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17 Feb 2021, 11:47PM

Turbulence ahead for airlines and overvalued stocks

This content is part of our newsletter series, Analyticks which goes out to over 200,000 readers every week. Sign up to receive them in your email.

by Aakash Athawasya

Valentine’s Day came and went but not everyone felt the love. Indian airlines haven't been able to attract riders back, and some mutual funds have broken up with index-beating stocks. In the meantime, Indian Energy Exchange made some big moves.

In this week’s Analyticks we look at:

Rising airfare, which won’t help India’s stranded airlines
Indian Energy Exchange’s power play
Screener: Mutual funds selling off index beating stocks

Let’s dive in.

Airlines: No clear skies yet

Last week, the Ministry of Civil Aviation announced an increase to the lower and upper price limits of domestic flights. This would increase the airfare of domestic airlines by as much as 30% till March 31, 2021. The increased airfares won’t do much for the prospects of the airline business, however, despite a short-term boost to the stock prices of listed airline companies. Investors looking to play the theme of air travel revival should exercise some caution.

The news of the increase in airfare gave a boost to the stock price of listed airlines - InterGlobe Aviation’s Indigo Airlines and SpiceJet (up by 5% each on February 11, the day of the announcement). But internal and external problems will ensure they’ll close a poor financial year on a negative note.

After India shut down air travel due to the pandemic, services resumed in May 2020, with an initial capacity restriction of 33%. By the end of the year, this increased to 70%. However, the number of passengers carried by airlines was just 45% of pre-Covid levels. This was because passengers were fearful of traveling even after the lockdown restrictions were lifted.

The airline which saw the strongest revival was Vistara, the joint venture between Tata Sons and Singapore Airlines. The premium carrier’s passenger traffic reached 53% of pre-Covid levels. Its peers - InterGlobe Aviation and SpiceJet’s -passenger traffic recovered to 47% and 43% of pre-Covid levels respectively by December 2020.

Airlines PAX

The drivers of the passenger revival in Q3 were the festive season in October - November and the deployment of a Covid-19 vaccine in December. This allowed InterGlobe Aviation and SpiceJet’s stock price to move up by 40% and 90% between October 2020 to December 2020. However, since the turn of the year, their stocks are down by 7% and 8% respectively. This is despite the Ministry of Civil Aviation increasing airlines’ capacity from 70% in December 2020 to 80% till the end of FY21.

Aviation turbine fuel (ATF) in May 2020 was priced at Rs 17,000 per kilolitre (Kl). Its price rose three times to Rs 53,000 per Kl in February 2021, as crude oil prices went up. For the quarter ended December 2020, InterGlobe Aviation and SpiceJet’s fuel expenses accounted for between 20-23% of total expenses.

Airlines Fuel Expenses

For the airline industry, Q4 is a weaker quarter compared to Q3 because of the nature of traveling passengers. The majority of domestic passenger traffic in Q4 comes from the visiting friends or relatives (VFR) category. This category of passengers is more sensitive to prices than other reliable customers like corporate traffic, said ICICI Securities. The increase in airfares will discourage these passengers from traveling via air. With road and rail travel also reviving, these passengers will have other means of transit.

While both InterGlobe Aviation and SpiceJet posted a lower net loss in Q3, compared to Q2, their financials remain in turmoil. InterGlobe Aviation’s Q3 net loss stood at Rs 620 crore, against a net loss of Rs 1,195 crore in Q2. The airline’s debt has been rising consistently, while its cash balances have been reducing since FY21 began.

SpiceJet’s net loss came in at Rs 67 crore in Q3, against a net loss of Rs 105 crore in the previous quarter. However, the airline’s net loss would have been Rs 201 crore, if it had not recognized other income of Rs 140.4 crore and foreign exchange gains of Rs 10.6 crore. The other income was on account of the expected compensation the airline would receive due to the grounding of 13 of its Boeing 737 max aircraft. The airline’s auditors raised doubts on the airline’s ability to “continue as a going concern” because of its poor operational performance and the overarching Covid-19 conditions.

