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    The Baseline

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    The Baseline
    25 Feb 2022
    Several stocks enter PE buy zone with market correction, diagnostic companies look for new ways to grow

    Several stocks enter PE buy zone with market correction, diagnostic companies look for new ways to grow

    It's often said that those who can bend with the wind, will weather the storm. The sharp volatility in markets amid Putin's invasion of Ukraine and rising oil prices, has shifted investors’ focus back to fundamentally strong companies that are now priced competitively.

    This week, we look at such newly affordable stocks, and also at how Indian businesses are bracing themselves for the post-pandemic world.

    In this week’s Analyticks:

    • Waning Covid-19 business forces diagnostic companies to look for new sources of growth
    • China+1 strategy drives exports jump for agrochem major PI Industries
    • Screener: Which stocks are in the PE Buy Zone post the market correction?

    Let’s get into it.


    Diagnostic labs are changing their strategy post-Covid

    Diagnostic companies were in the spotlight for around two years with the pandemic.Covid-19 related testing helped these companies post strong revenues and profits. However, with the end of the pandemic's third wave and falling Covid testing, diagnostic companies are looking at different growth strategies.

    Diagnostic labs saw modest YoY revenue growth in Q3FY22, missing Trendylne’s Forecaster Estimates. The overall revenue trend is still upward: Dr Lal Pathlabs’ Q3FY22 revenue rose 9% YoY to Rs 509 crore driven by robust growth in non-Covid revenues while Vijaya Diagnostics’ revenue grew 11% to Rs 114 crore. Only Thyrocare Technologies’ Q3 revenue fell 19% YoY to Rs 118.8 crore due to a reduction in Covid testing volume from government contracts.

    In terms of non-Covid revenue growth, Dr Lal Pathlabs leads the pack with an increase of 28% YoY to Rs 438 crore. Metropolis Healthreported a modest 7% growth to Rs 243 crore in non-Covid revenue in Q3 due to lesser revenues from government contracts. 

    However, the net profit numbers across the sector tell a different story. While Metropolis Healthcare’s revenue in Q3FY22 increased by 6% YoY to Rs 295.7 crore, its net profit fell 30% to Rs 41 crore. This fall in revenue is not limited to Metropolis Healthcare alone, Dr Lal Pathlabs’ net profit fell 39% YoY to Rs 57.3 crores as well. Only Vijaya Diagnostics managed to report a marginal increase in net profit by 2% to Rs 25.3 crore. 

    The operating profit margin of all four companies decreased YoY in Q3FY22. While Dr Lal Pathlabs operating margin shrank by 870 bps YoY to 22%, Metropolis Healthcare’s margin fell 580 bps to 31.53%. Comparatively, Vijaya Diagnostics performed better with a decrease of 300 bps in operating profit margin YoY to 43.6%. The revenue per patient and per test fell for these diagnostic labs. For Metropolis Healthcare, revenue per patient fell 13% YoY to Rs 898, and revenue per test decreased by 14% to Rs 462. 

    There are a lot of moving parts responsible for this fall in profit margins in the sector. A drastic decrease in the operating profit margin from Covid revenues is a major contributor. According to Dr Lal Pathlabs’ management, the price of a Covid test for international passengers at Mumbai airport fell 44% to Rs 1,975 in Q3. The introduction of price ceilings by governments on Covid tests played a big part in this. In addition, the acquisitions by the diagnostics company pulled down overall operating profit margins as well. 

    However, when we look at the bigger picture in terms of annual revenue growth, the growth story for the diagnostic sector remains intact. The diagnostic industry is expected to grow at a CAGR of 12.1% over FY21-FY23E.

    Only 15-20% of the overall market share of the diagnostics business is captured by listed companies. Given this fact, acquisitions of established private diagnostic labs has been the primary growth strategy for the top companies in this sector. While Dr Lal Pathlabs acquired Suburban diagnostics in Mumbai in Q3, Metropolis Healthcare acquired HiTech labs, which has a strong presence in South India.

    Interestingly, both acquired companies have lower operating margins, resulting in a lowering of the overall profit margin. However, the increase in the number of patients is what these acquisitions are aiming for. The number of patients increased by 21% to 66 lakh and 22% to 33 lakh for Dr Lal Pathlabs and Metropolis Healthcare, respectively. The strategy of these companies is to leverage this increase in patients and top line growth, while normalising profit margins by offering a wider diagnostic test menu to new patients.

    However, revenues can come under pressure with large healthcare service providers expanding aggressively into integrated digitised healthcare services. All these developments are happening after phenomenal Covid-led growth, as diagnostic companies try to keep flying high post pandemic.


    Rising input costs spoil the party (a little) for PI Industries

    The rise in input costs hurt almost all sectors, especially manufacturing companies. From auto to chemicals and coal, rising cost is a shared thorn in everyone's side. The story with PI Industries is no different.

    Total expenses for PI Industries increased 18.8% YoY to Rs 1,123.4 crore in Q3FY22. Although the company tried to pass this on by increasing their product prices, the management says that the full effect will be visible from Q4FY22.

    Net profit rose 14% YoY to Rs 222.6 crore. Analysts at ICICI Direct believe this was because of lower taxes in Q3FY21. Revenues grew 17% YoY to Rs 1,356 crore.

    Growth in revenue is mainly because of growth in the CSM (custom synthesis and manufacturing) segment. This segment recorded a growth of 19% YoY to Rs 1,076 crore in Q3FY22.

