectors. Major stocks that feature in the screener are Great Eastern Shipping, JK Paper, Bharat Petroleum Corp, Tata Motors, Welspun Corp, Natco Pharma, Bombay Burmah Trading and Ceat.

Great Eastern Shipping’s TTM PE stands at 6.4 compared to its 3-year and 5-year PE at 7.3 and 8.4, respectively. The TTM PE ratio reflects the most recent earnings. The shipping company’s revenue and net profit increased by 18.1% YoY and 18% YoY, respectively in Q1FY25. This rise in earnings has led to a lower TTM PE ratio compared to the 3-year and 5-year average P/E ratios.

JK Paper also features in the screener with its TTM PE falling to 8 from its 3-year average of 10.3 and 5-year average of 8.2. This paper & paper products company’s TTM PE declined on the back of its stock price falling by 7.4% over the past month due to a disappointing Q1FY25 due to margin pressures. Despite a 16% rise in sales volume, net sales growth was offset by higher raw material costs, which rose 23% YoY. Other expenses increased 40% YoY due to an acquisition. Consequently, EBITDA margin fell by 1376 bps YoY to 16.4%, and net profit dropped 55% YoY to Rs 1.4 billion.

However, IDBI Capital expects the company’s margins to improve in Q2FY25 on account of price hikes across its product portfolio.

You can find some popular screeners here.

The Baseline

12 Sep 2024

Five stocks to buy from analysts this week - September 12, 2024

By Ruchir Sankhla

1. Bajaj Auto:

Sharekhan reiterates its ‘Buy’ rating for this 2/3 wheeler manufacturer, setting a target price of Rs 12,584, a potential upside of 7.8%. The analyst highlights that the company has seen a 9.8% increase in sales in FY25, with domestic volumes rising 12.6% and export volumes up 5.4%. While exports remain modest, recovery in the Nigerian market could drive further growth. Its CNG motorcycle, Freedom 125, is gaining popularity, and production capacity is set to expand to 50,000 units per month by January 2025.

The company is also strengthening its position in the electric vehicle (EV) market, holding a 14% share in the domestic electric 2-wheeler segment and a 36% share in the electric 3-wheeler segment. Upcoming EV product launches are expected to support future growth.

The brokerage expects the company’s volume growth to improve, supported by rural market recovery, strong 125cc sales, and festive season demand, while export recovery and CNG expansion should boost growth. The analysts anticipate a EBITDA CAGR of 19% over FY25-26 and EV/EBITDA to be 22.3 times in FY26.

2. Godrej Consumer Products:

Motilal Oswal maintains a ‘Buy’ rating on this personal products maker with a target price of Rs 1,700. This indicates an upside of 12.7%. Analysts Naveen Trivedi, Pratik Prajapati and Tanu Jindal highlight Godrej Consumer Products’ (GPCL) strategic moves in FY24 across various geographies. In India, the company launched ‘Project Vistaar’ to improve its rural reach and expand sales channels. In Indonesia, it has adopted a distributor-led model in general trade, which it said lowered its operational costs. Additionally, GCPL’s focus on e-commerce in the US drove 15%+ growth, and now accounts for 8% of its total business.

GCPL aims to drive growth in rural markets by introducing affordable products for price-sensitive consumers. It has set up a transportation management system to streamline its delivery routes, improve demand forecasting, and reduce excess inventory.

Trivedi, Prajapati and Jindal are upbeat about GCPL’s acquisition of Raymond Consumer Care, which has added brands like Park Avenue to its portfolio. The company reduced RCCL’s inventory from 90 to 15-20 days, improving operational efficiency despite a 25% revenue drop in FY24 as it cuts excess stock. The management anticipates that the segment will generate Rs 600 crore in revenue in FY25.

3. AIA Engineering:

Asit C Mehta initiates a ‘Buy’ rating on this other industrial goods company with a target price of Rs 5,106, suggesting a upside potential of 18.2%. Analyst Abhinav Kapadia says that the company sees growth in supplying more advanced materials for mining. These materials are used to grind down gold, copper, and iron ore more efficiently than traditional ones. Currently, less than 15% of the market uses these advanced materials, suggesting a large opportunity to increase usage.

Analysts say AIA Engineering's new mill liner plant improves its products with less wear, better output, and lower costs. AIA is expected to gain a strong position in the global mining industry, similar to its leadership in the cement sector. Its partnerships with EE Milling Solutions and the purchase of MPS Australia have helped improve equipment design and cut costs for customers.

Kapadia highlighted that the company achieved a revenue, EBITDA, and PAT CAGR of 19%, 20%, and 27%, respectively, from FY21 to FY24. He expects EBITDA and PAT margins to remain stable at 29% and 24% in FY25 and FY26, despite export challenges arising from the ongoing Red Sea crisis.

4. Awfis Space Solutions:

Edelweiss maintains ‘Buy’ rating on this consumer services company with a target price of Rs 1,013, indicating a potential upside of 40%. Analysts Amit Agarwal and Rishith Shah point out that the company is set to benefit from favorable market dynamics, including a 25-27% CAGR in demand for flexible office space due to hybrid working models, increased global capability centres (GCCs), and decentralization of office space by larger firms. The company expects the average seat rental to rise by 5-6% annually.

The analysts note that the company plans to add 40,000 seats in FY25, expanding from its current inventory of 95,030 seats, and has a capex budget of around Rs 140 crore for fitouts. Their expansion strategy focuses on Tier I and Tier II cities, targeting smaller 100-200 seat centers for better pricing. The firm uses a capital-light managed aggregation model, sharing fitout costs with landlords to boost returns while maintaining an asset-light approach, without owning properties

Agarwal and Shah forecast a revenue, EBITDA, and PAT CAGR of 40.1%, 68.6%, and 92.3% respectively for FY25-27, excluding Ind AS 116 adjustments.

5. Va Tech Wabag:

ICICI Securities maintains its ‘Buy’ rating on Va Tech Wabag with a target price of Rs 1,541, suggesting an upside of 8.2%. Analysts Mohit Kumar, Abhijeet Singh and Nidhi Shah highlight that this non-electrical utilities company recently secured a contract from the Middle East for a 300 million litre per day (MLD) desalination plant.

This greenfield project, located on the west coast of Saudi Arabia near Yanbu al-Bahr, is set to be completed in 30 months and is valued at Rs 2700 crore, exceeding FY24 engineering, procurement, and construction (EPC) revenues of Rs 2300 crore.

Analysts say that with this order, Wabag’s EPC order book is expected to rise to Rs 7800 crore, improving the book-to-bill ratio to 3.4 times. The operation and maintenance order book stands at Rs 4500 crore. Revenue growth estimates for FY26 have been increased to 20% from earlier projection of 15%. Wabag also has a strong pipeline in the Middle East, having bid for projects worth $100 crore and pre-qualified for a 1000 MLD desalination project.

Kumar, Singh, and Shah expect revenue and earnings CAGR of 15% and 20%, respectively, along with a 300 basis point expansion in return on equity from FY25 to FY26, driven by order book expansion, improved execution, and enhanced margins.

