Focussing on our Portfolio Cash Flow – Reviewing 4QFY21 at Itus
The nature of equity markets is to give investors a lot to worry about – be it around lockdown, inflation, interest rates or the RBI policy.
However, one needs to realize that the predictive power of each of these is not more than 50% (you do not have the odds to play this game). Instead, as someone wise said, it’s important we focus inward and pay attention to the process of how we invest and why we make investing decisions.
While there has been a lot of scepticism on the Indian economy, it’s important to analyse our portfolio through the lens of growth and how our companies are evolving through the uncertainty we are faced with.
Post the latest results season, the robustness of our portfolio is highlighted through the growth that our portfolio companies have shown during the last one year. To summarise, our overall weighted average revenue growth has been at 12.19% and net profit growth has been at 43.68% for FY21. More importantly, this has been accompanied by an absolute doubling of the cash that our portfolio companies have generated over the last year.
Not only have our portfolio companies grown their market share, but they have also done it by cutting down expenses which truly creates long-term shareholder value.
We also measure the health of the portfolio with the following metrics, which give us a summary of the earning capability of our holdings.
We now walk through each of our portfolio companies and how their individual growth has panned out over the last quarter and year. It’s the robustness of these earnings that will ensure that the portfolio drawdowns during times of volatility will be contained.
Alembic Pharmaceuticals Limited
Alembic Pharmaceuticals manufactures and markets generic pharmaceuticals, Active Pharmaceutical Ingredients (APIs), and several complex therapeutics across the globe. Their revenue in the year increased 22.4% and their net profit went up by 42.1%
During this year, the company’s API vertical grew 34.8% and the company has several complex therapeutics drugs that are imminently awaiting USFDA approval or have been licensed for commercialisation. Their US generic drug business recovered this year by growing 9.5% in volumes. We believe that since the company heavily invests in R&D (roughly ~15% of net sales), it holds an advantage in its product discovery and development process.
Alkem Laboratories Limited
Alkem Laboratories is a manufacturer of generic pharmaceuticals, APIs and other specialty molecules. The company’s revenue grew 7.6% and net profit grew 40.7% in FY21, as their US business scaled up by 11.4%. Increasing NP Margin, 17.9% in FY21 as compared to 13.5% in FY20, is a great sign of efficiency.
The company witnessed a large growth rate of 27.4% in Vitamins/Minerals Therapy segment of their drugs. This was primarily Zinc & Vitamin C, driven by demand during the pandemic. The management expects significant growth in the domestic formulation segment led by anti-infective and diabetic segment. Their foray into Latin America and the UK will add newer sources to their revenue.
Balkrishna Industries Limited
Balkrishna Industries is a manufacturer of Off-Highway tyre manufacturers, focused on agricultural, construction and industrial applications of tyres. Over the last year, the company’s volumes have increased 12.6% aided by recovery in economic activity in Europe as well as overall demand in replacement as well as OEM tires across the globe.
The company has invested 1,900 crores in capital expenditure that spans across brownfield expansion in its Bhuj plant and a Carbon Black plant with an annual 10,000 MTPA capacity, which it concluded recently. We believe that this would help them achieve self-reliance and drive margins further upwards by backwards integrating into the value chain. The long-term prospects of the company are promising as we see growth in newer and in existing markets.
Computer Age Management Services Limited
CAMS is a financial infrastructure and services provider to Mutual Funds and other financial institutions, acting as a Registrar and Transfer Agency, to roughly ~ 70% of the average assets under management – as of March 2021. The company in FY21, has seen a muted growth of 1.9%, on account of winding down some portion of the non-Mutual Fund business which together contributes 13% to the topline. The company has managed to attain increased profitability (19.4%) on account of reducing expenses.
In FY21, CAMS forayed into payment aggregation and was given a permit to act as a central record-keeping agency. Since the company enjoys a fairly dominant position in this oligopolistic space, it serves as a proxy play for the Asset Management industry which is seeing significant growth to the tune of 20-25%.
