StockAxis Market Insights Outlook for 2022

StockAxis Market Insights Outlook for 2022

Year of Policy Rotation by Central Banks

December 30, 2021 | 80665 Views

Themes to play in CY22

  • IT services (digitalization, cybersecurity, cloud computing, artificial intelligence, semiconductors)
  • Capex on Modernization, upgrade, and automation
  • Infrastructure push by government
  • Electric Mobility,
  • Clean Technology/Green Energy (Hydrogen, Ethanol, Solar)
  • Commodity users against commodity producers
  • Consumption (rebalance towards services)
  • Exports (Weakening of INR)
  • Import substitution (aided by PLI)

Preferred Sectors & Top 10 Stocks for CY22

Sectors likely to do well in 2022

  • IT (Technology)/Digitization/Innovation
  • Capital Goods
  • Healthcare (excluding pharma)
  • Realty
  • Oil & gas
  • Banks/Financials
  • Home Improvement

Top Picks:


HCL Technologies Ltd

Allcargo Logistic Ltd

Larsen & Toubro Ltd

Latent View Analytics Ltd

MTAR Technologies

Greenply Industries

Happiest Minds Technologies Ltd

Vardhman Textiles Ltd

Prestige Estates Projects Ltd

Hitachi Energy India Ltd

Portfolio Strategy

We believe key driving factors for portfolio returns in CY22 would be

  • Right sector & stock selection as CY22 will be year of stock pickers
  • Avoiding stocks with high valuation multiples
  • Broader markets (mid & small caps) to give better opportunities versus large caps

Key Risks in CY22

  • Threat of new and more contagious variants of the corona virus
  • Persistent inflationary pressures
  • Uneven economic recovery
  • Uncertainties over earnings growth
  • Elevated valuations in certain pockets of market
  • Tightening liquidity and
  • Increasing interest rates

Outlook for CY22

Most markets around the world (including India)gave stellar returns in CY21 Despite a fall of ~10% from peak in recent months, Indian headline indices have given a decent return of 20% + in CY21. Through the year Nifty moved steadily from 14000 levels to 18500+ levels. The year started on a good note with favorable Union budget clearly pushing growth through liberalization, asset monetization & loose fiscal policy. Global liquidity environment remained benign for most part of the year aiding the upward trajectory of Nifty.. Broader markets too performed well during the period on back continuous support from domestic institutions, retail & HNI money. Despite 15% retracement in Nifty Midcap 100 index & 11% decline in Nifty Smallcap 100 (from the peak) both these indices clocked returns 56% & 63% respectively from January 01 to Dec 24, 2021.

As we move ahead into CY22 there is a marked change in global macros. Major central banks are changing policy stance & prioritizing controlling inflation over growth. Unwinding of monetary policy support and reduction in fiscal support in the upcoming year may have negative repercussions for global growth as well as equity valuations. We believe headline indices level returns in CY22 will be driven more by macro trends & less by micro events at sector or company level. We expect moderate returns (in vicinity of 8-10%) at index level in CY22. However, we believe CY22 will be year of stock pickers & there will be many opportunities to beat the index level returns. Thus, choice of right sectors/stocks will be imperative for portfolio performance

Indices performance In CY2021

Indices Returns in CY21

Source: NSE Website, Data till Dec24, 2021

Sectoral Returns (%) Dec 22, 2020 to Dec 24, 2021

Source: NSE Website, Data till Dec24, 2021

CY22 Market direction will depend on

Global Factors

  • We believe globally tightening cycle is underway. Major Central banks (USFED, ECB, BOK, BOE) are turning hawkish simultaneously & embarking on rate as well as liquidity tightening cycle.
  • Fiscal stimulus by governments is likely past its peak. Globally, post-pandemic spending commitments totalled almost USD20 trillion, the highest levels of fiscal spending relative to GDP since World War II.
  • Most governments are now focusing on long term spending proposals like infrastructure projects etc
  • Supply shortages hitting economic output in near term. Any turnaround in supply situation could result in a quick turnaround in prices. Currently demand is overstretched due to hoarding effects from businesses.
  • The path of the virus will likely continue to have an impact on the economy. While It's too difficult to come up with any view on what happens next with Covid ,we can surely say that with every single lockdown, the adverse economic impact becomes weaker.
Nifty v/s Peers  performance in CY21

Source: Bloomberg, Data till Dec24, 2021

Domestic factors

  • Improved macro economic conditions: During Pre covid years (2017 to 2019), India was growing below its potential due to several growth headwinds stemming from the implementation of the goods and services tax (GST) and insolvency code, the introduction of the Real Estate (Regulation and Development) Act, 2016, demonetization, etc. However, in coming years 20212, 2023 India’s GDP growth will be much superior to its peer countries driven by a sharp improvement in the real estate sector, significant investments in infrastructure debottlenecking over the past few years, the introduction of production-linked incentives (PLI) schemes, higher-than-expected tax collections by the government and rising private capex spending.
  • Strong improvement in corporate balance sheets: Net debt/Ebitda of BSE500 has come down from 3.4% in FY15 to 1.5% in FY22E & 1.4% in FY23E.
  • Earnings growth powers equity market returns. Investors are wiling to pay a premium for exceptional earnings growth and free cash-flow generation
  • Improved macroeconomic fundamentals and corporate balance sheets lead to higher valuation multiples relative not only to its historical average but also other markets
  • RBI likely to tighten liquidity conditions gradually and hike rates by 50–75 bps in FY23
  • Frontline stocks (large caps) may remain susceptible to FII selling in the near term

Moderate returns expectation in CY22

Reasons to mellow down return expectations in CY22

Past trends tell us that whenever any year has clocked spectacular returns, the returns in the following year are usually muted. This is due to the nature of markets which discount future much in advance. Key factors that supported growth in cY21 but may not be available in CY22

  • Low base effect & pent-up demand - Growth recovery from the impact of Covid-19 pandemic is almost complete, so the benefit of low base & pent-up demand will not be available in CY22.
  • Not much scope of further Earning upgrade - main earning drivers of FY22 were sectors such as Metals, IT and Private Banks. However now these sectors are witnessing reversals
  • Supply pushed inflation-since the logistic constraints are likey to ease over next few months the supply of many products which hitherto were in shortage will increase dramatically leading to normalization of prices of theses products/services.

Markets behavior in previous rate hike cycles

In the last two rate hike cycles, Indian equities have given high returns among all asset classes. We wish to highlight both rate hikes coincided with an economic recovery.

After the dot com bubble, interest rates were in a declining trajectory. They started moving upwards from 2004 onwards. The move started during that phase continued till 2007. During 2003-07 Indian markets recorded strongest gains till date when Nifty rallied from 1450 to 6420 levels.

