Markets To Head Higher Next Diwali!

A lot has changed from the previous Diwali to this Diwali for the equity markets. If the mood was optimistic during last year’s festive season, this year the mood is that of cautious optimism. Yogesh Supekar discusses the market behaviour that has been prevalent in the past one year while also focusing on what to expect in the coming year. Alongside, the DSIJ research team shares their top 10 picks for ‘mahurat’ trading 

The festival of lights i.e. Diwali is always special for Indians, whether they be in India or in any corner of the globe. For investors in the equity markets, Diwali is even more auspicious and every investor knowingly or unknowingly tends to look at the markets with a fresh perspective, hoping to get a fresh insight on the individual portfolio and also on the markets. It is indeed time to take stock of the portfolio and evaluate realistically how the equity portfolio has performed vis-à-vis other asset classes. The key benchmark indices have gone nowhere while delivering negative returns in excess of 6 per cent in the past one year. However, the broader markets have kept equity investors in India rich and shining. The broader market indices reflect the same bearishness as seen in the key benchmark indices but the breadth of the market has been positive this season with several stocks turning out to be multi-baggers. We find that at least 19 stocks have gained by more than 1,000 per cent in the past one year or so since the previous Diwali. 

As many as 27 stocks delivered returns between 500 per cent and 1,000 per cent while at least 401 stocks delivered returns between 100 per cent and 500 per cent. This also means that investors had in total 447 stocks to choose from that more than doubled since the previous year’s Diwali. The broader market’s strong performance is further realised when we see that as many as 400 stocks have gained between 50 per cent and 100 per cent since the previous Diwali and at least 433 stocks have gained by more than 25 per cent and up to 50 per cent. 

It was a year to reckon with for the broader market investors. The story since previous year’s Diwali also belonged to SME stocks and micro-cap stocks. This year we saw the market capitalisation of SME stocks crossing ? 60,000 crore. Most of the multi-baggers in the previous year emerged from the micro-cap space. Many believe that the outperformance in the broader space will continue for a few more years. However, experts are quick to alert investors to the risks involved in micro-cap investing. Micro-cap investing is not for everyone, and it requires extraordinary efforts to gain insights into a micro-cap company. 

"This Diwali, gold and silver market sale in India is expected to increase by 20 to 30 per cent compared to last year. Gold prices may continue to remain volatile."

Sagar Kaigaonkar
Partner, SG Kaigaonkar Jewellers & Co-Director IBJA 

Says Dr. Prashant Mishra, who is a successful and active micro-cap investor: “Micro-cap investing is not easy and you can’t invest in micro-caps without groundwork. This week we travelled close to 1,200 km by road and train to explore some micro-caps for groundwork. You can’t invest in a microcap by sitting in an AC room in front of your computer.” Indeed, it requires a lot of hard work and meticulous planning to become successful in micro-cap investing. The Indian equity market at this juncture stands out and there are a lot of positive things happening on the ground in India that may benefit long-term investors. Global investors are looking at the Indian equity markets as an oasis of sorts with almost every other developed economy and large emerging economies facing turmoil.

The consensus is that the Indian markets will outperform. According to Gunavanth Vaid, yet another successful micro-cap investor, “I travel 20 days a month and it is something I have been doing for the last seven years. Most of my visits are to non-metro plants. Today, I am in Khandesh in Maharashtra. One thing I can vouch for is that a majority of the companies are doing extremely well. Almost all are engaged in record capital expansion. Most MNCs have shifted or are in the process of shifting their plant from China to India. The kind of volumes this new capex can generate is unimaginable. For example, in one of the companies which I visited, the new order from just one new plant they are planning is equal to their existing annual turnover.” 

“Don’t listen to the noise. Just spend a few days on the ground. You will know the truth. Believe in the country and think long term. I can assure you we are in the mist of the best economic phase. I am not saying we are picture perfect. There are issues on the ground level which are beyond just economic conditions. Yet, wealth can be created. Believe in yourself, believe in India. The next five years belong to India,” he adds. Fund managers also believe that India is the place to be in the coming years. While there is no doubt that India continues to shine and is expected to stand out, the question is how long and how far the Indian market can continue to outperform. 

"With the volatile macroeconomic conditions where global central banks are raising interest rates to tame inflation & oil prices, as a wealth manager, I narrowly see upside potential in the next 12 months. But our economy is slightly in better condition & investors who want to invest long with a 3-5 years time frame. The major boom may occur in 2024-25. Again when rates start stabilizing. But next 12 months value investors are going to be acting aggressively as there are many stocks at attractive valuations to hunt."

Ankit Yadav
Wealth Manager and Founder, Market Maestroo 

Review of Our Previous Diwali Portfolio 

In line with our track record the DSIJ Diwali Portfolio of 2021 has outperformed BSE Sensex and BSE 500 by a good margin. While Wipro, JK Lakshmi and DLF disappointed with their performances it was quality stocks like Bank of Baroda, Sun Pharmaceutical Industries, Century Plyboards (India) and ICICI Bank that contributed the most to the healthy portfolio returns. Overall, the DSIJ Diwali portfolio managed to deliver ~4 per cent in one year while BSE Sensex and BSE 500 indices clocked losses of 2.28 per cent and 2.18 per cent, respectively. Bank of Baroda was most impressive pick as we were able to book 48.15 per cent returns in less than 12 months. Sun Pharma is up by 23.48 per cent and Century Plywood gained by 13.75 per cent. 

Sandip Raichura
CEO of Retail Broking and Distribution and Director, Prabhudas Lilladher (P) Ltd. 

“Being out of the Markets is Not Advisable” 

What has changed for the equity markets from previous Diwali to this Diwali? 

Last year, around the same time, the Dow Jones average had hit its highs and soon after, around January 22, the index started weakening. Also, this time last year the GDP forecast for FY22 was maintained at around 9.5 per cent but the Russia-Ukraine crisis as well as the Federal Reserve-related nervousness started impacting the markets. We were then also in the firm grasp of a commodity bull run which impacted net hard metal importers as well as resulted in a massive shortage of semiconductor chips. These situations have virtually reversed this year even as the Nifty is still more or less within a similar range as Diwali last year. Bond yields today are at multiyear highs and this is definitely a much different place than last year. India has maintained a robust growth trajectory and is now standing out as a shining star in a chaotic world. 

Will this lead to a higher Sensex next Diwali and will Small-Caps and micro-caps outperform till next Diwali? 

Our fundamental research team maintains an FY23 of around 20,930 levels. However, until volatility subsides, it would be safer to seek shelter with Large-Caps at least over the next few months. As we saw in the last couple of months where Mid-Caps have underperformed as volatility has risen, it’s always useful to remain tactical during such times. The Federal Reserve stance may be volatile as we approach H1FY23 given that there would be very strong opposing forces – a very strong and uncompetitive dollar and high yields on the one hand and weakness in employment or GDP growth on the other. Of course, as and when a broad-based rally starts, mid-caps would surely outperform. 

Which investment themes are you banking on right now and where do you see a better margin of safety in the current market situation? 

Our fundamental research team remains bullish on sectors which are either gaining from strong domestic demand or declining commodities or a favourable policy environment. We as a research house remain relatively bullish on automobiles, banks, construction, engineering, IT, telecom and healthcare. 

What is your advice to equity market participants? 