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

(You can find all analyst picks here)

The Baseline

11 Sep 2024

Chart of the Week: Crude oil prices at 52-week low boosts prospects for India

By Satyam Kumar

Crude oil prices fell below $70, marking a new 52-week low on September 10 due to oversupply concerns and a weak demand outlook. A week ago, OPEC+ announced it would postpone its planned oil supply increase until the start of 2025.

OPEC, or the Organization of the Petroleum Exporting Countries, was established in 1960 by Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela. The organization has since grown to include 13 member nations. OPEC operates like a cartel, regularly meeting to set oil production targets and coordinate output to manage global oil prices.

In 2016, in response to falling oil prices driven by a surge in United States crude production—also known as shale oil—OPEC signed an agreement with 10 other oil-producing countries, forming OPEC+. Among these countries was Russia, the world’s third-largest oil producer accounting for more than 10% of global production.

This week’s Chart of the Week looks at the reasons behind falling crude oil prices and how these trends may affect India and its equity markets.

Weak demand in the US & China and an increasing supply of US crude led to decline in crude prices

US increases crude production to all-time high levels, while OPEC+ cuts

Oil posted its biggest weekly drop in 11 months as a weak US jobs report added to concerns about tepid demand in the world’s largest consumer of crude. Oil prices have trended lower since early July, with weakness in the economies of China and the US — the top two oil consumers — creating fears about demand.

According to U.S. Energy, the production of crude oil in the United States, also known as shale oil has steadily risen in recent years to all-time high levels, adding supply pressure and messing up OPEC’s calculations as oil demand weakens.

Falling crude oil prices a boost for the Indian economy

India imports more than 80% of its crude oil needs, so falling oil prices will significantly reduce the country's import bill. This will help narrow the trade deficit and boost foreign exchange reserves.

High oil prices typically lead to a stronger US dollar against other currencies, which puts downward pressure on the Indian rupee. This is because high oil prices drive up demand for dollars as it is the preferred currency used in oil trade across the globe–so much so that it is referred to as the petrodollar trade. So falling crude oil prices can alleviate the pressure on the rupee.

According to India Today, the government is considering lowering oil prices to reduce inflation by bringing down energy costs. High retail prices for petrol and diesel tend to drive up domestic commodity prices, as increased oil costs raise production and transportation expenses across various sectors, squeezing profit margins. As the world's fourth-largest energy consumer, behind China, the US, and the European Union, India is especially sensitive to shifts in global oil prices.

Indian oil marketing companies & airlines would directly benefit from lower crude oil prices

Oil marketing and distribution companies such as Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation stand to benefit from falling crude oil prices, as it is a key input material. Despite crude price fluctuations, retail fuel prices have remained near Rs 100 for the past few years. As a result, declining crude prices, coupled with stable retail prices, will significantly enhance their profit margins.

These companies saw their net profit surge nearly tenfold during the Russia-Ukraine war. This was due to US sanctions on Russian crude, which left Russia with limited buyers and forced it to sell at discounted rates. Consequently, India's crude imports from Russia skyrocketed, increasing from $2.3 billion in 2021 to $25.5 billion in 2022, and nearly doubling again to $48.6 billion in 2023.

Although Russia still supplies 40% of India’s crude oil, the price advantage has lessened due to higher insurance and freight costs.

Similarly, for airlines like InterGlobe Aviation (IndiGo), fuel expenses make up more than 30% of its total expenses. Lower crude oil prices can help reduce operating costs and boost profit margins.

Paint, tyre and lubricant manufacturers that use crude oil derivatives as raw materials would witness higher gross profit

Paint manufacturers such as Asian Paints, Berger Paints (India), and Kansai Nerolac Paints will benefit from lower crude oil prices, as more than 40% of their revenue is spent on raw materials, many of which are crude oil derivatives. Gulf Oil Lubricants India will also see a reduction in operating costs in the coming quarters if crude oil prices remain low.

On the other hand, rubber prices have risen by 24% over the past year, squeezing profit margins for tyre manufacturers. Companies like Balkrishna Industries, MRF, Apollo Tyres, and Ceat have taken price hikes over the past year to offset rising costs. However, as the prices of crude oil derivatives decline with falling oil prices, rubber costs are expected to decrease, which will, in turn, benefit these tyre manufacturers.

The recent decline in crude oil prices offers significant advantages to various sectors in India. Overall, crude oil prices at or below $70, is good for the Indian economy. However, global economic dynamics, particularly demand trends in the US and China, will be critical in shaping the long-term outlook for crude prices and their impact on India.

The Baseline

06 Sep 2024

Five Interesting Stocks Today - September 06, 2024

1. Medplus Health Services:

This healthcare supplies company rose by over 8% in the past week. The firm recently obtained a stay order on the suspension of its Vikhroli, Maharashtra store. In the past week, ICICI Prudential India Opportunities Fund acquired 18.1 lakh shares of the company for Rs 111.6 crore, while ICICI Prudential Pharma Healthcare & Diagnostics purchased a 1.4% stake. Additionally, the Government of Singapore bought 11.5 lakh shares.

For Q1FY25, the company’s net profit had surged by 279.4% YoY to 14.4 crore, while its revenue rose by 15.8% YoY on the back of 15.3% YoY rise in its retail segment revenue. The firm beat trendlyne’s Forecaster estimates for net profit by 16.5%, but missed the revenue estimate by 0.5%. The stock appears in a screener for stocks with strong momentum.

At its recent Annual General Meeting (AGM), the firm's management emphasized their strategy to deepen market penetration in core areas, particularly in tier-2 and smaller locations, which now account for approximately 50% of their stores. They also outlined plans to open over 600 new stores in FY25. Currently, the company is the second-largest organized retail pharmacy network, with 4,444 physical stores as of Q1FY25, trailing only Apollo Pharmacy, which has 6,074 stores.

In June, the company introduced Medplus brand generics, offering discounts of 50-80%. In FY24, these products generated revenues of Rs 747 crore on a gross merchandise value (GMV) basis, accounting for 8.3% of net revenue. For FY25, Sujit Mahato, CFO of the firm maintained previously guided revenue growth of 20%. He adds that, “Given that a significant portion of our sales is now coming from MedPlus private label, and these are all selling at half the price of our regular brands. This will affect our overall top line.”

Analysts note that major organized retail companies are significantly impacting the pharma retail sector by expanding market reach and intensifying competition. These chains bring advanced supply chains, extensive distribution networks, and strong marketing power, leading to increased consumer access and higher sales volumes. They project India’s retail pharmacy market to grow at ~10% CAGR from 2022-30, with organized pharmacy penetration reaching ~23% by FY27.

HDFC Securities has maintained a “Buy” rating on Medplus Health Services, with a target price of Rs 820. The brokerage anticipates gradual margin improvement, driven by a favorable mix of factors: consistent growth in mature stores (2+ years, with ~9-10% margin), a rising share of margin-enhancing private-label and Medplus-brand generics, and an efficient supply chain.

2. AU Small Finance Bank:

This banking firm surged 9.8% over the past week as it submitted an application to the RBI for a voluntary transition into a universal bank. This shift could benefit AU Small Finance Bank (SFB) by allowing it less stringent regulatory norms. Analysts predict the transition will broaden its target market and enhance visibility among depositors.

In April, the central bank had announced guidelines related to the eligibility criteria for small finance banks seeking a voluntary transition to a universal bank. The RBI stated that only profitable and listed small finance banks with a minimum net worth of Rs 1,000 crore and a gross non-performing assets (NPA) ratio of less than 3% for the last two fiscal years are eligible to apply for the transition.

