Trade Talk | L&T Announces First Ever Buyback Worth Rs 10,000 Crore
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00:00 Good morning and thanks so much for tuning in.
00:02 You are watching Trade Talk on BK Prime.
00:04 My name is Alex Mathew and with me is Heeral Dharia.
00:06 Good morning, Heeral.
00:07 Good morning, Alex.
00:08 It's going to be a busy day and that is to say the least today because at the end of
00:12 the day is what is probably going to be the highlight for global markets, which is the
00:16 rate decision by the US Federal Reserve.
00:19 And I think that is going to color the way that global markets trade.
00:23 Indeed, our markets are also expected to see consolidation.
00:25 Absolutely.
00:26 And if you see in our markets, we've been cautious.
00:29 One of the reasons being the Fed meeting and that's the reason the sell-off has started
00:32 to come in.
00:33 Yesterday's session, we ended below the 1,900 mark already.
00:37 Today, if you see GIFT Nifty as well, it's indicating a start around similar levels of
00:42 1,700.
00:43 But where from here on is going to be crucial because there are two things that come in
00:47 on a Thursday.
00:48 The decision of the Fed will impact our markets tomorrow and you have expiry tomorrow.
00:53 And the ECB.
00:54 And the ECB, which is later on.
00:55 But three things that actually dominate in terms of market reaction.
00:59 Interestingly, and I think Neeraj was pointing out this earlier as well.
01:03 We spotted it yesterday at the close.
01:05 You saw India VIX come off in a very big way.
01:08 And Neeraj was pointing out that it was close to 2011 levels, which is quite significant.
01:13 So you've seen a coming off of volatility in several markets in the US as well.
01:17 You saw the VIX come off.
01:18 So that's something to watch.
01:19 Absolutely.
01:20 But what's happening, Alex, is if you see the VIX, the correlation between the market
01:25 movement and the VIX over the last couple of trading sessions has not really been in
01:29 tandem as we've always seen.
01:33 So there is some bit of a disconnect that's coming in on that front.
01:36 But how it moves from there on is going to be crucial because what's happening is we're
01:39 just moving further down and further away from those 20,000 levels.
01:45 Certainly.
01:46 So earnings is going to be a clear focus in trade today.
01:49 Several nifty companies posting results.
01:51 But of course, you have corporate announcements by two very large companies that will take
01:55 center stage and one in particular.
01:57 And we're talking about Tata Motors at the start because you had the earnings, of course,
02:02 but you also had an announcement that the DVR, which is the differential voting right,
02:08 which is going to be extinguished or canceled, the ratio that this is going to be done in
02:14 is that if you hold 10 shares of the Tata Motors DVR, you will get seven ordinary shares
02:21 that translates to a 23%.
02:23 The implied price of the DVR is a 23% premium to what was the closing price for the DVR
02:31 on Tuesday.
02:32 And it is 30% below what Tata Motors price was on Tuesday.
02:36 But there are several more implications beyond that.
02:40 Of course, here are one, the share capital of Tata Motors as a whole once this takes
02:45 place and they're talking about it taking more than a year to pan out, the share capital
02:49 will shrink, there are tax implications.
02:52 What does this mean for shareholders?
02:53 All of this needs clarity.
02:54 Absolutely, a lot of factors that need to be considered over here.
02:57 So two things that you'll have Tata Motors react to, right?
03:01 One is in terms of cancellation of the DVR and secondly is in terms of earnings.
03:07 But to get more details on it, let's actually welcome in Sunny Agarwal from SBI Cap Securities.
03:13 Sunny, good morning and welcome to the show.
03:15 Yeah, good morning, Eeram.
03:17 Thanks for having me on the show.
03:19 Always a pleasure to speak to you.
03:20 Sunny, let's start with, you know, Tata Motors.
03:23 Two parts to this.
03:24 One is we talk about the earnings and two is we talk about the delisting of the DVR.
03:30 To start off with in terms of the earnings, you know, what's your read overall?
03:35 Because JLR clearly has been one of the outperforming factors here.