We are in a strong environment which is however volatile due to readjustment of yields and currencies, partly also spiking because of geopolitical turmoil. However, given the fact that we may soon be at the cusp of what may be considered as too much action too rapidly by central banks, we may have very quick reversals to the upside often marred by downward spikes. With fears of a stronger than expected stagflation situation – which is the worst situation to be in for any nation – central banks may come around to a more benign policy environment but without warning. Of course international trade flows may get impacted and so we believe that domestic stories in the above sectors should continue to remain investors’ harbours till more clarity emerges. Being out of the markets is not advisable. For customers who fear sharp slides, we have been recommending buying protective puts and a large-cap bias to make these efficient. India is a good bet for the next decade. One must be patient while facing some short-term turbulence. 

Concerns about Global Financial Situation 

The recent volatility that has hit the global markets is owing to the sudden realisation by US Federal Reserve and other central banks to increase interest rates to contain the record inflation. For almost a decade now, the financial markets, especially the fixed income markets, were made to believe that the zero interest rates or the negative rates were here to stay for many years to come. Now that the financial markets must face rising interest rates, the weakness in the whole system is getting highlighted and the same is putting pressure on the equity markets, thereby leading to forced selling of equity as there are margin calls. The problems in the UK financial markets and especially in the pension funds are not to be ignored by the equity markets. 

What is LDI? 

Liability-driven investing or LDI is defined as an approach that focuses on the investment policy and asset allocation decisions matching the current and future liabilities of the pension plan. The primary goal of LDIs is to ensure that pension funds have adequate funds to pay what they owe to retirees. As retirement takes place only after a certain age, typically the payouts are expected to be 30-40 years in the future. To plan for these payouts, fund managers buy long-dated bonds along with derivatives to hedge their bets. Pension payments have a long life and their present value is directly linked to interest rates, potential inflation, and longevity. 

If interest rates or inflation expectations change, asset and liability values rise or fall together and the funding level of the pension scheme should be less volatile. In other words, the pension scheme’s unwanted or unrewarded liability risks are hedged. This process entails the pension fund offering collateral. If bond yields rise rapidly, even more collateral has to be offered in what is usually known as a 'margin call'. If bond yields rise slowly, it doesn't hurt pension funds relying on LDIs. It helps the finance of the funds. However, if bond yields rise sharply, it is problematic. 

The Pension Fund Crisis In UK

A pension fund, also known as a superannuation fund in several countries, is any plan, fund, or scheme which provides retirement income to the investor. The key objective of this plan is for the investor to get a steady stream of income after completing your active years of employment service. Pension funds typically have large amounts of money to invest and are the major investors in sovereign government securities, and equity/debt of listed and private companies. These retirement plans carry much less risk than other forms of investments, making them ideal to secure assured returns for senior citizens. At the end of September 2021, UK-funded occupational pension schemes had assets of between £2.5 trillion (market value of pension funds) and £3 trillion. On 23 September 2022, two weeks into the tenure of Prime Minister of the United Kingdom Liz Truss, Chancellor of the Exchequer Kwasi Kwarteng announced a set of economic policies, mostly various tax cuts, widely referred to in the media as a "mini-budget". The markets went berserk on the minibudget proposal of unfunded tax cuts. In all of this, pension fund managers ran into trouble in LDIs (i.e. liability-driven investments). 

The mini-budget announcement of unfunded tax cuts led to a steep rise in yields which led to a fall in UK gilt bond prices. This triggered margin calls for pension funds. The UK pension protection funds faced a £1.6 billion call for cash. Pension protection funds were unable to pay this margin call without dumping assets (i.e. highly liquid UK long-term government bonds). As the circumstances aggravated, ultimately, the Bank of England was forced to step in with emergency bond buyback measures in an attempt to calm the turmoil in the bond market and ease liquidity pressures. The central bank has decided to buy up to £65 billion in bonds, to stop a “self-reinforcing spiral” and “widespread financial instability.” 

This move ensured that the yields on longer-term government bonds decline, which provided pension funds with muchneeded breathing room. According to a letter written by the Bank of England to the head of the UK Parliament’s Treasury Committee, the central bank believes that if it hadn't intervened, several funds would have defaulted. Presently, the central bank has stated that it will continue with its emergency measures beyond its scheduled end date. 

A pension crisis was all but inevitable as interest-rate increases created new stresses for hedging strategies. Experts at Goldman Sachs warned of a deeper and “more significant recession” in the UK, following the sacking of Kwasi Kwarteng as chancellor and Prime Minister Liz Truss’ reversal of corporate tax decision. In its report, the investment downgraded UK’s economic outlook, saying, “Folding in weaker growth momentum, significantly tighter financial conditions, and the higher corporation tax from next April, we downgrade our UK growth outlook further and now expect a more significant recession." 

One of the most important shifting perspectives on the equity market lately has been about how powerless and effective the reserve bank can be. The mood during the previous Diwali and during the pandemic was totally different. During the pandemic the impression we all had as market participants was that the US Federal Reserve and other central banks can at any time arrest the market downfall by printing money and save the financial markets from crash landing. The power seems to have shifted from the reserve banks to the governments where increasingly it is the governments that decide where the capital expansion has to happen. For example, in India it is the government-led capex decision that is influencing where private capital expansion happens. 

The existing government in India has outlined huge capital expansion for such sectors as renewable energy, defence, railways and infrastructure. Unprecedented capex is seen in these select sectors in India and hence some of the top-notch investing opportunities can emerge from these action-oriented sectors. The manufacturing sector in India is also witnessing huge capex as the capacities are being augmented on ground in a majority of the industries that are attempting to take advantage of the inflationary situation. Equity consultant Darpan Patil, who believes in technical analysis, says, “We expect the markets to perform well and are recommending our clients to buy select mid-caps and small-caps in spite of the current volatility. We believe that they will outperform the large-caps.” 

Conclusion

There is a mood of caution amongst investors globally as probability increases for the global indices to slip further before recovering. However, there is another school of thought that suggests that if you buy when things are settled the stock prices will already be much higher. As a long-term investor, it has been proven time and again that volatility helps to build a durable portfolio. The equity investing game is that of patience and conviction. Build conviction in the right kind of stocks and in the right sectors and just hold on to your investments while ignoring the short-term pains. This is the right approach to create wealth.

At the current juncture the outlook remains bullish on the banking sector even as we have seen that in the near term the momentum has weakened for IT stocks and has strengthened for the banking pack. The reason is the strong credit growth at eight years’ high and rising interest rates. When there is a rise in credit growth with rising interest rates, the NIMs improve for banks and thus the profitability. Banks will be in focus at least till next Diwali. The IT sector, even though it has underperformed recently, expects the order book to build up so that it will remain healthy despite the US’ recessionary environment. 

The near-term margin pressure at best can be transitory and the sector should continue to do well. Exposure to quality IT stocks, both large-caps and mid-caps, is a must for any high-quality portfolio. The automotive sector is here to create wealth for investors as the current cyclic recovery in the sector is expected to last for more than two years. The major issues impacting the automobile sector such as semiconductor shortage are behind us. The pent-up demand and the softening commodity prices are positives for the sector. As an investor it is easy to get confused owing to lot of noise impacting the market sentiment. 

