Yesterday’s Market Performance

Nifty: 17,617.15 | -139.85 (-0.79%)
FII Net Sold: INR 3,148.58 crore

Sensex: 59,037.18 | -427.44 (-0.72%)
DII Net Bought: INR 269.36 crore

Howdy Toasters!

In today’s issue of the Morning Toast, we discuss:

• Bajaj Auto numbers and auto results expectations
• Update on global indices including Netflix, AA & Peloton
• Lupin’s foray into the Diagnostics business

EBITDA # drop 21% YoY for Bajaj Auto; What’s up and What do you need to know?

Financial Highlights

• The company recorded revenue growth of 1% YoY to INR 90.2 Bn; volumes declines ~10%, while realisations improved by 12%, assisting in meagre revenue growth
• EBITDA # contracted by 21% to INR 13.7 Bn (along with Street estimates), while % dropped 420 Bps to 15.2%, owing to commodity inflation and an increase in shipping costs (export portfolio contributed ~50% of topline)
• Along similar lines, overall adjusted PAT declined ~22% to INR 12.1 Bn

Business Highlights

• Exports representative >50% of the topline in Q3FY22, with a healthy demand situation and volume momentum expected to continue, barring seasonal factors
• The company has sustained and/or gained market share in export markets regardless of price increases (~5%); Bajaj is in discussions with the Egypt government about the removal of restrictions
• Domestic 2W / 3W remained muted for the quarter across segments, and especially more for low-income category customers (2W); the company does not expect demand revival in Q4, with volumes likely to reduce further before improving
• The threat of lockdowns, reduced disposable income and thrust of impending EV demand is likely to affect core business in the interim (we believe)
• Semiconductor chip shortages continue to remain an area of concern, especially in the EV business, with the company expecting some ease going forward (has tied up with multiple vendors to smoothen supply)

Interesting! Going forward? And valuations, stock price et al.

• Bajaj is likely going to continue its premiumization efforts — in the 100 CC segment, electric starts account for ~95% sales vs 75% in FY21; in the Pulsar 125CC segment, 22% of sales are for the more expensive variant
• The company mentioned limited commodity inflation impact in coming quarters, ~1% on account of increase in prices of steel, aluminium, and lead, while there has been a correction in prices of precious metals
• Bajaj took a price increase in Jan’22, to manage & pass-on cost inflation

EV 

• The company is aggressively focusing on EVs (think: OATS :P), with multiple launches in 2W / 3W planned for domestic/overseas markets, R&D collaborations with KTM / Husqvarna
• The company is likely going to commission an E-2W plan, with 500,000 capacity, with an investment of INR 3 Bn in June’22
• At present, Chetak (current EV product) is available in only 8 cities, with an order book of 10,000 units
• The company has applied for various PLI schemes, committing INR 10 Bn investment over a 5 year period

Stock, Valuations 

• The stocks down ~11% in the last 6 months, and currently trades at ~14x 2Yr FWD P/E(x), amidst a general downturn in demand, due to a variety of factors
• Consensus Bloomberg estimates value the company at ~17x FY24E March EPS, leaving plenty of scope for upside, contingent on demand returning, in a stable and consistent fashion and considering supply side challenges abate

Keep a track?

Like our news coverages?😍 Become a part of our fam, subscribe to our newsletter. Subscribe here

Around the World 🌍

NASDAQ Composite dropped 1.3% (~186 points) and the S&P fell 1.1%

Biggest losers include – 

Netflix Inc (NASDAQ: NFLX) shares fell 20% wiping off $45 billion in market value as the company reported the addition of only 18 million subscribers in 2021 (down 50%). This slowdown is expected to continue with factors like increased competition, and a tough economy playing out. CEO Hastings has also cited not gaining enough traction in markets like India as a factor.

American Airlines (NASDAQ: AAL) shares fell 3.2% to end Thursday at $16.76. Despite posting its highest revenue ($9.43 billion) of the Covid pandemic in Q4 it still reported a loss (of $931 million) as the Omicron variant wreaked havoc on the demand for travel. A staffing shortage exacerbated existing problems like weather adding to the number of flight cancellations.

Peloton Interactive Inc (NASDAQ: PTON) tumbled nearly 24% as news that it has paused production of its connected fitness products hit the markets. The company is looking to control costs as it is not getting sufficient demand.

Lupin enters uncharted territory? What’s up and what do you need to know?

