Marico To Cipla: What Morgan Stanley Makes Of These Stocks Amid Volatility

Morgan Stanley has listed potential triggers and risks on select Indian companies at a time persistent foreign selling, spike in volatility due to geopolitical unrest, inflation woes and surging crude roiled equity markets.

Companies such as Apollo Hospitals Ltd., Tata Consumer Products Ltd., Cipla Ltd. and Grasim Industries Ltd. attended the ‘Virtual India Summit’ hosted by the research house on June 7-9 in Mumbai.

Here are Morgan Stanley’s views on these stocks...

• Maintained ‘overweight’ stance on the stock with a target price of Rs 888 apiece, implying a potential upside of 18%.

• Over the long term, Tata Consumer aspires to be a large FMCG company, primarily driven by India but with a presence globally. The ambition is based on three things—becoming a stronger foods company, expanding and strengthening the sales and distribution infrastructure while focusing on innovation (2x of FY21 in FY22),and global simplification.

• CEO Sunil D’Souza highlighted four drivers of margins—increasing the gross margin via accretive products like Soulfull, being very tight on costs, going capex-light but striking strategic partnerships, and focusing on free cash flows and not building receivables or inventories.

• Downside risks: Sharp volatility in input costs, foreign exchange; increase in competitive intensity in international market; weak profitability in packaged foods business; slower pace of growth for Starbucks.

• Maintained ‘overweight’ stance on the stock with a target price of Rs 605 apiece, implying a potential upside of 22%.

• Management is hopeful that inflation cools off by the second half of FY23. Inflationary pressures are not completely passed on and gross margins drop during inflationary periods as the company looks at relative pricing and premium charged in Saffola oil.

• Overall, the mix hasn’t changed much; Gold and Active sub-brands are the key growth drivers.

• In parachute coconut oil, copra prices are on a deflationary cycle. Volume growth could be affected by slower loss to branded conversion and the overall inflationary environment hurting consumer wallets. Based on its past experience, the company has been proactive in passing on price benefits to consumers.

• Downside risks: Deceleration in volume growth in the core portfolio; shift in consumer behaviour in the core portfolio—reducing edible oil usage, change in pre-wash hair care behaviour.

• Reiterated ‘overweight/in-line’ with target price at Rs 513 apiece, an implied upside of 41.97%.

• Expects the U.S. business to grow in mid-single digits.

• Expects injectable portfolio to add $250-300 million (about Rs 1,945-2,335 crore) in incremental revenue to the U.S. business over three-four years.

• Firm targets a capex of Rs 900-1,000 crore per annum for a greenfield facility in the U.S., brownfield Liva expansion for injectables, and biosimilar/vaccine plants.

• Downside risks: Higher price erosion in gAsacol HD (bowel disease); regulatory risk driven by FDA actions; greater price erosion in the U.S. generics market; lower-than-expected value accretion from new products.

• Maintained its ‘overweight’ stance on the stock with a target price of Rs 1,122 apiece, implying a potential upside of 15%.

• Key focus areas for the company include global lung leadership, growing its consumer wellness business to 12-15% of sales, new technologies for resistant infections, innovation and maintaining regulatory compliance.

• Key elements for global respiratory rollout are high regulatory requirements, doctor connect, business-to-business partners, strong entrenched competition, and a focus on large markets such as Brazil, Russia and China.

• Margins should expand in FY24, driven by new niche launches and the full-year impact of second half of FY23 launches.

• Downside risks: Accelerated price erosion in the U.S. generics; obstacles in monetising niche opportunities; forex headwinds; NPPA/FDC challenges; delayed recovery because of the Covid-19 pandemic.

• Maintained its ‘overweight’ stance on the stock with a target price of Rs 1,800 apiece, implying a potential upside of 35%.

• Capacity utilisation in viscose staple fibre has trended better-than-expected. Management expects this business to continue to do well on volumes given strong domestic demand, strong potential for market share gains from cotton, and new product launches (Navyasa brand in saree.

• In paints, management reiterated their plan of setting up six plants with overall capacity of 1,332 million litre per annum. Early to say what kind of market share they are targeting (but will be a strong No. 2 player), but volumes shouldn’t be materially different than capacity.

• Downside risks: Higher-than-expected capacity addition in VSF, putting pressure on prices and driving margins lower; lower cement realisations, driving profitability lower; lower-than-expected valuation of financial services.

• Maintains ‘overweight’ on the stock with a target price of Rs 980 apiece, implying a potential upside of 34%.

• Management remains watchful of macro trends, but expects India to hold up better than history.

• CEO sounded comfortable on asset quality, as well as core PPoP growth helped by market share gains amid high trailing investments.