 For example, Credit Suisse bankruptcy speculation and its potential impact on global banking and financial system, the UK pension funds fiasco, Russia-Ukraine geopolitical situation, UK political uncertainty, rumours of property market bubble in China, recession fears in the US, inflation situation going out of hand leading to a situation of stagflation and energy crisis can cause relentless irritation. What we have on hand is a growing inflationary situation and slowing economic growth condition. People tend to call it stagflation when stagflation is actually growing inflation and rising unemployment situation. We are not there yet. The employment levels in the US economy are healthy. 

Having said that, the market seems to have discounted all the above negatives and has chosen to trade where it is trading now. Going ahead, the market story will be scripted by dollar strength, earnings report and easing of raw material prices which depends a lot on the outcome of the Russia-Ukraine war. The positive aspect for long-term investors is that the inflation and interest rates may have already peaked and thus it makes this the best time to take exposure to the equity market. Also, equity remains one of the best assets that can beat inflation and thus the allocation to equity is expected to remain high. Equity as an asset class can never go out of fashion and in fact will gain prominence if inflation persists. It would be wrong to believe that rising interest rates often lead to falling markets. 

There are numerous occasions where we have seen equity outperforming other assets when the interest rates and inflation have risen. The earnings report so far is showing strength in resilience. There is concern that the rising interest rates will have a negative impact on several sectors and companies with a lag effect. One must factor that in when investing in companies with a high debt component. Capital expansion is happening at a record pace in India and as an investor one cannot miss the trend of investing in companies and sectors where the capex is taking place so rapidly. To make the most of the capex happening on ground, one can focus on quality micro-cap companies that are engaged in capital expansion and are exhibiting earnings’ visibility. 

Identifying micro-cap companies with explosion in earnings’ possibility and high-quality promoters is your ticket to identifying future multi-baggers. Another way to tap the India growth story and identify market outperformers is to find the areas where maximum capex expenditure is happening. It looks like India is witnessing a capex boom both in the government and the private sectors and this trend may continue for several years. The inflationary environment will remain and high interest rates may also exist longer than policymakers find it comfortable. However, as investors we need to not stay away from markets due to these factors. An inflationary environment and rising rates are no guarantee of underperformance. 

Recommendations

Britannia Industries Ltd. 

CMP (₹ ): 3,796.25 

BSE CODE: 500825
Face Value(₹ ) : 1
52 Wk High/Low : 3,950.00 / 3,050.00
Mcap Full ( ₹  Cr.) : 90,989.20 

Here is why:
•  Robust portfolio
•  Solid growth volume
•  Improving infrastructure efficiency. 

Britannia Industries, with a 100-year tradition and annual revenues in excess of ₹ 9,000 crore, is one of India’s biggest food firms. The company is one of the most dependable food companies, producing well-known brands in India such as Good Day, Tiger, NutriChoice, Milk Bikis and Marie Gold. The product line offered by Britannia Industries consists of biscuits, bread, cakes, rusk and dairy items like cheese, beverages, milk and yoghurt. Many generations of Indians have grown up with the ‘Britannia’ brand, which are cherished and adored in India and around the world. Britannia Industries’ goods are sold at about 5 million retail locations nationwide, reaching more than 50 per cent of Indian homes. With an annual turnover of more than 1 lakh tonnes in volume and ₹ 450 crore in value, Britannia Bread is the most well-known brand in the organised bread market. 

With the help of 13 factories and four franchisees, the company sells about 10 lakh loaves per day in more than 100 Indian cities and villages. Around the world, it is present in more than 60 nations. The company's global reach includes a local manufacturing base in the Middle East where it is the secondlargest biscuit player in the UAE and has a strong claim to leadership. It also has a similarly strong market position in the other GCC nations. Through exports, it has a presence in North America, Europe, Africa and Southeast Asia. To support the export markets, the company is investing in a cutting-edge facility at Mundra SEZ, Gujarat. 

Financial Overview

The company’s quarterly consolidated financials show that net sales rose by 9.01 per cent in Q1FY23 to ₹ 3,653.80 crore as compared to ₹ 3,351.94 crore in Q1FY22. The operating profit declined to ₹ 556.24 crore in Q1FY23 from ₹ 614.25 crore in Q1FY22 i.e. a 9.44 per cent fall. On the contrary, the net profit also declined to ₹ 335.89 crore in Q1FY23 from ₹ 386.80 in Q1FY22. The annual performance of net sales shows average returns of 8.24 per cent in FY22 of ₹ 13,944.67 crore as compared to ₹ 12,883.04 crore in FY21. The operating profit dropped to ₹ 2,424.34 crore in FY22 from ₹ 2,882.16 crore in FY21. Subsequently, the annual net profit slipped in FY22 to ₹ 1,516.18 crore as opposed to ₹ 1,849.78 crore in FY21. The company’s established market position and extensive track record in the food industry is backed by high-capacity utilisation and a diverse product portfolio. 

Rationale

Britannia Industries maintained its strong growth momentum in top-line growth at 7.6 per cent YoY (domestic sales increased by 8.4 per cent while exports decreased by 4.8 per cent) despite a challenging environment thanks to a well-balanced mix of a strong portfolio, direct distribution and improved distribution infrastructure. Britannia Industries started the process of becoming a complete food corporation. Additionally, it has entered a number of product categories, including salty snacks, milkshakes, cream wafers, dairy goods, dairy products with added value and croissants. As distribution of these items increases substantially, a corresponding increase in volume might be anticipated. 

The contribution made by these new categories is still in its development though. Britannia Industries intends to concentrate on value-added dairy whiteners, cheese and milk-based beverages with better profit margins. The corporation is accelerating its efforts to improve distribution, closing the gap with leading competitors. Direct reach has expanded by more than 26 per cent over the last two years to 2.49 million outlets. Additionally, it has been increasing its manufacturing capacity to accommodate continued expansion into new goods and categories. 

Currently, 60 per cent of its manufacturing is done internally. In light of rising commodity prices, packaging costs, fuel prices and transportation costs when many costs are at 10-year highs, cost control is a top issue. More lately, the business has been steadily redirecting its advertising and promotion budget into long-term, brand-building activities. In Ranjangaon near Pune, the business has invested in a dairy greenfield factory that complies with international standards. With the ability to produce yoghurt, ghee, cheddar, processed cheese, skimmed milk powder, etc. it can serve as a multi-category dairy plant. The factory can produce 150,000 tonnes per year. Given such growth prospects, we recommend BUY. 

Cipla Ltd. 

CMP (₹ ): 1,108.90 

BSE CODE: 500087
Face Value(₹ ) : 2
52 Wk High/Low : 1,149.00 / 850.00
Mcap Full ( ₹  Cr.) : 89,415.78 

Here is why:
•  Well-diversified product portfolio
•  Robust pipeline of NDAs and ANDAs
•  Healthy dividend payout. 

Established in 1935, Cipla is a global pharmaceutical company focused on agile and sustainable growth, complex generics and deepening portfolio in the home markets of India, South Africa, North America and key regulated and emerging markets. The company’s strengths in the respiratory, anti-retroviral, urology, cardiology, antiinfective and CNS segments are wellknown. It has 47 manufacturing sites around the world which produce more than 50 dosage forms and 1,500+ products using cutting-edge technology platforms to cater to over 86 markets across the world. 