During second rate hike cycle in 2013 when tapering discussion started, equity markets witnessed an initial setback (Nifty corrected about 15% during June-August 2013, FII’s withdrew ~ $3.8 bn) but in next few years market picked up & gave good returns.

US Fed interest rate vs. Nifty (2003-2008)

Source: Bloomberg

US Fed interest rate vs. Nifty (2015-2019)

Source: Bloomberg

Likely Impact of Central banks action in CY22

We believe current phase of consolidation in markets may continue for at least first half of next year. Markets will await clarity from actions taken by the central banks across the globe as well as RBI.

After many years of loose monetary policy & almost Nil interest rates, most central banks are now looking to tighten liquidity as well as increase interest rates in next few months. US Fed has already started tapering bond purchase program & indicated rate hikes to start probably from march/April.

Similarly, BOE has already initiated first rate increase in Dec 2021. ECB has announced reduction in bond purchases over next few months. Such simultaneous withdrawal of monetary support has potential to adversely impact the market movement. However, we have seen in previous rate hike cycles equities have performed well as mostly the rate hikes happen when economies are recovering. Reversal of policy stance to Normal policy by central banks can be taken as harbinger of economic recovery. Hence, we believe rising interest rates may not necessarily be negative for equities.

In our opinion current phase of indecisiveness in markets is also due to abating fiscal support from governments. One of the key reasons for V shaped recovery in markets in April 2020 after first wave of Covid was the forceful support from governments across the globe. However now the balance sheets of most countries have stretched to the limit & therefore they have little room for further fiscal stimulus.

Most governments are now focusing on long term spending proposals like building infrastructure etc. versus giving cash dole outs to population. Hence markets are now assuming that any further waves of Covid will not have Central Banks or governments at their back. Therefore, most participants are reducing positions in market & prefer to stay light at this moment.

Commentary & action by central banks (especially USFED) over next few months will determine markets future direction. If the Fed resists aggressive rate hikes despite higher inflation markets may resume their previous uptrend.

Markets are usually most volatile in times of transition.

CY22 –Year of stock picking

We believe headline indices performance will be led by macro environment. Large cap & frontline stocks may remain susceptible to FII selling pressure in near term. However, we see opportunities in broader markets where returns will be determined by drivers of revenue & quality of earnings.

We expect CY22 to be year of stock picking on the back of following reasons:

  1. Top - down growth: We expect positive surprise in India’s GDP growth mainly led by improvement in the real estate sector, investments in infrastructure debottlenecking, the introduction of production-linked incentives (PLI) schemes, high tax collections by the government, and rising capex spending. Domestic cyclicals & mid cap are major beneficiaries of accelerating GDP
  2. Financialization of savings and higher internet penetration can lead to higher retail inflows into the mid and small- cap sector
  3. Significant improvement on corporate balance sheets. Net debt/Ebitda of BSE500 has come down from
  4. 4% in FY15 to 1.5% in FY22E & 1.4% in FY23E.
  5. Earnings & margins are at all time highs leading to significant free cash flow generation
BSE 500 Debt to Equity

Source: Bloomberg

Nifty EPS & Growth

Source: Bloomberg

What can spook the markets

  • Path taken by Corona virus will have significant impact on economic growth. Threat of new & more contagious variants of corona virus (Omicron) may lead to severe restrictions on mobility & economic activity.
  • Aggressive rate hikes & excessive liquidity tightening by USFED & other Central Banks (including RBI)
  • Earnings expectations –post Q2FY22 results most management have mentioned severe dent on margins due to high input costs/inflation. Many corporates have taken price hikes. Earnings season of Q3FY22E will show the resilience of Indian corporates on profitability & elasticity of demand
  • Earnings upgrade cycle has decelerated significantly post Q2FY22. Will next few quarter earnings season lead to downgrade in earnings expectations for FY23E & FY24E?
  • Stretched valuations leave little room for deterioration in earnings.

Themes to play in CY22

  • The pandemic entrenched certain megatrends like digital transformation, healthcare innovation etc which can lead to opportunities in
    • E-commerce spending is 20% higher than it was before the pandemic,
    • Global spending on cybersecurity for cloud computing grew at a 40% pace in 2021.
    • Automation both in goods-producing and service industries is likely to increase. Artificial intelligence and machine learning will continue to enable new technologies such as voice assistants and autonomous driving.
    • Digital transformation is increasingly common in sectors like finance (payments and the blockchain), retail (augmented reality), entertainment (preference algorithms), healthcare (preventive medicine, Wearables, telemedicine and gene editing)
    • Cloud computing continues to accelerate Before the pandemic, 20%–30% of work was done in the cloud. In 3 years it is expected to go to 80%
  • Clean technologies such as carbon capture, battery storage, renewable energy sources and energy efficiency. Is another are of big opportunity.  Some estimates suggest that in current decade USD 4–6 trillion per year is needed to decarbonize the global economy
  • Capex theme can be played through Import substitution (aided by PLI)
  • Government’s focus on infrastructure push
  • Electric Mobility, and Green Energy (Hydrogen, Ethanol, Solar, Hydro and Wind, etc.)

Top picks for CY22

Based on our rigorous research process & incorporating our view on macro-economy as well as themes to play over 2022, we have selected 10 stocks for our investors. We believe these stocks have potential to give superior returns over next one year. Read the following pages to know these stocks


HCL Technologies Ltd

Allcargo Logistic Ltd

Larsen & Toubro Ltd

Latent View Analytics Ltd

MTAR Technologies

Greenply Industries

Happiest Minds Technologies Ltd

Vardhman Textiles Ltd

Prestige Estates Projects Ltd

Hitachi Energy India Ltd

HCL Technologies Ltd

Company Overview: HCL Technologies (HCL) is a leading global technology company. HCL offers its services and products through three business units - IT and Business Services (ITBS), Engineering and R&D Services (ERS) and Products & Platforms (P&P).

Investment Rationale

Structural changes in the IT industry:
We believe that to navigate businesses through the current crisis, digitization and use of technology will be of prime importance. There is high demand for services like i) digital transformation, ii) cyber security, iii) cloud.

Large engineering presence to benefit from demand momentum:
HCL has one of the largest global ER&D practices. This includes client relationships with 65 of the top 100 global ER&D spenders. It has a balanced mix of asset heavy (Aero, Auto, Industrial, Telecom, etc.) and asset light verticals (Software and internet, Healthcare, etc.). The management has laid down an investment plan for new emerging technologies like Softwareization within Digital Engineering, IoT, 5G, etc. It currently has more than 80 engineering labs (v/s over 50 labs for LTTS).

Beneficiary of Cloud transformation led by IMS leadership:
Cloud transformation is the backbone of the current acceleration in technological demand. As per Gartner, end-user spending on Cloud services is USD330b in CY21, and is growing at more than 20% CAGR over CY20-23E. Moreover, IaaS will see the highest growth at 34% CAGR.

