April 2019 India Strategy Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Research Team ([email protected]) Vote for Vote for FY18-20E: 15.5% CAGR 606 486 455 423 394 413 406 369 NIFTY EPS FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
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April 2019
India Strategy
Investors are advised to refer through important disclosures made at the last page of the Research Report.Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Financials-Banks .................................. 119-147 AU Small Finance .......................................... 125 Axis Bank ....................................................... 126 Bank of Baroda ........................................... 127 DCB Bank....................................................... 128 Equitas Holdings............................................ 129 Federal Bank ................................................. 130 HDFC Bank .................................................. 131 ICICI Bank ................................................... 132 Indian Bank ................................................... 133 IndusInd Bank ............................................... 134
Kotak Mahindra Bank .................................... 135 Punjab National Bank .................................. 136 RBL Bank ........................................................ 137 State Bank ..................................................... 138 Yes Bank ........................................................ 139 HDFC Stand. Life ............................................ 140 ICICI Pru Life .................................................. 141
Financials-NBFC ................................... 142-157 Bajaj Finance.................................................. 145 Chola. Inv & Fin. ............................................. 146 HDFC .............................................................. 147 Indiabulls Housing ......................................... 148 L&T Fin.Holdings ............................................ 149 LIC Housing Fin .............................................. 150 M & M Financial ............................................ 151 MAS Financial ................................................ 152 Muthoot Finance ........................................... 153 PNB Housing .................................................. 154 Repco Home Fin ............................................ 155 Shriram City Union......................................... 156 Shriram Transport Fin. ................................... 157
Media .................................................. 192-203 D B Corp ......................................................... 197 Ent.Network .................................................. 198 Jagran Prakashan ........................................... 199 Music Broadcast ............................................ 200 PVR ................................................................ 201 Sun TV............................................................ 202 Zee Entertainment ......................................... 203
Telecom ............................................... 264-272 Bharti Airtel ................................................... 269 Bharti Infratel ................................................ 270 Tata Comm .................................................... 271 Vodafone Idea ............................................... 272
Utilities ................................................ 273-290 CESC .............................................................. 275 Coal India ...................................................... 276 JSW Energy .................................................... 277 NHPC ............................................................. 278 NTPC ............................................................. 279 Power Grid Corp. ........................................... 280 Tata Power ................................................ 281 Torrent Power ............................................... 282
Others.................................................. 283-305 Avenue Supermarts ....................................... 283 Brigade Enterpr. ............................................ 284 BSE ................................................................ 285 Castrol India .................................................. 286 Coromandel International ............................. 287 Delta Corp ..................................................... 288 Godrej Agrovet .............................................. 289 Indian Hotels ................................................. 290 Info Edge ....................................................... 291 Interglobe Aviation........................................ 292 Kaveri Seed.................................................... 293 MCX ............................................................... 294 Navneet Education ........................................ 295 Oberoi Realty ................................................ 296 P I Industries.................................................. 297 Phoenix Mills ................................................. 298 Quess Corp .................................................... 299 S H Kelkar ...................................................... 300 SRF ................................................................ 301 Tata Chemicals .............................................. 302 Team Lease Serv. ........................................... 303 Trident .......................................................... 304 UPL ................................................................ 305
April 2019 3
India Strategy | India's PE movement: Politics to Economy
India's PE movement: Politics to Economy Banks dominate the earnings revival
Politics to dominate 1QFY20 narrative; Ex-Banking 4QFY19 earnings expected to be weak As we step into the new fiscal FY20, the backdrop for markets is dominated by
politics. The previous five years have seen the first government with fullmajority after 1989. India votes over the next 50 days and high-decibel politicalnoise will occupy the market’s attention as it struggles to figure out if the 17th
Lok Sabha will have another majority government or a coalition governmentwith one of the two national parties as a dominant partner or a coalitiongovernment of regional parties backed by one of the national party. Once thedust settles on politics in 1QFY20, we expect the market’s focus to revert tofundamentals. Narratives like earnings revival led by banking, global growth andcentral bank policies, rural consumption trends given the predictions of below-normal monsoons, and the inter-play of crude and currency will dominate thediscourse, in our view.
The market’s performance has been impressive so far in CY19, with the Niftyand the Nifty Mid-cap 100 delivering 7.4% and 2.1% returns, respectively. Thesharp underperformance of mid- and small-caps over Dec’17-Feb’19 has alsobeen arrested in Mar’19, with USD4.8b of FII inflows in the month. What isrelatively more comforting is the participation of broader markets in the rally, asagainst a very narrow nature of consolidation seen in Nifty over Dec’17-Feb’19,a point discussed in greater detail in one of our previous note.
The 4QFY19 earnings-report season will be a repeat of 3QFY19, with Financialsdriving the performance singlehandedly. Global Cyclicals – the driver of earningsgrowth over the last few quarters – have decelerated sharply.
Corporate banks will account for entire growth in the Nifty and the broaderMOFSL Universe’s earnings performance. PSU Banks will benefit from a benignYoY comparison due to a loss of INR241b in 4QFY18, even as profits stay flatsequentially. IT is likely to post the fifth straight quarter of double-digit profitgrowth, aided by momentum in deal activity. NBFCs might face significantdeceleration in profit growth, but still post a respectable double-digit number.
We expect MOFSL Universe PAT to grow 29% YoY, led by Financials and draggedby Metals. Global Cyclicals are likely to post a decline of 14% in profit, whileDefensives are expected to post flat profits YoY. Domestic Cyclicals will post 4xYoY jump in PAT. MOFSL ex-OMC and PSU Banks PAT growth is estimated at 2%.
We expect Nifty sales, EBITDA and PAT to increase by 11%, 2% and 15% on abase of 16%, 22% and 8% growth, respectively. Ex-Corporate Banks, Nifty profitsare expected to decline 2.7% YoY. Our Nifty EPS estimates for FY19/20 havebeen cut by 2.1%/3.6% to INR486/INR606 (prior: INR496/INR629). We are nowbuilding in EPS growth of 6.8%/24.8% for the Nifty for FY19/20. Excludingcorporate banks, FY20 Nifty profits are expected to grow 14%.
India Strategy BSE Sensex: 39,057 S&P CNX: 11,713
Sources of exhibits in this report include RBI, CMIE, Bloomberg, IMF, Industry, Companies, and MOFSL database
India Strategy | India's PE movement: Politics to Economy
Top Picks Large-Caps: ICICI Bank, SBI, Maruti, Titan, Coal India, Bharti Airtel, L&T, Infosys, ACC. Mid-Caps: Federal Bank, Shriram Transport, Godrej Agrovet, Indian Hotels, Marico, IGL, Exide, Jindal Steel, Alkem Labs. Key sectoral trends/highlights Auto Universe is expected to report a 28% YoY PAT decline on a modest base
(6% YoY growth in base quarter) – a fourth consecutive quarter of double-digit PAT decline. Even after excluding Tata Motors, the Auto Universe is expected to post PAT decline of 16% YoY. We expect EBITDA margin to shrink by 180bp YoY to 11.4%, impacted by weak operating leverage (volumes continue softening across the board in 4QFY19) and higher variable marketing spend.
Technology will post another healthy set of numbers, with sales/EBITDA/PAT growth of 17.7%/18.1%/12.6%. This will be the fifth consecutive quarter of double-digit PAT growth. There is significant revenue acceleration amid strong momentum in deal activity; however, INR appreciation can act as a headwind. TCS is expected to account for 43% of incremental PAT of our Technology Universe.
Private Banks are expected to report a strong set of numbers (79% PAT growth – a multi quarter high), driving 20% of the entire PAT delta of our universe. Entire universe, barring IndusInd Bank (-45% YoY) and Yes Bank (-18% YoY), is expected to report double-digit earnings growth, with Axis Bank (loss to profit), Federal Bank (143% YoY) and ICICI Bank (112% YoY) leading the pack.
NBFCs are likely to post another quarter of double-digit growth (13% YoY), slowest since Mar’17. In recent times, 4QFY19 was one of the toughest quarters for most NBFCs under our coverage. While liquidity started improving toward end-3QFY19, a number of events (Cobrapost, Essel Group related, etc.) led to it tightening once again. Bajaj Finance is expected to post another strong quarter, with 40%+ profit growth. SHTF (81%), LTFH (46%), LIC HF (25%) and PNB HF (26%) are expected to deliver healthy profit growth, while MMFS, Chola, Indiabulls Housing Finance and Repco are expected to post subdued growth in profitability.
PSU Banks are expected to report second consecutive quarter of profit (led by lower slippages and a decline in provisioning requirement) after four consecutive quarters of losses, while Telecom is expected to report a loss for the seventh straight quarter. PSU Banks had posted a loss of INR241b in 4QFY18, and are now accounting for the entire profit growth of MOFSL Universe in 4QFY19.
Consumer Universe profits are expected to grow 7.8% YoY on a strong base (base quarter profits grew by 17% YoY), with United Spirits (-21% YoY), Pidilite (-6% YoY) and Godrej Consumer (-6% YoY) expected to post de-growth. United Breweries (24%), Marico (23%), Asian Paints (18%) and Britannia (13%) are expected to post a strong set of numbers. Management commentaries suggest a slight moderation in the demand environment. In Retail, Titan is expected to deliver another solid quarter (25% YoY).
Metals are expected to post PAT de-growth (-34% YoY) for the first time after eight quarters. Within our coverage universe, barring Hindalco, every other
April 2019 5
India Strategy | India's PE movement: Politics to Economy
company is expected to report an earnings decline. Metals had a stellar run in the last three years and profitability of our Metals Universe has more than tripled from INR135b in FY16 to INR459b in FY19.
Oil & Gas is expected to report a flattish profit, driven by a significant YoY decline at OMCs owing to lower GRM. ONGC is expected to report 26% PAT growth. Ex-OMCs, we expect 15% YoY growth in O&G profits.
Cement is expected to post 9% YoY profit growth on a strong base (24% YoY growth in 4QFY18), after delivering 18% growth in 3QFY19, with ACC (44%), JK Cement (39%) and Ramco Cements (19%) likely to lead the pack.
Capital Goods are expected to report sales/EBITDA/PAT growth of 9.6%/9.3%/9.3%, with Bluestar/Thermax/BHEL expected to lead the pack delivering 82%/29%/27 PAT growth. ABB, Bharat Electronics and Voltas are expected to post 40%/15%/9% PAT decline YoY.
Utilities sector is expected to report (-5%) PAT de-growth. Utilities ex Coal India is expected to post growth (1.6% YoY), with NHPC posting the biggest decline (53%) in our universe. Coal India is expected to post PAT de-growth after five quarters, dragging growth of the entire universe, whereas JSW Energy is expected to post a loss.
Healthcare is expected to deliver 15.8% PAT growth in 4QFY19 on a low base (5% YoY decline in 4QFY18). Large cap Cipla is expected to post flat YoY profit, while Dr. Reddy, Lupin and Sun are expected to report 36%, 19% and 7% YoY profit growth.
Model portfolio Improvement in the market sentiment led by strong FII flows in Feb-Mar’19 has
corrected the underperformance of beaten-down ‘value ’stocks to an extent. While the macro environment remains stable, the recent up-move in markets has made valuations somewhat expensive. Weak high frequency data and election risk ahead keep us calibrated in our portfolio stance. Our model portfolio continues to reflect our bias for earnings visibility and growth. Overall, we continue favoring Private Financials (with more emphasis on Corporate Banks), Consumer Discretionary, Industrials and select quality Mid-caps. We had highlighted the divergence of mid-caps v/s large-caps in our recent strategy report, and have turned incrementally more positive on mid-caps since then.
BFSI: We stay overweight on corporate banks and remain positive on ICICI Bank and Axis Bank. As a reflection of our confidence in the credit cycle having turned, we raise further weights in SBI. Credit cycle is showing clear recovery signs, as evident in the declining NPL formation (SBIN’s 3QFY19 slippage was the lowest in the past 13 quarters). The size of SMA-1&2 accounts at INR170.5b (<1% of advances) and the steady trends in core portfolio will drive a further improvement in asset quality over FY20/21, and hence, earnings. Amongst mid-size banks, our preferred picks are Ratnakar Bank and Federal Bank.
In NBFC, we replace LIC Housing Finance with Shriram Transport after the former’s sharp run-up. SHTF’s growth and return ratios have rebounded after three years of regulatory pain (due to NPL migration) and some impact of demonetization and GST. The company has managed its margins and asset quality well. It has navigated the stressed liquidity situation comfortably. Bulk of the loans generated is eligible for priority-sector lending, and hence, the
India Strategy | India's PE movement: Politics to Economy
company should be able to generate liquidity through sell-downs. ROEs have already improved to ~17% v/s the average of 12% over the past three years.
Consumer: We retain HUL and Titan in the model portfolio, given our structural positive view on both the names. We also maintain our positive view on Marico.
Information Technology: In IT, we maintain our positions in Infosys and Tech Mahindra. Valuations remain reasonable given the underlying cash return policy to shareholders. It also serves as defensive bastion in volatile markets.
Cement and Capital Goods: We are replacing Shree Cements with ACC. The profitability gap between ACC and its peers has narrowed significantly over the last few quarters. The company has also done well to manage costs through efforts such as increasing the proportion of linkage coal, reducing the lead distance and route optimization. The stock trades at an attractive valuation of 7.7x CY 20 EV/EBITDA. We are replacing Thermax with Siemens as increasing share of product business offers scope for margin improvement over the next five years. Valuations provide comfort as SIEM trades at a discount to its historical trading average as well as peers – 30% discount to its LTA.
Metals & Utilities: In Utilities, we are adding Coal India and replacing Power Grid with NTPC. Coal India has delivered 35% average earnings growth over FY17-19, driven by price hike, annual volume growth of 5% and operating leverage. Quality and wage hike related issues are now behind. Volume growth of 5-6%, operating leverage due to natural attrition and an increase in the share of e-auction volumes will drive up earnings over the next few years. Valuations are compelling at EV/EBITDA of 4x and P/E of 8x xFY20E, which is at a discount of ~40% to its historical trend. Dividend yield of 8% is quite attractive too. For NTPC, the CERC regulations 2019-24 have been very constructive and provide visibility for the next five years. Most of the issues that dragged the stock performance in the last 2-3 years have been addressed. Strong pipelines of projects provide visibility for earnings growth. We expect earnings CAGR of 19-20% along with 300bp improvement in RoE to 13% over FY19-21. The stock trades at attractive P/BV of 1.1x and P/E of 9.8x FY20.
Mid-caps: We are introducing Godrej Agrovet, Torrent Pharma and Alkem Labs in our model portfolio. In Torrent Power, we expect EBITDA CAGR of ~12% over FY19-21, led by Renewables and DF business. Torrent Power’s balance sheet position is comfortable (net debt: equity: ~1x) and it is well poised to capitalize on opportunities stemming from distribution privatization, thrust on RE, and consolidation in the conventional generation sector. Godrej Agrovet sights holistic growth going forward, driven by (a) crop protection – 10 expected product launches over 3-5 years and capacity expansion in triazole chemistry, (b) palm oil – to tap the opportunity arising out of GoI’s focus on promoting cultivation and (c) animal feed – low compound feed penetration and a decline in fodder availability to drive industry growth. Alkem Labs is in the process of ramping-up business from the chronic portfolio in the domestic formulation market. We expect ALKEM to deliver 15% CAGR in sales over FY19-21 in domestic branded business. With US business having reached breakeven, new launches would enable improved operating leverage, driving better profitability from the US business.
April 2019 7
India Strategy | India's PE movement: Politics to Economy
It’s all about Banks! Earnings headwinds emerging for FY20
CY19 has seen a change in market sentiment. Dovish global central bank action and commentary have aided emerging market trade. That, coupled with improving sentiment on politics post the Balakot air strike by Indian Air Force, has resulted in inflow of USD4.8b dollars in the month of Mar’19 alone. The significant underperformance of mid- and small-caps v/s large-caps since Dec’17 has been arrested in the last one month. The RBI, in its April’10 monetary policy, cut the repo rate by another 25bp and further lowered its inflation forecasts for 2HFY19 and 1HFY20. However, two key concerns in the near term are: [A] Weak high frequency indicators (IIP, auto numbers, core sector growth), which points toward growth risk ahead, and the outcome of general elections in May’19. A stable government with majority will ensure continuance of policy reforms and decision making and shift the focus back toward fundamentals. At the same time, emergence of third front coalition without either of the two national parties in the driver’s seat will muddy the waters as far as policy reform initiatives and decision making are concerned and result in elevated market volatility and pose macro risks (currency, twin deficits, yields), in our view.
Overall, as far as 4QFY19 earnings season is concerned, Financials will dominate the narrative, with Banking alone accounting for more than 100% of incremental YoY earnings in 4QFY19. The baton has well and truly shifted from Global Cyclicals to Domestic Cyclicals, as highlighted by us in our earlier Strategy previews. Autos remain weak, while Telecom is still posting losses.
Financials to drive earnings in 4QFY19 MOFSL Universe is expected to deliver earnings growth of 29% in 4QFY19, led by
Financials, even as Global Cyclicals (led by commodity price correction, Metals expected to post profit decline after eight quarters of stupendous performance) and Defensives are likely to drag the performance.
Approximately 33% of MOFSL Universe is expected to post a YoY decline in PAT, while 41% of the MOFSL Universe is expected to post >15% growth.
In 4QFY19, Domestic Cyclicals are likely to contribute 37% of the profit pool, followed by Global Cyclicals (35%) and Defensives (28%).
We expect MOFSL Universe revenue to grow 11% YoY in the quarter (revenue grew 15% YoY in the base quarter) – lower than 21% growth in 3QFY19, largely due to (a) moderation in commodity prices, which is leading Metals to post nine-quarter low YoY top-line growth and (b) across-the-board slowdown in Automobiles, which is expected to post flat revenue growth.
MOFSL Universe EBITDA growth is estimated at 4% YoY, with the operating margin ex-Financials and OMCs compressing by 150bp YoY to 18.7%.
Global Cyclicals are expected to post second consecutive quarter of PAT de-growth (-14% YoY) after five consecutive quarters of double-digit growth. Global Cyclicals were driving a lion’s share of MOFSL Universe PAT delta in the previous quarters. As we highlighted in our 3QFY19 Strategy preview report, the baton of earnings growth has shifted to Domestic Cyclicals and predominantly Financials, as Automobiles performance remains subdued (expect third consecutive quarter of 20%+ YoY earnings decline for MOFSL Auto universe).
4QFY19 PREVIEW 4QFY19 PREVIEW
April 2019 8
India Strategy | India's PE movement: Politics to Economy
Defensives are expected to post flattish set of numbers (-1% YoY PAT), as Telecom universe is expected to post another quarter of losses, offsetting the healthy performance by IT (13% PAT growth, fourth consecutive quarter of double-digit growth) and Consumer (8% YoY profit growth).
For 4QFY19, Domestic Cyclicals’ EBITDA and PAT are expected to grow by 13% and ~4x YoY, respectively, driven by Financials. Domestic Cyclicals had posted a decline of 62% YoY in profit in 4QFY18.
Earnings breadth remains weak; Domestic Cyclicals to drive earnings Earnings breadth is expected to remain similar to 3QFY19, with 33% of MOFSL
Universe likely posting a YoY decline in PAT. The number of companies expected to report growth (>30%) has declined from 30% to 23%, while that of companies expected to report growth (0-15%) is expected to increase to 26%.
Global Cyclicals (Metals and Oil & Gas) have taken backstage in 4QFY19 and have paved way for Domestic Cyclicals and in particular Financials to drive earnings growth.
Apart from Financials, IT and FMCG are expected to contribute to incremental earnings in 4QFY19. Autos will post a 28% YoY decline in earnings, while Telecom will post another quarter of elevated losses, dragging the aggregate performance.
Snapshot of sector performance Auto Universe is expected to report a 28% YoY PAT decline on a modest base
(6% YoY growth in base quarter) – a fourth consecutive quarter of double-digit PAT decline. Even after excluding Tata Motors, the Auto Universe is expected to post PAT decline of 16% YoY. We expect EBITDA margin to shrink by 180bp YoY to 11.4%, impacted by weak operating leverage (volumes continue softening across the board in 4QFY19) and higher variable marketing spend.
Technology will post another healthy set of numbers, with sales/EBITDA/PAT growth of 17.7%/18.1%/12.6%. This will be the fifth consecutive quarter of double-digit PAT growth. There is significant revenue acceleration amid strong momentum in deal activity; however the INR appreciation can act as a headwind. TCS is expected to account for 43% of incremental PAT of our Technology Universe.
Private Banks are expected to report a strong set of numbers (79% PAT growth-multi quarter high), driving 20% of the entire PAT delta of our universe. Entire universe barring IndusInd Bank (-45% YoY) and Yes Bank (-18% YoY) is expected to report double-digit earnings growth, with Axis Bank (loss to profit), Federal Bank(143% YoY) and ICICI Bank (112% YoY) leading the pack.
NBFCs are likely to post another quarter of double-digit growth (13% YoY), slowest since Mar’17. In recent times, 4QFY19 was one of the toughest quarters for most NBFCs under our coverage. While liquidity started improving toward end-3QFY19, a number of events (Cobrapost, Essel Group related, etc.) led to it tightening once again. Bajaj Finance is expected to post another strong quarter, with 40%+ profit growth. SHTF (81%), LTFH (46%), LIC HF (25%) and PNB HF (26%) are expected to deliver healthy profit growth, while MMFS, Chola, Indiabulls Housing Finance and Repco are expected to post subdued growth in profitability.
April 2019 9
India Strategy | India's PE movement: Politics to Economy
PSU Banks are expected to report second consecutive quarter of profit (led by lower slippages and a decline in provisioning requirement) after four consecutive quarters of losses, while Telecom is expected to report a loss for the seventh straight quarter. PSU Banks had posted a loss of INR241b in 4QFY18, and are now accounting for the entire profit growth of MOFSL Universe in 4QFY19.
Consumer Universe profits are expected to grow 7.8% YoY on a strong base (base quarter profits grew by 17% YoY), with United Spirits (-21% YoY), Pidilite (-6% YoY) and Godrej Consumer (-6% YoY) expected to post de-growth. United Breweries (24%), Marico (23%), Asian Paints (18%) and Britannia (13%) are expected to post a strong set of numbers. Management commentaries suggest a slight moderation in the demand environment. In Retail, Titan is expected to deliver another solid quarter (25% YoY).
Metals are expected to post PAT de-growth (-34% YoY) for the first time after eight quarters. Within our coverage universe, barring Hindalco, every other company is expected to report an earnings decline. Metals had a stellar run in the last three years and profitability of our Metals Universe has more than tripled from INR135b in FY16 to INR459b in FY19.
Oil & Gas is expected to report a flattish profit, driven by a significant YoY decline at OMCs owing to lower GRM. ONGC is expected to report 26% PAT growth. Ex-OMCs, we expect 15% YoY growth in O&G profits.
Cement is expected to post 9% YoY profit growth on a strong base (24% YoY growth in 4QFY18), after delivering 18% growth in 3QFY19, with ACC (44%), JK Cement (39%) and Ramco Cements (19%) likely to lead the pack.
Capital Goods are expected to report sales/EBITDA/PAT growth of 9.6%/9.3%/9.3%, with Bluestar/Thermax/BHEL expected to lead the pack delivering 82%/29%/27 PAT growth. ABB, Bharat Electronics and Voltas are expected to post 40%/15%/9% PAT decline YoY.
Utilities sector is expected to report (-5%) PAT de-growth. Utilities ex Coal India is expected to post growth (1.6% YoY), with NHPC posting the biggest decline (53%) in our universe. Coal India is expected to post PAT de-growth after five quarters, dragging growth of the entire universe, whereas JSW Energy is expected to post a loss.
Healthcare is expected to deliver 15.8% PAT growth in 4QFY19 on a low base (5% YoY decline in 4QFY18). Large cap Cipla is expected to post flat YoY profit, while Dr. Reddy, Lupin and Sun are expected to report 36%, 19% and 7% YoY profit growth.
Domestic Cyclicals’ share in MOFSL Universe earnings would be at 37%, while Global Cyclicals/Defensives would account for 31%/29% respectively.
Nifty sales/EBITDA/PAT are expected to grow by 11%/2%/15% in 4QFY19. Nifty EPS cut 2.1%/3.6% for FY19/20: Our FY19/20 Nifty EPS estimates have
been cut by 2.1%/3.6% to INR486/INR606 (prior: INR496/INR629). We are now building in EPS growth of 6.8%/24.8% for the Nifty for FY19/20. Excluding corporate banks, FY20 Nifty profits are expected to grow 14%. For FY20, major earnings upgrades are in BPCL (15%), IOC (12%), Yes Bank (9%), Bharti Infratel (7%) and Grasim Industries (5%), while the major earnings downgrades are in Tata Motors (-29%), Vedanta (-19%), Eicher Motors (12%), Cipla (-12%) and Sun Pharma (-12%).
April 2019 10
India Strategy | India's PE movement: Politics to Economy
Exhibit 1: Profit growth led by Financials, whereas Automobiles will post third consecutive quarter of 20%+ profit decline
Sector Sales EBITDA Net profit PAT Delta EBITDA Margins
MOFSL Universe: Double-digit sales growth trajectory intact, PAT growth at a 19-quarter high of 29%, Defensives’ PAT to stay flat YoY
Exhibit 2: Double-digit sales growth for MOFSL Universe but lowest in seven quarters
3
Exhibit 3: Sales growth of Defensives stays strong at 12%
Exhibit 4: Earnings growth to come in at 29% for MOFSL Universe (base quarter earnings de-growth of 7%)
Exhibit 5: Earnings to stay flat for Defensives on a weak base (growth of 4% in the base quarter)
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April 2019 11
India Strategy | India's PE movement: Politics to Economy
Exhibit 6: EBITDA margin to shrink by 150bp in 4QFY19
Source: MOFSL
Exhibit 7: PAT margin to shrink by 150bp in 4QFY19
Source: MOFSL
With 29% growth, MOFSL Universe absolute PAT to be at all-time high 4QFY19 earnings are expected to be driven by Domestic Cyclicals, which are
likely to post 4x growth in YoY PAT, led by depressed base owing to Financials. The share of Defensives, Domestic Cyclicals and Global Cyclicals in the profit pool stands at 28%, 37% and 35%, respectively.
Global Cyclicals are expected to post de-growth, whereas Defensives are expected to post flattish growth (-0.6% YoY).
' * CV volume for Tata Motors and Ashok Leyland; PV Volume for Maruti Suzuki (total volume growth)
April 2019 13
India Strategy | India's PE movement: Politics to Economy
Exhibit 11: Sectoral PAT growth YoY in 4QFY19 (%)
Exhibit 12: Sectoral PAT growth QoQ in 4QFY19 (%)
Exhibit 13: Approximately 33% of the companies are likely to report PAT decline, while 23% of the companies are expected to post >30% PAT growth
41% of the companies would grow at >15% YoY, and 23% of the Universe would report >30% PAT growth. 33% of the Universe would report PAT de-growth.
Banks to account for more than 100% of 4QFY19 incremental earnings YoY Domestic Cyclicals are expected to post multi-quarter-high earnings growth of
295% YoY, led by Financials, even as Auto universe posts its fourth consecutive quarter YoY PAT decline.
Global Cyclicals are expected to post an earnings decline of 14% YoY after five consecutive quarters of double-digit growth, as commodity price correction impacts the profit pool of Metals. Metals Universe is expected to post de-growth after eight consecutive quarters of PAT growth.
Defensives are expected to post flattish PAT numbers (-0.6% YoY), with Telecom expected to post continued elevated losses (loss of INR 41b expected in 4QFY19e), offsetting the performance by the IT (13% PAT growth, fifth consecutive quarter of double-digit growth) and Consumer (8% growth).
India Strategy | India's PE movement: Politics to Economy
Exhibit 14: Domestic Cyclicals taking over from Global Cyclicals in 2HFY19
Source: MOFSL
Exhibit 15: Global Cyclicals growth significantly exceeds MOFSL Universe in 1HFY19, with Domestic Cyclicals leading the pack in 2HFY19
Source: MOFSL
Source: MOFSL
Exhibit 16: Banks contribute majority of the earnings delta in 4QFY19
Source: MOFSL
73 58
29 28 23 13 10 8 2 1 1 1 0
-1 -5 -6 -21
-35
-80
Oil
& G
asM
etal
sU
tiliti
esTe
chno
logy
NBF
CCo
nsum
erCa
pita
l Goo
dsHe
alth
care
Med
iaRe
tail
Cem
ent
Logi
stic
sIn
fras
truc
ture
Life
Insu
ranc
eO
ther
sBa
nks-
Pvt
Auto
mob
iles
Tele
com
Bank
s-PS
U
Contribution to 1HFY19 PAT growth (%) 116
27 17 8 5 5 4 2 2 1 1 0
0 0 0 -15 -16 -20
-33
Bank
s-PS
UBa
nks-
Pvt
Tech
nolo
gyN
BFC
Cons
umer
Capi
tal G
oods
Heal
thca
reCe
men
tM
edia
Util
ities
Reta
ilLo
gist
ics
Infr
astr
uctu
reO
ther
sLi
fe In
sura
nce
Met
als
Auto
mob
iles
Oil
& G
asTe
leco
m
Contribution to 2HFY19 PAT growth (%)
69
36 32 32 31 28 20 18 17 17 15 12 8 2
-5 -10 -16 -21
PL PL
Met
als
NBF
CCa
pita
l Goo
dsU
tiliti
esRe
tail
Oil
& G
asM
edia
Logi
stic
sHe
alth
care
Cons
umer
Tech
nolo
gyIn
fras
truc
ture
MO
SLCe
men
tBa
nks-
Pvt
Life
Insu
ranc
eO
ther
sAu
tom
obile
sBa
nks-
PSU
Tele
com
1HFY19 PAT growth (%) LP
45 34 31
17 17 15 14 13 12 10 9 1
-2 -10 -10 -11 -17 -20 Loss
Bank
s-PS
UBa
nks-
Pvt
Reta
ilM
edia
Capi
tal G
oods
NBF
CTe
chno
logy
MO
SLCe
men
tHe
alth
care
Cons
umer
Logi
stic
sU
tiliti
esO
ther
sLi
fe In
sura
nce
Oil
& G
asIn
fras
truc
ture
Met
als
Tele
com
Auto
mob
iles
2HFY19 PAT growth (%)
1,28
9
1,00
3
290
58 22 9 7 6 5 5 4 3 2 1 0
-0 -1 -6 -33 -39 -49
MO
SL 4
QFY
18 P
AT (I
NRb
)
PSU
Ban
ks
Priv
ate
Bank
s
Tech
nolo
gy
NBF
C
Heal
thca
re
Cons
umer
Oth
ers
Cap
Goo
ds
Oil
& G
as
Med
ia
Cem
ent
Reta
il
Logi
stic
s
Life
Insu
ranc
e
Infr
a
Util
ities
Auto
Tele
com
Met
als
MO
SL 4
QFY
19 P
AT (I
NRb
)
April 2019 15
India Strategy | India's PE movement: Politics to Economy
Share of Global Cyclicals in earnings moderate QoQ Domestic Cyclicals appear to be the key drivers of PAT growth in 2HFY19, with
their share rising to 34% of aggregate PAT in FY19 (v/s 26% of FY18) and accounting for 91% of incremental PAT growth.
Consequently, we expect the share of Cyclicals to increase to 71% in FY19 from 67% in FY18.
Share of Domestic Cyclicals in MOFSL Universe (Excl OMCs) earnings at 40%
Exhibit 17: PAT share of Domestic Cyclicals will be at 40%, up from 13% in 4QFY18
Defensives includes Consumer, Healthcare, Technology, Telecom and Utilities Global cyclicals includes Metals, Oil & Gas and JLR Domestic cyclicals includes Automobiles, Banks, Capital Goods, Infrastructure, Cement, Media, NBFCs, Real Estate and Retail
Nifty expected to post 15% profit growth, aided by corporate banks, but dragged by Automobiles Nifty PAT is likely to grow at 15% in 4QFY19 on a moderate base (8% growth in
the base quarter). Excluding OMCs, Nifty PAT growth is expected at 19%. Corporate banks are singularly driving the Nifty profit growth. Excluding
corporate banks – SBI, ICICI, Axis Bank – the Nifty is expected to post a 2.7% YoY PAT decline for 4QFY19.