Financial Overview

In terms of quarterly consolidated financial performance, the company’s net sales and other operating income for Q1FY23 stood at ₹ 5,375.19 crore, down by 2.35 per cent from ₹ 5,504.35 crore in Q1FY22. Operating profit slipped by 11.63 per cent from ₹ 1,410.82 crore in Q1FY22 to ₹ 1,246.78 crore in Q1FY23. Net profit marginally fell by 0.74 per cent from ₹ 711.80 crore in Q1FY22 to ₹ 706.56 crore in Q1FY23. The company’s ‘One India’ business saw sustained momentum in core portfolio across branded prescription, trade generics and consumer health over the last year with 9 per cent YoY growth adjusted for the corona virus portfolio. 

During the quarter the company’s gross margins after material cost stood at 62.3 per cent which is broadly in line with last year’s figures. The margins have baked in higher procurement freight and forex to the extent of 170 basis points which was offset by calibrated price hikes as well as the benefit of decline in the low margin corona virus portfolio. In terms of annual consolidated financial performance, Cipla posted net sales and other operating income of ₹ 21,763.34 crore in FY22, up by 13.59 per cent compared to ₹ 19,159.59 crore in FY21. Operating profit for FY22 came in at ₹ 4,833.69 crore, up by 6.98 per cent from ₹ 4,518.42 crore reported in FY21. Net profit rose by 6.59 per cent from ₹ 2,401.30 crore in FY21 to ₹ 2,559.47 crore in FY22. Geopolitical conflicts and associated supply chain challenges kept procurement and freight costs at elevated levels. The company is managing some of the external headwinds by passing on cost escalations wherever possible, continued cost optimisation and managing its product and geography mix to insulate core margins while balancing growth investments in portfolio, markets and channels.

Rationale

Cipla’s product portfolio is well-diversified with the top 10 products contributing 31 per cent of the total operating income in FY22. It is a leader in respiratory therapy with a market share of 22.2 per cent in India. Six of Cipla’s brands are featured in the top 10 respiratory brands by value in India (as per IQVIA March 2022). It is also the second-largest inhaler-selling company globally. The company launched 93 new products across the world in FY22. It also secured approvals of 12 abbreviated new drug applications (ANDAs) and filed for another 11 ANDAs in FY22. The company was granted 15 patents in FY22 and filed 13 new patents in the same period. Cumulatively, Cipla has a pipeline of 250 ANDAs and 165 are approved. 

The company continues to focus on moving up the innovation curve by leveraging data science and digital technology in research and development, coupled with best-in-class commercialisation and unlock value. Over the past two years, Cipla has strengthened its business model with complex launches and expanded its footprint to augment its competitive position in key geographies. Throughout the pandemic, the company has upscaled its capabilities to support stronger execution and ensure widespread availability of quality medicines from its organic portfolio and leveraging partnerships with global MNCs. 

Cipla is investing in automation and digitalisation to drive sustainable efficiencies across portfolio selection, manufacturing, supply chain and quality operations. The company’s focus continues on realising commercial opportunities beyond respiratory and complex generics and injectables, particularly in the space of co-developing biosimilars, inhalation devices, diagnostics solutions, new-age technology platforms and digitised business models. The organisation aspires to build a strong global wellness franchise. Hence, we recommend BUY. 

Gujarat Alkalies & Chemicals Ltd.

CMP (₹ ): 885.00 

BSE CODE: 530001
Face Value(₹ ) :10
52 Wk High/Low : 1,044.75 / 568.70
Mcap Full ( ₹  Cr.) : 6,419.86 

Here is why:
•  Strong financial growth
•  Robust expansion plans
•  Optimistic outlook for chemical stocks. 

Gujarat Alkalies and Chemicals Ltd. is a multi-product chemical manufacturing company and is one of the leading producers of caustic soda lye. Its manufacturing facilities are located at Dahej and Vadodara in Gujarat. The company’s product basket comprises 36+ products including caustic soda (lye, flakes and prills), liquid chlorine, chloromethanes, hydrogen peroxide, caustic potash (lye and flakes), aluminium chloride, phosphoric acid, etc. Its products are used by various industries such as textiles, pulp and paper, soaps and detergents, alumina, water treatment, petroleum, plastics, fertilisers, pharmaceuticals, agrochemicals, plant protection, dyes and dyes intermediates, etc. 

Financial Overview

The company’s quarterly consolidated financial results portray that the operating profit for Q1FY23 was ₹ 387.65 crore as compared to ₹ 142.21 crore for Q1FY22, an increase of 57.49 per cent. Net sales for Q1FY23 stood at ₹ 1,128.33 crore, recording a rise of 57.49 per cent as compared to ₹ 716.44 crore in the same quarter last year. The net profit was recorded at ₹ 222.07 crore which was ₹ 63.5 crore in Q1FY22, improving robustly by 249.72 per cent. On an annual basis, the company reported a positive performance in terms of net sales of ₹ 3,758.73 crore for FY22, zooming 54.71 per cent from the previous year’s value of ₹ 2,429.48 crore. 

The operating profit reached ₹ 1,032.56 crore as compared to ₹ 425.624 crore for FY21, which has increased by 142.6 per cent. The net profit was ₹ 561.98 crore for FY22 as compared to net profit of ₹ 166.85 crore for FY21, an attractive rise of 236.82 per cent. The operations of the company are mainly under one segment only i.e. chemical manufacturing. The total production excluding power generation has increased by 6.93 per cent to 1,718,835 MT during FY 2021- 22 from 1,607,469 MT in the previous year. As regards the export of various products of GACL, this stood at ₹ 339 crore in FY20-21 whereas it was ₹ 500 crore in FY21-22. Looking at the financial ratios of the company, it is well positioned in terms of its PE ratio which is lower than the peer average as well as the industry average. 

In terms of price to book ratio and dividend yield, the company is positioned well as compared to its peer companies. Considering the FY22 figures over FY21, the company has witnessed a significant jump in EPS from 22.57 in FY21 to 76.22 in FY22. Some notable changes in the ratios include the interest coverage ratio, which is used to determine how easily a company can pay interest on its outstanding debt. This stood at 168 times in FY22 and was 27.53 times in FY23. Along with the same, the operating profit margin, net profit margin and return on net worth also showed healthy improvement on a YoY basis. The debt equity ratio, one of the common analytical ratios, has been decently lower than the average industry debt-to-equity ratio for the past five years which is one of the positive indicators for the company. 

Rationale

Chemical stocks are predicted to post healthy growth in top-line, particularly in international revenues due to increase in product prices. Gujarat Alkalies and Chemicals Limited (GACL) has recently completed various new projects for producing new chemicals and expanding the capacities of its current product lines. 

A joint venture company with National Aluminium Company Ltd. (NALCO) has also led to the installation of an 800 TPD caustic soda plant, integrated with a 130 MW captive cogeneration plant. Considering the performance of the last two years, Gujarat Alkalies and Chemicals is a multi-bagger stock rising by nearly three-folds in two years. 

The mid-cap stock has shown a strong performance despite a series of periodic corrections. The shares of Gujarat Alkalies and Chemicals have delivered returns of 36.05 per cent in the year 2022, so far. The company strives to work towards a strong growth curve with strengths pertaining to economies of scale, state-of-the-art eco-friendly technologies, extensive use of renewable energy, integrated downstream plants, strong network for marketing and distribution, in-house research and development facilities and proximity to major raw material sources and markets. Hence, we recommend BUY. 