03:39 Yeah, definitely a robust set of earnings by Tata Motors, purely driven by JLR.
03:45 So a margin, EBITDA margin of 8.6%.
03:49 I mean, totally surprised in terms of margin.
03:51 At the same time, the volume growth is kicking on well.
03:54 So for the first quarter, 93,000 unit sales volume.
03:59 Again the company has went on record to say that quarter two will be again the same 93,000
04:04 unit sales.
04:05 At the same time, they have retained the sales guidance of 4 lakh unit for entire financial
04:10 year 2024.
04:11 So what I believe is that Tata Motors as of now is under promising and over delivering.
04:17 Because obviously in case there is a volume expansion, at the same time, margins are supportive.
04:23 Then it may happen that post second quarter, we may see an upgradation in terms of margin
04:27 guidance also.
04:28 So overall, a pretty good outlook in terms of JLR business.
04:31 Commercial vehicle, although they have lost the market share, but again, margin are very
04:36 supportive over there.
04:37 So that business is doing well.
04:39 Passenger vehicle, basically again, there are two parts to this.
04:42 One is normal passenger vehicle, IC engine, that portfolio is doing well.
04:49 Few launches in the SUV segment will be seen in the second half of 2024.
04:54 That will again aid the volume growth.
04:57 Electric vehicle portfolio is under trouble because on the margin front.
05:01 Again, the company has clarified that first quarter was the quarter where they have sponsored
05:07 the IPL.
05:08 At the same time, the sale prices for the battery are on a higher side and they have
05:11 started to come up.
05:12 So the margin expansion on EV portfolio will also be seen in the second half.
05:17 So basically, all engines hiring for Tata Motors are pretty good outlook in terms of
05:21 earning growth for FY24 as well as in terms of free cash flow.
05:25 That reduction will also be seen during the financial year 2024.
05:28 So I feel again, a pretty bullish outlook.
05:31 One can easily expect a price target of 700-750 as the consensus from an entire broking community.
05:40 Interesting.
05:41 Okay, so we've primarily spoken about the earnings so far, but I think the focus today,
05:45 Sunny, is clearly going to be about that corporate action that was announced.
05:49 And we're also trying to make sense of it, right?
05:52 Because there is expected to be a tax implication of it.
05:56 I think to a certain extent, our viewers have also read about the ratio and the implied
06:01 value.
06:02 But before we get into that implied value and what it means for shareholders and what
06:06 they should do, potential shareholders as well, could you take us through the tax implications
06:11 as you have understood them?
06:13 Yeah, basically, Alex, what will happen is that Tata Motors is going to create one trust
06:19 wherein all these shares will be transferred and that trust will be executing entire transaction
06:23 of conversion from DVR to ordinary share.
06:26 Now coming to the tax implication, basically, there will be three angles to the tax implication.
06:31 One is withholding tax on a deemed dividend.
06:33 Now why this concept of deemed dividend has come in?
06:36 So what is happening, the shares which are allocated in lieu of Tata Motors DVR of normal
06:41 ordinary share, that will be treated as a deemed dividend.
06:44 Now the treatment of withholding tax on deemed dividend will be different for the different
06:49 class of investor, like for mutual fund or insurance or institutions, the withholding
06:54 tax on deemed dividend will be a nil, 0%.
06:57 For domestic resident, it will be 10%.
07:00 For SPI, it will be between 22 to 23, 24%.
07:04 And for NRI, it will be 24%.
07:07 Then second angle on withholding tax is on capital gains on issue of ordinary share.
07:11 It will be nil for institution, domestic and SPI.
07:14 But for NRI, it will be in the range of 12%.
07:18 And again, the third is short term capital gains in this share will be sold to recover
07:21 this tax liability on a short term capital gain tax.
07:26 It will be nil for institution, 17 to 18% for domestic resident, 16 to 17% for SPI and
07:33 18% for NRI.
07:34 But I would like to clarify the withholding tax on deemed dividend will be adjusted in
07:40 the hands of the shareholder.
