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HDFC
Bank continued to deliver a healthy performance on business growth and
operating front in 3QFY18, led by strong growth in loan book,
best-in-class NIMs of 4.3%, and higher fee-based and forex income. While
the Bank’s loan book grew by 27.5% YoY and 4.4% QoQ to Rs6,312bn owing
to strong sequential growth in Retail (4.8% QoQ), Business Banking (4.5%
QoQ) and Corporate Banking segment (4% QoQ), its deposits grew by 10.1%
YoY and 1.4% QoQ to Rs6,990bn in 3QFY18. Notably, the Bank’s annual
growth rate in loan and deposit seems to be incoherent owing to the
demonetisation base. Its NII grew by 24.1% YoY and 5.8% QoQ to Rs103.1bn
aided by higher loan growth
and healthy margin. Its net profit grew by 28% YoY and 8% QoQ to
Rs84.5bn, which adjusted for provisioning grew by 20.1% YoY (+11.8% QoQ)
to Rs46.4bn. Following the decision of Joint Lenders Forum (JLF), the
Bank has upgraded one large corporate account to standard account. Post
2QFY18 results the Bank had downgraded the same account to NPA on the
RBI’s advice during Assets Quality Review (AQR) of FY17.
Management Commentary & Guidance
Contingent
provisioning of Rs7bn made in 2QFY18 for a large corporate account has
not been reversed, out of which ~Rs3.5bn moved to floating provisioning
and remaining Rs3.5bn went into general provisioning towards Agri and
other bad loans. As of Dec’17-end, the Bank was carrying floating
provisioning to the tune of Rs13.3bn.
The
Bank will continue to focus on Agri book, as this segment continues to
be a profitable business proposition. Marking a substantially rise over
the last one year, its NPA from the Agri book touched level of 5-6% at
gross level. However, the Bank does not see any material change in its
credit cost due to higher level of NPA from Agri segment.
The
Bank is in process to raise Rs240bn of equity capital over next few
years to support its loan growth and meeting higher capital requirement
due to its classification as systematically important bank by the RBI.
Outlook & Valuation
Despite
adverse operating environment, HDFC Bank continued to deliver strong
performance on business growth as well as operating and asset quality
front. The Bank is in process to raise Rs240bn of fresh equity in 4QFY18
via QIP and preferential placement to HDFC. As the dilution is expected
to be book value accretive, we expect book value of the Bank to
increase by ~12-14% on QoQ basis. Further, incremental capital will help
the Bank to support its growth plan over next 3-4 years. Hence,
upwardly revising book value and profit estimates by 31% and 23%,
respectively for FY19, we maintain our BUY recommendation on the stock
with a Target Price of Rs2,285 based on
4.3x FY19E Adjusted book value.
Kotak Mahindra Bank (KMB) has reported a healthy performance in 3QFY18. Its standalone PAT grew by 19.7% YoY and 5.9% QoQ to Rs10.5bn aided by healthy growth in customer assets (23.4% YoY and 3.3% QoQ), best-in-class NIMs (4.2%) and strong growth in core fee income (14.3% YoY and 2.3% QoQ). Further, its consolidated PAT surged by 28.2% YoY and 12.7% QoQ to Rs16.2bn led by strong bottom-line growth in Kotak AMC (137.5% YoY and 65.2% QoQ to Rs380mn), Kotak Capital (414% YoY to Rs360mn), Kotak Securities (81.2% YoY and 30.5% QoQ to Rs1.5bn) and Kotak Life (42.6% YoY to Rs970mn). Customer assets growth was aided by 22.4% YTD and 8.6% QoQ growth in CV & CE portfolio, 20.7% YTD and 3% QoQ growth in Corporate portfolio, 18.5% YTD and 5.1% QoQ growth in Home Loan & LAP portfolio, and 32.0% YTD and 9.8% QoQ growth in Small Business & Personal Banking portfolio. Notably, KMB has started getting benefitted from full integration of erstwhile ING Vysya Bank especially in post demonetisation period.
Management Commentary & Guidance
KMB witnessed a strong improvement in profitability from its financial services and life insurance business subsidiaries. Notably, it owns 100% stake in these subsidiaries. Recently, it completed process of buying back the remaining 26% stake in Kotak Life from Old Mutual.
Fresh slippages/new inflows to stressed assets portfolio declined considerably to the Bank’s comfort level. Currently, only 0.19% of its loan book is 60-day overdue and classified under SMA 2. Further, only 0.4% of its loan book is classified as standard restructured loan book.
KMB will launch consumer finance business through its NBFC subsidiary i.e. Kotak Prime, which will help the Bank to optimally utilise the excess capital available at Kotak Prime.
With the positive initial response to Digital 811 Account, KMB expects the traction to continue in FY19 as well. However, standalone opex was partially impacted due to higher promotional cost for same. The Management has clearly indicated that apart from organic growth, the Bank will be continuously exploring suitable inorganic growth opportunities as well.
Outlook & Valuation
KMB has undoubtedly proven its competitive edge over its private sector peers with higher fee income, superior asset quality management and effective management of financial business arms. It continues to witness moderation in SMA-2 balance, which clearly suggests a stable trend on asset quality front. Looking ahead, we expect strong traction in earnings to continue owing to robust growth in loan book, moderate credit cost and healthy margins. Introducing our estimates for FY20E, we expect KMB’s earnings to witness 24% CAGR through FY17-20E.Valuing standalone entity at 4.2xFY19E adjusted BV and expecting subsidiaries to fetch Rs257/share after deducting holding company discount of 15%, we maintain our BUY recommendation on the stock with a revised Target Price of Rs1,172. Next Read : Galaxy Surfactants IPO Review Previous Read :HDFC Bank-3QFY18 Results Update - Loan Growth Momentum Continues Q3FY18-Sector Review: Pharmaceuticals Sector -Q3FY18-Results Preview FMCG Sector-Q3FY18-Results Preview IT Sector-Q3FY18-Results Preview Banking Sector-Q3FY18-Results Preview
Navi Mumbai-based surfactants manufacturer Galaxy Surfactants is set to launch its initial public offer for subscription on January 29, with a price band of Rs 1,470-1,480 per share.
Bids can be made for a minimum of 10 equity shares and in multiples of 10 shares thereafter.
Equity shares are proposed to be listed on BSE and NSE. ICICI Securities, Edelweiss Financial Services, and JM Financial Institutional Securities are the book running lead managers to the issue.
Company Profile
The company is one of India’s leading manufacturers of surfactants and other specialty ingredients for personal care and home care industries. Its products are mainly used in a host of consumer-centric personal care and home care products including skin care, oral care, hair care, cosmetics, toiletries and detergent products.
Currently, its product portfolio comprises over 200 product grades (45 are performance surfactants and 155 are speciality care products), which are marketed to more than 1,700 customers in over 70 countries.
Capacity and Utilisation
Galaxy Surfactants which commenced operations as a local supplier to FMCG companies in India, has diversified customer base currently comprises multinational, regional and local FMCG companies, including, Cavinkare Private Limited, Colgate-Palmolive (India) Limited, Dabur India Limited, Henkel, Himalaya, L’ORÉAL, Procter & Gamble, Reckitt Benckiser, Ayur Herbals (Private) Limited, Jyothy Laboratories Limited and Unilever.
