Shakti Pumps (India) Ltd : A Promising Investment with 16% Upside Potential

Target (Rs) Potential Upside % Investment Horizon:
₹ 750
31.57%
12 Months

Shakti Pumps India Ltd., established in 1982, specialises in manufacturing energy-efficient pumps and motors, particularly for agriculture. With over 1,200 products, the company is a leader in renewable energy solutions and has a significant presence in the solar pumping industry. 

It exports to over 120 countries and holds a 40% market share in India’s PM-KUSUM scheme, which promotes solar power in agriculture. Shakti Pumps is committed to research and development, creating innovative products for various applications including irrigation, industrial processes, and water supply.

Why should you invest in Shakti Pumps (India)?

Investment Rationale

Healthy order book and increasing revenues ensure robust growth in the near future
Shakti Pumps (India) Ltd. has a promising outlook with a strong order book of Rs. 22.5 billion, including a significant Rs. 15.5 billion order from Maharashtra State Electricity Distribution Company Limited to be completed within two years. Other orders involve Off-Grid and Grid Connected Solar Water Pumping Systems, with execution timelines ranging from three to nine months. 

The company anticipates a minimum 25% order growth in the upcoming financial year and expects H2FY24 revenues to reach around Rs. 900 crores, up from Rs. 497 crores in H2FY23. With over 69,000 pumps to be installed in the next two years, Shakti Pumps’ top line and order book appear robust for the foreseeable future.

PM KUSUM Scheme – a potential for earnings and growth
Under the PM KUSUM Scheme, the goal is to install over 20 lakh off-grid solar pumps and 15 lakh on-grid solar pumps by 2028, creating an opportunity worth Rs. 1,050 billion. As of January 2024, 12.9 lakh units have been sanctioned, but only 2.9 lakh units have been installed, leaving a significant opportunity for growth. Shakti Pumps India Ltd., as a market leader, is well-positioned to capitalise on this expanding market in the coming years.

 

Valuation and Outlook

Shakti Pumps (India) Ltd. is a leading manufacturer of pumps and motors, offering a wide range of water pumping solutions for various applications. The company has over three decades of experience and is known for its quality-driven products. 

With the growing emphasis on solar power in India, Shakti Pumps is well-positioned to benefit from the increasing demand for solar-powered water pumps. The company’s recent financial performance has shown strong growth, and it has a healthy order book. The government’s support for the solar sector and the rising need for sustainable water pumping solutions are expected to drive the company’s growth in the coming years. 

Therefore, the current macro situation, a healthy order book, and rising government support towards the sector makes us constructive on the company and assign a buy rating with an investment horizon of 12 months. On the valuation front, we have arrived at a target price of Rs 1,753 (16% upside from CMP) based on P/E of 43x of FY24E earnings.

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Ambuja Cements: Strong Financials and Expansion Plans – Target Price Rs. 750

Target (Rs) Potential Upside % Investment Horizon:
₹ 750
31.57%
12 Months

Ambuja Cements Ltd. is one of India’s top cement companies. It is part of the Adani Group, known for its diverse and sustainable businesses. Ambuja Cement has been offering easy solutions for home building with its special focus on sustainable development projects and eco-friendly practices. The company currently has a cement capacity of 31 million tonnes, operating six integrated cement manufacturing plants and eight cement grinding units across India.

Management Meet Update

  • Ambuja Cements is poised for growth, with January volumes showing excellent performance.
  • The company anticipates high double-digit growth in volumes, with EBITDA/ton set to improve due to cost synergies, including those from the Sanghi plant.
  • Promoters plan to infuse Rs. 15,000 crore in April, aiming for a capacity of 140 million tons and Rs. 18,000 crore EBITDA by FY28.

Why should you invest in Ambuja Cements?