Indian energy exchange: Bringing back the power

A stock that is back in focus is Indian Energy Exchange (IEX). The power exchange operates with a near-monopoly in the short-term power market, especially in the day-ahead market for delivery of power on the next day. With new product offerings, catering to the evolving power needs of the Indian economy, IEX’s prospects look good.

IEX is a power trading marketplace for delivery of electricity. Its main products are electricity contracts for delivery within a day or the day-ahead market (DAM), and the term ahead market (TAM), where electricity is delivered within a maximum period of 11 days. As of December 2020, the exchange had a 96% market share in both the DAM and TAM segments.

IEX Product

As power demand for an even shorter time frame arose, IEX launched its real-time electricity market (RTM) in June 2020. This would allow state power distribution companies (discoms) to buy power for delivery within 60 minutes. In the first six months post the launch of RTM contracts, IEX has connected 200 power generators with 330 industrial power consumers in 28 states. It has a 99% market share in the RTM market.

The only other domestic power exchange is Power Exchange India (PXIL), with a 5% market share in the short-term market. PTC India received the approval of the Central Electricity Regulatory Commission (CERC) to set-up the third power exchange in India.

In August 2020, the exchange received approval from the Central Electricity Regulatory Commission (CERC) to launch green-term ahead contracts (GTM). These contracts will trade power sourced from renewable energy sources. This will aid the central government’s push to achieve a renewable energy capacity of 175 gigawatts (GW) by 2022. Currently, the installed renewable capacity is 88 GW. IEX has a 100% market share in the GTM market.

IEX Volume by Product

The strong performance of the DAM, TAM and RTM allowed IEX to clock 20.2 billion units (BU) in electricity volume in Q3FY21. This is a 62% increase on a YoY basis and a 22% increase sequentially. This was its highest ever quarterly electricity trading volume. This increase in electricity volumes was by no means limited to Q3. In January 2021, IEX’s recorded electricity volume was 7.4 BU, its highest ever in a single month, and a 47% YoY growth.

IEX Electricity Volume

Mutual funds load up on IEX stock

In August 2020, Parag Parikh Financial Advisory Services (PPFAS) purchased 50 lakh shares taking a 4.7% stake in the company through its PPFAS Long Term Value Fund. In January 2021, the fund further raised its stake to 5% purchasing another 7 lakh shares, at a 30% higher price.

In September 2020, the cement company Dalmia Bharat, which held a 1.8% stake in IEX, purchased another 70 lakh shares representing a 2.3% stake. The cement company directly holds a 4.13% stake in IEX and an 8.18% stake through Dalmia Power (part of the Dalmia Group).

IEX and Dalmia Bharat Stock Price Other domestic institutional investors are also increasing their stake in IEX. In the December 2020 quarter, mutual funds held a 20% in IEX, this is up from 7.6% in the December 2019 quarter. Between April 2020 to December 2020, mutual funds purchased 2.1 crore shares in the company.

Stake sales and new products

To capitalize on the need to secure long-term power requirements, IEX is looking to introduce longer-duration contracts. Rohit Bajaj, senior vice president of IEX said the exchange will introduce long-term contracts, cross-border trade, and also derivative contracts. The inclusion of derivative contracts especially will provide a massive boost to discoms in need of a regular supply of power by locking in prices ahead of time.

In addition to this, IEX is also selling its stake in its subsidiary Indian Gas Exchange (IGX) to various power companies. In the Q3 earnings call, the management announced that Adani Total Gas and Torrent Gas each acquired a 5% stake in IGX. Last week, Gas Authority of India (GAIL) purchased a 5% stake. Reports suggest that the National Stock Exchange (NSE) is looking to acquire a 26% stake in IGX.

