Nifty ends flat amidst volatility, broader markets outperform.

Benchmark indices continued to remain flat amidst high volatility dominated by global news flow. Worries about surging coronavirus cases along with U.S Fed status quo on policy impacted sentiments negatively. However, broader markets continued to outperform the benchmark indices as the new SEBI rule on Multicap Mutual Funds were released. The Nifty ended the week up 0.3 pct to 11,505 levels. The midcap and the Smallcap indices outperformed and were up 3.8 pct and 6 pct respectively.

On the institutional activity front, FIIs were net buyers to the tune of Rs 16.88 bn while DIIs were net sellers to the tune of Rs 23.94 bn.

On the currency front, USDINR activity is more or less sideways since past few days but on the weekly scale, it has managed to cement its position on 50 week moving average for a second straight week. A price crossover after moving lower below 50 WMA could be an indication of a trend reversal.

S&P Global Ratings has forecast India's economy to shrink by 9 pct in FY21. It said that rising COVID-19 cases in India will keep private spending and investment lower for longer. The COVID cases have been rising at an average of ~90,000 per day since the beginning of September with total cases reaching 54 lacs. Though recovery rates are keeping pace, the deaths as of date is more than 86,000. We are today the top in terms of daily cases and may beat the USA in terms of total cases in the next month if the daily cases do not peak out. However, the fear factor seems to be missing across the country especially in Tier 2 and below. 

On the stock-specific front, Pharma sector was in the best of health and gained 9 pct for the week led by sharp gains in key constituents. Dr Reddy’s gained 21 pct during the week after it announced the settlement of their patent litigation with innovator - Celgene, a wholly-owned subsidiary of Bristol Myers Squibb, relating to patents for gRevlimid (lenalidomide) Capsules for the US market. As per the settlement, Celgene has agreed to provide license to Dr Reddy’s to sell limited volume of gRevlimid in the US after March 2022, subject to US FDA approval. Dr Reddy’s will be able to sell gRevlimid with limitation on volume until January 30, 2026, and post that it can sell without volume limitations. Dr Reddy’s becomes third generics firm to settle with Celgene. gRevlimid posted sales of USD 4.0bn in H1CY20 in the US market. Revlimid is an oral cancer drug used to treat myeloma and has been posting a sales CAGR of 20 pct over CY16-19. gRevlimid settlement provides strong earnings visibility beyond FY22. We have a positive view on the stock.

Natco Pharma surged 15 pct as the Company is expected to launch gRevlimid ahead of Dr Reddys. Natco Pharma was the first company to settle litigation with Celgene for gRevlimid in CY15 to sell limited volume of the generic version after March 2022- January 30, 2026, and unlimited volume from 31 January 2026.

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Lupin and Cipla too gained as Perrigo has voluntarily recalled Albuterol inhalation from the US market due to clogging issues in the inhalation device. Perrigo also clarified that they are likely to be out of the market for the remainder of 2020 with no clarity of their return. Perrigo currently has around 11-12 pct market share in the albuterol market. This is an unexpected positive for Lupin and Cipla as Perrigo's exit will provide a temporary window of opportunity to both Cipla and Lupin. Although Perrigo’s product is directly competing with Lupin’s, we believe that given the product’s interchangeability, Cipla and Lupin will benefit, depending on their ability to scale up. Cipla launched gProventil in April 2020, Lupin’s gProAir launch is expected this month. Perrigo’s market share can shift to other generics. Perrigo reported sales of USD 44 mn in Q1 and USD 73 mn in Q2 from Albuterol.

IT stocks gained sharply and the NSE IT index was up 6.4 pct after HCL Tech said it expects the revenue and the operating margin for the September 2020 quarter to be meaningfully better than the top end of the guidance provided in July 2020. It expects revenues to grow by over 3.5 pct in Q2, higher than the 1.5-2.5 pct growth it had projected in July enabled by broad-based momentum across all service lines, verticals. Operating profit margins are now estimated to be about 100 bps above its earlier target. It expects to get back to the pre-COVID levels by March 2021. The Company is seeing pent up demand in few projects which were kept on hold. H1 margins will be above the higher end of the guidance range. CC revenue growth to be close to last year levels, assuming the lower end of the guidance. This raised hopes of improvement in the entire industry’s performance in Q2. HCL Tech gained 12.3 pct, Wipro gained 8 pct while Infosys and TCS were up 6 pct and 3 pct respectively.