HCL’s strong IMS capabilities (over 30% of revenue) and partnerships with leading hyperscalers, strategically positions it to capture the high growth opportunity in Cloud.

Strong order booking and pipeline with Margin improvement:
Company’s order book remains strong, even as it continues to win new deals in the US and European regions. In Q2FY22 company recorded net new deals worth USD 2.2bn (35% Q-o-Q, 38% Y-o-Y), including 13 large service deals and one product deal across verticals. Management guided revenue growth of 22-23% on constant currency basis, and EBIT margin to remain in the range of 19-21% for FY22E.

Risk

  • Foreign Currency Fluctuation: INR appreciation against the USD, pricing pressure, retention of the skilled headcount, strict immigration norms and rise in visa costs are key concerns.
  • High Competitive Intensity: Company has to compete with Indian IT majors such as TCS, Infosys, Cognizant, and Wipro; and global players such as IBM, Accenture, and Computer Sciences Corporation.
  • Execution remains a crucial factor: The large size as well as multiple acquisitions and increased participation in the products business as against services, which is its core strength, could cause execution challenges.

Outlook & Valuation

Given its deep capabilities in IMS and strategic partnerships, investments in Cloud, and Digital capabilities, we expect HCLT to emerge stronger on the back of an expected increase in enterprise demand for these services. We believe HCL valuation should expand and the P/E difference as compared to Infosys & TCS should narrow. At the CMP of Rs 1,292, HCL is currently trading at 22x FY23E EPS.

Financial Snapshot (Consolidated)

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EPS (Rs)
FY2019 60,427 19% 13,926 10,120 16% 37
FY2020 70,676 17% 17,316 11,057 9% 41
FY2021 75,379 7% 20,048 11,145 1% 41
FY2022E 85,135 13% 20,995 13,549 22% 50
FY2023E 95,927 13% 23,675 15,783 16% 58

Allcargo Logistic Ltd

Company Overview
Allcargo Logistics Ltd. (ACL) provides logistics services such as Non-Vessel Owning Common Carrier (NVOCC), Container Freight Station (CFS), Inland Container Depot (ICD), warehousing, coastal shipping, express logistics, project logistics and equipment leasing. It has a strong presence at major container ports that handle >70% of India’s container traffic. In 2020, Allcargo Logistics Ltd. (ACL) had acquired a stake of 46.86% in Gati. ACL and Gati will derive synergy benefits and, together, would be in a position to offer end-to-end services across the value chain.

Investment Rationale

Leadership position in various segment: Company is India's largest and a leading global operator, engaged in the NVOCC business, and is backed by a strong network. It is the world's second-largest provider of LCL freight forwarding services. Profitability would be supported by LCL cargo, which is a higher-margin, lower-volume market that is expected to show resilience and volume growth even during the current slowdown compared to FCL cargo. It will be leveraging on its existing global network that should help the NVOCC business grow steadily without significant investments over the medium term.

Focus on being assets light business in Gati as well as P&E business: The company has a strong focus on asset-light business growth, which will help reduce capital employed and borrowings. It is also focusing on rationalizing its fleet in its Projects and engineering (P&E) business to make the overall fleet younger. In Gati company has exited the cold chain business, discontinued other lossmaking businesses, and disposed non-core assets, which are classified as assets held for sale. Proceeds from these are expected to be utilised to repay debt, which would reduce the finance expense. In the P&E Business company has sold cranes and trailers on basis of underutilization and age criteria. It will now focus on renting in these on need basis. It still has a host of cranes and trailers on ownership basis.

Strategic move will position the company to accelerate growth across businesses: Allcargo Logistics (ACL) to demerge its CFS/ICD division and its asset heavy Equipment, Logistics Parks business into separately listed entities. The demerger would create three focused entities targeting distinct set of growth opportunities. ACL would now focus on its International Supply Chain (MTO) business and organic and inorganic opportunities thereon. The company would continue maintaining its controlling stake in Gati and ACCI. The strategic move will position the company to accelerate growth across businesses by creating independent business undertakings, with sharper management focus, better access to right capital, and greater operational and financial flexibility.

Risk

  • Heavy dependence on the domestic economy: The company’s Projects and engineering (P&E) business has been executing important projects for reputed clients such as Reliance Industries Ltd, Larsen & Toubro Ltd, Bharat Heavy Electrical Ltd and NTPC Ltd; it has an effective equipment fleet of over 800 units. However, the business is heavily dependent on the domestic economy and the pace of project execution and completion.
  • Low Entry Barrier: The low entry barrier has encouraged the implementation of new CFS facilities by new and existing players, leading to a build-up of surplus facilities; this will intensify price-based competition in the long term, thereby restricting profitability.

Outlook & Valuation

We expect the company to gain from its leadership position in the NVOCC & LCL, diversification of customer base, and revenue offering from different segments including Gati. Also, Allcargo’s focus on restructuring the business will improve return ratios and financials and transform the business into an asset-light one. We have not taken into consideration the Demerger part in our future Expected Financials. At the CMP of Rs 384, the stock is currently trading at 20x FY23E EPS.

Financial Snapshot (Consolidated)

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EPS (Rs)
FY2019 6,895 14% 449 249 46% 10
FY2020 7,346 7% 503 246 -1% 9
FY2021 10,498 43% 634 173 -30% 7
FY2022E 14,165 35% 935 411 137% 17
FY2023E 16,361 16% 1,137 460 12% 19

Larsen & Toubro Ltd

Company Overview:
Larsen & Toubro (L&T) is the foremost player in Infrastructure and Engineering space in India and company has interests in technology and financial services as well. L&T has presence globally in over 30 countries around the world. Company addresses critical needs in key sectors such as Hydrocarbon, Infrastructure, Power, Process Industries and Defence. The Company serves the Government and large corporate customers across multiple sectors, both in India as well as globally. The Realty and Financial Services businesses provide B2C offerings as well in addition to B2B products/services.

Investment Rationale

Huge order build up is expected to drive exponential growth: Prospects pipeline for 2HFY22 stands at INR6.8tn in 2QFY22 (v/s INR6.1tn Y-o-Y), up 12% Y-o-Y. Domestic order pipeline stood at INR4.7tn and international order pipeline at INR2.2tn. Infrastructure segment prospects stood at INR5.3tn (20% Y-o-Y), out of which domestic pipeline comprised INR4.2tn and international pipeline INR1.1tn. Hydrocarbon prospects stood at INR1.2t, 80% of which comprises international prospects. Out of the total order book, 4-5% can be termed as slow moving, with no execution challenges in the remaining 95% of the order book.

Management Guidance remains strong: The management has maintained its FY22 margin guidance for the core E&C business (flat Y-o-Y) and will revisit its guidance at the end of 3QFY22. 60-65% of the company’s order book is on variable cost basis, thus shielding it from the ongoing commodity cost inflation. Management has maintained its FY22 order inflow guidance of a low double digit to mid-teen growth YoY. The management expects several key projects to cross the margin booking threshold in FY22.