Screener: Mutual funds trimming stake in overvalued companies

Last week the Association of Mutual Funds in India (AMFI) reported a net outflow of Rs 9,253 crore from equity schemes in January 2021. This is the seventh consecutive month of net outflows from equity schemes. This screener lists the Nifty 500 companies that have seen mutual funds trimming their stake for three consecutive months.

There are 58 companies that saw mutual funds consistently decrease their holdings over the past three months. The most prominent industry among these companies is pharmaceuticals These are - AstraZeneca Pharma India, Abbott India, Aarti Drugs, Sanofi India, Pfizer, Divi’s Laboratories, Ipca Laboratories, Eris Lifesciences, and Aurobindo Pharma, followed by banks and non-banking financial companies (NBFCs) with 6 representatives - YES Bank, Kotak Mahindra Bank, Union Bank of India, Shriram City Union Finance, Cholamandalam Investment & Finance Company, and Bajaj Finance.

The company in which mutual funds sold the most number of shares in the past two months is Cochin Shipyard. January 2021, was the 9th consecutive month of outflows in the shipbuilder. Mutual funds trimmed their stake by 22% in Power Grid Corporation between November 2020 to January 2021, selling nearly 8 lakh shares in the power transmission company.

Out of the 58 companies that have seen consistent mutual fund disposals, 37 companies have beaten the benchmarked Nifty in the past year. This list is of 27 companies includes two Nifty 50 companies - JSW Steel and Divi’s Laboratories.

The partial exit of mutual funds and index-beating returns were accompanied by skyrocketing valuations. Out of the 27 companies that had consistent mutual fund stake sales, and greater relative performance than the Nifty 50 in one year, 17 are in the PE sell zone. This is based on the company’s trailing 12-month (TTM) price to earnings (PE) ratio exceeding the historic PE ratio for more than 75% of all trading days.

Only three Nifty 500 companies are not overvalued (PE buy zone) despite beating the benchmark Nifty in one year and mutual funds consistently trimming their stake - Info Edge, Aurobindo Pharma, and Ipca Laboratories.

You can build a screener using the parameters of your choice here.

The Baseline

17 Feb 2021, 12:33AM

Five Interesting Stocks Today

Divi's Laboratories: Mutual funds are trimming their stake in this pharmaceutical company. In January 2021, mutual funds held 32.6 lakh shares in the company, down from 38.1 lakh shares in October 2020. Its stock price is down by 4.5% since the beginning of the year.
Apollo Tyres: This tyre maker’s promoter group holding a 20.5% stake in the company sold 1.9 crore shares worth Rs 46 crore via a market sale. This is the first insider trade in the company since the year began.
Aditya Birla Fashion and Retail: Brokers are bullish on this retail company in which Flipkart purchased a 7.8% stake last year. Four brokerages - Edelweiss, HDFC Securities, ICICI Securities, and Sharekhan have signalled a ‘Buy’ on the company’s stock in 2021. Its average broker target price is at an upside of 17.3% above its market price.
Affle: This mobile marketing company’s stock has rallied by 38% in two weeks. In this rally, its domestic institutional investor has booked profits. Malabar India Fund disposed 5.8 lakh shares in the company, decreasing its stake by 2.25% via a market sale.
Prism Johnson: This cement manufacturing company’s stock price is beating the Nifty 50, despite the benchmark at a record high. In the past week, the stock’s price is up by 30% relative to the Nifty 50 and by 10% in one month.