  • Ambuja Cements is a leading player in the cement industry, offering strong cash flows and a direct play on India’s infrastructure development.
  • Recent financial results showed flat standalone EBITDA due to clinker maintenance, which is expected to revert in the next quarter.
  • Management is bullish on demand and aims to double capacity to 140 million tonnes by FY28 from the current 77 million tonnes.
  • The company is at an inflection point, with upcoming promoter infusion expected to drive capacity growth and improve margins.
  • Current pet coke prices have decreased, reducing a key cost component, and initiatives to reduce costs further are underway.
  • Ambuja Cements is confident of achieving Rs. 1450 EBITDA/ton on a capacity of 120 million tonnes by FY29E.
  • With the government’s infrastructure focus and strong promoter backing, the company’s valuation is expected to improve significantly.
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Bharat Forge Ltd. – Healthy margins

Sector Outlook – Positive

Bharat Forge’s Q3FY24 standalone revenues increased by 1% QoQ / 16% YoY to Rs. 2,263 crores, driven by a 9% QoQ rise in domestic business but offset by a 6% QoQ decline in export revenues. 

The adjusted standalone EBITDA was Rs. 663 crores, with an EBITDA margin of 28.5%, surpassing market estimates due to improved gross margins and cost-control measures. 

The reported standalone PAT was Rs. 380 crores, up 8.7% QoQ / 32.1% YoY. Domestic revenues grew 34% YoY, led by the non-auto segment, while export revenues fell 6% QoQ due to declines in PV, M&HCV, and non-auto segments. 

The company’s overseas operations showed improvements, with the US subsidiary expected to become profitable in 1QFY25E. The balance sheet remains strong, with Rs 1,000 crores in cash reserves.

Concall Highlights

  • Bharat Forge secured orders worth about Rs 550 crores in Q3FY24, with a mixed outlook for different markets.
  • US commercial vehicle demand is expected to be flat, with pre-buy activity anticipated in 2024-26 due to emission norm changes.
  • European demand is uncertain, but growth is expected in PV and industrial segments.
  • E-mobility and aluminium casting businesses are expected to contribute to profitability.
  • The defence order pipeline is healthy, with orders worth around Rs 2,000 crores, largely for exports.
  • Aerospace revenues are expected to double annually for the next 2-3 years, with exports accounting for over 80% of segment revenues.
  • Non-auto exports, particularly in oil and gas, declined due to significant destocking at the customer end.
  • Domestic PV revenues were muted due to the completion of several programs.
  • JS Auto Vestas business in Russia has decreased, but orders worth about Rs 200 crores have been acquired across end-user segments.
  • Capex stands at Rs 500 crores, covering both Indian and overseas operations.
  • Capacity utilisation is approximately 50% in the US and around 70% in Europe.
  • Subsidiaries’ performance is expected to yield overall mid to high single-digit margins.
  • European operations reported an EBITDA of Rs 21.8 crores in Q3FY24, aiming to elevate aluminium business EBITDA margins to mid-teens by FY25.

Valuation and Outlook

Bharat Forge, a leading forging company based in Pune, reported lower than expected consolidated EBITDA in Q3FY24, mainly due to weaker revenue and profitability in the EU business. 

The near-term outlook is challenging, with limited growth opportunities in core businesses due to increased competition in export markets and the potential impact of electrification in some segments like PVs and tractors, as well as the oil and gas sector. 

However, the domestic business showed resilience in the India CV segment, supported by government infrastructure initiatives. The India PV business expects growth from premiumization and the rise in Utility Vehicles. While the Industrial segment performed well, sales to the Agri sector and Construction Mining declined. Overseas operations saw improvements in the Aluminium business in Europe, with similar expectations for the US plant. Looking ahead, moderate growth is anticipated in both domestic and export markets, with Bharat Forge aiming to outperform the market through its diversified business and efforts to expand into new sectors and markets.

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Lumax Industries Q3FY24: Illuminating the Road to Strong Capex-Led Growth

Sector Outlook – Positive

In the third quarter of FY24, Lumax Industries Ltd. (LIL) performed better than expected, with revenue reaching Rs. 640 crores, up 9% from the previous year. This growth was driven by the recovery in the two-wheeler segment and sustained demand from the passenger vehicle segment, especially SUVs. 