Fine Organics Industries Limited
Fine Organics is a manufacturer of oleo chemical-based chemistry primarily focused on producing polymer and food additives. The company’s revenue grew by 12.1% while its net profit declined by -23.9% as Fine Organics saw a decline in its gross margins.
We believe that this decline is due to the company being unable to maintain a pricing power as raw materials (primarily vegetable oils) saw a steep 20-40% rise in this quarter alone. The company also recently commissioned one phase of its Patalganga plant, which aims to target Food Emulsifiers with an additional 10,000 MTPA capacity. On the whole, we remain confident about the shifting consumer trend which would benefit the oleo-chemicals industry but cautious as we monitor the progress of the company.
Galaxy Surfactants Limited
Galaxy Surfactants is one of India’s leading manufacturers of surfactants and other specialty ingredients, exclusively focused on the personal care and home care industries. The company’s volume growth in this year stood at 5.3%, stifled by the pandemic but saw a sharp recovery in this quarter from its India (5.8%) and AMET (13.4%) segments that collectively make two-thirds of their overall volume.
The revenues of the company went up 7.5% while net profit was up 31.1% in the year. Despite a sharp incline in lauryl alcohol prices (key raw material), the company was able to maintain a pricing power, a tell-tale sign of a strong dominant position. We believe, that as Galaxy has invested in capacity expansion (over 30,000 MTPA) and a plant for R&D, it is well-positioned to grow its topline at ~10% annually.
HDFC Asset Management Company Limited
HDFC AMC is one of a handful of publicly listed asset management companies in India. Their primary driver of revenue is based on the assets they manage, which grew 8.8% in Q4 and 23.9% in the year. As a means to calculate efficiency, we measure the expenses and profit as a percentage of AUM. The company has the lowest operational cost conversion (0.11% of AUM) among its competitors, leading to higher free cash flow generation.
We believe that the company will be able to scale its AUM at 20% on a conservative basis for the foreseeable future, both organically and through newer inflows (Industry MF inflows are growing at 22% CAGR).
HDFC Bank Limited
In FY21, HDFC Bank has seen its pre-provisioning operating profit increase by 18.7% and its profit by 16.8%. The bank continues to show strong signs of long-term growth and has seen branch growth at 5% and debit cards at 14.8% (a good proxy for CASA growth).
Quarterly, the PPOP for the bank grew 5.4% but profitability declined by -3.6%, on account of one-off higher provisioning. In terms of efficiency, the bank has Gross NPAs at 1.53%, the lowest among all major private-sector or public-sector banks.
HDFC Life Insurance Company Ltd
HDFC Life Insurance is the 3rd largest life insurance company in India in terms of Annualised Premium Equivalent (APE). The net premium income for the company saw growth at 18.3% and profit at 4.8% in FY21.
The company saw a 14% growth in Value of New Business (VNB), while the VNB margin also rose to 26.1%. We believe that despite higher provisioning and pay-outs in the short term, the pandemic has created an increasing adoption for life insurance of which we will continue to see tailwinds. It is our belief that the company has the capability to grow cash flows ~25-30% once the provisioning rate lowers to pre-pandemic levels.
ICICI Bank Limited
In FY21, ICICI Bank has seen its pre-provisioning operating profits grow by 29.5% and net profits by 104.2%. On a quarterly basis, the company’s pre-provisioning operating profit and net profit declined by -3.1% and -10.8% respectively.
Key component that aids our confidence in ICICI is CASA growth at 20.5% over Q4 last year and an increase in issuances of credit cards. On an efficiency standpoint, the Gross NPA percentage of the company fell to 4.96% in FY21 from 5.53% in FY20. We believe that a similar trend in the above factors would lead to healthy PPOP growth of ~15-20% annually.
ICICI Lombard Gen Insurance Co Ltd
ICICI Lombard General Insurance Ltd is one of the largest private sector general insurance companies in India. Its revenues in FY21 grew by 10.1% and net profit by 23.4%. A great sign for their business, premium income from each of their segments grew with excellent performance in fire insurance (70%) and corporate health (28%).