The Baseline

12 Feb 2021

Five Interesting Stocks Today

JK Tyre & Industries: This tyre company’s stock is being accumulated by mutual funds. In January 2021, mutual funds bought over 20,200 shares in the company. This is more than the total purchases between September - December 2020 (19,700 shares). Its stock price rose by nearly 70% in January.
Deepak Nitrite: This chemicals company’s stock price is rising ahead of its earnings. In one week, its price rose by 9% to reach a new lifetime high. Its earnings for the quarter ended December 2020 will be announced on 12 February.
Avenue Supermarts: This supermarket operator is receiving mixed signals from brokerages. It has received two Buys, Sells, and Holds from six brokerages - Dolat Capital, Prabhudash Lilladher, HDFC Securities, ICICI Securities, Axis Direct, and Geojit BNP Paribas. The average target price is 9% below its market price. The company’s trailing 12-month (TTM) price to earnings is over 200, higher than the average PE of 114 times, placing it in the sell-zone.
UltraTech Cement: This cement making company’s stock price is up by 20.6% in two weeks, making a new all-time high. Its trailing 12-month (TTM) price to earnings (PE) ratio is 26.9 which is below the average PE of 38.8, putting it in the buy zone despite the rally.
Banco Products: This auto-components maker’s managing director has tendered his resignation to the company’s board.

The Baseline

10 Feb 2021

Five Interesting Stocks Today

HDFC Bank: This private sector bank’s insiders are selling its shares in droves. Since the beginning of the month, insiders have sold nearly 5 lakh shares worth Rs 7.3 crore in 46 market sales. Last month, over 1 lakh shares were sold for Rs 1.6 crore. In 2021, its stock price is up by 13%.
Au Small Finance Bank: This small finance bank’s price is up by 20% since the beginning of the month, trading at a 10-month high. Its trailing 12-month (TTM) price to earnings (PE) ratio is 28 times, lower than the historical average PE of 38.2 times, putting it in the buy-zone.
Jubilant Foodworks: This food services company’s strong quarterly numbers haven’t helped its stock price. In Q3, it reported a 22% YoY jump in net profits, and revenues stayed flat. However, its stock price is down by 4% in one month and it has underperformed the benchmark Nifty 50 by over 5%.
Lupin: This pharmaceutical company, in which Rakesh Jhunjhunwala holds a 1.6% stake is catching the eye of brokers. After its Q3 results, two brokerages - Geojit BNP Paribas and ICICI Securities upgraded their ratings on the stock to ‘Hold’ and ‘Buy’ respectively. The average broker target price post the quarterly earnings is 7.7% above the market price.
Thyrocare Technologies: This diagnostic lab operator’s price momentum has tapered off. Its stock price is above the 200-day simple moving average (SMA) but below the 100 and 50-day SMAs. Since reaching a lifetime high in October, its price has dropped by 22%.

The Baseline

05 Feb 2021

Five Interesting Stocks Today

Aurobindo Pharma: This pharmaceutical company has seen big insider trades in the last few days. This week its promoter group (holding a 33% stake) created a pledge with 90 lakh shares, representing 1.54% of the company. Last week, its domestic institutional investor (DII), HDFC Mutual Fund disposed of 1.1 crore shares, cutting its stake by over 2%.
PNC Infratech: This construction engineering company’s chief financial officer Chakresh Kumar Jain has resigned from his position effective immediately.
Alkem Laboratories: This pharmaceutical company’s stock price is down ahead of its earnings. In the past week, its stock dropped 4%, despite the post-Budget market rally. Its Q3 earnings call is scheduled for 5 February.
Manappuram Finance: This non-banking finance company’s stock price has jumped by 18% in one week, reaching a new 52-week high and is 4% off its lifetime high. With a trailing 12-month (TTM) price to earnings (PE) ratio of 9.3 times, against a historic average PE of 11.7 times, it is in the buy-zone.
IndusInd Bank: This private bank’s stock price is up by 28% in one week outperforming the Nifty 50 by 18.6%. This rise is backed by strong price momentum. Its price is now 62% over its 200-day simple moving average (SMA), the most by any Nifty 50 stock.