    EBITDA grows but margins take a hit

    The rise in costs hurt EBITDA margins, which fell 210 bps YoY to 22% in Q3FY22. It also affected gross margins which fell 49 bps YoY to 46%. Cost of materials rose 13.8% YoY to Rs 671.3 crore (however this fell sequentially by 12.5% in Q3FY22). The sequential drop suggests that the company is tackling the problem of rising input costs.

    EBITDA is up 8% YoY to Rs 297 crore. A favourable product mix helped absolute EBITDA grow in Q3FY22. However, the increase is very subtle as overhead costs surged by 24% YoY to Rs 333 crore. The rise in overhead cost is because of a spike in fuel prices, shipping costs, and expenses related to strategic initiatives.

    Exports rise because of the China+1 strategy

    PI Industries’ exports rose 19% YoY to Rs 1,076 crore in comparison to 8% YoY (Rs 280 crore) growth in the domestic market. This is because China is losing out on market share in the global chemicals sector. China had the lion’s share in this market for almost three decades until its unsustainable environmental practices led to the closure of most of its chemical manufacturing hubs. 

    As Chinese manufacturing tries to comply with new environmental rules, they are facing high operational and capital costs resulting in production cuts and supply-chain disruptions. This has caused most global companies to shift their procurement away from China and choose other alternatives, including India. This strategy is commonly known as the ‘China+1 strategy’. It is one of the main drivers for rising Indian chemical exports, and PI Industries has cashed in well on it.

    Brokerages enthused by PI Industries prospects

    Brokerages like Chola Wealth, Geojit BNP Paribas, and ICICI Securities are positive on the company with ‘Buy’ calls for this stock. They expect a strong order backlog in the CSM (custom synthesis and manufacturing) segment to drive growth as most of PI's revenues came from this segment in Q3FY22. Currently, the order book of the company stands at Rs 140 crore. The company is also diversifying into the pharma segment to improve its product mix and presence in the market.

    PI Industries' is already working on scaling up its biochemical processes for both pharma and non-agrochemical segments in Q4FY22 and Q1FY23. The company expects 15-20% of revenues to come in from the non-agrichemical space for FY23-25. For now, its strategies put it on track to clock total revenue growth of 15% for FY22.


    Screener:Stocks in PE buy zone with reasonable durability and quarterly growth rates

    While the Nifty 50 index was resilient over the past month, BSE Small Cap and Nifty MidCap 100 indices lost nearly 10% and 7%, respectively.

    This screener (subscriber) shows a list of stocks that are now trading in the PE Buy Zone, but also saw decent topline and bottomline growth in an otherwise difficult Q3FY22. These stocks are also on analysts’ radar given their robust business prospects. 

    Among 27 companies, heavyweights like Hindustan Unilever, Axis Bank, ONGC, Hindalco Industries, and Indian Oil Corp are currently trading in the ‘Buy Zone’. Given that Q3FY22 was a weak one for the FMCG sector, HUL continues to stay resilient in the face of inflationary cost pressures. Oil companies’ Q3 sales realisations got a boost owing to a nearly 70% YoY rise in global crude oil prices. These stocks still have steam left, given the sustained uptrend in oil prices on account of geopolitical concerns. 

    Axis Bank’s Q3 performance has been buoyed by higher growth in the home loan segment and lower provisioning. The favourable real estate cycle also worked in the favour of NBFCs like Home First Finance, Aditya Birla Capital, and CreditAccess Grameen.  

    Interestingly, while most mid-tier IT companies are out of investors’ reach owing to their sky-high valuations, Intellect Design Arena is currently trading in the PE Buy Zone. 

    Leading specialty chemicals player Aarti Industries and healthcare services company Narayana Hrudayalaya were other notable stocks in this list. Aarti Industries plans to demerge its pharma business as "Aarti Pharmalabs" in the next 6 months or so. Coal India, also in the Buy Zone, has gained out of the intermittent energy crises in India occurring in October and November 2021.

    Broking companies ICICI Securities and IIFL Securities also find their place in this screener. However capital markets are likely to stay volatile for some time with instability in Europe and rising inflation, so the breakneck growth of the past few quarters for brokerages may not be as visible in Q4.

    You can find some popular screeners here.


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    The Baseline
    24 Feb 2022
    Five Interesting Stocks Today: Russia Ukraine Edition

    Five Interesting Stocks Today: Russia Ukraine Edition

    This instalment of Five Interesting Stocks looks at the potential impact of the Russia-Ukraine war and global sanctions on five stocks.

    • Dr Reddy’s Laboratories: This pharma company hit a new one-year low on Thursday with Russia invading Ukraine. In Q3FY22, Dr Reddy’s got about 13.2% (Rs 710 crore) of its total revenues from Russia and the Commonwealth of Independent States (CIS), including Ukraine.

    The company’s revenue from this region may be greatly affected with the tensions, and as sanctions on Russia can disrupt the supply chain. The company’s forex losses may also rise with the rapid depreciation of the Russian Ruble.

    Dr Reddy's had posted decent Q3FY22 results but missed Trendlyne’s Forecaster estimates. Dr Reddy’s Q3 net profit rose 14% YoY to Rs 709 crores and the revenues increased by 8% to Rs 5,394 crore. Since the company derives more than half its revenue from the US and India, it has been focusing on expansion in the emerging markets (mainly Russia). Revenue from Russia grew 5% YoY in Q3FY22 to Rs 470 crore (about 9% of the total revenues) on the back of new product launches, favorable forex rate, and increase in prices. In Q3FY22, Russia and Emerging Markets provided the company with growth opportunities in a time of high pricing pressure in the US, where it derives 35% of the total revenues. According to the management, the company is careful in allocating capital across geos and has been reducing the R&D expenditure towards the US markets to focus more on Indian and emerging markets. This Russia-Ukraine crisis comes as a roadblock for the management to carry out its long-term strategy to diversify its geographical revenue mix. 