However, the EBITDA margin contracted to 9.22% due to the commissioning of a new plant in Pune and higher staff costs. Despite this, the company remains optimistic about revenue growth, particularly from the new Chakan plant and increased revenue share from key customers like Maruti Suzuki, Mahindra & Mahindra, and Tata Motors. 

LIL is also focusing on increasing its LED revenue share, which has grown from 25% to 35% over the last five years, with plans to further increase it to 50%.

Concall Highlights

  • The interim budget allocated Rs. 3,500 crore for promoting the EV industry, boosting hopes for its growth.
  • The two-wheeler segment is growing steadily, driven by rural demand, but commercial vehicles are struggling.
  • Challenges in the tractor segment persist due to delayed monsoons.
  • There is optimism for the passenger vehicle and two-wheeler sectors, with a strong outlook and increasing EV adoption.
  • LED lighting contributed 36% of total revenue, while conventional lighting made up 64%.
  • Front lighting accounted for 66% of total revenue, rear lighting 25%, and other products 9%.
  • The passenger vehicle segment contributed 67% to total revenues, two-wheelers 27%, and commercial vehicles 6%.
  • The Chakan plant in Maharashtra began producing automotive lighting in November 2023, focusing on new business from M&M and Tata Motors.
  • Revenue growth in Q3FY24 was limited (Rs. 20 crores) due to fewer working days, but Q4FY24 is expected to improve, targeting a monthly revenue of Rs. 30 crores.
  • Phase-1 of the plant is expected to reach 70-75% utilisation by the end of Q4FY24, with Phase-2 expansion starting soon for full commercialization by FY26.
  • The current order book is worth Rs. 2,200 crores, with 64% from new business and EVs accounting for 34% of this.
  • LED lighting orders make up 85%, with around 70% expected to start production in FY25, leading to significant revenue growth from FY26.
  • FY24 revenue guidance expects 15% growth (Rs. 2,600 crores) with margins exceeding 9.3-9.5%.
  • FY25E is poised for stronger double-digit growth, estimated at ~20%, with margins expected to reach at least 10%.
  • After Phase-1 and Phase-2 expansions at the Chakan plant, peak revenues are projected to reach Rs. 900 crores.
  • The expansion will increase capacity by 30%, leading to a 50% boost in revenue, with Phase-2 starting operations in Q3FY25.
  • Lumax secured orders for Maruti’s first EV model, expected by year-end, and is in talks for a potential second model in FY26.
  • Financially, capex for FY24 is expected to reach around Rs. 280 crores, with an ETR of 31% and net debt of Rs. 560 crores for the first nine months of FY24.

Valuation and Outlook

In the third quarter of FY24, Lumax Industries Ltd. showed impressive growth with a 9% increase in revenue compared to the previous year. This growth was mainly driven by higher sales in the 2W segment and steady demand in the PV segment, especially for SUVs. Looking forward, the company expects this positive trend to continue, supported by increased 2W sales, a rise in electric vehicle (EV) adoption, advancements in driving technology, and changing trends in automotive lighting design. 

The management anticipates significant industry expansion after the second half of FY25, despite possible capacity constraints. Operational efficiencies and better raw material consumption led to improved gross margins, with further enhancements expected as new plants become operational. Lumax is focusing on cost reduction measures like part localization and in-house manufacturing to boost margins. 

Phase 1 of the new plant is expected to be 70-75% utilized by Q4FY24, paving the way for Phase 2 expansion by Q3FY25. The company is also working on reclaiming lost market share and expanding its client base, especially in the EV segment. Lumax’s strong relationships with OEMs, coupled with its strategies for margin improvement and client diversification, are expected to drive significant revenue growth from FY25 onwards.

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Unlock 23% Upside: Why Archean Chemicals is a Strong Buy

Target (Rs) Potential Upside % Reco. Price Investment Horizon:
₹ 812
23
₹ 659
12 Months

Why Invest in Archean Chemical Industries?