• Management highlighted its improved digital capabilities, strong branch expansion and focus on ecosystem banking as key enablers to drive sustained deposit growth.

• Downside risks: Severe Covid wave/sustained high commodity prices, driving slower growth and higher NPLs; potential risk of deeper holding company discount if the RBI moves to make non-operating financial holding company mandatory.

• Maintains ‘equal-weight’ on the stock with a target price of Rs 2,500 apiece, implying a potential upside of 33%.

• Despite rising rates, management said SIP cancellations should remain in the historical range of 8-10%.

• Given slower growth in debt AUM, which is lower yielding, and increasing flows to equities, the shift in AUM mix towards equities should alleviate some pressure on yields.

• Management continues to view India as a favourable active equity market given the alpha-generating track record of active managers.

• Downside risks: Sharp drawdown in equity markets; significant sustained loss of market share; decline in SIP inflows.

• Retains ‘overweight/attractive’ with target price at Rs 293 apiece, an implied upside of 8.18%.

• Improving share in cigarette business, rising volumes, scale and product mid aid margins.

• Expects ITC’s single-digit price hikes in FMCG business to offset inflationary pressure.

• Market share gains in hygiene business, wheat flour, premium biscuits, noodles bode well for the company.

• Agri and paper business is likely to benefit from opportunities due to global supply side disruptions.

• ITC has a competitive advantage due to its investments in pulp manufacturing.

• Expects the rebound in industry cycle to aid hotels business.

• Expects the company to gain from opportunities due to PLI schemes in food processing industry

• Downside risks: Adverse policies on cigarette consumption (steep tax hikes, loose cigarette ban, etc.); inability to drive profitable growth in FMCG; severe downturn in cyclical businesses.

• Reiterates ‘overweight/in-line’ with the target price unchanged at Rs 5,569 apiece, an implied upside of 51.74%.

• Firm expects mid-teens growth in hospitals, 20%+ growth in pharmacy and retail businesses.

• Expects company’s cost control measures to drive margin expansion in FY23.

• Expects the company to have sufficient funds to continue to build its digital channel despite the delay in raising capital by six months.

• The company has a competitive advantage in digital shift due to omnichannel presence.

• Downside risks: Prolonged Covid-19 impact; skilled doctor attrition; regulatory changes leading to pricing caps or approval delays; cost escalation leading to higher material costs; government interventions such as losses at Gleneagles Hospitals.

• Reiterates ‘overweight/attractive’ with target price kept unchanged at Rs 1,450 apiece, an implied return of 24.60%.

• Firm continues to see faster growth in higher VNB margin products.

• Firm’s focus to deepen penetration augurs well.

• Potential competition from LIC will be positive for the industry. Expects RoE to move structurally higher if IRDAI introduces risk-based insolvency.

• Downside risks: Longer-than-expected slowdown in economy; affecting investment performance, growth, and persistency; potential tie-ups with other insurers and/or potential increase in commissions; regulatory changes linked to corporate income tax rate.

• Reiterates ‘equal-weight’ with target unchanged at Rs 1,965 apiece, an implied return of 5.35%.

• Remains comfortable with 15 basis points margin compression in FY23 for now.

• Expects retail deposit competitive intensity to touch new high in the current cycle.

• Expects the lender to further increase deposit rates given its accelerated share gains in loans.

• The bank has reasonable liquidity on the balance sheet and high share of floating loans which will help offset the rise in funding costs.

• Downside risks: Severe Covid wave/sustained high commodity prices, driving slower growth and higher NPLs; potential risk of deeper holding company discount if the RBI moves to make non-operating financial holding company mandatory.

• Reiterates ‘overweight/attractive’ and maintains target at Rs 910 apiece, an implied return of 37.61%

• The recent volatility in the stock should change.

• Asset quality remains robust, balance sheet and revenue granularity have improved.

• Expects growth to accelerate aided by expansion in distribution.

• The next big deliverable will be retail deposit growth which could improve operating profit growth.

• Expects Axis Bank turnaround story to gain traction and post 18% CAGR over FY22-25.

• Core valuations appear attractive.

• Downside risks: Severe Covid wave/sustained high commodity prices, driving slower growth and higher NPLs; potential risk of deeper holding company discount if the RBI moves to make non-operating financial holding company mandatory.

• Reiterates ‘overweight/attractive’ with target price unchanged at Rs 1,095, an implied return of 101.6%.

• The sustained demand will help the company achieve flat pre-sales volume on high base.

• Inflation could have an adverse impact on sales velocity.

• Robust launch pipeline and addition of new projects augur well for the company.

• Further rate hikes by the RBI may have an impact on sales and consumer sentiment.

• Downside risks: Delays for large projects, leading to slower new sales; demand weakness, especially in Bengaluru.