    1. Indraprastha Gas: As the Russia-Ukraine conflict intensified, the stock of this city gas distributor witnessed an over 7% intraday correction in today’s session. On Thursday, crude oil prices shot up to over $103 per barrel, the highest since August 2014. While this works to the advantage of upstream oil and gas companies, downstream companies like IGL could face further heat. Stocks of City Gas Distributors (CGDs) were already under pressure as higher oil prices caused domestic gas prices to be hiked by 62% to $2.9/mmbtu in October 2021. Notably, the government also reduced the domestic gas allocation to CGDs which ultimately drove them to rely on spot gas/imported gas which is pricier. HDFC Securities initially expected gas prices to rise by another 37% to $4/mmbtu in April, 2022. However, the current geopolitical situation could brew fresh uncertainty.  

    Indraprastha Gas’ stock corrected over 20% ever since the Delhi Government released a draft EV policy note for cab aggregators on January 18, 2022. Acceleration in transition to EVs would sooner or later impact its sales volumes. Cut to the present, and IGL faces heightened risk of soaring oil prices as it will negatively impact the company's gross margins. Higher gas prices mean higher input costs for IGL. Once the company hikes prices to pass on higher costs, its volume could face downward pressure if the price differential with petrol/diesel reduces. Investors should watch out for IGL’s Q4FY22 performance and the upcoming gas price revisions in April, 2022.

    1. Kajaria Ceramics: The stock of this ceramic and vitrified tiles manufacturer fell by 5.6% on Thursday with the sharp rise in crude prices, as Russia-Ukraine fighting intensifies. Rising prices of crude can hurt the company’s margins, playing spoilsport to otherwise steady volume growth. Kajaria's Q3 results were good considering the rise in fuel costs and supply chain bottlenecks. Net profits increased 2.6% YoY to Rs 122 crore, and revenue from operations increased 27.4% YoY to Rs 1,068.2 crore. In order to offset increased input costs, the company hiked prices across tiles product segments.The company aims to achieve 15% CAGR growth in volumes over the next 2-3 years on rising demand from urban India. The company has announced a capex of Rs 250 crore to increase its tile capacity by 17% to 85 MSM (million square meters) by Q1FY23. It further outlined Rs 290 crore capex towards tiles and bath-ware segment.

    However, these plans of expansion were made with the expectation that fuel prices would eventually decrease and demand will increase. With the Russia-Ukraine conflict intensifying and geopolitical tensions rising, it is hard to predict how long the ramifications of the conflict and sanctions on Russia will last. One thing is clear, oil and gas prices will shoot up and supply chains will be further disrupted.

    1. Kansai Nerolac: This paint maker’s stock hit a 52-week low of Rs 453.4 today, continuing to fall after the company posted weak Q3FY22 results. The stock has been falling after the company’s profit fell 34.7% YoY to Rs 132 crore because of low volume growth and raw material inflation. Although revenues grew 13% YoY to Rs 1,694 crore because of an increase in demand in the decorative segment, low demand from the industrial paints segment hit growth. This is because of reduced demand from the auto sector as it is facing production issues because of the ongoing semiconductor shortage.

    High raw material cost and delays in raising product prices hit EBITDA margins of the company, falling 721 bps YoY to 12.4%. A recent price increase will sustain the decorative paints segment. Industrial segment prices however need a further increase to offset the sharp rise in raw material cost. With the ongoing Ukraine-Russia conflict, and most of the raw material for the paint sector being petroleum-based, input costs are set to soar even more. Kansai Nerolac needs to take quick decisions on its pricing techniques to avoid significant margin pressure.  

    1. Petronet LNG: This liquified natural gas re-gasifier’s stock hit a new 52-week low on Thursday. The stock fell nearly 7% in trading after Russia announced military operations. Oil and gas prices may rise further as sanctions against Russia are announced.

    The company’s Q3FY22 results were good with net profit up 30% YoY to Rs 1,143.5 crore and revenues up 71.9% to Rs 12,597 crore. However, volume growth was down 11.5% YoY at 208 trillion British thermal units. Analysts at Geojit BNP Paribas believe the company’s ramp-up with capacity expansion will bode well for future opportunities that may come in with an increase in demand for natural gas. Analysts at Prabhudas Lilladher expect the Kochi plant’s increased capacity utilization to 30% from 19% in FY23 to help in increasing production. 

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    The Baseline
    23 Feb 2022, 12:45PM
    Chart of the Week: Hotels, upstream oil and internet platform companies deliver stellar performance in an otherwise weak quarter

    Chart of the Week: Hotels, upstream oil and internet platform companies deliver stellar performance in an otherwise weak quarter

    In Q3FY22, companies across sectors such as cements, consumer durables, building materials, automobile, and FMCG witnessed the double whammy of muted demand and high input costs. Only sectors which saw a meaningful rise in their topline due to structural reasons escaped this situation unscathed. 

    The Hotels sector sprung a positive surprise in Q3 by riding the wave of higher leisure travel, which news pundits fondly call ‘revenge travel’. Many hospitality players such as Indian Hotels and EIH returned to black after six consecutive quarters of losses, led by material improvement in occupancy rates. The FY23 outlook for this sector looks bright as the world returns to normalcy. 