At present, the company has 7 strategically-located manufacturing facilities, out of which 5 are located in India and 2 are located overseas.
The company had paid dividend for last five financial years - Rs 6 per share each for FY17 & FY16, Rs 4 per share each for FY15 & FY14, and Re 1 per share for FY13 on face value of Rs 10 per share.
About the Issue
Galaxy Surfactants' 63,31,674 equity shares IPO will close on January 31, 2018. It is a complete offer for sale issue from selling shareholders who are promoter and promoter group.
The issue comprises of an offer of sale of up to 39,250 equity shares by promoter Sudhir Dattaram Patil and up to 21,07,804 equity shares by 15 promoter group selling shareholders, including main promoters Gopalkrishnan Ramakrishnan, Sudhir Dattaram Patil, Unnathan Shekhar and Shashikant Rayappa Shanbhag & his wife.
It also comprises of offer for sale of up to 41,84,620 equity shares by 291 other selling shareholders and together with the promoter selling shareholder and promoter group selling shareholders.
The company aims to raise Rs 930.75-937.08 crore at a price band of Rs 1,470-1,480 per share. Out of which, it already garnered Rs 281.13 crore from 33 anchor investors at Rs 1480 per share on January 25.
Objects of the Issue The main objects of the offer are to achieve the benefits of listing the equity shares on the stock exchanges and the sale of equity shares by the selling shareholders.
Hence, Galaxy will not directly receive any proceeds of the offer and all the proceeds of the offer will go to the selling shareholders.
Strengths
It is an established global supplier to major FMCG brands with demonstrated track record;
It has robust product portfolio to address the needs of a diverse range of customers and applications;
Its emphasis on R&D has been a catalyst for the growth of businesses and contributes significantly to ability to meet customer needs in a competitive market;
Over the years, company has successfully diversified both product profile and geographical footprint by way of organic growth and inorganic expansions;
It has strong presence in high growth markets of India and Africa Middle East Turkey (AMET) region;
It has a professionally managed organisation that is driven by a qualified and dedicated management team;
It has track record of robust financial performance
Financial Performance
From FY14 to FY17, as per the restated consolidated financial statements, profit after tax increased from Rs 76 crore to Rs 146.31 crore, representing a CAGR of 24.40 percent. Return on net worth for FY15, FY16 and FY17 was 19.27 percent, 24.88 percent and 28.68 percent, respectively.
What is surfactants and about industry?
Surfactant is a surface-active substance or agent. The word surfactant is a shortened form of surface-active agent.
Surfactants can be broadly defined as compounds which concentrate at surfaces (interfaces) such as waterair or water-oil when dissolved in water. Surfactants and surface activity are controlling features in many important systems, including emulsification, detergency, foaming, wetting, lubrication, water repellence, waterproofing, spreading and dispersion, and colloid stability.
The major application fields of surfactants are classified as under household cleaning, industrial cleaning, personal care products, etc.
According to the research by Acmite Market Intelligence, the Indian Surfactants market is a USD 1.35 billion market (2015) which is expected to grow at a CAGR of 6 percent to touch USD 2.28 billion by 2024.
In terms of application, household cleaning and personal care together made up for 49 percent of the total surfactants market. Personal care surfactants market is expected to be the fastest growing market growing at a CAGR of 7.6 percent till 2024.
Promoters
Promoters Unnathan Shekhar, Gopalkrishnan Ramakrishnan, Shashikant Shanbhag and Sudhir Dattaram Patil, have been associated with the company since its incorporation in 1986.
Unnathan Shekhar, the Managing Director, holds a bachelors degree in chemical engineering from the University Department of Chemical Technology, Mumbai and a Post Graduate Diploma in Management from Indian Institute of Management, Calcutta. He has over 30 years of experience in the chemical manufacturing industry.
Gopalkrishnan Ramakrishnan, a non-executive director, holds a Masters Degree in Commerce from University of Bombay. He has over 30 years of experience in personal and home care in the area of business creation and marketing.
Sudhir Dattaram Patil, a non-executive director, holds a bachelors degree in chemical engineering from the University Department of Chemical Technology, Mumbai. He has over 30 years of experience in the chemical manufacturing industry.
Shashikant Shanbhag holds a bachelors degree in commerce from University of Mumbai. He has over 30 years of experience in the chemical manufacturing industry. He was a former whole-time director of the company.
Risks and Concerns
Here are key risks and concerns highlighted by brokerage houses:-
1> Fluctuations in raw material prices;
2> The company does not have long-term agreements with suppliers for its raw materials;
3> Top 10 customers contribute around 60 percent revenues. Hence it faces the risk of concentration;
4> The business of the company is dependent on its manufacturing facilities. Any slowdown or shutdown in its manufacturing operations or underutilisation of its manufacturing facilities could have an adverse effect on its business, results of operations and financial condition;
5> Its operations are subject to various hazards associated with the production of chemical and other products;
6> Galaxy operates in industry which is characterised by rapidly changing preferences. Hence its revenues can be significantly impacted if it fails to anticipate changing customer preferences;
7> Its operations are subject to extensive government regulation;
8> Higher exposure to foreign currency fluctuations;
9> Dependence on a single key supplier for one of its raw material. Any disruption in supply would have a material adverse effect on the business;
10> If GSL is unable to introduce new products and respond to changing consumer preferences in a timely and effective manner, the demand for products may decline;
11> If any of the products of customers cause, or are perceived to cause, severe side effects, GSL’s reputation, revenues and profitability could be adversely affected.
HEM Securities has come out with its report on Galaxy Surfactants IPO .
The research firm has recommended to “ Subscribe ” the IPO in its research report as on January 25, 2018
Galaxy Surfactants is one of India’s leading manufacturers of surfactants and other speciality ingredients for the personal care and home care industries. Co’s products find application in a host of con-sumer-centric personal care and home care products, includ-ing, inter alia, skin care, oral care, hair care, cosmetics, toilet-ries and detergent products. Since co’s incorporation in 1986, co have significantly expanded and diversified its product pro-file, client base and geographical footprint. Co’s customers in-clude some of the leading multinational, regional and local players in the home and personal care industries. At present, co have 7 (seven) strategically-located manufacturing facilities, out of which 5 (five) are located in India and 2 (two) are locat-ed overseas. Co also have set-up 1 (one) pilot plant at Tarapur, Maharashtra, for the scaling up of new products and processes from lab-scale to plant-scale. Out of co’s 5 (five) manufacturing facilities in India, 3 (three) are located at Tarapur, Maharashtra, 1 (one) is located at Taloja, Maharashtra, and 1 (one) is located at Jhagadia, Gujarat.
Valuation
The co is bringing the issue at p/e multiple of 35 on annualized H1FY18 eps at higher price band of Rs 1470-1480/share. Co being established global supplier to major FMCG brands with demonstrated track record has robust product portfolio & proven R&D capabilities with the strong presence in high growth markets of India and AMET region .Looking after strong fundamentals & the financial performance of co, we recommend “Subscribe” on the issue.