Sales is expected to grow 11% YoY (16% YoY growth in base quarter), a sharp moderation v/s 23% in 3QFY19. This is largely owing to deceleration in top-line growth in commodities like Metals and O&G and broad-based demand deceleration in Automobiles.
Nifty EBITDA is expected to grow 2%. Excluding OMCs, Nifty EBITDA is expected to increase 5% YoY.
16 Nifty companies are expected to report a YoY decline in PAT. Bharti Airtel is the only company expected to post a loss in 4QFY19.
40 35 32 32 35 36 33 38 36
34 36 36 32
38 37 32 13
31 32
39 40
26 33 41 42 38 34 34 26 24 25 22 25 33
28 27 33 47
34 34 33
31
34 28 26 29 37 40 41 42 39 34 34 35 34 39
35 33 28
29
0%
25%
50%
75%
100%
Mar
-09
June
-09
Sep-
09De
c-09
Mar
-10
June
-10
Sep-
10De
c-10
Mar
-11
June
-11
Sep-
11De
c-11
Mar
-12
June
-12
Sep-
12De
c-12
Mar
-13
June
-13
Sep-
13De
c-13
Mar
-14
June
-14
Sep-
14De
c-14
Mar
-15
June
-15
Sep-
15De
c-15
Mar
-16
June
-16
Sep-
16De
c-16
Mar
-17
June
-17
Sep-
17De
c-17
Mar
-18
June
-18
Sep-
18De
c-18
Mar
-19E
Defensives
Global cyclicals
Domestic cyclicals
Excl OMCs
April 2019 16
India Strategy | India's PE movement: Politics to Economy
Exhibit 18: Nifty sales to grow 11% in 4QFY19, lowest in seven quarters
Exhibit 19: 4QFY19 Nifty PAT to increase by 15%, led by Corporate Banks
Exhibit 20: Nifty EBITDA to grow at 2%, slowest in seven quarters
Exhibit 21: Nifty sectoral 4QFY19 PAT change YoY (%)
Source: MOFSL
16
5
-2 -12 -6 -8 -6
1
-2
4 8
16 11 12 14 16
24 25 22
11
June
-14
Sep-
14
Dec-
14
Mar
-15
June
-15
Sep-
15
Dec-
15
Mar
-16
June
-16
Sep-
16
Dec-
16
Mar
-17
June
-17
Sep-
17
Dec-
17
Mar
-18
June
-18
Sep-
18
Dec-
18
Mar
-19E
36
5
-3 -10
8 3 11
2 2 5 8 4
-5
14 16 8 11 12 9
15
June
-14
Sep-
14
Dec-
14
Mar
-15
June
-15
Sep-
15
Dec-
15
Mar
-16
June
-16
Sep-
16
Dec-
16
Mar
-17
June
-17
Sep-
17
Dec-
17
Mar
-18
June
-18
Sep-
18
Dec-
18
Mar
-19E
18
3 4
-4
14
3
12 15 12
18 17
5
-5
18 14
22
31
14
7 2
June
-14
Sep-
14
Dec-
14
Mar
-15
June
-15
Sep-
15
Dec-
15
Mar
-16
June
-16
Sep-
16
Dec-
16
Mar
-17
June
-17
Sep-
17
Dec-
17
Mar
-18
June
-18
Sep-
18
Dec-
18
Mar
-19E
LP 121 80
25 25 15 13 11 11 10 8 5 4 3
-4 -35 -39 PL
Bank
s-PS
U
Med
ia
Bank
s-Pv
t
Infr
a
Reta
il
Nift
y
Tech
nolo
gy
Heal
thca
re
Cons
umer
Cap
Goo
ds
NBF
C
Cem
ent
Agro
Che
m
Oil
& G
as
Util
ities
Auto
Met
als
Tele
com
Banks and Media to outperform; Telecom,
Metals and Auto to underperform
April 2019 17
India Strategy | India's PE movement: Politics to Economy
Nifty companies’ 4QFY19 performance (INR b) Company Sales EBITDA PAT PAT Contbn EBITDA margin
Note: For Financials, Sales represents Net Interest Income, and EBITDA represents Operating Profit; Consensus estimates are used for Adani Ports and Bajaj Finserv
April 2019 18
India Strategy | India's PE movement: Politics to Economy
Telecom Loss TCOM: 79 BHIN: 11 BHARTI: PL, IDEA: Loss
April 2019 19
India Strategy | India's PE movement: Politics to Economy
Banks to decide Nifty earnings trajectory in FY20 Auto emerging as new headwind for earnings MOFSL FY19 earnings growth at 13%; FY20 growth estimated at 26% led by
Financials: We expect FY19 revenue growth for our MOFSL Universe to come in at 20% (v/s 5.2% CAGR over FY15-18). This will be the third consecutive year of double-digit revenue growth. The top-line performance is likely to be driven by broad-based growth across sectors. We expect EBITDA margin for the MOFSL Universe (ex-OMCs, Financials) to contract by 70bp to 18.3% in FY19. We expect profits to grow 13% YoY for the MOFSL Universe, aided by a low base (flat earnings in FY18 due to losses in PSU Banks). Ex-PSU banks, MOFSL Universe is likely to deliver 5% profit growth in FY19. Financials alone account for 82% of incremental profits (60% is contributed by PSU Banks, 13% by Private Banks), while Metals, and Technology are expected to post 16% and 14% PAT growth, respectively. As far as FY20 is concerned, we expect MOFSL Universe to post sales/EBITDA /PAT growth of 11%/15%/26%. Deceleration in sales growth in FY20 is owing to moderation in top-line growth of commodities like Metals and O&G. Financials are expected to contribute 55% of incremental earnings in FY20. Ex-Financials, earnings growth for FY20 for MOFSL Universe is expected to be 14%.
Nifty profits to grow 9.8% in FY19; Corporate banks to drive Nifty profit growth of 22% in FY20: Nifty sales are expected to deliver healthy 21% YoY growth in FY19. Nifty EBITDA and PAT are expected to grow 11.4% and 9.8% in FY19, with an estimated CAGR (FY18-20) of 13% and 16%, respectively. In FY19, 44% of incremental profit growth in the Nifty is expected to be contributed by corporate lenders like Axis Bank and SBI. These banks, along with ONGC and TCS, contribute 84% of the PAT delta for FY19. FY20 Nifty sales/EBITDA/PAT are expected to grow 10%/14%/22%. Ex-Corporate Banks (ICICI, SBI, AXIS), we expect Nifty FY20 profits to grow 14%. Banks and Autos are expected to account for 57% and 11%, respectively, of incremental Nifty earnings in FY20.
Exhibit 22: Expect Nifty PAT CAGR of 16% over FY18-20
Sector Sales Gr. / CAGR (%)
EBIDTA Margin (%)
EBIDTA CAGR (%)
EBITDA margin change (bp) PAT Gr. / CAGR (%) PAT delta
Exhibit 23: Expect Nifty ex corporate lenders PAT CAGR of 10% over FY18-20
MOFSL Universe to post 13% earnings growth in FY19 aided by a low base For MOFSL Universe, we estimate FY19 PAT growth of 13% (on a flat base of
FY18), led by a recovery in Financials in 2HFY19. All sectors – barring Telecom, Infrastructure, Oil & Gas and Autos – are expected
to post double-digit PAT growth.
Exhibit 24: Nifty EPS – expect 16% CAGR over FY18-20, significantly higher than the 5% CAGR over FY08-18
Nifty EPS cut 2.1%/3.6% for FY19/20 Our FY19/20 Nifty EPS estimates have been cut by 2.1%/3.6% to INR486/INR606
(prior: INR496/INR629). We are now building in EPS growth of 6.8%/24.8% for the Nifty for FY19/20. Excluding corporate banks, we are expecting 14% profit growth for the Nifty in FY20.
3.4
15.2
1.4
9.3
16.4
10.3
6.2
13.7 12.7
5.4
12.8
3.2 6.2
9.3 6.5
9.8
21.7
15.5
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Nifty Ex Corp Lenders Nifty-50PAT Growth (%)
73 78 92 131
169 184 236
281 251 247 315
348 369 406 413 394
423 455 486
606
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
FY20
E
FY01-08: 21% CAGR
FY08-18: 5% CAGR
FY18-20E: 15.5% CAGR
8%
7%
25%
April 2019 21
India Strategy | India's PE movement: Politics to Economy
For FY20, major earnings upgrades are in BPCL (15%), IOC(12%), Yes Bank (9%), Bharti Infratel (7%) and Grasim Industries (5%), while the major earnings downgrades are in Tata Motors (-29%), Vedanta (-19%), Eicher Motors (-12%), Cipla (-12%) and Sun Pharma (-12%).
Exhibit 25: Top Nifty companies’ EPS upgrades/downgrades since 3QFY19 review (%) Companies FY20 BPCL 14.8 IOC 12.0 Yes Bank 9.2 Bharti Infratel 6.8 Grasim Industries 5.3 Sun Pharma -12.0 Cipla -12.0 Eicher Motors -12.2 Vedanta -18.8 Tata Motors -29.4
Exhibit 26: Nifty stock absolute FY19E PAT change (INR b)
Exhibit 27: Nifty stock absolute FY20E PAT change (INR b)
3,82
2
3480
10
6 83
54
50
44
35
31
22
22
21
17
15
15
14
14
14
12
10
9 9 8 7 7 6 6 4 3 3 3 3 3 2 1 1 1 1 0 0 0
1 2 2 3 8 21
22
27
44
80
102
NIF
TY F
Y18
SBI
ON
GC TCS
Coal
Indi
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is Ba
nkHD
FC B
ank
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TPC
GAIL
JSW
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in ITC
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ank
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4,64
9
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18
2 86
66
57
44
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26
26
25
22
19
17
16
15
15
14
14
13
13
13
12
12
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10
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9 9 9 8 7 6 5 4 4 4 4 4 3 3 3 2 2 1 1 1 0 3 19
24
NIF
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Y19E SB
IIC
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ank
Tata
Mot
ors
Axis
Bank
HDFC
Ban
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Veda
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ank
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Pow
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Bhar
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elGA
ILTa
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IFTY
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0E
April 2019 22
India Strategy | India's PE movement: Politics to Economy
Exhibit 28: Nifty performance - expect PAT CAGR (FY18-20) of 16% Sales (INR b) Sales EBIDTA Margin (%) EBITDA PAT (INR b) PAT YoY (%) PAT Contbn to
Company FY18 FY19E FY20E CAGR %18-20 FY18 FY19 FY20 CAGR
India Strategy | India's PE movement: Politics to Economy
Markets bid adieu to FY19 in style India top performer among global markets; FII flows weakest in three years
There couldn’t have been a better finish to FY19 as the Nifty rallied by an impressive 7.7% in March to close at 11,624 (+15% YoY), within a whisker of an all-time high. The last time the benchmark did this well in a month was way back three years ago.
In FY19, the Nifty Midcap100 (-2.7% YoY) underperformed the Nifty (+14.9% YoY) significantly, largely due to the unsustainable valuation premium of mid-caps to large-caps and the lack of pick-up in earnings growth.
In FY19, India-Nifty (+15%), Brazil (+12%), the US (+7%) and the UK (+3%) were the key global markets to close higher in local currency terms. On the other hand, Korea (-12%), MSCI EM (-10%), China-HSCIE (-5%), Taiwan (-2) and Japan (-1%) ended lower.
India’s share in the world market cap is at 2.8%, above its historical average of 2.5%. In FY19, the world’s market cap decreased 3.5% (USD2.8t), while India’s market cap was down 1.6%.
In the sectoral space, Private Banks (+34%), PSU Banks (+28%), Technology (+26%), Consumer (+14%) and Healthcare (+10%) were the top performers for FY19. Media (-25%), Autos (-22%), Metals (-15%) and Real Estate (-7%) were the key laggards.
Market breadth remained mixed in FY19, with 28 Nifty stocks closing higher. Bajaj Finance (+71%), Reliance Industries (+54%), Axis Bank (+52%), ICICI Bank (+43%) and TCS (+40%) were the top performers. Tata Motors (-47%), Vedanta (-34%), Indiabulls Hsg (-31%), Hero Moto (-28%) and Eicher (-28%) were the top laggards.
FII flows were muted at USD0.2b in FY19 – weakest in three years. Notably, at USD4.8b, FII inflows in March were the highest since Mar’17.
DII inflows were at USD10.3b (domestic MF inflows of USD12.5b and DII (ex-MFs) outflows of USD2.2b).
Nifty P/E is valued at 19x, above its historical average of 17.7x. At 2.8x, the Nifty P/B is also above its historical average. Market-cap-to-GDP at 81% (FY19E GDP) is also above its long-term average.
Exhibit 29: Markets gain strength toward end-FY19; Indian markets recorded a CAGR of 14.4% over FY09-19
Exhibit 30: Nifty QoQ change (%) — Rallied impressively in the last month of the year
India Strategy | India's PE movement: Politics to Economy
India top performer among global markets Among the key global markets, India-Nifty (+15%), Brazil (+12%), the US (+7%)
and the UK (+3%) were the key global markets to close higher in local currency terms. On the other hand, Korea (-12%), MSCI EM (-10%), China-HSCIE (-5%), Taiwan (-2) and Japan (-1%) ended lower.
Exhibit 31: World equity indices (FY19) – local currency (%)
Exhibit 32: World equity indices (FY19) – USD (%)
India’s share in world market cap above historical average India’s share in the world market cap is at 2.8%, above its historical average of
2.5%. In FY19, the world’s market cap decreased by 3.5% (USD2.8t), while India’s market cap was down by 1.6%.
Exhibit 33: Trend in India's contribution to world market cap
Exhibit 34: Market cap change in FY19 (%)
-12
-10
-5
-2
-1
0
3
7
12
15
South Korea
MSCI EM
China (HSCEI)
Taiwan
Japan
Russia MICEX
UK
S&P 500
Brazil
India - Nifty
-18
-13
-10
-8
-5
-5
-5
-4
7
8
South Korea
Russia MICEX
MSCI EM
Taiwan
Brazil
Japan
China (HSCEI)
UK
S&P 500
India - Nifty
3.3
1.6
2.8
1.5
2.0
2.5
3.0
3.5
Mar
-09
Sep-
09Fe
b-10
Jul-1
0De
c-10
May
-11
Nov
-11
Apr-
12Se
p-12
Feb-
13Ju
l-13
Jan-
14Ju
n-14
Nov
-14
Apr-
15Se
p-15
Mar
-16
Aug-
16Ja
n-17
Jun-
17N
ov-1
7M
ay-1
8O
ct-1
8M
ar-1
9
India's Contribution to World Mcap (%)
Average of 2.5%
4 3
-2
-6 -7 -9 -10 -10 -11
-18
0.5 30.4 2.2 7.2 0.6 1.2 0.9 3.3 5.7 1.4
Indo
nesia U
S
Indi
a
Chin
a
Russ
ia
Taiw
an
Braz
il
UK
Japa
n
Kore
a
Mkt cap chg 12M (%) Curr Mcap (USD Tr)
April 2019 26
India Strategy | India's PE movement: Politics to Economy
Sector performance: Banks, Technology outperform the market In the sectoral space, Private Banks (+34%), PSU Banks (+28%), Technology
(+26%), Consumer (+14%) and Healthcare (+10%) were the top performers for FY19.
Private Banks delivered positive returns in 8 out of the 12 months, while PSU Banks and Technology delivered positive returns in 7 months.
Media (-25%), Autos (-22%) and Metals (-15%) were the biggest underperformers in FY19 – these sectors delivered 8, 6 and 8 months of negative returns, respectively.
Exhibit 35: Trend in sector performance YoY (%) — Banks and Technology top outperformers MoM Abs. Performance (%) FY19 MoM Relative Performance (%) FY19
India Strategy | India's PE movement: Politics to Economy
Institutional flows: FII flows weakest in three years FII flows were muted at USD0.2b in FY19 – weakest in three years. Notably, at
USD4.8b, FII inflows in March were the highest since Mar’17. DII inflows were at USD10.3b (domestic MF inflows of USD12.5b and DII (ex-
MFs) outflows of USD2.2b).
Exhibit 37: Yearly domestic MF flows in equities (USD b)
Exhibit 38: Quarterly domestic MF flows in equities (USD b)
Exhibit 39: Yearly FII flows in equities (USD b)
Exhibit 40: Quarterly FII flows in equities (USD b)
Exhibit 41: Yearly DII ex-MF flows in equity (USD b)
Exhibit 42: Quarterly DII ex-MF flows in equity (USD b)
1.5
-2.3 -4.4
-0.2
-4.2 -3.6
6.6 10.1 8.4
22.0
12.5
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
-1.3
0.1
2.7 2.4 1.5
3.7 3.9
2.1
0.4 1.0 1.0
4.7
1.7
4.6
7.3
4.7 5.3 5.0
2.8
4.4
0.3
Mar
-14
Jun-
14Se
p-14
Dec-
14M
ar-1
5Ju
n-15
Sep-
15De
c-15
Mar
-16
June
-16
Sep-
16De
c-16
Mar
-17
June
-17
Sep-
17De
c-17
Mar
-18
Jun-
18Se
p-18
Dec-
18M
ar-1
9
-10.4
23.4 25.0
8.5
25.8
13.7 18.1
-1.5
8.3
3.2 0.2
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
4.1
6.2
3.5 2.3
6.0
0.2
-2.6
-0.3
1.2 1.7
4.6
-4.6
6.6
1.8
-3.2
2.5 2.1
-2.7
-1.4 -2.6
6.8
Mar
-14
Jun-
14Se
p-14
Dec-
14M
ar-1
5Ju
n-15
Sep-
15De
c-15
Mar
-16
June
-16
Sep-
16De
c-16
Mar
-17
June
-17
Sep-
17De
c-17
Mar
-18
Jun-
18Se
p-18
Dec-
18M
ar-1
9
11.6
7.4
0.3
-0.7
-8.5
-5.3
-10.3
2.0
-3.9 -4.3 -2.2
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
-0.9
-2.8 -3.0
-2.0 -2.4
1.3
0.3
-0.1
0.5
-0.6
-2.2
0.5
-1.5 -1.5 -0.8
-0.5
-1.5
0.6
0.0 -0.7
-2.1
Mar
-14
Jun-
14Se
p-14
Dec-
14M
ar-1
5Ju
n-15
Sep-
15De
c-15
Mar
-16
June
-16
Sep-
16De
c-16
Mar
-17
June
-17
Sep-
17De
c-17
Mar
-18
Jun-
18Se
p-18
Dec-
18M
ar-1
9
April 2019 28
India Strategy | India's PE movement: Politics to Economy
Valuations above long-period averages Nifty P/E is valued at 19x, above its historical average of 17.7x. At 2.8x, the Nifty P/B is also above its historical average. Market-cap-to-GDP at
81% (FY19E GDP) is also above its long-term average.
Exhibit 43: 12-month forward Nifty P/E (x)
Exhibit 44: 12-month forward Nifty P/B (x)
Exhibit 45: 12-month forward Nifty RoE (%)
Exhibit 46: India’s market cap to GDP (%)
Mid-caps underperform large-caps; premium v/s large-caps comes off In FY19, the Nifty Midcap100 (-2.7% YoY) underperformed the Nifty (+14.9%
YoY) significantly, largely due to the unsustainable valuation premium of mid-caps to large-caps and the lack of pick-up in earnings growth. Currently, valuation premium of mid-caps versus large-caps stands at 3%.
Exhibit 47: Mid-caps underperformed large-caps in FY19
12.7
22.5
19.0
9
13
17
21
25
Apr-
09
Apr-
10
Apr-
11
Apr-
12
Apr-
13
Apr-
14
Apr-
15
Apr-
16
Apr-
17
Apr-
18
Apr-
19
10 Year Avg: 17.7x
3.1
2.0
2.8
1.5
2.0
2.5
3.0
3.5
Apr-
09
Apr-
10
Apr-
11
Apr-
12
Apr-
13
Apr-
14
Apr-
15
Apr-
16
Apr-
17
Apr-
18
Apr-
19
10 Year Avg: 2.6x
14.9
12.5
13.9
15.3
16.7
18.1
Apr-
09
Apr-
10
Apr-
11
Apr-
12
Apr-
13
Apr-
14
Apr-
15
Apr-
16
Apr-
17
Apr-
18
Apr-
19
10 Year Avg: 14.8%
103
55
95 88
71 64 66
81
69 80 85 81
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
E
Average of 78% for the period
115
97
80
90
100
110
120
Mar
-18
Apr-
18
May
-18
Jun-
18
Jul-1
8
Aug-
18
Sep-
18
Oct
-18
Nov
-18
Dec-
18
Jan-
19
Feb-
19
Mar
-19
Nifty Rebased Nifty Midcap 100 Rebased
April 2019 29
India Strategy | India's PE movement: Politics to Economy
Exhibit 49: Midcaps trading at 3% premium to Nifty
Sector valuations: Banks, Technology outperform; Autos underperform Elevated valuations, coupled with challenging macros and a busy political
calendar, kept the market range-bound in FY19. PSBs are trading at a P/B of 1.0x, in line with the historical average of 0.9x.
Valuations for PSBs have recovered gradually on the back of the recent capital infusion by the government and the prospects of stronger earnings. Overall valuations still remain in line with the long-term average, and an earnings bounce-back is anticipated from FY20.
Technology trades at a P/E of 18.5x, at a 13% premium to the historical average of 16.4x. Our interaction with various companies indicates sustained momentum in deal activity as of now, but the threat of unpleasant macros is also not unreal. Valuations for mid-cap IT have cooled off in comparison to larger peers in 9MFY19. Tier-II IT trades at a 17% discount to Tier-I P/E (notably, it was trading at a peak premium of 12% nine months ago).
Auto sector is trading at a P/E of 17.3x, at a 4% premium to its historical average of 16.6x. PV volumes remained weak for the ninth consecutive month, with no signs of a broad-based recovery yet.
Midcap PE (x) Nifty PE (x)Nifty Avg: 20.0x Midcap Avg: 20.8x
3
-35
-10
15
40
65
Apr-
14
Oct
-14
Apr-
15
Oct
-15
Apr-
16
Oct
-16
Apr-
17
Oct
-17
Apr-
18
Oct
-18
Apr-
19
Midcap Vs Nifty PE Prem/(Disc) (%)
Average: 5%
April 2019 30
India Strategy | India's PE movement: Politics to Economy
MOFSL Universe: 4QFY19 Highlights
& Ready Reckoner
Note: In our quarterly performance tables, our four-quarter numbers may not always add up to the full-year numbers. This is because of differences in classification of account heads in the company’s quarterly and annual results or because of differences in the way we classify account heads as opposed to the company.
All stock prices and indices as on 2 April 2019, unless otherwise stated.
Note: In our quarterly performance tables, our four-quarter numbers may not always add up to the full-year numbers. This is because of differences in classification of account heads in the company’s quarterly and annual results or because of differences in the way we classify account heads as opposed to the company.
All stock prices and indices as on 2 April 2019, unless otherwise stated.
MOFSL Universe: 4QFY19 Highlights
& Ready Reckoner
April 2019 45
Demand trends remain weak across segments OEMs facing margin pressures for the third straight quarter
All auto segments faced demand headwinds in 4QFY19 – a trend similar to theprevious quarter. Increased ownership cost and stress at the farm level hamperedbuying sentiment, particularly in 2Ws/PVs.
EBITDA margin for our OEM (ex-JLR) universe is likely to contract for the thirdconsecutive quarter by 120bp YoY (+30bp QoQ) to 12% due to negative operatingleverage and higher variable marketing expenses. While almost all OEMs (except TVSLand TTMT S/A) are likely to see YoY margin contraction, MSIL, AL and BJAUT areexpected to deliver a QoQ margin recovery of 220bp, 80bp and 40bp, respectively.
We have lowered our FY20/21 EPS estimates for EIM (12%/6%), TVSL (10%/17%),TTMT (23%/19.5%), ENDU (4%/8%) and MSS (8%/9%).
Increased ownership cost and farm stress continue hurting demand, particularly in PVs/2Ws: All auto segments faced demand headwinds even in 4QFY19, continuing the trend of weak retails in the previous quarter. Not only increased ownership cost but also stress at the farm level hampered buying sentiment, particularly in 2Ws/PVs. Consequently, inventories were at record levels across segments (highest in the 2W segment at 60-70 days).
Negative op. leverage, higher variable marketing spend to exert margin pressures for third consecutive quarter: EBITDA margin for our Auto OEM (ex-JLR) universe is likely to contract by 120 bp YoY (+30 bp QoQ) to 12% due to negative operating leverage and an increase in variable marketing expenses. All OEMs are likely to witness margin contraction on a YoY basis – BJAUT (-320bp), MM (-360bp), EIM (-280bp), HMCL (-240bp), MSIL (-220bp) and AL (-70bp) – barring TVSL (+30bp) and TTMT S/A (+230bp). Consequently, PAT is expected to decline (by a significant 20% YoY or 11.5% QoQ) for the first time in seven quarters.
Expect better demand trend from 2QFY20, but FY20 could be mixed bag: We expect the demand environment to only improve from 2QFY20 with pre-buy to kick start ahead of BS-6 implementation; however, the strategy around BS4 inventory management in 4QFY20 will determine the overall FY20 performance. The increase in regulatory cost to comply with BS6 emission norms is likely to take a toll on demand post FY20, as players will have to pass on the higher cost to consumers to tackle the consequent pressure on margins. The impact is likely to be significant on 2Ws and CVs but limited on PVs. We estimate 5-6% CAGR for 2Ws, 6-7% for 4Ws, 1-2% for CVs and 6-7% for tractors over FY19-21 (assuming normal monsoon).
Valuation and view Near-term headwinds notwithstanding, our preference remains for PVs over CVs/2Ws as it would be least impacted by BS-6 transition as well as stable competitive environment, in turn reflecting in strong earnings growth. Our top picks in autos are MSIL and MSS among large caps, and ENDU and EXID among midcaps.
Company name Amara Raja Batteries
Ashok Leyland
Bajaj Auto
Bharat Forge
BOSCH
CEAT Eicher Motors
Endurance technologies
Escorts
Exide Industries
Hero MotoCorp
Mahindra & Mahindra
Maruti Suzuki
Motherson Sumi
Tata Motors
TVS Motor Company
Automobiles March 2019 Results Preview | April 2019
Amara Raja BatteriesCMP: INR721 TP: INR861 (+19%) Buy We expect AMRJ’s revenue to grow 7% YoY (flat QoQ) to
INR16.9b, driven by growth in the automotive replacement andindustrial segments.
Spot LME lead prices increased by 1.1% QoQ (-11.5% YoY) in4QFY19 to average INR143/kg.
EBITDA margin is likely to expand 110bp YoY (-50bp QoQ) to14.4%.
We expect PAT to increase 13.7% YoY (-4.6% QoQ) to INR1.24b. The stock trades at 20.1x FY20E and 16.8x FY21E EPS; maintain
Buy.
Key issues to watch Update on the demand environment for OEMs, auto
replacement and industrial battery segments. Outlook for raw material cost trend and recent pricing action. Update on competitive intensity in telecom segment and pricing
power thereof. Strategy on technology sourcing post termination of JV with
Johnson Control. Update on progress made on product development in lithium
ion battery space and plans going forward.
Bloomberg AMRJ IN
Equity Shares (m) 170.8 M. Cap. (INR b)/(USD b) 123 / 2 52-Week Range (INR) 908 / 671
1,6,12 Rel Perf. (%) -9 / -10 / -29
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
CMP: INR89 TP: INR113 (+27%) Buy Volumes grew 1.3% YoY (+36% QoQ) to 59,523 units in 4QFY19, as
M&HCV sales declined 0.9% YoY to 44,019 units. LCV sales, however, increased 8.3% YoY to 15,502 units.
We expect realization to increase 0.4% YoY (+3.7% QoQ), led by product mix and price increase.
Consequently, net revenue is likely to increase 1.7% YoY (+41% QoQ) to INR89.2b.
EBITDA margin is likely to contract 70bp YoY (+80 bp QoQ) to 11.1%, led by the product mix impact.
EBITDA should decline 4.5% YoY (+51.8% QoQ) to INR9.9b. Adj. PAT should decline 0.6% YoY (+72% QoQ) to INR6.6b. The stock trades at EV/EBITDA of 6.1x FY20E and 6.9x FY21E
EBITDA. Maintain Buy.
Key issues to watch Update on CV demand and discount trends. Update on LCVs, exports and defense business. RM cost guidance and price hikes to mitigate the same. Capex and investment guidance for FY20 and FY21.
Bloomberg AL IN
Equity Shares (m) 2927.1 M. Cap. (INR b)/(USD b) 261 / 4 52-Week Range (INR) 168 / 78
units due to a 15.2% YoY increase in domestic volume and a12.8% YoY increase in export volume.
Total motorcycle volume increased 17% YoY, while 3W volumedeclined 1.4% YoY.
We expect realization to decline by 7.4% YoY (+1.8% QoQ), led bydeterioration in the product mix. Consequently, net sales are expected to increase by 5.8% YoY (-3.6% QoQ) to INR71.4b.
We expect EBITDA margin to contract by 320bp YoY (+40 bp QoQ)to 16%.
We expect PAT to decline by 6% YoY (-9.4% QoQ) to INR9.98b. We increase FY21 volumes estimate by 1.3% and margins
estimate by 70bp to 17.3% to factor in INR depreciation andbetter product mix. As a result, our EPS estimate for FY21 isincreased by 6.8%.
The stock trades at 15.9x FY20E and 14.1x FY21E EPS; maintain Buy.Key issues to watch Update on 2W demand outlook from urban and rural areas. Price increase in domestic markets across segments. Export demand outlook and pricing in key currency market. Comments on 3W demand momentum in domestic market. Update on EV strategy.
Bloomberg BJAUT IN
Equity Shares (m) 289.4 M. Cap. (INR b)/(USD b) 826 / 12 52-Week Range (INR) 3214 / 2425
1,6,12 Rel Perf. (%) -9 / -2 / -16
Financial Snapshot (INR b) Y/E MAR 2018 2019E 2020E 2021E
Bharat ForgeCMP: INR514 TP: INR604 (+18%) Buy BHFC’s shipment tonnage is expected to increase by 1.4% YoY
(+4.4% QoQ) to 69,669 tons, impacted by weakness in thedomestic auto segment. Weakness in domestic autos segmentwould be off-set by robust growth in the CV exports segment aswell as non-segment (both domestic and export).
Net realization is expected to increase 16.5% YoY (-2% QoQ) to~INR248.8k/ton led by favorable mix and currency.
As a result, net revenue would increase 18% YoY (+2% QoQ) to~INR17.3b.
EBITDA margin is likely to expand ~120bp YoY (-50bp QoQ) to28.3%.
PAT is expected to increase by 46% YoY (-14% QoQ) to INR2.7b. The stock trades at 18.9x FY20E and 18.7x FY21E EPS; Maintain
Buy.
Key issues to watch Update on FY20 outlook for Class 8 trucks & India CVs. Update on capex plans. New order wins and ramp-up of past order wins. Update on defense business.
Bloomberg BHFC IN
Equity Shares (m) 465.7 M. Cap. (INR b)/(USD b) 239 / 3 52-Week Range (INR) 784 / 452
1,6,12 Rel Perf. (%) -9 / -25 / -46
Financial Snapshot (INR b) Y/E Mar 2018 2019E 2020E 2021E
BoschCMP: INR17,985 TP: 19,556(+9%) Neutral Net revenue is expected to decline by 3.6% YoY (-2% QoQ) to
INR30.5b, impacted by weakness in CV, tractors and PV segments. EBITDA margin is expected to contract 210bp YoY (+620bp QoQ)
to 19.8% due to higher commodity costs YoY and highercontribution of imported traded goods.
EBITDA is projected to decline by 13% YoY (+43% QoQ) to INR6b. Adjusted PAT is likely to decline 12% YoY to INR4.4b (+31% QoQ). The stock trades at 29.3x FY20E and 24.8x FY21E EPS; Maintain
Neutral.
