MUHURAT PICKS – 2023 | Equity desk

Muhurat Pick – 1: Cyient Ltd

Investment Rationale:

• Cyient Ltd offers niche product and process engineering services in domains such as communication, aerospace & defence, transportation, mining, energy, and utilities. Cyient has built strong relationships with industry leaders, such as Raytheon Technologies Corp, Bombardier Inc, Boeing Co, British Telecommunications Plc and Tele Atlas and gets high repeat orders of over 90%. The company’s niche offerings and strong client relationships have driven healthy revenue growth over the last five years.
• Cyient Limited has posted a net profit for Q2FY24 at Rs.184 crore, up 132% in compared to Rs.79 crore during the corresponding quarter of last year. The company’s revenue from operations stood at Rs.1778.50 crore in Q2FY24, up 27.4% as against Rs.1396.20 crore during Q2FY23. The company’s EBIT stood at Rs.260 crore. 
• The company has won two prestigious awards at the NASSCOM Design & Engineering Summit. One was in the area of enabling the blue economy via last mile hydrogen fuel delivery for marine and automotive application and the second was for designing and engineering, the world’s most fuel-efficient aircraft engine. The company has received the Modern Network Management Award at the 2023 ESRI Infrastructure Management and geographic information systems (GIS) Conference. Enabling Blue economy via Last Mile Hydrogen Fuel delivery for Marine and Automotive applications.

Outlook: The company is holding on to the 15-20% revenue growth guidance for FY24 and expects EBIT margins to improve by 150-250 basis points compared to FY23. The company expects Q3 to be better than Q2 and anticipates growth in the aerospace and sustainability segments. Cyient will continue to maintain its healthy financial risk profile over the medium term, with moderate debt, high liquid surplus in absence of any large debt funded acquisition and a conservative financial policy.

Key risks:-

• The demand environment is uncertain due to the potential threat of recession from the world’s largest economies.
• The rising subcontracting cost and cross-currency headwinds may impact operating margins negatively.

Muhurat Pick 2: L&T Finance

Investment Rationale:

• L&T Finance is a subsidiary of Larsen & Toubro which holds a 63.5% stake in the company. L&T Finance has become an integral part of the L&T group and it derives constant technical and capital support from the parent company. The Co. received an equity infusion of Rs. 1,900 crore in FY2021 and Rs. 2,000 crore in FY2018. L&T Finance has a diversified product portfolio comprising of Rural Group Loans & Micro Finance (25%),Farm Equipment Finance (17%), Urban Finance- 38% (Home loans/ loans against property [18%], Two-wheeler loans[12%], consumer loans [8%]), SME Finance (2%) and Wholesale Finance- 18% (comprising Real Estate Finance [5%]and Infrastructure Finance [13%].
• L&T Financial has registered the highest ever retail disbursements and also maintained excellent margins and have further reduced the credit cost and achieved a 46% PAT growth, registering a PAT of Rs.595 crore. The company has already achieved 88% Retailisation in Q2FY24 and its quite confident of going beyond 90% in Q3FY24 itself. The retail growth was at 33% YoY in this quarter and a growth of 34% YoY in Q1. The Retail GS3 and NS3 today stand at 3.05% and 0.67%, respectively, and even on a consolidated basis, this is at 3.27% and 0.82%. The retail ROA has grown to 3.32%.
• The company’s Retail profit after tax is at Rs.606 crores, up 86% from last year. The Retail ‘NIMs+Fees’ are at almost an all-time high of more than 12%. The company has registered highest ever quarterly retail disbursements of about Rs.13,500 crore, which is up 32%. The retail book is now at Rs. 69,400 crores, which is up 33% and the Retail ROE now has reached 16.31%.

Outlook:

L&TFH is set to primarily transform itself into a retail franchise, which could lead to improvement in overall profitability and return ratios. The company is realigning its strategy by repositioning its portfolio growth from product-based to customer-centric, focusing on cross-selling, up-selling along with using deep analytics to understand various nuances like business selection, dealer selection, sale volumes, market positioning in various segments, portfolio vintage including customer behaviour, counter share performance, and distribution network, which are key positives.

Key risks:-

• Slower retail growth and higher-than-anticipated write-off in wholesale and retail NPL cycle.
• Presence in relatively riskier asset class – The Rural Business Finance and Two-wheeler segments remains risky on account of the nature of the customer profile and vulnerability of the borrowers’ cash flows to economic shocks, as majority of the rural borrowers belong to the lower socio-economic background.

Muhurat Pick 3: Tata Motors

Investment Rationale:

• Tata Motors Group is a leading global automobile manufacturer. The company is the market leader in the domestic CV industry and one of the top three manufacturers of PVs in India. In the domestic CV industry, TML has one of the most diversified product portfolios with a presence across light, medium and heavy-duty segments of the CV industry. The company’s product portfolio in the PV segment also spans passenger cars and sport utility vehicles (SUVs).
• The company’s revenue from operations stood at Rs.1,05,128 crore in Q2FY24, up 32% as against Rs.79,611 crore during Q2FY23. The company has posted net profit for the consecutive four quarters. The company posted a net profit of Rs.3832 crore as against a net loss of Rs.898 crore for the same quarter last year.
• Tata Passenger Electric Mobility Ltd (TPEM) and Jaguar Land Rover Plc (JLR), both 100% subsidiaries of Tata Motors Limited (TML), have entered into a Memorandum of Understanding (MoU) for the licensing of JLR’s Electrified Modular Architecture (EMA) platform for a royalty fee (including electrical architecture, electric drive unit, battery pack and manufacturing know-hows) for the development of TPEM’s ‘premium pure electric’ vehicles series ‘Avinya’ on the EMA platform. TPEM and JLR will also enter into an Engineering Services Agreement (ESA) to support TPEM’s change content requirements for the first vehicle development.