Subscribe to Galaxy Surfactants listing gains possible: Centrum
Centrum has come out with its report on Galaxy Surfactants IPO , The research firm has recommended to “ Subscribe ” the IPO in its research report as on January 25, 2018
Galaxy Surfactants Ltd (GSL) is one of India’s leading manufacturer of
surfactants and other specialty ingredients. The company’s product
portfolio consists of Performance Surfactants (PS – 65% of FY17 sales
volume) and Specialty Care Products (SCP – 35%) catering to the personal
and home care products, including, skin care, oral care, hair care, cosmetics, toiletries, and detergent. GSL has evolved to become a global supplier to leading FMCG players like Cavinkare, Colgate-Palmolive (India), Himalaya, L’ORÉAL, Procter & Gamble to name a few. Recommendation:
At the higher end of the price band of ₹1,480, the issue is priced at P/E of 35.9x (post-dilution) on FY17 and 34.9x on H1FY18 (annualized) basis, which appears to be fairly valued. GSL has decent set of financials (FY14-17 revenue and PAT CAGR of 8% and 24%, respectively,
EBITDA margins of 12%, RoE of 25% and positive free cash flows). As GSL is a global supplier to a host of FMCG players focused on the personal and home care segment, there is a likelihood of significant demand potential in the future irrespective of market conditions, owing to the daily utility of products.
Given the decent financials and future growth prospects, the IPO could garner interest in the current market environment. Hence, we believe that despite fair valuations, the listing may still be at a premium to the offer price.
ITC - 3QFY18 Result Update - Results Largely In-line; Budget – A Key Event to Watch Out For
ITC has delivered largely an in-line performance in 3QFY18. While reported net revenues grew by 5.7% YoY to Rs96.7bn (vs. our estimate of Rs100.5bn), EBITDA increased by 10.4% YoY to Rs38.1bn (vs. our estimate of Rs37.4bn). Reported net profit surged by 16.8% YoY to Rs30.9bn (vs. our estimate of Rs28.3bn), mainly due to exceptional income of Rs4.1bn (Rs2.7bn post tax) pertaining to reversal of Entry Tax levied by Tamil Nadu following a favourable Supreme Court order. Adjusted for this, net profit came in line with our estimate.
We expect ITC to post 9.6% revenue and 10.8% earnings CAGR through FY17-20E. Based on expected EPS of Rs11.4, the stock currently trades at 24.2x FY20E earnings, which is at a 35% discount to sector multiples and 45% discount to Hindustan Unilever. Attractive valuation provides adequate margin of safety, in our view. Considering ITC as a value pick than a growth stock, we maintain our BUY recommendation on the stock with an SOTP-based Target Price of Rs320.
Cigarette Business Performance in line
Cigarette volumes for the quarter are estimated to have fallen by ~3-4% in line with our estimate compared to decline to the tune of 7% and 2% in 2QFY18 and 3QFY17, respectively. Cigarette EBIT grew by 7.8% YoY to Rs32.7bn. Notably, reported revenue growth is not comparable due to accounting changes post GST roll-out, as base quarter figures include Excise Duty. Segmental margins stood at 70.6% compared to 72.3% in 2QFY18. We expect sequential recovery in volumes in coming quarters, although forthcoming Union Budget would be the key event to watch out for.
Improved Growth Momentum in non-Cigarette Biz
Non-cigarette FMCG business posted revenue growth of 11.8% YoY (16.2% on comparable basis) to Rs28.7bn, while the business witnessed segmental profit of Rs470mn vs. 197mn loss in the base quarter. Revenue from Hotels segment grew by 9.2% YoY to Rs4bn, while segmental EBIT surged by 30% YoY to Rs548mn on the back of increasing room rates, F&B and higher operating leverage. Despite 4% YoY decline in revenue to Rs12.8bn, EBIT from Paperboard segment grew by 9% YoY to Rs2.7bn due to benign input costs. Revenue from Agri business fell by 22% YoY to Rs15.3bn due to limited trading opportunities, while segmental EBIT remained largely flat at Rs2.3bn.
Everyone might have noticed this in recent days, that market is making new highs while their portfolios are falling.
This has happened in whole last week because of continuous “fall in midcaps and small caps”. The mid and smallcap mutual fund categories have returned exceptionally in the past one year. Midcap schemes returned 38.49 per cent and smallcaps offered 50.62 per cent in the last one year.
Small/mid-caps collapse post Uday Kotak’s bubble warning
On 16-Jan2018,Tuesday saw panic selling in small- and mid-cap stocks on the back of warning by one of India’s richest bankers, Uday Kotak, of building of a stock market bubble. The BSE mid-cap index fell 1.74 per cent and the small-cap crashed 2.24 per cent, which is the most in over three months. Several stocks in both the indices crashed by 7-15 per cent. Key benchmark index Sensex was down 0.21 per cent while the broader index Nifty fell 0.38 per cent.
Kotak, Vice-Chairman, Kotak Mahindra Bank, in an interview to a newspaper expressed concerns over the surging stock market and India’s financial savings going into selective stocks. Kotak group is one of the pioneers of stock market funding and a key player who had a large number of foreign portfolio investors registered as clients.
“Money is coming to a broad funnel and it’s going into a narrow pipe where massive amount of Indian savers’ money is now going into a few hundred stocks,” Kotak told the interviewer. “And you come back to the question of how good is the governance of these companies. The amount of money that’s going into small- and mid-cap stocks is something on which we have to ask tough questions. You’re pushing all this (money) into a narrow funnel which inevitably runs the risk of a bubble,” said Uday Kotak.
“Kotak’s comments are being taken as a signal by the bulls that stock prices could be in the final leg of a melt-up,” said a head of foreign equity research desk in Mumbai.
The price to earnings (PE) multiple, a key measure of valuations in the current times, of the BSE Small-cap index stood at 129 while that for BSE Mid-cap index stood at 50. The PE for both the indices is higher than in the tech bubble of year 2000 and financial crisis of 2008. Then, it was mainly the leveraged margin funding bets that saw the markets crash.
Kotak also headed a SEBI committee which submitted a report last year on changes in corporate governance rules for listed firms. Talking on the same, he said, “Keep in mind now you have EPFO money, insurance money, pension, investors’ and savers’ money... People think nothing can go wrong. Micro (economic fundamentals) is improving but the speed at which stock prices are going up is even faster… The speed at which stock prices are going up is sheer money power,” he said.
So, Why is this happening?
Fundamentally the valuations are high and prediction of a fall after a prolonged rally are some of the reasons. But the recent fall in mid and small cap is mainly attributed to the announcement by SEBI.
There was an order by SEBI(Securities and Exchange Board of India) for consolidation of various schemes provided by the mutual funds.
And also Sebi specified some rules to define large caps, mid caps and small caps.
Due to this restructuring, all the major mutual funds have to buy more of large cap funds and sell their small caps and mid caps to make the scheme compatible with sebi norms.
They have a time period upto march 2018.
So they will keep buying large caps and keep selling mid n small caps.
So overall the market may look positive but we will have negative impact on portfolios.
Suggestion:
Technical correction is getting over in sectors like metals, small cap and midcap. Use next good rally to exit overbought stocks. Next technical dips can be deeper with any bad news. You can add fresh stocks there. Stay bullish on Indian Stock market as a whole.