Strong Bromine Business
Archean Chemical Industries holds a robust market position in bromine, leveraging global relationships, efficient infrastructure, and access to brine reserves in the Rann of Kutch. Amidst China’s production restrictions and increased global demand due to geopolitical tensions, Archean remains a reliable alternative supplier, enhancing its bromine export business.

Industrial Salt Capacity for Growth
As India’s largest industrial salt producer, Archean, with a 3 million MT capacity in 9MFY24, strategically exports all production through proximity to Jakhau Jetty and Mundra Port. The company is set for significant growth in the industrial salt sector, driven by strong demand in Asia, particularly in Japan and China. Expanding its client base and plans to increase manufacturing facilities further support this growth.

Future Growth through Bromine Derivatives
Archean Chemical’s expansion into bromine derivatives, including flame retardants and clear brine fluids, positions it for future success. With an increased bromine capacity and ongoing investments in a new facility in Randedi, Gujarat, the company aims to capture 15% of total sales by FY25E, expanding its product range and driving further growth.

Valuation and Recommendation

Archean Chemical Industries, a leading exporter of bromine and industrial salt, showcases strong financials and growth potential. With an anticipated steady increase in revenue, EBITDA, and profit, the company is viewed as a stable, long-term investment. The current price-to-earnings ratio of 19.7x/13.3x for FY24e/25e EPS estimates suggests an upside potential of 23%, leading to a BUY rating on Archean Chemical Industries Ltd.

Conclusion

In summary, Archean Chemical Industries emerges as a compelling investment option, backed by its dominant position in bromine, substantial industrial salt capacity, and strategic expansion into bromine derivatives. The company’s financial strength and growth prospects make it an attractive choice for investors seeking stable returns in the chemical manufacturing sector.

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Eicher Motors Ltd. – Demand weakness persists

Sector Outlook – Positive

In the third quarter of FY24, Lumax Industries Ltd. (LIL) performed better than expected, with revenue reaching Rs. 640 crores, up 9% from the previous year. This growth was driven by the recovery in the two-wheeler segment and sustained demand from the passenger vehicle segment, especially SUVs. 

However, the EBITDA margin contracted to 9.22% due to the commissioning of a new plant in Pune and higher staff costs. Despite this, the company remains optimistic about revenue growth, particularly from the new Chakan plant and increased revenue share from key customers like Maruti Suzuki, Mahindra & Mahindra, and Tata Motors. 

LIL is also focusing on increasing its LED revenue share, which has grown from 25% to 35% over the last five years, with plans to further increase it to 50%.

Concall Highlights

  • The interim budget allocated Rs. 3,500 crore for promoting the EV industry, boosting hopes for its growth.
  • The two-wheeler segment is growing steadily, driven by rural demand, but commercial vehicles are struggling.
  • Challenges in the tractor segment persist due to delayed monsoons.
  • There is optimism for the passenger vehicle and two-wheeler sectors, with a strong outlook and increasing EV adoption.
  • LED lighting contributed 36% of total revenue, while conventional lighting made up 64%.
  • Front lighting accounted for 66% of total revenue, rear lighting 25%, and other products 9%.
  • The passenger vehicle segment contributed 67% to total revenues, two-wheelers 27%, and commercial vehicles 6%.
  • The Chakan plant in Maharashtra began producing automotive lighting in November 2023, focusing on new business from M&M and Tata Motors.
  • Revenue growth in Q3FY24 was limited (Rs. 20 crores) due to fewer working days, but Q4FY24 is expected to improve, targeting a monthly revenue of Rs. 30 crores.
  • Phase-1 of the plant is expected to reach 70-75% utilisation by the end of Q4FY24, with Phase-2 expansion starting soon for full commercialization by FY26.
  • The current order book is worth Rs. 2,200 crores, with 64% from new business and EVs accounting for 34% of this.
  • LED lighting orders make up 85%, with around 70% expected to start production in FY25, leading to significant revenue growth from FY26.
  • FY24 revenue guidance expects 15% growth (Rs. 2,600 crores) with margins exceeding 9.3-9.5%.
  • FY25E is poised for stronger double-digit growth, estimated at ~20%, with margins expected to reach at least 10%.
  • After Phase-1 and Phase-2 expansions at the Chakan plant, peak revenues are projected to reach Rs. 900 crores.
  • The expansion will increase capacity by 30%, leading to a 50% boost in revenue, with Phase-2 starting operations in Q3FY25.
  • Lumax secured orders for Maruti’s first EV model, expected by year-end, and is in talks for a potential second model in FY26.
  • Financially, capex for FY24 is expected to reach around Rs. 280 crores, with an ETR of 31% and net debt of Rs. 560 crores for the first nine months of FY24.