Key issues to watch Outlook on impact of slowdown in auto segment. Update on demand environment in aftermarket business. Update on any developments in the BSVI opportunity
Bloomberg BOS IN
Equity Shares (m) 31.4 M. Cap. (INR b)/(USD b) 565 / 8 52-Week Range (INR) 22400 / 17170
1,6,12 Rel Perf. (%) -12 / -16 / -21
Financial Snapshot (INR b) Y/E Mar FY18 FY19E FY20E FY21E
CEATCMP: INR1,128 TP: INR1,313 (+16%) Buy We expect revenue to increase 3% YoY (flat QoQ) to INR17.2b in
4QFY19. RM cost is expected to increase by 40bp QoQ (-80bp YoY) to
59.5% in 4QFY19. We estimate 20bp QoQ margin expansion (-330bp YoY) in EBITDA
margin to 8.5%. We expect margins to remain subdued due tohigher costs attributable towards commissioning of the TBR plantduring the quarter.
EBITDA is likely to decline 26% YoY (+3% QoQ) to INR1.5b. We expect adjusted PAT to decline 45% YoY to INR528m. The stock trades at 14.1x FY20E and 12x FY21E EPS. Maintain Buy.
Key things to watch for Demand environment in replacement market. Guidance on RM costs and pricing actions. Update on ramp-up of newly commissioned TBR capacity. Whether capacity expansion is on track.
Bloomberg CEAT IN
Equity Shares (m) 40.5 M. Cap. (INR b)/(USD b) 46 / 1 52-Week Range (INR) 1666 / 984
1,6,12 Rel Perf. (%) -7 / -8 / -44
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
CMP: INR20,581 TP: INR23,657 (+15%) Buy Royal Enfield’s volumes declined 13.6% YoY (+0.9% QoQ) to 196k
units. Net realization is expected to improve by 12.7% YoY (+4% QoQ). S/A EBITDA margin is expected to contract by 280bp YoY to 29.5%.
Consolidated revenue would decline 2.7% YoY (+5.1% QoQ) to INR24.6b. Consolidated margin is likely to be 28.9%. Adj. PAT is estimated to decline 16.3% YoY (+1.9% QoQ) to INR5.4b.
We are lowering our volume estimates for RE for FY20/21 by 9%/7.4% to 840k/913.5k. We have also cut VECV volumes by 5% each for FY20/21, translating in consol. EPS cut of 11%/4%.
Stock trades at 23.4x/20.4x FY20/21 consol. EPS. Key issues to watch Outlook on RE demand from metros, tier 1 and tier 2 cities, and
order book trend. Inventory levels for RE.
Bloomberg EIM IN
Equity Shares (m) 27.3 M. Cap. (INR b)/(USD b) 561 / 8 52-Week Range (INR) 32210 / 18780
1,6,12 Rel Perf. (%) -5 / -24 / -45
Financial Snapshot (INR b) Y/E March FY18 FY19E FY20E FY21E
Endurance TechnologiesCMP: INR1,172 TP: INR1,351(+15%) Buy We expect 7% YoY growth (+5% QoQ) in consolidated revenue to
INR19.1b, led by strong performance in standalone operations. While S/A operations revenue is expected to grow ~9% YoY, we
expect European operations to deliver 4% revenue growth led by~2% currency gain as well as consolidation of recent acquisitionFonpresmetal.
Consolidated EBITDA is expected to grow 7% YoY (+8% QoQ). EBITDA margin is likely to remain flat YoY (+40bp QoQ) at 14.4%. We expect PAT to grow 4% YoY (+9% QoQ) to INR1.2b. We have lowered our EPS estimates for FY21 by 8% mainly to
factor in for weaker demand environment. The stock trades at 27.2x FY20E EPS and 23.4x FY21 EPS. Maintain
Buy.
Key issues to watch for Update on new order wins in India and Europe during the
quarter. Extent of impact of slowdown in domestic 2W industry. Update on outlook for European market.
Bloomberg ENDU IN
Equity Shares (m) 140.7 M. Cap. (INR b)/(USD b) 165 / 2 52-Week Range (INR) 1579 / 1065
1,6,12 Rel. Perf. (%) -16 / -20 / -24
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
EscortsCMP: INR772 TP: INR760 (-1.5%) Neutral Tractor volumes grew 6.7% YoY (-2.4% QoQ) to 25,136 units. Realizations are estimated to grow 7% YoY (-1% QoQ) to
INR497.2k/unit due to product mix impact. Revenues should grow 16.5% YoY (+1.1% QoQ) to INR16.7b. We expect EBITDA margins to contract 30bp YoY (-30bp QoQ) to
11.8%. EBITDA is expected to increase by 13.4% YoY (-1.7% QoQ)to INR1.97b.
We expect PAT to be at INR1.3b (+14.9% YoY, -2.6% QoQ). The stock trades at 12.8x/12.2x FY20/21E EPS. Maintain Neutral.
Key things to watch for Market share movement and new launches in tractor segment. Demand momentum in construction equipment segment. Visibility of order book execution in railways division.
Bloomberg ESC IN
Equity Shares (m) 122.6 M. Cap. (INR b)/(USD b) 95 / 1 52-Week Range (INR) 1019 / 543
1,6,12 Rel Perf. (%) 6 / 17 / -30
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Exide IndustriesCMP: INR215 TP: INR274 (+27%) Buy We expect revenues to grow 9.3% YoY to INR26.9b, led by healthy
auto replacement demand, as well as ramp-up in new segmentssuch as E-rickshaw and Solar.
Spot LME lead prices increased by 1.1% QoQ (-11.5% YoY) in4QFY19 to average INR143/kg.
EBITDA margin is likely to contract 70bp YoY (+50 bp QoQ) to 13%. PAT is likely to decline by 2.3% YoY (+19.4% QoQ) to INR1.85b. The stock trades at 20.2x FY20E and 18.1x FY21E EPS. Maintain
Buy.Key issues to watch Update on demand environment for OEMs, auto replacement
and industrial battery segments. Market share in autos and non-autos. Outlook for raw material cost trend and recent pricing actions, if
any.
Bloomberg EXID IN
Equity Shares (m) 850.0 M. Cap. (INR b)/(USD b) 183 / 3 52-Week Range (INR) 305 / 195
1,6,12 Rel Perf. (%) -10 / -25 / -23
Financial Snapshot (INR b) Y/E MARCH 2018 2019E 2020E 2021E
Hero MotoCorpCMP: INR2,570 TP: INR2,867 (+11%) Neutral Volumes declined by 11% YoY (-1.1% QoQ) to 1.8m units. Realization is expected to grow by 2.4% YoY (+0.3% QoQ) to
INR43,823/unit, largely led by price hikes. Net revenue is expected to decline by 8.9% YoY (-0.7% QoQ) to
INR78.1b. EBITDA margin is expected to shrink by 240bp YoY (-40bp QoQ) to
13.6%. EBITDA is likely to decline by 22.7% YoY (-4.1% QoQ) to INR10.6b. We expect PAT to decline 26.9% YoY (-8.1% QoQ) to INR7.1b. We cut FY20/21 EPS by 3% each as we cut volumes by 1.6% each
and margins by 20bp to factor in negative operating leverage. The stock trades at 14.7x FY20E and 14.2 FY21E EPS; maintain
Neutral. Key issues to watch Update on demand trend in rural and urban markets. Level of inventory in the system. New product launches and the timelines. Outlook on exports.
Bloomberg HMCL IN
Equity Shares (m) 199.7 M. Cap. (INR b)/(USD b) 513 / 7 52-Week Range (INR) 3862 / 2517
1,6,12 Rel Perf. (%) -12 / -20 / -47
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
as UV and 3W volumes increased 5.7% YoY and 12.8% YoY,respectively, while tractor volume declined 14.5% YoY.
MM’s (including MVML) realization is expected to decline 0.2%YoY (+1% QoQ), as impact of price increase is partly offset byproduct mix impact.
Revenue is likely to decline 0.6% YoY (+1.7% QoQ) to INR131b. EBITDA margin is expected to shrink 360bp YoY (-170 bp QoQ) to
11.5%. Adj. PAT is expected to decline 33% YoY (-48.5% QoQ) to INR7.5b. We have cut consol. EPS for FY20/21 by 7%/14% as we cut
volumes by 2%/8% to factor in uncertainties in tractor volumes.We cut margins by 70bp each to 13.9%/13.3% due to change inmix (from tractor to UVs) and BS6 challenge.
We are lowering target P/E to 14x (from 15x) as MM is exposed toBS6 challenge with over 95% of PV volume being diesel dependent and to factor in weak product mix.
The stock trades at 16x FY20E and 16.4x FY21E EPS; maintain Buy.Key issues to watch Outlook for UV and tractor businesses for FY19 and FY20. Update on response to the newly launched products. Update on average discounts per unit during festivals. Update on new launches and timelines.
Bloomberg MM IN
Equity Shares (m) 1209.0 M. Cap. (INR b)/(USD b) 807 / 12 52-Week Range (INR) 992 / 616
1,6,12 Rel Perf. (%) -6 / -28 / -28
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E Sales 486.9 529.3 582.8 610.9
Maruti SuzukiCMP: INR6,883 TP: INR8,003 (+16%) Buy Volume declined by 0.7% YoY (+7% QoQ) to 458.5k units. Net realization is expected to decline 1.3% YoY (-1.4% QoQ) to
INR452,618 per unit, resulting in net revenue decline of 2% YoY(+5.5% QoQ) to INR207.5b.
We expect margins to expand 230bp QoQ (-210 bp YoY) to 12.1%,mainly due to lower discount and other expense.
EBITDA is estimated to decline by 17% YoY (+29.6% QoQ) toINR25b.
We expect adj. PAT to decline by 21.8% YoY (+8.2% QoQ) toINR16.1b.
We cut our FY20/21 EPS estimates by 1.8%/1.2% as we cutvolumes by 0.9%/1.2%.
The stock trades at 24.2x FY20E and 19.8x FY21E EPS. MaintainBuy.
Key issues to watch Update on demand scenario, channel inventory, discounting
trends and new launches. Demand trend in urban and rural areas.
Bloomberg MSIL IN
Equity Shares (m) 302.1 M. Cap. (INR b)/(USD b) 2079 / 30 52-Week Range (INR) 9923 / 6324
1,6,12 Rel Perf. (%) -9 / -15 / -41
Financial Snapshot (INR b) Y/E MARCH 2018 2019E 2020E 2021E
Tata MotorsCMP: INR203 TP: INR195 (-4%) Neutral Consolidated revenues are estimated to decline 1.6% YoY
(+16.6%) QoQ), with EBITDA margin contracting 180bp YoY to10.1%.
We expect JLR’s (including JV) volume to decline by 11.6% YoY(+14% QoQ), impacted by slow demand and deferment ofpurchase in China.
JLR’s net realization is expected to increase by 3.2% YoY (+0.3%QoQ). JLR’s EBITDA margin would contract 380bp YoY (+240 bpQoQ) to 9.7%.
S/A volume declined YoY by 5.7% (+12.2% QoQ) as CV volumedeclined 6% YoY, while PV volume fell 4.9% YoY. EBITDA margin isexpected to expand to 9.2% (+230bp YoY and +40bp QoQ). Weexpect adjusted PAT to be at INR4.4b.
We cut FY20/21 consolidated PAT by 23%/19.5% as we cut S/APAT by 8%/20%. For JLR, we cut PAT estimates by 34%/17%.
The stock trades at 16.7x/13x FY20/FY21 EPS. Maintain Neutral.Key issues to watch Current demand trends for JLR and outlook for key markets. Update on cost cutting initiatives at JLR. Demand trend in domestic markets and new product launch. Impact of forex hedge loss.
Bloomberg TTMT IN
Equity Shares (m) 3396.6 M. Cap. (INR b)/(USD b) 689 / 10 52-Week Range (INR) 372 / 142
1,6,12 Rel Perf. (%) 4 / -18 / -58
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
TVS Motor CompanyCMP: INR486 TP: INR523 (+8%) Neutral Volume increased 2% YoY (-8.3% QoQ) to 907.3k units.
Motorcycle volume increased 8.2% YoY while Scooter andMopeds volume decline YoY by 3.3% and 5.6%, respectively. 3Wvolumes rose by 41.1% YoY.
Net realization is likely to increase 3.6% YoY (-1.3% QoQ) toINR46,526 per unit due to price hikes and better product mix.
We estimate net sales to grow by 5.7% YoY (-9.5% QoQ) toINR42.2b.
EBITDA margin is expected to be 7.3% (+30bp YoY and -70bpQoQ).
We expect PAT to decline 20% YoY (-26% QoQ) to INR1.3b. The stock trades at 24.7x FY20E and 19.2x FY21E EPS; Maintain
Neutral. Key issues to watch Update on demand from rural and urban areas. Exports outlook for 2W and 3W in key markets. Response to newly launched Radeon. Update on new product launches including EV.
Bloomberg TVSL IN
Equity Shares (m) 475.1 M. Cap. (INR b)/(USD b) 231 / 3 52-Week Range (INR) 693 / 449
1,6,12 Rel Perf. (%) -5 / -19 / -44
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Sales 151.3 180.5 210.9 245.3
EBITDA 11.3 14.3 18.8 23.1
Adj. PAT 6.6 6.7 9.4 12.0
EPS (INR) 13.9 14.1 19.7 25.3
EPS Gr. (%) 18.7 0.9 40.0 28.3
BV/Sh (INR) 60.6 69.9 83.6 102.8
RoE (%) 25.1 21.6 25.7 27.1
RoCE (%) 24.1 23.9 30.0 34.2
Valuations P/E (x) 34.8 34.5 24.7 19.2
P/BV (x) 8.0 7.0 5.8 4.7
EV/EBITDA (x) 21.6 17.0 12.8 10.3
Div. Yield (%) 0.7 0.8 1.0 1.0
April 2019 65
March 2019 Results Preview | Sector: Capital Goods
Exhibiting signs of an operational improvement Strong execution momentum to continue, helped by strong backlogs
Most companies in our coverage universe should report double-digit revenuegrowth; at an aggregate level, we expect 10% revenue growth; supported bypick-up and smooth execution of domestic projects.
Operating profit margin at an aggregate level is expected at 12.8% v/s 12.9% in4QFY18, despite most companies facing multiple headwinds, such as (a) inputprice pressure, (b) adverse foreign exchange movement, and (c) highcompetitive intensity. Cost rationalization measures undertaken by companiesat large also supported margins.
We continue to maintain positive stance on L&T, Cummins and Thermax in theIndustrials space, whereas on the Electronic Consumer Durables front, Havellsand Crompton remain our top picks.
Double-digit revenue growth supported by improved order execution Domestic execution has now started to witness traction after the hiccups felt post implementation of structural reforms like the GST. We expect companies from our coverage universe to register 10% revenue growth at an aggregate level. Industrials and Engineering companies are likely to witness healthy revenue growth, backed by smooth execution of projects in hand. For Electrical Consumer Durable companies, 9MFY19 has been weak given the muted demand for the RAC segment, which has impacted operational performance of companies like Voltas and Blue Star. The same trend is expected to continue in 4QFY19, given the weak demand for unitary cooling products (UCP) segment.
Operating margins to remain stable led by cost rationalization measures Operating margins are expected to remain stable despite multiple headwinds like (a) input price pressure, (b) adverse foreign exchange movement, and (c) high competitive intensity faced by the industry. Cost rationalization measures taken by the companies at large also supported margins. Operating profit margins at an aggregate level is expected at 12.8% v/s 12.9% in 4QFY18. Net profit at the sector level is expected to grow 9% YoY.
Adverse forex movement to impact MNCs, consumer durable companies INR depreciation of 9% YoY against the USD can potentially have a negative impact on the earnings of companies like Siemens, ABB, and GE T&D, which rely on its parent company for import of critical components. Even companies like Voltas and Blue Star could experience a potential negative impact given its reliance on import of compressor and indoor units from China.
Approaching general elections to slow fresh government orders Over the last few years, the capex cycle in India has been supported by government spending on infrastructure projects like roads, railways and power T&D sector. But, private sector capex has remained subdued given the underutilization of assets created by companies historically.
Company name
ABB
Bharat Electronics
BHEL
Blue Star
CG Consumer Elect.
Cummins India
Engineers India
GE T&D
Havells India
Larsen & Toubro
Siemens
Thermax
Voltas
Technology March 2019 Results Preview | April 2019
Capital Goods
Nilesh Bhaiya – Research Analyst ([email protected]); +91 22 6129 1556 Amit Shah – Research Analyst ([email protected]); +91 22 6129 1543
April 2019 66
March 2019 Results Preview | Sector: Capital Goods
However, with the impending general elections, even government capex has started witnessing a lull. The recently released CMIE capex data for FY19 showed new project announcements at -17% YoY.
Though the near-term outlook remains subdued, we note that policy initiatives have been undertaken to (i) expedite regulatory approvals, and (ii) establish monetary conditions conducive to industrial capex revival over the medium term.
We believe investment revival would be triggered by (i) sustained recovery inconsumption demand, and thus, capacity utilization; and (ii) investment push bythe public sector, leading to a virtuous cycle of cash flow generation.By initiating GST, labor and energy sector reforms, the Indian government haspartly addressed concerns about the pace and extent of reforms.Implementation of substantive reforms is essential for structured investmentgrowth.
Exhibit 1: Summary of expected quarterly performance Sector CMP Sales (INR m) EBDITA (INR M) PAT (INR m)
Ordering activity supported by a select few sectors Overall, ordering activity has started to see signs of a pick-up, driven by ordering
from Steel, Cement, Fertilizers, and Oil & Gas sectors. Government awarding has been a pillar of support for industrial and engineering
companies. Sector-wise, roads, railways, and water segments registered strongtendering activity (fiscal allocations for roads/railways have increased).
April 2019 67
March 2019 Results Preview | Sector: Capital Goods
Exhibit 2: Revenue growth pick-up driven by domestic execution
Source: MOFSL, Company
Exhibit 3: EBITDA margin improvement on cost rationalization by companies
Source: MOFSL, Company
Exhibit 4: Book-to-bill stable at 2.1x
Source: MOFSL, Company
Exhibit 5: Order intake impacted by weak order inflow for L&T from domestic market
Source: MOFSL, Company
Exhibit 6: Relative performance – three-month (%)
Source: Bloomberg, MOFSL
Exhibit 7: Relative performance – one-year (%)
Source: Bloomberg, MOFSL
20.9
15
.6
6.6
-5.2 -3
.5 16.6
15.3
26
.3
11.7
1.
3 -1
.0 -0.8
-1.4
2.7 2.8
3.1
2.4 8.7
3.5
1.2
9.3
5.5
2.9
9.2
8.4 23
.0
17.5
18
.9
10.0
4QFY
12
2QFY
13
4QFY
13
2QFY
14
4QFY
14
2QFY
15
4QFY
15
2QFY
16
4QFY
16
2QFY
17
4QFY
17
2QFY
18
4QFY
18
2QFY
19
4QFY
19E
Engg Sector (revenue growth %)
12.1
12
.3
17.9
10
.2
12.0
11
.3
16.0
8.
4 10.0
11
.0 14
.0
9.9
9.2
10.0
12.0
8.
3 7.
2 4.
3 11
.6
8.7
7.8 8.5 10
.2
7.4 8.
7 9.5 11
.9
8.0 9.
7 10.9
12
.8
2QFY
12
4QFY
12
2QFY
13
4QFY
13
2QFY
14
4QFY
14
2QFY
15
4QFY
15
2QFY
16
4QFY
16
2QFY
17
4QFY
17
2QFY
18
4QFY
18
2QFY
19
4QFY
19E
EBITDA Margin (%)
3,02
8 2,
943
3,23
0 3,
482
3,59
4 3,
605
3,81
3 3,
717
2,70
7 3,
979
3,92
4 3,
917
3,97
6 3,
936
3,96
1 3,
940
4,13
9 4,
075
4,22
5 4,
317
4,25
1
2.4
2
.4
2.6
2
.9
3.0
2
.9
2.8
2
.5
1.7
2
.5
2.4
2
.4
2.4
2
.4
2.3
2
.3
2.4
2
.3
2.2
2
.2
2.1
3QFY
144Q
FY14
1QFY
152Q
FY15
3QFY
154Q
FY15
1QFY
162Q
FY16
3QFY
164Q
FY16
1QFY
172Q
FY17
3QFY
174Q
FY17
1QFY
182Q
FY18
3QFY
184Q
FY18
1QFY
192Q
FY19
3QFY
19
Order book (INR b) BTB (x) 52
-2 -131
14
22
-5-2
227
15
3
-11
-15 -11 -9 -8
33
25
33
47
-14
3QFY
14
1QFY
15
3QFY
15
1QFY
16
3QFY
16
1QFY
17
3QFY
17
1QFY
18
3QFY
18
1QFY
19
3QFY
19
Order intake YoY %
85
92
99
106
113
Dec-
18
Jan-
19
Feb-
19
Mar
-19
Sensex Index MOSL Capital Goods Index
72
87
102
117
132
Mar
-18
Apr-
18
May
-18
Jun-
18
Jul-1
8
Aug-
18
Sep-
18
Oct
-18
Nov
-18
Dec-
18
Jan-
19
Feb-
19
Mar
-19
Sensex Index MOSL Capital Goods Index
April 2019 68
March 2019 Results Preview | Sector: Capital Goods
March 2019 Results Preview | Sector: Capital Goods
ABBCMP: INR1,323 TP: INR1,175 (-11%) Sell On reported basis, we expect a revenue decline of 32% YoY as the
power grid business, which constitutes 40% of the revenue hasnow been segregated from the company. Continued business ofautomation and electrification products is expected to register 14%growth YoY.
We expect EBITDA margin to decline 140bp to 6.1%; EBIDTA onreported basis is expected to decline 44% on YoY basis to INR1.1b.
Net profit is expected to decline 40% YoY to INR617m. However, onlike-to-like basis, the growth is expected to be robust (Difficult toquantify as base numbers are not available, post re-segmentation).Maintain Sell.
Key issue to watch Management commentary suggests cautious optimism, continued
focus on exports and services—an important driver of theprojected strong double-digit revenue and profit growth.
Bloomberg ABB IN
Equity Shares (m) 211.9 M. Cap. (INR b)/(USD b) 280 / 4 52-Week Range (INR) 1517 / 1123
1,6,12 Rel Perf. (%) -2 / -14 / -15
Financial Snapshot (INR b) Y/E Dec 2017 2018 2019E 2020E
Net Sales 60.9 66.9 75.3 83.8
EBITDA 4.1 4.6 5.5 6.5
Adj. PAT 4.2 5.1 3.2 3.6
Adj. EPS (INR) 10.6 12.0 14.9 17.2
EPS Gr (%) -41.9 12.7 24.0 15.8
BV/Sh (INR) 170.2 189.1 196.8 205.8
RoE (%) 6.3 6.3 7.6 8.4
RoCE (%) 9.8 8.6 8.2 9.3
Payout (%) 41.3 40.0 40.0 40.0
Valuations
P/E (x) 124.3 110.3 89.0 76.8
P/BV (x) 7.8 7.0 6.7 6.4
EV/EBITDA (x) 22.6 17.2 12.8 9.4
Div. Yield (%) 0.3 0.4 0.4 0.5
April 2019 70
March 2019 Results Preview | Sector: Capital Goods
Quarterly Performance Y/E March FY18 FY19 FY18 FY19
March 2019 Results Preview | Sector: Capital Goods
Bharat ElectronicsCMP: INR101 TP: INR115 (+15%) Buy Order inflow for FY19 stood at INR232b (+132% YoY). Order inflow
was supported by finalization of LRSAM, Kerala fiber opticsnetwork, smart city projects, integrated perimeter securitysolution, weapon repair facility for naval ships, and naval airfieldintegrated security system.
Order backlog stands at record high level of INR516b providingstrong revenue visibility of 4.4x its FY19 revenue.
Provisional Revenue for FY19 stood at INR11.7b (+16% YoY),implying 4QFY19 revenue of INR37b (+7.5% YoY), broadly in linewith our estimates. Exports revenue stood at INR1.3% of itsrevenue (USD22m).
We expect EBITDA margin of 19.5% for 4QFY19 v/s 22.1% in4QFY18, given the adverse revenue mix (contribution from low-margin EVM machines). EBITDA is likely to decline 5% YoY toINR7.6b.
PAT is expected to decline 15% YoY to INR4.8b. Maintain Buy.
Key issue to watch Akash missile, IACCS, Ship-borne EW systems and EVM orders are
expected to support revenue growth
Bloomberg BHE IN Equity Shares (m) 2436.5 M. Cap. (INR b)/(USD b) 246 / 4
CMP: INR75 TP: INR60 (-19%) Sell We expect revenue growth of 9% YoY for 4QFY19 for BHEL, led by a
pick-up in execution of orders in hand. We expect gross margins to decline 850bp YoY to 41.0%, impacted
by higher import content required to execute the supercriticalorders.
BHEL is likely to report operating profit of INR10.1b in 4QFY19 asagainst INR12.3b in 4QFY18, a decline of 18% YoY. We anticipateoperating margin compression of 300bp YoY to 9.1%
Tax rate is expected to stand at 38.3% as against 60% in 4QFY18. We estimate adjusted net profit at INR5.8b as against INR4.6b in
4QFY18, a growth of 27% YoY. Maintain Sell.Key issues to watch Execution of orders in hand given that private sector order
backlog is slow moving Trends in provisions, particularly for liquidated damage on project
completion
Bloomberg BHEL IN Equity Shares (m) 3671.4 M. Cap. (INR b)/(USD b) 274 / 4
March 2019 Results Preview | Sector: Capital Goods
Blue StarCMP: INR706 TP: INR755 (+7%) Neutral Unitary cooling division (UCP) of Blue Star is likely to report
revenue growth of 17% YoY; however, excluding INDAS 115implementation impact, we expect revenue to remain flat atINR6.9b.
We expect revenue growth of 11% YoY in the MEP segment,excluding the INDAS 115 implementation impact. MEP revenue isexpected to grow 7.2% to INR7.8b.
Operating margin is expected to improve 100bp YoY at 5.5%,supported by margin improvement in the MEP segment (5.3% v/s4.6% in 4QFY18) and normalization of margins in the ProfessionalElectronics segment (18.7% v/s 13.0% in 4QFY18). Operatingprofit is expected to increase 39% YoY.
We expect net profit of INR482m as against INR264m in 4QFY18(+82% YoY) supported by lower losses in the JV business.Maintain Neutral.
Key issue to watch Inventory situation in the UCP segment and demand outlook for
FY20
Bloomberg BLSTR IN Equity Shares (m) 95.6 M. Cap. (INR b)/(USD b) 67 / 1
March 2019 Results Preview | Sector: Capital Goods
CG Consumer Elect.CMP: INR222 TP: INR270 (+21%) Buy We expect sales to grow 9% YoY, driven by 15% growth in the
Electrical Consumer Durables’ segment. We expect operating profit of INR1.8b in 4QFY19, an improvement
of 8.5% YoY and a 10bp compression in EBITDA margin to 14.5%.Margin compression is expected on account of pricing pressurewitnessed in the lighting segment given high competitive intensity.
Net profit is expected at INR1.1b in 4QFY19 as against INR1.0b in4QFY18, implying a YoY growth of 11.0%. Maintain Buy.
Key issues to watch Performance of the lighting segment as players have taken price
hikes during the quarter Ad spends incurred by the company during the quarter, as
Crompton intends to position itself as an Electrical Consumer Durables brand as against its current positioning of a ‘fan’ brand
Bloomberg CROMPTON IN Equity Shares (m) 626.8 M. Cap. (INR b)/(USD b) 139 / 2
March 2019 Results Preview | Sector: Capital Goods
Cummins IndiaCMP: INR745 TP: INR950 (+30%) Buy We expect revenue to increase 7% YoY, supported by growth in the
Industrial segment (24% YoY) and Distribution and Spars business(+17% YoY). However, exports is expected to decline sharply (-18%YoY) given weak demand from Middle East and Europe.
EBITDA margin is expected to remain flat YoY to 14%; andoperating profit is expected to improve 8% YoY to INR1.9b.
Net profit is expected to register growth of 3% YoY to INR1.7b.Maintain Buy.
Key issue to watch Performance and guidance for the exports segment
Bloomberg KKC IN
Equity Shares (m) 277.2 M. Cap. (INR b)/(USD b) 206 / 3 52-Week Range (INR) 885 / 612
1,6,12 Rel Perf. (%) -3 / 4 / -13
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Net Sales 50.8 56.7 65.7 72.9
EBITDA 7.3 9.3 11.5 12.8
Adj. PAT 6.5 7.6 9.1 10.0
EPS (INR) 23.5 27.3 32.8 36.2
EPS Gr. (%) -11.2 16.2 20.1 10.3
BV/Sh. (INR) 143.8 155.3 169.2 184.4
RoE (%) 18.3 18.3 20.2 20.5
RoCE (%) 16.1 17.5 19.4 19.7
Payout (%) 58.7 49.7 49.7 49.7
Valuations P/E (x) 35.9 30.9 25.8 23.4
P/BV (x) 5.9 5.4 5.0 4.6
EV/EBITDA (x) 31.7 24.4 19.8 17.6
Div Yield (%) 1.8 1.6 1.9 2.1
April 2019 75
March 2019 Results Preview | Sector: Capital Goods
March 2019 Results Preview | Sector: Capital Goods
Engineers IndiaCMP: INR120 TP: INR155 (+24%) Buy We expect revenue to increase 40% YoY to INR7.1b, supported by
growth in Turnkey segment execution (106% YoY); we expectConsultancy and Engineering projects to register a growth of 5%YoY.
We expect operating profit to register 35% growth YoY, supportedby better margins in the consultancy segment (29.3% v/s 26.6% YoY). Margins in the turnkey segment are expected to remain stable at 7% YoY.
We expect net profit to register 35% YoY growth to INR1.2b.Maintain Buy.
Key issue to watch Performance of the Turnkey project segment, which has seen
margin volatility in the recent past
Bloomberg ENGR IN
Equity Shares (m) 673.9 M. Cap. (INR b)/(USD b) 81 / 1 52-Week Range (INR) 168 / 100
1,6,12 Rel Perf. (%) 0 / -7 / -43
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Net Sales 17.9 25.4 30.5 33.1
EBITDA 4.4 3.8 4.8 5.8
Adj. PAT 4.0 4.0 4.7 5.5
EPS (INR) 6.3 6.3 7.4 8.7
EPS Gr. (%) 14.8 0.7 17.2 17.6
BV/Sh. (INR) 33.7 36.8 40.5 44.9
RoE (%) 15.7 16.8 17.9 19.1
RoCE (%) 15.7 16.8 17.9 19.1
Payout (%) 77.6 46.4 46.4 46.4
Valuations P/E (x) 18.1 17.9 15.3 13.0
P/BV (x) 3.4 3.1 2.8 2.5
EV/EBITDA (x) 10.6 12.0 9.0 6.9
Div Yield (%) 3.5 2.2 2.6 3.1
April 2019 76
March 2019 Results Preview | Sector: Capital Goods
CMP: INR290 TP: INR300 (+2%) Neutral We expect GE T&D to register revenue growth of 32% YoY to
INR10.7b in 4QFY19. Revenue growth is supported by the weakbase of 4QFY18 (-32.0% YoY).
We expect operating profit of INR1b in 4QFY19, as againstINR179m in 4QFY18 . Operating margins are expected to improve740bp at normalized level of to 9.6%. Margins in 4QFY18 (2.2%)were impacted by weak execution leading to operating de-leverage.
GET&D is expected to book net profit of INR665m as againstINR305m in 4QFY18. Maintain Neutral.
Key issues to watch Progress in the Champa-Kurukshetra II project, which is
expected to be executed in FY19
Bloomberg GETD IN
Equity Shares (m) 256.1 M. Cap. (INR b)/(USD b) 74 / 1 52-Week Range (INR) 413 / 219
1,6,12 Rel Perf. (%) -8 / 15 / -46
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
March 2019 Results Preview | Sector: Capital Goods
GE T&D
April 2019 77
March 2019 Results Preview | Sector: Capital Goods
CMP: INR765 TP: INR871 (+14%) Buy Revenue is expected to grow 18% YoY, driven by revenue growth
from the Electrical Consumer Durables segment (+23% YoY), andSwitchgear (+13% YoY). Lloyd Electric is expected to register growthof 12% YoY supported by primary channel filling on expandednetwork.