07:41 But at the same time, the capital gains on issue of ordinary share and that will be absorbed
07:45 by the trust by selling the shares of Tata Motors in the market.
07:49 So overall, there will be some implied cost when we think of an arbitrage between Tata
07:56 Motors, DVR as well as Tata Motors.
07:58 So the 23% premium which we are seeing right now, it may shrink when the market opens today.
08:04 So to the extent of this dividend liability.
08:06 Sunny, does this actually imply that there will be something like fractional allotment
08:12 that will come in in this case taking the entire scenario of deemed dividend and the
08:17 breakups that you've already given us right now?
08:19 Yeah, so definitely, the management has clarified that there can be a fractional allotment.
08:25 And in that case, again, the same mechanism will be applied wherein the company will be
08:30 selling those fractional shares and the cash will be deposited to the respective shareholders
08:35 to that extent.
08:37 OK, but they've also in that notification, Sunny, spoken about why they're doing this.
08:44 Ostensibly because it is a complex structure, ostensibly because since the listing, they
08:50 have said that the discount that the DVR trades at to the ordinary share has widened from
08:57 what was 10% earlier at listing to about 40% on average.
09:01 And as a result of which this significantly understates the market capitalization of Tata
09:07 Motors.
09:08 Do you think that one, what do you make of this and what happens to Tata Motors ordinary
09:14 shares once this process is completed?
09:18 Yeah, definitely, the discount has always been on the range of 40 to 50%.
09:24 And what I believe is that the entire process of consolidating the shareholding, what is
09:29 my understanding is that maybe 12 to 24 months down the line, we may see some demerger of
09:35 some of the businesses from the Tata Motors.
09:37 So once this consolidation in terms of shareholding is done, we may see some demerger of maybe
09:42 passenger vehicle or commercial vehicle to that extent.
09:45 So that once the consolidation is over, the demerger process can be easily taken care
09:53 of.
09:54 And at the same time, since the equity share that is getting extinguished due to this entire
09:59 restructuring of capital to the extent of 4%, that will be a security for the existing
10:04 shareholder.
10:05 So again, a win-win situation for the shareholders in the short term also, and in medium to long
10:10 term as well.
10:11 Right.
10:12 So, Sunny, the next question is more from an investor perspective, because the clear
10:17 question that comes in now is how will both of these react in trade today, right?
10:22 Clearly, the swap ratio is pretty much in favor of Tata Motors DVR.
10:27 So there is some amount of arbitrage opportunity that actually exists.
10:31 So one is what should the arbitrage opportunity be?
10:34 Two, a follow up to that is in terms of what should the strategy be?
10:39 And what would you advise investors to do?
10:41 Yeah, so definitely, it is positive for Tata Motors DVR shareholder and we may see a positive
10:47 reaction to the extent of 10 to 15%.
10:50 Why I am saying that why only 10 to 15% when clear theoretical arbitrage is to the extent
10:56 of 23% because it may happen that a few guys in the opening trade may try to short the
11:02 Tata Motors plain vanilla share and try to grab on to the Tata Motors DVR.
11:08 So the gap, the arbitrage opportunity may get filled in the first 10 to 15 minutes.
11:13 And at the same time, since the transaction will get consummated over the period of 12
11:16 to 15 months, so there is an opportunity cost attached to that.
11:20 So to that extent, also, we may see the stock share price adjusting.
11:23 So my feeling is that during the opening trade, Tata Motors DVR may open up in the
11:29 range of 12 to 15%.
11:31 Tata Motors may stay flat or we may see some negative reaction in the initial trade on
11:35 Tata Motors.
11:36 And once this adjustment is done, then the stock will again go back to the earning growth
11:41 and future growth outlook of Tata Motors.
11:44 So for that, we may see a gradual upward movement in both the share prices of Tata Motors DVR
11:50 as well as Tata Motors ordinary share in the same ratio as been discussed over the show.
11:58 Okay.
11:59 So we've talked about potential moves in the market.
12:01 We'll see soon enough how that pans out.
