• JK Cement: The stock of this cement company plunged nearly 14% in just two days after it announced a foray into paints business on March 5, 2022. A year ago, Grasim made a similar announcement and ended up gaining 12% in the next one week. Why did the market react to two similar events differently?

The announcement of JK Cement comes at a time when both cement and paint stocks are underperforming the broader indices. Paints and cement companies are reeling under inflationary cost pressures and posted weak results in Q3FY22. With the Russia-Ukraine conflict far from over, crude oil prices are unlikely to cool off anytime soon.

But there is more to this story. Grasim had a clear aim to become the No. 2 player in the paints industry, and the quantum of investment was accordingly set at Rs 5,000 crore. Analysts and investors took this as a positive, despite the fact that the decorative paints segment is a difficult market to crack owing to high competition. Grasim also brought with it a strong distribution network and brand. JK Cement is planning a much smaller investment of Rs 600 crore and might incur some EBITDA losses in the initial years. It is also the third company after Grasim and JSW group planning to enter the paints space. Another concern of analysts w.r.t JK Cement is a previously failed investment in the white cement plant of Fujairah, UAE. The company invested Rs 692 crore in the project and took an impairment of Rs 328 crore so far. Though the new paints business will bank on the strength of robust sales channels of JK Cement’s white cement division, the stock reaction after the announcement makes it clear that investors are not enthused with its capital allocation policy as of now.

• HDFC Bank: This private bank’s stock tanked with the broader market, falling 7% on the bourses on March 3. Nifty Bank is down 11% this month. Some analysts suggest that the stock was reeling under investor concerns over FPI (Foreign Portfolio Investment) outflows. This is because the US Federal Reserve tightened its monetary policies over the ongoing Russia-Ukraine war. These large FPI outflows shadowed HDFC Bank’s Q3FY22 performance.

HDFC Bank’s Q3 net profit rose 18.3% YoY to Rs 10,843 crore with loan AUM (assets under management) growing by 16% YoY to Rs 12,609 crore. Its credit card segment is also inching towards winning back market share after RBI lifted its ban over the issuance of new credit cards. In January 2022, HDFC Bank’s market share in outstanding credit cards stood at 23%, close to its January 2021 market share of 25%. This shows the bank’s resilience, as it regained its market share after the seven-month ban on issuing new credit cards from December 2020 to July 2021.

Reports suggest that HDFC Bank’s market share for outstanding credit cards stands at 23% for 9MFY22, with State Bank of India holding the second position with 19%.

HDFC Bank’s market share for credit card spends is at 26.6%, higher than ICICI Bank with 19.9%. With stabilizing asset quality of the bank and robust loan growth, the brokerage Motilal Oswal, gives a positive outlook on the bank in Q4FY22 as well.

• Natco Pharma: This pharmaceutical company’s stock rose 9% intraday on Tuesday as the company launched the first generic version of Revlimid (lenalidomide). Natco Pharma launched the drug with Teva Pharmaceuticals as its marketing partner in the US market. Currently, Celgene (acquired by Bristol Myers Squibb - BMS) manufactures and markets Revlimid, which is used to treat cancer, such as multiple myeloma, follicular lymphoma, and mantle cell lymphoma.

As per BMS’ quarterly filings, Revlimid’s annual US total sales were $ 8.7 billion. Natco Pharma has a 180-day exclusivity for all the strengths it has launched (5mg, 10mg, 15mg, and 25mg). Natco Pharma and Dr Reddy’s were the only two companies out of 15 to receive the product approval from the US Food and Drug Administration. Dr Reddy’s is expected to be the second to launch Revlimid in the US with 180-day exclusivity for two strengths (2.5mg and 20mg). Other generics manufacturers have also announced plans for their own versions of lenalidomide. Natco Pharma has a differentiated approach of manufacturing hard-to-make complex generic drugs including the Paragraph IV and First to File (FTF). Paragraph IV filing is a subset of an abbreviated new drug application - ANDA, where the generic applicant (Natco Pharma in this case) claims that the patent they are targeting is unenforceable.

The company derives about 50% of its total revenue through exports, mainly from the US markets. With Indian Rupee hitting a lifetime low of Rs 77.01 against US Dollar on Monday, the company stands to improve its profit margin through forex gains. This comes at a time when Indian pharma companies are struggling in the US market amid intense competition. Most pharma companies reported aggressive price erosion in the formulations business in the US markets.

• ITC: The stock of this tobacco-to-consumer goods company was up by more than 5% in the last week. It is one of the few large cap stocks that rose in while the markets were in turmoil. Although high input costs affected the margins of the company, it saw strong performance across all segments in Q3FY22 as its profit rose 15% YoY to Rs 4,056.7 crore. Revenues were up 28% YoY to Rs 18,787.7 crore as COVID-19 cases fell and business environment improved.

The company saw the revenue from its agribusiness rise 100% YoY to Rs 4,962 crore led by strong revenue growth in wheat, rice, spices, and leaf tobacco exports. The agribusiness segment contributes almost 30% to ITC’s consolidated revenue. The brokerage Edelweiss believes that the company could potentially gain from wheat exports amid the ongoing war between Ukraine and Russia. The two countries combined account for 30% of wheat exports worldwide. The brokerage added the company will gain only if regulators have a conducive policy and India’s food inflation does not become a big challenge.

In FY22, the company exported a significant quantity of wheat due to poor production in Russia and Ukraine. It has scaled up its wheat development program and has introduced location-specific superior seed varieties. As wheat production in India is estimated to reach a record high of 111.32 million tonnes this year and with the global wheat prices at a 14-year high, the Indian government wants to capitalize on this opportunity to increase exports. ITC tapping into European markets may be hard due to lack of regulatory approvals but will be able to gain in the Middle Eastern and Asian markets.  

• Gujarat Narmada Valley Fertilizers & Chemicals: This fertiliser company’s stock rose 5.3% in the last five trading sessions and hit a lifetime high of Rs 635.2 this week. The company had a stellar Q3FY22 performance with a nearly 123% rise in profits YoY to Rs 540.78 crore and revenue growing 56.4% YoY to Rs 2,428.5 crore. The stock is up 38.5% since it announced its Q3FY22 results on February 4, 2022. The company derives 68.2% of its revenue from the chemical segment and 30.9% revenue from the fertiliser segment. Being the only manufacturer of acetic acid, Toluene Di-Isocyanate (TDI), and formic acid gives the company a significant advantage in the market. The company’s domestic market share in the product segments of TDI, Formic acid, and technical grade Urea stands at 66%, 38%, and 37%, respectively. The company capitalised on higher import costs due to rising commodity prices, as it was the only domestic producer of certain products. The company also has the largest Ammonia Plant and Urea plant in India.

Amid high input costs, GNFC's margins were shielded thanks to higher realisations, leading to a profitable product mix mainly in the chemical segment. In the case of fertilisers, the support from the government for granting a special subsidy aided in minimising the adverse impact on margins. The management said it is well-positioned to benefit from the rise in demand for specific products with a flexible and diverse product mix. The company is continuously looking for growth opportunities and has initiated a capex of Rs 3,000 crore to expand its production capacity for the next three years.