We expect the cables segment to register 22.0% YoY growth,supported by robust demand from government infrastructureproject segment.
We expect EBIDTA margin to decline 40bp YoY to 13.7%, impactedby margin pressure across segments. Operating profit is expectedto register 14% growth YoY
Net profit is expected to register a growth of 20% YoY to INR2.8b.Maintain Buy.
Key issue to watch Commentary on overall demand scenario of the company’s
product portfolio
Bloomberg HAVL IN
Equity Shares (m) 625.0 M. Cap. (INR b)/(USD b) 478 / 7 52-Week Range (INR) 783 / 484
1,6,12 Rel Perf. (%) 0 / 21 / 33
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
March 2019 Results Preview | Sector: Capital Goods
Larsen & ToubroCMP: INR1,410 TP: IN1,710 (+22%) Buy L&T announced an order intake of INR578b in 4QFY19 compared to
INR329b in 4QFY18. Order inflow during the quarter was supportedby large (>INR15b), and base order finalizations.
Large orders worth ~INR400b were finalized during the quarter.Domestic order wins were supported by order finalizations in theInfrastructure segment. Overseas order finalization was supportedby Infrastructure and Power segments.
For 4QFY19, we expect revenue growth of 11% YoY to INR452b. Wehave factored in 11% YoY growth in the E&C segment driven by execution in the domestic segment. We expect operating profit margin to improve by 60bp YoY to 13.9% in 4QFY19.
We expect net profit to register 10% YoY growth to INR35b. MaintainBuy.
Key issue to watch Order inflow, revenue and margin guidance for FY20.
Bloomberg LT IN Equity Shares (m) 1401.7 M. Cap. (INR b)/(USD b) 1976 / 29
March 2019 Results Preview | Sector: Capital Goods
SiemensCMP: INR1,130 TP: INR1,138 (+1%) Neutral We expect SIEM to register 10% YoY revenue growth during the
quarter to INR36.0b, led by strong performance in its Power & Gas,Building Technologies and Digital factories.
Operating margin is expected to improve by 60bp YoY to 10.4%,and operating profit is expected to register 17% YoY growthsupported by margin improvement in Power & Gas, EnergyManagement and Digital Factory segment
Net profit is expected to register 16% growth YoY to INR2.6b;Maintain Neutral.
Key issue to watch Raw material imports account for 55% of raw material cost;
Siemens AG’s network comprises 82% imports
Bloomberg SIEM IN Equity Shares (m) 356.1 M. Cap. (INR b)/(USD b) 402 / 6
March 2019 Results Preview | Sector: Capital Goods
Thermax CMP: INR941 TP: INR1,290 (+37%) Buy Revenue is likely to grow 10% YoY, supported by execution pick-
up in the Energy segment (+20% YoY) and Chemicals segment(+31% YoY) given improvement in orders available for execution.
Operating profit is expected to register 9% YoY growth toINR1.5b, while operating margin is expected to remain stable at9.4% during the quarter.
Net profit is expected to register 29% YoY growth to INR979msupported by lower tax rate (40.3% v/s 37.6% in 4QFY18) andlower share of loss in JV (INR13m loss v/s INR172m loss in4QFY18). Maintain Buy.
Key issue to watch Demand environment in domestic and overseas markets
Bloomberg TMX IN Equity Shares (m) 112.6 M. Cap. (INR b)/(USD b) 106 / 2
March 2019 Results Preview | Sector: Capital Goods
VoltasCMP: INR623 TP: INR605 (-3%) Neutral VOLT is likely to report revenue growth of 8% YoY, supported by
growth in EMP and the Engineering segment. We expect revenue growth of 11% YoY in the MEP segment,
supported by swift execution of orders in hand. Sustainability ofmargins will be a key challenge in the segment. VOLT had bookedEBIT margins of 8.0% in 3QFY19 supported by INR depreciationand execution of better margin RE orders.
We expect revenue growth of 6% in the UCP segment for 4QFY19. We expect operating profit to register 2% YoY decline to INR2.5b
despite revenue growth of 8% YoY, as we bake in margincompression in the Engineering Product and Services segment.
We expect net profit to decline 9% YoY to INR1.7b given highershare of losses in its JVs/associates (INR96.7m v/s INR25.3m4QFY18). Maintain Neutral.
Key issues to watch Impact of import duty hike on the performance of the UCP
segment Sustainability of profits in the MEP segment
Bloomberg VOLT IN Equity Shares (m) 330.8 M. Cap. (INR b)/(USD b) 206 / 3
Characterized by healthy realization and lower cost South-based companies to benefit significantly
Demand growth moderating after a strong 9MFY19 We expect companies under our coverage to report volume growth of ~6% YoY in 4QFY19. Notably, this will follow a healthy volume growth phase (+14% in 9MFY19 for coverage universe), led by a low base and healthy demand from government projects.
The southern region – which was primarily driving demand – witnessed a slowdown in Feb-Mar’19 on account of a high base of the previous year. Also, huge price increases taken by southern players led to lower volumes, as the hikes were not completely absorbed by the market. Demand in Rajasthan declined drastically after the state elections. Demand in central India too remained muted after the elections in Madhya Pradesh. The eastern region witnessed limited supply from southern players in 4QFY19. Supply of clinker was also affected due to shortage of wagons.
We expect (a) pan-India players (ACC and Ambuja) to report volume growth of 5-7% YoY and UTCEM to deliver growth of 5% YoY, (b) SRCM to report 9% YoY volume growth and (c) south-based companies(TRCL and ICEM) to report 5-10% volume growth.
We estimate volume growth at 11% for FY19, as demand for 9MFY19 remained healthy, led by increased infrastructure activities and affordable housing programs.
Price hikes taken in Feb’19 moderated in Mar’19 In Feb’19, south-based companies announced price hikes to the extent of INR30-50/bag. While Chennai saw a sustainable INR30/bag hike, the quantum was ~INR50/bag for Hyderabad, Bangalore and Kerala.
Cement production in the region was also curtailed with companies deciding not to sell OPC cement (an ordinary portland cement with lower margins). Also, blending OPC cement with fly-ash and selling it at a lower price by unorganized players was rampant in the south. However, this practice was controlled as organized players decided to not supply OPC cement to smaller players. Overall prices improved by INR45/bag MoM in Feb’19 in the southern region.
However, these hikes couldn’t sustain as Mar’19 approached because of selling pressure due to the year-end impact and the lack of demand. As a result, prices corrected to the extent of INR20/bag in Hyderabad, Kerala and Bangalore, while they remained constant in Chennai. Increase in prices in the south was 5% QoQ in 4QFY19.
The Delhi-NCR region witnessed a hike of INR20/bag in Feb’19 in the non-trade segment. Prices in the north increased by 1% QoQ.
Company name
ACC
Ambuja Cements
Birla Corporation
Grasim Industries
India Cements
J K Cement
Ramco Cement
Sanghi Industries
Shree Cement
UltraTech Cement
Technology March 2019 Results Preview | April 2019
Cement
April 2019 83
Prices increased 5% QoQ in the west (led by healthy prices in Pune/Maharashtra), remained flat QoQ in the east and increased 2% QoQ in the central region in 4QFY19. All India cement prices increased 3% QoQ.
Cost pressures easing out Petcoke prices declined 3% QoQ (up ~8% YoY) in 4QFY19. Prices of imported coal (adjusted for USD/INR) also decreased 13% QoQ. This should result in lower power & fuel cost for the companies. Additionally, the decrease in diesel prices (-6% QoQ) would result in lower freight cost for the companies. We, thus, expect a lower cost curve in 4QFY19. EBITDA/ton is likely to be higher (by INR152 QoQ) for our coverage companies.
Top picks: Shree Cement and ACC Shree Cement’s superior execution capabilities would enable it to achieve RoIC of over 30% (FY20), while its gross block to capacity has been structurally trending downward. Also, ACC – which is on a growth capex mode – seems to be narrowing its profitability gap with peers, led by its higher proportion of (a) premium sales and (b) sales from its new cost-efficient units of Jamul and Sindri.
March 2019 Results Preview| Sector: Cement
April 2019 84
Exhibit 1: Trend in key performance indicators Sector CMP Sales (INR M) EBTIDA (INR M) Net Profit (INR M)
ACCCMP: INR1,620 TP: INR1,863 (+15%) Buy We expect dispatches to grow 7% YoY to 7.61m tons in 1QCY19, led
by growth in underlying markets. Average realizations are expectedto increase ~2% QoQ to INR4,794/ton, led by higher realizations insouth.
Revenues are expected to increase 11.7% YoY to INR40.5b. EBITDAmargin is expected to be 15.8% (+2.67pp QoQ; +2.22pp YoY).
EBITDA/ton is estimated at INR839 (+INR159 QoQ), led by INR129QoQ increase in blended realization and INR30 QoQ decrease incost. PAT is likely to increase by 44% YoY to INR3.5b.
The stock trades at a P/E of 22.4x (CY19E) and 17.3x (CY20E),EV/EBITDA of 9.9x (CY19E) and 7.7x (CY20E), and EV/ton of USD103(CY19E) and USD95 (CY20E). Maintain Buy.
Key issues to watch out for Cement pricing sustainability. Volume growth. Update on capacity expansion plans.
Bloomberg ACC IN Equity Shares (m) 188.0 M. Cap. (INR b)/(USD b) 304 / 4
Ambuja CementsCMP: INR230 TP: INR201 (-12%) Neutral We expect dispatches to grow 5% YoY to 6.53m tons in 1QCY19, led
by volume growth in underlying markets. Average realizations areexpected to increase 2% QoQ to INR4,761/ton due to healthyprices in west. Revenue is likely to grow 9% YoY to INR31.1b.
EBITDA margin is expected to be 16.9% (+2.8pp QoQ, -0.8pp YoY).EBITDA/ton is estimated at INR806 (+INR147 QoQ, -INR9 YoY).
Adjusted PAT is estimated to increase 10% YoY to INR3b. The stock trades at a P/E of 24.2x (CY19E) and 21.3x (CY20E),
EV/EBITDA of 13.5x (CY19E) and 11.7x (CY20E), and EV/ton ofUSD131 (CY19E) and USD127 (CY20E). Maintain Neutral.
Key issues to watch out for Volume growth outlook. Cement pricing outlook and sustainability. Cost curve trend in CY19.
Bloomberg ACEM IN
Equity Shares (m) 1985.7 M. Cap. (INR b)/(USD b) 456 / 7 52-Week Range (INR) 252 / 189
1,6,12 Rel Perf. (%) -3 / -3 / -22
Financial Snapshot (INR Billion) Y/E Dec 2017 2018 2019E 2020E
Sales 104.2 113.6 123.2 135.9
EBITDA 19.1 18.9 20.1 23.7
NP 12.2 12.4 12.8 14.5
Adj. EPS (INR) 6.1 6.3 6.4 7.3
EPS Gr. (%) 32.0 2.0 2.6 13.3
BV/Sh. (INR) 100.9 106.2 107.8 110.3
RoE (%) 6.2 6.1 6.0 6.7
RoCE (%) 6.6 6.6 6.3 7.0
Payout (%) 64.7 64.3 74.9 66.1
Valuations
P/E (x) 25.3 24.8 24.2 21.3
P/BV (x) 1.5 1.5 1.4 1.4
EV/EBITDA (x) 14.1 14.3 13.5 11.7
EV/Ton (USD) 130 130 131 127
April 2019 89
Consolidated Performance (INR Million) Y/E March FY18 FY19 FY18 FY19E
Birla CorporationCMP: INR 523 TP: INR634 (+21%) Buy 4QFY19 consolidated cement volumes are estimated to increase
5.6% YoY to 3.6m tons, led by growth in underlying market.Realizations are estimated to increase by 2% QoQ toINR4,638/ton, led by healthy prices in the central region.
We estimate blended EBITDA/ton at INR745 (+INR100/t QoQ), ledby INR85/t QoQ increase in realization. EBITDA margin is expected to expand 2.05pp QoQ to 15.4%.
Consolidated EBITDA is likely to increase 7% YoY and 29% QoQ toINR2.68b. We expect the company to report PAT of INR1.05b in4QFY19 (-4% YoY).
The stock trades at a P/E of 10x (FY20E) and 7.1x (FY21E),EV/EBITDA of 6.3x (FY20E) and 5.1x (FY21E), and EV/ton of USD68(FY20E) and USD66 (FY21E). Maintain Buy.
Key issues to watch out for Volume growth recovery and outlook. Cement pricing outlook and sustainability. Update on profitability of acquired subsidiary of Reliance.
Bloomberg BCORP IN
Equity Shares (m) 77.0 M. Cap. (INR b)/(USD m) 40 / 1 52-Week Range (INR) 819 / 440
1,6,12 Rel Perf. (%) -5 / -28 / -49
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
India CementsCMP: INR111 TP: INR103 (-7.5%) Neutral India Cements’ volumes are expected increase by 5% YoY to 3.23m
tons in 4QFY19. We expect realizations to increase by 4.4% QoQ toINR4,646/ton due to strong prices in the underlying markets ofsouth. We estimate revenue at INR15b (+7.5% YoY).
EBITDA is estimated at INR2.13b. EBITDA margin is likely to expand2.86pp YoY and 3.96pp QoQ to 14.2%, translating into blendedEBITDA/ton of INR660 (+INR204 QoQ), led by higher realization.PAT is expected to be INR608m in 4QFY19 (+72.5% YoY).
The stock trades at a P/E of 20.7x (FY20E) and 14.3x (FY21E),EV/EBITDA of 8.6x (FY20E) and 7.5x (FY21E), and EV/ton of US58(FY20E) and USD57 (FY21E). Maintain Neutral.
Key issues to watch out for Visibility on demand in south. Pricing outlook in south India.
Bloomberg ICEM IN
Equity Shares (m) 308.2 M. Cap. (INR b)/(USD b) 34 / 0 52-Week Range (INR) 156 / 75
1,6,12 Rel Perf. (%) 11 / 3 / -45
Financial Snapshot (INR Billion)
Y/E March 2018 2019E 2020E 2021E
Sales 51.7 55.7 61.5 67.6
EBITDA 6.9 6.6 7.9 8.9
NP 1.0 0.9 1.7 2.4
Adj. EPS (INR) 3.3 2.8 5.4 7.8
EPS Gr. (%) -42.0 -14.1 91.5 44.7
BV/Sh (INR) 168.8 170.4 174.6 181.2
RoE (%) 2.0 1.7 3.1 4.4
RoCE (%) 4.8 4.1 4.9 5.6
Payout (%) 24.5 41.4 21.6 14.9
Valuations P/E (x) 34.0 39.6 20.7 14.3
P/BV (x) 0.7 0.7 0.6 0.6
EV/EBITDA(x) 9.4 10.2 8.6 7.5
EV/Ton (USD) 57 58 58 57
April 2019 92
Quarterly Performance (INR m) Y/E March FY18 FY19 FY18 FY19E
JK CementCMP: INR 864 TP: INR 993 (+15%) Buy 4QFY19 volumes (grey cement + white) are estimated at 2.87m
tons (+5.4%YoY). Realizations are estimated to increase 0.9% QoQto INR5,142/ton.
We estimate EBITDA/ton at INR995 (+INR 152 QoQ), primarily dueto a lower cost curve and better realizations. EBITDA margin isexpected to expand 2.8pp QoQ to 19.4%.
PAT is estimated to grow 39% YoY to INR1.45b. The stock trades at a P/E of 19.9x (FY20E) and 16.4x (FY21E),
EV/EBITDA of 10.2x (FY20E) and 8.3x (FY21E), and EV/ton ofUSD92 (FY20E) and USD88 (FY21E). Maintain Buy.
Key issues to watch out for Volume growth outlook. Cement pricing outlook and sustainability.
Bloomberg JKCE IN
Equity Shares (m) 77.3 M. Cap. (INR b)/(USD b) 67 / 1 52-Week Range (INR) 1025 / 650
1,6,12 Rel Perf. (%) 10 / 8 / -32
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Sales 48.5 53.0 58.5 65.9
EBITDA 7.9 8.6 10.0 11.7
NP 2.9 2.8 3.4 4.1
Adj. EPS (INR) 41.0 35.8 43.4 52.7
EPS Gr. (%) 56.2 -12.6 21.1 21.5
BV/Share (INR) 282.4 283.9 318.8 363.1
RoE (%) 15.8 13.3 14.4 15.4
RoCE (%) 10.4 9.1 9.0 9.8
Payout (%) 30.8 23.6 19.5 16.0
Valuation
P/E (x) 21.1 24.1 19.9 16.4
P/BV (x) 3.1 3.0 2.7 2.4
EV/EBITDA (x) 11.0 9.6 10.2 8.3
EV/Ton (USD) 106 101 92 88
April 2019 93
Quarterly Performance (INR m) Y/E March FY18 FY19 FY18 FY19E
CMP: INR741 TP: INR853 (+15%) Buy 4QFY19 volumes are estimated to grow 10% YoY to 3.02m tons,
with growth from underlying markets of south. Averagerealizations are expected to increase by 5% QoQ to 4,603/ton dueto strong prices in the south.
EBITDA margin is likely to expand 4.8pp QoQ (+0.8pp YoY) to22.3%. EBITDA/ton (ex-windmill) is estimated at INR 1042 (+INR42YoY, +INR258 QoQ) due to higher realization.
PAT is estimated to increase 19% YoY to INR1.6b. The stock trades at a P/E of 26x (FY20E) and 20x (FY21E),
EV/EBITDA of 14.2x (FY20E) and 10.8x (FY21E), and EV/ton ofUSD130 (FY20E) and USD123 (FY21E). Maintain Buy.
Key issues to watch out for Volume growth recovery and outlook. Cement pricing outlook and demand sustainability in south (AP
and Tamil Nadu).
March 2019 Results Preview| Sector: Cement
Ramco CementsBloomberg TRCL IN Equity Shares (m) 235.6 M. Cap. (INR b)/(USD b) 175 / 3 52-Week Range (INR) 879 / 546 1,6,12 Rel Perf. (%) -1 / 6 / -17
Financial Snapshot (INR Billion) Y/E MARCH 2018 2019E 2020E 2021E
Sanghi IndustriesCMP: INR64 TP: INR76 (+18%) Buy We expect 4QFY19 cement volumes to increase 10% YoY to 0.68mt
due to an increase in sales in the new markets of Mumbai.Realizations are expected to increase 2.4% QoQ to INR4,102/tondue to healthy prices in west.
Revenue is estimated at INR2.8b (+10% YoY; +5% QoQ) and EBITDAat INR381m (-8%YoY; +19%QoQ), translating into margin of 13.6%(-2.6pp YoY; +1.6pp QoQ), led by QoQ realization increase.Adjusted PAT is likely to be INR40m (-78% YoY).
The stock trades at a P/E of 28.2x (FY20E) and 26.6x (FY21E),EV/EBITDA of 14.5x (FY20E) and 8.9x (FY21E), and EV/ton of USD 50(FY20E) and USD50 (FY21E). Maintain Buy.
Key issues to watch out for Volume and pricing recovery for western region. Update on expansion projects.
Bloomberg SNGI IN
Equity Shares (m) 251.0 M. Cap. (INR b)/(USD b) 16 / 0 52-Week Range (INR) 128 / 51
1,6,12 Rel Perf. (%) -3 / -13 / -64
Financial Snapshot (INR Billion) Y/E March FY18 FY19E FY20E FY21E
Shree CementCMP: INR 18,505 TP: INR21,198(+15%) Buy We expect 4QFY19 cement volumes to grow 9.3% YoY to 7.04m
tons, led by healthy growth in underlying markets. Realizations areexpected to increase 2% QoQ to INR4,401/ton.
Revenue is estimated at INR33b (+18% YoY) and EBITDA atINR8.6b, translating into margin of 26% (+3.6pp YoY; +1.2ppQoQ)due to better realizations and lower cost curve.
We expect power EBITDA to be ~INR405m. SRCM should report EBITDA/ton of INR1168 (+INR100 QoQ), led by
QoQ increase in realization and lower cost curve. Adjusted PAT is likely to be INR3.55b (-11% YoY).
The stock trades at a P/E of 40x (FY20E) and 30x (FY21E), EV/EBITDA of 16.8x (FY20E) and 13.2x (FY21E), and EV/ton of USD188 (FY20E) and USD171 (FY21E). Maintain Buy.
Key issues to watch out for Volume and pricing recovery for north India. Update on various expansion projects. New expansion plans.
Bloomberg SRCM IN
Equity Shares (m) 34.8 M. Cap. (INR b)/(USD b) 645 / 9 52-Week Range (INR) 19260 / 13125
1,6,12 Rel Perf. (%) 2 / 3 / -5
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Sales 98.3 117.5 137.6 157.3
EBITDA 24.3 28.0 35.4 43.0
NP 13.4 12.9 16.0 20.9
Adj. EPS (INR) 385.8 371.5 459.7 600.3
EPS Gr. (%) 0.4 -3.7 23.7 30.6
BV/Share (INR) 2,554 2,775 3,172 3,708
RoE (%) 16.2 13.9 15.5 17.4
RoCE (%) 13.7 11.2 12.8 14.5
Payout (%) 15.2 21.7 13.6 10.6
Valuation
P/E (x) 48.0 49.8 40.3 30.8
P/BV (x) 7.2 6.7 5.8 5.0
EV/EBITDA (x) 25.6 21.8 16.8 13.2
EV/Ton (USD) 241 220 188 171
April 2019 96
S/A Quarterly Performance (INR m) FY18 FY19 FY18 FY19E
UltraTech CementCMP: INR4,021 TP: INR4,688 (+17%) Buy 4QFY19 grey cement volumes are estimated at 19.37m tons,
including JPA’s volumes. Realizations are estimated to increase1.6% QoQ to INR5,004/ton.
We estimate EBITDA/ton at INR931 (+INR154 QoQ), primarily dueto lower cost curve and healthy realization. EBITDA margin isexpected to expand 2.8pp QoQ to 18.6%.
EBITDA is estimated to increase 6% YoY to INR18b, while PATshould increase by 1% YoY to INR7.2b due to higher depreciationand interest.
The stock trades at a P/E of 38x (FY20E) and 29x (FY21E),EV/EBITDA of 16.1x (FY20E) and 13x (FY21E), and EV/ton ofUSD170 (FY20E) and USD159 (FY21E). Maintain Buy.
Key issues to watch out for Volume growth recovery and outlook. Cement pricing outlook and sustainability. Update on JPA’s operations.
Bloomberg UTCEM IN
Equity Shares (m) 274.4 M. Cap. (INR b)/(USD b) 1103 / 16 52-Week Range (INR) 4490 / 3264
1,6,12 Rel Perf. (%) -5 / -5 / -16
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Sales 293.6 350.2 443.7 493.1
EBITDA 58.8 61.1 78.0 93.1
NP 23.5 21.6 30.6 39.4
Adj. EPS (INR) 85.7 78.6 106.0 136.6
EPS Gr. (%) -10.9 -8.3 41.7 28.9
BV/Share (INR) 944 1,010 1,254 1,382
RoE (%) 9.4 8.0 9.6 10.4
RoCE (%) 8.5 7.0 8.0 8.7
Payout (%) 15.6 16.3 13.2 11.2
Valuation
P/E (x) 46.9 51.2 37.9 29.4
P/BV (x) 4.3 4.0 3.2 2.9
EV/EBITDA (x) 20.6 19.5 16.1 13.0
EV/Ton (USD) 198 186 170 159
April 2019 97
Moderation in sales likely for the quarter Lowest PAT growth in seven quarters likely, rural to outpace urban growth again
APNT/MRCO/BRIT/HUVR to report healthy earnings in a weak environment Various industry players have cited a relatively weak environment in 4QFY19. However, companies believe that government schemes aimed at boosting consumption, particularly in rural India, will likely revive demand 1QFY20 onward. Meanwhile, 4QFY19 top-line numbers are likely to be muted due to relative moderation in volume growth and low price realization as a result of tepid material costs/and or promotion spends. Rural growth is likely to outpace urban growth YoY for the seventh consecutive quarter in 4QFY19, but the extent of outperformance is likely to moderate (was ~1.3x in earlier quarters). On the margins front, the pressures are likely to abate in 4QFY19 (unlike the previous quarter) due to a decline in material costs. Aggregate sales are likely to grow at 11.7% YoY, while EBITDA/PAT growth is estimated at 11.3%/7.8%. Aggregate PAT growth is likely to come in lowest in seven quarters.
HUVR’s sales growth is expected to come in at ~9.5% YoY (with 8% volume growth). Lower material costs and cost savings are likely to drive EBITDA growth of 14.4% YoY and adj. PAT growth of 11.9%. We expect ITC to report 7% cigarette volumes increase, driving sales growth of 13.6% YoY and PAT growth of 8.9% YoY. Strong all-round numbers are expected from APNT. Emami, Dabur, GCPL, Jyothy and Colgate are likely to report tepid numbers (PAT growth between -5% to +5%). Marico is expected to report double-digit sales growth and over 20% PAT growth owing to margin expansion. UNSP is likely to report weak top line as a result of a delay in passing on excise increase in Maharashtra and up-stocking in Karnataka in the base.
Commodity costs are largely benign For 4QFY19, PFAD prices declined by 21.4% YoY but increased marginally QoQ. Mentha prices declined 5.3% QoQ but were still up 12.2% YoY. Barring wheat (for which prices were down sequentially by 2.2% but up 14.7% YoY), many agri commodities saw a decline in prices YoY – e.g. sugar (-3.1%), palm oil (-18.7%) and cashew (-8.0%). Barley costs were flat QoQ but up sharply 29.5% YoY. Copra costs declined in double-digits YoY. VAM costs declined in double-digits YoY, but Pidilite will benefit only in subsequent quarters. Molasses costs remained benign.
Preference for quality and longevity of growth Our framework for earnings visibility, longevity of growth and quality management drives our choices in the sector universe. We continue preferring BRIT, HUVR and MRCO. We recently upgraded UNSP to Buy owing to favorable risk-reward after price correction. The FY20 outlook on industry growth appears robust, and medium-term margin expansion triggers are intact. We downgraded UBBL (now rated Neutral), for which we believe the best in terms of earnings growth (especially on margin improvement) is in the past, which, along with fair valuations, will limit upside.
Asian PaintsCMP: INR1,516 TP: INR1,530 (+3%) Neutral We expect revenue to grow 16.7% YoY to INR52.3b in 4QFY19,
with double-digit volume growth in the domestic decorativebusiness.
We note that crude prices are down 5.7% YoY and 6.7% QoQ in4QFY19. The magnitude of price movement in crude derivatives islower vis-à-vis crude prices.
We expect gross margin to contract slightly by 10bp YoY to 43.1%. Operating margin is likely to remain flat at 18.8%, with EBITDA
growing 16.9% YoY. We estimate 17.8% adjusted PAT growth for the quarter. The stock trades at 53.5x/44.6x FY20E/21E EPS of INR28.3/INR34.
Maintain Neutral.
Key issues to watch for Volume growth trends and demand scenario in urban and rural
geographies. Market share trends. Outlook for raw materials. Commentary on pricing action.
Bloomberg APNT IN
Equity Shares (m) 959.2 M. Cap. (INR b)/(USD b) 1454 / 21 52-Week Range (INR) 1520 / 1113
CMP: INR2,994 TP: INR3,700 (+24%) Buy We expect Britannia’s (BRIT) sales to grow 8.3% YoY to INR27.5b,
with base business volumes growing 6% on a high base of +11%.
Wheat prices are up 14.7% YoY (down 2.2% QoQ), while sugarand cashew prices are benign. Milk/SMP prices are now startingto see some inflation. We build in gross margin expansion of200bp YoY to 40.5%.
We expect 50bp YoY expansion in the operating margin to 16.1%.
EBITDA and adj. PAT are thus likely to grow 11.6% and 13.4% YoY,respectively.
The stock trades at 50.7x/42.9x FY20E/21E EPS ofINR59.1/INR69.8. Maintain Buy.
Key issues to watch for Pace of growth in erstwhile weak states. Direction on future volume growth. Outlook for raw materials. Update on dairy business.
April 2019 103
CMP: INR1,247 TP: INR1,555 (+25%) Buy We expect Colgate’s (CLGT) sales to grow 8.7% YoY to INR11.9b,
with 6% toothpaste volume growth.
Gross margins are expected to contract by 60bp YoY to 65.1%.
We estimate EBITDA margin to expand by just 10bp YoY to 28.3%.
Hence, we have modeled EBITDA growth of 9.1% to INR3.4b andadjusted PAT growth of 3.5% to INR2b for the quarter.
The stock trades at 38.8x/33.7x FY20E/21E EPS of INR32.1/INR37.Maintain Buy.
Key issues to watch for Volume growth in toothpaste. Market share movement. Ad spends and competitive intensity in toothpaste.
Bloomberg CLGT IN
Equity Shares (m) 272.0 M. Cap. (INR b)/(USD b) 339 / 5 52-Week Range (INR) 1365 / 1020
1,6,12 Rel Perf. (%) -8 / 7 / 2
Financial Snapshot (INR b) Y/E March 2018 2019 2020E 2021E
Emami CMP: INR410 TP: INR540 (+32%) Buy We project Emami’s (HMN) sales to grow 5.1% YoY at INR6.5b in
4QFY19, with 2% domestic volume growth on a base of 8%volume growth.
Gross margin is likely to contract 100bp to 64.2% in the quarter.Mentha prices were up 12.2% YoY (-5.3% QoQ).
We expect EBITDA margin to contract 160bp to 26.5%. Thus,EBITDA is likely to decline by 0.9% YoY to INR1.7b.
PAT before amortization is expected to grow 4.2% YoY to INR1.3b.
The stock trades at 28.7x/25.1x FY20E/21E EPS ofINR14.3/INR16.4. Maintain Buy.
Key issues to watch for Volume growth and broad consumer demand across categories. Outlook for mentha oil prices. Competitive intensity. Performance of Kesh King.
Bloomberg HMN IN
Equity Shares (m) 453.9 M. Cap. (INR b)/(USD b) 186 / 3 52-Week Range (INR) 602 / 338
1,6,12 Rel Perf. (%) -5 / -24 / -42
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Sales 25.3 27.0 30.3 34.2
EBITDA 7.2 7.5 8.7 9.9
NP 5.5 5.7 6.5 7.4
EPS (INR) 12.1 12.5 14.3 16.4
EPS Gr. (%) -8.5 2.7 14.7 14.5
BV/Sh. (INR) 44.4 47.9 49.6 49.9
RoE (%) 29.2 27.0 29.4 32.9
RoCE (%) 28.2 29.0 34.7 39.7
Payout (%) 21.6 44.1 52.5 61.1
Valuations
P/E (x) 33.8 32.9 28.7 25.1
P/BV (x) 9.2 8.6 8.3 8.2
EV/EBITDA (x) 25.8 24.6 21.0 18.5
Div. Yld (%) 0.6 1.3 1.8 2.4
April 2019 106
Consolidated - Quarterly Earning Model Y/E March FY18 FY19 FY18 FY19E
Future Consumer CMP: INR45 TP: INR58 (+30%) Buy We expect Future Consumer’s (FCON) sales to grow 25.9% YoY to
INR10.2b.
Gross margins are expected to remain flat YoY at 12.9% (up 10bpQoQ).
We estimate EBITDA margin expansion of 70bp YoY to 2.8% (upjust 10bp QoQ). Hence, we have modeled EBITDA growth of71.9% in the quarter with adj. loss of INR41m.
The stock trades at 1.6x/3.1x FY20E/21E EV/sales. Buy.
Key issues to watch for Whether the pace of top-line growth will be sustained. Extent of gross margin expansion. Flow of gross margin expansion into EBITDA margin.
Commentary on working capital
Bloomberg FCON IN
Equity Shares (m) 1902.1 M. Cap. (INR b)/(USD b) 85 / 1 52-Week Range (INR) 63 / 35
1,6,12 Rel Perf. (%) -14 / 9 / -37
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
MaricoCMP: INR346 TP: INR460 (+33%) Buy We expect sales to grow 12.1% YoY to ~INR16.6b, with 8.5%
growth in domestic volumes.