Government’s infra push to boost growth LT’s order inflow correlates to India’s economic growth: Over the last few years, the Indian economy has faced challenging times and this was further accentuated by the Covid-19 pandemic, which delayed recovery for LT. However, the National Infrastructure Pipeline (NIP) indicates spends of INR111 lakh cr over the next five years and L&T with its diverse presence and capabilities would be the biggest beneficiary of the same.

Divestment of Non-core assets: LT recently concluded the sale of its 100% stake in a 99MW hydroelectric plant in Uttarakhand. This is in line with the company’s strategy to divest non-core assets. Nabha Power will also be divested over a period of time. The company is looking at various options like assistance from the state government, stake sale, monetization of real estate and refinancing of debt for the Hyderabad metro.

Risk

  • Large working capital requirement: Even as it grapples with increased working capital requirements and low OPM in its core E&C business, L&T's return ratios may remain low for some time. The company's cash requirements from its real estate, housing, and LAP businesses may continue to rise until the sector bottoms out.
  • Higher dependence on Economy: The unprecedented event of COVID-19 has halted activities across the nation and infrastructure spending might take a hit. Even in Government-backed projects the company may witness some execution delay due to lack of materials, men or funds.

Outlook & Valuation

Multi-year revenue visibility seen on the back of a large and diversified order book. Though awards finalisation activity contracted during the quarter, we expect it to pick up steam in the coming months owing to a strong prospects pipeline in place for H2FY22. L&T’s execution capabilities remain robust, and coupled with steady order inflows, effective capital utilisation and reduction in borrowing costs augurs well for long-term performance. At the CMP of Rs 1892, the stock is currently trading at 22x FY23E EPS.

Financial Snapshot (Consolidated)

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EPS (Rs)
FY2019 1,35,220 13% 15,330 8,610 17% 61
FY2020 1,45,452 8% 16,329 8,895 3% 63
FY2021 1,35,979 -7% 15,624 6,902 -22% 49
FY2022E 1,54,939 14% 18,718 9,369 36% 67
FY2023E 1,76,960 14% 22,268 11,912 27% 85

Latent View Analytics Limited

Company Overview:
Latent View Analytics is a pure-play data analytics company based in India. The scope of work is classified into: (i) Consulting services, that involves understanding business trends, challenges, and opportunities and preparing a roadmap of data and analytics initiatives to address them; (ii) Data engineering, that is undertaken to design, architect and implement the data foundation required to undertake analytics; (iii) Business analytics, that delivers analysis and insights for clients to take more accurate, timely and impactful decisions; and (iv) Digital solutions that the company develops to automate business processes, predict trends, and generate actionable insights.

Investment Rationale:

Wide range of capabilities with clients across industries:
The company brings skills, a wide range of capabilities, and experience in helping organizations to use the power of data and analytics across the spectrum of the business value chain. These include capabilities such as Customer analytics, marketing analytics, supply chain solutions, finance & risk analytics etc. Latent partnered with many of the largest enterprises and have worked with over 30 Fortune 500 companies in the last three fiscals. Its client base is diversified across size, industry, and geography. It provides services primarily to companies in Technology, CPG and Retail, Industrials, and BFSI industries.

Intends to expand client base & geographic presence:
The analytics market in North America has grown at a CAGR of 16% in the last few years, and like most other developed markets, Canada is facing a significant shortage of analytics talent. Covid-19 pandemic has accelerated the demand for analytics as Canada’s traditional sectors of retail, banking and insurance have significantly accelerated their digital transformation requirements (Source: Zinnov Report). The growing market represents a potential opportunity for Latent as it intends to strengthen operations outside India (Particularly in Canada). It has identified Canada as an important and margin accretive market and has recently entered a strategic partnership with a recognised Canadian entity.

Intends to Strengthen Global Position Through Select Inorganic Opportunities
The investment in data and analytics is expected to grow within the BFSI, CPG & Retail industrial, at a CAGR of almost 20% over the next 5 years to exceed USD 110 billion by 2024 (Zinnov Report). Additionally, spend on supply chain analytics is expected to also increase at a CAGR of 19.8% from 2019 to 2024 (Source: Zinnov Report). The company proposes to leverage these opportunities and continue to pursue strategic expansion plans through inorganic opportunities. It is exploring strategic acquisition opportunities that will enable it to gain access to new geographies, industries, and client base. The company continues to identify and evaluate prospects that can provide access to new technologies/IP, clientele, and those, which the company, believes to be synergetic with its existing operations. It intends to pursue opportunities that will complement its data engineering capabilities and help in building deeper capabilities in terms of AI/ML functions. The company raised Rs 474 crore through fresh issue in order to support acquisitions and other business requirements.

Risks and Concerns

  • Customer Concentration: The company derives a significant portion of revenue from its existing clients. Revenue from top five clients represented 59.3% and 54.0% for Q1FY22 and FY21, respectively. Amongst these, top three clients contributed ~44% and 41.6% of revenue in Q1FY22 and FY21, respectively. Its clients have no obligation to renew agreements after the terms of existing agreements expire.
  • Geography Concentration: It derives more than 90% of revenues from clients located in the United States and any adverse developments in this market could impact Latent view’s business.
  • Highly Competitive Industry: The market for data and analytics is very competitive and it is expected to continue further. Certain competitors include Mu Sigma, Fractal, Tiger, Palantir, Accenture, TCS, and Capgemini. It can also face competition from emerging companies as well as established companies who have not previously entered the market.

Outlook & Valuation

Latent View is the only publicly traded pure-play data analytics company, which has been a trusted partner to multiple Fortune-500 companies in recent years. In our opinion, medium-to-long term industry tailwinds could also support Latent's growth, as investment in data and analytics is expected to grow at a CAGR of nearly 20% in the BFSI, CPG, and Retail industries over the next 5 years to exceed USD 110 billion, and spend on supply chain analytics is expected to grow at a CAGR of 19.8% from 2019 to 2024. Data analytics will play a key part in growth of any organization and Latent View is in a sweet spot to capture this growth opportunity. Also, it is the only listed player in India to focus purely on data analytics. Based on the CMP of Rs 538, Latent view is trading at 67x FY24E earnings and 19x FY24E sales.

Financial Snapshot (Consolidated)

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EPS (Rs)
FY2019 288 - 73 60 - 3
FY2020 310 8% 80 73 22% 4
FY2021 306 -1% 105 91 25% 5
FY2022E 382 25% 116 99 9% 5
FY2023E 458 25% 147 120 21% 7
FY2024E 597 25% 183 149 24% 8

MTAR Technologies

Company Overview:
MTAR Technologies is a leading national player in precision engineering industry engaged in the manufacture of mission critical precision components to serve projects of high national importance, through precision machining, assembly, testing, quality control, and specialized fabrication competencies, some of which have been indigenously developed and manufactured. MTAR has diverse revenue streams such as clean energy, nuclear, space and defence, and others. It has developed long-standing client relationships with not only premier Indian institutions such as NPCIL (16 yrs), ISRO (30 yrs+) and DRDO (40 yrs+), but also leading global clean energy companies such as Bloom Energy (9 yrs).