12:03 Let's quickly turn, Sunny, to Larsen and Toubro and first talk about the results, which were
12:09 positive.
12:10 What's your overall take on the results?
12:12 Again, Larsen and Toubro, very robust set of results.
12:16 Also on margin front, there are some issues on the infrastructure side, but management
12:21 has went on record to say that second half of the year when we will see a margin coming
12:25 back to the 8 to 9% range.
12:28 So there were some legacy projects which has held on to the margins in this quarter.
12:33 But one thing is very positive on Larsen and Toubro is the healthy order book, right?
12:37 So 4 lakh crore plus order book.
12:39 Again the addition on infrastructure, which is their core business, has been the jump
12:42 to the extent of 100% year over year.
12:45 So I feel overall a pretty strong set of numbers by Larsen and Toubro.
12:50 At the same time, the buyback at the price of 3000 rupees, although the buyback is to
12:56 the extent of only 2 to 3% of the total outstanding equity share, but at least it sets a benchmark
13:01 that the 3000 rupees is a fair value for Larsen and Toubro in medium to long term.
13:06 It gives a stamp that 3000 can be a fair value in medium to long term.
13:11 And I feel again looking at a good healthy business outlook, a fair value of the business
13:16 again can be in the range of 29 to 60%.
13:20 Sunny, a quick one in terms of the buyback.
13:23 This is the first buyback that L&T has announced since listing.
13:26 10,000 crores is the overall buyback size and the maximum price is 3000 rupees per share.
13:33 What would you advise investors to do?
13:35 Participate in the buyback or not?
13:37 Considering the kind of value creation we have already seen from L&T?
13:41 One has to keep in mind that although the buyback is to the extent of 10,000 crores,
13:48 but in terms of percentage holding, it is hardly 2 to 3% of the, whether it is for the
13:53 retail shareholder or all the shareholders of Larsen and Toubro.
13:58 So the acceptance ratio may not be very significantly high.
14:02 So what I would suggest is that if somebody is a long term investor, one should stay put
14:05 in the Larsen and Toubro for a long term investment horizon.
14:10 And if somebody wishes to encash on the buyback opportunity, one can try their luck by tendering
14:16 the share and in case those shares get tendered, one can again come back to the market and
14:21 buy the share from the open market.
14:23 And perhaps that gap of 16% will be closed in the interim.
14:26 Thank you so much, Sunny, for taking the time and for speaking to us.
14:29 Pleasure speaking with you.
14:30 Thank you.
14:31 All right, let's turn to the other earnings.
14:34 I mentioned quite a few to watch out for.
14:36 SBI Life is the one that we're focusing on first and Monal is joining in to give you
14:40 some perspective on what to expect.
14:43 Monal, Yeruniya, I believe is expected to be not a very significant move because of
14:48 the high base of last year, but what are the key highlights?
14:51 Yeah, so it's a beat on the estimates, at least the Bloomberg Street estimates, both
14:57 on the revenue and the net profit front.
14:59 The net profit was up 45% to 381 crores.
15:02 Revenue almost up sixfold at 27,692 crores.
15:06 VNV, however, is down 1% year on year and the VNV margins have weakened.
15:15 They've come down to 28.8% levels from 30.4% levels.
15:18 So now the management here had to say that it's because of the change in the product
15:23 mix.
15:24 So there was a lot of pent up demand last year for non-bar products, which now has gone
15:29 down and sort of come to a normal level.
15:34 So on a high base, that's the problem.
15:37 Also there's been an increase in the ULIP maybe because of the buoyancy in the market.
15:41 That's what the management is talking about.
15:43 However, they've said that they're comfortable with the current levels, 28.8%.
15:47 So we can expect the year FY24 to have VNV margins at around 28 to 29%.
15:54 Also, they've retained a really high growth guidance of 20% premiums in FY24.
16:00 Their persistency ratios for the 13th and 25th months have fallen.
16:04 61st month still going strong.
16:06 Overall, Nomura has lowered its price target to 15.50.
16:12 Current market levels are 1300.
