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This is the second post in our quarterly update series for Q4 FY20.

In this post, we’re sharing the latest updates of the stocks from our watchlist. Please don’t treat this as a buy recommendation. We find these businesses interesting and we may build position (or buy more of those that are already in our portfolio) in them in the future. The purpose of this post is to bring clarity to our understanding of the businesses we are tracking.  We make our notes on the quarterly results and conference calls. Putting it up here makes it easier for us to refer them at a future date.

You can see the earlier updates here.

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Please click on the read more button for more details on each stock.

AU Small Finance Bank

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has been performing well in the tough economic conditions and strengthening its brand in the market. The Small Finance Bank industry was hit hard from the Yes Bank situation and the COVID-19 outbreak further deepened the softness in the industry. The bank has done well to keep engaging its customers in such trying times and to maintain enough provisioning and liquidity for uncertain situations. It remains to be seen how the whole COVID-19 situation pans out and what second-order effects will remain in the small finance bank industry from it. Nonetheless, given the company’s good performance record, its robust customer engagement, and its prudent management of its AUM, AU Small Finance Bank remains a good small finance stock to watch out for.

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Bharti Infratel

Bharti Infratel is India’s leading provider passive telecom infrastructure and it deploys, owns and manages telecom towers and communication structures, for various mobile operators.  The company is facing challenges on two fronts. On one hand, its major tenant, Vodafone-idea is in bad financial shape. Hence, future business potential through them is very uncertain at the moment. Secondly, competition from Reliance Jio Infratel is very powerful. The merger with the Indus tower is getting delayed for long. Recently, the deadline has been again extended from April to June. The telecom industry is going through a consolidation phase for a long time. Moreover, the demand for towers is expected to rise going forward as demand for data in this WFH environment will rise. Hence, it would be interesting to watch out how the company performs going ahead. In the near term, completing the merger with Indus Towers could be positive for the company.

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Marico

Marico is one of India’s leading FMCG companies with many market-leading brands like Saffola and Parachute. The company has done well to maintain volume growth in its core Saffola brand and is showing encouraging performance in the food category. The company has seen a decline in volumes in its hair oil categories but has maintained or gained market share in its specific categories highlighting good brand resilience. In light of the COVID-19 disruption, the company has done well to develop alternative distribution channels for its products through Zomato and Swiggy. The company’s focus on enhancing the value proposition of its products and its push for rural expansion and consolidation should reap a lot of benefits in the near future. It remains to be seen how long the COVID-19 situation lasts and what second-order effects it has on the company and general consumer behavior. Nonetheless, given the company’s solid standing in core categories of cooking and hair oils and its robust distribution network, Marico looks like a pivotal FMCG stock to watch out for.

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Varun Beverages

Varun Beverages have been one of the biggest bottlers in India and has been quite proactive in international expansion for some time now. The company has seen good growth in the quarter with good organic volumes growth in Jan and Feb. The lockdown has hit the company’s sales hard but demand seems to have stayed resilient as sales volumes have been rising since the opening of sales since 20th April. The company has indeed been hit hard with low sales volumes for more than a month into its peak season. But the rising sales patterns are expected to continue as more and more areas come out of lockdown. It remains to be seen whether there is a further economic disruption in the future from COVID-19 which may have severe second-order effects on the company’s performance. Nonetheless, given the resilient sales network, the rising demand for the company’s products, and the arrival of the peak season for the beverages industry, Varun Beverages is a good consumption stock to watch out for at present.  However, as it is a capital intensive business, the current pandemic can put a strain on the Balance Sheet which is already laden with debt. The valuation at current levels does not give any margin of safety at the moment.

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