HDFC Bank Ltd. 

CMP (₹ ): 1,439.00 

BSE CODE: 500180
Face Value(₹ ) : 1
52 Wk High/Low : 1,724.30 / 1,271.75
Mcap Full ( ₹  Cr.) : 8,05,611.02 

Here is why:
•  Anticipated gains from the largest merger
•  Robust product portfolio with a strong market position
•  New opportunities brought on by market expansion 

The premier housing finance company in India, the Housing Development Finance Corporation (HDFC) has a stellar reputation both domestically and abroad. It was one of the first institutions to receive 'in principle approval from the Reserve Bank of India (RBI) in 1994 to establish a bank in the private sector. Today, HDFC Bank, the largest private sector bank, operates 6,378 branches and over 18,000 ATMs across 3,203 locations, with its headquarters in Mumbai. The bank has three key pillars in its banking and financial services: retail banking, wholesale banking, and treasury activities. 

Customers can access a wide range of financial products and banking services through HDFC Bank retail banking, including net banking and mobile banking. Working capital finance, trade services, transactional services, and cash management are among the services offered under wholesale banking. With a focus on three primary product categories, including foreign exchange and derivatives, domestic currency money market and debt securities, and equities, the bank provides treasury services to assist businesses in improving returns on their capital and managing financial risk. 

Financial Overview

For the second quarter of FY23, the income from interest was recorded at ₹ 40,929.79 crore, a significant rise of 22.1 per cent from ₹ 33,520.44 crore for the same period last year. The total income surged by 18.69 per cent from Q2FY22's level of ₹ 41,436.36 crore to Q2FY23's level of ₹ 49,182.10 crore. In the second quarter of FY23, the bank had spectacular growth of 22.40 per cent, increasing its net profit to ₹ 11,162.59 crore from ₹ 9,119.96 crore in the corresponding quarter of FY22. 

In terms of annual earnings, the bank reported interest income of ₹ 1,35,936.41 crore for FY22, an increase of 5.74 per cent from ₹ 1,28,552.40 crore for FY21. The total income surged 7.58 per cent in FY22, from ₹ 1,55,885.28 crore in FY21 to ₹ 1,67,695.40 crore. From the net profit of ₹ 31,856.77 crore in FY21 to the net profit of ₹ 38,150.90 crore in FY22, the company reported a remarkable rise of 19.76 per cent. 

The largest bank in the private sector is HDFC Bank, with a market valuation of over ₹ 8,05,000 crore. Promoters own 25.73 per cent of the business as of June 2022. Massive holdings are held by institutional investors of 59.58 per cent, of which foreign portfolio investors (FPIs) own 32.31 per cent and mutual funds control 18.03 per cent. The remaining 14.69 per cent of the equity is held by non-institutional investors 

Rationale

India's banking sector contributes significantly to the country's economy and is a crucial one from a strategic perspective. The banking industry in India is well-regulated and adequately capitalized. 

By 2030, India will have the third-largest consumer economy in the world owing to its young population, which comprises 65 per cent of those under the age of 35. India is the second-largest market for Internet users and already has the second-highest number of smartphone users worldwide. India's improved digitalization status has given the banking sector access to new markets in semi-urban and rural areas. And in the future, these elements will unquestionably be growth drivers for the industry. 

The bank added 8,500 employees and 121 branches in the most recent quarter. HDFC Bank plans to open 900 new branches soon. Because of the emphasis on retail loans and the upcoming merger, the bank expects opex to remain elevated, with a 21 per cent CAGR in opex over FY22-25. When compared to other banks, its price-to-earnings (PE) ratio is low. The bank generates good profitability per unit of total capital with a return on equity (ROE) of 15 per cent. 

Among its key strengths are the varied loan book, consistent asset quality, adequate capital, good profitability, extensive distribution network, and robust product groups. Due to HDFC Bank’s potential for rapid growth soon and the excellent long-term prospects for the Indian banking industry, we recommend BUY. 

Hindustan Aeronautics Ltd. 

CMP (₹ ): 2,337.00 

BSE CODE: 541154
Face Value(₹ ) :10
52 Wk High/Low : 2,639.00 / 1,181.25
Mcap Full ( ₹  Cr.) : 79,034.16 

Here is why:
•  Strong order pipeline
•  Healthy financials
•  Significant entry barrier 

Hindustan Aeronautics Limited (HAL), a defence public sector undertaking (DPSU), was established on October 1, 1964, when Hindustan Aircraft Limited and Aeronautics India Limited were amalgamated. The principal business of HAL is to undertake design, development, manufacturing, maintenance, repair and overhaul of aircrafts, helicopters, engines and other related systems like avionics, instruments and accessories. It also engages with the Indian Space Research Organisation (ISRO) to contribute to the space programmes of the country. The Government of India (GoI) remains HAL’s largest shareholder with its current stake of 75.15 per cent. HAL was conferred with the Navratna PSU status in June 2007. 

HAL’s primary consumers are the Indian defence forces comprising the Indian Air Force, Indian Army and Indian Navy along with the Indian Coast Guard. The company has four production complexes: Bangalore complex and MIG complex located in Nashik and Koraput, helicopter complex located in Bangalore and Barrackpore and accessories complex located in Kanpur, Lucknow, Hyderabad, Kasargod and Korwa along with a design complex comprising research and development centres jointly located with the related manufacturing divisions. 

Financial Overview

The consolidated quarterly financials of the company show that its net sales more than doubled to ₹ 3,622.46 crore in Q1FY23 in comparison with ₹ 1,615.83 crore in Q1FY22. The operating profit grew by 2.59 times coming in at ₹ 1,017.93 crore in Q1FY23 relative to ₹ 392.58 crore in Q1FY22. Net profit rose threefold from ₹ 197.01 crore in Q1FY21 to ₹ 607.36 crore in Q1FY23. In the financial year 2021-22, HAL recorded the highest-ever turnover of ₹ 24,361.66 crore, experiencing strong growth of 8 per cent from the previous year’s ₹ 22,500.96 crore. The profit before tax (PBT) saw YoY growth of 22 per cent from ₹ 4,277.38 crore to ₹ 5,231.15 crore while the profit after tax (PAT) increased by a solid 57 per cent from ₹ 3,239.45 crore in the previous year to ₹ 5,086.50 crore, majorly due to receipt of Income Tax refund of previous years.

Rationale

The aerospace and defence industry is passing through an exciting time in which companies are focusing on technology advancements and operational efficiencies. It is expected that advancements in UAVs, aero-engines and electric and hybrid propulsion aircraft technologies are going to set the future path for the industry, whereas additive manufacturing, digitalisation, artificial intelligence and augmented and virtual reality tools are going to be efficiency drivers. To boost growth the company is focusing on the international market, civil aviation, civil MRO, UAVs and other diversified business opportunities through indigenous efforts and business collaborations with the Indian private industry and global OEMs. 

As far as international business is concerned, there is a lot of optimism for the company, especially in view of the recent geopolitical scenario and the neutral stance which India has taken. The changing world order has provided a good opportunity to the company in pursuing some of the markets which were not targeted before. The management team has said that there have been enquiries from countries like Malaysia, Philippines, Argentina and Egypt for supply of new platforms as well as to support their existing fleets. 