In Q1FY25, the bank reported net interest income growth of 54.1% YoY to Rs 1,920 crore. Gross NPA on loans disbursed stayed constant at 1.8%, well below RBI’s requirement for a universal bank transition. If granted this status, its capital adequacy ratio (buffer capital it is required to hold) requirement would decrease from the current level of 15% to 11.5%. In addition to that, the bank would no longer be required to keep at least half of its loan portfolio in loans worth less than Rs 25 lakh.

MD and CEO Sanjay Agarwal said, "We don’t have to do anything extra in terms of balance-sheet build-up to get the license. So, there won’t be any extra cost for this." He also emphasized that the transition should be smooth as the bank is already governed under Schedule Commercial Bank regulations, meaning no additional costs are expected.

NDTV Profit reports that Goldman Sachs initiates coverage on AU SFB with a ‘Buy’ rating, and sets the highest target price of Rs 831 among analysts tracking the bank. With the lender’s growing market share in deposits, the brokerage forecasts an EPS CAGR of 27% over FY25-27.

3. Radico Khaitan:

This breweries and distilleries company saw a 10% increase in its stock price in the past week. This followed the government's decision on August 29 to remove the cap on the amount of sugarcane that can be used for ethanol production. Ethanol is a key ingredient in alcoholic beverages, and removing the cap on sugar diversion is expected to increase the supply of ethanol. This, in turn, could benefit companies involved in the alcoholic beverage industry by reducing the cost of raw materials.

The changes will become more significant once the next sugarcane-crushing season begins. Crushing season in India is typically from October to March or April.

The price rise is also supported by positive Q1FY25 results. Radico’s revenue and net profit grew by 19.3% YoY and 20.6% YoY, respectively, reaching Rs 1,140.2 crore and Rs 76.3 crore. Despite the temporary closure of liquor shops due to elections, Radico Khaitan's volume remained unaffected, and revenue exceededTrendlyne's Forecaster estimates by 0.6%. The major contributor to this was the Prestige & Above brands category, where volume increased by 14.3% YoY. The revenue of this category alone reached Rs 499.5 crores, a 19.1% YoY increase.

Dilip Banthiya, Chief Financial Officer, commented on the results and performance: "Going forward, our focus will be on improving our profitability along with the cash flow generation and more efficient working capital management, resulting in debt reduction.”

Sharekhan maintains a Buy rating with a target price of Rs 1,995 per share. According to the brokerage, the company’s focus on high-end products and backward integration is expected to drive strong double-digit earnings growth in FY25-26. It expects the company’s revenue to grow at a CAGR of 18.6% over FY25-26.

4. Hindustan Petroleum Corporation:

This oil exploration and production company has risen 4.4% over the past week to touch its all-time high of Rs 457.2, after crude oil prices fell over 4% amid concerns over lower global demand growth, particularly from the two largest economies of the world - the US and China. This surge in stock price has placed the company in a screener of stocks with strong momentum.

In Q1FY25, Hindustan Petroleum Corp (HPCL) reported a net profit decline of 90.6% YoY to Rs 633.9 crore, missing Trendlyne Forecaster estimates by 55.3%. This decline was attributed to weak gross refining margins and rising crude oil costs, with total expenses increasing by 8.6% YoY to Rs 1.21 lakh crore during the quarter. However, the company achieved its highest-ever quarterly sales volume of 12.6 million metric tonnes (MMT), marking a 6% YoY increase.

The earnings of oil marketing companies (OMCs) usually rely on refining and marketing margins. OMCs have kept retail prices largely unchanged for the past 28 months which has led to significant losses. HPCL’s marketing loss on LPG stood at Rs 2,540 crore. Bharat Petroleum Corp (BPCL) and Indian Oil Corp (IOCL) also reported similar losses, amounting to Rs 2,300 crore and Rs 5,200 crore, respectively.

The Rajasthan refinery, starting in FY26, is a joint venture between HPCL (74%) and the government of Rajasthan (26%) with a capacity of 9 MMTPA. The project has a total estimated cost of Rs 72,937 crore, with Rs 48,001 crore already invested by the end of Q1FY25. The management is confident, noting that 80% of the project has been completed. This refinery will boost HPCL's refining capacity by 30% and is projected to contribute 37% to FY26 EBITDA.

HPCL has increased its Russian crude usage to 30-35% with the expansion of the Vizag refinery and anticipates greater benefits from this crude along with a faster ramp-up at Vizag. Commenting on this, Chairman and MD Pushp Kumar Joshi stated, “We aim to reach 3.5 MMT per quarter by the second half of FY25, up from the current production of 3 MMT, and increase refinery capacity to 15 MMT by FY28.”

Motilal Oswal has maintained a “Buy” rating on HPCL, with a target price of Rs 460. The brokerage highlights that separating and listing the company’s lubricant business might increase the stock’s value by up to Rs 33 per share. Additionally, upgradation of the Vizag unit and the start of the Rajasthan refinery at the end of Q4FY25 are expected to drive growth.

5. Gujarat Gas:

This non-utility electrical company surged 12% on Monday after its board approved a major restructuring. Gujarat State Petroleum Corporation (GSPC), Gujarat State Petronet, and Gujarat State Petroleum Corporation Energy will merge into India’s largest city gas distribution company, Gujarat Gas (GGL). The newly formed company will then separate its transmission business into a new entity, GSPL Transmission Limited (GTL).

The merger will combine the operations of Gujarat State Petroleum Corporation and Gujarat Gas to simplify processes and improve organizational structure. This will reduce internal transactions, leading to higher earnings for Gujarat Gas. It isl also expected to help expand their gas trading market and strengthen competitiveness.

Post merger, Gujarat Gas is likely to have better profit margins, returns, and cash flow. Shareholders of Gujarat State Petronet will get shares in both Gujarat Gas and the new GSPL Transmission Limited.

Milind Torawane, Managing Director of Gujarat Gas and also MD of Gujarat State Petroleum Corporation Limited, said, ”The board has approved the scheme to simplify the structure, enabling GGL and GTL to pursue their growth strategies more effectively and expand their operations.” According to the management's growth projections, Gujarat Gas is expected to become one of India’s largest integrated players in the gas trading and city gas distribution sectors.

In Q1FY25 the company reported a net profit increase of 53.1% YoY to Rs 330.7 crore due to reduction in spot gas prices and increase in volumes. Revenue grew 17.7% YoY to Rs 4,450.3 crore during the quarter. The company appears in a screener of stocks where mutual funds increased their shareholding over the past two months.

Nirmal Bang upgrades Gujarat Gas to ‘Buy’ from ‘Sell,’ with a new target price of Rs 702, up from Rs 552. The upgrade is driven by expected gains from gas sourcing benefits post-merger, and a favorable tax shield. Key factors include new earnings from GSPC’s gas trading, potential value-added tax (VAT) savings, and improved competitiveness in Industrial piped natural gas. EBITDA is projected to grow at a CAGR of 17.5% over FY 25-27.