Valuation and Outlook

In the third quarter of FY24, Lumax Industries Ltd. showed impressive growth with a 9% increase in revenue compared to the previous year. This growth was mainly driven by higher sales in the 2W segment and steady demand in the PV segment, especially for SUVs. Looking forward, the company expects this positive trend to continue, supported by increased 2W sales, a rise in electric vehicle (EV) adoption, advancements in driving technology, and changing trends in automotive lighting design. 

The management anticipates significant industry expansion after the second half of FY25, despite possible capacity constraints. Operational efficiencies and better raw material consumption led to improved gross margins, with further enhancements expected as new plants become operational. Lumax is focusing on cost reduction measures like part localization and in-house manufacturing to boost margins. 

Phase 1 of the new plant is expected to be 70-75% utilized by Q4FY24, paving the way for Phase 2 expansion by Q3FY25. The company is also working on reclaiming lost market share and expanding its client base, especially in the EV segment. Lumax’s strong relationships with OEMs, coupled with its strategies for margin improvement and client diversification, are expected to drive significant revenue growth from FY25 onwards.

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Bosch Ltd: Powering Ahead with Innovation and Growth in Q3FY24

Sector Outlook – Positive

Bosch Ltd. reported net sales of Rs. 4,205 crores in Q3FY24, showing a growth of 14.9% YoY and 1.8% QoQ, driven by growth across most segments but slightly missing market expectations. 

The mobility solutions business, contributing 83% of revenue, increased by 16.8% YoY and 2.1% QoQ to Rs. 3,505 crores, primarily due to higher demand for passenger vehicles (PVs) & heavy commercial vehicles (HCVs), where Bosch’s content per vehicle is higher. 

The non-mobility business also saw strong growth of 32.5% YoY but declined 7% QoQ to Rs. 452 crores, driven by increased demand for blue tools and accessories through online channels and a higher number of orders for security systems installation. 

Despite lower gross margins, EBITDA grew by 43.3% YoY and 17.7% QoQ to Rs. 578.4 crores, with an improved margin of 13.8% due to lower expenses and higher other income. Adjusted PAT for the quarter was Rs. 473.4 crores, up 48.4% YoY and 17.7% QoQ, with a PAT margin of 11.3%.

Concall Highlights

Outlook for FY25 

The IMF predicts that global growth will be 3.1% in 2024, with India expected to grow even faster at 6.5% due to strong domestic demand. Bosch expects the growth in the automotive segment to slow down because last year had a high base, and upcoming general elections and challenges in developed economies, worsened by the Red Sea crisis, will add to the moderation.

Localisation Efforts 

Bosch has made big efforts in localising its operations by assembling and setting up its first fuel cell power module to assess the demand for fuel cells in the Indian market. In Q3FY24, the percentage of traded goods decreased from 55% to 51% compared to the previous year, showing the company’s focus on localization.

Other Expenses 

The company’s other expenses decreased by Rs. 47 crores due to the sale of its ‘project house mobility solutions’ business in Q2FY24, along with lower warranty expenses compared to the previous year. However, the increased income from services could potentially raise these expenses. Bosch also charges technical fees to its clients, which increased sequentially, indicating its focus on localization. The company aims to keep other expenses as a percentage of sales at 14.5% in normal business conditions.