Market returns and good return probabilities are higher while the markets are at their new highs than the returns and high return probabilities at market lows.
3 months back the NIFTY was said to be costly and was at its high. The returns of the portfolio is above the market returns in the last 3 months.
Enter quality stocks, buy on dips, have a good stoploss and beat the market returns.
“Existing investors” should not worry about the volatility in the space. Such correction will come and go but there is no trigger for a big fall in the mid and smallcap space. “New investors” are better off in multicap schemes as the valuations in the small and midcaps are becoming too high.
IT Sector - 3QFY18 Results Preview - Steady Quarter Likely
Sector Preview
We expect the USD revenue of the IT firms under our coverage universe to post a combined 1.9% QoQ rise in 3QFY18. Top-5 IT firms are expected to post 1.5-3% QoQ rise in USD revenue in reported terms (1.6-3.2% in CC terms) with HCL Technologies (HCLT) likely to lead. Mid-sized firms will see variation, with Cyient and Mindtree likely to lead (3% and 2.8% QoQ USD revenue growth, respectively). Cross-currency movements were varied in 3QFY18, with the USD largely remaining flat against the EUR, appreciating against the AUD (2.7%) and depreciating against the GBP (1.5%).
The IT sector continues to face disruptive trends in terms of SMAC leading to cannibalisation of revenue, apart from pricing pressure in commoditised services, and automation. The IT industry body, NASSCOM projects 7-8% growth in IT-BPO exports in FY18 with the announcement coming as late as June 22, as against its traditional practice of providing industry growth guidance in February, owing to global uncertainty. We do not expect the industry to surpass this growth target and believe high single digit growth is realistic in the near-term.
On margin front, we expect a stable performance despite seasonal weakness owing partly to INR depreciation against key currencies including the USD (0.7%), EUR (0.9%) and GBP (2.1%), and partly due to operational efficiencies and automation. Among top-tier IT firms, we expect Tech Mahindra (TechM) to post 69bps QoQ margin expansion, followed by Infosys with 53bps expansion. TCS, Wipro and HCL Technologies are likely to see range-bound margins. Within our mid-cap coverage universe, we expect Mindtree and KPIT Technologies (KPIT) to post the maximum margin improvement of 224bps and 76bps QoQ, respectively aided by revenue growth and improved operational efficiency. We expect continuous focus on levers like utilisation and cost efficiency. On YoY basis, margin performance is likely to improve, with 6 companies of our 13 IT coverage universe likely to post expansion to the tune of 44-172bps.
We would watch for sustainable margin outlook going forward, and IT budget trend for CY18E. Focus on return of cash to shareholders is also a theme playing out, with TCS, Infosys, Wipro, HCLT, Hexaware, Mindtree and eClerx all resorting to share buy backs in order to make better usage of their cash balances. Impact of the recent US tax change is also another focal area. We continue to believe Indian IT is a bottom-up sector and stock picks will play a key role in driving alpha.
Our Top Picks: HCLT and CDSL (India).
Revenue Expected to be Steady
We expect 1.9% sequential revenue growth for the IT firms under our coverage universe. On YoY basis, growth is likely to remain in single digit at 4.2% with the exception of KPIT (12%), as the IT sector continues to get affected by disruptive trends, increasing competitive intensity and pricing pressure. This quarter, there will not be any major impact of cross currency movements with CC revenue growth likely to be in 10-20bps range to reported USD revenue growth. Company-wise, we expect HCLT to lead the top-tier IT firms, while Cyient and Mindtree are likely to lead the mid-tier firms.
Margins to See Steady-to-Improving Trend
We expect IT firms to report small expansion in EBIT margins in 3QFY18E aided by currency and operational efficiency and automation focus. Among top-tier IT firms, TechM is likely to outperform with 69bps QoQ improvement, while Mindtree is likely to post a strong 224bps QoQ expansion among mid-tier firms.
Eyes on CY18E IT Budgets, US Tax Change Impact
In our view, the street’s attention will be focused on the likely trends in CY18E IT budgets. While finalisation may still take some time, some clarity on the likely direction of spend is a key focus area, in our view. Vertically, the key BFSI and Retail verticals will be watched. Apart from this, the potential impact of the recent US tax changes is also likely to be another focus area. The increasing role of automation and other margin levers are also critical factors, in our view.
Performance of Banking & Financial Service (BFS) sector is likely to remain under stress in 3QFY18 led by: (a) sharp decline in profitability from treasury operations; (b) higher MTM provisioning on non-HTM portfolio of the bank (benchmark 10 year Gsec yield increased by 65bps QoQ in 3QFY18); (c) higher provisioning on existing NPAs as well as additional provisioning on loans referred to NCLT/IBC; and (d) weaker business growth. However, the banks/NBFCs with relatively higher exposure to Retail and MSME segments will continue to deliver strong numbers.
Earnings profile of the corporate focused banks to remain subdued: We expect the banks with significant exposure to corporate term loans to report elevated level of provisioning. Further, ageing of existing NPAs and write-down of security receipts from sale to the ARC will keep their credit cost elevated in 3QFY18. However, fresh slippages are expected to decline, as recognition of stressed assets is peaking out across the banks. Continuing to remain firm on NPA recognition, the Reserve Bank of India (RBI) has asked the banks to refer 25 out of total 28 cases from the second set of larger stressed corporate accounts to NCLT/ IBC proceedings post the expiry of Dec’17 deadline. Further, the RBI has also asked the banks to provide more than 50% on all these accounts, which will negatively impact their profitability. Several cases referred to NCLT/IBC in first list indicated relatively higher haircut (in range of 60-80%) by the banks and hence, we expect provision expenses to remain elevated.
Further, few banks to report higher asset quality divergence in Annual Supervision Audit conducted by the RBI for FY17, which will be keenly watched by the market participants. Within that, we expect accelerated haircut/write-off by the Public Sector Banks as the Government of India has given final nod for much-needed capital infusion to the tune of Rs880bn in 4QFY18. However, the banks with higher retail/consumer portfolio will continue to show stable trend in their asset quality.
Credit growth revived marginally: After touching multi-year low in 1HFY18, credit growth revived marginally to 10.7% in fortnight ended 22nd Dec’17. We expect major part of incremental credit growth may flow into private banks helping them to improve their operating performance further. Further, deposit growth remained higher led by massive inflow of deposit during the demonetisation drive. Lending rate fell sharply owing to liquidity overhang, which resulted in moderation in Net Interest Margins (NIMs). This along with pressure on NIMs will curb NII growth for these banks in 3QFY17E as well as in FY18E.
Rising Gsec yield play spoilsport: Further, the sector has got negatively impacted by sharp rise in bond yield due to deteriorating conditions on fiscal deficit front. Fiscal deficit of the Central Govt. touched 112% of Budget Estimate for FY18 as of Nov’17-end, as the Govt. continued spending spree to support the economy. Resultantly, the benchmark G-Sec bond yield jumped to 7.33% as of 3QFY18-end from 6.66% as of 2QFY18-end.