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

The Baseline

05 Sep 2024

Five stocks to buy from analysts this week - September 5, 2024

By Divyansh Pokharna

1. Tata Technologies:

ICICI Securities reiterates its ‘Buy’ rating on this software and services company with a target price of Rs 1,290, implying an upside of 22.1%. Tata Technologies has recently expanded its capabilities in internal combustion engine (ICE) to EV conversions, validated by its work in converting the Tata Tigor and Tiago models. Analysts Ruchi Mukhija, Seema Nayak, and Aditi Patil are upbeat about the company’s growth prospects, supported by its partnerships with OEMs like Agratas in the evolving EV market.

The company is shifting from a hardware-focused portfolio to one centered on software, which aims to improve the car user experience. It has formed a joint venture with BMW to set up a center in India, with a software team of 4,000-5,000 people. Mukhija, Nayak, and Patil said, “The company’s focus on AI-driven solutions should boost the productivity of its engineers and planners across product design, digital modelling, and sales processes.”

Tata Technologies has also started developing battery solutions for 2-3 wheelers, giving it a competitive edge as batteries make up about 50% of EV costs. The analyst expects revenue and net profit CAGR of 13.7% and 16% respectively over FY25-27.

2. Nippon Life India Asset Management:

Sharekhan maintains a ‘Buy’ rating on this asset management company with a target price of Rs 840, indicating an upside of 22.2%. The company saw strong growth across all its segments, with equity asset under management (AUM) now contributing 50% of total AUM compared to 45% in FY24. Nippon Life Asset Management (NAM) is working on growing its market share and boosting SIP flows. Its SIP market share has risen to 11% from 8% in FY24. Recently, the company launched a new fund offer (NFO) for the Nifty 500 Equal Weight Index Fund, which is gaining attention.

Analysts are positive about NAM’s prospects, expecting AUM growth of 22-24% over FY25-27. In Q1FY25, the company’s revenue grew 35% YoY to Rs 635.8 crore, surpassing the Trendlyne Forecaster estimates by 23.5%. The firm has managed the expected drop in revenue from SEBI’s pricing changes by growing its AUM and increasing its market share. It is focused on improving the efficiency of existing branches rather than opening new branches.

Analysts are confident that strong retail flows and innovative passive schemes will drive NAM India's growth. They also highlighted that NAM India’s equity funds have consistently outperformed those of its peers, leading to stronger net inflows and market share gains.

3. L&T Technological Services:

Motilal Oswal maintains a ‘Buy’ rating on this IT consulting & software firm with a target price of Rs 6,300, indicating a 10.8% upside. L&T Technology Services (LTTS) has updated its go-to-market approach by focusing on fast-growing areas like mobility, sustainability, and tech, aiming to take advantage of new opportunities in these sectors.

Mobility margins increased from 14.7% in FY21 to 19.6% in FY24, while sustainability margins rose by 400 basis points, reaching 28.2% over the same period. Analysts Abhishek Pathak and Keval Bhagat said, “Margins may stay steady in the short term, but growth in mobility and sustainability could push them to the higher end of the target range over the next three years”. The company also highlighted increased growth in the oil and energy markets, with the shift from engineering, procurement, and construction (EPC) to EPC management (EPCM) to boost industrial growth.

Pathak and Bhagat are optimistic about LTTS’s expansion into AI and embedded systems, which are expected to drive future growth and enhance innovation across its business. They project a 10.6% revenue CAGR and 12.6% PAT CAGR over FY25-26.

4. Arvind Fashions:

Anand Rathi maintains a ‘Buy’ rating on this apparels and accessories company with a target price of Rs 689, indicating a potential upside of 18.7%. Arvind Fashions reported a net profit rise of 119.7% to Rs 80 crore in FY24 while its revenue fell 4% YoY to Rs 4,472.6 crore during the year.

Analysts Vaishnavi Mandhaniya and Shreya Baheti indicate that for FY25, the company will prioritize increasing brand value through product innovation and strategic advertising. They will also focus on expanding and updating their retail network, while improving profitability by maximizing full-price sales and optimizing costs. Additionally, the company aims to become debt-free by leveraging surplus cash generated from enhanced operational efficiencies.

Mandhaniya and Baheti are optimistic about the company's prospects, anticipating 12% and 22% CAGR in sales and EBITDA, respectively, over FY25-26. They expect the RoCE to increase to 20.2% by FY26. Reflecting these improved operations, they have raised the target multiple to 13 times FY26 EV/EBITDA, up from 12 times.

5. Emami:

Khambatta Securities maintains a ‘Buy’ rating on Emami with a target price of Rs 943, suggesting a 14.4% upside. This personal products company reported a net profit rise of 10.8% YoY to Rs 152.6 crore in Q1FY25. Operating revenue increased 9.7% YoY to Rs 906.1 crore during the quarter. Analysts noted that the 8.7% YoY domestic volume growth, contributing 85% of sales, was a key driver of overall growth. Emami’s personal care brands Navratna & Dermicool saw a 27% YoY increase, while the Healthcare range grew 11% YoY due to new products and strong digital sales. However, hair care brand Kesh King experienced a 15% YoY decline.

The analysts note that despite geopolitical challenges and currency depreciation in key markets, the international business grew 10.2% YoY in Q1FY25. The strong international performance was primarily driven by double-digit growth in the MENA and South Asian Association for Regional Cooperation (SAARC) regions.

The analysts anticipate that the company’s ongoing investment in its brands will position it favorably for the mid-to-long term. They project EBITDA margins to reach 26.7% in FY25 and 27.2% in FY26, with PAT margins expected to be 20.6% and 21.4% for the same periods, respectively.

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

(You can find all analyst picks here)

The Baseline

05 Sep 2024

A rising preference for pricey goods among Indian customers

By Swapnil Karkare

I don’t want to sound like that building uncle (I haven’t reached the ‘uncle’ age yet) who complains about the modern world and “kids these days”.

But I have to say, life was a lot simpler for Indian consumers a few years ago. At least, it felt that way. Let's take this cup of tea, simmering by my side while I type. A cup of tea was black tea powder, milk and sugar. Dessert meant a sizzling brownie or gajar halwa. “Skincare? What’s that?”men would ask. But in the last few years, and especially after Covid, things have changed.

Now, tea can be green, fifty kinds of herbal, black, iced. Milk can be low-fat, lactose-free, A2, or oat and nut-based varieties. In addition to the usual Indian desserts, we have to resist gelato, baklava, tiramisu, parfait. And skincare? It’s a full-blown daily routine with people casually dropping names like paraben, niacinamide, and hyaluronic as if they are talking about apples, mangoes and bananas. Every decision feels complicated.

The market is all about wellness, quality and experimentation. Whether it’s food, clothes, cars, or home décor, we’re seeking premium and niche products and services.

Remember when Uber offered its ill-fated Mercedes taxi rides in India, via Uber Black? It didn’t appeal to enough customers, and Uber discontinued it in 2014. Earlier this year, Dara Khosrowshahi, the company’s CEO said, 'Indians are extremely demanding, but are not willing to pay for anything'.

But now, Uber’s premium service is growing at a much faster rate than its budget rides. That has prompted the company to bring Uber Black back. So perhaps enough Indians are willing to pay.

As India gets wealthier, a significant number of people are upgrading their lifestyle, and firms are getting on board fast to cater to them.