Tractor TREM V Guidelines 

Tractor OEMs anticipate the issuance of TREM V guidelines in CY 26 with Bosch prepared to supply to OEMs promptly

Electrification 

Bosch expects significant growth in electric scooters in India and has started providing hub motors to manufacturers, while also localising production lines to qualify for benefits under the PLI scheme. Despite electric vehicles generally having lower profit margins worldwide, Bosch is taking a careful approach to ensure profitability aligns with customer demands. Although Bosch has qualified for the PLI scheme in India, disbursements under the scheme have not started yet.

Hydrogen Trucks 

Bosch sees hydrogen trucks as a feasible option for manufacturers to adopt, but it requires changes to current internal combustion engine (ICE) platforms and strict safety measures due to hydrogen’s corrosive properties. Despite these challenges, pilot vehicles are expected to be ready within the next year, with distribution challenges also being taken into account.

Valuation and Outlook

Bosch Ltd remains committed to leading in key technologies, focusing on innovation and solutions. Their strategy includes being a technology-neutral partner, working with customers, governments, and stakeholders, and investing in skills and solutions for the Indian market

In non-automotive areas, Bosch introduces in-demand products and expands its market presence both offline and online. The growth of electric two-wheelers and three-wheelers offers opportunities, and Bosch plans significant investments to localize advanced automotive technologies and expand digital platforms. 

However, the outlook is cautious regarding electric vehicles (EVs) due to competition. While Bosch aims to outperform the auto industry’s growth, achieving margins above 15% is uncertain, especially without established leadership in EV components. Localization efforts are expected to improve margins, but reaching the 15% margin target in the next 2-3 years could be challenging.

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Eris Lifesciences Ltd. – Foray into fast-growing parenteral segment to enhance growth

Sector Outlook – Positive

Eris Lifesciences Ltd. saw its revenue grow by 14.9% to Rs. 4,863 million, slightly above market expectations. This growth was driven by the integration of Oaknet, Biocon Insulin business, and strong performance of existing brands. 

EBITDA increased by 27.9% to Rs. 1,755 million, with operating profit margin expanding to 36.1% due to higher gross margins. However, net income only rose by 1.2% to Rs. 1,015 million due to higher taxes. 

The company has also decided to buy a 70% stake in a Swiss company that makes sterile injectables for Rs. 63.8 billion, which will allow Eris to enter the fast-growing injectables market and expand internationally. 

This acquisition is expected to initially lower earnings per share but become profitable by FY26. Eris is expected to continue outperforming the industry, especially in the cardiac and antidiabetic segments, and is working on improving profitability and launching new products.

Concall Highlights

Base business outlook

In the third quarter of the fiscal year 2024, the company’s 20 leading brands made up 66% of its total revenue. Out of these, 14 brands are among the top five in their respective categories. We anticipate that this group of brands will keep growing in the upcoming years, resulting in high profit margins and substantial cash flow for further investments.

Acquisition of Swiss Parenteral Ltd

Eris is planning to buy a 70% stake in a business that specialises in generic and specialty injectable medicines, mainly for markets outside of India. The company they’re acquiring, Swiss, makes a wide range of small volume parenterals (SVPs) in two manufacturing units in Gujarat, India. 

These units have been approved by over 50 regulatory agencies worldwide, including the EU, Brazil, Mexico, and Australia. This acquisition will give Eris access to Swiss’s extensive portfolio of sterile products, and Eris can use this to build a business in India that focuses on branded SVP formulations.

Biocon business

By acquiring the Biocon business, the company has expanded into the kidney care market and strengthened its presence in the skin care field.

New product launches

Eris is developing unique product combinations and has reintroduced two products at risk in FY24. The company aims to release Glargine and Liraglutide from MJ’s pipeline in Q4FY24. Additionally, Eris has increased its R&D pipeline to 26 candidates, featuring several first-in-market fixed-dose combinations (FDCs) for the Indian market.

