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Four stocks to sell now

We zoom in on four multibaggers that investors can book profits on, when the going is good

Minda Industries: Parts don’t add up (₹719.95)

In the market rally after the March 2020 lows, Minda Industries has gained over 230 per cent. This auto component player now trades at a rich valuation of 92 times its trailing 12-month consolidated earnings, at a steep premium to its three- and five- year historical average valuation of 45 times and 41 times respectively.

Strong profit growth from Q2 to Q4 of FY21 after losses in the first quarter, diversified, electric vehicle (EV)-ready product portfolio and diffused client mix constituting almost all domestic vehicle makers have been selling points for the stock. While long-term prospects remain sound, given the big gains as also the high valuation, investors can afford to take some profits off the table.

Diversified player

Minda Industries is a leading supplier of switches, sensors, lighting, seating, air bags, alloy wheels and acoustics products for bikes and cars. The company has been able to provide a wide basket of products by following an inorganic growth strategy. Over the years, this has helped increase its content supplied per vehicle to clients as well as improve realisations. For instance, in 2014, the company acquired Spain-based Clarton Horns giving Minda access to technology for electric horns. With many premium models of cars and bikes using LED lighting to save energy, Minda acquired Spain-based Rinder group in 2015 that is a pioneer in LED technology for automotives. Through a group company, Minda entered into the manufacture of aluminium alloy wheels for passenger vehicles a few years back. Recently, it completed the acquisition of Harita Seating Systems as well.

A second factor that has caught investor fancy is the EV readiness of the company’s products. Minda already supplies various sensors as well as LED lamps for electric two-wheelers. Others, such as battery management systems, smart plugs and on-board charger, are in the pipeline.

While EV readiness is a positive, it is at best a long-term benefit. As it stands now, India plans to have a 100 per cent EV fleet in public transport by 2030, and will aim for 40 per cent electrification in personal transport such as cars and two-wheelers, by then. However, only 2.36 lakh EVs were sold in the country FY21, constituting just 1.27 per cent of the internal combustion engine vehicles sold last fiscal.

Overall car and bike sales dropped by 2 per cent and 13 per cent respectively in FY21, due to the national and localised lockdowns and other restrictions. The uncertainty has continued into FY22 too. The run-up in the stock leaves little margin of safety for a third Covid wave or consumer preference for conserving cash in the current environment by postponing big-ticket purchases. Considering the euphoric market conditions, booking profits now will be prudent.

Financials

For the year ended March 31, 2021, revenue moved up by 2 per cent year-on-year to ₹6,374 crore (₹757 crore added due to restatement as a result of Harita Seatings merger) and net profits by 32 per cent to ₹248 crore. EBITDA margin came in at 11.4 per cent vs 10.8 per cent a year ago. With raw material prices inching up, what can partially cushion the impact is an expansion in replacement market sales (12 per cent of revenues now). Component makers usually enjoy higher pricing power in sale to retail customers, than auto manufacturers. Towards this end, the company is adding alloy wheels and seating systems to its aftermarket portfolio.

Happiest Minds Technologies: No digital superiority (₹1494.15)

Investors can book profits in the stock of Happiest Minds after a stellar run in the stock. With returns of a little over 800 per cent from its IPO price of ₹166 in September last year, the valuation of the company is overly stretched, and the risk reward is not favourable anymore.

The company now trades at EV/Revenue of around 22 times based on FY22 revenue and 18 times FY23 revenue (Bloomberg Consensus estimates) .

In terms of PE, it is trading at multiple of 119 times FY22 EPS and 99 times FY23 EPS.

Such levels of valuation for Indian IT services companies were last witnessed only during the dotcom era (although this is lower than peak dotcom levels)and what followed then was not all that exciting.

While one differentiator for the company is that its business is near 100 per cent focussed on the higher growth digital segment (cloud, analytics, IoT, etc) within IT services, that does not justify these valuations.

For example, if one were to apply similar EV/Revenue multiple (22 times) to Infosys which derives around 50 per cent of total revenue from digital segment, then the value of its digital business alone would be around ₹12.5 lakhcrore whereas the entire company is valued at around ₹6.6 lakh crore now.

However, in terms of recent business performance, there is not much to complain.

The company has delivered well in terms of financial as well as operating metrics. For FY21, its revenue grew around 11 per cent (6.3 per cent in dollar terms), and net profit grew by 127 per cent.

It, however, needs to be noted that the sizeable growth in net profits also had benefits from a few one-time factors.

The company’s EBITDA margin saw a big jump from 16 per cent in FY20, to 27 per cent in FY21. But the main driver here was the tight leash in wage costs for the year and a 20 per cent reduction in SG&A expenses in a pandemic year.

Wage costs and SG&A, which were under curbs in a pandemic year, will start pushing up, going forward.

In fact, consensus expectations for EBITDA margins for FY22 and FY23 are only around 23 per cent, lower than what was achieved in FY21.

As a consequence, its expected y-o-y earnings growth of 13 per cent for FY22 is much lower than revenue growth expected at 28 per cent.

Risk factors

Looking ahead, with FY20-23 revenue CAGR expected at around 21 per cent, Happiest Minds has the business momentum going for it.

But this is not any higher than the growth expected in the digital business segment for leading companies like Infosys or TCS.

Just to give a recent example, in Q4 FY21, revenue for Happiest Minds grew at 14 per cent y-o-y, while the digital business for Infosys for the same period grew around 30 per cent y-o-y.

Being a relatively smaller company without any unique technology moat in the IT services business, Happiest Minds has some risks, which are not reflected in its current valuation.

It may face outsized margin pressures or impact to revenue growth, if larger players in the industry choose to prioritise growth over margins.