The Baseline

03 Feb 2021

Five Interesting Stocks Today

Sun Pharmaceutical Industries: Brokers have changed their tune on this pharmaceutical company following its Q3 results. Three brokerages - Nirmal Bang, BOB Capital Markets, and Prabhudas Lilladher upgraded their recommendation on the stock last week with a higher target price.
Chennai Petroleum Corporation: This oil & gas company’s stock declined by 25% relative to the Nifty 50’s weekly gain of 3.5%. This is the most by any stock within the Nifty 500.
LIC Housing Finance; This public sector housing finance company’s CEO and Managing Director, Siddhartha Mohanty, resigned from his position effective immediately.
Capri Global Capital: This financial services company’s stock is up by 17% in one month moving above its 20-day, 50-day, 100-day, and 200-day exponential moving averages (EMA). Its relative strength index (RSI) has pushed above 70, currently at 74.1, in the overbought zone.
Pfizer: This pharmaceutical company’s stock price is falling fast, but its delivery volumes are rising. In one month, its price is down by 14.6%. During this fall, its delivery volume rose from 13.6% to 64%. Its average weekly delivery volume is 54.7%, higher than the average monthly delivery volume and average 6-month delivery volume.

The Baseline

31 Jan 2021

What are the expectations from the 'once in a century' Budget?

by Vivek Ananth

It is Budget time - that time of the year when every industry maven is hoping that a certain curly-haired genie will grant their specific wish.

Articles with their expectations for the Budget have flooded the news media over the past week, each clearly hoping that the Finance Ministry was listening. This particular Budget - coming as it does after the COVID19 pandemic hit the Indian economy like a juggernaut - is especially closely watched.

Finance Minister Nirmala Sitharaman’s remark that Budget 2021 will be a “once in a 100-year budget” has left investors and various industries hopeful. But considering the negative response of the stock market has already shown to the tabling of the Economic Survey 2020-21 in the Lok Sabha, there may be disappointment on February 1.

We looked at the various expectations from industries and market participants leading up to Monday and the Finance Minister's speech. Here we break down some of the major hopes and dreams from select industries for Budget 2021.

Real Estate looks for buyer incentives

To kickstart the economic revival, the real estate industry will have a big part to play as a recovery here would give a fillip to steel consumption, cement consumption, and many other allied industries, apart from generating employment for unskilled labour. With the government’s focus on affordable housing over the past couple of budgets, the industry expects some more incentives for buyers, in the form of higher caps on interest deductions from their income.

For property developers, the expectations are almost endless. The main ones are increased allocation for the government’s interest subvention scheme for affordable housing, and extension of the time period of income deductions for developers of affordable housing projects. There has also been some clamour to remove the cap of Rs 45 lakh for affordable houses, which would make more buyers eligible for the interest subvention scheme.

Infrastructure hopes for an NIP roadmap

With the government planning a big push on infrastructure projects to get the Indian economy out of its rut, the industry will be looking at the funding plans of the Rs 100 crore national infrastructure pipeline of projects (NIP).

The NIP has various projects planned, which stretch from railways, power projects (including transmission), metro rail, roads and highways as part of Bharatmala Pariyojana, etc. which will be implemented till 2025. The government expects to contribute nearly Rs 20 lakh crore in NIP projects. A roadmap on how the remaining Rs 80 lakh crore will be mobilised for the NIP is expected in Budget 2021.

The government already announced that there will be a new bailout package for the power sector, which will subsume the older UDAY scheme that was meant to rejuvenate state power distribution companies (discoms). An incentive-based (linked to reforms) Rs 3 lakh crore scheme, that will increase the efficiency of the distribution sector and reduce losses, is also expected to be announced. Hopefully, this will not end up like previous schemes that didn’t move the needle far enough to clean up the mess in state discoms.

Insurance eyes higher deductions for taxpayers

To increase the penetration of insurance, be it various general insurance products or life insurance, the industry is hoping for higher deductions for taxpayers on life and health insurance premium payments.

There is also a demand to increase the Foreign Direct Investment limit for the insurance section to 74% from the current 49%. With the increased capital flow in the industry, this would result in an increase in underwriting and penetration of insurance in India.

Pharmaceuticals keen on PLI scheme for bulk drugs

With expectations rife that Budget 2021 will overwhelmingly be focusing on healthcare, the pharma industry is keeping its fingers crossed. After the rollout of the production-linked incentive (PLI) scheme, the pharma industry is hoping for a similar PLI scheme for the bulk drugs sector to reduce imports for Active Pharmaceutical Ingredients or APIs.