We observe that copra prices are down 16.5% YoY, while kardi oilprices are up 10.9% YoY (till Feb’19). We are modeling grossmargin expansion of 70bp YoY to 47.3%.
EBITDA is expected to grow at 18.5% YoY, with margin expansionof 100bp YoY to 18.5% in the quarter.
Adjusted PAT is projected to grow by 22.7% YoY to ~INR2.2b,higher than EBITDA growth, due to a low tax rate in the base.
We like MRCO’s franchise, portfolio strength, managementquality and multiple growth drivers. The stock trades at39.3x/32.4x FY20E/21E EPS of INR8.8/INR10.8; we have a Buyrating on the stock and is one of our top picks.
Key issues to watch for Comments on volume growth trends across key categories. Outlook for raw materials. Margin expansion and guidance for international business.
Bloomberg MRCO IN
Equity Shares (m) 1289.6 M. Cap. (INR b)/(USD b) 446 / 6 52-Week Range (INR) 397 / 286
1,6,12 Rel Perf. (%) -5 / -3 / -12
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Page IndustriesCMP: INR25,225 TP: INR27,515 (+9%) Neutral We expect Page to report net sales of INR7b, up 15.6% YoY, led by
double-digit volume growth.
We expect EBITDA margin to be down by 230bp YoY to 21.8% ledby contraction in gross margin of 410bp YoY (as base marginswere high). Thus, EBITDA should grow by just 4.6% YoY toINR1.5b.
Adjusted PAT is likely to grow 9.4% YoY to INR1b.
The stock trades at 53.4x/44x FY20E/21E EPS of INR472/INR573.3;we maintain Neutral on account of fair valuations.
Key issues to watch for Performance of kidswear. Competitive intensity, especially in men’s and women’s
innerwear. Any update on minimum wage hike in Karnataka for the textile
industry.
Bloomberg PAG IN
Equity Shares (m) 11.2 M. Cap. (INR b)/(USD b) 281 / 4 52-Week Range (INR) 36062 / 20241
CMP: INR541 TP: INR690 (+28%) Buy We expect United Spirits (UNSP) to post revenue growth of 3.8%
to INR22.6b, with 1.9% decline in volumes, as a result of a delay inpassing on excise increase in Maharashtra, up-stocking inKarnataka in the base and disruptions in UP in 4QFY19. Whileprestige & above volumes are expected to grow 7.1%, popularvolumes are modeled to be down 9.9%.
Gross margins are expected to contract 50bp YoY to 48.2%.
We expect EBITDA margin to be up 10bp to 12.7% and EBITDAgrowth of 4.8% YoY to INR2.9b.
We estimate adjusted PAT of ~INR1.5b in 4QFY19, down 20.5%YoY, mainly due to steep decline in other income. Buy.
Key issues to watch for Trends in volume growth, premiumization and margins. Price trend and outlook for ENA/molasses.
Bloomberg UNSP IN
Equity Shares (m) 726.5 M. Cap. (INR b)/(USD b) 393 / 6 52-Week Range (INR) 731 / 439
Earnings set to improve driven by corporate banks Margins to remain stable; Deposits traction – a key monitorable
Corporate banks to drive earnings recovery; expect 79% YoY PAT growth forprivate banks: We expect banking system earnings to pick up sharply, led bystable/expanding NIMs, moderate credit costs, stability in fee income andtreasury book. Margin cycle is set to recover as loan book re-prices over FY19,offsetting the impact of higher cost of funds. We expect private banks to report~79% YoY PAT growth, led by a sharp pick-up in profitability of AXSB and ICICIBCas the provisioning requirement moderates. However, PAT growth is likely toremain muted at ~2% QoQ, as banks will be making higher provisioning towardsIL&FS exposure (like IIB) and the resolution of key NCLT cases is getting delayed.PSU banks will likely report PAT growth of ~2% QoQ on the back of lowerslippages and a decline in the provisioning requirement, though we remainoptimistic on the earnings trajectory during FY20/21E.
NII to grow at 21%/19% YoY for private/PSU banks; mid-sized private banks tomaintain strong traction: We expect private banks to record NII growth of21.3% YoY, led by stronger growth in mid-sized private banks – IIB (~20% YoY),YES (~28% YoY) and RBL Bank (~40% YoY). SFBs Equitas and AUBANK wouldcontinue reporting healthy growth of 39% and 32%, respectively. Among PSUs,PNB/BOB/SBIN are expected to report strong ~45%/23%/15% YoY growth in NII,while INBK is likely to report modest growth.
Systemic credit growth at five-year high; private banks to maintain steadymomentum: Systemic credit growth has remained strong and recovered to afive-year-high of ~14.5% YoY, driven by (a) strong growth in the retail/servicessegment, (b) pick-up in industrial growth (5.1% YoY), and (c) the recent liquiditycrisis witnessed by NBFCs, which led to incremental credit disbursements andportfolio buyouts by the banks. We expect loan growth to remain steady, led bycontinued strength in the retail segment, portfolio buyouts from NBFCs due tosustained funding pressure, the government’s recent capital infusion in PSUbanks, and the RBI’s decision to bring six banks out of PCA.
Stance on IL&FS exposure is to be watched for; bond yields largely stable: Mostbanks have downgraded their exposure towards IL&FS holding co and have madeadequate provisions on the same. However, exposure toward the SPVs was keptstandard by some banks. With the NCLAT now giving the relaxation for notdeclaring these accounts as NPA, the stance of banks toward these accountswould be a key monitorable – though we expect status quo to sustain. Bond yieldshave remained largely stable over 4QFY19 while capital markets have performedwell. We, thus, expect banks to report modest treasury gains.
Mid-sized private banks to maintain stronger growth; improvement tocontinue for PSU banks: We expect profitability to pick up to ~79% YoY (~12%YoY exlcluding ICICIBC and AXSB) for private banks and improve for PSU banks.Mid-sized private banks will continue recording superior PAT growth (35%YoY/27% YoY for RBK/AUBANK), barring IIB, which is estimated to report asequential decline due to higher provisioning. PSU banks’ earnings, too, areexpected to pick up.
Other monitorables: (a) Margins trajectory, particularly as the loan book re-pricing happens, (b) Growth in deposits has been consistently lagging the loangrowth by ~500bp for most of FY19 resulting in stretched CD ratios for privatebanks. Thus, traction in deposits would be a key factor, (c) Asset qualityclassification and provisioning requirement toward IL&FS (especially after therecent relaxation by the NCLT), (d) Commentary on stress assets in theSME/business banking segment. (e) Trends in overall business growth and assetquality.
Our top picks –AXSB, ICICIBC and HDFCB AXSB (BUY): Asset quality will continue improving, as the bank has already
increased the PCR to 75%, which will further curb incremental provisioningrequirement. This, along with an improving outlook on fresh slippages/creditcost, would result in normalized earnings. Retail franchise has strengthened,which is likely to support margins and keep funding cost stable. Fee income hasbecome highly granular, with retail and transaction banking forming 80% of thebank’s fees, driven by cards/third-party distribution, and is expected tocontribute significantly to RoA. AXSB disclosed its FY20-22 strategy with the keyvectors being (i) Growth, (ii) Profitability and (iii) Sustainability. The bank aims todeliver 18% RoE over the medium term, led by reducing credit cost below itslong-term average, improving operating efficiency and optimizing the businessmix. We believe in management's focus on delivering long-term sustainablegrowth, expecting earnings to accelerate FY20 onward.
ICICIBC (BUY): The bank's strong operating performance has beenovershadowed by the continued pressure on asset quality. However, with asuccessive decline in the size of watch-list, controlled slippages from coreportfolio and bottoming out of the NPL ratios over FY19, we expect ICICIBC'sreturn profile to improve steadily. Watch-list has declined successively, whilePCR has increased sharply to 68.5%. We derive comfort on asset quality from (a)bulk of slippages happening from watch-list/OSRL, (b) of the total power sectorexposure, excluding state electricity boards, ~81% is rated A- and above and (c)relatively low concentration of deeper-stressed sectors such as power on watch-list. Retail business matrix remains healthy, with (a) robust liability franchise(CASA ratio of 49.3% as of 3QFY19), (b) retail contribution to fees at 73%+ and(c) higher share of secured loans.
HDFCB (BUY): With structural drivers in place – (a) best-in-class liabilityfranchise, (b) opportunities for market share gains, (c) improving operatingefficiency led by digitalization initiatives and (d) expected traction in income dueto strong expansion in branch network – we expect HDFCB to record strong loangrowth and profitability. Retail growth has been led by contribution from thehigh-RoE products like personal loans, LAS and credit cards. Over the last 12years, HDFCB's market share has increased significantly in (a) retail loans, (b)low-cost deposits and (c) profitability, indicating the strength of its franchisee.Margin expansion, a robust fee income profile and strong control on operatingleverage are likely to continue driving a steady improvement in the returnratios, in our view. We believe that strong capitalization and liquidity levelsshould enable HDFCB to sustain growth momentum over the next few years.
March 2019 Results Preview | Sector: Financials
April 2019 121
Exhibit 1: 4QFY19 earnings estimate (INR m)
CMP (INR) RECO
NII PPoP PAT
Mar-19 YoY (%)
QoQ (%) Mar-19 YoY
(%) QoQ (%) Mar-19 YoY
(%) QoQ (%)
Private Banks AU Small Finance Bank 608 Buy 3,790 32.1 8.9 1,975 27.8 10.5 1,055 27.1 10.7 Axis Bank 767 Buy 56,173 18.7 0.2 45,717 24.5 -17.2 15,185 NM -9.7DCB Bank 203 Neutral 3,126 18.5 6.5 1,852 30.8 6.5 928 44.5 7.8 Equitas Holdings 138 Buy 3,454 39.0 7.9 1,437 113.2 17.3 705 102.4 12.9 Federal Bank 98 Buy 11,278 20.9 4.7 7,459 26.7 5.4 3,526 143.2 5.7 HDFC Bank 2,297 Buy 1,32,442 24.3 5.3 1,10,439 25.0 2.5 58,033 20.9 3.9 ICICI Bank 397 Buy 68,393 13.6 -0.5 62,332 -17.0 1.4 21,628 112.0 34.8 IndusInd Bank 1,776 Buy 24,037 19.7 5.1 22,576 27.6 6.6 5,261 -44.8 -46.6Kotak Mahindra Bank 1,339 Neutral 31,262 21.2 6.4 24,773 22.8 27.8 13,880 23.5 7.5 RBL Bank 678 Buy 6,984 39.5 6.6 5,337 39.3 7.1 2,400 34.7 6.6 Yes Bank 280 Buy 27,614 28.2 3.6 25,006 17.1 25.6 9,709 -17.7 -3.1Pvt Banking Sector Aggregate 3,68,555 21.3 3.4 3,08,900 13.2 2.4 1,32,309 79.0 2.2 PSU Banks Bank of Baroda 133 Buy 49,097 22.7 3.5 35,797 34.3 1.2 6,567 NM 39.4 Indian Bank 282 Buy 17,507 6.9 2.0 12,527 7.6 9.3 1,808 37.0 18.7 Punjab National Bank 98 Neutral 44,324 44.7 3.3 34,738 NM 12.1 4,400 NM 78.5 State Bank 329 Buy 2,29,386 14.8 1.1 1,55,768 -1.9 23.4 36,498 NM -7.7PSU Banking Sector Aggregate 3,40,313 18.7 1.8 2,38,829 24.0 17.0 49,273 NM 2.1 Banking Sector Aggregate 7,08,868 20.0 2.6 5,47,730 17.7 8.3 1,81,582 NM 2.1 Life Insurance HDFC Standard life 380 Buy 95,414 7.2 38.3 4,317 27.4 68.3 4,044 16.6 64.6 ICICI Prudential life 369 Buy 1,03,911 20.0 38.9 3,636 0.6 22.2 2,692 -21.0 -9.3Life Insurance Aggregate 1,99,325 13.5 38.6 7,953 13.6 43.6 6,736 -2.0 24.2 Note: For HDFC life and IPRU life NII represents net premium income, PPoP represents shareholder’s PBT and PAT represents shareholder's profit
Exhibit 4: System loan growth stable at ~14%-15% Exhibit 5: Deposit growth also picked up to ~10%
Exhibit 6: IL&FS exposure and provision thereon INRm Exposure Provision
Axis Bank 8,300 500
Bandhan Bank 3,885 3,850
Federal Bank 2,450 184
ICICI Bank* 8,210 NA
IndusInd Bank 30,000 6,000
RBL Bank 150 NA
South Indian Bank 4,000 600
Yes Bank 26,180 5,708
Bank of Baroda 46,800 4,092
Bank Of India 36,000 3,630
Canara Bank 22,700 4,000
Indian Bank 17,650 2,500
State Bank Of India 31,000 4,500
Union Bank Of India 10,930 150 *Includes downgrades to a group engaged in infrastructure, infra-financing and EPC business and some other accounts (fund and non-fund)
Exhibit 7: NIMs are likely to remain stable driven by lower interest reversals
CMP: INR767 TP: INR875 (+14%) Buy We expect AXSB to report ~16% loan growth, driven by continued
strong growth in the retail and SME segments. Deposit growth islikely to be ~20%, resulting in a CD ratio of ~94%.
Margins are likely to remain stable QoQ at ~3.5%. Net stressed loans for the bank have declined to 5.2%, while the
bank has already improved its coverage ratio to 75% (Incl. TWO).We expect slippages to remain at ~3.1% (from ~17.7% a year ago)as the bank proceeds to clean up its balance sheet.
We estimate PAT of INR15.2b v/s loss of INR21.9b in 4QFY18, thusresulting in total PAT of INR46.9b for FY19.
AXSB trades at 2.4x FY21E ABV. Buy.
Key issues to watch for Quantum of corporate slippages from BB and below list and any
revision in the size of the stressed assets. Outlook on the power assets. Bank's strategy on retail, unsecured and business banking loans.
Bank of Baroda CMP: INR133 TP: INR160 (+20%) Buy We expect loan book to grow at 11% YoY and deposit growth to
remain moderate at 7% YoY. We expect drill-down in theinternational book to continue and the focus to remain ongranular retail loans.
We expect margins to improve to 2.8% on account of re-pricing ofloans and an improvement in international margins.
We expect slippages to moderate (0.6% annualized) and GNPA/NNPA to decline to 10.9%/3.6%.
Management aims to develop more sustained fee income streams, which, coupled with an improvement in treasury performance, is expected to result in an uptick in other income.
PAT is expected to be at INR6.6b v/s INR4.7b in 3QFY19. PAT for FY19 is expected to be INR20.8b. The stock trades at 0.8x FY21E ABV. Buy.
Key issues to watch for Movement of the watch-list and stress addition from the
exposure toward infra group and international book. Developments on the merger front and the possible benefits
DCB Bank CMP: INR203 TP: INR190 (-7%) Neutral Loan growth (24% YoY) and deposit growth (23% YoY) are
expected to remain high off a low base. Growth will be driven byretail loans; management intends to grow corporate loan at sub20%.
Non-interest income to remain muted (+10% YoY) on account oflower fee income.
Overall, we expect PPoP growth to remain strong at ~31% YoY,supported by lower opex (+ ~7% YoY), as the pace of branchaddition is expected to slow down. Credit cost is likely to remainelevated owing to the potential stress in the SME and LAPsegments (we factor in ~2.0% slippage ratio for 4QFY19). We,thus, expect PAT growth of ~45% YoY to INR928m (INR3.2b forFY19).
DCBB trades at 1.7x FY21E ABV. Expensive valuations leavelimited room for upside. Maintain Neutral.
Key issues to watch for Management commentary on slippages in the SME/LAP
segment and the potential restructuring due to RBI guidelines. NIM compression due to higher cost of funds. Management guidance on the cost ratios, particularly as the
pace of branch addition moderates.
Bloomberg DCBB IN
Equity Shares (m) 309.3 M. Cap. (INR b)/(USD b) 63 / 0.9 52-Week Range (INR) 209 / 140
Equitas Holdings CMP: INR138 TP: INR160 (+16%) Buy We expect NII growth of 39% YoY due to (a) pick-up in loan
growth and (b) recalibration in the liability side (sufficientavailability of funds). AUM is expected to grow ~50% YoY, as thesecuritized portfolio continues to run down.
NIM is expected to contract by ~31bp QoQ to 8.7% on account ofan increase in cost of funds and a moderation in yields.
Opex growth is expected to stay elevated at 21% YoY (v/s 42%YoY growth in total income), with increase in both employee andother expenses led by investment in further branch additions.
GNPA ratio is likely to remain stable at 3%, with NNPA ratio of1.6%.
The stock trades at 1.6x FY21E ABV. Maintain Buy.
Key issues to watch for Asset quality of MSME book remains a key monitorable. Commentary on growth and asset quality in MFI book.
Federal Bank CMP: INR98 TP: INR115 (+18%) Buy We expect FB to report loan growth of ~21% YoY (5% QoQ), aided
by the renewed focus on corporate growth. Traction in SME andretail loans would be maintained. We expect NIM to be ~3.2% forthe quarter, aided by MCLR re-pricing and lower interest reversal.
Other income (+18% YoY) is likely to grow at a healthy rate, aidedby strong fee income. We expect PPoP growth of ~27% YoY,significantly higher than opex growth of 14% YoY.
We expect slippages to moderate (1.4% annualized) during thequarter, with most of the dispensation from Kerala floods beingrecognized.
We expect PAT of INR3.5b v/s INR1.5b in 4QFY18 and INR3.3b in3QFY19. PAT for FY19 is expected to be at INR12.1b. FB trades at1.3x FY21E ABV. Buy.
Key issues to watch for Outlook on slippages, asset quality and growth post the recent
floods in Kerala and restructuring of MSME loans. Strategy on balance sheet growth, particularly corporate loan
HDFC Bank CMP: INR2,297 TP: INR2,650 (+15%) Buy Loan growth is expected to remain healthy at ~23% YoY, driven by
retail loans, while deposit growth is estimated at ~21% YoY, led byan increase in term deposits.
Calculated margins are likely to pick up to 4.4% as NII is expectedto grow at ~24% YoY.
Other income growth is expected to come in at ~16% YoY,factoring in healthy fee income and stable treasury performance.
Opex growth at 17% YoY is likely to trail total income growth of~22% YoY (aided by the bank's strong digital initiatives), leading toPPoP growth of ~25% YoY.
We estimate 4QFY19 PAT at INR58b (up ~21% YoY), resulting intotal PAT of INR209.9b for FY19.
Asset quality is expected to remain stable, with GNPA at ~1.4%. HDFCB trades at 3.4x FY21E ABV. Buy.
Key issues to watch for Management indicated some stress in SME and retail book.
Hence, the outlook on the same will be a key monitorable. Trends in digital banking/payments and various initiatives.
Bloomberg HDFCB IN
Equity Shares (m) 2,719.5 M. Cap. (INR b)/(USD b) 6,245 / 88.5 52-Week Range (INR) 2,332 / 1,880
ICICI Bank CMP: INR397 TP: INR470 (+18%) Buy We expect loan growth to come in at ~14% YoY, driven largely by
retail loans. Corporate loan growth would be moderate, whileoverseas book would continue declining. Deposits are expected togrow at ~13% YoY, mainly driven by growth in term deposits.
NIMs are expected to be under slight pressure due to an increasein funding cost. NII is expected to grow ~14% YoY.
Other income is likely to grow at 6% QoQ to INR41.2b. Gross slippages are expected to moderate to 2.0% due to a
reduction in corporate slippages. Net stress loans (incl. BB &below) as on 3QFY19 stood at 6.8% of loans and are expected todecline further as incremental stress addition moderates.
We expect PAT of INR21.6b v/s INR10.2b in 4QFY18 and INR16b in3QFY19. We expect ICICIBC to report PAT of INR45.6b for FY19. ICICIBC trades at 1.7x FY21E consolidated ABV. Buy.
Key issues to watch for Movement of BB and below pool and commentary on power
assets. Outlook on asset quality and trend on further relapse from
restructured loans. Growth in CASA + retail term deposits.
Indian Bank CMP: INR282 TP: INR325 (+15%) Buy Loan growth is expected to remain at ~14% YoY (+3.9% QoQ), led
by balance sheet recalibration. Deposit growth is expected to pickup to ~12% YoY (3.5% QoQ).
Calculated NIM is expected to expand slightly at ~3%, while NIIgrowth is likely to come in at ~7% YoY.
Overall non-interest income is expected to increase, primarily ledby improved treasury gains.
We expect the slippage ratio to moderate to 3.2% from the highlevels seen over the past 3-4 quarters and the NNPA ratio todecline to 4.2%, improving the coverage ratio to 46%.
INBK trades at 0.79x FY21E ABV. Maintain Buy.
Key issues to watch for Outlook on business growth. Incremental slippages could provide some overhang. Views on margin trajectory.
IndusInd Bank CMP: INR1,776 TP: INR2,050 (+15%) Buy We expect IIB to report strong loan growth of ~32% YoY in
4QFY19, significantly ahead of system loan growth. Depositgrowth should also remain strong at ~22% YoY. Margins are likelyto remain flattish QoQ at ~3.9%.
We expect non-interest income to grow ~26% YoY, supported byhealthy fee income growth. Stronger third-party distribution feesand treasury gains will further support non-interest income.
Opex growth would remain at ~15% YoY v/s 22% growth in totalincome. PPoP growth would remain healthy at 28% YoY.
We expect earnings to remain under pressure and report a PATof INR5.3b in 4QFY19 (INR34.7b for FY19) on account of elevatedprovisions due to IL&FS.
IIB trades at 2.8x FY21E ABV. Maintain Buy.
Key issues to watch for Impact on the CV portfolio, particularly after the slowdown in
CV sales. Corporate asset quality will be a key monitorable. Provisioning and further developments on the IL&FS exposure
Kotak Mahindra Bank CMP: INR1,339 TP: INR1,350 (+1%) Neutral We expect standalone bank to report loan growth of ~22% YoY
and deposit growth of ~18% YoY in 4QFY19. Margins are likely toexpand marginally to ~4.4%. Overall, we expect NII growth of 21%YoY. CASA retention would be a key driver of NII and NIM.
With strong digital initiatives and fast-paced customer acquisition,fee income would be a key growth driver for the bank. We factorin other income growth of ~12% in 4QFY19, driven mostly byhealthy fee traction and expect the trend to continue.
We expect asset quality to remain stable, with GNPA at ~2.1% andNNPA at 0.7%, led by an improvement in the coverage ratio.
We expect standalone bank earnings to grow ~23% YoY(INR13.9b) for 4QFY19. We thus expect FY19 PAT of INR48.5.
The stock trades at 3.4x FY21E consolidated BV. Maintain Neutral.
Key issues to watch for Guidance on balance sheet growth, CASA and fee income
growth. Trend in customer acquisition post the Aadhar verdict. GNPAs in the MSME segment. Update on the stake reduction.
RBL Bank CMP: INR678 TP: INR650 (-4%) Buy Loan growth (+36% YoY, driven by credit card/MFI business) and
deposit growth (+33% YoY) are expected to remain robust andsignificantly above industry average.
We expect NII to grow ~40% YoY, led by strong loan growth andfavorable NIMs. Increase in yields is expected to offset higher costof funds.
Overall non-interest income is expected to grow ~31% YoY, led bystrong growth in fee income and digital initiatives. Opex growthof 34% (led by branch expansion) is expected to trail total incomegrowth of 36%, leading to an increase in PPoP by 39% YoY toINR5.3b.
Asset quality is expected to remain largely stable in 4QFY19, withthe MFI segment showing lower delinquencies. Credit costs wouldlargely be under control. We expect PAT growth of 35%/7%YoY/QoQ to INR2.4b.
RBK trades at 3.1x FY21E ABV. We maintain our Buy rating.Key issues to watch for Management commentary on slippages in the SME segment. Trend in provisioning expenses, particularly residual credit cost
related to MFI business. CASA ratio and traction on NIMs. Update and commentary on balance sheet growth strategy.
Bloomberg RBK IN Equity Shares (m) 428.1 M. Cap. (INR b)/(USD b) 290 / 4.1
CMP: INR329 TP: INR380 (+16%) Buy We expect loan growth of 11% YoY, led by growth in retail books
and portfolio buyouts. Deposit growth is expected to come in at8% YoY.
NII is expected to increase by 15% YoY due to lower interestreversals and better recoveries from w/off accounts.
Non-interest income is expected to decline YoY, but increase QoQon account of an improvement in the treasury performance andfee income.
Stress addition is likely to moderate to 1.9% levels, as we believethat most of the stress has been recorded in previous quarters.Developments on the IBC-related accounts and resolution ofpower assets remain a key monitorable.
The stock trades at 1.3x FY21E consolidated ABV. Buy.
Key issues to watch for Updates on the retail, SME and agri slippages. Recoveries from resolution of NCLT accounts. Outlook on power assets and macro developments on asset
Yes Bank CMP: INR280 TP: INR270 (-4%) Buy We expect loan growth to remain ahead of the system at ~24%
YoY on the back of refinancing opportunities, strong growth inretail banking and sell-down of portfolios. Deposits growth is alsolikely to remain healthy at ~19% YoY.
We expect NIM to pick up to 3.4% due to MCLR increase andpricing power shifting toward banks. Consequently, NII growth isexpected to remain robust at ~28% YoY.
Non-interest income growth is likely to remain strong, led bythird-party distribution and processing fees, further aided by theimproved treasury performance.
GNPL/NNPL ratio is expected to increase slightly in 4QFY19, butthe likely higher recoveries in 4QFY19 will provide some supporton the asset quality front.
We expect PAT of INR9.7b for 4QFY19 (INR41.9b for FY19). YES trades at 1.7x FY21E ABV. Maintain Buy.
Key issues to watch for Capital raising plans and strategy of the bank under new MD &
CEO. Performance on balance sheet growth/asset
quality/CASA/margins.
Bloomberg YES IN Equity Shares (m) 2305.7 M. Cap. (INR b)/(USD b) 647 / 9.2
Financial Snapshot (INR B) Y/E MARCH FY18 FY19E FY20E FY21E Net Premiums 268.1 309.1 353.6 407.0 Surplus / Deficit 13.6 10.0 11.1 13.3 Sh. holder's PAT 16.2 11.5 12.7 14.8 New bus.gr-unwtd. % 16.2 12.0 15.0 17.0 New bus gr- APE. % 16.0 0.4 13.9 16.5 Total prem.gr – unwtd. % 20.3 16.5 14.5 15.1 NBP margin (%) 16.5 16.6 16.9 17.4 RoE (%) 24.4 16.0 16.4 17.5 RoEV (%) 16.1 15.3 14.3 14.0 Total AUMs (INR b) 1,395 1,601 1,819 2,070 VNB(INRb) 12.9 12.6 14.5 17.5 EV (INRb) 188 217 248 282 Valuations P/EV (x) 2.8 2.4 2.1 1.9 P/EPS (x) 32.7 40.2 36.3 31.3
CMP: INR369 TP: INR430 (+17%) Buy We expect net premium income to grow by 20% YoY, with
renewal premium expected to grow by 18% YoY and first-yearpremium to grow by 25%, mainly due to ULIP-dominatedbusiness.
Total commission and operating expenses are likely to increaseby 43% YoY, led by a 53% YoY increase in operating expenses.
We expect surplus to decline by 35% YoY and PAT in shareholders' account to decline by 21% YoY to INR2.7b.
IPRULIFE trades at 1.9x FY21E EV. Maintain Buy.
Key issues to watch for New business growth in ULIP segment due to volatile market
conditions. Value of new business and the margin trajectory after
reporting sharp expansion in FY18.
April 2019 142
March 2019 Results Preview | Sector: Financials - NBFCs
Liquidity improves, but normalcy a while away Moderation in growth across segments In recent times, 4QFY19 was one of the toughest quarters (although tad better than
3Q) for most NBFCs under our coverage. While liquidity started improving towardsend-3QFY19, a number of events (Cobrapost, Essel Group related, etc.) led to ittightening once again. While short-term money has been more easily available, long-term money access from the capital markets has shrunk significantly. Also, with thepick-up in credit growth and increase in risk aversion towards NBFCs, bank fundingwas also slow during the quarter.
We analyzed the borrowing trends from the capital markets (NCDs and CPs) for NBFCs.The NCD market has still not recovered fully due to mutual funds reducing their NBFCexposure significantly. In this space, companies with strong parentage have benefitteddisproportionately compared to others. On the other hand, the CP market has beenmore active, money has, by and large, been available to all players. However, cost ofcapital from this source has been very divergent across players – those with highershare of wholesale lending continue to witness much higher incremental cost of fundscompared to others.
The quarter has been tough for vehicle financiers due to slowdown in auto sales andimpact of the high base of 4QFY18. We expect disbursements for vehicle financiersunder our coverage to remain stable at best, on a YoY basis. Margins should be largelystable as companies were able to pass on most of the cost of funds’ increase to theircustomers. We also expect incremental migration towards used vehicle financing formost players.
HFCs with good parentage are likely to witness healthy retail growth (reduction inprepayment rates) despite strong competition from banks. However, the non-retailsegment would see some moderation due to funding constraints. For some HFCs,access to credit is still limited. Overall, we expect HFCs to lose market share to banksin the core home loan segment. Also, the quantum of direct assignments is likely toreduce on a sequential basis. This could impact the upfront assignment income. Weremain selective in the NBFC space and prefer companies with good parentage. Ourtop picks are HDFC and LICHF.
Housing Finance – Divergent performance across companies We expect HFCs to report divergent performance in 4QFY19. In our view, HDFC and LICHF will be the biggest beneficiaries of a tight liquidity environment, resulting in some market share gains. AUM growth for these two HFCs would be 15-18%. Spreads are likely to be sequentially stable as both these players have hiked home loan rates in 2HFY19. Asset quality performance of LICHF will be a key monitorable. We expect PNBHF to report largely stable sequential disbursements, resulting in 35% AUM growth. However, lower-than-average direct assignments would result in lower upfront assignment income QoQ. We expect other HFCs to report subdued performance in the quarter.
Financials - NBFCs
Company name
Bajaj Finance
Chola. Inv & Fin.
HDFC
Indiabulls Housing
L&T Finance
LIC Housing Fin
M & M Financial
MAS Financial
Muthoot Finance
PNB Housing
Repco Home Fin
Shriram City Union
Shriram Transport Fin.
Full year numbers may not match quarterly numbers in tables below, due to difference in accounting standards in quarterly v/s full year financials; Full year nos are also likely to be restated due to IND AS
March 2019 Results Preview | Sector: Financials - NBFCs
Vehicle Finance – Players to witness a slowdown Vehicle financiers are likely to face challenges on the growth front. While disbursements are likely to improve sequentially, they would be lower on a YoY basis due to the high base. We also expect two key trends emerging from these NBFCs – (a) less focus on HCVs given the intense pricing pressure from banks, and (b) incremental migration towards financing of used vehicles. On the margin front,we expect largely stable margins as the companies have been able to pass on bulk ofthe cost of funds increase to their borrowers. We expect CIFC and MMFS to report18%+ AUM growth, while SHTF should report high single-digit growth.
Diversified financiers and others – BAF, LTFH to outperform BAF and LTFH are likely to have a strong quarter and report numbers in line with past trends. We expect LTFH to continue its trend of balance sheet retailization coupled with improvement in asset quality. The company has been making floating provisions to the tune of ~INR1b every quarter – we expect this trend to continue. SCUF is expected to have a muted quarter with disbursements down 18% YoY, driven by decline in MSME and 2W disbursements. Margins should be stable. However, credit costs during the quarter will be the key monitorable – SCUF has reported INR1.3b credit costs in 3Q v/s the quarterly average of INR2.3b in 1HFY19. We believe the provisioning number during the quarter would have a big impact on PAT.
Exhibit 1: Expected quarterly performance summary (INR m) Sector CMP Sales (INR M) EBDITA (INR M) Net Profit (INR M)
March 2019 Results Preview | Sector: Financials - NBFCs
Bajaj FinanceCMP: INR3,050 TP: INR2,760 (-10%) Neutral BAF will continue its robust growth trajectory on the assets front.
The incremental cost of funds has also declined from the peak in3QFY19.
AUM is expected to grow 5% QoQ/ 37% YoY. Margins are expectedto be largely stable at 11.6%.
With prudent cost management, C/I ratio is expected to be 35%. The YoY comparison would be inaccurate due to migration to Ind-AS.