• Lupin is now entering the diagnostics sector (valued at Rs. 1.15 lakh crore, growing at 22% CAGR till 2026) and will be focusing on untapped markets of Tier 1 & 2 Cities (Metro focused has left room for improvement)
• The company seems to be shifting focus from the US to the Indian markets with operations already started in Maharashtra, West Bengal, Assam, Jharkhand, Bihar, and many more states underway
• The aim is to open 100 labs and 1000 centres in the next 5 years (90% based on franchises) and make its place in the Top 5 diagnostic chains in the country

Will this be Lupin’s lucky charm?

• Hard to say since most of its bets have failed – acquisitions like Gavis Pharmaceuticals (for $880m) failed to provide any ROI while its lead product Solosec (acquired for $150m) could not capture a significant market share
• Warning letters from the US FDA were sent to key manufacturing units in Goa (now cleared) and Indore and drug approvals were withheld in 2017
• It has since been fighting criticism of misallocating capital and the overall verdict is that it needs to either reinvest in the high-performing domestic market or foray into another domestic health segment

Industry Overview?

• Diagnostic companies are trading at a > 60x multiple (compared to 32x for NIFTY Pharma) with their market caps having doubled in the two years of the pandemic
• Three major players – Dr Lal PathLabs, Metropolis and Thyrocare – have seen RoE and RoCE of 20-25%
• While Lupin’s consolidated revenue is 10x that of India’s largest diagnostics player the numbers have been shrinking, with profit down by half in ‘21 from ‘17
• The industry is expected to double in size in the next 5 years, with standalone diagnostic players accounting for ~47% of the market, hospitals 37% and chains 16%, leaving ample scope for acquisition and market share gains (for chains)
• Pan-India labs (think: Thyrocare, Dr. Lal PathLabs, SRL, Metropolis) account for only 5% of the share, vs regional chains with ~11% of the market

So what works/doesn’t work for Lupin?

• There are major synergies with the pharma business and it can leverage its network of 7,00,000 doctors + the untapped markets of India provide huge potential
• Other pharma players (in the past), who have tried to manage both set of businesses (pharma + diagnostics) have had mixed results – Mankind Pharma launched Pathkind Diagnostics in 2017, with an investment of INR 305 crore, reporting INR 72 crore in revenue and INR 39 crore in loss
• Similarly, SRL which had the backing of yesteryear Pharma giant Ranbaxy, and is now under the Fortis umbrella has been unable to beat the likes of Dr. Lal PathLabs, despite having a complementary business (doctor access etc.)

Give some stock information? Comparisons et al. 

• As mentioned above, Nifty Pharma trades at a trailing PE of 32x (last 12 months), while shares of Dr. Lal PathLabs & Metropolis, two of the leading players trade at >60x, primarily down to growth profile amidst the pandemic
• Yet, if you take into consideration stock performance over >2 year period (2019 onwards) Lupin’s MCAP has halved since 2017, with gross misallocation of capital dodging the company repeatedly
• That being said, the overall verdict seems to however be positive as the stock price has risen 7% post the announcement (against the pharma index rising 3%)
• Lupin will need to grow organically & inorganically, only not in the traditional sense, with capital allocation key to success in building out this business

Keep a track?

What else caught our eye? 👀

Tik Tok wants to be paid 

• Tik Tok is testing a paid subscription model that would allow creators to charge people to view their content
• This is very similar to what Instagram & Twitter have launched in the past with the former not collecting any fees from creators till 2023
• The pricing of Instagram’s monthly subscriptions ranges from $0.99 to $99.99 while creators on Twitter can charge $2.99 to $9.99 monthly for bonus content

Gems & Jewellery are in demand

• Exports for gems and jewellery in April-Dec of 2021 grew by 5.76% to USD 29.08 billion (In Dec itself it rose by 29.49%)
• The industry saw healthy demand from countries like the USA, Hong Kong and Thailand due to the festive season
• FY22 target of $41.67 bn in exports seems possible with diamond as well as gold and silver jewellery exports seeing growth rates of 23%, 25% and 94% respectively

Saturday, 22nd January: ICICI Bank, Sharda Cropchem., Vakrangee, Vardhman Textiles

Monday, 24th January: Yes Bank, Axis Bank, Cera Sanitaryware, Deepak Nitrite, Ramco Cements, Shriram Transport Finance, Sudarshan Chemical, Supreme Industries, Zensar Tech, IEX, HDFC AMC, Indiamart Intermesh, SBI cards, Burger King