Outlook:-

The order book remained strong with over 168,000 client orders, with RR, RR Sport and Defender accounting for 77% of the order book. Looking ahead, production and wholesale volumes are expected to gradually increase in H2 FY24. The EBIT margin for FY24 is now expected to improve to around 8% compared to the 6% plus previously indicated. The company is expecting a free cash flow of over 2 billion pound in FY24 with net debt reducing to less than 1 billion pound by the end of FY24.

Key risks:-

• JLR’s cost competitiveness as well as profitability is susceptible to forex movement, particularly the Euro, given the high share of imported components from Europe. Further, it has significant exports and foreign currency debt, which increases its exposure to foreign currency fluctuations.
• Slower than anticipated volume recovery of company across its operations will impact the revenue growth.

Muhurat Pick 4: SBI Life

Investment Rationale:

• SBI Life, began as a joint venture between SBI and BNP Paribas Cardif and commenced operations in 2001. The company is uniquely positioned to tap the vast potential of the Indian life insurance sector. SBI Life strives to make insurance accessible to all, with its extensive presence across the country through its 1,011 offices, 23,998 employees, a large and productive network of about 236,978 agents, 73 corporate agents and 14 bancassurance partners with more than 41,000 partner branches, 148 brokers and other insurance marketing firms.
• SBI LIFE reported GWP (Gross Written Premiums) growth of 21.4% YoY (+48.8% QoQ) to Rs.20,176 crore in Q2FY24 led by strong growth in the New Business Premium (NBP). In H1FY24, GWP stood at Rs.33,731 crore, a growth of 20.6% mainly driven by 27.6% growth in single premium growth. NBP for the quarter increased by 34.1% YoY/ 62.0% QoQ driven by both the segments viz First Year segment (+33.1% YoY) and single premium segment (+35.0% YoY). The renewal segment grew by 10.9% YoY (+37.7% QoQ).
• As of September 30, 2023, the total number of agents stood at 236,978, a growth of 33.0% over the previous period. In H1FY24, the Company added a net of 28,204 agents. SBI life will introduce two or more products in the non-par savings segment. The company also working on the comprehensive review of the rider portfolio as this will help them to not only increase the protection but also increase savings product.

Outlook:-

The performance of SBI Life has been consistently improving led by growth, margins, cost ratio, and persistency. The company’s VNB margin, although fallen QoQ, stands healthy in the industry which is led by the improving product mix and operating leverage. SBI Life enjoys competitive cost ratios in the industry which help it maintain a superior margin profile.

Key risks:-

• Intense competition from other private life insurers can make it challenging for the company to maintain profitability. Moreover, with the dominant position of the Life Insurance Corporation of India in the domestic market, private players need to continuously innovate to attract customers, and also manage the returns expectation of policy holders.
• Changes in the interest rates would adversely impact certain products offered by the company.

Muhurat Pick 5: Godrej Properties

Investment Rationale:

• Godrej Properties Limited (GPL) is the real estate development arm of the Godrej Group, which was started in 1897 and is today one of India’s most successful conglomerates. Godrej Properties brings the Godrej Group philosophy of innovation, sustainability, and excellence to the real estate industry. At present, GPL is present in 10 cities in India and focuses mostly on residential real estate development.
• Godrej Properties is the India’s largest developer by number of homes sold in FY23. Successfully delivered ~38 million sq. ft. of real estate in the past five years. As of Q2FY24, it has ~214 million sq. ft. of saleable area across India. They have added 61 residential projects with ~121 million sq. ft. saleable area since FY2018.
• Revenue came in at Rs.343 crore (+108%/-64% YoY/QoQ, a 49% miss). This was on the back of 1.6 msf of delivery during the quarter. GPL is targeting 12.5 msf of deliveries for FY24 with 6.5 msf delivered YTDFY24. Presales for Q2FY24 was highest ever in any quarter and stood at Rs.5030 crore (+109%/+123% YoY/QoQ), with a booking area of 5.2msf (+93%/+133% YoY/QoQ). This was on back of mainly two projects i.e. Godrej Tropical Isle in Noida which was GPL’s most successful launch ever achieving a booking value of Rs.2000 crore.

Outlook:-

On back of the strong presales, GPL is confident of achieving INR 140bn+ of targeted presales in FY24. GPL added one new project with a gross development value of INR 7.3bn in Q2FY24, taking the total YTD GDV addition to INR 72bn, on track, with targeted INR 150bn of GDV addition in FY24. However, given a strong launch pipeline of ~18msf and growth visibility of two to three years, GPL will be adding projects on replacement basis in most of the existing markets.

Key risks:-

• The real estate sector is cyclical and has a highly fragmented market structure because of the presence of a large number of regional players.
• In addition, being a cyclical industry, the real estate sector is highly dependent on macro-economic factors, which in turn exposes the company’s sales to any downturn in demand.