HDFC Bank was in news after US-based Rosen Law Firm and Schall Law Firm filed class-action suits against the Bank alleging misleading public statements and for failing to inform investors about the bank's improper internal controls on vehicle loans. Specifically, the bank “made false and/or misleading statements and/or failed to disclose” that it had “inadequate disclosure controls and procedures and internal control over financial reporting. The lawsuit named outgoing managing director Aditya Puri, CEO-designate Sashidhar Jagdishan, and company secretary Santosh Haldankar as ‘individual defendants. The lawsuit pointed out that the bank’s ADR fell after it was reported that the bank was probing its lending practice in the vehicle financing operations involving the unit’s former head Ashok Khanna. It said Investors suffered “significant losses and damages," after the revelation. This could keep the pressure on HDFC Bank for a while.

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Vedanta was also in the news after the Supreme Court upheld the foreign arbitration award in favour of Vedanta and Videocon for the development of the Ravva oil and gas fields off the coast of Andhra Pradesh between 2000 and 2007. It dismissed the Centre's appeal against the foreign arbitration award that allowed Vedanta and Videocon to recover USD 499 mn from the government.

Meanwhile, a senior government official stated that automakers should lower costs, cut royalty payouts to foreign parents and improve efficiency to decrease the purchase price of vehicles rather than expect the government to reduce tax rates.

SEBI new rules on Multi-cap funds has brought the lost momentum in midcap and small caps. The SEBI came up with a new set of guidelines, which required Multicap to invest at least 25 pct of their AUM into each of the three categories- large-cap, midcap and smallcap. The said changes are likely to attract fresh inflows into quality Mid and Small caps as most of the schemes are large-cap dominated, leading to significant valuation re-rating in the absence of earnings growth. Amongst the key NSE Midcap stocks that gained during the week were Mphasis (up 21 pct), Syngene (up 20 pct), Ashok Leyland (up 17 pct). Various smallcaps too gained, prominent being Birlacorp and Aster DM (up 20 pct), Laurus Labs (up 19 pct) and Persistent (up 18 pct). As mentioned in last week’s note, this would be a sentiment improvement compared to the real shift of funds by the Mutual Funds.

On the primary market front, Happiest Minds closed 123 pct higher at Rs 371 on the exchange on the first day of its listing, as compared to its issue price of Rs 166. Its IPO was subscribed 151 times. Route Mobile is too set for a decent listing after its IPO was subscribed 74 times on the last day of subscription.

On the macroeconomic front, India's retail inflation eased to 6.69 pct in August 2020. The CPI for the month of July 2020 was revised to 6.73 pct from 6.93 pct. WPI increased 0.16 pct from a year earlier in August 2020, after a 0.58 pct decline in July 2020.

The Lok Sabha passed the Banking Regulation (Amendment) Bill, 2020. The Bill proposes amendments to the Banking Regulation Act, 1949. With this new Bill, the central government aims to bring cooperative banks under the supervision of the RBI.

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On the global front, the Federal Reserve’s Open Market Committee unanimously decided to maintain the federal fund rate at 0-0.25 pct in its recently announced monetary policy. This is the fourth policy meeting when the Committee has decided to maintain status-quo after slashing the federal fund rates in the month of March 2020 following the outbreak of the coronavirus pandemic. It asserted that it will be appropriate to maintain the policy rates in this target range until labour market conditions are consistent with the assessment of maximum employment and inflation averages 2 pct over time. It also expects to maintain an accommodative stance until these outcomes are achieved. As per the projections of the Committee members, the Federal funds rate (median) is like to be in this range until 2023.

The Bank of England left interest rates unchanged at 0.1 pct and said that it will continue with its separate bond-purchase stimulus scheme and maintain the stock of those purchases at £745 billion. The Bank also admitted that the outlook for the economy remained "unusually uncertain".

For the coming week, the global markets may continue to dominate the market movement as we near the U.S. elections. Domestically, the interest moratorium petitions being heard by the Supreme court remains a major overhang on financial stocks.

Automobile stocks could be in action after the Government said a Cabinet note has been formulated for the vehicle scrapping policy. The proposed policy once approved, will be applicable on all vehicles.

Primary markets will be busy with IPOs of CAMS, Chemcon Speciality Chemicals and Angel Broking. Mutual fund registrar and transfer agency CAMS's public issue is offered at a price band of Rs 1,229-1,230. It will open for subscription during September 21-23. Chemical manufacturer Chemcon Speciality issue consists of a fresh offer of sale for 45 lakh equity shares at Rs 338-340 which opens on September 21. Angel Broking plans to raise Rs 6 bn and its IPO will open for subscription during September 22-24 in a price band of 305-306.