We expect provisions of INR4.9b in 4QFY19, as against INR4.5b in 3QFY19 and INR2.3b in 4QFY18.
The stock trades at 7.5x FY20E BV. We maintain a Neutral rating, given the rich valuations.
Key issues to watch for Trend in disbursement growth Incremental cost of funds and borrowing mix Asset quality trends, especially in LAP and 2W/3W businesses Traction in the cross-sell franchise
Bloomberg BAF IN
Equity Shares (m) 575.2
M. Cap. (INR b)/(USD b) 1754 / 26
52-Week Range (INR) 3070 / 1770
1,6,12 Rel Perf. (%) 6 / 31 / 50
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Total Income 81.5 118.1 151.6 193.4
PPP 48.8 75.9 98.3 125.8
PAT 25.0 38.8 49.6 62.8
EPS (INR) 43.4 67.5 86.2 109.2
EPS Gr. (%) 35.9 55.5 27.7 26.8
BV/Sh. (INR) 269 329 405 501
RoA (%) 3.3 3.8 3.7 3.7
RoE (%) 20.4 22.6 23.5 24.1
Payout (%) 10.1 10.0 10.0 10.0
Valuations P/E (x) 70.3 45.2 35.4 27.9
P/BV (x) 11.3 9.3 7.5 6.1
Div. Yield (%) 0.1 0.2 0.3 0.4
April 2019 146
March 2019 Results Preview | Sector: Financials - NBFCs
Quarterly Performance (INR M) Y/E March FY18 FY19 FY2018 FY2019E
YoY Growth (%) 26.5 19.3 35.0 36.7 36.0 49.4 38.7 2.3 35.5 23.3 AUM Growth (%) 13.5 14.3 19.3 25.5 29.5 30.9 29.3 24.1 25.5 24.1 NIM on AUM (%) 7.7 7.8 7.6 8.2 7.4 7.0 7.1 7.0 8.1 6.9 Cost to Income Ratio (%) 34.9 39.0 39.4 44.8 34.4 35.8 36.1 36.5 41.4 35.7 Tax Rate (%) 35.3 34.2 35.0 33.8 35.0 33.7 34.3 35.0 34.3 34.5 E: MOFSL Estimates; * Quaterly nos and full year nos will not tally due to different way of reporting financial nos; FY19 numbers under Ind-AS
March 2019 Results Preview | Sector: Financials - NBFCs
Cholamandalam Inv & FinCMP: INR1,483 Under Review The vehicle finance business is likely to witness a severe
moderation in disbursement growth due to (a) high base, and (b)slowdown in OEM sales across CVs and cars. We estimate totaldisbursements to be largely stable on a YoY basis.
As a result, we expect a decline in AUM growth from 29% YoY in3QFY19 to 24% YoY in 4QFY19.
The company has managed its treasury well. As it has passed onincremental increase in CoF to its borrowers, we expect margins tobe largely stable at 7%.
Trend in asset quality, especially LAP, would be a key monitorable.We expect provisions of INR1b v/s INR953m in 3QFY19.
The stock trades at 3.8x FY19E and 3.1x FY20E BV. Under Review.
Key issues to watch for Disbursement growth and product mix in the vehicle finance
segment Traction in home loans Management expectation of incremental cost of funds Trend in opex, given management’s intent to reduce expense
ratio to 2.5% by FY20.
Bloomberg CIFC IN
Equity Shares (m) 156.4 M. Cap. (INR b)/(USD b) 232 / 3 52-Week Range (INR) 1761 / 1039
YoY Change (%) -23.9 8.3 211.5 39.2 53.7 24.7 -60.1 -18.9 63.4 -24.8E: MOFSL Estimates; FY19 estimates are under Ind-AS
March 2019 Results Preview | Sector: Financials - NBFCs
HDFCCMP: INR1,993 TP: INR2,365 (+19%) Buy HDFC was able to manage the liquidity situation well this quarter.
It assigned loans worth INR24b in 4QFY19 vs INR70b in 3QFY19. We expect 3% QoQ/ 14% YoY AUM growth. The mix of retail and
corporate lending will remain largely stable on a sequential basis. Profit on sale of investments amounted to INR3.14b in 4Q Asset quality has remained healthy over past several quarters,
and the trend is likely to continue. Asset quality in the corporateloan book would be a key monitorable.
We estimate provisions at INR1.9b (after factoring in one offprovision of INR1b (30% of profit on sale of investment) in4QFY19 vs INR1.2b in 3QFY19.
We expect reported PAT of INR23.7b in the quarter v/s INR21.1bin 3QFY19.
The stock trades at 3.6x FY19E AP/ABV and 2.8x FY20E AP/ABV(price adjusted for value of other businesses and book valueadjusted for investments made in those businesses). Buy.
Key issues to watch for Loan growth trend in corporate loans. Movement in spreads and margins (on individual loans). Asset quality in corporate lending
March 2019 Results Preview | Sector: Financials - NBFCs
Indiabulls HousingCMP: INR841 TP: INR1,000 (+19%) Buy Albeit a sequential improvement, we expect this quarter to be
tepid for Indiabulls. Disbursements should improve from INR39b in3Q to INR87b in 4Q. This would result in 1% QoQ growth in AUM toINR1.26t.
Quantum of sell-downs will be a key monitorable. In 3QFY19, IHFLrecorded INR5b+ upfront income from direct assignments. Weestimate lower upfront income in 4Q, resulting in total incomedeclining sequentially from INR20.3b to INR18.2b.
Opex is expected to decline sequentially as the company upfrontedINR500m+ of CSR in 3Q itself. We estimate INR3.0b opex in 4Q v/sINR3.35b in 3Q.
We expect provisions of INR832m in 4QFY19 v/s INR1.7b in 3QFY19(one-off provisions made). Asset quality trends would be a keymonitorable.
The stock trades at 2.1x FY19E and 1.9x FY20E BV. Maintain Buy.
Key issues to watch for Asset quality trends in the corporate segment Quantum of sell-downs in the quarter Movement in incremental spreads and margins AUM growth trend and guidance
March 2019 Results Preview | Sector: Financials - NBFCs
L&T FinanceCMP: INR151 TP: INR185 (+23%) Buy With a strong parentage, LTFH has been able to raise adequate
capital at competitive rates. This has helped it maintain growthmomentum.
The company is likely to report strong numbers in the rural andhousing finance segments. Performance in the wholesale financeand builder finance segments is a key monitorable. We expecttotal AUM to grow 19% YoY growth to INR991b.
We expect total income to be at INR17.4b, with margins largelystable sequentially.
Operating profit should be at INR12.5b vs. INR 11.9b in 3QFY19. Asset quality is expected to remain stable. We factor in provisions
of INR4.4b v/s INR4.2b in the prior quarter. Note that thecompany has been making floating provisions of INR1b everyquarter.
PAT is likely to be at INR5.9b in the quarter. The stock trades at 2.3x FY19E and 1.9x FY20E BV. Maintain Buy.
Key issues to watch for Asset quality outlook in the builder loan book Commentary on outlook for rural and housing finance segments Competition in the wholesale finance segment, especially
March 2019 Results Preview | Sector: Financials - NBFCs
LIC Housing FinanceCMP: INR549 TP: INR640 (+17%) Buy The company has been regularly tapping the NCD and CP markets
over the past three months. Incremental cost of NCD borrowingsis 8.3-8.7% (3-10 years) while that of CPs is 7.0-7.5%.
We expect loan growth of 14% YoY, driven primarily by the LAP/developer loans segment. The share of builder loans is likely tomarginally increase from ~6% of the overall book driven bymarket share gains. Growth in the retail home loan book wouldbe a key monitorable.
The company hiked home loan rates by 20bp in 2HFY19, theimpact of which will be seen in the 4Q. Hence, calculated marginsare likely to be stable to improving QoQ, despite the increase incost of funds.
Operating expenses to come in at INR1.2b, with the C/I ratioexpected at ~10%.
Asset quality is likely to remain stable. We model provisions ofINR1.3b (flat QoQ).
The stock trades at 1.7x FY19E and 1.5x FY20E BV. Buy.
Key issues to watch for Growth in the core home loan book Trend in incremental CoF and spreads Performance of corporate loan book and loans against property Management commentary on increasing competitive intensity
March 2019 Results Preview | Sector: Financials - NBFCs
Mahindra Financial Services
CMP: INR416 TP: INR530 (+27%) Buy Given the slowdown in growth for key auto OEMs, we expect
AUM growth to slow down to 18% YoY in the quarter. Further company has also moderated growth towards SME and Smaller NBFCs considering the liquidity situation which would have temporary issues in growth.
Given the strong parentage, MMFS has been able to raise money from multiple sources at attractive rates. It’s 90-day CPs are raised at sub-7.5% levels – lower than the pre-crisis levels. Hence, margins are expected to be sequentially stable at 8.0%.
With operating expenses expected at INR4.8b, operating profit should improve to INR7.8b.
We factor in INR2.3b provisions in 4QFY19 v/s INR2.2b in 3QFY19 and INR1.6b in 4QFY18.
The stock trades at 2.4x FY19E and 2.2x FY20E BV. Maintain Buy. Key issues to watch for Management commentary on performance of rural areas Potential for further market share gains Margin and growth trends Performance of subsidiaries
Bloomberg MMFS IN
Equity Shares (m) 614.5 M. Cap. (INR b)/(USD b) 256 / 4 52-Week Range (INR) 538 / 351
Growth Y-o-Y (%) 16.8 29.1 65.5 100.6 79.6 44.7 50.7 44.6 52.2 52.4 Int. Exp/Int. Income % 47.0 41.8 35.9 31.0 36.3 37.1 37.5 38.7 38.8 37.5 Cost to Income Ratio % 31.7 27.1 30.5 22.9 24.7 24.5 20.9 23.1 27.8 23.2 Prov to Operating Profits % 20.1 22.9 15.4 24.4 22.2 18.7 16.7 17.3 20.8 18.5 Tax Rate % 42.1 39.3 34.8 34.5 34.7 35.2 34.3 34.8 37.2 34.7 E: MOFSL Estimates; FY18 annual number taken as sum of 4 quarters
March 2019 Results Preview | Sector: Financials - NBFCs
MAS FinancialCMP: INR586 TP: INR705 (+20%) Buy The company is likely to have a stable quarter. We expect
consolidated AUM growth to slow down from 34% in the priorquarter to 29% in 4QFY19.
Margins are expected to contract QoQ due to re-pricing ofborrowings and build-up of excess liquidity in the balance sheet.We estimate margins of 7.8% v/s 8.5% QoQ.
With stable asset quality, we estimate provisions of INR140m(unchanged QoQ).
The stock trades at 3.8x FY19E and 3.3x FY20E BV. Maintain Buy.
Key issues to watch for Guidance on growth trends and loan mix Asset quality performance Management commentary on increasing competitive intensity
and margin trends
Bloomberg MASFIN IN
Equity Shares (m) 54.7 M. Cap. (INR b)/(USD b) 32 / 0 52-Week Range (INR) 635 / 365
1,6,12 Rel Perf. (%) -1 / 12 / -22
Financial Snapshot (INR b)
Y/E March 2018 2019E 2020E 2021E
NII 2.5 3.4 4.0 5.0
PPP 2.1 2.9 3.5 4.3
PAT 1.0 1.5 1.8 2.1
EPS (INR) 19.2 28.4 32.6 39.1
BV/Sh. (INR) 132.8 154.0 178.5 207.9
RoA on AUM (%) 2.7 3.1 2.9 2.7
RoE (%) 20.7 19.8 19.6 20.3
Valuations
P/E (x) 30.6 20.7 18.0 15.0
P/BV (x) 4.4 3.8 3.3 2.8
April 2019 153
March 2019 Results Preview | Sector: Financials - NBFCs
Quarterly Performance (INR M) Y/E March FY18 FY19 FY18 FY19E 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE Income from operations 13,599 16,431 15,652 15,223 16,108 16,316 16,827 17,207 60,905 66,459 Other operating income 173 186 150 287 215 181 338 327 796 1,061 Total Operating income 13,773 16,616 15,802 15,510 16,323 16,496 17,165 17,535 61,701 67,519
YoY Growth (%) 6.2 20.3 17.9 -9.3 18.5 -0.7 8.6 13.1 7.7 9.4 Other income 1 2 112 571 6 5 6 8 685 25 Total Income 13,773 16,619 15,914 16,080 16,330 16,501 17,171 17,542 62,387 67,544
YoY Growth (%) 27.6 50.2 64.5 40.3 42.5 8.6 1.4 11.3 45.8 14.1 E: MOFSL Estimates; Note 1HFY18 and FY19 numbers as per Ind-AS
March 2019 Results Preview | Sector: Financials - NBFCs
Muthoot Finance
CMP: INR616 TP: INR560 (-9%) Neutral While the company maintained a conservative stance in 3Q, we
expect it to be a bit more aggressive in 4Q. AUM is expected to grow 3% QoQ/ 15% YoY to INR334b. We believe this growth will be led by both volume and pricing gains.
Incremental cost of funds remains high for MUTH. We see spreads remaining sequentially stable at 11.6%.
Opex, which dropped in 3Q, would pick up to a run-rate of INR3.65b in the quarter.
We expect gross stage 3 loans to remain stable or even decline further. Hence, credit costs are likely to be subdued at INR24m.
The stock trades at 2.7x FY19E and 2.3x FY20E BV. Maintain Neutral.
Key issues to watch for Management commentary on business growth and steps taken to
sustain AUM growth Plan of branch expansion Movement in yields and margins, with declining cost of funds Progress in gold auctions
Bloomberg MUTH IN
Equity Shares (m) 400.0
M. Cap. (INR b)/(USD b) 246 / 4
52-Week Range (INR) 625 / 357
1,6,12 Rel Perf. (%) 8 / 38 / 32
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
NII 41.0 44.1 49.2 56.1
PPP 30.0 30.7 34.2 39.3
PAT 17.2 19.6 22.1 25.3
EPS (INR) 43.0 49.1 55.2 63.2
BV/Sh.(INR) 194 228 267 311
RoA on AUM (%) 6.1 6.3 6.2 6.4
RoE (%) 24.1 23.2 22.3 21.9
Valuations
Div. Yld. (%) 1.6 2.0 2.2 2.6
P/E (x) 14.3 12.6 11.2 9.7
P/BV (x) 3.2 2.7 2.3 2.0
April 2019 154
March 2019 Results Preview | Sector: Financials - NBFCs
March 2019 Results Preview | Sector: Financials - NBFCs
PNB Housing FinanceCMP: INR920 TP: INR1,100 (+20%) Buy PNBHF has had a stable quarter – growth remained strong in retail
lending, while the company scaled back a bit in corporate lending.We estimate disbursements of INR89b leading to 36% YoY growthin AUM.
The company has demonstrated its ability to raise money frommultiple sources including banks, ECBs, NCDs and CPs. We expect5bp QoQ margin compression to 1.8%.
However, loan assignments in 4QFY19 have not been as robust asthe prior quarters. Hence, there could be lower upfronting ofassignment related income in the quarter.
We estimate provisions of INR723m, as against INR701m in3QFY19.
The stock trades at 2.1x FY19E and 1.9x FY20E BV. Maintain Buy.
Key issues to watch for Disbursement trend in corporate lending Management commentary on incremental cost of funds Upfront assignment related income recognized in the quarter Plans of branch expansion Movement in yields and margins, with declining cost of funds
March 2019 Results Preview | Sector: Financials - NBFCs
Repco Home FinanceCMP: INR465 TP: INR550 (+18%) Buy Our interactions at the ground level suggest that the lack of sand
availability still remains an issue. Hence, disbursements areexpected to grow 3% YoY to INR8.7b. As a result, we expect loangrowth to remain largely unchanged at 12% YoY in 4QFY19.
We expect a modest 20bp QoQ spread compression to 2.8% in4Q. Hence, NII is expected to be largely stable on a QoQ and YoYbasis at INR1.2b.
C/I ratio is expected to be 21.1%, with opex at INR254m. Credit costs would be a key monitorable. Provisions are expected
to be INR73m v/s INR182m in 3QFY19. The stock trades at 1.9x FY19E and 1.6x FY20E BV. Maintain Buy.
Key issues to watch for Competitive environment and prepayments by borrowers Business outlook, loan growth, and share of home loans and LAP Trend in credit costs under Ind-AS Movement in borrowing costs and margins
March 2019 Results Preview | Sector: Financials - NBFCs
Quarterly performance (INR m) Y/E MARCH FY18 FY19 FY18 FY19E 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE Interest Income 12,274 12,790 13,384 12,428 13,893 14,721 14,131 14,205 50,358 56,950 Interest expenses 4,040 4,152 4,242 4,310 4,640 4,952 5,302 5,373 16,677 20,267 Net Interest Income 8,234 8,638 9,142 8,118 9,253 9,769 8,829 8,832 33,681 36,683 Y-o-Y Growth (%) 20.0 17.5 19.9 13.8 12.4 13.1 -3.4 8.8 18.4 8.9 Fees and Other Income 16 113 399 10 109 437 271 432 658 1,250 Net Operating Income 8,250 8,751 9,541 8,128 9,362 10,206 9,100 9,265 34,339 37,933 Y-o-Y Growth (%) 20.0 19.0 25.0 13.9 13.5 16.6 -4.6 14.0 18.4 10.5 Operating Expenses 3,209 3,433 3,878 3,251 3,677 3,963 3,740 3,840 13,624 15,094 Operating Profit 5,041 5,318 5,664 4,877 5,685 6,243 5,361 5,425 20,715 22,839 Y-o-Y Growth (%) 21.8 17.5 21.7 12.8 12.8 17.4 -5.3 11.2 17.4 10.3 Provisions 1,968 1,718 1,825 4,122 2,154 2,506 1,335 2,153 10,537 8,148 Profit before Tax 3,073 3,600 3,838 756 3,532 3,737 4,025 3,272 10,178 14,691 Tax Provisions 1,072 1,251 1,299 285 1,236 1,244 1,438 1,150 3,531 5,068 Net Profit 2,001 2,349 2,540 470 2,296 2,493 2,588 2,122 6,647 9,622 Y-o-Y Growth (%) 10.0 14.9 61.0 291.5 14.8 6.1 1.9 351.2 19.5 44.8 Int Exp/ Int Earned (%) 32.9 32.5 31.7 34.7 33.4 33.6 37.5 37.8 33.1 35.6 Cost to Income Ratio (%) 38.9 39.2 40.6 40.0 39.3 38.8 41.1 41.4 39.7 39.8 Tax Rate (%) 34.9 34.8 33.8 37.8 35.0 33.3 35.7 35.2 34.7 34.5 E: MOFSL Estimates; *Quarterly nos and full year nos will not tally due to different way of reporting financial nos; Note: FY19 numbers on Ind-AS basis
March 2019 Results Preview | Sector: Financials - NBFCs
Shriram City Union Finance
CMP: INR1,796 TP: INR2,100 (+17%) Buy While business conditions have improved since 3QFY19, yet, SCUF
is expected to have a tough quarter. On account of liquidity tightness, disbursements are expected to be 18% lower YoY to INR55b. The decline would be broad-based across segments.
Hence, we expect AUM to be sequentially stable at INR288b. The company has been securitizing assets more intensively, though.
We expect margins to be largely stable at 12.3%, resulting in NII of INR8.8b.
We expect asset quality to remain largely stable. We factor in provisions of INR2.15b, as against INR1.34b in 3QFY19 and INR4.12b in 4QFY18.
The stock trades at 1.9x FY19E and 1.6x FY20E BVPS. Buy. Key issues to watch for Trends in asset quality in each segment. Business growth and momentum, and management
commentary on the same. Impact of GST. Performance of the housing finance subsidiary.
YoY Growth (%) 17.9 25.3 21.2 36.6 15.7 22.6 17.3 1.9 25.4 13.9 Provisions 5,107 5,669 5,475 13,666 5,227 6,836 6,362 6,223 29,917 24,647 Profit before Tax 7,041 7,560 8,335 1,934 8,831 9,390 9,839 9,668 24,869 37,728 Tax Provisions 2,442 2,588 2,919 488 3,101 3,295 3,485 3,399 8,437 13,280 Net Profit 4,599 4,972 5,415 1,446 5,729 6,096 6,355 6,268 16,432 24,448 YoY Growth (%) 22.9 28.3 56.5 -3.4 24.6 22.6 17.3 333.5 30.7 48.8 AUM Growth (%) 10.4 14.6 19.2 22.2 21.7 20.9 14.1 9.0 22.2 9.0 Cost to Income Ratio (%) 21.6 21.1 21.6 21.2 23.6 21.8 21.1 23.2 21.4 22.4 Tax Rate (%) 34.7 34.2 35.0 25.2 35.1 35.1 35.4 35.2 33.9 35.2 E: MOFSL Estimates; * Quarterly nos and full-year nos will not tally due to different way of reporting financial nos
March 2019 Results Preview | Sector: Financials - NBFCs
Shriram Transport FinanceCMP: INR1,200 TP: INR1,450 (+21%) Buy SHTF is likely to have a slightly tough quarter with respect to
growth. While disbursements are expected to improve fromINR94b to INR125b QoQ, they would still be 18% below 4QFY18levels.
Hence, SHTF is expected to deliver 1% QoQ/ 9% YoY AUM growthin the quarter. We also expect share of used vehicles to increase sequentially.
We expect calc. NIMs to be sequentially stable at 7.8%. We factor in INR6.2b NPL provisions v/s INR6.4b in 3QFY19 and
INR13.2b in 4QFY18. We expect stable to improving asset qualitytrends.
The stock trades at 1.7x FY19E and 1.5x FY20E BVPS. MaintainBuy.
Key issues to watch for Disbursements in used and new vehicle segments CV demand in FY19, volume gain on BS4 switch to BS6 Movement in borrowing costs and margins Asset quality trends, given impact of GST
Earnings to be on a gradual uptrend Marginal recovery in US sales supported by FX to support growth
Year-on-year earnings growth on an aggregate basis has been picking up gradually over the past three quarters. We expect this uptrend to continue, with 15.8% YoY growth in 4QFY19. Sales are estimated to grow by 13.9% YoY, led by healthy growth in the domestic formulation (DF) business and a moderate recovery in US sales led by currency tailwinds. Lower RM prices and controlled operational cost are likely to drive 24% YoY growth in EBITDA in 4QFY19. PAT growth is likely to trail EBITDA growth due to a higher tax outgo.
US sales to pick up moderately, further support from weak INR 4Q is likely to be the fourth consecutive quarter of positive top-line growth (in CC terms). US sales are likely to grow at 5-6% YoY on an aggregate basis. Companies were seen benefiting from tailwinds in the form of (a) healthy ANDA approvals, (b) moderate price erosion, (c) product-specific opportunities (e.g. G-Ranexa for LPC, g-Suboxone for DRRD) and (d) INR depreciation v/s USD. Within our coverage universe, we expect ARBP/Cipla/TRP to deliver more than average growth. However, a high base and a lower number of launches may impact growth for SUNP and CDH. Regulatory concerns have been easing for a few companies (DRRD/LPC/TRP), based on the current status of plants. We, however, believe that consistency in compliance remains critical. Momentum in approvals and potential launches over the next 12-15 months would be the key monitorable in the US generics segment.
DF to remain on steady growth path; volume growth to pick up marginally We expect 15% YoY growth in the DF segment on an aggregate basis in 4QFY19. At the industry level, price hikes continue driving growth, while volumes have started picking up. Within our coverage universe, ALKEM/CIPLA/TRP are likely to deliver considerable growth, with the former two benefiting from a low base and CIPLA from superior execution. We expect LPC/IPCA/GNP to maintain 12-15% YoY growth in the DF segment in 4QFY19, and CDH/SUNP/AJP to exhibit moderate growth.
DIVI/IPCA/GNP/BIOS – outperformers; CDH/AJP/TRP – underperformers We expect strong YoY growth in 4QFY19 for DIVI, IPCA, GNP and BIOS on the back of superior execution. GRAN/STR/ALKEM are expected to deliver significant growth, partly due to a low base of the past year. We expect CIPLA and SUNP to exhibit moderate growth in earnings due to headwinds in the institutional business (CIPLA) and lower profitability in Taro (SUNP). We expect CDH’s earnings to decline meaningfully due to a high base (some high-potential products were launched in 4QFY18).
Our top picks – ARBP/ALKEM
Company name Alembic Pharma Ajanta Pharma Alkem Lab Aurobindo Pharma Biocon Cadila Health Cipla Divis Labs Dr Reddy’ s Labs Fortis Health Glenmark Pharma Granules India GSK Pharma IPCA Labs. Jubilant Life Lupin Sanofi India Shilpa Medicare Strides Pharma Sun Pharma Torrent Pharma
Healthcare March 2019 Results Preview | April 2019
Tushar Manudhane – Research Analyst ([email protected]); +91 022 6129 1536 Rajat Srivastava – Research Analyst ([email protected]); +91 22 6129 1557
April 2019 159
Exhibit 1: Expected quarterly performance summary (INR m) Sector / Companies CMP SALES (INR m) EBDITA (INR m) NET PROFIT (INR m)
A push from FX tailwinds The INR has depreciated by ~9% from 64.6 in 4QFY18 v/s 70.3 in 4QFY19. This should benefits exports to the regulated markets. The extent of hedging, RM imports and foreign currency servicing would decide the quantum of benefits.
Currency depreciation adversely impacts companies having foreign currency borrowings. This will, however, vary depending on the hedging policy of the respective companies.
March 2019 Results Preview | Sector: Healthcare
April 2019 160
Exhibit 3: 86 ANDA approved for companies under coverage Exhibit 4: Favorable FX to support US sales growth
Ajanta PharmaCMP: INR1,033 TP:INR1,375 (+33%) Buy We expect Ajanta Pharma’s (AJP) sales to decline 4% YoY to
INR5.1b due to significant erosion in the institutional anti-malariabusiness. With the global fund delaying its procurement process,sales of anti-malaria drugs have been impacted. Consequently, weexpect AJP’s Africa business to see 47% YoY decline for thequarter, which, in turn, will drag overall growth.
We expect the domestic formulation business to grow at 7% YoYto INR1.5b for the quarter. We expect subdued growth in DF dueto low growth in Melacare range of dermatology products andsaturation in overall market share in the ophthalmic segment.
We expect Asia business to deliver sales of INR1.3b, growing 4%YoY for the quarter.
On an overall basis, we expect EBITDA margin to come in at 23.7%,contracting by 260bp YoY and remaining stable on a sequentialbasis. Expect PAT at INR806m for 4QFY19, down 15% YoY.
We expect FY19 to be the year of trough with a 17% YoY declinein earnings. Further, we expect 16% CAGR in earnings over FY19-21 on the back of smoothening of base for Institutional Anti-malaria business, better traction in US generics andoutperformance in domestic formulations. We maintain Buy witha target price of INR1,375 (24x 12M forward earnings).
Key issues to watch out Procurement of anti-malaria medicine by Global Fund. ANDA filing rate, new approval and traction from recently
launched products in the US market.
Bloomberg AJP IN
Equity Shares (m) 88.5 M. Cap. (INR b)/(USD b) 91 / 1 52-Week Range (INR) 1422 / 898
1,6,12 Rel Perf. (%) -4 / -10 / -44
Financial Snapshot (INR Billion) Y/E MARCH FY18 FY19E FY20E FY21E
Alembic PharmaCMP: INR542 TP: INR615 (+14%) Neutral In 4QFY19, we expect Alembic Pharma (ALPM) to report
moderate growth of ~11% YoY in sales to INR9.4b, led by 19% YoYgrowth in the international formulations business.
Within the international segment we expect higher growth tocome from Non US geographies as US business had a high baselast year. We expect domestic segment to witness 13% YoYgrowth while API business to see 8% YoY decline.
We expect EBITDA margin to come in at 19.7%, down 60bp YoYand 410bp sequentially. Absolute EBITDA is expected to 7% YoYgrowth on account of increased sales.
PAT expected to decline YoY to INR913m vs INR938m in 4QFY18on account of reduced margins and higher tax rate (32.7% vs27.3% in 4QFY18) expected during the quarter.
We value ALPM at 18x 12M forward earnings to arrive at TP ofINR615. We have Neutral rating on the stock.
Key issues to watch out for Rate of ANDA filings and approval pace for US Contribution of chronic therapies to overall domestic business
Bloomberg ALPM IN
Equity Shares (m) 188.5 M. Cap. (INR b)/(USD b) 102 / 1 52-Week Range (INR) 664 / 412
1,6,12 Rel Perf. (%) -10 / -21 / -17
Financial Snapshot (INR Billion) Y/E MARCH 2018 2019E 2020E 2021E
March 2019 Results Preview | Sector: Healthcare Alkem Labs
CMP: INR1,744 TP: INR2,170 (+24%) Buy We expect Alkem Labs to witness strong revenue increase of
~31% YoY to INR19.9b (on a high base), led by strong growth in both India and international business.
Domestic business is expected to grow by ~43% YoY on a low base to INR13.7b. The US business is expected to grow by ~51% YoY to INR6b for the quarter led by new product launches. Revenue from other international markets is expected to grow at a much lower rate of 17% YoY, offsetting growth to some extent.
EBITDA margin for the company is expected to improve by 770bp YoY and 90bp sequentially to 17.1% for the quarter. The improvement in EBITDA margin is due to lower employee expenses, R&D expenses and other expenses as a % of sales. Thus, we expect PAT to come in at INR2.5b, up 166% YoY and 25% sequentially, driven by higher sales and improved margins for the quarter.
We remain positive on ALKEM on the back increased share of chronic therapy in the domestic formulation business, improvement in MR productivity and enhanced US business where the operating leverage is now kicking in. Maintain Buy with a TP of INR2,170 @ 22x 12M forward earnings.
Key issues to watch out for Rate of ANDA filings and approval pace. Consistency in compliance. New launches in the domestic formulations business.
Bloomberg ALKEM IN
Equity Shares (m) 119.6
M. Cap. (INR b)/(USD b) 209 / 3
52-Week Range (INR) 2265 / 1693
1,6,12 Rel Perf. (%) -10 / -22 / -27
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Sales 64.3 75.1 87.1 99.6
EBITDA 10.6 12.3 15.4 18.2
NP 7.0 8.5 11.0 13.1
EPS (INR) 58.9 70.9 91.7 109.4
EPS Gro. (%) -21.1 20.3 29.4 19.2
BV/Sh. (INR) 406.8 461.7 532.8 617.6
RoE (%) 15.1 16.3 18.4 19.0
RoCE (%) 13.0 18.4 20.5 21.3
Valuations
P/E (x) 29.6 24.6 19.0 15.9
P/BV (x) 4.3 3.8 3.3 2.8
EV/EBITDA (x) 20.0 16.9 13.3 11.0
EV/Sales (x) 3.3 2.8 2.4 2.0
April 2019 164
Quarterly performance (Consolidated) Y/E March FY18 FY19E FY18 FY19E
Aurobindo PharmaCMP: INR787 TP: INR940 (+20%) Buy We expect Aurobindo (ARBP) to post healthy growth of ~21% YoY
to INR48.9b in 4QFY19. Growth will be supported by 26% YoYincrease in the formulation business (~83% of sales).
We expect the US business to grow by 27% YoY to INR22b. Europeand rest-of-the-world (RoW) sales are expected to grow 18% YoY,while active pharmaceutical ingredient (API) sales are estimatedto be stable on a YoY basis.
EBITDA margin is expected to improve by ~90bp YoY to 20.8%,mainly due to lower employee cost and other expenses as % ofsales. Absolute EBITDA is expected to grow 27% YoY to INR10b.
We expect PAT to grow at a lower rate of ~18% YoY to INR6.4b onaccount of increased tax rate during the quarter.
We remain positive on ARBP on the back of its high ANDA filingsrate, strong pace of approvals, minimal regulatory risks and thecompany outperforming the industry in the EU market. Wemaintain Buy on the stock with a TP of INR944 (15x 12M forwardearnings).
Key issues to watch out for Pace of approvals in the US business. Consistency in compliance. US business outlook amid ongoing pricing pressure.