Investment rationale:

Diversified revenue profile and healthy operating profitability:
MTAR has a diverse portfolio, catering to multiple segments like clean energy (51% of revenues), defence and aerospace (17%) and nuclear (30%). Healthy unexecuted order book across these segments provides ample revenue visibility over the next 2 fiscals. New clients and capability additions in terms of machining and fabrication are expected to start contributing to revenue from next fiscal onwards. Increased focus on indigenization in defence, space and nuclear power sectors along with strong new product pipeline of MTAR will support the company to further diversify its revenue profile and will be a key rating sensitivity factor. MTAR has healthy operating profitability of 34% which is expected to sustain with benefit of operating leverage and execution of more profitable orders in nuclear, defence and space segments. Despite working capital intensive operation, RoCE of the company remained healthy at over 18% over last two fiscals.

Large addressable market in clean energy:
According to a CRISIL report, fuel cells, which use the chemical energy of hydrogen or other fuels to produce electricity, are among the evolving distributed sources of electricity. The global fuel cell market is expected to register a CAGR of 14-15% between FY20 and FY25. The market size is expected to reach US$5.2– US$5.5 billion. Further, MTAR is in the process of development and manufacture of hydrogen boxes and electrolysers to serve Bloom. Going ahead, new customer addition and Bloom’s tie up with Gail to deploy fuel cell technology is expected to augur well for the company.

Proxy play on the increase in nuclear power capacity:
The Government of India (GoI) has sanctioned the manufacture of 10 pressurised heavy water reactors (PHWR) in fleet mode (10 x 700MW) with a combined generation capacity of 7,000 MW. As MTAR is one of the few companies to have secured orders from the NPCIL in the past, and has been able to deliver these successfully, it is best placed to capitalize on this opportunity. Currently, PHWR reactors constitute 65% of the total installed base and are likely to remain the dominant majority in future planned installations. MTAR caters to the equipment portion (20-25%) of the overall order for a 700 MW PHWR nuclear plant. MTAR supplies 14 different equipment which translates into an opportunity size of Rs 700-800 crore. per reactor. We believe MTAR’s ability to develop manufacturing technologies using end-to-end engineering capabilities under one roof positions it better than peers.

ISRO’s strong order pipeline to aid MTAR:
ISRO completed 14 launch missions in FY19 while 17 were planned in FY20, although 6 missions could not be completed in FY20 due Covid-19 pandemic. The number of launches was expected to ramp up significantly to 36 in FY21, but continued disruption due to Covid-19 led to the launch of only 5 missions. We believe spill-over of missions from the past 2 years is likely to accelerate over FY22-23, which could lead to accelerated ordering of space equipments.

Risks and concerns

  • High client concentration: As on 30 Sep’20, MTAR catered to 35 customers. The contribution of top 5 customers as a percentage of revenue from operations in FY18, FY19, and FY20 was 90%, 89%, 87%, respectively. The company depends on a limited number of customers for significant revenue and a loss of one or more significant customers or a significant reduction in demand for products from such significant customers, failure to succeed in tendering for projects for customers in the future can adversely affect business, financial condition, result of operations and cash flows.
  • High concentration of revenue towards Bloom Energy: Bloom Energy’s revenue contribution was 49.1%, 61.43% & 64.53% in FY18, FY19 & FY20, respectively. A greater portion of topline is dependent on Bloom Energy. The loss of business or orders from Bloom Energy can lead to significant reduction in order book and thereby revenue. Further, disruption in Bloom Energy’s business will directly impact MTAR’s performance.
  • Reduction in government spending: MTAR depends significantly on orders from NPCIL, ISRO and DRDO. A decline or reprioritization of funding in the Indian budget towards the respective departments of the Government of India under which these customers operate, or delays in the budget process would impact the company.

Outlook & Valuation:

MTAR is engaged in manufacturing complex/wide product portfolio with strong client relationship and high entry barriers. The company is poised to deliver strong growth going forward as the focus on clean energy increases rapidly, growing trend of increased indigenization and increased budgetary allocation towards defence capex & renewables. Based on the CMP of Rs 2268, MTAR is trading at 53x FY24E earnings and x 12FY24E sales. We are positive on MTAR on the back of fast growing fuel cell market (clean energy) (~USD 5bn market by 2025), ~Rs 700-800 crore opportunity in the nuclear space and strong order pipeline from ISRO. Also, MTAR is one of the preferred suppliers to organizations such as Bloom Energy, NPCIL & ISRO.

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EPS (Rs)
FY2019 184 17% 54 38 660% 13
FY2020 214 16% 58 31 -18% 12
FY2021 246 15% 85 46 48% 15
FY2022E 330 34% 112 66 43% 21
FY2023E 446 35% 152 98 49% 32
FY2024E 580 30% 197 133 36% 43

Greenply Industries

Company Overview:
Greenply Industries (GPIL) currently is one of India’s premier interior infrastructure companies manufacturing, marketing, distributing and branding plywood and MDF. It has a wide range of products across plywood segments—block boards, flush doors and decorative veneers. GPIL has 4 plywood manufacturing capacities at Nagaland, West Bengal, Uttarakhand and 1 MDF plant at Uttarakhand. GIL enjoys a leadership position in the plywood business with 26% of the organized plywood market in India. It has a distribution network of 2,300+dealers/authorized stockists and a retail network exceeding 6,000 and 50+ physical and virtual branches pan-India.

Investment rationale

Planned capex in plywood to provide additional revenue in the medium to long term
The demand momentum for GIL’s product portfolio was temporarily disrupted due to the second-wave of the Covid-19 pandemic. However, the company has been witnessing a decent demand recovery from July 2021 backed by a) gradual unlocking of economies, b) pent-up demand, c) improved momentum in the real estate sector and d) preference for organised players. Considering the proximity of principle raw material, availability of workers, growing demand in northern and central markets of India and to secure seamless supply, GIL had planned to setup a new unit of 13.5 MSM capacity in Sandila Industrial Area (Uttar Pradesh) for manufacturing plywood and its allied products during FY21. The construction activities are currently on track. The management expects to spend Rs 85 crore by FY22 end and are hopeful of commencing production from March 2022.