    Buoyed by higher transaction volumes in the stock markets, higher mutual fund SIPs and record IPOs in Q3, brokerage firms like ICICI Securities and Angel One saw their revenues and profits jump by over 50% YoY. However, higher market volatility and downward pressure on market returns could hit revenues for the capital market sector going forward. 

    Defence companies also posted a robust performance in Q3 led by a strong order pipeline thanks to the Center’s thrust on indigenization of defence products. 

    Performance of internet services companies like Tanla Platforms, Affle (India) and Brightcom Group continued to impress investors, with the increased usage of digital media and digital channels to conduct commerce and engage with customers.  

    While rising crude oil prices worked to the detriment of most manufacturing companies, it worked wonders for sales realizations of upstream oil companies like ONGC and Oil India. Notably, global oil prices might rise to US$120/bbl levels should the conflict between Russia and Ukraine escalate further. Russia is the third largest crude oil producer after the United States and Saudi Arabia.

    Given the occurrence of the third Covid wave in January 2022 and the unabated upward trend in energy costs, it will be interesting to see which sectors hold their ground and which ones face the heat in Q4FY22.

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    The Baseline
    21 Feb 2022
    Five analyst stock picks this week

    Five analyst stock picks this week

    1. Ashok Leyland: Axis Direct retains its ‘Buy’ rating on this truck maker’s stock but reduces its target price to Rs 160. This indicates an upside of 28.5%. The company reported subdued performance that was below Axis Direct’s estimates. “This was primarily on account of a steep rise in raw material costs, a lower-than-expected increase in average selling price, and higher expenses,” says analyst Darshan Gangar. The net profit for Q3FY22  stood at Rs 5.8 crore against Axis’s estimates of Rs 37 crore and net revenue stood at Rs 5,535 crore as against Axis Direct’s estimate of Rs 5,697 crore. Yet the brokerage remains positive on the automobile company due to a rise in replacement demand, and the government’s thrust on infrastructure and scrappage policy for older vehicles and trucks. Additionally, the analyst at Axis Direct believes that bus demand will increase as travel restrictions ease off from Q4FY22 onwards and hence retains the ‘Buy’ rating.

    2. Eicher Motors: Motilal Oswal maintains ‘Buy’ on the owner of the Royal Enfield brand with a target price of Rs 3,050, indicating an upside of 12.84%. The company’s Q3FY22 net profit fell 14% YoY to Rs 420 crore while revenue grew 2% YoY to Rs 2,880 crore. For 9MFY22, net profit grew 30% to Rs 1,060.1 crore and revenues 23% YoY to Rs 7,104.6 crore, respectively, in 9MFY22. The fall in net profit was due to lower realisations but that’s not a long-term problem. “Focus on exports and revenue from accessories is helping Royal Enfield improve its realisation,” say analysts Jinesh Gandhi, Vipul Agrawal, and Aniket Desai. The company added two more suppliers of semiconductors to deal with the shortage, which will help increase the supply. Additionally, “the demand remains good, with a healthy order book,” they dd. Royal Enfield (RE) exports rose by 57%. The brokerage believes with the recently launched classic 350, and upcoming products will expand markets and drive the next phase of growth for RE.

    3. Greenply Industries: Bob Capital gives a ‘Buy’ rating to this plywood maker’s stock, with a target price of Rs 260 (indicating an upside of 39%). The company’s Q3FY22 revenues grew 24% to Rs 420 crore. The company hiked prices by 8% in Q3 to mitigate the rise in input cost and also plans to foray into medium density fibreboard (MDF) manufacturing, setting up an 800 cubic metres per day capacity at a cost of Rs 550 crore. This has an estimated revenue potential of Rs 650 crore at peak utilisation. “This will be the first MDF facility in Western India, giving the company a freight advantage over peers when catering to demand in the region,” says analyst Ruchitaa Maheshwari. “With this foray, Greenply will be able to broaden its wood panel portfolio and deepen its presence in a growing market.” She “expect(s) strong plywood recovery” due to considerable balance sheet strengthening post-Covid and strong recovery in the secondary real estate market and hence stays positive on the stock.

    4. Hero MotoCorp: Prabhudas Lilladher gives this two-wheeler maker’s stock a ‘Buy’ rating with a target price of Rs 3,221, an upside of 17.9%. “Hero’s Q3FY22 EBITDA margin at 12.2% surprised positively and came ahead of our estimates (of 11.8%),” say analysts Varun Baxi and Mansi Lall. This was due to multiple price hikes over the year, a focus on a cost savings program, and higher spares revenue (up 15% YoY). The average realisations stood at Rs 61,000, improved 15% YoY. The analysts believe that in FY23, the company will have a strong rebound in volumes on the back of Covid-19 third wave in India phasing out, the opening of colleges, etc., and commodity prices now peaking out. Additionally, exports during January stood at 2,39,000 units (up 80%). The brokerage stays positive on the company due to increased savings that the company achieved through cost savings program, and success in electric vehicles.

    5. KNR Constructions: ICICI Securities maintains a ‘Buy’ rating on this infrastructure development company with a target price of Rs 360 (an upside of 12.9%). According to analysts Bhupendra Tiwary and Lokesh Kashikar, KNR Constructions reported a decent set of numbers during Q3FY22. The company’s net profit stood at  100.8 crore, up 29.9% YoY and standalone revenue improved 11.7% YoY to Rs 766.3 crore, led by a strong order book position and pick-up in execution. This, the analysts believe, will further translate into a 17.7% CAGR over FY21-24. The company is aiming to bag Rs 2,000-3,000 crore worth of orders in the rest of FY22. ICICI Securities believes that the company will surpass current revenue levels in FY23 and operating margins will remain elevated at 18-19%. According to the analysts, KNR Constructions is likely to be one of the prime beneficiaries of the roads and water segment. 