Bloomberg ARBP IN
Equity Shares (m) 585.9
M. Cap. (INR b)/(USD b) 461 / 7
52-Week Range (INR) 830 / 527
1,6,12 Rel Perf. (%) 1 / -5 / 15
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Sales 165.0 191.7 264.6 293.4
EBITDA 37.9 39.1 56.4 63.7
NP 25.0 25.1 34.6 37.6
EPS (INR) 42.7 42.8 59.1 64.2
EPS Gro. (%) 8.7 0.2 38.1 8.7
BV/Sh. (INR) 199.4 238.1 294.7 356.5
RoE (%) 23.8 19.6 22.2 19.7
RoCE (%) 17.4 14.7 15.3 13.3
Valuations
P/E (x) 18.4 18.4 13.3 12.3
P/BV (x) 3.9 3.3 2.7 2.2
EV/EBITDA(x) 12.6 12.4 9.3 7.8
EV/Sales (x) 2.9 2.5 2.0 1.7
April 2019 165
Quarterly performance (Consolidated) (INR m) Y/E March FY18 FY19E FY18 FY19E
BioconCMP: INR615 TP: INR685 (+11%) Neutral Biocon (BIOS) is expected to report robust revenue growth of
~37% YoY to INR16b, primarily led by ~96% YoY growth inBiologics. Branded formulations business is expected to grow at15% YoY, while small molecules and research services are bothexpected to see moderate growth of ~9% YoY.
EBITDA margin is expected to improve by 680bp YoY to 26.7%with the changing product mix towards high margin products forthe company. Absolute EBITDA is expected to see 84% YoYgrowth to INR4.2b for the quarter.
We expect PAT of INR1.9b as against INR1b in 4QFY18. We expect the Biologics segment to continue to perform strongly,
led by improved traction for approved biosimilars in both regulated and emerging markets. Accordingly, we estimate earnings CAGR of 45% to INR15.4b over FY19-21. We continue to value BIOS at 30x P/E and roll our target on 12M forward basis to INR685. We maintain our Neutral stance on limited upside from current levels.
Key issues to watch out for Increased traction in biosimilars in regulated market. Update on BIOS’ plans to list Biologics business separately. Update on various products under approval stage.
Bloomberg BIOS IN
Equity Shares (m) 600.0
M. Cap. (INR b)/(USD b) 369 / 5
52-Week Range (INR) 718 / 544
1,6,12 Rel Perf. (%) -11 / -16 / -15
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
March 2019 Results Preview | Sector: Healthcare Cadila Healthcare
CMP: INR344 TP:INR420 (+22%) Buy Cadila Healthcare's (CDH) 4QFY19 revenues are expected to see
YoY growth of 7.4% to INR34.9b. Growth is expected to be moderate on a high base of 4QFY18 which included sales of FTF g-Lialda.
Overall export formulations (58% of sales) business is expected to see growth of ~12% YoY to INR21.3b, while domestic formulations business (25% of sales) is likely to grow marginally by ~2% YoY to INR9b.
Margins are expected to shrink by ~530bp YoY to 20.7% due to a change in the product mix. Consequently, EBITDA is expected to decline by 17% YoY to INR7.2b for the quarter. Adjusted PAT is expected to decline at a higher rate of 34% YoY to INR3.9b, with the tax rate expected to go up during the quarter.
We remain positive on CDH, considering its robust ANDA pipeline for the US market, minimal regulatory hurdles, and outperformance versus industry in the DF market. We value the stock at 22x P/E on 12M forward earnings and maintain Buy with a TP of INR420.
Key issues to watch out for Update on growth in the US business post competition in
existing potential molecules. Growth strategy for domestic formulations going forward.
Bloomberg CDH IN
Equity Shares (m) 1023.7 M. Cap. (INR b)/(USD b) 352 / 5 52-Week Range (INR) 432 / 306
1,6,12 Rel Perf. (%) -2 / -20 / -28
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
CiplaCMP: INR526 TP: INR488 (-7%) Neutral We expect Cipla’s revenue to grow ~11% YoY to INR41b in 4QFY19. Growth is expected to be driven by domestic formulations business
which we expect to grow by 21% YoY. Export formulations areexpected to grow at a subdued rate of 5% YoY on account of declinein sales expected in South Africa and emerging markets. Thisdecline will be somewhat offset by exports to the US (which areexpected to deliver strong growth of 31% YoY) and EU (which areexpected to grow by 8% YoY).
EBITDA margin is expected to come in at 17.6% (+250bp YoY).Absolute EBITDA is expected to see 30% YoY growth to INR7.2b.
We expect PAT to grow 1% YoY to INR3.4b on account of increasedtax rate during the quarter (25.8% vs 16.7% in 4QFY18).
We remain positive on the company on the back of outperformancein domestic formulations business and better traction in the USbusiness leveraging on its own front end. However, we maintainNeutral on limited upside from current levels with TP of INR488(19x 12M forward earnings).
Key issues to watch out for Quality of filings in US and approval rate. Response to USFDA latest inspection observations. Outlook on institutional business. New product launches in the domestic segment.
Bloomberg CIPLA IN
Equity Shares (m) 804.5
M. Cap. (INR b)/(USD b) 423 / 6
52-Week Range (INR) 678 / 484
1,6,12 Rel Perf. (%) -13 / -27 / -26
Financial Snapshot (INR Billion) Y/E MARCH 2018 2019E 2020E 2021E
Sales 152.2 160.7 178.7 199.9
EBITDA 28.3 28.6 33.7 39.1
NP 16.3 14.1 17.1 20.3
EPS (INR) 20.3 17.6 21.2 25.3
EPS Gro. (%) 31.2 -13.6 20.8 19.1
BV/Sh. (INR) 176.7 191.3 209.5 231.7
RoE (%) 11.5 9.2 10.1 10.9
RoCE (%) 8.6 7.8 8.9 9.7
Valuations
P/E (x) 25.8 29.9 24.7 20.8
P/BV (x) 3.0 2.7 2.5 2.3
EV/EBITDA (x) 16.0 15.8 13.1 11.2
EV/Sales (x) 3.0 2.8 2.5 2.2
April 2019 168
Quarterly Performance (INR m) Y/E March FY18 FY19E FY18 FY19E
Dr Reddy’s LabsCMP: INR2,796 TP: INR2,540 (-9%) Neutral Dr Reddy’s Laboratories is expected to report moderate growth of
~10% YoY in 4QFY19 with revenues at INR38.9b. The US business is likely to remain stable YoY at INR14.6b. Europe
sales are expected to decline ~9% YoY to INR1.5b, while Indiabusiness is expected to grow ~13% YoY to INR6.9b.
EBITDA margins are expected to improve ~400bp YoY for thequarter at 19.8%. Consequently, absolute EBITDA is likely to grow~40% YoY to INR7.7b during the quarter.
PAT is expected to be up 36% YoY to INR4.1b. We maintain Neutral with TP of INR2,540 @18x 12M forward
earnings, due to limited upside from current levels. Delay in theresolution of regulatory issues and subsequent launches remainsthe key overhang.
Key issues to watch out for Update on resolution of USFDA warning letters for Srikakulam,
Duvvada and Miryalaguda API plants. Update on data to be submitted related to g-Copaxone. Update on g-Suboxone related litigation.
Bloomberg DRRD IN
Equity Shares (m) 165.8 M. Cap. (INR b)/(USD b) 464 / 7 52-Week Range (INR) 2875 / 1888
1,6,12 Rel Perf. (%) -2 / 4 / 14
Financial Snapshot (INR Billion) Y/E MARCH 2018 2019E 2020E 2021E
Sales 142.0 152.7 182.5 199.2
EBITDA 22.9 30.8 39.2 43.4
NP 10.7 18.6 21.4 23.5
EPS (INR) 64.7 111.8 129.2 141.5
EPS Gro. (%) -10.9 72.8 15.6 9.5
BV/Sh. (INR) 757 845 955 1,073
RoE (%) 8.6 14.0 14.4 14.0
RoCE (%) 4.8 9.3 10.9 11.3
Valuations
P/E (x) 43.2 25.0 21.6 19.8
P/BV (x) 3.7 3.3 2.9 2.6
EV/EBITDA (x) 21.1 15.5 11.9 10.7
EV/Sales (x) 3.4 3.1 2.6 2.3
April 2019 170
Quarterly performance (Consolidated) (INR m) Y/E March FY18 FY19E FY18 FY19E
CMP: INR650 TP: INR560 (-14%) Neutral We expect Glenmark Pharmaceuticals (GNP) to report revenue
growth of ~14% YoY to INR25.5b. Growth can be attributed to 24% YoY increase in sales expected in
the US business and 14% YoY increase in sales expected in bothIndia and ROW markets. API segment is too expected to show29% YoY growth during the quarter. LATAM and EU are expectedto drag overall growth with both expected to see decline in salesduring the quarter.
EBITDA margins are expected to expand by ~210bp YoY to 15.9%with other expenses as a % of sales seeing 340bp decline.However R&D cost as a % of sales is expected to increase by100bp YoY. Thus, absolute EBITDA is expected to grow by ~38%YoY to INR4b led by margin expansion and revenue growth.
PAT is expected to grow at a higher rate than EBITDA, growing~52% YoY to INR2.3b. This is mainly due to margin expansion,higher other income and lower tax rate.
We value GNP at 15x P/E multiple 12M forward earnings to factorin subdued return ratios as earnings CAGR is yet to pick upmeaningfully and financial leverage remains elevated. Wemaintain Neutral with a TP of INR560, on limited upside fromcurrent levels. Out-licensing deals could act as positive triggers.
Key issues to watch out for New ANDA filings in complex category. Update on free-cash generation and debt repayment schedule. Progress of NCE/NBE pipeline and potential out-licensing
March 2019 Results Preview | Sector: Healthcare Granules India
Bloomberg GRAN IN
Equity Shares (m) 228.7
M. Cap. (INR b)/(USD b) 26 / 0
52-Week Range (INR) 123 / 72
1,6,12 Rel Perf. (%) 1 / 9 / -10
Financial Snapshot (INR Billion) Y/E MAR 2018 2019E 2020E 2021E
Sales 16.9 23.2 26.1 30.5
EBITDA 2.8 4.0 4.9 5.8
NP 1.3 2.3 2.6 3.1
EPS (INR) 5.6 9.1 10.4 12.3
EPS Gro. (%) -23.2 63.3 14.2 18.4
BV/Sh. (INR) 51.4 57.8 64.2 72.5
RoE (%) 12.0 16.6 17.0 17.9
RoCE (%) 11.3 13.5 14.8 16.5
Valuations
P/E (x) 20.4 12.5 10.9 9.2
P/BV (x) 2.2 2.0 1.8 1.6
EV/EBITDA (x) 12.3 8.9 7.1 6.1
EV/Sales (x) 2.0 1.5 1.3 1.2
CMP: INR114 TP: INR140 (+23%) Buy We expect Granules India (GRAN) to post strong 29% YoY sales
growth in 4QFY19 to INR6.5b on the back of enhanced traction in the formulation business and commercialization of its new API/PFI facility.
EBITDA margin is expected to expand 850bp YoY to 17.2% on account of write offs done by the company in 4QFY18 which had significant impact on the margins. On a sequential basis, we expect EBITDA margin to contract by 70bp. Absolute EBITDA is expected to remain stable QoQ at INR1.1b.
We expect PAT, including associate income, to increase by ~182% YoY to INR577 on account of margin expansion and lower tax rate (27% vs 36% in 4QFY18).
We value GRAN at 13x 12M forward earnings with TP of INR140. We remain positive on GRAN as it is almost through with its capex cycle and the company is in process to reap benefit on the back of increased revenue from US formulations, better capacity utilization which will further improve return ratios as well. Recommend Buy.
Key issues to watch out for New ANDA filings in complex category. Update on free-cash generation and debt repayment schedule. Update on performance of JV with Onmichem.
GSK PharmaCMP: INR1,294 TP:INR1,309 (+1%) Neutral In 4QFY19, we expect GlaxoSmithKline Pharmaceuticals (GLXO) to
report muted growth of 5.7% YoY in revenues to INR7.9b. We expect EBITDA margin to contract by 250bp YoY due to
change in product mix. However, on sequential basis, EBITDAmargin is expected to improve 160bp.
PAT is expected to be down 9% YoY on account of reducedmargins.
We continue valuing GLXO on 43x 12M forward earnings, at a35% discount to its 3-year average to factor in lower growth in itsmajor brands. The ongoing product rationalization attempts bythe company would pave way for some improvement inprofitability. We maintain our Neutral rating due to limitedupside from current levels with a TP of INR1,309.
Key issues to watch out for New drug launches in FY20. Impact on sales of products under which came under DPCO
2013. Impact on sales due to product rationalization exercise.
Bloomberg GLXO IN
Equity Shares (m) 169.4
M. Cap. (INR b)/(USD b) 219 / 3
52-Week Range (INR) 1812 / 1043
1,6,12 Rel Perf. (%) -11 / -18 / 6
Financial Snapshot (INR Billion) Y/E March
2018 2019E 2020E 2021E
Sales 29.0 31.7 35.5 39.9
EBITDA 5.1 5.9 7.2 8.4
NP 3.3 4.0 4.9 5.6
EPS (INR) 19.7 23.6 28.7 33.3
EPS Gro. (%) 14.4 20.3 21.5 16.1
BV/Sh. (INR) 121.4 124.8 133.4 146.6
RoE (%) 16.2 18.9 21.5 22.7
RoCE (%) 16.4 19.2 22.2 23.8
Valuations
P/E (x) 65.8 54.7 45.1 38.8
P/BV (x) 10.7 10.4 9.7 8.8
EV/EBITDA (x) 40.8 35.8 29.1 24.4
EV/Sales (x) 7.1 6.6 5.9 5.1
April 2019 173
Quarterly Performance (Standalone) (INR m) Y/E March FY18 FY19E FY18 FY19E
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Sales 32.8 37.2 42.8 48.8
EBITDA 4.5 7.1 8.5 9.9
NP 2.4 4.6 5.4 6.4
EPS (INR) 19.0 36.8 42.7 50.7
EPS Gro. (%) 18.1 94.1 15.9 18.9
BV/Sh. (INR) 213.0 246.6 282.9 326.0
RoE (%) 9.3 16.0 16.1 16.7
RoCE (%) 8.6 14.1 14.4 15.0
Valuations
P/E (x) 50.3 25.9 22.4 18.8
P/BV (x) 4.5 3.9 3.4 2.9
EV/EBITDA (x) 20.4 12.8 10.6 11.0
EV/Sales (x) 2.8 2.5 2.1 2.7
CMP: INR954 TP: INR981 (+3%) Buy We expect Ipca Laboratories’ (IPCA) revenue to grow ~17.4% YoY
to INR9b, led by 24% YoY growth in the international formulationsbusiness to INR3.1b. This growth will be offset to some extent bythe domestic formulations business which is expected to grow at12% YoY to INR3.6b and 14% YoY decline in the API business.
EBITDA margin is expected to expand by 240bp YoY to 17.4% onaccount of higher gross margin and contraction in employee costas a % of sales
With high growth in revenues and expansion in margins, weexpect PAT to grow by 49% YoY to INR873m.
We remain positive on IPCA on the back of healthy growth in theDF segment, the gradual recovery in the international market andoperating leverage kicking in, which has led to a revival in returnratios. We have Buy rating on the stock with TP of INR981 @ 21x12M forward earnings.
Key issues to watch out for Consistency in compliance with respect to USFDA inspections. New product launches in both domestic and international
markets. Outlook for institutional tender business.
April 2019 174
Consolidated - Quarterly Earning Model (INR m) Y/E March FY18 FY19E FY18 FY19E
Equity Shares (m) 155.4 M. Cap. (INR b)/(USD b) 107 / 2 52-Week Range (INR) 898 / 617
1,6,12 Rel Perf. (%) -21 / -11 / -36
Financial Snapshot (INR Billion) Y/E MARCH FY18 FY19E FY20E FY21E
Sales 75.6 88.8 99.0 111.0
EBITDA 15.2 18.8 21.4 22.3
NP 7.1 9.4 10.8 11.5
EPS (INR) 45.6 60.4 69.5 73.7
EPS Gro. (%) 23.3 32.5 15.1 6.1
BV/Sh. (INR) 262.3 317.7 381.4 449.0
RoE (%) 18.9 20.8 19.9 17.8
RoCE (%) 12.1 14.1 14.3 13.7
Valuations
P/E (x) 15.0 11.3 9.9 9.3
P/BV (x) 2.6 2.2 1.8 1.5
EV/EBITDA (x) 9.2 7.4 6.1 5.5
EV/Sales (x) 1.8 1.6 1.3 1.1
D. Yield (%) 0.5 0.7 0.8 0.9
CMP: INR686 TP:INR1,050 (+53%) Buy We expect Jubilant Life Sciences to deliver muted revenue growth
of 5.4% YoY to INR23.7b on a high base in 4QFY18. We expectsales to remain stable QoQ.
We expect pharmaceutical segment (incl. Triad) to remain stableat INR12b on account of ongoing pricing pressure in US and slowpace of approvals in this geography.
The Life Science Ingredient business is expected to see 28%sequential growth in revenues to INR11.5b due to increasedtraction in existing products, new product launches and favorablepricing environment.
We expect EBITDA margin to improve marginally by 80bp YoY at21.1%.
Consequently, we expect PAT to come in at INR2.6b, up 22% YoYand down 2% QoQ for the quarter.
We remain positive on JLS on the back of improved businessscenario for the LSI segment and superior execution in thepharma segment through its own front-end. Maintain Buy, with atarget price of 1,050 (SOTP-based).
Key issues to watch out Outlook on contracts for new radiopharmaceutical products. Price mix for LSI segment. Competitive scenario for existing pharma products in the US.
March 2019 Results Preview | Sector: Healthcare
Jubilant Life Sciences
April 2019 175
Quarterly Performance (Consolidated) (INR m) Y/E March FY18 FY19E FY18 FY19E
LupinCMP: INR777 TP:INR1,000 (+29%) Buy We expect Lupin (LPC) to report moderate growth of ~9% YoY in
its 4QFY19 revenue to INR44.3b led by 16% YoY growth in itsdomestic formulations business to INR11b, 12% YoY growth in USformulations to INR16.7b and 18% YoY growth in Japan toINR6.2b. This growth will be to some extent be offset by 3%decline in EU business to INR1.7b and muted 3% YoY growth inROW markets to INR5.4b.
EBITDA margin is expected to remain stable YoY and expand160bp YoY to 17.6%.
PAT is likely to grow by 20% YoY to INR4.4b on account ofincreased revenues and lower tax rate for the quarter (6% vs 17%in 4QFY18).
We remain positive on Lupin on account of healthy pipeline forthe US business and outperformance in the domesticformulations business. The company is also preparing for somekey launches in the near term. Maintain Buy with TP of INR1,000@21x 12M forward earnings.
Key issues to watch out for Update on warning letter for Goa and Indore facility. New product filings and approvals for US.
Bloomberg LPC IN
Equity Shares (m) 451.6
M. Cap. (INR b)/(USD b) 351 / 5
52-Week Range (INR) 986 / 720
1,6,12 Rel Perf. (%) -9 / -20 / -17
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Sales 158.0 165.3 180.0 201.5
EBITDA 31.5 25.5 35.6 41.9
NP 14.5 11.8 17.2 21.6
EPS (INR) 32.0 26.2 38.2 47.9
EPS Gro. (%) -43.5 -18.2 46.0 25.4
BV/Sh. (INR) 300.3 307.0 334.7 372.0
RoE (%) 10.7 8.6 11.9 13.6
RoCE (%) 4.9 5.2 8.9 10.2
Valuations
P/E (x) 26.3 32.2 22.0 17.6
P/BV (x) 2.8 2.7 2.5 2.3
EV/EBITDA (x) 13.9 17.0 12.0 9.9
EV/Sales (x) 2.8 2.6 2.4 2.1
April 2019 176
Quarterly Performance (INR m) Y/E December CY18 CY19E CY18 CY19E
Sanofi IndiaCMP: INR5,914 TP:INR7,000 (+18%) Buy We expect Sanofi India's (SANL) revenue to grow at moderate
~8% YoY in 1QCY19 to INR6.2b. Top 2 brands – Lantus and Allegra– continue to do well and grew >15% for quarter ending Feb-19.Some other top brands like Hexaxim, Combiflam and Avil aredragging overall growth.
EBITDA margin for the company is expected to contract by 180bpYoY to 20% for the quarter on account of a significant reduction in other expenses as % of sales.
We expect PAT to remain stable YoY at INR828m. Maintain Buy with a TP of INR7,000 (32x 12-month forward EPS).
Key issues to watch out for Sales outlook for drugs under DPCO. New launches in the near term.
Bloomberg SANL IN
Equity Shares (m) 23.0
M. Cap. (INR b)/(USD b) 136 / 2
52-Week Range (INR) 6840 / 4706
1,6,12 Rel Perf. (%) -8 / -12 / -2
Financial Snapshot (INR Billion) Y/E Dec 2017 2018 2019E 2020E
CMP: INR335 TP: INR465 (+39%) Buy We expect sales to decline by 20% YoY to INR1.8b for the quarter
on account of reduction in CRAMS business. This decline isexpected to be offset to some extent by high growth in USformulations business.
We expect EBITDA margin for the company to expand by 310bpYoY to 23.4% for the quarter on account of increased revenueshare from US formulations business.
We expect PAT to come in at INR391m. Stock trades at 15x FY20E EPS. We remain positive on SLPA on the
back of strong product pipeline for the regulated markets,consistency in compliance and higher capacity utilization to resultin improved operating leverage which will in turn drive the returnratios.
We maintain Buy, with a target price of INR465 (20x 12-monthforward earnings).
Key issues to watch out Pace of filings, approvals and new product launches in the US. Traction in existing products. Progress on next growth drivers – Biologics & Transdermals.
Bloomberg SLPA IN
Equity Shares (m) 80.0
M. Cap. (INR b)/(USD b) 27 / 0
52-Week Range (INR) 547 / 328
1,6,12 Rel Perf. (%) -13 / -23 / -45
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Sales 7.9 7.2 9.0 10.9
EBITDA 1.6 1.6 2.2 2.9
NP 1.0 1.1 1.8 1.9
EPS (INR) 12.8 13.9 22.3 24.2
EPS Gro. (%) -0.7 8.2 60.8 8.3
BV/Sh. (INR) 133.1 148.8 169.6 192.1
RoE (%) 10.3 9.7 13.8 13.2
RoCE (%) 8.0 7.9 11.5 11.2
Valuations
P/E (x) 26.1 24.1 15.0 13.8
P/BV (x) 2.5 2.3 2.0 1.7
EV/EBITDA (x) 17.6 17.2 12.5 9.4
EV/Sales (x) 3.6 3.9 3.1 2.5
March 2019 Results Preview | Sector: Healthcare
Shilpa Medicare
April 2019 178
Consolidated - Quarterly Earning Model (INR m) Y/E March FY18 FY19E FY18 FY19E
CMP: INR474 TP:INR590(+24%) Buy We expect sales at INR9.3b (+41% YoY) for 4QFY19 on account of
high growth expected in the US business. We expect US business to clock revenues of ~INR3.4b for the
quarter v/s INR1.3b in 4QFY18. Africa business is expected togrow 14% YoY.
We expect 290bp QoQ improvement in EBITDA margin at 15.9%due to better product mix with increased US business, thus driving operating leverage for STR.
Accordingly, PAT is expected at INR6.3b for 4QFY19. We remain positive on STR on the back of enhanced business
from US geography which will in turn drive profitability. Wemaintain Buy, with a target price of INR590 (SOTP basis).
Key issues to watch out Quality of ANDA filings and rate of approvals. Competitive scenario in existing products in the US. Outlook on institutional as well as branded generic business in
Sun PharmaCMP: INR470 TP:INR546 (+16%) Buy Sun Pharmaceuticals (SUNP) is expected to deliver 10% YoY
growth in revenues to INR74b for 4QFY19. We expect the US business to grow at a muted ~7% YoY to
INR25.7b on a low base of past year. Domestic formulationsbusiness is expected to grow at 7% YoY to INR21b. We expect APIbusiness to register strong revenue growth of 28% YoY whileROW markets to witness 16% YoY decline in revenues.
EBITDA margins are expected to improve by 170bp to 22.8% dueto shift towards high-margin specialty products.
We expect PAT to witness YoY growth of 7% to INR9.8b. We remain positive on SUNP on the back of its shift towards high
margin specialty products, healthy product pipeline for regulatedmarkets and sustained performance in domestic formulations.We maintain Buy on the stock with TP of INR546 @ 23x 12Mforward earnings.
Key issues to watch out Ongoing pricing pressure in US and impact on SUNP sales. New launches in the domestic segment and impact on drugs
under DPCO 2013. Update on traction in specialty products.
Bloomberg SUNP IN
Equity Shares (m) 2399.0 M. Cap. (INR b)/(USD b) 1127 / 16 52-Week Range (INR) 679 / 375
1,6,12 Rel Perf. (%) -3 / -32 / -25
Financial Snapshot (INR Billion) Y/E MARCH 2018 2019E 2020E 2021E
Torrent PharmaceuticalsCMP: INR1,889 TP:INR1,660 (-12%) Neutral We expect Torrent Pharmaceuticals (TRP) to post ~23% YoY
growth in revenues to INR21b in 4QFY19. The domestic formulations and Europe business are expected to
grow 20% YoY to INR8.3b and INR2.9b respectively while USbusiness is expected to witness 12% YoY decline to INR2.7b.
The EBITDA margin is expected to expand 580bp YoY to 26.9% onaccount of better product mix and lower employee cost and otherexpenses as % of sales.
Absolute EBITDA is expected to increase 57% YoY to INR5.7b,while PAT is expected to remain stable YoY at INR2.7b due to taxcredit received by the company in 4QFY18.
We remain positive on TRP on the back of pick-up in the Unichemportfolio, sustained outperformance in DF and increased R&Dspend for building a healthy pipeline for US business. However,we maintain Neutral given the limited upside from current levelswith TP of INR1,660 @ 20x 12M forward earnings.
Key issues to watch out for Performance in the acquired portfolio of Unichem. Outlook on future ANDA launches in the US market.
Bloomberg TRP IN
Equity Shares (m) 169.2 M. Cap. (INR b)/(USD b) 320 / 5 52-Week Range (INR) 1964 / 1245
1,6,12 Rel Perf. (%) -2 / 8 / 32
Financial Snapshot (INR Billion) Y/E MARCH 2018 2019E 2020E 2021E
Sales 60.0 78.7 90.0 102.3
EBITDA 13.5 20.5 24.0 27.5
NP 9.1 8.2 11.6 14.1
EPS (INR) 53.7 48.7 68.5 83.4
EPS Gro. (%) -2.6 -9.3 40.6 21.7
BV/Sh. (INR) 273.1 322.5 366.3 419.5
RoE (%) 20.3 16.4 19.9 21.2
RoCE (%) 10.6 11.8 13.5 14.9
Valuations
P/E (x) 35.2 38.8 27.6 22.7
P/BV (x) 6.9 5.9 5.2 4.5
EV/EBITDA (x) 27.3 17.3 14.3 12.0
EV/Sales (x) 6.1 4.5 3.8 3.2
April 2019 181
Sectoral hurdles receding; focus shifts to project execution Ordering activity stands muted for FY19 Ordering activity in the road sector has been slowing down in FY19 owing to (a) land acquisition delays faced by the NHAI, (b) banks’ caution toward lending to infrastructure projects, (c) changes at top management of the NHAI and (d) upcoming general elections impacting project awarding in the road sector. Awarding activity by the NHAI stood at ~INR600b in FY19, and tenders worth INR300b have been deferred and now stand to be awarded in FY20. We expect awarding activity to pick up in 2HFY20 post the general elections.
Execution of awarded projects – a key focus area HAM projects awarded in FY18 had seen delays in receiving the appointed date due to land acquisition issues faced by the NHAI and as banks adopted stringent approach in lending to infrastructure projects. However, activities have started picking up now – most of the HAM projects awarded in FY18 have achieved financial closure and now awaiting the appointed date from the NHAI. This, along with the resolution of the land issues, sets the tone for timely execution of these HAM projects in FY20.
Execution for coverage universe to increase 20% YoY We expect execution for our coverage universe to increase 20% YoY. Barring KNR, which is likely to be hurt by a lower order book, all companies are likely to deliver healthy execution.
Operating margin to shrink due to adverse revenue mix; expect muted net profit growth We expect operating margins for our coverage universe to contract at the aggregate level, given the adverse revenue mix and the moderation in profitability. Net profit is likely to decline 20% YoY, given that most companies would incur higher tax burden after the expiry of tax holiday under section 80IA.
Opportunities abundant for incumbent players With financial closure becoming stringent and banks being selective in extending credit to companies, the sector will likely see consolidation, in our view. Companies with a healthy balance sheet would benefit the most. Stringent financial closure would also lead to moderation in competition (witnessed in recently invited tenders), and thus, an improvement in pricing and margins of financially strong players.
Robust capex is being planned by both the central and state governments (INR7t construction opportunity). We believe the best way to play the road sector capex theme is through EPC players having a strong execution record and a healthy balance sheet. Our top picks are KNR and Ashoka Buildcon.
Company name
Ashoka Buildcon
IRB Infra
KNR Constructions
Sadbhav Engineering
March 2016 Results Preview | Sector: Capital Goods March 2019 Results Preview | Sector: Infrastructure
Infrastructure
Amit Shah – Research Analyst ([email protected]); +91 22 6129 1543 Nilesh Bhaiya – Research Analyst ([email protected]); +91 22 6129 1556
April 2019 182
Exhibit 1: Summary of expected quarterly performance Sector Sales (INR M) EBITDA (INR M) PAT (INR M)
March 2019 Results Preview | Sector: Infrastructure
KNR CMP: INR257 TP: INR295 (+15%) Buy We expect revenue to decline 16% YoY to INR5.3b on account of
lower order book availability for execution. Operating profit is expected to decline 16%, given weak execution
during the quarter. Margins are expected to remain stable at 19.2% (19.3% in 4QFY18). Net profit is expected to decline 60% YoY on account of higher tax
rate assumption for the quarter at 28%, as against 1.7% in 4QFY18.Maintain Buy.
Key issues to watch Update on execution timelines for the newly won HAM projects.
Bloomberg KNRC IN
Equity Shares (m) 140.6 M. Cap. (INR b)/(USD b) 36 / 1 52-Week Range (INR) 339 / 163
1,6,12 Rel Perf. (%) 19 / 29 / -27
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Net Sales 19.3 19.5 25.4 30.3
EBITDA 3.9 3.8 3.9 4.5
NP 2.7 2.0 2.0 2.2
EPS (INR) 19.4 14.4 14.4 15.5
EPS Gr. (%) 61.8 -25.4 -0.4 8.1
BV/Sh (INR) 82.3 96.0 110.1 125.4
RoE (%) 26.5 16.2 14.0 13.2
RoCE (%) 19.5 14.3 13.6 12.7
Valuations P/E (x) 10.4 13.9 14.0 12.9
P/BV (x) 2.4 2.1 1.8 1.6
EV/EBITDA (x) 7.8 7.1 7.0 5.2
April 2019 186
Standalone - Quarterly Earning Model (INR Million) Y/E March FY18 FY19 FY18 FY19E
Financial Snapshot (INR b) Y/E March 2018 2019 2020E 2021E
Net Sales 35.1 38.0 45.9 54.0
EBITDA 4.2 4.4 5.4 6.1
Adj. PAT 2.2 2.3 2.3 2.4
EPS(INR) 12.9 13.5 13.4 14.0
EPS Gr. (%) 17.5 5.2 -1.1 4.6
BV/Sh. (INR) 108.8 121.0 132.9 145.5
RoE (%) 12.5 11.8 10.5 10.0
RoCE (%) 8.4 9.0 9.9 9.7
Valuations P/E (x) 17.8 16.9 17.1 16.4
P/BV (x) 2.1 1.9 1.7 1.6
EV/EBITDA (x) 12.6 11.4 9.2 8.3
Div Yield (%) 1.5 1.3 1.1 0.9
*Consolidated
April 2019 187
Container volume growth moderates in Jan-Feb 2019 Lead distance declines in EXIM
EXIM originating container rail volumes increased 6% YoY, while domestic containerrail volumes grew 5% YoY in Jan-Feb 2019.