Planned capex in MDF segment on the back of robust demand scenario:
GIL plans to strategically foray into the MDF boards business with a green-field manufacturing set-up at Vadodara, Gujarat. As per the management, the MDF plant with an installed capacity of 800 CBM/day would have the revenue potential of Rs 600-650 crore per annum at its peak utilization. The plant is expected to commence operations by Q4FY23. The company expects capacity to reach optimum level by FY26E while its ROCE in a steady state would be 18-19%. Breakeven for the plant would be at ~40-50% capacity expected to be reached during FY24E. According to the management, this would be the first MDF plant in the western region, which is likely to provide great competitive advantage with pricing and logistics benefit, abundance of required raw material, and robust demand arising from the western market. The estimated capex of Rs 548 crore is likely to be funded by a mix of debt and equity in the ratio 65:35.

Strong brand presence, well established distribution network and product portfolio to support sales growth:
Improving real estate dynamics has given confidence to the company to foray into new products. The company has strong brand presence in metro cities with establised distribution network. The reverse migration from the cities to the villages in the wake of the lockdown opened up a new opportunity window as disposable income saw an immediate surge in these areas. Hence, the company decided to strategically expand into the rural and semi-urban market. As a result, The company expanded dealer network into rural/Tier II & III markets (number of dealers in rural areas increased from 12 to 38 while in semi-ubran areas it increased from 543 to 910 in FY21), and set up of warehouses (2300 dealers pan India).

Risks and Concerns

  • Over capacity in MDF business MDF margins can be severely impacted by huge capacity additions by leading manufacturers, resulting in intense price war.
  • Downturn in real estate sector The company has planned capex in plywood and MDF segment on the back of rising demand. In case of downturn in real estate sector, demand for housing materials could get hampered leading to growth challenges for the company.

Outlook & Valuation

After a weak FY21, we expect a bounce-back in FY22 and FY23 on improved consumer sentiment for home renovation/purchases. Several cost-reduction measures may provide a cushion to margins. The company is also expanding its network of dealers beyond metro cities to capture market share from unorganized players. Based on CMP of Rs 202, the stock is trading at 18x FY24E earnings.

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EPS (Rs)
FY2019 1412 55% 146 80 7
FY2020 1420 1% 156 47 -41% 4
FY2021 1165 -18% 117 61 30% 5
FY2022E 1394 20% 153 84 37% 7
FY2023E 1701 22% 221 111 32% 9
FY2024E 2007 18% 261 134 22% 11

Happiest Minds Technologies Limited

Company Overview
Promoted by Mr. Ashok Soota, Happiest Mind Technologies (HMTL) was incorporated in March, 2011. The company, positioned as “Born Digital. Born Agile,” enables digital transformation for enterprises and technology providers. Its business units comprise of Digital Business Service, Product Engineering Services, and Infrastructure Management and Security Services. It offers solutions across various technologies such as Robotic Process Automation, Big Data and advanced analytics, Internet of Things, cloud, Business Process Management, and security. The company delivers services across industries such as automotive, BFSI, consumer packaged goods, e-commerce, EdTech, engineering R&D, hi-tech, manufacturing, retail, and travel/transportation/hospitality.

Investment Rationale

Strong Brand in Digital IT Services:
The global enterprise digital spend is expected to be ~USD 691 billion and in 2025, the amount is expected to reach ~USD 2,083 billion, thereby growing at a CAGR of 20%.The company derives ~97% of revenue from digital technologies; the proportion is in-line with US-based digital companies and is expected to be 40%-50% higher than Indian mid-and-large IT companies. The adoption of digital technology has increased and accelerated during the Covid-19 pandemic and therefore the investment in this space is expected to see sharp improvement as businesses look to increase the adoption of cloud/SaaS to lower costs and reinvest savings back in modernization and improving customer experience.

Growing Average Revenue per Active Client, Having Potential Head Room for Growth:
As of March and June 2021, HMTL had 173 and 186 active clients, respectively. Average annual revenue per active customer has increased from USD 4,71,000 in FY18 to USD 634,000 in FY21; in Q2FY22, the number stood at USD 7,83,000. Further, average revenue per active client is expected to increase further backed by growth in USD billion customers from 46 clients in FY21 (37 in FY20) to 50 clients as of September 2021, and cross selling. The broad range of offerings helps HMTL to up-sell and its multiple BUs aids in cross-sell to existing customers as well as to acquire new customers.

Strong and Established Client Base Providing Diversity Across Geographies and Verticals:
The United States, which has the majority market share of global technology spend, has historically contributed most to the company’s revenue. In Q2FY22, revenue contribution split was US (66%) followed by India (13%), Europe (11%), and RoW (10%). Over the years, Edutech and Travel, Media & Entertainment (TME) has aided the company’s revenue growth while retail has dragged the revenue growth. Revenue growth is expected to continue going forward backed by continued investments in digital transformation across industry verticals and Edutech, Hitech, and BFSI are expected to be growth drivers.

Strong Promoter Pedigree:
Mr. Ashok Soota, the promoter of HMTL, has a long history in the IT industry, having served as Vice Chairman of Wipro and Chairman and CEO of Mindtree, giving him experience in both running a top-tier IT services firm and founding and running a mid-sized IT services firm from the ground up, with great success in both roles. Given Mr. Soota's extensive domain understanding and strong connections with client boardrooms, this is likely to benefit the company in the future.

Risks and Concerns

  • Foreign Exchange Risk: The United States accounts for more than 65% of the company’s revenue, India for 13%, and Europe and other nations for the remaining. The corporation has a hedging policy in place that allows it to hedge 65% to 70% of its foreign currency. HMTL gained from currency impact based on exchange rates from FY16 to FY19, except for FY19, when it suffered forex losses of Rs. 8.85 crores.
  • Highly Competitive Industry: HMTL is up against stiff competition from tier one IT firms and well-established tier two firms, limiting its pricing and bargaining leverage with customers.

Outlook & Valuation

Happiest Minds Technologies had 186 active clients as on Q2FY22. Its repeat business has gradually increased over time, contributing a major amount of its income from contracts with customers, indicating a high level of client stickiness. By 2025, the enterprise digital spend is expected to grow at a CAGR of 20% by 2025. The company addresses full gamut of an enterprise’s digital journey via its three business units, which also allows the company to participate in the end-to-end lifecycle of a customer’s digital journey. Given the Mr. Ashok Soota’s deep domain expertise and connect, it is likely to benefit the company going forward. The company’s strong deal wins also gives confidence in its strong position and revenue visibility over medium term. The stock is trading at ~90x of FY23E estimates.

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EPS (Rs)
FY2019 590 33% 55 14 NA 5
FY2020 698 18% 97 72 405% 16
FY2021 773 11% 191 162 127% 11
FY2022E 951 23% 219 171 5% 12
FY2023E 1,170 23% 271 213 24% 15

Vardhman Textiles Limited

Company Overview:
Incorporated in 1973, Vardhman Textiles Ltd (VTL) was founded by S.P. Oswal. It is one of India's most prominent textile firms, specializing in cotton yarn and fabric. It has 17 manufacturing facilities spread across Punjab, Madhya Pradesh, and Himachal Pradesh, with a total installed capacity of 1.2 million spindles, 1,544 fabric looms, and 175.6 million meters per annum of fabric processing capacity. It is also a significant producer of piece-dyed fabric and a cotton yarn exporter.