Increase in G-Sec yield will result in MTM loss on non-HTM investment portfolio of the banks as well as result in sharp decline in treasury income. As the banks have deployed major chunk of excess liquidity from the demonetisation drive in government bonds, they have to report MTM loss from this portfolio. We expect our banking sector coverage universe to report a NII growth of 22% YoY and 4.6% QoQ led by PSBs (24.8% YoY and 3.7% QoQ) and private sector banks (18.9% YoY and 5.7% QoQ). However, other income of our banking universe is expected to decline by 13.3% YoY and 29.5% QoQ due to sharp decline in treasury income. Thus, on pre-provisioning profit front, we expect 15% QoQ decline. Overall, we expect our banking sector coverage universe to report 19.7% YoY and 5.8% QoQ decline in PAT led by PSBs with 68.5% YoY and 27.3% QoQ decline vs. 0.2% YoY and 2.1% QOQ decline for private banks.
Outlook & Valuation
Lower operating profit, subdued treasury income and higher credit cost on ageing of stressed assets will negatively impact the sequential performance of the banks in 3QFY18. As the recent steps by the RBI and the GoI clearly indicate that the banks will have to accelerate their efforts to resolve issues on asset quality front, we expect further surge in provisioning expenses in FY18E. We expect overall return to remain depressed over FY18E for the banking sector in general and corporate term loan focused banks in particular. Further, we believe that incremental deterioration in asset quality has been aptly addressed in last few quarters, however speedy resolution will continue to impact banks’ profitability. We expect improvement in banks’ core operating performance in coming quarters due to peaking out of NPA recognition cycle and improvement in non-corporate credit demand. As we expect the demand for retail loan to pick-up before any rise in demand for infrastructure/corporate loans, we prefer the banks having higher exposure to consumer and business banking portfolio. We expect asset quality stress to decline along with relatively moderation credit cost from FY19E onwards.
Our Top Picks: IndusInd Bank, DCB Bank, HDFC Bank and Federal Bank among private sector banks and SBI and Indian Bank among the PSBs.
FMCG Sector - 3QFY18 Results Preview - Lower Base Effect to Prop up Earnings; Medium-term Outlook Remains Robust
Our consumer sector coverage universe comprising of 18 companies is poised to report a stellar performance in 3QFY18 albeit due to favourable base effect (Demonetisation in the base quarter). We expect the sector to report 12.1% revenue and 13.3% earnings growth in the quarter. Excluding ITC, the growth is estimated to be even higher at 12.8% for revenues and 17.8% for earnings.
We expect the growth momentum to improve in the coming quarters on the back of trade channel stabilisation post GST roll-out, two consecutive good monsoons aiding rural growth, increasing premiumisation, strong pricing power and increasing share of the organised players in the GST regime. The sector currently trades at rich valuations of 35x FY19E earnings, while excluding ITC, the multiples are even richer at 40.7x earnings. We expect the current valuations to sustain, as medium-term growth momentum is on the cusp of taking off due to above mentioned factors and hence, we remain Positive on the sector. Our top picks are: ITC, Asian Paints, Colgate-Palmolive and Kajaria Ceramics.
Coming out of a Challenging Phase
The consumer sector has been through a challenging phase for past four quarters. When the growth was seemingly recovering in 3QFY17, it was hit by government’s decision to demonetise high value currencies, which substantially impacted the companies, consumers and the entire trade channel. While other channels have witnessed gradual recovery in demand led by modern retail, the wholesale trade segment continued to remain under pressure in parts of the country. All companies have rightly made investments in enhancing their direct distribution network in past couple of years. The second near-term disrupting factor was GST roll-out. While GST rates were largely positive for the sector sans ITC, the implementation with inherent complexities and confusion led to sharp correction in trade pipeline in the run-up to the roll-out in the month of June. While the growth has somewhat recovered in 3Q, we expect the full benefits of GST to flow in with effective implementation of E-Way bill system w.e.f. Feb’18.
Mixed Input Cost Scenario
Situation on the raw material cost front was largely mixed in the quarter. While the average prices of HDPE (down 3%), PFAD (down 6%), Milk (down 11%), Wheat (down 15%), Sugar (down 5%) and Refined Palm Oil (down 7%) declined on YoY basis, the prices of Copra (up 85%), Menthol (up 75%), Liquid Paraffin (up 25% YoY) and VAM (up 22% YoY) were substantially higher. The prices of TIo2 were moderately higher by 6% in the quarter. While most consumer companies enjoy strong pricing power, there is a lag effect between increase/volatility in raw material prices and the corresponding price hikes. This may impact the near-term gross margin profile of the sector.
Outlook & Valuation
We expect our consumer sector coverage universe to report 11.8% and 15.8% growth in revenue and earnings, respectively in FY18E, and the growth is estimated to improve to 14%/18% in FY19E. While valuations at 40.7x FY19E earnings ex-ITC are rich, we expect the sector to command high multiples on visible improvement in growth trajectory in coming years. Key risks for the sector are: delay in recovery in consumer demand, sharp increase in input costs and delay in implementation of E-Way bill system. In that case, the sector is likely to go through a prolonged time correction than price correction, in our view.
Our top picks are: ITC (muted expectations and attractive valuations), Kajaria Ceramics (strong brand and increasing market share post GST roll-out), Asian Paints (double-digit volume growth and reasonable time correction) and Colgate-Palmolive (renewed efforts to recover market share loss and benefits of lower GST rates).
Pharmaceuticals Sector - Results Preview - Domestic Biz to Recover Further; US Biz Expected to Remain Weak
The companies under our pharma coverage universe are expected to report a flat sales performance both on YoY and QoQ basis in 3QFY18 due to multiple headwinds in the US (increasing pricing pressure, regulatory concerns and channel consolidation). Overall, we expect weak sales growth in the US business (-12.9% YoY in CC terms) and further recovery in domestic business post GST roll-out. We expect EBITDA and PAT of our coverage universe to decline by 13.3% YoY (-3.0% QoQ) and 15.4% YoY (-6.1% QoQ), respectively, while the EBITDA margin is expected to decline by 350bps YoY (-67bps QoQ) due to weak US sales. However, we continue to remain positive on long-term prospects of the pharmaceutical sector and recommend being stock-specific.
Pricing Pressure & High YoY Base to Impact US Biz
Most companies in our coverage universe are expected to report muted growth in US sales (YoY) due to high revenue base in 3QFY17 and steep price erosion (led by faster ANDA approvals and channel consolidation). We believe US business will continue to remain under pressure due to regulatory concerns (US FDA). On a positive note, the US FDA has approved higher number of ANDAs to Indian companies (246 ANDAs in 3QFY18 vs. 198 in 2QFY18 and 169 in 3QFY17). Notably, the US business remains mainstay for most companies under our coverage universe. Several measures i.e. aggressive R&D spend and scale-up in complex ANDA filings are considered sustainable for meaningful growth in their US business. We envisage improvement in US sales of the companies like ARBP (injectable portfolio) and Cadila HC (gLialda & gTamiflu), while we expect weak US sales for Sun Pharma (increased price erosion & gGleevec), Glenmark (end of gZetia exclusivity) and Lupin (steep price erosion to gGlumetza and gFortamet sales).