HAL has a diversified revenue mix covering sale of products, spares and services for multiple aircraft programmes, coupled with the sustainable profitability arising from the cost-plus nature of majority of contracts. As of Q1FY23 on receipt of fresh orders, the company’s order book has further strengthened to almost ₹ 82,000 crore, which is 3.3 times the company’s FY22 revenue. Further, it has a strong pipeline of approximately ₹ 1.24 lakh crore of manufacturing orders over the next three to four years, which will help the company deliver double-digit revenue growth. Its collections and budget allocations are healthy during the current year as well and the organisation has a surplus cash balance of almost ₹ 14,000 crore, which is the working capital funded upfront by its customers. The company faces limited competition from the private sector due to the high capital intensity and long gestation periods for developing manufacturing capabilities in the sector. Hence, we recommend BUY. 

IDFC First Bank Ltd. 

CMP (₹ ): 54.30 

BSE CODE: 539437
Face Value(₹ ) :10
52 Wk High/Low : 55.95 / 28.95
Mcap Full ( ₹  Cr.) : 34,652.85 

Here is why:
•  Strong fundamentals
•  Improving asset quality
•  New channels gaining traction. 

IDFC First Bank Limited was incorporated in October 2014 and the name of the bank underwent a change from IDFC Bank Limited (IBL) to IDFC First Bank Limited with effect from January 12, 2019 following the merger of Capital First Limited with the bank. The merger of Capital First Limited and its two subsidiaries with IDFC Bank Limited became effective from December 18, 2018. Post-merger, IDFC Limited held a 40 per cent stake in IDFC First Bank as the promoter, which has come down to 36.5 per cent as on June 30, 2022. IDFC First Bank’s operations are spread across its three business verticals – corporate banking, consumer banking and rural banking. 

As on June 30, 2022, it had a network of 651 branches and 807 ATMs across the country. The operations of the bank are led by Managing Director and CEO V Vaidyanathan, who has over 25 years of banking experience across Citibank and the ICICI Bank Group. The RBI has approved the reappointment of Vaidyanathan as the MD and CEO of the bank for a period of three years up to December 19, 2024. The bank also offers high-quality technology-enabled corporate banking solutions, contemporary cash management solutions, fleet card and FASTag solutions along with wealth management solutions. 

Financial Overview

On the quarterly consolidated financial performance front, the bank’s net profit for Q1FY23 grew to ₹ 474 crore compared to net loss of ₹ 630 crore in Q1FY22 and compared to net profit of ₹ 343 crore in Q4FY22, driven by strong growth in core operating income and lower provisioning requirement. Sequentially, PAT grew by 38 per cent on a QoQ basis. Net interest income (NII) grew by 26 per cent YoY to ₹ 2,751 crore in Q1FY23, up from ₹ 2,185 crore in Q1FY22. Net interest margin (NIM) on a quarterly annualised basis stood at 5.89 per cent for Q1FY23 compared to 5.50 per cent in Q1FY22 and 6.27 per cent in Q4FY22. The bank’s CASA deposits posted growth of 22 per cent on a YoY basis to reach ₹ 56,720 crore as on June 30, 2022 as compared to ₹ 46,439 crore as on June 30, 2021. Current account deposits contributed 15 per cent of the total CASA as on June 30, 2022 as compared to 12 per cent as on June 30, 2021. The CASA ratio was at 50.04 per cent as on June 30, 2022 as compared to 50.86 per cent as on June 30, 2021. The bank’s retail funded book is highly diversified over multiple lines of businesses and has reached ₹ 90,630 crore as on June 30, 2022, led by strong growth in housing loans’ book which grew 61 per cent YoY. 

The impact of the pandemic’s second wave is gradually diminishing and this improvement is being reflected in the performance of the bank and in its asset quality. The bank’s gross and net non-performing assets (GNPA and NNPA) were at 3.36 per cent and 1.30 per cent, respectively, which is a YoY reduction of 125 bps and 102 bps and QoQ reduction of 33 bps and 22 bps, respectively. For Q1FY23, provisions other than tax were lower by 84 per cent YoY basis at ₹ 308 crore in Q1FY23 at 0.9 per cent (annualised) of the average funded assets.

Rationale

The bank has been maintaining comfortable capitalisation levels to support growth in business as well as to have an adequate capital cushion to absorb credit costs Beyond lending, in FY22 the bank has also considerably scaled up several other new businesses such as digital cash management solutions (3,000 clients), trade forex, FASTag (8.5 million, up 50 per cent last year), toll acquiring business (420 toll plazas, up 50 per cent over last year), credit cards (7 crore cards). Their wealth management business with AUM of ₹ 6,536 crore as of FY22 is close to doubling every year, which will provide additional fee income. The enterprise is evolving into a highly diversified universal bank with multiple sources of income. 

The bank has turned the corner. With most of the legacy issues behind and taken care of, the strong improvement in profitability profile has been a key priority for the Bank, and the movements in FY22 trajectory of quarterly profits demonstrate an inflection point. With a strong foundation in place, a clear strategy of customer first and a rich product suite, the bank is well-positioned for a bright and sustainable future. Hence, we recommend BUY. 

Infosys Ltd. 

CMP (₹ ): 1,474 

BSE CODE: 500209
Face Value(₹ ) : 5
52 Wk High/Low : 1,953.70 / 1,355.50
Mcap Full ( ₹  Cr.) : 6,27,050.46 

Here is why:
•  A strong top-line raise
•  Advancing clientele
•  New pipeline transaction. 

Infosys Limited is a global information technology corporation that deals in business consulting, information technology and outsourcing. Bangalore serves as the company’s headquarters but it was established in Pune. Infosys is India’s second-largest IT firm. The conglomerate has over 40 years of experience operating and managing the systems and operations of multinational corporations. By providing the business with an AI-powered core that helps prioritise the execution of change, it helps its clients navigate into the digital world. It also enables the company to reach unparalleled levels of performance by leveraging adaptable technology at a global level. 

The business focuses on an agenda of constant learning as a means of fostering and disseminating digital skills, knowledge and ideas from the innovation ecosystem. In order to offer digital outcomes, Infosys is also focusing on developing core digital skills. The AI platform, cloud-based enterprise, management consulting, digital marketing, engineering services, analytics platform and financial technology (fintech) solutions are the company’s main products and services. On August 24, 2021, Infosys became the fourth Indian service company to achieve the USD 100 billion market value milestone. 

Financial Overview

The company’s quarterly results show stellar returns. It has delivered net sales of ₹ 36,538 crore as compared to ₹ 29,602 crore, giving a rise of 21.07 per cent. Similarly, the operating profit stood at ₹ 9,486 crore as compared to Q2FY22 which was ₹ 8,355 crore, indicating positive movement in Q2FY23. As a result, the net profit for the quarter ending Q2FY23 increased by 11.02 per cent. The net profit stood at ₹ 6,026 crore as compared to ₹ 5,428 crore in the same period last year. On the annual front, net sales showed a rise of 21.07 per cent and stood at ₹ 121,641 crore as opposed to ₹ 100,472 crore in Q2FY22. The operating profit for Q2FY23 stands at ₹ 33,786 crore and for Q2FY22 it was ₹ 30,090 crore. The net profit zoomed to ₹ 22,146 crore from ₹ 19,423 crore, showing a surge of 14.02 per cent. 