On a whole, GDPI growth stood at 5.2%, comparable to a 5% industry average. Combined ratios are consistently between 98-102% range, signifying a better chance at profitability compared to competitors. An increased FDI limit to 75%, might incentivize foreign players to foray into the Indian market but we believe that since this is already a fragmented industry, ICICI Lombard is well-positioned to grow at 20-25% on a steady basis.
Indiamart Intermesh Limited
Indiamart Intermesh is India’s largest online B2B marketplace, connecting buyers with suppliers and has a 60% market share of the online B2B Classified space in India. The company has seen a 6.8% increase in revenue while the profit went up 89.8% on account of a cut-down in expenses.
With the suppliers and buyers growing 8.4% and 22.7% respectively, and the increasing adoption catalysed by the pandemic, we believe that the growth potential for this company is extensive. One concern was the waning ability to convert suppliers into paying subscribers (95% of revenue comes from this model). Indiamart had also recently raised 1,070 crores from a QIP, partially earmarked for acquisitions to integrate auxiliary services onto its platform.
Indian Energy Exchange Limited
Indian Energy Exchange (IEX) is an energy exchange platform that facilitates the short-term trading of power in India. Currently, it remains the only major player in the space, with significant prospect for growth, as only ~6% (73,900 MU) of the power generated in India is traded.
Electricity volumes being traded on its platform have seen a 32% CAGR since 2008 and we believe that this growth would continue. The company has started cross-border applications and is in a pilot phase with Nepal and will later expand to Bangladesh and Bhutan, IEX has also recently launched the Indian Gas Exchange in collaboration with leading industry players. We believe that the combination of the company’s monopolistic nature and an underserved market will provide an ideal environment for a ~15% growth in cash flows.
Infosys, among its IT counterparts, has been consistent at generating strong cash flow growth. The company has seen its revenues rise by 9.7% and net profit by 16.7% in FY21. The topline was aided by large deal wins of $14 Billion in the year.
A particularly great sign of business, Infosys’ repeat business percentage grew to 95.9% in FY21 from 93% in FY20. Their revenue from the digital segment grew to 48.5% of the total revenue, aided by the pandemic. We remain confident about Infosys being able to maintain its ~12% growth trajectory for the foreseeable future.
L and T Technology Services Limited
L&T Technological Services is a pure-play engineering services provider, that primarily engages in engineering design and product development. The company’s revenue and net profit for FY21 declined -3.9% and -19.4% respectively, due to loss of a few high-value clients (who contribute more than $20 million).
In Q4, the company managed to secure a $100 million deal, that will boost revenue in the coming year. The company is seeing a 19% CAGR growth in digital engineering segment of their revenue, which we believe will continue to be accelerated by the pandemic.
Lupin is a pharmaceuticals manufacturer that produces generic as well as speciality formulations. During the past year, Lupin has shown promising growth in API manufacturing (6%, despite a bad Q4) and is focused on biosimilars, where it has recently commercialised a molecule and has another waiting in the USFDA pipeline, after having initiated the drug’s global trials.
The company’s revenues slightly deteriorated (-1.42%) in FY21, due to degrowth in its US segments but we expect a 10-15% growth in this segment once it attains approval for several of its drugs (15 FDA filings pending approval). Their expansion into Germany, Eastern Europe and Australia will also help ramp up revenue. Despite the decline in the topline, the company’s net profit grew to 8.1% of total revenue, aided by reducing capital expenditure and R&D costs.
Lupin is well-placed with a potentially robust pipeline of specialty drugs to be launched over the next 5 years in the US, Europe, and key emerging markets.
MCX India Limited
MCX is a government-owned commodity exchange based in India. The company’s revenue declined by -1.74% and net profit declined by -4.77% in FY21. The company was able to increase its realisation per transaction by 39.6%, despite a -4.6% decline in value of futures contracts traded within the year and -3.6% in average daily turnover.