Focus on therapy diversification

The company is keen on diversifying its therapies, with four emerging areas (CNS, Nephro, and Women’s Health) contributing 30% of its revenue from Branded Formulations in Q3FY24. Eris plans to keep investing in these areas to drive higher revenue growth.

Physician coverage

Eris continues to make good progress in expanding the coverage of specialists and consulting physicians, which aligns with the company’s expectations.

Financial Performance

In FY17, Eris was ranked 29th in the Indian Pharmaceutical Market (IPM) with a covered market of Rs 340 billion. Now, the company is ranked 21st in IPM with a covered market of Rs 900 billion. 

Eris is among the top 10 fastest-growing pharmaceutical companies in IPM in Q3FY24. The company’s growth outpaced the overall IPM growth by 600 basis points, reaching 12.8% year-over-year as per data up to December 2023.

Valuation and Outlook

Eris Lifesciences Ltd. saw strong revenue growth in Q3FY24, driven by integrating Oaknet operations and the Biocon Insulin business, along with growth in existing brands. Their Branded Formulations segment grew, especially in Chronic and Insulin businesses. 

The Swiss deal will expand Eris’ sterile portfolio and help establish a strong presence in the SVP branded Formulation market in India for Rest of the World (RoW) markets. Eris entered the Nephrology segment and strengthened its position in Medical Dermatology (Psoriasis) through acquisitions, aligning with its focus on Chronic and Sub-chronic therapies. 

Eris plans to focus on new product launches, particularly in Dermatology, Insulin, and Parenteral segments, and continue gaining market share in key products. With its strong financials and strategic acquisitions, Eris is poised for growth, especially in cardio-metabolic, nephrology, and dermatology markets, benefiting from patent expiration opportunities.

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City Union Bank – Steady performance on asset quality metrics

Sector Outlook – Positive

In Q3FY24, the bank’s Net Interest Income (NII) decreased to Rs. 516 crores, down 4.2% QoQ and 7.2% YoY. Pre-provision operating profit (PPOP) also declined to Rs. 364 crores, down 5.8% QoQ and 26.8% YoY. 

Provisions decreased to Rs. 46 crores from Rs. 56 crores in Q2FY24 and Rs. 225 crores in Q3FY23. 

The bank’s net profit rose to Rs. 253 crores, down 9.8% QoQ and 16.2% YoY. The Net Interest Margin (NIM) decreased to 3.50% in Q3FY24. Gross Non-Performing Assets (NPA) decreased to 4.47%, and Net NPA decreased to 2.19% in Q3FY24. 

Gross Deposits grew to Rs. 52,726 crores, and Gross Advances stood at Rs. 44,017 crores in Q3FY24. The Current and Savings Account (CASA) ratio slipped to 29.0%, and the cost-to-income ratio rose to 48.64% in Q3FY24.

Concall Highlights

  • City Union Bank targets 12-15% business growth in FY24, mainly towards year-end.
  • Recoveries exceed slippages, expected to continue; slippages to return to pre-COVID levels.
  • Increasing recoveries in NPAs reduce gross NPA, net NPA, and provision requirements, boosting potential PAT growth.
  • Plans to open around 800 branches by FY24 end, with 20 branches opened this fiscal year.
  • Reversed Rs. 25 crores from FITL interest income on loans during COVID restructuring, impacting NIM.
  • Asset quality significantly improved, with SMA 2 numbers below 2 post cleanup.
  • Digital lending efforts reduce customer turnaround time to as low as one day.
  • Focus on achieving a RoE growth rate of 16-17% in the next 4-8 quarters, supported by comfortable CAR levels.
  • Loan growth expected to gradually improve in FY25, led by gold loans, automated lending, and controlled slippages.
  • Deposit growth to align with advances growth; not currently aggressive on deposits.
  • Partnership with BCG for digitization reduces TAT from 7-15 days to 2 days; improved underwriting practices.