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    The Baseline
    18 Feb 2022
    Five interesting stocks today

    Five interesting stocks today

    • Tata Chemicals: This chemicals company posted stellar Q3FY22results as its net profit rose 69% YoY to Rs 340 crore due a rise in product prices and lower taxes. Revenues grew 21% YoY to Rs 3,141.6 crore led by growth across all geographies driven by both volumes and realisation growth due to revival in demand and re-opening of businesses across all sectors. The demand momentum looks set to continue. However, the input supply-side environment, especially energy costs remain high compared to historical levels. Supply chain challenges continue to be seen in the market. Globally, demand for soda ash (basic chemical segment) picked up significantly which helped in the revenue growth during the quarter. Basic chemicals contribute 75% to the company’s revenue, and special chemicals the rest. The basic chemical segment grew 23.2% YoY to Rs 2,447.80 crore, whereas the revenue from special chemical segment grew 9.7% YoY to Rs 678.55 crore. The rise in demand for soda ash resulted ina tight demand-supply situation, leading to higher spot prices which helped Tata Chemicals’ quarterly performance. Analysts atNirmal Bang maintain a ‘Buy’ rating on Tata Chemicals, having a positive outlook for the company. According to Nirmal Bang’s industry scenario analysis, soda ash will enjoy a cyclical upswing in margins for at least 2 years leading to higher pricing. On the other hand,  Motilal Oswal maintains a ‘hold’ rating as even though the company did well in Q3FY22, the brokerage believes that rising input costs are likely to negatively affect the margins.

    • Metropolis Healthcare: This diagnostics company’s stock slumped 17.4% till Thursday after the company posted weak Q3FY22 results, missing the Trendlyne Forecaster’s net profit  and revenue estimates. Profit fell 29.7% YoY to Rs 41.2 crore despite a 6.2% increase in revenue to Rs 295.6 crore. EBITDA margin dipped 550 bps YoY to 26.5% mainly because of a fall in margin across its testing both Covid and non-Covid segments. While the company’s peers registered robust non-Covid revenue growth in the range of 20-25% YoY, Metropolis Healthcare’s non-Covid revenue rose marginally by 7% to Rs 243.7 crore. This is because of a sharp drop in volumes from its government contract. Lower EBITDA margins of testing services of Hitech Diagnostics labs, which Metropolis Healthcare acquired last year, pulled down the overall profit margins. The revenues can come under additional pressure with large healthcare service providers expanding aggressively into Integrated digitized healthcare services. Edelweiss continues to remain positive on the company despite its lacklustre performance. The brokerage expects the non-Covid revenue to increase supported by the government contracts and the EBITDA margins to get back to pre-covid levels with the consolidation of Hitech labs.

    • Mahindra & Mahindra: Amid a weak quarter for the auto sector, this car and farm equipment maker saw its Q3 net profits jump 57% YoY to Rs 1,987 crore. Part of the rise in profit was because the company accounted for an exceptional income of Rs 205.1 crore on selling stake in its logistics joint venture Porter. So, what was brewing in its core segments?Although M&M’s auto and farm divisions’ Q3 revenue grew 10% YoY to Rs 16,928 crore, operating profit fell 29% YoY to Rs 1,287 crore. Higher commodity price inflation and semiconductor shortage affected M&M as well. The core topline growth was driven by the auto segment which saw revenues rise 16% to Rs 9,958 crore led by strong demand for XUVs, Thar and Bolero. However, the farm segment witnessed dismal sales growth as its tractor volumes fell 9% YoY to 91,769 units. Another trend highlighted in M&M’s earnings call was the spike in farm input costs by 25% while final output prices witnessed a rise of only 10% YoY. This led to lower purchasing power amongst the farmers as they were hardly left with any money in their hands. M&M has subsequently reduced its FY22 growth guidance for the farm equipment segment. While chip shortages are easing out in Q4, it will be interesting to see if this helps the auto segment give a boost to the company’s overall profitability.

    • Berger Paints: This paint maker’s stock is on an upswing over the past week, despite the larger paint industry being marred by fears of a rise in input costs due to the increase in crude oil prices. While Berger Paints’ Q3FY22 revenues rose 20.4% YoY to Rs 2,550 crore, its net profit fell 8% YoY to Rs 250 crore due to raw material price inflation of 28-29%. However, the decorative segment saw relatively lower raw material price inflation.. The decorative segment led the growth in revenue with a growth of 12% YoY, and as the company was able to pass on price hikes to its customers. Metros and tier-1 cities were key growth drivers, with increasing demand in this segment. Industrials continue to suffer due to falling demand and high input costs, especially in auto. This is probably why Chola Wealth Direct has a positive outlook on the company, despite its cost troubles in Q3FY22. To meet this growing demand, the company is setting up a new plant in Lucknow. The capex for the plant is Rs 800 crore and is expected to be operational by mid-2022, well before the official deadline of January 2023.