Investment Rationale

Strong Market Position:
VTL is one of India's largest integrated textile producers, with significant production capacities, high-capacity utilization, and great operating efficiencies. It is a prominent player in the cotton yarn, piece dyed fabric, and sewing threads segments, as well as a leading yarn maker. VTL has a diverse customer base, with only 9.7% of total revenue coming from its top five customers in FY21. Its cotton yarn has a strong market presence in quality-conscious areas such as the EU, the United States, and the Far East. The company has established itself as a global leader in premium quality yarn production thanks to an unwavering dedication to excellence, continual customer-driven innovation, and innovative technology partnership tactics. Over the medium term, we expect VTL to steadily develop its business across all market categories.

CAPEX to Aid Growth:
In order to meet growing demand, the company is doing capex on a continuous basis. In past 5 years, it has done the capex of Rs. 2,400 crores and further, it has planned additional capex of Rs. 1,800-1,900 crores over FY22E-24E, of which, Rs. 1,400 crores to be used to increase capacity of spindles by 0.165 million spindles. On the fabric capacity front, no capacity expansion is planned, but the existing capacity may be debottlenecked in the coming quarters, as per the management. The enhanced capacity is likely to commence operations in phases up to FYE24 and is likely to boost volumes over the medium term.

Improving Operating Matrices:
On the back of low base, high demand, and improved volume and realization, the company’s sales in H1FY22 increased 76.5% YoY. Furthermore, rising discretionary demand, particularly for textiles, resulted in greater revenue share of value-added fabrics compared to low-value yarns with lower realizations. In terms of sales volumes, the operational performance that was impacted by the second wave of COVID-19 during Q1FY22 rebounded in Q2FY22 to better-than-pre-COVID-19 levels for yarns and textiles. During 1HFY22, capacity utilization for yarns increased to ~99%, while capacity utilization for processed textiles increased to 76%.

Risks and Concerns

  • Cotton Price Risk: VTL purchases cotton during the cotton season and creates a six-to-eight-month inventory. Cotton production is seasonal, and the risks associated with agricultural yields and output expose the company's operations to price volatility.
  • Industry Related Risks: Due to low entry hurdles, India's textile industry is extremely fragmented, and it has also been troubled by overcapacity, particularly in the spinning sector. Furthermore, the pricing dynamics of the domestic industry are heavily influenced by events in China. In the textile business, substitution risk is very considerable. The synthetic yarn industry benefits from a decrease in demand for and production of cotton yarn.
  • Currency Risk: VTL's exports accounted for roughly 46% of total revenue in FY21; it also imports raw materials and some assets, putting its margins at risk from currency fluctuations.

Outlook & Valuation

As with many other textile companies, VTL is also expected to benefit as global retailers are looking to de-risk their supply chains and moving away from China. We take confidence in VTL’s strong market position and expect it to leverage on the strong demand and elevated realizations in near term. We expect higher volume along with higher realization to aid earnings in the current fiscal. We also expect the planned capacity expansion to boost volume growth in medium term. The stock is trading at ~10x of FY23E earnings.

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EPS (Rs)
FY2019 6,878 10% 1,194 731 26% 127
FY2020 6,735 -2% 937 578 -21% 100
FY2021 6,140 -9% 814 410 -29% 71
FY2022E 8,289 35% 1,989 1,285 213% 223
FY2023E 9,366 13% 2,014 1,358 6% 236

Prestige Estates Projects Limited

Company Overview
Prestige Estates Projects Ltd (Prestige) has over 34 years of real estate development experience and is one of South India's premier real estate developers. It has completed 250 projects totaling about 136 million square feet of developable space. It has built a diverse portfolio covering residential, commercial, hospitality, and retail. Apart from real estate development, Prestige provides a range of services such as property management, sub-leasing, and fit-out. Prestige has 47 ongoing projects in various segments, with a total developable area of 58.23 million square feet. It also has 45 upcoming projects comprising area of 79.43 million square feet. Further, the company has land bank of 27 million square.

Investment Rationale

Strong Sales in Residential Segment:
Despite the negative impact of the Covid-19 pandemic, the residential market saw a healthy increase in sales volume in FY21 and H1FY22. Prestige recorded pre-sales of 6.4 million square feet with a value of Rs. 4,285 crores in FY21, representing a 19% and 13% increase over FY20, respectively. In addition, during the Q2FY22, the company had a 168% YoY increase in area sold and a 354% QoQ increase in area sold. In H1FY22, the company also made good headway in selling completed inventory, which accounted for roughly 41% of total residential sales. As a result, the company's lower-maturity residential debt was reduced to Rs. 1,404 crores on September 2021, down from Rs. 2,669 crores on September 2020. As of September 2021, the company's receivables from sold areas covered ~81% of the balance construction cost and debt outstanding in the division.

Strong Launch Pipeline of Residential Properties in H2FY22:
According to the management, in H2FY22, there will be a strong pipeline of residential launches totaling 10 million square feet in South India, Noida, and Mumbai. According to the company, three Mumbai launches totaling 6 million square feet are planned for Q3FY21, with the final permissions in the works. With the launch of the new Mumbai and Noida projects, the company expects gross sales bookings of Rs. 6,000-6,500 crores in FY22E, with a medium-term goal of Rs. 10,000 crores in gross sales bookings by FY24-25E, with ex-Bengaluru accounting for 50% of the total.

A New Round of Capex in South India and Mumbai:
The business expects an annual exit rental revenue of Rs. 350 cores by March 2022 and is planning a new round of investment with incremental committed capex of Rs. 3,500-4,000 crores over FY22-25E, with 7 million square feet in Mumbai and the rest in Bengaluru and other South Indian markets.

Sale of Assets to Blackstone Group Provides Growth Capital:
The first phase of Prestige Group's sale of designated commercial offices, retail and hospitality buildings, mall management and maintenance business to Blackstone Group has been completed. The transaction's proceeds resulted in a considerable reduction in the Group's consolidated debt to Rs. 5,313 crores as of June 2021, down from Rs. 10,802 crores as of September 2020, while also providing capital for several upcoming and planned initiatives. The transaction's second phase is projected to be completed by the end of FY2022, resulting in a net inflow of roughly Rs. 600 crores.