In this week's Analyticks:

Going premium: The rise of the 'discerning' Indian customer

Screener: Rising stocks where Forecaster expects a high target price upside in the next 12 months

Indian pockets are getting deeper

Goldman Sachs recently noted that India’s affluent class–people earning above $10,000 (equivalent to Rs. 8.3 lakhs) per annum–rose in the last couple of decades. It jumped from 20 million in 2011 to 60 million in 2023, and accounts for 4.1% of the total population. GS expects this to reach 100 million by 2027.

People Research on India’s Consumer Economy (PRICE) expects the middle-class to increase to 61% of the total population by 2047, from 31% in 2021. The combo of upward income mobility, more choices, better tech and economic growth has already upgraded the lives of many Indians. It's visible across different pockets of the country, including smaller towns and villages.

Plus, we have access to global trends, thanks to the internet. We are not just comparing our house to the people next door. Instead we are discussing the viral kitchen renovation we saw online.

Food brands react to premiumisation and rising health awareness

A positive fallout from Covid, if any, has been rising health awareness. It started with at-home workouts and better food habits. Consumers are now spending more on healthier options, and companies have noticed.

Parag Milk Foods which owns a popular dairy products brand, Govardhan, also operates a premium brand called ‘Pride of Cows’, known for single-source and organic dairy products. In 2020, it forayed into premium curd and ghee.

Tata Consumer acquired Soulfull, a health-focused millet cereals company, in 2021, and Organic India, Fabindia’s herbal tea brand, in 2024. Amul has launched a high-protein segment selling milk at Rs. 396 a litre, which is seven times the price of the Amul Taaza pouch.

Hindustan Unilever (HUL) has launched over 70% of its new products in the premium segment in the last two years while Parle has shifted 60-65% of its new launches to the premium segment, up from 40% pre-Covid. Premium products now account for 25% of total sales for HUL, up by 300 basis points (bps) in the last three years and 12% for Nestle, up by 150 bps over last five years.

Tapping high-end consumers in fashion

“Premiumisation gives us better realisation,” Shailesh Chaturvedi, Arvind Fashions’ MD & CEO says. That’s how the company managed to improve its gross margins by 80 bps last quarter. In the previous quarter, sales of Aditya Birla Fashion & Retail (ABFRL)’s luxury segment and AjioLuxe, Reliance Retail’s online luxury shopping platform, jumped 18% and 39% YoY, respectively. Shoppers Stop’s premium brands now account for 57% of total sales, up from 54% last year.

People are becoming picky about the labels they wear, thanks to influencer marketing, global exposure and rising aspirations. Google Trends shows folks getting increasingly curious about premium products – checking out reviews, buying something because their friends or colleagues have it.

Brands are figuring out how to market high-end products to mid-premium customers. This is especially crucial in a weak season, as these consumers are less sensitive to downturns, and companies can offset lower sales in the budget segment with higher margins on premium items. India’s luxury fashion revenue is projected to cross $1.5 billion in 2024, compared to $11 billion in China and $28 billion in the US.

'Premium' is becoming a whole lifestyle

Once we have fancier clothes, taking care of them means more spending. We switch from semi-automatic machines to fully automatic, from powder soap to liquids, and fabric conditioner. This has benefited the likes of P&G and HUL. India's Electronic stores are complaining that semi-automatic washing machines have become a slow-moving inventory.

It doesn’t stop here. We need everything a notch up: accessories, skincare, shoes, phones, homes, cars and so on. Surveys shows that more Indians especially prefer buying premium in 'visible luxury' categories like smartphones, clothes, shoes, and laptops.

Banks vie for affluent customers

Recently, SBI announced it would hire 2000 executives to revive its wealth management arm and attract wealthy clients. Similarly, Axis Bank has expanded its wealth management business Burgundy Private, to Tier II and III cities.

HDFC Bank has launched the BizBlack Metal Edition Credit Card this year to tap self-employed and business people. Such premium metal credit cards have become a status symbol. A few years ago, only a few big banks offered them. But in the last few years, IndusInd Bank, IDFC First Bank, Yes Bank and AU Small Finance Bank have entered this segment.

Credit cards in general are gaining popularity as more Indians indulge in high-end shopping and air travel. The allure of loyalty points, deep discounts, and lounge access is driving growth. As of July 2024, Indians hold around 10.5 crore credit cards. In the last one year, the number of outstanding cards have increased by 16%, the transaction value has jumped 19% while the number of transactions have spiked by 38%.

Impact on industrial goods

The rise of luxury products has also affected other sectors, boosting the demand for better-quality raw materials and intermediary products. For example, rising sales of sports utility vehicles (SUVs), electric vehicles (EVs) and luxury cars have benefitted the auto components industry.

Strong demand for 3BHK, 4BHK and luxury homes means better quality cement and construction materials. Cement companies data reinforce this trend. Star Cement registered its highest-ever sales of premium cement in Q1 FY25 (9% of total sales). Dalmia Bharat continues to improve its premium share from 11% in FY19 to 21% in FY24 while that of Nuvoco Vistas from 34% in FY22 to 37% in FY24.

Take Apar Industries, the world’s largest aluminium and alloy conductor manufacturer. The company leads in premium quality conductors and cables used in various sectors like renewables, power, railways, EVs, etc. In the last three years, the volume of those conductors has grown by 37% CAGR while that of cables by 48%. That’s because its clients are shifting to better quality products.

At the end, consumers are better taken care of

While I may complain about having to take so many decisions about the smallest things, it's clear that premiumization helps both businesses and consumers. But going back into 'uncle' mode - the trend also highlights the widening gap between the rich and the poor. The premium segment is still very small, even if it's fast growing.

There is an expectation however, that India's GDP growth, combined with more effective social programs, will bring more Indians into this aspirational demographic. As India continues to grow, we can expect this trend to gain ground across industries.

Screener: Rising stocks where Forecaster expects a high target price upside in the next 12 months

Fashion & lifestyle stocks see high target price upside by Forecaster

The Indian markets have been trading flat over the past week, with the Nifty 50 index rising by just 0.5%. In this environment, we look at FMCG, consumer durables, food and fashion & lifestyle stocks which have risen over the past month with a high target price upside by Trendlyne’s Forecaster. This screener shows rising stocks where Forecaster expects stock prices to gain in the next 12 months.

Notable stocks that appear in the screener are Sai Silks (Kalamandir), Raymond, Electronics Mart India, Eureka Forbes, La Opala RG, Pitti Engineering, EID Parry (India), and Arvind.

Raymond features in the screener due to its 53.3% target price upside expected by Trendlyne’s Forecaster in the next 12 months. Analysts like Motilal Oswal believe that the textile company’s de-merger of its real estate and engineering businesses will help carve out individual growth strategies for both businesses. According to the broker, the company has created strong value by selling its FMCG business, demerging the lifestyle business, and setting up an engineering unit ‘Newco’ after the MPPL acquisition. The demerger of the lifestyle business has also helped the company’s stock price to rise by 7.9% over the past month.

Electronics Mart India comes next with a Forecaster estimated target price upside of 25% in the next 12 months. According to Anand Rathi, this specialty retail company’s revenue will grow on the back of volume growth. It expects the company to increase its profitability, driven by optimising store operations and improving inventory management.

You can find some popular screeners here.