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We are suggesting subscribe for both CAMS and Chemcon whereas for Angel Broking we are a bit sceptical as pure online players like Zerodha are much better placed compared to the traditional ones who have made a foray into online. Zerodha has around 34 lac customers and adding nearly 2 lacs every month vs Angel Broking having 21.5 lacs customers having set up in 1996. Unlike ICICI Securities or Motilal, Angel’s services are fairly limited though they have a good footprint. We would wait to see how the grey market premium moves to decide whether to subscribe for listing gains or give it a pass.

Also, on the radar will be news on COVID vaccine development. U.S President Trump has said that he expects to have a vaccine by April 2021. Meanwhile, U.K P.M Johnson said that we are now seeing a second wave of the infection, says it is inevitable.

We continue to maintain a cautious stance and would prefer staying on the side-lines as we expect the markets to continue its consolidation phase before we see a meaningful correction. In the meanwhile, our selective buying strategy is yielding results and this week we are recommending Colgate Palmolive for a Medium to Long Term investment.

Result Analysis

Solar Industries

Solar Industries Q1FY21 revenue decreased by 20.8 pct YoY to Rs 4.91 bn (down 10.3 pct QoQ). Gross margin for the quarter stood at 45.1 pct vs 42.6 pct in Q1FY20, an improvement of 249 bps YoY. EBITDA margin of 18.7 pct in Q1FY21 was down 137 bps YoY due to low operating leverage. Net Profit stood at Rs 420 mn for the quarter; down 40.8 pct YoY (down 15.7 pct QoQ).

The Company has a strong Rs 12 bn order book, of which Coal India share is Rs 7.1 bn. Despite COVID-19 challenges, growth in the international business bodes well. Post lockdown, the Company’s performance in June improved YoY. On the Defence front, the recent ban by the government on the import order of armours and weapons is expected to boost indigenous manufacturing with the Company anticipated to gain from tenders for Multi-mode Hang Grenade.

On the back of rising demand from end-use industries and fresh investments announced by the mining companies, management expects better demand in H2FY21 from the mining sector. During the quarter, the company became 1st ever private company whose manufactured rockets were successfully test-fired in India. For ISRO order, product development & testing phase is going on. Margins are expected to improve going forward due to Defence and Overseas turnaround. Company intends to maintain the P/E ratio of 0.5x. Hold.

IPO Analysis

Computer Age Management Services (CAMS): (Subscribe)

• Issue Size- 18.2 mn shares
• Issue Open/Close - Sept 21/Sep 23, 2020
• Price Band (Rs) 1,229-1,230
• Issue Size- Rs 22.43-22.44 bn
• Face Value (Rs) 10 Lot Size (shares) 12

Computer Age Management Services (CAMS) is India’s largest registrar and transfer agent of mutual funds with an aggregate market share of 69.4 pct based on mutual fund Average Assets Under Management (AAUM) managed by its clients and serviced by CAMS during November 2019. In the last five years, the company has been able to expand its market share from 60.5 pct in March 2015 to 67.6 pct in March 2019, based on AAUM serviced. 

Some of its prominent clients include HDFC Asset Management Company (HDFC AMC), ICICI Prudential Asset Management Company, SBI Funds Management Private, Aditya Birla Capital, and DSP Investment Managers. In total, the company serviced Rs 18.7 trillion of AAUM of 16 mutual funds as of November 2019. The company earns revenue on the basis of mutual fund AAUM of its clients. Over the last five years, the AUM of equity mutual funds serviced by it grew from Rs 2,180 bn to Rs 6,643 bn in FY2019, representing a CAGR of 32.1 pct.

Over the years, CAMS has expanded its product lines and it now offers services in six business verticals apart from Mutual Funds. These include Electronic Payment Collection, Insurance, Alternative Investment Fund, Banking and Non-Banking Services, KYC Registration Agency, and Software Solutions Business. In fact, it had a market share of 39% of the insurance repository business in FY2018, based on e-insurance policies being managed.

Key Strengths

• Largest infrastructure and services provider in a large and growing mutual funds market
• A diverse portfolio of technology-enabled services
• Pan-India physical network
• Scalable technology-enabled ecosystem
• Integrated business model and longstanding client relationships in mutual funds services business
• Strong focus on processes and risk management

Investment Argument and Valuation

A more than 350 member strong technology team which provides a strong backbone for CAMs and develops most of the products in-house could open up opportunities in that space as Covid-19 pandemic has speeded the need for paperless and digital interface across the investment chain. Insurance Repository could be another revenue stream which may gather pace going ahead along with RBI licensed Account Aggregator Services. The systems and processes set up by companies like CAMs would become a standard for most of the developing nations looking to upgrade the investment infrastructure in their respective regions and this could open up innumerable opportunities for CAMs. Needless to talk about the excellent footprint and the reach among investors in India, though at the bottom of the pyramid may be capitalised by CAMs going ahead.