    • Oil And Natural Gas Company: This oil and gas explorer’s stock rallied 5% on Monday as oil prices hit a seven-year high. The stock also hit a 52-week high of Rs 176.35 as crude was on the boil due to geopolitical tensions between Russia and Ukraine. The company’s Q3FY22 performance also helped. Its net profit zoomed 7X YoY to Rs 8,763 crore in Q3FY22 and revenues surged 1.6X YoY to Rs 28,742.9 crore. The rise in revenue comes in because of the realisation of crude oil at USD 75.4 per barrel and gas sales at 4.3 billion cubic metres. The thing to note here is that revenues and profit rose despite a fall in production. In this context, the management is infusing capex of Rs 30,000 crore to increase production of crude oil and gas to 60 metric million tonnes for FY 23-24. Total oil production is at 5.5 million metric tons down 3.2% YoY, while total gas production at 5.5 billion cubic metres, down by 4.2% YoY in Q3FY22. Motilal Oswal’s report suggests that ONGC’s gas production is likely to clock 7% CAGR growth over FY22-24. Meanwhile, HDFC Securities is positive on the company’s overall performance and believes that the capex guidance of the company will ramp up production. Both these brokerages have a ‘Buy’ rating on the stock.However, ICICI Securities remains concerned over lower production levels. Right now, the brokerage believes that if high crude oil prices sustain, the company may have higher earnings, but the sustainability of high crude prices is suspect. For now, the brokerage has downgraded its rating to ‘Hold’ from ‘Buy’.

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    The Baseline
    16 Feb 2022
    Chart of the week: Will LIC pull up its socks in the last quarter of FY22?

    Chart of the week: Will LIC pull up its socks in the last quarter of FY22?

    At the end of FY21,Life Insurance Corporation of India or LIC held a 66.2% market share. Although it still dominates the life insurance market, its market share at the end of January 2022 is down to  61.2%. The company is losing market share to private players likeSBI Life Insurance,HDFC Life Insurance,ICICI Prudential Life Insurance, among others.

    LIC sells individual insurance products and group insurance products. The Insurance Regulatory Development Authority of India, or IRDAI data shows LIC is ceding new business premium (NBP) market share to private players. This is especially true for individual single premium and group non-single premium products (NBP is the premiums on new insurance policies sold by an insurer, while gross written premium is the total premium including renewals on policies).

    LIC’s total NBP for individual single premium products for the ten months ended January 31, 2022 (10MFY22) was Rs 18,598 crore compared to Rs 28,822 crore in FY21. For group non-single premium, total NBP for 10MFY22 was Rs 2,116 crore compared to Rs 5,116 crore in FY21.

    LIC needs to earn more than 3X NBP in February and the coming two months just to match up to FY21 numbers. The slowness in NBP growth is reflected in the loss of market share. The market share for the individual single premium segment fell to 58.6% in January 2022 from 67.9% in March 2021. For group non-single premium, the market share was down to 87.9% from 93.3% in March 2021.

    Private life insurance peerICICI Prudential Life Insurance gained market share in the individual single premium segment reaching 8.4% in January 2022 compared to 6.3% in FY21.SBI Life has a 10% market share at the end of January 2022. 

    It will be interesting to see how investors welcome this company’s IPO considering that it is rapidly losing market share.

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    The Baseline created a screener Stocks with Weak Trendlyne …
    14 Feb 2022

    Stocks with Weak Trendlyne Durability Score and Year Returns of Over 50%

    Stocks with Weak Durability Scores, but Higher Returns
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    The Baseline
    14 Feb 2022
    Five analyst stock picks this week

    Five analyst stock picks this week

    1. Balaji Amines: Edelweiss maintains a ‘Buy’ rating on this chemicals company and increases its target price to Rs 4,150. This indicates an upside of 42.9%. The company posted strong revenue growth of 44.1% YoY to Rs 565 crore and net profit growth of 19% YoY to Rs 90 crore in Q3FY22. The company’s performance is driven by higher realizations and robust performance by the subsidiary Balaji Specialty Chemicals. According to analyst Anshul Verdia, “Bottlenecks in the availability of key raw material ethylene oxide are easing off and may result in volume growth in the upcoming quarters.” Edelweiss remains positive about the chemicals company due to an increase in contribution from higher-margin products following removal of bottlenecks in its plants, commercialisation of dimethyl carbonate, and propylene glycol capacity by Q1FY23, and strong demand for products leading to improvement in utilization and realizations. Verdia also anticipates more capex announcements in the upcoming quarters.  

    1. TVS Motors: Axis Direct maintains a ‘Buy’ rating on this automobile company and increases its target price to Rs 720 with an upside of 9.8%. “TVS Motors posted a robust set of numbers in Q3FY22 with the performance ahead of our expectations, driven by improved product mix leading to strong ASP growth and margin beat”, says analyst Darshan Gangar.  The company’s Q3FY22 net profit grew 8.5% YoY to Rs 288 crore (25% higher than Axis Direct’s profit estimates) and net sales increased 5.8% YoY to Rs 5,760 crore (5% higher than Axis Direct’s estimates). The company is also witnessing strong sequential recovery across its portfolio in domestic as well as international markets. Considering the better business visibility, new product launches, and healthy demand and exports, Gangar expects the company's volumes to grow by 9.5% CAGR over FY 21-24 and expect robust revenue and earnings CAGR of 16% and 36% over FY 21-24.

    1. Aditya Birla Capital: HDFC Securities gives this financial services company a ‘Buy’ rating with a target price of Rs 157, indicating an upside of 38.3%. According to analysts Krishnan ASV, Deepak Shinde, and Sahej Mittal, the company is steadily repositioning its lending business mix towards retail, small and mid-size enterprise loans and this is reflected in improved franchise earnings. The insurance businesses are steadily building their profitability trajectory. The life insurance business, despite soft growth, witnessed a better net value of new business margins at 11.2% while the health insurance business remains on track to break even over the next couple of quarters. Along with Aditya Birla Capital, HDFC Securities is also bullish on the company’s asset management armAditya Birla Sun Life AMC with a target price of Rs 720.