The Baseline

04 Sep 2024

Chart of the Week: Fertilizers and software & services sector emerge as top gainers over the past quarter

By Satyam Kumar

For the first time in six quarters, India’s quarterly GDP growth on a YoY basis came in below estimates at 6.7% for Q1FY25. This was primarily due to subdued government spending and a decline in manufacturing activity. Despite this slight moderation in short-term growth, the World Bank remains optimistic about India’s long-term growth outlook. They revised their growth projection for the current fiscal upward to 7%, from the previous estimate of 6.6%.

If we look at the equity markets, India’s influence in the MSCI Global Standard Index, also known as the World Index, has been growing rapidly. India currently holds a weightage of around 18%, second only to China, which has a weightage of approximately 25%. This marks a significant increase from levels below 10% at the end of 2020.

In this week’s Chart of the Week, we take a look at Trendlyne’s Sector Dashboard to identify the top-performing sectors over the past quarter. We focus on the top eight sectors that have delivered maximum gains, highlighting the stocks and underlying factors that have contributed the most.

Early signs of growth propel the fertilizers and software & services sectors

The fertilizers sector emerged as the best-performing sector, posting 34.1% gains over the past quarter. Average net profit growth more than doubled on a YoY basis in Q1FY25. This growth was driven by a good monsoon and initiatives taken by the government to boost the sector. For instance, the government is developing a national policy to boost local fertilizer manufacturing. The Fertilisers and Chemicals Travancore, Coromandel International and Chambal Fertilisers & Chemicals were the highest contributing stocks as they rose 41.8%, 36.6% and 28.6% respectively over the past quarter.

The software and services sector also saw significant growth, soaring 30.8% over the past quarter, driven by early signs of recovery in the IT industry. This was buoyed by demand for emerging technologies like Generative AI, machine learning and cloud transformation. Tata Consultancy Services (TCS) rose 19.7% over the past quarter driven by positive sequential growth among all verticals except media and communication. Q1FY25 marked the first positive revenue growth on a QoQ basis after four quarters of sequential decline.

IT consulting & software company Infosys saw a 34% uptick in its share price over the past quarter, accounting for 20% of the sector’s overall gain during the period. The company’s financial services segment, which contributes around 27% to the overall revenue, reported positive growth on a YoY basis after six quarters.

Retailing & consumer durables companies witness growth driven by rising demand for their products

The retailing sector has risen 29.5% over the past quarter, with Trent alone contributing 67.3% to the sector’s gains, as it surged 53.2%. Avenue Supermarts contributed 16% to the overall sector gains.

Trent posted revenue growth of 54.8% YoY to Rs 4,150 crore in Q1FY25, with net profit rising 126.3% YoY to Rs 393 crore. The company’s strategy to focus on its affordable, trend-led fashion retail store, Zudio, has been a key driver of revenue growth as consumers gravitate toward value products amid high inflation.

The consumer durables sector also recorded a 20% gain over the past quarter, supported by the “Make in India” initiative amid growing demand for electronics goods. The industry saw an average net profit growth of 45% YoY in Q1FY25. Electronics manufacturer, Dixon Technologies (India), contributed 18.4% to the overall sectoral gains after rising 42.6% over the past quarter. Similarly, Voltas, an air conditioner (AC) manufacturer gained 26.8% over the past quarter, contributing 8.5% to sectoral gains. This rise came on the back of high demand for ACs in the peak summer months from April to June.

Uptick in exports drives the pharmaceuticals & chemicals sector higher

The pharmaceuticals & biotechnology sector gained 26.7% over the past quarter. Pharmaceutical firms like Sun Pharmaceutical Industries and Lupin were the major contributors as they gained 23% and 40% respectively over the past quarter. Growth in Sun Pharma was led by global specialty sales and emerging market segments. Lupin, on the other hand, witnessed its net profit rise by 77% on a YoY basis to Rs 801 crore in Q1, driven by new product launches and improved product mix.

The chemicals and petrochemicals sector surged by 24.3% over the past quarter, as India strengthened its position in the global chemicals market. This growth was driven by increasing interest from global companies looking to source from India in a bid to de-risk their supply chains.

Leading carbon black producer, PCBL saw its stock price double over the past quarter, contributing 8% of the overall sectoral gains. This rise followed the company’s announcement to increase its global presence with capacity additions via brownfield and greenfield expansions, taking the total capacity to 10 lakh tonnes (currently, 7.7 lakh tonnes). Similarly, agrochemicals company PI Industries and specialty chemicals firm BASF India also contributed 7.7% and 6.4% to the sectoral gains over the past quarter.

Food, beverages & tobacco and FMCG companies capitalise on shifting consumption trends

The food, beverages and tobacco sector gained 21.6% over the past quarter. Cigarettes and tobacco manufacturers like ITC and Godfrey Phillips India accounted for around 50% of the sector’s gains. This growth was driven by stable cigarette taxes and enforcement against illegal trade, which helped the legal cigarette industry recover volumes. Breweries & distilleries company United Spirits also gained 25% over the past quarter driven by its premium products, and contributed over 10% to the overall sectoral gains.

Likewise, the FMCG sector gained 20.3% over the past quarter, led by moderation in raw material prices and an uptick in rural consumption. Personal products companies Hindustan Unilever and Colgate-Palmolive (India) gained significantly over the past quarter contributing over 40% to the sectoral gains.

The Baseline

30 Aug 2024

Five Interesting Stocks Today - August 30, 2024

1. Honasa Consumer:

This personal products company has risen by 7% over the past week. This comes after the NCLT (National Company Law Tribunal) approved its amalgamation with two of its subsidiary companies, Just4Kids and Fusion Cosmeceutics. This amalgamation is expected to help prevent cost duplication and enhance financial efficiencies, making the combined operations more cost-effective.

Just4Kids Services is a platform that gives access to information about playschools and schools, sports classes, and similar events for kids across Delhi, Gurgaon, Noida, Faridabad, and Ghaziabad. Meanwhile, Fusion Cosmeceutics is engaged in the formulation and trading of skin care products.

Over the past three months, Mamaearth’s parent company has risen by over 18.1%. During Q1FY25, the firm’s net profit grew by 40.3% YoY to Rs 40.3 crore, beating Trendlyne’s Forecaster estimates by 11.3%. Revenue was up 19.3% YoY at Rs 554.1 crore, led by faster growth in emerging brands, market share gains (in face wash and shampoo), and aggressive distribution expansion (30% YoY).

Honasa Consumer is currently focusing on expanding its offline distribution, under a project called ‘Neev’. During Q1, the company’s offline distribution increased by 30% YoY, reaching 2 lakh retail outlets. Commenting on this, Ghazal Alaghh, the Co-founder said, “Our target is to double the offline distribution to 4 lakh retail outlets by FY27”.

Goldman Sachs recently initiated coverage on the stock with a ‘Buy’ rating and a target price of Rs 570. The brokerage highlights that the transformation of India's beauty industry presents a multi-year growth opportunity. Goldman Sachs also notes the significant growth opportunity as Honasa plans to double its offline distribution, driving growth in urban and rural markets.

2. One97 Communications (PayTM):

This digital payment player saw its parent company, One97 Communications’ share price rise 12.2% on Friday as it got approval from the Ministry of Finance for foreign direct investment (FDI) into its payment arm. With this approval, the company can re-apply for its payment aggregator license, which was rejected about two years ago due to compliance issues.