16:16 Jefferies has also retained a buy and has adjusted a target price of 15.30.
16:20 Right. Thanks, Monal, for getting us the details.
16:24 If time permits, we will come back to you on Cipla and Dr. Reddy's preview as well.
16:29 So stay with us on that.
16:30 But before that, we will quickly get Indrishree to get us more details in terms of the other
16:35 small cap and mid cap companies that have reported numbers.
16:38 How have they been and what reactions are we expected to see?
16:40 Firstly, there was Scient that came out with its results.
16:43 So the revenue and profits have marginally missed the estimates, but costs also reduced
16:47 that helped improve the bottom line.
16:49 Now, this growth over the previous was primarily driven by order wins in the aerospace, automotive
16:53 and energy verticals.
16:54 Next, we have Dixon Technologies.
16:56 So the revenue beat estimates, but profit and margins came out below estimates.
17:01 Now costs across the board, they were higher, which have weighed down on the profits.
17:05 Now then we have Delta Corp.
17:07 It reported the highest ever revenue at 272 crores.
17:11 And it also had margin expansion at both the EBITDA as well as net profit levels.
17:16 Now, the casino gaming segment, it achieved an EBITDA of about 100 crores and the margin
17:21 also improved by over 10%.
17:24 Then we have Amber Enterprises, the cost fell about by 120 crores and revenue was also down
17:30 by 7%.
17:31 But because of the cost reduction, net profit was up by 9%.
17:35 Then we have Triveni Engineering.
17:37 So the sugar company faced flat is growth and the profits missed estimates.
17:41 However, this was primarily driven by a lower turnover in the sugar business, while the
17:45 alcohol and the aggregate engineering turnover, it improved over the previous corresponding
17:50 quarter.
17:51 Now then we have UTI AMC.
17:52 Revenue and profits faced a big jump and they also beat estimates.
17:56 But however, this was driven by a one off of 173 crores increase that was there in the
18:01 operating income.
18:02 And this was from the net gain on fair value changes.
18:04 All right.
18:05 Thanks so much for that quick wrap, Rishi, of all the earnings that you want to watch
18:08 out for.
18:09 And we are continuing to focus on earnings because it's going to be a heavy day in terms
18:13 of several nifty companies posting results.
18:15 We've got Dr. Reddy's Laboratories as well as Zipla from the PharmaPact that will be
18:20 posting their Q1 results.
18:21 And Monal is still standing by to tell us more about what to expect.
18:25 Monal, over to you.
18:26 Yes, so both Dr. Reddy's and Zipla are expected to see a good set of numbers.
18:32 There's a boost due to the Revlimid, generic version of Revlimid that's been on sale.
18:39 So there's a healthy growth expected in the US portfolio.
18:41 However, there's some bit of price erosion that we're still expecting.
18:45 So the sales and the revenue and margins should be impacted by the erosion.
18:50 EBITDA margin is likely to improve because of Revlimid for Dr. Reddy's.
18:56 The Bloomberg estimates say that the top line expectation is 6300 crores for the first quarter
19:02 while its net profit is pegged at around 1000 crores.
19:05 For Zipla, they've said that there's going to be a low teens growth in the India business
19:10 and there's going to be a partial offset due to price erosion in the US and their lower
19:15 sales on Alputerol.
19:17 Overall, we need to see the key monitorables are their upcoming product launches demand
19:22 in their key therapeutic areas and the long term outlook.
19:24 Bloomberg has pegged its net profit at 860 crores and revenue to be at around 6200 crores.
19:31 Right.
19:32 Okay.
19:33 All right.
19:34 Thanks so much, Monal, for that.
19:36 You have to watch out for Tech Mahindra results as well today.
19:40 And the key highlights, of course, that revenue seen at 13,551 crore rupees EBIT is seen coming
19:47 in at just under 2000 crore rupees, the EBIT margin at about 14.5% and the PACT number
19:53 at about 1150 crore rupees.