    1. Affle (India): ICICI Securities gives this advertisement technology company a ‘Buy’ rating with a target price of Rs 1,500, indicating an upside of 27.3%. The company posted strong results for Q3FY22. The net profits increased 86.35% YoY and fell 20.9% QoQ to Rs 12.5 crore and revenue increased  125.5% YoY and 23.6% QoQ to Rs 339 crore. The EBITDA margin grew by 100 bps QoQ to 19.9%. The analyst Sameer Pardikar expects the company to add 600 croreconnected consumer devices globally by FY25. There is also a significant expectation of an increase in India’s digital user base from 52.5 crore in FY20 to 90.2 crore by FY25, at 11.4% CAGR. In the same period, mobile ad spending is expected to rise by 32.4% CAGR. “We expect 48% revenue growth in FY 21-24 (organic & inorganic combined),” says analyst Sameer Pardikar. 

    2. Union Bank of India: Motilal Oswal gives this bank a ‘Buy’ call with a target price of Rs 65 and an upside of 46.9%. Analysts Nitin Aggarwal and Yash Agarwal say “reported healthy earnings, supported by a pickup in loan growth and controlled provisions, as fresh slippage / special mention accounts moderated further.” The bank reported 49% YoY growth in profit to Rs 1,090 crore, supported by 10% YoY growth in core revenues. On the business front, loan books grew 6% QoQ to Rs 6.2 lakh crore. On the asset quality front, fresh slippage stood at Rs 3,410 crore due to slippage in the corporate portfolio. The total stressed book declined to 6% in December 2021 v/s 16% at the start of Covid-19. The analysts expect loans and deposits to grow in the 6–8% range. The company’s management expects loan growth to be likely at 11–12% for FY23. The analysts expect the improving asset quality will reduce net non-performing assets by 2.2% in FY23. The brokerage expects the bank’s return on assets and return of equity to be at 0.8% and 14%, respectively by FY24.

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    The Baseline
    11 Feb 2022
    Five interesting stocks today

    Five interesting stocks today

    • TVS Motor: With the auto sector going through turbulent times, this company managed to report a 6% YoY rise in total revenues to Rs 5,706 crore and a 9% rise in net profit to Rs 288 crore. Even with the ongoing semiconductor shortage and supply chain issues, TVS Motor’s material costs were flat on a  YoY basis but rose majorly by 7.2% on a QoQ basis to Rs 4,088 crore. This is a major feat for the company as it led to EBITDA margins seeing a growth of 50 bps to 10%. While brokerages Prabhudas Lilladher and Axis Direct continue to remain positive on the stock, Motilal Oswal is sceptical. Motilal Oswal expects a shit EVs to cause a major disruption in the scooter market.

    TVS Motor created a new subsidiary for EVs and acquired a Switzerland-based company, Ego Movement. It also signed an MoU with the Tamil Nadu government of Rs 1,200 crore to set up a plant for the production of EVs. However, Motilal Oswal is of the opinion that the company earns nearly 40% of EBITDA from the domestic scooter business. So, even with an increase in EV production, sales and revenues are likely to take a hit in FY23. Other analysts, like Axis Direct and Prabhudas Lilladher remain positive because of increased earnings, especially from the export side as demand improves with African and Latin American markets opening up.

    • Narayana Hrudayalaya: This multispecialty healthcare service provider, which initially focused on cardiac and renal specialisations, has expanded to over 30 specialties over the years. These include cancer and neurosurgery. However, the cardiology-focused flagship hospitals continue to be the major revenue contributor. The company’s Q3FY22 consolidated net profit rose 2.4 times YoY to Rs 97 crore despite a revenue increase of 28% to Rs 966 crore as the operating profit margin increased by 425 bps YoY to 18.5%. 

    The rise in profit was mainly led by higher profitability at flagship hospitals amid recovery in high-end cardiac elective surgeries. The waning of Covid-19 wave in the beginning of Q3FY22, and an increase in footfalls for medical tourism, helped flagship hospitals to post a robust profit growth. Though revenue from newly launched hospitals increased 21.5% YoY to Rs 90.4 crore, losses widened by 17% to Rs 48 crore. The new hospitals, which are based in Mumbai, Delhi, and Gurugram constitute 13% of the total revenues while the older hospitals contribute the rest. The company’s overall patients’ footfalls in India increased by 48.5% to 5.7 lakh mainly driven by an increase in outpatient (OP) footfalls.

    The increase in revenue is partly attributable to the pent-up demand for specialised elective surgeries after the second wave of the pandemic waned. With the stock hitting a new one-year high in the past week, brokerages like ICICI Securities and HDFC Securities continue to be positive on this company as they see profits rising led by a turnaround in new units. Another Covid-19 wave and a delayed breakeven of newer hospitals pose a risk for the company while the flagship hospitals continue to boost profits.