There is also a clamour to reinstate the weighted income deductions for research and development expenditure. This was reduced to just 100% of the R&D expenditure from 200% a few years ago. Going with the government’s new ‘Atmanirbhar’ slogan, this would go a long way in boosting R&D spend by pharma companies.

Banks & NBFCs count on refinance plans for MSMEs

For PSU banks, recapitalisation is the need of the hour, considering they will need more equity to meet regulatory capital requirements. This becomes even more important considering the rise in NPAs that are expected because of the damage to finances of businesses and individuals due to the pandemic induced economic slowdown. A further roadmap of consolidation of PSU banks is also something that will be keenly watched.

The government had introduced a refinance program for medium, small and micro enterprises to overcome the liquidity crunch caused by the current economic recession. The MSME sector which is reeling under the impact of the pandemic is seeking more measure to ease the pain.

The buzz about the government rolling out a bad bank has grown louder by the day. Considering that the government is planning another asset quality review (according to the Economic Survey 2020-21), the idea has many takers. If this does get rolled out, it will impact the entire PSU banking space and investors in these banks will be looking at the fine print of such a new bank.

The Baseline

29 Jan 2021

Five Interesting Stocks Today

Kotak Mahindra Bank: Brokers have changed their tune on this bank following its Q3 results. Two brokerages - HDFC Securities, and Nirmal Bang have downgraded its stock to ‘Sell’ and ‘Accumulate’ respectively. Its price is down by 14% in one month.
Apollo TriCoat Tubes: This pipes manufacturer’s stock is up by 10.5% in one month. After the rally, its trailing 12-month (TTM) price to earnings (P/E) ratio is 34.6, below the median P/E of 60, putting it in the buy-zone.
SBI Cards and Payment Services: This financial services company’s CEO and Managing Director, Ashwini Kumar Tewari tendered his resignation to the company’s board, effective immediately.
Amber Enterprises India: This airconditioner original equipment manufacturer’s stock price is up by 3.7% in one week ahead of its Q3 results scheduled for 30 January. Its stock price rose by 17% between October to December 2020.
Trent: This retail company under the Tata Group’s is being offloaded by mutual funds. In the previous month, mutual funds disposed 71.2 lakh shares. This is the seventh consecutive month in which mutual funds sold more shares than they purchased. On a QoQ basis, mutual funds have decreased their stake to 6.2% in December 2020, from 10.7% in September 2020.

The Baseline

28 Jan 2021

In January, some frogs became princes - and vice versa

by Aakash Athawasya

Last January, whispers around 'a dangerous new virus' were just beginning to build. This January, the fever is breaking and the speed of the economic recovery from Covid19 has become clearer as December quarter results come in.

The stock markets are having a wild ride - industries that fell flat last year are doing well, while industries that gained from the pandemic are normalizing.

This week we look at:

Why Alembic Pharmaceuticals’ stock fell post its Q3 results
Domestic tyre makers are ending FY21 better than expected
Screener: Stocks trading with high delivery volumes

Alembic Pharma skids at home and abroad, as Covid19 recedes

Last year was great for Indian pharmaceutical companies - the Nifty Pharma index rose by 56.6%, the largest yearly gain of any sectoral index. In comparison, the Nifty 50, ended 2020 up by 14% over 2019.

But in the first month of 2021, the pharma index is down by 4%, while the benchmark index is up by 3%. The biggest loser among large-cap pharma companies is Alembic Pharmaceuticals owing to problems at both home and abroad.

In the December quarter, the company’s net profits were up by 25% on a YoY basis, and revenue grew by 9%. But immediately after the results, Alembic Pharma’s stock tanked by 14%, touching its lowest level in three months.