Risks and Concerns

  • Impact of the Pandemic: The pandemic influenced the operating segments, such as hotels and shopping centers. The hospitality industry has also been harmed by the ban on business travel imposed by the pandemic. Furthermore, the new Covid-19 variant, Omicron, could have an impact on vacancy rates, rent rates, and new lease tie-ups.
  • Expected Increase in Debt: Capex debt is likely to rise in the short to medium term as a result of large-scale expansion plans in the commercial real estate market. While the robust sales and collection trend in the residential category may assist to keep debt in check, the huge projects now under construction in Mumbai and the NCR regions would necessitate significant construction financing.

Outlook & Valuation

We believe, the demand for real estate, especially in residential side, is strong and could witness increased demand in medium term backed by lower interest rates and increasing purchase power. We believe the strong momentum in residential sales is expected to sustain in near-to-medium term backed by strong pipeline of launches in H2FY22. The company is preparing to launch three new projects in Mumbai, and their performance would be crucial in meeting the company's goal of Rs. 10,000 crores in annual sales bookings by FY24-25E. The stock is trading at 5.8x of FY23E EV/EBITDA.

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EV/EBITDA
FY2019 5,172 -6% 1,454 416 12% 11.0
FY2020 8,125 57% 2,356 403 -3% 6.1
FY2021 7,264 -11% 1,948 1,456 261% 6.3
FY2022E 7,918 9% 2,851 1,319 -9% 6.4
FY2023E 8,552 8% 3,250 1,556 18% 5.8

Hitachi Energy India Limited

Company Overview
Hitachi Energy India Limited (formerly known as ABB Power Products and Systems India Limited-APPSIL) is the Indian arm of Hitachi Energy – a global leader in power technologies, providing the most comprehensive grid portfolio across the entire value chain. In February 2019, APPSIL was formed following its demerger from ABB India Limited. ABB Ltd announced the sale of its worldwide power grids business unit into a JV in December 2018, with Hitachi as the main shareholder (80.1%). APPSIL has 16 manufacturing sites spread over five countries, as well as 17 sales offices, 2,200+ workers, and 1,000+ customers. The company’s portfolio includes an extensive range of high-voltage products, transformers, grid automation products, and power quality products and systems.

Investment Rationale

Strong Order Book Provides Revenue Visibility:
In Q2CY21, Due to impact of Covid-19 pandemic, the order inflow of the company de-grew 12.2% compared to Q1CY21, however, in Q3CY21, the company witnessed a jump of 31.3% QoQ and 10% YoY. As of September 2021, the company had order backlog stood at Rs. 4,896 crores, which will unlock revenue stream in the coming months. The company has a comprehensive portfolio of future-ready and state-of-the-art products, software, services, and systems. It will focus on accelerating growth through services, digital solutions, and exports by leveraging its strong footprint.

Railways, a Big Growth Opportunity:
As per the management rail segment is a big growth area on the back of Railway’s ambition of 100% electrification and low carbon footprint. The company will play an active role in renewable energy integration as government aims to increase generation capacity, railway electrification with over 28,000 kilometers yet to be electrified by 2023-24, regional transport ventures and high-speed rail, and in metro projects that are either under execution or under planning. APPSIL is the preferred partner for Power Grid Corp, bringing higher-order inflow for railway electrification projects. As Indian railways seek to procure electric locomotives, we believe APPSIL will gain a sustainable business over the next 3-5 years.

Data Centers Hold Vast Untapped Potential:
Data centers is another market for the company that holds a huge untapped potential. With the Government expected to roll out a new data center policy (data localization), the company expects to see exponential growth and areas to pitch its products and services for segment expansion and business growth. APPSIL has the unique capacity to design, supply, and install the entire system using the system and products, from grid substations to circuit breakers at the server. Digital transformation, which is led by penetration of e-commerce, OTT platforms, 4G/5G telecom technology, and IoT, will lead to increase in demand for data centers and we expect the company to derive the benefits from the growing market.

Electric Mobility, a Potential Opportunity:
The Government has set a target of 30% electric vehicle penetration by 2030 and FAME-II could play an important role here. APPSIL has already taken advantage of this opportunity, establishing pilot projects with industry and academic institutions in order to expand the ecosystem for more efficient and environmentally friendly electric mobility. The increase in use of e-mobility may necessitate infrastructure in the form of grid upgrades, charging stations, and technology, all of which could present business opportunities for APPSIL and drive order inflow.

Risks and Concerns

  • Raw Material Risk: The Company is a sizable user of various commodities which exposes it to the price risk on account of procurement of commodities; It is exposed to commodity price risk on account of procurement of base metals (Copper and Aluminum) to be used in manufacturing activities.
  • Foreign Exchange Risk: Exports account for ~15% of the company's revenue and the management intends to expand the share to 25% in the coming years therefore, it is subject to FX risk as a result of its foreign currency exposure.
  • Project Delay: Due to longer execution times than expected in large projects, the company may incur cost hikes, thereby, putting pressure on margins.
  • Capex Risk: Order inflows from railways, metros, and smart cities projects might be delayed by a capex or expenditure slowdown in infrastructure and utilities, affecting the order book and revenue.

Outlook & Valuation

We expect the company’s growth in medium-to-near term will be backed by the factors such has its current order book, higher exports, potential projects from Indian Railways, growth in data centers, and its ability to gain market share through preferred supplier. The company sees itself well-placed to support the e-mobility segment with its award-winning, innovative flash and fleet charging solutions. As normalcy is restored, renewables and rail will continue to be areas of robust growth, while the data center and e-mobility markets will unleash opportunities. The stock is trading at 34.5x of CY23E earnings.

Net Sales (Rs Cr) Y-o-Y Sales Growth (%) EBITDA (Rs Cr) PAT (Rs Cr) Y-o-Y PAT Growth (%) EPS (Rs)
CY2020 3,420 NA 251 100 NA 24
CY2021E 3,849 13% 328 183 83% 43
CY2022E 4,457 16% 425 249 36% 59
CY2023E 5,111 15% 522 315 26% 74

Past Performance Outlook of 2021

Name of the Company Price (Dec 24 - 2020) Price (Dec 23 - 2021) Highest Price Absolute Return Returns (Higest Price)
Alkem Laboratories 2,899.95 3,449.20 4,070.00 18.94% 40.35%
Cholamandalam Investment & Finance 376.35 539.65 667.40 43.39% 77.33%
Gland Pharma 2,408.35 3,864.60 4,350.00 60.47% 80.62%
HCL Technologies 919.35 1,227.45 1,377.75 33.51% 49.86%
ICICI Lombard GIC 1,484.05 1,353.85 1,675.00 -8.77% 12.87%
ICICI Bank 513.55 731.30 867.00 42.40% 68.82%
Mastek 1,097.25 2,975.35 3,669.00 171.16% 234.38%
Minda Industries 401.80 1,185.40 1,254.40 195.02% 212.20%
Route Mobile 1,121.00 1,708.20 2,389.00 52.38% 113.11%
Voltas 810.95 1,209.80 1,356.90 49.18% 67.32%
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