Further Recovery in Domestic Biz Post GST Roll-out
Domestic formulation business of our pharmaceutical coverage companies was adversely impacted in 1QFY18 on the back of challenges relating to GST (inventory de-stocking by trade channels in run-up to roll-out). We have seen significant recovery in 2QFY18 due to inventory re-stocking at retailers level. We expect the domestic business of the companies to stage a further recovery in 3QFY18. Notably, inventory re-stocking is yet to reach at pre-GST level. The Indian pharmaceutical market – which reported 6.5% YoY growth in Oct’17 (vs. +3.2% YoY in Jul’17) and +6.0% YoY growth in Oct’17 (MAT; AIOCD) – is expected to witness mid-teen growth over next few years led by new product launches and volume growth. We continue to remain bullish on Indian pharmaceutical sector from long-term perspectives.
Top Picks: Alkem Labs, Torrent Pharma and Cadila Healthcare
Key Developments to Watch Out For:
Ajanta Pharma: Outlook on India business and margin profile.
Alkem Labs: Outlook on India business and update on new launches in US.
Aurobindo Pharma: Update on debt front and outlook on injectable business.
Cadila HC: Outlook on India and US business.
Cipla: Update on combination inhaler launch in the UK.
Glenmark: Outlook on the US/India businesses and update on debt repayment.
Lupin: Outlook on US and India business.
Sun Pharma: Update on Halol plant inspection and the US business outlook.
Torrent Pharma: Outlook on India business post acquisition of Unichem’s India business.
Cement Sector - Results Preview - Volumes Improve; Higher Costs and Dismal Realisations to Play Spoilsports
Having seen subdued sales volumes in 1HFY18, cement industry is expected to witness a healthy comeback in terms of sales volume growth in 3QFY18 mainly due to low base effect and benign construction environment. Further, favourable monsoon for two successive years is also expected to have aided rural demand. However, dismal realisations (-2% YoY and -3% QoQ at all-India average price) and higher fuel cost (owing to soaring petcoke prices in general and ban on petcoke usage in Rajasthan, UP and Haryana in particular) are likely to take a toll on the profitability of the cement companies. While we expect companies under our coverage universe to report a stellar average volume growth of ~16% YoY and ~9% QoQ, EBITDA and PAT are expected to register an average growth of ~15% YoY and ~8% YoY, respectively.
Companies having higher exposure to Western and Southern regions are expected to see a sharp drop in their profitability owing to steep price correction. We expect the large-cap cement companies to deliver 13-60% YoY growth in EBITDA with ACC likely to witness the highest growth of 60% YoY followed by Ambuja Cements (31% YoY). Further, India Cements, Sagar Cements and Ramco Cements are likely to report dismal operating performance led by sharp deterioration in Southern realisation. UltraTech Cement, Shree Cement and Ramco Cements are expected to lead the pack with higher EBITDA/tonne in the range of Rs870-1,140. Notwithstanding the cost pressure in the quarter, we foresee 2HFY18 would prove to be strong for the cement companies mainly owing to: (a) low base of volume growth; (b) likely recovery in realisation; (c) continuous traction in infrastructure projects; and (d) potential of further pick-up in rural consumption led by favourable monsoon and improving rural economy.
Sales Volume Growth Expected to be Impressive
Cement demand improved moderately in 3QFY18 after seeing continued sluggishness for last 3-4 quarters owing to DeMo and subdued real estate market post RERA implementation. Despite persistent sand crisis in several states, a low base and favourable monsoon boosted cement demand in 3QFY18. Notably, the companies under our coverage universe are expected to record an average volume growth of ~16% YoY (+9% QoQ) owing to low base and moderate pick-up in construction activities across the country. The companies having exposure to Eastern and Northern regions are expected to report better volume growth due to relatively better demand environment. Barring Shree Cement and India Cements, all companies under our coverage are expected to witness stellar doubly-digit volume growth on YoY comparison.
Realisation Continues to Remain Sluggish
Like 2QFY18, realisation environment remained soft in 3QFY18, while steep price correction in Western and Southern regions led to~3% QoQ decline in all-India average price. Price hike undertaken by companies in the beginning of quarter was not absorbed due to lack of strong demand rebound. However, price hikes in Dec’17 in select regions are expected to aid margins in the current quarter. Historically, 3Q has always been better in terms of sequential pricing, as the prices tend to rebound post seasonal correction. However, we have not seen the trend continuing in this fiscal and believe that the prices would move northwards in the ensuing quarter with the anticipation of better demand.
Higher Fuel Prices to Drag Margins
Cost savings due to improved utilisation led by demand pick-up is likely to be set off with the persistent increase in petcoke prices. Average petcoke cost per tonne in 3QFY18 hovered at ~US$100-105, as against average price of US$90-95 in 2QFY18. Higher fuel prices and dismal realisations are expected to be the major headwinds for margin improvement. Further, ban on petcoke usage in Rajasthan, Haryana and UP during the quarter is likely to bloat power and fuel cost further, as the companies having plants in these states had to shift to coal as fuel. Though the ban was subsequently withdrawn by the SC, the companies are still awaiting final directives from Pollution Control Board to resume petcoke usage.
Outlook & Valuation
While demand environment was impacted in 1HFY18 due to GST roll-out, seasonal overhangs, RERA implementation and sand crisis in several pockets, cement companies have reported decent operational performance amid cost pressure. However, we expect demand scenario to improve in 2HFY18 mainly on account of likely pick-up in rural demand with well-distributed and back-to-back normal monsoon, government’s infrastructure boost and low base effect. While withdrawal of petcoke usage ban by the Supreme Court offered sigh of relief to cement companies (though they are still awaiting Pollution Control Board’s directives to resume petcoke usage), a meaningful spike in operating cost due to hardening of fuel prices amid subdued realisation are expected to hurt 3QFY18 performance of cement companies. However, government’s positive approach to revive agriculture/rural economy is likely to augur well for the cement industry in FY19E.
Notably, slower capacity addition, incremental demand from the proposed “Housing for All” projects and commencement of construction activities of Metro/Irrigation projects are likely to aid utilisation and profitability of the industry in the long-term. However, in our opinion several mid-cap stocks are still available at comfortable valuations and trade at a huge discount (30-60%) to their large-cap peers. Looking ahead, we expect that likely improvement in return ratios to aid mid-cap counters to get re-rated. We maintain our positive stance on UltraTech Cement and Shree Cement in the large-cap space, while we prefer J.K. Cement, Ramco Cements, JK Lakshmi Cement and Sagar Cements in the mid-cap space.
Company Background And Business Model
Godrej Agrovet (GAVL) was incorporated in 1991 in the state of Gujarat. Godrej Agrovet Limited (GAVL), is a diversified, R&D focused agri-business company with operations across five business verticals viz. animal feed, crop protection, oil palm, dairy, and poultry & processed foods. GAVL is the largest crude palm oil producer in India, in terms of market share,& the leader in compound cattle feed in India as of March 2017. Godrej Agrovet Ltd has joint ventures Godrej Tyson Foods Ltd, a food processing firm, and ACI Godrej Agrovet Pvt. Ltd, which runs a poultry products business in Bangladesh. The Company made significant investments to enhance R&D capabilities over the years.
Product Portfolio
1. In animal feed business, the products comprises cattle feed, poultry feed (broiler and layer), aqua feed (fish and shrimp) and specialty feed. The products are produced at 35 facilities and sold through 4000 distributors across India.