Rationale

This quarter, the company reported good profitability growth with new deals and increased supply-side efficiencies promising top-line growth. With a robust revenue increase of 4 per cent QoQ CC in Q2FY23, Infosys also maintained its position as the leader in Tier I IT revenue growth. However, this figure fell short of consensus expectations of 5 per cent and 4.5 per cent. Digital, which climbed 31 per cent YoY, showed tremendous growth that persisted throughout the past year. For the quarter, cloud revenue exceeded USD 1 billion. Infosys earned a remarkable broad-based major deal of total contract value (TCV) of USD 2.744 billion or 27.5 per cent YoY, the highest in the last seven quarters, despite macro headwinds producing difficulties in some regions. The deal includes 27 significant contracts. 

These deals will provide the company strong transaction pipeline with a decent balance for cost optimisation and transformation. Its clients’ emphasis on cost minimisation has boosted demand for Infosys’ cost efficiency and automation deals. Infosys announced an ₹ 9,300 crore open market share buyback at a cost not to exceed ₹ 1,850 per share. The scale of the buyback is consistent with the company’s policy to return 85 per cent of FCF over a five-year period. Interim dividend of ₹ 16.50 was also declared by Infosys. The business has revealed that the purchase of the assets of Channel Bridge Software Labs (P) Limited has received approval from the Board of Directors. 

The corporation also released the estimated result of PAT which was ₹ 6,021 crore as opposed to ₹ 5,421 crore while revenue was ₹ 36,538 crore as opposed to ₹ 29,602 crore YoY. On the strength of the current clientele, the management additionally increased its revenue growth forecast for FY23 from 13 per cent to 16 per cent to 14 per cent to 16 percent. The operational profit margin it projected, which was likely to be in the lower range, was between 21 per cent and 23 per cent. With 19 new deals in Q1FY23, deal wins maintained a strong momentum. The net headcount grew by almost 21,000 to 335,186. The corporation consistently pays out a respectable 54.3 percent in dividends. Hence, we recommend BUY. 

Jyoti Resins & Adhesives Ltd. 

CMP (₹ ): 1,293.70 

BSE CODE: 514448
Face Value(₹ ) :10
52 Wk High/Low : 1,818.45 / 249.77
Mcap Full ( ₹  Cr.) : 1,523.46 

Here is why:
•  High-quality products with a sizable market share
•  Superiority in profitability and debt freedom
•  New market penetration. 

Jyoti Resins and Adhesives manufactures synthetic resin adhesives and several types of wood adhesives (white glue) under the brand name EURO 7000, which was established in 2006 and is now the second-largest selling wood adhesive brand in India in the retail segment. The company has been able to expand its footprint because of the success of its adhesive product, EURO 7000. With a network of 28 branches, 50 distributors and more than 10,000 retailers all across India, the company currently operates in 13 states. 

The company has set up a massive plant in Santej, Ahmedabad with 1,000 tonnes per month capacity. The company provides a broad range of products with a variety of features and caters to different substrates, including anti-termite, water-proof, fast drying, fungal resistance, heat resistance, weather-proof and for multipurpose uses for wood, PVC and acrylic. The vision of Jyoti Resins and Adhesives is to become a national leader in the retail area of wood adhesives. The company also aspires to be India’s most preferred adhesive brand among carpenters. 

Financial Overview

When the company’s financial performance was taken into consideration, it revealed a tremendous rise of 136.64 per cent from ₹ 27.01 crore in Q1FY22 to ₹ 63.91 crore in Q1FY23. It reported a boost in EBITDA of 174.30 per cent. Comparing the first quarter of FY23 to the same quarter last year, the net profit was found to have surged by 150.8 per cent from ₹ 3.62 crore to ₹ 9.07 crore. If we look at the company’s annual performance, net profit climbed 62.46 per cent to ₹ 19.76 crore from ₹ 12.17 crore the year before. Additionally, compared to the prior year, which ended in March 2021, net sales jumped by 79.63 per cent to ₹ 181.96 crore from ₹ 101.29 crore. The company’s market capitalisation is close to ₹ 1,552 crore. 

Promoters owned a sizeable 49.97 per cent stake in the business. Up to 2 per cent of the stock is owned by foreign portfolio investors (FPIs) while non-institutional investors own 48.03 per cent. Revenue, EBITDA and PAT for the company have grown at a CAGR of 38 per cent, 73 per cent and 115 per cent, respectively, over the past seven years and it has delivered a profit CAGR of over 116 per cent over the last five years. Since many years, the company has been able to maintain return on equity (ROE) levels of over 30 per cent and return on capital employed (ROCE) levels of over 40 per cent. When compared to other competitors, the stock price is very low but the dividend pay-out ratio is high. 

Rationale

Resins and adhesives are a minor but critical component of the Indian chemical industry. The government has announced a number of initiatives to support the chemical industry. With a budgetary allocation of ₹ 18,100 crore over five years, the government launched the production-linked incentives (PLI) scheme in 2021. To further promote bulk drug parks, PLI schemes with a budget of ₹ 1,629 crore have been introduced. To encourage investment and industrial growth, the Government of India has approved four petroleum, chemical and petrochemical investment regions (PCPIRs) in the states of Andhra Pradesh, Gujarat, Odisha and Tamil Nadu. 

Given the company’s outlook, it hopes to both expand its presence in its current states and enter a number of new ones with more branches and distributors. In Q4FY22, the company expanded into Assam. Due to strong demand and an increase in market share, the company finished the process of raising production capacity to 2,000 TPM. It is constructing a warehouse to improve the storage of raw materials and finished goods. With an eye toward maintaining a competitive edge, total manpower costs are limited to 15-16 per cent of revenues and selling and distribution costs are restricted to 12 per cent. With respect to competitors, the company has the highest EBITDA per tonne. It is totally debt-free owing to efficient working capital. 

Consistently, the company has put its attention toward improving its working capital management, trade terms, proportion of value-added products, and cost management. As a result, the business has a track record of being competitive throughout market cycles. As a result, given the optimistic long-term outlook for the chemical sector and the company’s potential to grow in the near future with excellent plans, we recommend BUY. 

Maruti Suzuki India Ltd. 

CMP (₹ ): 8,617.3 

BSE CODE: 532500
Face Value(₹ ) : 5
52 Wk High/Low : 9,450.00 / 6,540.00
Mcap Full ( ₹  Cr.) : 2,63,649.43 

Here is why:
•  Increasing sales
•  Fantastic product line
•  Strong demand from consumers. 

Maruti Suzuki India Limited (MSIL) is India’s leading passenger vehicle (PV) producer, accounting for over half of the market. It has a significant market share in the small and compact car class and has had success in the executive market as a result of the introductions of the Ciaz and Brezza. Japan’s Suzuki Motor Corporation owns 56 per cent of the business. In India, MSIL has the broadest selection of passenger automobiles with an emphasis on the entry-level market. When Maruti Udyog Limited was first founded by the Government of India on January 24, 1981, Suzuki Motor Corporation was a minor partner. However, Suzuki Motor Corporation replaced Maruti Udyog Limited as the official JV partner and licence holder in August 2021. Maruti Suzuki established its first manufacturing site in Gurugram, Haryana, the same year. 