19:55 It's going to be interesting, in fact, in terms of technology counters as well, because
20:00 now you have the entire gamut, which is already reported numbers, very mixed views coming
20:04 in in terms of the commentary, wherein it's mainly the mid cap companies which have actually
20:10 outperformed the large cap peers as well.
20:12 So that's going to be an interesting mix that we will be watching out for.
20:15 But apart from this, Alex, a lot of other companies that are in focus on the back of
20:18 news, usually on the back of earnings season, you do have less news inflows coming in.
20:23 But Mika has still managed to gather a few of the companies which could be in focus today.
20:27 Good morning, Mika.
20:28 What do you have?
20:29 So firstly, we have PML Enterprises, whose board is going to consider share buyback proposal
20:34 on its upcoming meeting on July 28.
20:36 And second, we have Kotak General Insurance.
20:39 So according to a Reuters article, US insured chub is talking to acquire around 49 or 51%
20:46 majority stake in Kotak General Insurance.
20:49 The deal would value the company at around $800 million.
20:51 Third, we have Union Bank that has entered into a strategic partnership with IBM, which
20:56 aims at accelerating growth via digital transformation.
21:00 The bank has embarked on a project, Sambhav, which aims at creating a digital bank in India.
21:04 Then we have Canfin Homes that reported a Rs. 38.53 crore fraud committed by its employee
21:10 at the Amla branch.
21:12 The nature of the fraud was misappropriation of funds where the funds were transferred
21:15 to personal accounts by misusing the cheque signing authority.
21:19 The fraud was detected on July 24 and an FIR has been lodged.
21:23 The company informed that there would be only a one-time impact on the profitability to
21:27 the extent of the misappropriated funds and no impact on the assets or the asset quality.
21:33 Then we have Deepak Fertilizers and Petrochemicals Corporation, whose wholly owned subsidiary
21:37 Mahadan Agritech Ltd has purchased compulsory convertible debentures from the IFC for a
21:45 concentration of Rs. 267.34 crores.
21:49 The CCDs were bought in two tranches at Rs. 10 lakh face value.
21:55 Coming to key changes in the managerial positions, first we have UTI Mutual Fund, where Mr. Sorojit
22:01 Saha retired as the Chief Financial Officer and Key Managerial Personnel for the company,
22:06 effective from September 30.
22:08 The company has now appointed Mr. Vinay Lakhotia as the new CFO, which would be effective from
22:14 October 1.
22:15 Then we have Asian Paints, where R. Sehsha Sai was appointed as the new chairman from
22:21 October 1, 2023 to January 22, 2027.
22:26 He was also a previous independent director of the company.
22:30 And then we have SBI Life, where the company has named Amit Jhingran as the new CEO and
22:36 Managing Director.
22:37 And to conclude, we have Yatharth Hospital and Trauma Care Services, whose IPO goes live
22:42 today.
22:43 The IPO includes a fresh issue of Rs. 490 crores and an offer for sale for 65.51 lakh
22:51 shares.
22:52 The price band is set around Rs. 285 to Rs. 300 per share.
22:56 And the company has also raised Rs. 206 crores from Anker Investors just before the IPO.
23:03 It allocated 68.6 lakh shares for a price of Rs. 300.
23:08 Thanks so much, Meka, for those updates.
23:10 On the shares, of course, that are stocks that Meka pointed out, Asian Paints was the
23:14 top loser in trade yesterday, despite a decent set of numbers, not a very big miss on the
23:19 top line.
23:20 So, well, the bottom line is that you've got a lot of stocks to focus in on.
23:24 We're just a few minutes away from the start of trade.
23:26 Absolutely.
23:27 And Bajaj Finance and Tata Consumer from the Nifty fat that will continue to remain in
23:31 focus as well on the back of earnings.
23:33 You'll find all of those updates and more on the website bqprime.com and on all of our
23:38 social media platforms.
23:39 So do stay tuned.
23:40 Thanks a lot.
23:41 Bye.
23:42 Bye.
23:42 Bye.
23:44 Bye.
23:44 Bye.
23:46 Bye.
23:48 Bye.
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