2. In crop protection business, company produces plant growth regulators, organic manures, generic agrochemicals and specialized herbicides. The products are sold in India and 24 countries. Company has over 6000 distributors in this business segment.
3. In oil palm business, the products include crude palm oil, crude palm kernel oil and palm kernel cake. Company owns five palm oil mills.
4. The dairy business is operate through a subsidiary Creamline Dairy. Company sell milk and milk based products under the 'Jersey' in 5 south India states. Company own nine milk processing units. Company has 2,500 milk product distributors and 50 retail parlors.
5. Company also produce processed poultry and vegetarian products under the brands 'Real Good Chicken' and 'Yummiez'.
Company Strengths:
1. Pan-India presence with extensive supply and distribution network.
2. Diversified businesses with five business verticals.
3. Emphasis on R&D
4. Part of the Godrej group. Part of strong 'Godrej' brand.
5. Leading position in the segments it operate.
Debut in Indian markets via IPO in 2017 :
GAVL came up with IPO issue in October 2017 with following objectives :
The Issue comprises a Fresh Issue and an Offer for Sale.
1. Offer for Sale: Each of the Selling Shareholders will be entitled to the respective portion of the proceeds of the Offer for Sale.
2. Fresh Issue: Company proposes to utilize the proceeds from the Fresh Issue towards:
a. Repayment or prepayment of working capital facilities availed;
b. Repayment of commercial papers issued by the Company; and
c. General corporate purposes.
Bumper Listing of GAVL :
On 16-Oct-2017 , Godrej Agrovet (GAVL )had Bumper Listing and ended 29% higher on Day 1 from issue price.
After soaring about 34 percent higher in the opening tick, market debutant Godrej Agrovet ended lower than its listing price, but around 29 percent higher than the issue price at Rs 592.
The diversified agro-business company started off first trade at Rs 615.60 on the National Stock Exchange, a whopping premium of 33.82 percent over its issue price of Rs 460 per share.
The Rs 1,157-crore initial public offer was oversubscribed 95.41 times on October 6, the last day of bidding. The issue was opened for subscription on October 4, with a price band of Rs 450-460 per share.
The IPO comprised of fresh issue of shares worth Rs 291.51 crore and offer for sale of up to Rs 300 crore by Godrej Industries and up to 1.23 crore shares by V-Sciences Investments Pte Ltd, a subsidiary of Singapore-based investment company Temasek.
Post issue, Godrej Industries holds 60.81 percent stake in Godrej Agrovet, which is an agri-business company with operations across five verticals - animal feed, crop protection, oil palm, dairy, poultry and processed foods.
Agrovet will use fresh issue proceeds towards repayment of loans and other general purposes.
Key Highlights :
Diversified business model to drive future growth – Operations across five business verticals has enabled GAVL to grow revenues over the last five years. Diversified product portfolios, across various categories provides the companies with a larger target market in terms of crops and/or geographies, as pest incidence and weather conditions are variable and different products would be required in varying degrees in these locations. Further, diversified players with a larger basket of products become less vulnerable to crop/location specific risks. The diversified business model along with geographic diversification provides a hedge against the risks associated with any segment. This helped to drive growth, optimize capital efficiency and maintain competitive advantage. Existing inter-linkages between businesses also helped to maximize the potential synergies amongst them. For example, the animal feed team frequently collaborates with dairy, and poultry and processed foods businesses for sale of compound feed to the farmers. Additionally, some of the biomass produced from the oil palm business is used as an animal feed ingredient, which provides additional source of revenue to oil palm business as well as strengthens the cost competitiveness of the animal feed business. Given the uncertainty in the domestic market owing to the dependence on monsoons, players present in export markets achieve some level of risk mitigation through diversification.
Strong R&D capabilities aid to growth – GAVL is focused on improving the productivity of farmers by innovating products and services that sustainably increase crop and livestock yields. The Company made significant investments to enhance their R&D capabilities over the years and believe that emphasis on R&D has been critical to their success. Hence GAVL has been able to identify market trends and introduce a range of innovative and value-added products in the market to cater to the evolving needs of customers.
Animal feed Business – Accounts for 53% of the top line & 36% to the EBIT, with segment margins in range of ~6-7%. Its product portfolio comprises of cattle feed, poultry feed (broiler and layer), aqua feed (fish and shrimp) and specialty feed. It has a strong distribution network for the animal feed business with ~4,000 distributors across India. The company is also present in this space with its 50:50 JV, ACI Godrej, which produces cattle, poultry and fish feed in Bangladesh. The focus for this segment is on achieving cost leadership by improving the operational efficiency of animal feed business through R&D as well as cost rationalization initiatives thereby improving profit margins and market share
Crop Protection Business – Accounts for 16% of the top line & 37% to the EBIT, with segment margins in the range of ~20-22%. The company’s product portfolio is spread across the entire crop lifecycle including plant growth regulators, organic manures, generic agrochemicals and specialized herbicides. Continuing the business growth story, GAVL acquired promoter holding in Astec Life Sciences Limited in 2015. The distribution network of Company’s crop protection business in India includes approximately 6,000 distributors, as of FY17. With good monsoons, the rabi season is expected to be strong and benefit crop protection business in H2FY2018. Further, the company launched three new products under the crop protection business this year and has guided for launch two to three new products every year. The focus for this segment is on introducing new products. R&D initiatives have increasingly focused on off patented chemistry synthesis, which will help in
expanding our product portfolio. GAVL also intend to achieve deeper market penetration and extend target crop segment with niche plant growth regulators.
Oil Palm Business – This business accounts for 10% of the top line & 22% to the EBIT, with segment margins in the range of ~19-20%. This is a regulated business under the PPP model with gross margins at ~20%. The internal consumption of biomass from this segment into the cattle feed segment help optimise costs. GAVL operates with an aggregate FFB processing capacity of 125 MT per hour and a palm kernel processing capacity of 7 MT per hour. In the oil palm business, the company has a strong market share of 35% in India and access to nearly 20% of India’s oil plantations. Higher oil prices and improvement in yield should benefit this segment in the near term. The focus for this segment is to grow its presence in certain regions, create additional revenue streams from oil palm biomass and continue to focus on R&D to improve FFB yield per hectare at laboratory in Chintampalli, Andhra Pradesh.
Dairy Business – This business accounts for 21% of the top line & 7.3% to the EBIT, with segment margins in the range of ~3-4%. In With ambition of expanding presence in the "Animal Protein" space further, GAVL acquired controlling stake in Cream Line Dairy Products Limited - a leading Dairy player in South India. The company has significant presence in Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Maharashtra, under the "Jersey" Brand name. Its value-added product portfolio includes Curd, Flavoured Yogurt, and Ice Cream. Dairy distribution network includes approximately 4,000 milk distributors, ~2,500 milk product distributors and 50 retail parlours, as well as direct sales to institutional customers. The focus for this segment is to introduce new products and increase product reach. It intends to continue to provide variants of existing, and new, value-added poultry products.