The company aims to refocus on its core business as it sells its ticketing arm to Zomato for Rs 2,048 crore. This move will enable PayTM to strengthen its core payments and financial services distribution business. The decision follows a more than 30% drop in PayTM's share price after the RBI cracked down on its payments bank arm due to irregularities in KYC (know your customer) norms and compliance issues. Currently, more than two years after listing at an issue price of Rs 2,150, the company is trading at a discount of about 70%.

As of July 2024, the company’s UPI market share was 7.8% by volume and 6% by value, according to the data released by the National Payments Corporation of India (NPCI). The RBI's action against Paytm Payments Bank has reignited discussions about capping UPI app market share at 30% to prevent any single platform from becoming too dominant. However, the NPCI postponed this proposal until December 31, 2024. If implemented in the end-of-year review, this proposal could significantly boost PayTM's market share.

Founder and CEO Vijay Shekhar Sharma, said, “The company aims to deliver at least one profitable quarter this financial year.” He emphasises that the company’s focus is returning to payments and cross-selling of financial services as its core business. Sharma also notes that the migration (from Paytm Payments Bank to payment service provider banks - Yes Bank, Axis Bank, HDFC Bank and SBI) of its technology and customers is nearing completion, after which the company can request NPCI’s permission to add new and incremental customers.

Motilal Oswal maintains a ‘Neutral’ rating on PayTM as it expects the sale of its entertainment business to strengthen its balance sheet. This transaction is expected to generate significant profits for PayTM, allowing it to reinvest in other high-potential areas. The firm forecasts that the company's EBITDA will turn positive by FY27.

3. Zee Entertainment Enterprises:

This broadcasting & cable TV company rose 11.6% on August 27 as it resolved disputes related to the scrapped $10 billion merger with Culver Max Entertainment (CMEPL) operating as Sony Pictures Networks India (SPNI). ZEE Entertainment Enterprises (ZEEL) and SPNI, along with Bangla Entertainment, agreed to a non-cash settlement, withdrawing all claims, including the $90 million termination fee for the merger.

The merger failed due to disagreements over valuation, control, and governance. ZEEL and SPNI had differing valuations for their companies, leading to conflicts over merger terms. Disputes also rose over how control would be divided in the merged entity, including decision-making authority and board composition. Questions over Zee’s corporate governance practices further complicated the merger.

This resolution ends the Singapore International Arbitration Centre arbitration and legal proceedings at the National Company Law Tribunal (NCLT). ZEEL’s management stated that the settlement allows both companies to independently pursue future growth in the evolving media and entertainment sector.

In Q1FY25 the company reported a net profit of Rs 118.1 crore compared to a loss of Rs 53.4 crore in Q1FY24, surpassing Trendlyne's Forecaster estimates by 24.3%. The surge in profit was driven by lower finance cost and employee benefit expenses. Revenue grew 7.6% YoY to Rs 2,149.5 crore during the quarter, driven by higher sales from subscription and movie releases. However, the company only released 13 titles, a 60% YoY fall.

ZEEL's total ad revenue decreased by 17.9% QoQ and 3.1% YoY to Rs 910 crore. Post results, MD and CEO Punit Goenka noted Q1FY25 ad revenue was low due to cricket and elections. He expects ad revenue to improve in H2FY25 driven by rural demand recovery, supported by a good monsoon and festive season.

ICICI Securities had retained its 'Buy' rating despite persistent concerns about financial weakness, governance challenges, and unresolved litigation. The brokerage is optimistic due to the improving balance sheet, which is a potential boost to investor confidence.

4. Sonata Software:

This IT solutions provider rose over 5% on Thursday after it won a multi-million-dollar IT outsourcing deal with a US-based healthcare provider. The AI-powered deal is to upgrade the client’s technology through better IT budget management, and the use of automation and cloud services. Commenting on this, MD & CEO Samir Dhir said, “The deal will impact short-term margins for the next two to four quarters due to the upfront AI investment, but won’t dilute long-term profitability. We expect AI services to account for 20% of our revenue over the next three years.”

Sonata Software won two more large deals in Q1FY25. The company was chosen as a partner to modernize outdated systems to the latest Microsoft technology for a client in Australia. The other cloud deal is with a major US financial firm.

In Q1FY25, the company reported a net profit decline of 12.1% YoY to Rs 105.6 crore due to higher raw material costs. Revenue grew 24.6% YoY to Rs 2,527 crore, surpassing Forecaster estimates by 56.1%. The company generated 27% of its revenue from overseas markets, with 7.5% YoY revenue growth in the International business.

Sonata’s share price has risen by 30.9% over the past year. The company has pushed its $1.5 billion revenue target for its international business to FY27, extending the timeline by two to four quarters due to the macro-economic slowdown. Dhir highlights that the company is “focused on modernization”, noting that cloud and data segments now make up 52% of Sonata's pipeline, up from 15% two years ago. The company also experienced growth in its partnership with Microsoft Fabric, which generated a pipeline of 385 crore across 80 clients.

Post results, KR Choksey downgraded its rating to ‘Accumulate’ as the stock surged 23% since the last rating, limiting further upside. However, it raised the target price to Rs 694, highlighting the company's focus on large deals and AI investments. The brokerage expects long-term growth to be driven by progress with Microsoft Fabric and effective client management.

5. Aether Industries:

This specialty chemicals company rose by 1.2% today and announced its results on July 19th. For Q1FY25, the company’s net profit increased by 0.4% YoY to Rs 29.9 crore, while its revenue rose by 17.5% YoY on the back of a 16.2% YoY rise in revenue in the large scale manufacturing vertical. The firm beat Trendlyne’s forecaster estimates for revenue by 14.7%. It appears in a screener for stocks with improving net cash flow for the last 2 years.

The firm has recently entered into an Exclusive Manufacturing Agreement with Chemoxy International, a subsidiary of the SEQENS group from France, which specializes in Health, Personal Care, and Specialty Ingredients. This three-year contract involves Aether supplying raw materials to Chemoxy, with production starting in 10 months and a volume of over 100 MT per year. Last month, Aether also commissioned site 4 for a strategic supply agreement with Baker Hughes (an energy technology firm). This deal includes six products to be manufactured in India for the first time and supplied globally, with a notable portion allocated for the Indian domestic oil and gas sector.

The company holds an estimated market share of 8-10% in the speciality chemicals space in India.Faiz Nagariya, CFO of the firm, guides the capex run rate of around Rs 300-350 crore for both FY25 and FY26.

Rohan Desai, whole time Director of the firm said: “During the quarter under review, we witnessed growth in overall volumes, but the prices have been impacted due to China's dumping. We feel the prices have already bottomed out and we are optimistic for an upswing in the business scenario. “

He added, With respect to Aether's business model, we have seen 66% contribution of the total top line coming from large scale manufacturing, 18% coming from contract/exclusive manufacturing, and 14% coming from contract research and manufacturing services business model during Q1FY25. Our export revenues stood at 42% of the total revenue and domestic sales stood at 58%.”

HDFC Securities has maintained a “Buy” rating on Aether Industries, with a target price of Rs 1,117. The brokerage notes that the company’s strategic capital investments are being fuelled by internal accruals and money raised (Rs 750 crore) through QIP. It expects a revenue CAGR of ~43% and an earnings CAGR of ~58% over FY25-27E.