Valuation and Outlook

In Q3FY24, City Union Bank (CUB) reported mixed results. While its core pre-provision operating profit (PPOP) declined due to lower net interest margins (NIMs), the bank’s asset quality improved due to controlled slippages and strong recoveries. The NIM decrease was primarily due to a one-time interest reversal of Rs. 25 crores related to a funded interest term loan (FITL). Despite weak loan growth, management expects credit flow to improve in the future, driven by reducing the Kisan Credit Card (KCC) book and digital lending initiatives. 

CUB aims to accelerate growth, but its nine-month performance suggests that FY24 growth may end up in high single digits, below industry averages. The bank plans for retail and unsecured segments to contribute 15% to loans in five years, but competitive intensity poses execution challenges. 

Asset quality improvement is expected to be gradual, and business growth may lag in the short term.

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Fiem Industries – Tepid performance; a miss on all fronts

Sector Outlook – Positive

JB Chemicals and Pharmaceuticals Ltd. reported a 6.5% year-on-year revenue growth, exceeding market expectations. The domestic formulation business saw robust double-digit growth of 14.0% year-on-year, driven by recovery in acute brands and strong momentum in chronic brands. 

However, the international formulation business declined 1% year-on-year, primarily due to a decrease in the South African tender business. The company’s CDMO business also had a muted performance, with sales growing at 7.0% year-on-year. JB Chemicals recorded a 27.7% year-on-year increase in EBITDA, with a margin of 26.4%, aided by cost optimization and a favourable product mix. 

Profit after Tax increased by 25.9% year-on-year, with a PAT margin of 15.8%. The company’s chronic cluster outpaced the IPM growth, growing 13% year-on-year compared to IPM chronic portfolio growth of 8.0% in Q3FY24. The company expects domestic revenue to increase in the mid-teen digits, driven by new launches, line extensions, and improved MR productivity.

Concall Highlights

Domestic Business Outlook

JB Chemicals will keep focusing on growth in the Indian market, particularly through its strategy for chronic illnesses. They anticipate that their business in India will continue to grow faster than the overall market, as their larger brands get even bigger and they concentrate on the recently acquired portfolio.

Chronic Portfolio

JB Chemicals is performing well in the chronic illness segment, surpassing the growth rate of the overall chronic market with its key brands. By increasing the proportion of chronic medications in its product mix, the company has been able to improve its profit margins in the domestic market. They aim to continue this trend by focusing on increasing the share of chronic medications to 60% in the future, which they believe will help them maintain strong growth in India.

Sporlac Franchise

The Sporlac franchise has nearly doubled in size over the past two years, according to IQVIA. Management mentioned that they have launched new products, including a paediatric version of Sporlac, in the fourth quarter of FY24.

Foray into Ophthalmology

The company is enthusiastic about its recent entry into the ophthalmology segment, which has introduced some of its most significant brands. They believe that the ophthalmology market has excellent potential, expecting it to grow in the mid-teens and consistently outperform the overall pharmaceutical market growth.

Continuous push on cost optimization initiatives

JB Chemicals anticipates maintaining operating margins between 25% and 27% despite facing inflationary pressures and uncertainties in the external market in the future.

MR Productivity

There are currently seven focused therapy divisions, with a total strength of more than 2,200 MR working for JB Chemicals

CMO Business

In Q3FY24, 75% of total sales came from the CMO business and the domestic formulation business. The company expects its CDMO segment to bounce back starting FY 25, thanks to its strong order book. The growing popularity and ongoing demand for lozenges will play a crucial role in driving this growth.

Valuation and Outlook

JB Chemicals and Pharmaceuticals saw strong revenue growth in Q3FY24, mainly driven by its domestic formulation business, which accounts for about 55% of its sales. The growth was fueled by increased demand for its acquired portfolio and continued success in the chronic segment, along with a recovery in the acute business. 

However, the international formulation business faced challenges, particularly in the South African tender business. The CDMO business also experienced a slight decline due to the comparison with the previous year’s Q3. 

Looking ahead, JB Chemicals plans to focus on expanding its CDMO offerings and strengthening its presence in other markets. Overall, the company expects to maintain its growth momentum through geographical expansion, new product launches, and improvements in operational efficiency.

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