The company's net profit growth was on account of an exceptional item (income) of Rs 26 crore (10% of net profits) from its joint venture Rhizen Pharma, which turned profitable for the first time since Alembic Pharma acquired it in 2012. In Q4, analysts expect Rhizen to receive royalties after the approval of its immunodeficiency inhibiting drug. Excluding the one-time income, net profits rose less than 1% YoY.

Alembic Pharma Revenue Distribution

Another big reason the stock fell was the lack of growth in Alembic’s US market. The US formulations market is its biggest revenue contributor.

Alembic Pharma US Sales

In Q3, Alembic US sales dropped 1% YoY to Rs Rs 512 crore. For the six months ended September 2020, US sales grew by 33% against the same period last year. From FY17 to FY20, Alembic’s US generics business’ revenues grew at a compounded annual growth rate (CAGR) of 29% to Rs 1,976 crore.

A key monitorable in the quarter was the revenue from sartans (contributing 22% of Q3 revenue), a drug used to treat blood pressure and hypertension. After the Q2 results, analysts expected Alembic to gain market share in the sartans through new launches. In Q3 however, Alembic failed to expand its sartans market share. Analysts noted that due to pricing pressure in the hypertension drug market, Alembic’s sartans’ products were priced out. Expecting the company to struggle in this market, the focus moved to the portfolio excluding sartans.

Azithromycin, an antibiotic drug used to treat Covid-19 patients drove growth in domestic formulations in Q2. During the earnings call for the quarter ended September 2020, Shaunak Amin, the Managing Director of Alembic Pharma called its Azithromycin oral solid the “outperformer for the quarter.”

In Q3, due to decreasing domestic Covid-19 cases, the growth in sales of Azithromycin dropped. Analysts expect the sales of Azithromycin to normalize in Q4 and in FY21, with the Covid-19 vaccine deployed. This is why the price of Alembic Pharmaceuticals’ stock dropped sharply immediately after its Q3 results.

You can track the results of the company of your choice here.

Tyre makers finally pick up speed

With automobile sales rising at the end of 2020, tyre manufacturers had a good Q3. But it wasn’t just returning automobile demand that helped tyre makers. Growing replacement demand, import restrictions, and exports opening up in major markets have provided a positive outlook heading into the final quarter of FY21.

Over 80% of the demand for tyres comes from two sources - original equipment manufacturers (OEMs) and from the replacement market.

OEM demand in Q3 was led by robust sales of commercial vehicles (CVs) in December 2020. Ashok Leyland’s CV sales grew by 22% on a monthly basis, Eicher Motors (VECV) by 32% and Tata Motors by 14%. Even with the rise in demand for FY21, OEM demand for tyres is expected to decline by 5-7%, according to CRISIL Ratings. The rating agency expects the fall in tyre demand from CV manufacturers to be offset by the rise in tyre demand by tractor makers in the agri sector. Mahindra & Mahindra’s farm equipment and VST Tillers & Tractors’ power tillers and tractors saw sales increasing by 23% and 59% on a YoY basis.

Replacement demand, the largest contributor to the tyre demand, declined by 2% YoY for the nine months ended December 2020. The lower fall compared to the 5-7% fall in OEM demand is because of resumption in freight movement and pent-up demand from existing CV manufacturers. Replacement demand from CVs and tractors contributes 90% of export demand, which CRISIL Ratings expects to sustain in Q4.

Tyre Demand Revival

With tyre companies witnessing demand from OEM manufacturers and replacements increasing, two tyre makers - Ceat and JK Tyre & Industries posted strong quarterly results. Ceat reported a net profit of Rs 128 crore in Q3, a 167% rise on a YoY basis, with revenue rising by 26% to Rs 2,213 crore. JK Tyres & Industries reported a net profit of Rs 230.4 crore in Q3, against Rs 10.2 crore in the previous year, with revenues growing by 26% YoY to Rs 2,769 crore. Last week, Ceat and JK Tyre Industries’ shares rose by 24% and 54%, respectively.