    • Bata India: The company delivered a stellar Q3 backed by a robust festive season, but does it hold a promise beyond its seasonally strong quarter? The company reported revenue growth of 37% YoY to Rs 841.3 crore. According to ICICI Direct, the revenue recovery rate is at 101% of pre-Covid levels indicating a good quarter for the footwear company. Gross margins also improved 114 bps YoY to 52.7% because of a change in product mix, but this is still below pre-Covid numbers. Although net profits tripled to Rs 72 crore, the highest profit reported in the last eight quarters, total expenses also rose 28.9% YoY to Rs 758 crore. Expenses rose because of a 19% YoY increase in employee costs to Rs 105 crore and an increase in raw materials expense by 34% to Rs 398 crore. Employee costs increased because of variable incentives given by the company and input cost inflation has hit almost every sector in the economy. However, even with such robust numbers, ICICI Direct reduced its target price for Bata India. The brokerage is cautious as the rise in revenue and profit may be seasonal, as consumer demand rose in Q2FY22 because of the festive season.  Investors and analysts will wait to see how the company performs with the shift in customer sentiment in absence of festive demand. The third wave could also play spoilsport with footfalls reducing in January 2022. Hence, it will be interesting to see how the company copes in Q4FY22.

    • Minda Industries:Shares of Minda Industries fell by more than 3% after the company’s Q3FY22 profit fell 13% YoY to Rs 118 crore despite a 7% rise in revenues to Rs 2,181 crore. Rising input costs hit the company’s bottom line. However, despite the disappointing quarterly results, Axis Direct upgraded its rating on the company’s stock to ‘Buy’ from ‘Hold’ and upgraded its target price of Rs 1,250 compared to Rs 1,000 earlier. The brokerage remains bullish on the stock as the company’s revenue growth is coming from entering into new markets by expanding its product portfolio and increasing its client base. The company has a diversified product portfolio, which helped it to benefit from an increase in content per vehicle.

    The addition of new customers and products, and growth across segments coupled with new order wins bodes well. A Joint Venture agreement with FRIWO AG gives Minda Industries an early mover advantage in the EV segment, which led to an order book with an aggregate annual peak sales value of Rs 400 crore from new-age EV OEMs. The company's client base grew by adding two more EV OEMs. Order wins in the switches, alloy wheels and lighting segments also remain robust. Minda Industries is well positioned to benefit from the recovery in manufacturing activity by original equipment makers, and with the new product addition in EV two-wheelers, revenue is expected to increase in the coming years.

    • InterGlobe Aviation (IndiGo):The market leader of the aviation sector sprung a positive surprise for investors in Q3FY22. The stock of InterGlobe Aviation is up nearly 15% in the past week. IndiGo generated a net profit of Rs 129.8 crore in Q3FY22 as against a net loss of Rs 620 crore in Q3FY21. The company achieved this feat after 7 quarters owing to a massive jump of 86% in its Q3 revenues. IndiGo’s passenger ticket revenues rose nearly 2X to Rs 8,073 crore in Q3 owing to a robust holiday and festive season. Notably, the government also withdrew the cap imposed on airline capacity from October 18, 2021.  While the company deployed 50% more capacity (at 88% of pre-Covid levels) in terms of available seat kilometres in Q3, its passenger load factor improved by 7.7 percentage points backed by higher passenger influx. Company’s yield/km also rose 19% YoY to Rs 4.41 owing to pent-up leisure travel demand as well as recovery in the international travel segment. Amidst these positive developments, a 186% YoY spike in fuel costs stuck out as a sore thumb. To meet the current inflationary trends, the company plans to replace most of its A320 Ceo aircrafts with the fuel efficient A320 Neo series by end of FY22.

    While the going was good in Q3, IndiGo witnessed travel bookings fall on a daily basis between mid-December and mid-January. Hence, the third Covid-19 wave is likely to weigh heavily on the company’s Q4FY22 performance. IndiGo is certainly hopeful of a better FY23 with the new Managing Director Rahul Bhatia’s astute focus on the high-margin international travel segment and smaller cities in India. Bhatia also happens to be one of the co-promoters of the company and his presence at helm of affairs at IndiGo signifies his clear win in the long standing conflict between him and Mr. Gangwal.

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    The Baseline
    09 Feb 2022
    Chart of the Week: Car retail sales rise month-on-month in January 2022

    Chart of the Week: Car retail sales rise month-on-month in January 2022

    The narrative for the Indian auto industry has been bleak coming out of the pandemic, with the sector hit by rising costs, supply challenges and weak demand. And the clouds didn't part in January:retail sales for the auto industry across all segments fell 10.7% YoY to 14,39,747 units in January 2022. Car sales are down 10.1% to 2,58,329 units. But one thing to note here is that although Maruti Suzuki, Tata Motors, and Mahindra & Mahindra’s wholesales are erratic month-on-month from October 2021 to January 2022, retail sales are looking up.  

    With the rise in input costs leading to a rise in car prices, the rising car retail sales might signal some hope for the India’s auto industry amid a stalled recovery. There is still plenty of catching up to do: when we look at retail sales on a year-on-year basis, market leader Maruti Suzuki’s retail sales fell 15% YoY in January 2022 to 1,20,114 units, but rose 15.4% MoM. Tata Motors’ retail sales grew 37% YoY to 32,408 units (up 4.7% MoM) while Mahindra & Mahindra’s car retail sales grew 22% to 18,638 units (up 4.2% MoM)

    Another point to note here is the data put out by theEconomic Survey of India for 2021-22. The survey said the Indian passenger vehicle industry had a backlog of nearly seven lakh cars as of the end of December 2021. This means many customers are waiting for the delivery of their cars. But supply chain issues are causing long delays. A study in late 2021 also showed that nearly half of first-time buyers were preferring used cars to new cars. This might reduce future retail sales for car companies. So, while retail sales may be rising, carmakers maybe now competing with used cars as they work to liquidate the inventory at their dealerships.

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