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

The Baseline

30 Aug 2024

As China slows down, it is spreading the pain | Screener: Stocks with rising FII holdings and revenue forecast

Imports falling. IBM's research team shutting shop. China's most popular consumer companies like Temu seeing revenue misses. Nepal asking China to wipe out a $216 million loan.

In 2004, it felt like China was doing everything right. It was rising fast as a manufacturing powerhouse, and seeing GDP growth rates of 10-12%. In 2024 however, it feels like everything is going wrong. China's growth has slowed down quite dramatically, and it is facing multiple global crises - chip sanctions from the US, new tariffs and taxes from the EU and other trading partners.

China's real estate is struggling while unemployment is up. The country's two-decade long strategy of spending heavily on infrastructure and real estate to boost growth, has hit a wall. This kind of spending has a natural limit: what do you do when you have built all the revenue generating airports and flyovers you need? China's local governments have now started building highways and airports in small towns and villages - such as one in Zhangbei, a rural town of 65,000 people. This infrastructure spending, unlike in the past, is not generating growth.

China's slowdown may feel like an opportunity for other countries like India to step in. In reality though, there is both promise and danger. China has been so closely tied into India's and the world's supply chains, that bad news for China is impacting countries worldwide. Especially in the short term.

In this week's Analyticks:

A weaker China changes calculations: India and other countries are rethinking policies as China struggles

Screener: Stocks where FIIs are increasing their shareholding, with high future estimates for revenue growth

As China's own market weakens, it has turned to exports. Not everyone is happy

Even as China overtook the US to become India's top trading partner in FY24, India has also passed the maximum number of anti-dumping orders against China, across sectors like steel, plastic and chemicals. India's anti-dumping orders have also become highly targeted - on items like include printed circuit boards, industrial machinery, and even niche products like telescopic drawer sliders.

China's worsening domestic market has forced Chinese companies to shift their focus to exports. And thanks to heavy subsidies, Chinese companies are often able to manufacture below cost and export to international markets.

Consider steel. China is easily the world's biggest steel producer, producing more than 1 billion tons a year, over half the world’s output.The decline of China's massive real estate sector however, has resulted in a lot of steel inventory with no buyers.

Domestic demand in China has fallen over 10%, but exports are ballooning as China's producers look desperately for other markets. Chinese steel exports have jumped 20% YoY and are at the highest level since 2016.

This problem of excess is not just in the steel sector. Consider the beleaguered European auto sector, where Volkswagen, Mercedes etc are facing imports of high numbers of low-cost, high quality Chinese electric vehicles. EU has responded with heavy tariffs on Chinese EVs - MG maker SAIC, and BYD face additional duties of 36.3% and 17% on their exports to the EU.

But for European auto manufacturers, that was not enough. So EU has also now imposed a 9% duty on Chinese-made Teslas. Turkey is also planning tariffs on Chinese EVs, while Indonesia is set to impose import duties of up to 200% on textile products, which are mainly from China.

Countries exporting China's domestic market struggle

Over the past decade, many countries started to export heavily to China's massive domestic market, which welcomed them with open arms. Chinese consumers wanted Audis, BMWs, Prada bags. Now Chinese purses, Prada or otherwise, are zipping shut, and trading partners are feeling the pain. China's imports are declining and are at a four month low. Germany's exports to China fell by nearly 10% last year, and its economy shrunk.

American companies like Apple, Nike, and Starbucks are all similarly losing steam in China. India's gems and jewellery industry had dismal results in the most recent quarter - China accounts for a third of India's cut and polished diamond exports, and demand has weakened.

Another factor with falling imports is cultural. Under Xi Jinping, China is increasingly, turning inward. Consider the movies that the Chinese are watching. China is typically a major market for US studios, but this summer, ticket sales fell by 50% year on year. More than 80% of box office revenues this year was instead, from local releases. Hollywood movie Deadpool & Wolverine opened at No. 1 in most countries, but in China it opened at No. 2, behind a Chinese comedy, Successor.

Now, China wants its money back

The diminishing of China is visible in one other area - lending. China was the world's biggest bilateral lender in 2017. Now as its economy has slowed, it trying to get its money back.

Developing countries around the world owe China around $1.5 trillion. Thanks to projects like the $3.7 billion hydropower station that China funded in Angola, the country's debt to China is nearly 4% of the country's GDP.

One of the countries that is on the hook for billions of dollars in Chinese loans, is Pakistan. Pakistan has laid off an estimated seven million textile workers as it struggles with debt. The government says it cannot afford to keep the textile factories running as it tries to deal with soaring interest payments.

Many of these economies who borrowed from China are now in financial distress: Chinese government loans have a 2% interest rate compared with the 1.54% norm from the World Bank. On top of this, Chinese lenders also have a penalty interest rate of 8.7% for late payments. The World Bank says that the total value of interest payments of the 75 poorest countries in the world has jumped 4X, and will exceed their combined annual spending on health, education and infrastructure.

From 2008-2021, China accounted for over 40% of global GDP growth. The way China now handles its trade and lending relationships as it slows down, is going to be key, so that it doesn't drag the world economy down with it.

Screener: Stocks where FIIs are increasing their shareholding with high Trendlyne Forecaster estimates for YoY revenue growth

FIIs increase stake in the banking and software sectors

As Q1FY25 results season has ended, we take a look at the stocks that were the top picks for foreign institutional investors (FIIs), which also have strong YoY growth estimates for revenue in Q2FY25. This screener shows companies increasing FII holding QoQ in Q1FY25 and high Trendlyne Forecaster estimates for revenue YoY growth in Q2FY25.

The screener is dominated by stocks from the banking & finance, software & services, pharmaceuticals & biotechnology, consumer durables, and automobiles & auto components sectors. Major stocks that appear in the screener are Indus Towers, Coforge, KFIN Technologies, Yes Bank, MphasiS, RBL Bank, Gland Pharma, and Craftsman Automation.

Coforge shows up in the screener with its FII holding increasing by 6.4 percentage points QoQ in Q1FY25. Major funds which bought stake in the company are New World Fund (bought a 1.5% stake), and Smallcap World Fund (bought a 0.4% stake). The company also has a Forecaster estimated revenue growth of 24.9% YoY for Q2FY25. Dolat Capital believes that the IT company is well positioned for revenue growth owing to its multiple contract wins in the breadth-first search algorithm (BFS) and insurance segments, and increased contribution from its acquisitions of Cigniti and OptML.

KFIN Technologies’ FII holding grew by 6.1 percentage points QoQ in the past quarter. The most notable buyers of the company’s stock were Employees Provident Fund Board (bought 1.5% stake), The India Fund (bought 1.2% stake), and Aberdeen New India Investment Trust (bought 1.1% stake). Trendlyne’s Forecaster expects the company’s revenue to grow by 27% YoY in Q2FY25. ICICI Securities expects the company’s revenue to grow on the back of improving equity mix in mutual funds assets under management (AUM), market share expansion, a strong new listing pipeline in the issuer solutions business, and client wins in its international business. The issuer solutions business provides banking solutions to corporates like banks, mutual funds, and PSUs.

You can find some popular screeners here.