There is also risk from customer concentration. Its top customer accounted for 13.8 per cent of revenue and top 10 customers account for 46 per cent of revenue in FY21.

Adani Green Energy: All is not positive (₹1003.85)

The stock of renewable power company, Adani Green Energy (AGEL) has lost a quarter of its value since May 24, 2021. News reports about NSDL freezing the accounts of a few foreign funds with stakes in some of the Adani Group companies took a toll on the stock.

Despite this, at ₹1.5 lakh crore, AGEL is the highest market-cap company in the Adani stable comprising Adani Enterprises, Adani Ports & SEZ, Adani Transmission, Adani Total Gas and Adani Power. This is thanks to the ten-fold run-up in the AGEL stock from the March 2020 low to the May 2021 high.

Overpriced stock

Today, at a per share price of ₹1,003.85, AGEL stock trades at a trailing-twelve-month price-to-earnings multiple of 1,474 times. With the stock price having galloped far ahead of the company’s expected earnings growth, investors can consider booking profit.

AGEL builds, owns, operates and maintains solar, wind and hybrid (solar-wind) projects. As of July 2021, it had an operational renewable power generation capacity of 5,370 MW with solar power accounting for 88 per cent of this. The total includes 1,700 MW of operational capacity of SB Energy Holdings, which is being acquired by AGEL.

The operational solar plants reported a high capacity utilisation factor (CUF) of 22-23 per cent between FY19 and FY21. AGEL’s entire portfolio is backed by 25-year fixed tariff power purchase agreements, which provides long-term revenue visibility. By end of FY21, 84 per cent of AGEL’s operational and under-development capacity was tied up with sovereign entities such as NTPC and SECI, thereby minimising the counterparty risk.

AGEL’s non-operational portfolio of 14,874 MW comprises 5,124 MW of under-execution projects and another 9,750 MW of confirmed pipeline of projects. SB Energy Holdings accounts for around 22 per cent of this non-operational portfolio. While the impact of this portfolio will reflect in the company’s earnings only in the coming years, the stock has already run up sharply.

Financials and leverage

With AGEL expanding its operational capacity by 22 per cent CAGR between FY18 and FY21, its revenue from operations grew at 53 per cent CAGR to ₹3,124 crore and operating profit grew at 98 per cent CAGR to ₹1,828 crore by FY21.

Higher interest cost and exceptional expenses (the latter only in FY20 and FY21), however, dented the company’s net profit. AGEL posted net profit of ₹182 crore in FY21, after five consecutive years of losses at the net level. In FY21, higher revenue, fall in other expenses and unchanged tax expense helped it improve its bottom line compared to year ago. AGEL was incorporated in 2015 and went public in 2018 after the renewable energy business of Adani Enterprises was demerged into it.

As of March-end 2021, the highly leveraged AGEL had a consolidated debt-to-equity ratio of 10.65 times. It has had consistently high interest expense, nearly as much as its operating profit or even higher since FY16. AGEL reported interest expense of ₹1,953 crore and operating profit of ₹1,828 crore in FY21.

Alkyl Amines Chemicals: The elements are unfavourable (₹3769.70)

Investors with holdings in Alkyl Amines (AACL) stock can book profits, following a stellar 650 per cent returns from the March 2020 lows.The company delivered consistent revenue growth of 26 per cent CAGR and earnings growth of 66 per cent CAGR in the last three years, aided by capacity addition and favourable pricing of both inputs and end products.

The high valuation multiple ascribed to AACL may not be sustainable, going forward, owing to the cyclical nature of commodities and international/domestic competition.

AACL manufactures specialty chemicals such as amines and acetonitriles that find application primarily in Pharma (55-60 per cent of FY21 revenues) and Agrochem (15-20 per cent).

The company operates from Kurkumbh/Patalaganga in Maharashtra and Dahej, Gujarat. In the last three years, AACL benefited from simultaneous growth in volumes, pricing and margins.

It started expanding methylamine capacities from 2018, amidst demand recovery in the pharma industry and shortage from Chinese suppliers owing to environmental steps taken by the Chinese government.

The total revenue growth of 26 per cent CAGR during 2018-2021 was led by volume (16 per cent) and also pricing (10 per cent).

The prices of acetonitrile, accounting for 15-20 per cent by capacity, increased from ₹130-150 per kg in FY18-19 to ₹250-300 per kg by FY21, aiding pricing growth.

The period also saw benign raw material prices that, combined with higher realisations, led to gross margins improving from 45 per cent in FY18 to 57 per cent in FY21.

These factors aided bottom-line growth of 66 per cent during FY18-21.

The valuation ascribed to AACL has also followed a similar cycle. The company’s 1-year forward P/E, which stood at 22 times in FY18, re-rated to 60 times in July-2021, as per Bloomberg estimates.

Its competitor, Balaji Amines, trades at 38 times FY22 earnings (Bloomberg estimates).

Higher input prices

Going forward, AACL may face higher raw material prices, as prices of oil and other input materials have increased in the last quarter of FY21.

Price moderation can be expected in end products like acetonitrile, as international trade opens up fully and imports find their way back to domestic markets.

Domestically, Balaji Amines has also been expanding capacities, adding to the pricing pressure.

Bloomberg consensus estimates for AACL now indicate stable earnings growth of 15 per cent during FY21-23 as margins are expected to decline by 500 basis points in the next two years, even as total capacity addition of 35 per cent is expected.

The valuation multiple, supported by high earnings growth earlier, will likely revert to lower levels as the aggressive expansion cycle reaches a consolidation phase and attracts higher competition.

Published on July 17, 2021

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