At the upper end of price band of Rs1,230, the issue is priced at 35x FY20 EPS, at a 10-15% discount to listed AMCs, Exchanges and Depositories. Considering dominant market share in a growing industry, low risk of competition, strong parentage, strong free cash flow generation, and robust RoEs, one can Subscribe with a long-term perspective.

Chemcon Speciality Chemicals Ltd. (Chemcon): (Subscribe)

• Issue Size- 93.52-93.81 mn shares
• Issue Open/Close - Sept 21/Sep 23, 2020
• Price Band (Rs) 338-340
• Issue Size- Rs 3.17- 3.18 bn
• Face Value (Rs) 10
• Lot Size (shares) 44

Key Strengths
Chemcon Speciality Chemicals Ltd (Chemcon) is a manufacturer of specialised chemicals, such as Hexamethyldisilazane/Hexamethyldisilane(“HMDS”)and Chloromethyl Isopropyl Carbonate (“CMIC”) which are predominantly used in the pharmaceuticals industry (the Pharmaceutical Chemicals), and inorganic bromides, namely Calcium Bromide, Zinc Bromide and Sodium Bromide, which are predominantly used as completion fluids in the oilfields industry (the Oilwell Completion Chemicals). Chemcon is the only manufacturer of HMDS in India and was the 3rd largest manufacturer of HMDS worldwide in terms of production in CY19 and has an opportunity to grow at a CAGR of 15-20 pct between 2019- 2023 including great opportunity for exports. Chemcon is the largest manufacturer of CMIC in India and the 2nd largest manufacturer of CMIC worldwide, in terms of production and capacity in calendar year 2019 and has an opportunity to grow at a CAGR of more than 25 pct between 2019-2023. Their manufacturing facility is located at Manjusar near Vadodara in Gujarat and currently has 7 operational plants.

• Leading manufacturer globally of the Pharmaceutical Chemicals & a leading manufacturer in India of the Oilwell Completion Chemicals.
• Diversified customer base coupled with long-standing relationships.
• The speciality chemicals industry in which the company operate has high entry barriers.
• Consistent financial performance with a strong financial position.
• Strong manufacturing facility with dedicated plants for each of its products.
• Increasing export market

Valuation

At the upper end of the price band of Rs 340, the issue is quoting at a PE of 21.12x its FY20 earnings of Rs 15.37.
 
Colgate Palmolive  CMP Rs 1,373  (Target Rs 1,570, Time Frame 12 months)
 

Company Description

Colgate-Palmolive (India) Limited is a leader with a market share of over 50 pct in the Indian toothpaste market which has a size of over Rs 100 bn. About 97 pct of the company’s sales come from the oral care products category. Company’s product range includes toothpastes, toothpowder, mouthwash, toothbrushes and dental gel under the “Colgate” brand. Under the personal care products segment, it offers a range of shower gels and liquid hand washes under brand “Palmolive”. It has the widest distribution network in the toothpaste category as it reaches out to almost 6.1 mn outlets across the country
 

Investment Argument

• Colgate is a leader in the toothpaste and toothbrush category with 52 pct/45 pct volume market share in India as of 2018. Although the company’s market share declined from FY16 to FY19 owing to competition (Patanjali’s Dant Kanti), the same has now stabilized. There is limited scope for downtrading in a stable growing oral care category as 70-75 pct sale is from mass/economy segments.
• Per capita consumption of toothpastes in India is less than 200gms versus China (+300gms), Brazil (600gms) and USA (500gms). Management also believe, increasing per capita consumption remains a big opportunity.
• The company has been putting efforts to drive growth through large scale campaigns & innovations. It has launched Palmolive hand sanitisers & Colgate gentle toothbrushes in Q1. We believe the company would be able to drive volume through Colgate Vedshakti given naturals & Ayurveda space is growing fastest within the toothpaste category.

Valuations
 
At the CMP of Rs 1,373, the stock quotes at PE of 43x and 39x its FY21E and FY22E earnings of Rs 32 and Rs 35 respectively. But for a longer-term perspective.
 

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