Valuations
At its CMP of `593/-, the stock trades at a PE of ~37x its FY18 estimated annualized EPS of `16/-. GAVL is focused on improving the productivity of farmers by innovating products and services that sustainably increase crop and livestock yields. The Company made significant investments to enhance their R&D capabilities over the years and believe that emphasis on R&D has been critical to their success. The company aims to improve market share across all business verticals.Since several sectors in which GAVL operate are largely unorganized, we believe that cost leadership will be a key enabler for GAVL to increase the market share. The company has evolved from cattle feed to an animal protein player. We are POSITIVE on the company’s long-term growth prospects.
Buy Godrej Agrovet : Prasanth Prabhakaran
Prasanth Prabhakaran, Senior President & CEO at YES Securities told CNBC-TV18, "We started off January by saying that you should have an agri based portfolio and some stocks where you are going to see capex expenditure from the government over the next three or four years. So, one remains Godrej Agrovet, it is a strong buy from our side."
"We see a strong upside in the stock thanks to two things. One is that their main business which is their animal feeds business, they have built in capacity. There are at around 50 percent capacity utilisation and we see that going through at least 20-25 percent growth track on that side. Their other lines of businesses which includes crop protection chemicals, pesticides that they end up having, their dairy business and their poultry business all are strong segments for growth. So you have a mixture of consumption story plus an agri theme that agrovet continues to hold for the long term."
Credit Suisse initiates coverage on Godrej Agrovet; Target at Rs 630 in the medium term.
Credit Suisse has initiated coverage on Godrej Agrovet with a neutral rating and a target of Rs 630.
The brokerage observed that the company is a diversified agri-business with a strong pedigree. Further, Indian agricultural value chain offers business opportunities.
Going forward, it expects earnings to grow at CAGR of 18 percent over FY17-20. Further, the stock has good long-term potential, but valuations leave little upside.
For the firm, the key earnings driver will be crop protection which will see new launches and exports growth.Meanwhile, dairy margins will bounce back in H2FY18, likely to see gradual margin expansion from thereon.
Axis Securities Reseach Report of GAVL: Investment Rationale: GAVL to continue its multi-year secular growth; tremendous growth potential in each segment as each business segment GAVL operates in is either under-penetrated (animal feed) or in high growth areas(dairy, poultry, agri-inputs)
A leader in animal feed with customer stickiness. 5-7x growth opportunity as industry shifts from noncompound to compound feed. Benefits from strong brand, R&D, sales on cash & carry and pan-India distribution
Agri Inputs: A renewed focus led by 3 pronged strategies to drive 2.5x revenue growth over FY17-21.
Strategy revolves around (1) launch of rice herbicide; (2) in-license agreements; and (3) acquisition-ledgrowth (Astec).
GAVL aims to be among the top 10 agri-chem companies in India over the next 3 years
Dairy: 20% revenue CAGR as GAVL focuses on (1) higher proportion of revenue from value added
products, and (2) deepening its geographic reach
Strong financials: 40%+ PAT CAGR over past 7 years, minimal working capital requirement, RoCE of~20%, high asset turn (~5x). We expect 20% PAT CAGR over FY17-21. We maintain a BUY with a target of Rs 682 for long term 1 year and above.
Budget 2018 Connection :
See budgetary allocations for irrigation, eNAM, rural insurance: Godrej Agrovet
here will be budgetary allocations into three critical areas of agriculture -- rural insurance, irrigation projects, and eNAM, said Balram Yadav, MD, Godrej Agrovet. See budgetary allocations for irrigation, eNAM, rural insurance: Godrej Agrovet
Sir John Templeton, who was given the tag of "arguably the greatest global stock picker of the (twentieth)century”, founded the Templeton Growth Fund in 1954. He famously said, "Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria."
While many experts have even further subdivided the phases, I think Sir Templeton's prognosis is a simple template for analysing the bull markets. This categorisation may be a bit simplistic as all bull markets have their own nuances and differences but I feel it is still very effective. Let us first look at what each of these phases typically look like.
The Pessimism Phase
This phase typically comes at the end of a big downtrend, when everything is seemingly at its worst and while the news-flow is still bad but the market stops reacting to bad news. This is a very difficult phase to enter as in general there is still a lot of gloom. However, smart investors start to enter the market in this phase. The asset based valuation metrics like Price/Book or measures like Dividend Yield work well in this phase. The Trend following technical analysts are still very bearish as typically this could be a sideways market. The one big exception here was the almost V shaped bounce in the market following the Financial crisis in 2009 when most investors remained very bearish.
Market disillusionment characterizes phase one of a bull market, according to Futures Magazine. This "reluctance" phase follows a bear, or falling, market in which many sold their holdings to cut their losses. The general public has little confidence in the market even though average prices and price/earnings ratios are typically low. Institutional investors start to accumulate holdings to take advantage of the low prices.
The Scepticism Phase
You would have heard in the press or some experts saying that the market is climbing the Wall of Worry. They are talking about the Sceptisicm phase. In this phase while the news stops being negative but investors in general are still not convinced about the market. Market participants look at earnings based measures like P/E or EV/EBIDTA and buy them only when they look attractive. The short term technical trends become positive but the tendency is to trade as the volatility is still high.
Individual investors begin to return in the second phase of the bull market. Institutional trader, Ali Meshkati, notes that, as they recognize the potential for a bull market to develop, investors study stocks in earnest once again. Stock prices, having increased for several months, attract more interest. In this second stage, investors add to their portfolios, which pushes prices higher. Rising prices create demand and greed sets in.
The Optimism Phase
During this phase, negative sentiment starts to reduce and typically the economic outlook starts improving and news-flow becomes positive. This phase can be long lasting, and also sees a broader participation of investors and of stocks. The trend following technical analysts do very well. Volatility comes down and buying on dips becomes a very profitable and easy to follow strategy. Investors start justifying valuation through measures like PE to Growth, Relative valuations, Sum of parts as the bull market matures.
Chris Johnson writes in his Winning Edge investment newsletter that this acceptance phase is the most powerful bull market. Stock prices soar as new investors enter the market. IPOs become popular to take advantage of growing public interest in investments, while the number of corporate mergers and acquisitions, fed by the availability of capital, increases. Media coverage gives investors pointers on how to profit from market activity. Institutional investors sell the shares they bought in phase one, then move into technology and other more speculative stocks. Mutual funds benefit from investors shunning cash vehicles such as money market funds, a reflection of confidence in sustained market growth.
The Euphoria Phase
In this phase money making becomes very easy. The perception is that only good things lie ahead. This is also usually the phase when investors who were sitting on the sidelines all this while start entering the market. Number of IPO's announced sky-rockets, stocks of companies considered untouchable do very well. New valuation metrics are often created for example towards the end of the tech boom in 1999 we saw market values of internet companies being justified based on the “eyeballs” they attracted on their site!
This "exuberance" phase is a period of volatility, high trading volume and high expectations. Investors in this stage of a bull market become speculators who ignore fundamental performance measurements when choosing stocks. An overriding feeling that the market will continue to flourish prevails. However, the market eventually becomes crowded, leaving fewer new investors. The flow of dollars sustaining market performance begins to trickle and top-performing stocks start to drop. The bubble of this final stage bursts as investors realize the market has outpriced itself.
This is the “melt-up” phase , Here, the ferocity of fall in the market after this phase is directly related to the ferocity of the rise!