Tyre Stock Change

After tyres were put on the restricted import list by the Directorate General of Foreign Trade in June 2020, tyre companies have upped prices in the domestic market. In FY21, the average realisation per tonne of tyres manufactured will increase by 4-5% said CRISIL Ratings. Last month, the US Department of Commerce proposed an anti-dumping duty on tyres imported from South Korea, Taiwan, Thailand and Vietnam. CRISIL Ratings expects Indian tyre makers to benefit if the anti-dumping duty is implemented.

Both CEAT and JK Tyre Industries’ capacity utilisation has moved to 95% in December 2020, against 80% in September 2020. The existing capacity will be increased with planned capital expenditure (capex). Ceat did not alter its capex guidance of Rs 500 crore in FY21. Out of the FY21 corpus, Rs 50 crore will be deployed in Q4. JK Tyre and Industries has deferred capex for the year and is focusing on reducing debt. At the end of FY20, it had net debt of Rs 5,413 crore, and expects to reduce this to Rs 4,160 crore by FY23.

With strong demand, realizations improving, and capacity increasing, CRISIL Ratings estimates that tyre companies’ operating profits will grow by 6-8% in FY21, despite a poor first half of the year.

Some stocks are seeing higher delivery volumes in this volatile market

The markets have been up and down in the first few weeks of 2021. The Nifty 50 began the year just shy of 14,000, reached 14,600, and is now at 14,200 levels. In this volatile market investors are taking delivery of some stocks, as can be seen by the rise in their delivery volumes.

This screener checks which stocks which have seen high delivery volumes over the past month among Nifty 200 companies. In the past one month, 24 companies have seen their monthly average delivery volumes exceed the 6-month average delivery volumes by at least 20%. This list includes 9 Nifty 50 companies - Reliance Industries, Bajaj Finance, Adani Green Energy, Sun Pharmaceutical Industries, Titan Company, Power Grid Corporation of India, Dr. Reddy's Laboratories, Bharat Petroleum Corporation, and IndusInd Bank.

The stocks with the highest delivery from this list are two companies with high debt - Adani Green Energy (87%) and Future Retail (64%).

This screener shows 10 companies with delivery volumes rising by at least 33% in one month against the delivery volume of the past six months. This means that investors are increasingly taking delivery of these stocks over the past few weeks

Rising delivery volume is also an indication of the strength of a price trend. Out of the stocks with high delivery volumes from the Nifty 200, over 70% (17 companies) have seen their stock prices rise in the past month.The most represented industry here is pharmaceuticals with 4 companies, followed by banks and non-banking finance companies (NBFCs) with 3 companies. No large-cap information technology company was trading with rising delivery volumes. This is despite the Nifty IT index rising by 10% in one month, the most by any sectoral index.

This analysis is part of our newsletter series. Sign up to get these in your inbox.

The Baseline

22 Jan 2021

Five Interesting Stocks Today

MRF: This tyre manufacturing company’s foreign institutional investor (FII) holding has increased to 12.7% in December 2020, from 7.4% in September 2020. This is its highest FII holding in over two years. However, domestic mutual funds have decreased their holding in the company from 9.9% in Q2 to 7.9% in Q3.
Jyothy Labs: This FMCG company’s stock price is up by 11% in one month and is less than 3% off its 52-week high. This rally has pushed its trailing 12-month price to earnings (PE) ratio of 30.6 closer to its average historic PE of 34.2, nearing the sell-zone.
GMM Pfaudler: The chief financial officer of this glass-lined equipment maker resigned on January 20. Its stock has not recovered from its heavily discounted offer for sale in September 2020, down by 34% since then.
Force Motors: Mutual funds are turning bullish on this automobile manufacturing company. In December 2020, mutual funds purchased over 50,000 shares in the company, increasing their holding by 63% from November 2020.
Indian Energy Exchange: This power trading exchange’s stock has rallied by 10% in one week. Its board will meet on January 21 to announce the Q3 results and to consider the declaration of an interim dividend.