The total unique clients that have traded in this FY21 is increased by 14% to 4.57 lakh, which hints at latent potential for volume growth. With the new peak margin requirements set at 50%, we closely monitor the operational performance of MCX, in terms of growth in futures contracts and volume of deliverable commodities.
Orient Electric Limited
Orient Electric is a consumer electricals brand that is a part of the CK Birla group of companies. The company posted a decline of -1.3% in revenue but a 52.3% growth in net profit in FY21, driven by reduced expenses.
Their Electric Consumer Durables segment delivered 40.2% growth in Q4 and 5% in FY21. The company managed to generate a 57% return on capital employed in FY21 as compared to 27% in FY20. The company is also investing on a greenfield expansion project for manufacturing capacity expansion in South India.
Route Mobile Ltd
Route Mobile is a Communications Platform-as-a-Service (CPaaS) provider catering to Enterprise clients and Mobile Network Operators. The company’s revenues rose by 46.9% and net profit by 128.1%. However, Q4 saw a slight decline of -5.4% in revenues but is not a concern as it is a seasonal trend.
The company, in April, had announced the acquisition of Phonon Communications which would help them integrate the virtual contact center into their platform to help increase stickiness from existing clients into newer products and geographies. The company is yet to utilise over half of the 240 crores that it raised during its IPO in late 2020, which it earmarked for inorganic expansion and acquisitions. We also believe that in this niche and fragmented industry that Route operates in, there will continue to be ~30% growth for the sector.
Sumitomo Chemical India Private Limited
Sumitomo Chemical India Ltd (SCIL) manufactures and markets products in the agri-chemical additives industry in India. The company’s revenues for the financial year grew 9.3% and net profit grew 68.7% as the company’s focus changed in favour of higher-margin speciality segments.
On a business note, the company has 5 molecules that are in the pipeline for commercialisation in the next 2-3 years which would bring in ~250 crores annually. Their speciality segments catering to India and Latin America spurred a product mix shift in favour of speciality segment (32% in FY21 from 29% in FY20). Another benefit that the company has in its sights are potential outsourcing of manufacturing on a contract basis from its parent group company. This would likely be sticky in nature. We look forward to the tailwinds that we see in this industry that could benefit Sumitomo Chemicals in the long run.
Syngene International Limited
Syngene is a pharmaceutical company that specialises in integrated research, development and manufacturing services on a contract basis. The company posted a 7.4% gain in revenue and a -1.9% decline in PAT during FY21.
The company invested roughly ~14% of its revenue on capital expenditure and is investing an additional 100 crores, dedicates for gene therapy drugs, that could add in ~200 crores annually to their revenue. Syngene’s business mix is currently favoured towards contract research, but they plan to forward integrate their manufacturing capabilities to the process by partnering with existing clients.
Tata Consumer Products Limited
Tata Consumer Products is an FMCG company focused exclusively on food and beverage brands. Its revenue and net profit grew by 20.2% and 102.2% respectively in FY21. Geography-wise, their revenue from India grew 29% while Internationally, they grew 12%.
The company did, however, see a decline in gross margins to 40.1% in FY21 from 43.8% in FY20. This was partly due to inflationary raw tea prices, which pressurised their margins. Packaged beverages segment posted a 32% increase in revenue with significant growth coming from e-commerce channels (which currently constitutes ~6% of net sales). We believe that this trend will likely continue, driven by the pandemic.
UTI AMC is an asset management company that had been carved out of the erstwhile Unit Trust of India. The key driver of revenue is based on the assets they manage in their Mutual Fund, which grew 20.5% in the year.
As a means to calculate efficiency, we measure the expenses and profit as a percentage of AUM. The company has the highest operational cost conversion among its competitors, primarily due to unionisation issues in the past. On this, we are optimistic that the company will straighten out over time with a (-15%) degrowth and is not likely to scale along with AUM. The company is aggressively promoting its MF through distribution networks, and we believe this will help them scale significantly.
To Summarize our portfolio companies growth, the table below gives the overall snapshot of the portfolio health