Maruti Suzuki’s parent company, Suzuki Motor Corporation, has a Gujarat manufacturing facility that is solely dedicated to supplying Maruti Suzuki with all of its output. Maruti Suzuki also has two manufacturing sites in Haryana at Gurugram and Manesar. Up to 2,250,000 automobiles are being produced annually at all its manufacturing facilities with 1.5 million at Maruti Suzuki’s two plants and 750,000 at Suzuki Motor Gujarat. Nexa, which stands for New Exclusive Automotive Experience, is a new dealership network for Maruti Suzuki’s high-end vehicles that was introduced in 2015. Maruti Suzuki operates 380 Nexa sales locations throughout 228 cities and 2,413 Arena sales shops across 1,992 cities in India. 

Financial Overview

In terms of the company’s quarterly financial performance, its net sales shot through the roof, rising by 50.53 per cent from ₹ 16,799.90 crore in Q1FY22 to ₹ 25,288.90 crore in Q1FY23. Likewise, the operating profit jumped by 50.43 per cent in Q1FY23 to ₹ 1,995.90 crore as compared to Q1FY22 which was ₹ 1,326.80 crore. Accordingly, the net profit also skyrocketed by 128.97 per cent to ₹ 1,005.40 crore in Q1FY22 from ₹ 439.10 crore in Q1FY22. The annual performance of the company shows positive results. Its net sales showed above average rise in FY22 of 25.88 per cent to ₹ 83,799.80 crore from ₹ 66,571.80 crore in FY21. The operating profit showed astonishing results. There was a decline by 10.01 per cent in FY22 and it stood at ₹ 7,450.90 crore as compared to ₹ 8,287.90 crore in FY21. The net profit witnessed a hit, dipping by 11.91 per cent in FY22 and it stood at ₹ 3,717.60 crore as opposed to ₹ 4,220.10 crore in FY21.

Rationale

MSIL has a solid market position in the entry-level market and an advantageous product lifetime. Launches like the Grand Vitara and Brezza are doing well with consumers. It will increase its market share as gasoline and hybrid vehicles are predicted to become more prevalent. This will increase income together with a better mix and cheaper discounts. While the pandemic-led limits on its activities were most noticeable in FY21, FY22 was hampered by a second lockdown and chip shortages. With the aid of cost reduction and an increase in selling price, MSIL was able to generate strong top-line growth and stable margins despite substantial input cost inflation. 

It is therefore anticipated that the growth momentum will persist over the next few years. The order backlog for Maruti Suzuki is at an all-time high of around 350,000 units. Within this, the Grand Vitara has a backlog of 20,000 units (45 per cent for the powerful hybrid) while the new Brezza has a backlog of 70,000 bookings. The management has also stated that it has a strong pipeline of items in this market area that are slated for release. The introduction of robust hybrid technology, a first for India, is something the management said it is very focused on, making sure Indian clients like it. 

Once this is confirmed, the same technology can be released in several variations. A big bang volume growth can be seen because of the management’s aggressive electric vehicle+hybrid plan, which is supported by ₹ 126 crore in capex at Gujarat and a new capacity investment of 250, 000 vehicles in FY25. The company is positioned for further robust growth thanks to its capacity to counter competition from the EV transition and the opening up of rural markets that were adversely damaged by the pandemic’s second wave. Hence, we recommend BUY. 

The Phoenix Mills Ltd. 

CMP (₹ ): 1,361.85 

BSE CODE: 503100
Face Value(₹ ) : 2
52 Wk High/Low : 1,474.90 / 884.30
Mcap Full ( ₹  Cr.) : 24,072.11 

Here is why:
•  Strong and unprecedented financials
•  Lined up significant projects
•  Anticipated growth in the real estate sector. 

Established in 1905, Phoenix Mills Ltd. is India’s largest retail-led mixed use developer with presence across major metros including Mumbai, Bengaluru, Chennai, Pune, Agra, Indore, Lucknow and Ahmedabad. It is one of the leading players in the operations and management of malls, construction of commercial and residential properties and hotel businesses in India. It has a glorious history of more than 100 years. The Phoenix Mills commenced its operations as a textile manufacturer at Lower Parel in Mumbai. Later, in the year 1987, the company entered into the real estate market where High Street Phoenix emerged as one of the most frequented destinations in Mumbai. 

The company has best-in-class hotels, namely, The St. Regis, Mumbai and Courtyard by Mariott, Agra, managed by renowned global operators. The company’s vision is to create shareholder value by generating exceptional yields from capital growth, sales and lease of architecturally superior and difficult-to-replicate assets that are truly world-class in quality and infrastructure and to create superior business environment by building a loyal customer base. It has over the years built up strong brand value and recall that has firmly placed it in the luxury segment, attracting those with spending power. 

Financial Overview

Taking into account the company’s financial performance on a consolidated basis, it reported an outstanding growth of 188.17 per cent from ₹ 199.32 crore in Q1FY22, recording total revenue of ₹ 574.39 crore in Q1FY23. It reported 324.26 per cent EBITDA growth. When the net profit for the first quarter of FY23 was compared to the same quarter last year, it is found to have soared significantly from a loss of ₹ 34.78 crore to a profit of ₹ 745.01 crore. Considering the yearly performance, the net profit of the company skyrocketed 631.32 per cent to ₹ 247.99 crore as against ₹ 33.91 crore during the previous year. 

Also, net sales rose by 41.96 per cent to ₹ 1,483.48 crore as against ₹ 1,045.01 crore during the previous year ended on March 2021. The pandemic did cause a disruption in business and had a significant impact on several of its business segments with the construction and real estate sectors bearing the brunt of the damage. Now that all restrictions have been lifted, the company is performing well financially. As revenue and profit margins improve quarter after quarter, the company is able to recover all its prior losses. The company has a market capitalisation of nearly ₹ 24,315 crore. Promoters held a 47.32 per cent stake in the company as of March 31, 2022. 

Institutional investors have a total stake of 48.28 per cent, of which foreign portfolio investors (FPIs) owned a sizeable 31.60 per cent. Non-institutional investors have a total stake of just 4.40 per cent. The company’s debt-equity ratio is constantly decreasing, indicating that it is obtaining more of its funding through equity rather than debt. The company generates average profitability per unit of total capital with a return on equity (ROE) and return on capital employed (ROCE) of 4-5 per cent. Different growth ratios, such as operating profit growth, net profit growth and EPS growth are unprecedented. 

Rationale

The company is all set to expand its operations in all segments such as hospitality, commercial and residential. It has four malls under construction and one upcoming huge commercial project. It has already acquired the required land and has started working on some commercial projects like Phoenix Millennium at Wakad in Pune, Palladium in Chennai, Phoenix Market City in Bangalore and The Rise at Lower Parel in Mumbai. It has occupancy of 78 per cent and 65 per cent at St. Regis Hotel and Courtyard by Mariott Hotel, respectively, and wishes to increase these levels to deliver the best experience to its customers. It is also planning to spread its wings in the residential sector with two projects which are limited to Bangalore only. Hence, considering the positive long-term outlook for the real estate sector and the company’s relentless focus on innovation, quality services and greater efficiencies, we recommend BUY. 

(Closing price as of Oct 14, 2022)