Lead distance remained flat YoY for EXIM and declined 16km YoY for domesticoperations in Feb’19.
CCRI is likely to report healthy QoQ improvement in margins led by volume andrealization growth.
AGLL’s margins are expected to decline QoQ, as improvement in MTO margins is likelyto be offset by a contraction in CFS margins.
Originating container rail volumes grow 6% for EXIM, 5% for domestic in Jan-Feb 2019 After growing a robust 8% YoY in Jan’19, EXIM originating container rail volumes
increased by a moderate 4% YoY in Feb’19. Domestic originating container rail volumes grew 7.4% YoY in Jan’19 and 3.3%
YoY in Feb’19. CCRI is likely to report EXIM handling volume growth of 6% YoY for 4QFY19 and
5% YoY volume growth for the domestic segment. In Feb’19, lead distance remained flat YoY for EXIM (-3% YoY in 3QFY19) and
declined 16km YoY (-5% YoY in 3QFY19) for domestic operations.
Margins to improve for CCRI We expect CCRI’s EXIM volumes to grow by 6% YoY and domestic volumes to
increase by 5% YoY in 4QFY19. We expect margins to improve QoQ led by healthy volume growth and
realization improvement of 3% QoQ.
AGLL – MTO, CFS margins to remain healthy, P&E loss to narrow We expect AGLL’s net sales to improve by 22.5% YoY, led by a 4% YoY increase
in MTO volumes. Margins for MTO should remain stable while that for CFS should contract. We expect P&E segment to report positive EBIT.
Exhibit 1: Expected quarterly performance summary CMP Sales (INR m) EBITDA (INR m) PAT (INR m)
CMP: INR 113 TP: INR142 (+24%) Buy We expect AGLL to report EBITDA of INR968m (+31% YoY, -13%
QoQ). With MTO reporting healthy margins, we expect the P&E segment to also report a positive EBIT. We expect PAT at INR501m (+170% YoY, +5% QoQ) in 4QFY19.
We estimate MTO volumes at 166k TEU (+4% YoY, -1% QoQ) and CFS volumes at 76k TEU (0% YoY, -7% QoQ).
We estimate ~14% EBITDA CAGR and ~15% PAT CAGR over FY19-21 and expect return ratios to improve from ~9.5% in FY18 to ~10.8% in FY21, driven by margin expansion.
The stock trades at 13.2x/11.3x FY19E/20E P/E and FY19E/20E EV/EBITDA of 7x/6.1x. Maintain Buy.
Key issues to watch for Volume data Setting up of a logistics park in Jhajjar
Bloomberg AGLL IN
Equity Shares (m) 245.7 M. Cap. (INR b)/(USD b) 28 / 0 52-Week Range (INR) 158 / 90
1,6,12 Rel Perf. (%) 3 / 8 / -42
Financial snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Sales 60.5 70.5 80.8 91.5
EBITDA 3.7 4.4 5.1 5.7
NP 1.8 2.1 2.5 2.8
EPS (INR) 7.3 8.7 10.1 11.4
EPS Growth (%) -23.1 19.3 16.2 12.9
BV/Share (INR) 80.0 88.7 99.0 110.6
RoE (%) 9.5 10.3 10.7 10.8
RoCE (%) 8.4 9.7 10.3 10.5
Valuations
P/E (x) 15.7 13.2 11.3 10.0
P/BV (x) 1.4 1.3 1.2 1.0
EV/EBITDA (x) 7.8 7.0 6.1 5.3
April 2019 191
Container Corp of India (INR m) Y/E March FY18 FY19 FY18 FY19E
Tariff order headwinds to impact broadcasters Print/Radio pack eying revival
A lackluster quarter for broadcasters Marred by the implementation of the TRAI’s new tariff order, broadcasters are likely to see a slowdown in revenues. On-ground hiccups coupled with blackouts in some areas are expected to impact subscription growth. This has also led to various advertisers tightening their purse strings on ad spends, thus, hurting ad growth. However, big movie releases should provide some support to overall revenue. We expect ZEE/SUNTV to report 11%/14% YoY revenue growth, with ad growth of 13%/4% YoY and subscription growth of 4%/11% YoY.
Muted revenue growth coupled with increasing thrust on digital content (in addition to the traditional content) should accentuate the impact on margins – ZEE/SUNTV are likely to report 250bp/80bp YoY drop in margins resulting in 1%/13% EBITDA growth.
Print pack to start seeing revival Print companies should see an improvement in performance due to (a) higher ad spends, (b) the 25% increase in DAVP rates, and (c) softening newsprint prices. Post the muted growth of the last few quarters, print companies should see ad growth inching up on improving ad spends by the government, retail, education, and real estate advertisers. Overall revenue is expected to grow at 7%/5% for JAGRAN/DBCL, primarily led by 8%/7% ad growth. Circulation growth, however, is likely to remain subdued YoY. The 20% decline in newsprint prices from the peak should start to translate into lower cost to the tune of 7-8% for Jagran and DB Corp, even as fresh domestic inventory starts getting utilized from Feb’19. Consequently, increase in overall costs should be limited to 5%/6% YoY for Jagran/ DB Corp, resulting in EBITDA solace for DB Corp (1% QoQ growth), and relatively better performance by Jagran with 13% EBITDA growth.
Radio companies to see healthy growth The radio pack is likely to report healthy growth. During 4Q, traction in ad spends was limited to select categories, such as the government and BFSIs. However, higher utilization at new stations coupled with election-led spending is expected to drive growth for radio companies. We expect ENIL/MBL to report 17%/14% revenue growth. This, along with operating leverage as a result of higher contribution from new stations would support margins; launch of new stations would offset some benefits for ENIL though. Expect ENIL to report 225bp YoY margin expansion while MBL should report 60bp contraction (on a high base of 36%)
Exhibition – PVR to continue its robust momentum Reduced GST rate on movie tickets coupled with the launch of new screens and healthy occupancy during 4Q should drive revenue growth for PVR. Including SPI Cinemas, PVR is likely to report 31% YoY revenue growth on the back of (a) healthy 25% growth in ticketing revenue backed by higher admits and ~16% YoY decline in ATP (due to the cut in GST rates), (b) strong volume-led 31% YoY growth in F&B revenue, and (c) SPI Cinemas’ consolidation. We expect margin to expand 225bp on the back of operating leverage coupled with merger synergies from SPI Cinemas.
D B CorpCMP: INR186 TP: INR215 (+16%) Buy We expect print ad revenues to grow at a modest 7% YoY to
INR3.6b, mainly led by traction in ad spends across selectcategories such as government, real estate, retail, and education.Further, election driven ad spends should also provide somesupport.
Circulation revenue is likely to grow at 4% YoY to INR1.3b. Subsequently, we expect consolidated revenue to grow 5% YoY to
INR5.9b. Though, there has been correction in newsprint prices, we believe
the benefits would not be fully captured in 4Q due to (a) increasein circulation copies and (b) consumption of already bought high-priced inventory, thus leading to high newsprint cost.
Consequently, we expect EBITDA to grow marginally by 1% YoY toINR1b; margins to contract 70bp YoY to 16.8%.
We estimate net profit of INR0.6b, down 2% YoY. The stock trades at 8x FY20E/21E EPS. Maintain Buy.
Key issues to watch for Print ad revenue (expect 7% YoY growth) EBITDA margin (expect 70bp YoY contraction to 16.8%)
Bloomberg DBCL IN Equity Shares (m) 183.7 M. Cap. (INR b)/(USD b) 34 / 0
CMP: INR532 TP: INR720 (+35%) Buy We expect standalone revenue to grow 17% YoY to INR1,869m,
mainly driven by volume-led growth in FCT business. Revival in adspends across certain categories such as Govt. and real estateshould drive overall volumes.
Consequently, standalone EBITDA is likely to grow 29% YoY toINR457m led by strong revenue growth and operating leverage. Weexpect margins to expand 225bp YoY to 24.5%.
PAT is expected to grow 74% YoY to INR204m on the back of strongEBITDA growth.
The stock trades at an EV/EBITDA of 13x FY20E and 8x FY21E.Maintain Buy.
Key issues to watch for Growth in advertisement revenue in old and new stations Yield improvement at legacy stations
Bloomberg ENIL IN Equity Shares (m) 47.7 M. Cap. (INR b)/(USD b) 25 / 0
Jagran PrakashanCMP: INR120 TP: INR140 (+16%) Buy Despite subdued election-led ad spending, the uptick in ad spends
across select categories including government, retail, real estate,etc., should lead to a modest 8% YoY print ad growth to INR3.4b.
Circulation revenue is likely to remain flat YoY at INR1.1b. Expectradio revenue to grow at a faster pace of 14% YoY to INR0.9b.
Subsequently, consolidated revenue should come in at INR5.9b, up7% YoY.
Benefits from correction in newsprint prices would not be fullyreflected in 4Q due to (a) increase in circulation copies, and (b)consumption of already bought high-priced inventory.
Consequently, we expect EBITDA to grow 13% YoY to INR1.4bmainly driven by revenue growth; margins should expand 120bpYoY to 23.1%.
PAT is expected to grow 27% YoY to INR0.8b. The stock trades at 9x FY20E and 8x FY21E EPS. Maintain Buy.
Key issues to watch for Ad revenue (expect 8% YoY growth) EBITDA margin (expect 120bp expansion to 23.1%)
Bloomberg JAGP IN Equity Shares (m) 311.4 M. Cap. (INR b)/(USD b) 37 / 1
Music Broadcast CMP: INR59 TP: INR76 (+28%) Buy We expect revenue to grow at a healthy 14% YoY to INR865m
mainly on the back of a revival in ad spends across categoriessuch as BFSI and Govt. Although election-led ad spends started ona soft note, it should provide impetus to overall growth.
EBITDA is expected to grow 12% YoY to INR306m on the back ofoperating leverage and higher contribution from new stations,partly offset by higher opex; margins are likely to contract 60bpYoY to 35.4% (on a high base of 36%).
We expect PAT to grow 21% YoY to INR197m led by EBITDAgrowth.
The stock trades at EV/EBITDA of 11x FY20E and 8x FY21E.Maintain Buy.
Key issues to watch for Growth in utilization of new and old stations Yield improvement at legacy stations
Bloomberg RADIOCIT IN Equity Shares (m) 285.3 M. Cap. (INR b)/(USD b) 17 / 0
the SPI Cinemas’ consolidation) in PVR to INR7.6b. The stronggrowth can be attributed to (a) strong ticketing revenue growth –led by screen additions, better content driven uptick in footfalls,and GST rate-cut leading to a decline in ATP, (b) (volume-led)double-digit growth in F&B revenue, and (c) consolidation of SPICinemas.
We expect EBITDA to grow 49% YoY to INR1.4b mainly on the backof strong revenue growth coupled with merger synergies; weexpect margins to expand 230bp YoY to 18.4%.
However, higher depreciation and finance cost are expected topartly offset benefits of EBITDA growth. Consequently, we expectPAT to grow 13% YoY to INR295m.
The stock trades at 46x FY20E and 41x FY21E EPS. Maintain Buy.
Key issues to watch for Number of screen additions Occupancy rate Growth in ATP and SPH
Bloomberg PVRL IN Equity Shares (m) 46.7 M. Cap. (INR b)/(USD b) 77 / 1
Sun TVCMP: INR642 TP: INR740 (+15%) Buy We expect Sun TV’s standalone revenue to grow 14% YoY to
INR8.2b mainly led by domestic subscription growth and movierevenue.
Though impacted by implementation of TRAI’s new tariff order, weexpect domestic subscription revenue to grow 11% YoY to INR3.4b,primarily led by digitization in Tamil Nadu and contribution fromSun Nxt.
Domestic ad revenue is likely to witness subdued growth; expect a4% YoY increase to INR3.5b.
However, margins are expected to be under pressure due to highercontent cost along with investments for Sun Nxt; we expect 80bpYoY contraction in margins to 72.1%. Standalone EBITDA is likely togrow 13% YoY to INR5.9b.
PAT is expected to grow 26% YoY to INR3.7b on the back of EBITDAgrowth.
The stock trades at 16x FY20E and 14x FY21E EPS. Maintain Buy.
Key issues to watch for Domestic ad revenue (expect 4% YoY growth) Domestic subscription revenue (expect 11% YoY growth)
Bloomberg SUNTV IN Equity Shares (m) 394.1 M. Cap. (INR b)/(USD b) 253 / 4
CMP: INR418 TP: INR450 (+8%) Neutral We expect domestic ad/subscription revenue to grow at a
relatively slower pace — 13%/4% YoY to INR11.1b/INR4.7b due to the implementation of the TRAI’s new tariff order.
However, revenue from the release of the movie ‘Manikarnika’ should support overall growth.
Consequently, we expect overall revenue to grow at 11% YoY to INR19.1b.
Slow pace of revenue growth coupled with higher content cost on account of amortization of ZEE5’s content, and investment in traditional and movie content are expected to accentuate the impact on margins. We expect EBITDA margin to contract 250bp YoY to 26.8%; consolidated EBITDA is likely to grow a meager 1% YoY to INR5.1b.
Yet, lower finance cost and taxes should provide impetus to PAT, and is expected to grow 23% YoY to INR2.8b.
The stock trades at 22x FY20E and 18x FY21E EPS.
Key issues to watch for Domestic ad revenue (expect 13% YoY growth) Domestic subscription revenue (expect 4% YoY growth)
Bloomberg Z IN Equity Shares (m) 960.5 M. Cap. (INR b)/(USD b) 402 / 6
Earnings to decline as lower prices seep in Our top picks: JSP, HNDL and JSTL
Steel prices lower but stabilizing Average flat steel product prices were down ~9% QoQ to ~INR 41,660/t while average long steel product prices were unchanged at ~INR37,500/t. Flat steel prices, though, have recovered by INR2,000/t since the start of Feb’19. Long products are trading at ~INR36,700/t, while flat products are at ~INR42,000/t. Domestic steel demand growth was modest at ~5% YoY in Jan-Feb 2019 (according to JPC). While steel exports have been hit, it declined ~16% during Jan-Feb 2019 on a YoY basis. On a QoQ basis, we expect sales volumes to recover as 3Q witnessed a deferral in purchases due to price volatility and on companies looking to reduce their excess inventory. Expect steel sales volumes for companies under our coverage to increase 19% /8% QoQ /YoY in 4QFY19.
Base metals (except aluminum) inch higher Prices for most base metals (except aluminum) were higher on a QoQ basis. Avgerage Zinc prices increased ~3% QoQ to USD2,694/t. Lead was up ~4% QoQ to USD2,039/t; while copper was up ~1% QoQ to INR6,202/t. Alumina prices, though, continued to trend lower and declined ~12% QoQ to USD387/t due to increasing supply from China, upcoming capacity (Emirates Global) and lifting of sanctions on Rusal. All-in aluminum prices declined ~5% QoQ to USD1,949/t (LME is down 6% QoQ to USD1,859/t).
Earnings growth to get impacted due to falling prices Earnings growth for our metals coverage universe is expected to decline on the back of lower spreads. Aggregate EBITDA for the universe is expected to decrease by ~14% YoY (down 5% QoQ), turning negative after 11 quarters of YoY increase. Aggregate PAT is expected to decline by 34% YoY (-18% QoQ). Declining steel and metal prices amid US China trade war concerns and signs of a slowdown in China have driven the weakness. Expect JSW Steel‘s EBITDA to decline 10% QoQ owing to lower realizations. SAIL’s EBITDA is expected to decline ~2% QoQ to INR25.2b. JSP’s EBITDA is likely to increase ~1% QoQ to INR21b on higher steel volumes and improved subsidiary performance. We expect EBITDA for Tata Steel to increase ~1% QoQ to INR68.1b led by higher steel volumes,and offset by lower realizations.
NMDC’s EBITDA is expected to decrease 17% QoQ to INR19b on lower prices. Amongst base metals, the ~2% QoQ appreciation in the USD-INR is likely to have a negative impact. Vedanta’s EBITDA is likely to decrease 2% QoQ to INR55.5b. HNDL and NACL will be impacted by lower LME leading to 10%/36% QoQ fall in EBITDA.
Estimates and TP change (Exhibit 15 to 17) We have cut LME aluminum assumption from USD2,000 to USD1,900 for FY19 and have increased our alumina assumption from USD350 to USD400 for FY20 and FY21. The change in estimates is presented in Exhibit 15 to 16.
Top picks – JSP, HNDL and JSTL Metal stocks have de-rated in recent months on risk of a trade war and on concerns pertaining to the slowing demand in China. We prefer structurally efficient companies with low capital and operating cost, access to cheap raw material and a strong balance sheet. Our top picks are HNDL and JSTL. We also like JSP, which should benefit from capacity addition and revival in the Power sector, though the leverage is high. We also have a Buy rating on NACL and NMDC.
HindalcoCMP: INR217 TP: INR281 (+29%) Buy Standalone (incl. Utkal): We expect EBITDA to decline 17% QoQ
to INR14.2b on lower LME aluminum, partly offset by the benefitof hedges. Aluminum EBITDA is expected to decline 19% QoQ toINR10.4b and copper is likely to decrease 12% QoQ to INR3.8b.Aluminum LME is down ~USD109/t QoQ to USD1,859/t, drivingthe decline in EBITDA.
Aluminum volumes will increase 5% QoQ to 338kt and copper willincrease 1% QoQ to 100kt.
Novelis: We expect Novelis to report adjusted EBITDA of USD319m, down 1% QoQ. Adjusted EBITDA/t is estimated at USD388 (v/s USD403 in 3QFY19). Volumes are expected to increase by 3% QoQ to 821kt. Buy.
Key issues to watch for: Lower margins in aluminum Foreign exchange rate impact at Novelis
Bloomberg HNDL IN
Equity Shares (m) 2228.9 M. Cap. (INR b)/(USD b) 483 / 7 52-Week Range (INR) 267 / 183
1,6,12 Rel Perf. (%) 2 / -17 / -15
Financial Snapshot (INR Billion) Y/E March 2018 2019 2020E 2021E
Hindustan ZincCMP: INR283 TP: INR244 (-14%) Neutral We expect HZL’s EBITDA to decrease 11% QoQ (-30% YoY) to
INR25.3b on lower volumes. LME zinc is expected to increase by USD67/t QoQ to USD2,694/t.
Lead is up USD73/t QoQ to USD2,039/t. Mine metal production is expected to decrease 1% QoQ to 244kt. PAT is seen decreasing 14% QoQ to INR19b (-2% YoY). Neutral.
Key issues to watch for Recovery in global zinc prices Production issues
Bloomberg HZ IN
Equity Shares (m) 4225.3 M. Cap. (INR b)/(USD b) 1194 / 17 52-Week Range (INR) 313 / 243
Jindal Steel & PowerCMP: INR185 TP: INR287 (+55%) Buy Standalone: We estimate standalone EBITDA to decline 4% QoQ
(-6% YoY) to INR14.3b as lower steel prices are partly offset byhigher volumes. EBITDA per ton should decline ~INR2,500/t toINR9,838/t. Volumes will increase 21% QoQ to ~1.45mt.
Jindal Power: Jindal Power’s EBITDA is expected to come in atINR4.1b on higher generation, which is pegged to increase 12%QoQ to 2.9BU.
Oman: We expect an EBITDA of INR3.7b. Consolidated EBITDA is likely to increase 1% QoQ to INR21b. Buy.
Key issues to watch for Ramp-up of Angul Power demand growth
Bloomberg JSP IN
Equity Shares (m) 967.9 M. Cap. (INR b)/(USD b) 179 / 3 52-Week Range (INR) 265 / 123
1,6,12 Rel Perf. (%) 6 / -12 / -35
Financial Snapshot (INR Billion) Y/E March 2018 2019 2020E 2021E
CMP: INR56 TP: INR52 (-8%) Neutral SAIL’s EBITDA is expected to decline 2% QoQ to INR25b on lower
steel prices, partly offset by higher volumes. Volumes would increase 17% QoQ to 4.4mt. Steel prices are
expected to decline ~8% QoQ on lower global steel prices. EBITDA per ton would decline ~INR2,100/t QoQ to INR5,852/t. Adj. PAT will decrease ~8% QoQ to INR5.8b. Neutral. Key issues to watch for Impact of lower steel prices Domestic steel demand growth
Bloomberg SAIL IN
Equity Shares (m) 4130.4 M. Cap. (INR b)/(USD b) 233 / 3 52-Week Range (INR) 91 / 44
1,6,12 Rel Perf. (%) -1 / -25 / -40
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
CMP: INR531 TP: INR367 (-31%) Sell India: We expect Tata Steel’s standalone EBITDA to increase ~2%
QoQ to INR46.2b led by higher volumes offset by lower steel prices. Volumes would be up 13% QoQ at 3.36mt while EBITDA per ton would decline ~INR1,560/t to INR13,755/t on lower steel prices.
Europe: EU margins are estimated to decline to USD49/t v/s USD56/t in 3Q.
Consolidated EBITDA is expected to increase 1% QoQ to INR68.1b. Adjusted PAT is expected to increase 8% QoQ to INR24.3b. Sell.
Key issues to watch for Global iron ore prices Impact of lower steel prices
Bloomberg TATA IN
Equity Shares (m) 1145.0 M. Cap. (INR b)/(USD b) 608 / 9 52-Week Range (INR) 647 / 442
VedantaCMP:INR188 TP: INR122 (-35%) Sell We expect VEDL’s EBITDA to decrease 2% QoQ (-29% YoY) to
INR55.5b, due to lower zinc volumes and the exchange rateimpact. Adjusted PAT is estimated to decrease 51% QoQ toINR7.7b.
Aluminum: EBITDA is expected to come in at INR0.9b, on lowerLME.
Zinc India: EBITDA is expected to decrease 11% QoQ to INR25.3bon lower volumes, and on ~2% appreciation in USDINR QoQ.
Power: EBITDA is expected to be at INR3.9b (+7% QoQ). Copper: Will be impacted due to closure. Oil & Gas: EBITDA is expected to be flat QoQ at INR19.8b on
lower crude oil prices, partly offset by higher volumes. Sell
Key issues to watch for Progress on Gamsberg mine Movement in base metal prices
Bloomberg VEDL IN
Equity Shares (m) 3717.0 M. Cap. (INR b)/(USD b) 697 / 10 52-Week Range (INR) 314 / 146
1,6,12 Rel Perf. (%) 0 / -26 / -51
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Refining margin slips; inventory gain for OMCs Strong volume growth for CGDs
Very low Naphtha cracks (~2012-13 levels) and Gasoline cracks (lowest since FY03)resulted in the Singapore (SG) GRM declining further from USD7.0/bbl in 4QFY18 toUSD3.2/bbl in 4QFY19 (v/s USD4.3/bbl in 3QFY19), the lowest after 3QFY14.
Brent remained volatile averaging ~USD63.2/bbl (declined ~6% QoQ and YoY) in4QFY19, with concerns over OPEC+ cuts and increased US shale supply.
Petchem margins remained under pressure despite lower Naphtha prices, whileprimary spreads of ethylene, propylene and butadiene declined 31%/11%/18% YoY.
A volatile Brent — declines 5.5% YoY and 6.2% QoQ After bottoming out in Dec’18, crude prices followed a strong upward
momentum in the quarter, 4QFY19 averaged ~USD63.2/bbl. This is expected toresult in inventory gains for refiners in the quarter.
We understand there may not be any subsidy sharing with the oil marketingcompanies (OMCs) or the upstream companies (ONGC/Oil India) in the quarter.
SG GRM at USD3.2/bbl, down from USD7.0/bbl in 4QFY18 Singapore GRM for the quarter stood at USD3.2/bbl, down ~55% YoY and ~26%
QoQ due to weak Gasoline and Naphtha cracks. Gasoline cracks in 4QFY19 averaged USD1.6/bbl (lowest since FY03), while
Naphtha cracks were around FY13 levels — at USD7.8/bbl. Diesel cracks declined to USD11.7/bbl (down 16% YoY and 10% QoQ) due to
increased product inventory. Petrochem margins declined despite weakness in feedstock prices. PE delta
declined ~22% YoY and PP delta declined ~13% YoY, while PVC delta witnessed3% YoY increase.
Domestic oil production remains a laggard, while gas production grows We have limited data for the quarter. However, total domestic oil production in
Jan-Feb’19 declined by 5% YoY, while FY19 (March data not out yet) witnessed4% decline YoY.
Domestic gas production in Jan-Feb 2019 increased ~5% YoY, while FY19 (Marchdata not out yet) increased 1% YoY.
LNG consumption grew 8% in Apr-Jan 2019, with increased consumption fromthe Fertilizer sector (+13% YoY) and City Gas Distribution (CGD: +10% YoY). BothPower and others have shown a decline of 2.5% and 7.4%, respectively.
Valuation and view PLNG – accumulate for the long term: Visibility for PLNG’s medium-term/long-
term earnings is high, given (a) the huge gas demand-supply gap in India, (b)volume growth driven by gradual capacity addition, and (c) earnings growthboosted by annual re-gas charge escalation. Poor competition from existing andupcoming terminals and lower LNG prices are additional positives for PLNG.
Prefer IGL among CGDs: We expect volume growth to continue for CGD players.IGL took a price hike on 18 Nov’18, reflecting a higher exchange rate. Since then,the INR has appreciated, averaging ~INR70.6/USD, which is likely to result inmargin expansion for the quarter. We prefer IGL among CGD players due to (a)higher longevity of volume growth compared to MGL, and (b) higher share ofCNG v/s PNG, supporting stable EBITDA/SCM.
OMCs election hurdle to end: The quarter has seen low GRM and USDdepreciation, both expected to hit OMCs. They have also stopped sharing theirgross margins periodically. Although auto fuel prices have declined, there isalways a risk of populist measures hitting the companies during election period.IOCL remains our preferred pick due to (a) strong FCFF, (b) high dividend yield,(c) and inexpensive valuation.
Mixed quarter for RIL: RIL is expected to clock in GRM of USD8.0/bbl, led byweakness in benchmark GRMs. Petchem segment is expected to suffer due toreduced Petchem margins.
ONGC appears attractive: ONGC has been faltering on its oil production growth.But, we believe that once KG-DWN-98/2 comes into production, it would resultin significant gas production growth for the company. We prefer ONGC over OilIndia, as (a) gas production is likely to grow ~5-6% annually for the next 3-4years, (b) oil production is set to increase marginally, (c) ONGC has no subsidyburden so far, (d) it has strong dividend yield, and (e) its valuations areattractive.
Aegis LogisticsCMP: INR205 TP: INR276 (+35%) Buy AGIS is an attractive play in India’s rising LPG consumption. Its
recently commissioned Haldia LPG terminal is expected to drive thenext leg of growth for the LPG segment.
The Liquids segment should remain a cash-cow for the company,growing in line with capacity addition.
We estimate AGIS’ EBITDA at INR1.1b (+59% YoY; +20% QoQ), ledby a ramp-up of the Haldia and Pipavav LPG terminals.
We estimate PAT at INR704m (+46% YoY; +19% QoQ). AGIS trades at 19.3x FY20E EPS of INR9.9 and 11.6x FY20E
EV/EBITDA. Maintain Buy.
Key issues to watch for Ramp-up of Pipavav and Haldia LPG terminals Capacity addition in the liquids segment Clarity on the commissioning of two new LPG terminals
Bloomberg AGIS IN Equity Shares (m) 334.0 M. Cap. (INR b)/(USD b) 68 / 1 52-Week Range (INR) 299 / 170 1,6,12 Rel Perf. (%) -9 / 1 / -38
BPCLCMP: INR381 TP: INR444 (+17%) Buy Inventory gains and higher marketing margins would aid BPCL’s
earnings in 4QFY19. We model nil subsidy-sharing for OMCs;subsidy in 4QFY19 would be borne entirely by the government.
We estimate BPCL’s refinery throughput at 8.3mmt for 4QFY19 v/s7.9mmt in 4QFY18 and 7.5mmt in 3QFY19. We model core GRM ofUSD3.0/bbl and inventory gain of USD1.5/bbl for refining.Additional inventory gain of INR10.2b is expected in marketing.
We expect BPCL to report adj. EBITDA of INR20.1b (-38% YoY; -41%QoQ) in 4QFY19. We estimate PAT at INR22.3b (-17% YoY) for4QFY19.
BPCL trades at 8.0x FY20E EPS of INR47.8 and 1.6x FY20E BV, with~4.2% current dividend yield. EPS change is due to thenormalization of marketing margins.
We raise our PBV multiple from 1.6x to 1.7x as post-election we donot expect government intervention. Maintain Buy with a TP ofINR444 (earlier: INR398).
Key issues to watch for Kochi refinery stabilization Update on Mozambique/Brazil E&P blocks GRM and marketing margins Inventory and forex change impact
Bloomberg BPCL IN Equity Shares (m) 1966.9 M. Cap. (INR b)/(USD b) 748 / 11 52-Week Range (INR) 455 / 239 1,6,12 Rel Perf. (%) 2 / -4 / -27
Financial conso snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Sales 2,358 2,959 3,206 3,336
EBITDA 152 152 164 168
Adj. PAT 98 77 94 102
EPS (INR) 49.8 39.3 47.8 51.8
EPS Gr.% 3.0 -21.0 21.4 8.5
BV/Sh.INR 186.2 207.0 232.5 261.3
RoE (%) 29.0 20.0 21.7 21.0
RoCE (%) 13.7 11.5 11.2 10.6
Payout*(%) 49.4 47.1 46.6 44.4
Valuation
P/E (x) 7.6 9.7 8.0 7.3
P/BV (x) 2.0 1.8 1.6 1.5
EV/EBITDA (x) 7.3 7.6 7.1 6.9
Div yield (%) 5.5 4.2 5.0 5.2
April 2019 228
Quarterly Performance (INR Million) Y/E March FY18 FY19
GAILCMP: INR362 TP: INR340 (-6%) Neutral We expect petrochem sales to get a boost due to an increase in
utilization after the temporary slowdown to introduce new grade(Metallocene film) during 3QFY19. Transmission volumes areexpected to increase 2% QoQ.
We estimate EBITDA at INR28b in 4QFY19 v/s INR17b in 4QFY18 andINR26.7b in 3QFY19.
We expect GAIL to report adjusted PAT of INR17.8b (+77% YoY and+4% QoQ). We model nil subsidy-sharing for GAIL.
GAIL trades at 12.8x FY20E EPS of INR28.4. Maintain Neutral.
Key issues to watch for Petchem profitability LNG glut impacting gas trading business Progress of pipeline projects Pending tariff revisions for key pipelines Visibility on placement of US contracts
Bloomberg GAIL IN Equity Shares (m) 2255.1 M. Cap. (INR b)/(USD b) 816 / 12 52-Week Range (INR) 399 / 296 1,6,12 Rel Perf. (%) -3 / -12 / -6
Financial snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Sales 536.6 742.9 755.8 804.9
EBITDA 76.3 106.4 101.5 105.9
Adj. PAT 46.0 66.5 63.9 67.6
Adj. EPS (INR) 20.4 29.5 28.4 30.0
EPS Gr. (%) 20.5 44.6 -3.8 5.7
BV/Sh.(INR) 182.1 200.7 218.5 237.3
RoE (%) 11.8 15.7 13.7 13.3
RoCE (%) 10.2 13.5 11.7 11.5
Payout (%) 37.1 37.1 37.3 37.3
Valuations
P/E (x) 17.7 12.3 12.8 12.1
P/BV (x) 2.0 1.8 1.7 1.5
EV/EBITDA (x) 10.0 7.4 7.6 7.3
Div. Yield (%) 1.7 2.5 2.4 2.6
April 2019 229
Standalone - Quarterly Earning Model (INR Million) Y/E March FY18 FY19
Gujarat GasCMP: INR147 TP: INR183 (+24%) Buy GUJGA is expected to see a pick-up in its industrial volumes after the
NGT order to ban coal gasifiers at Morbi. Due to the slowdown involumes in Jan-Feb 2019, we expect volumes of 6.4mmscmd, andEBITDA/scm at INR4.3 in 4QFY19.
We expect 4QFY19 PNG industrial/commercial volumes at4.4mmscmd (-6% YoY; -4% QoQ), and PNG household volumes at0.6mmscmd (-23% YoY; +3% QoQ). We expect CNG volumes at1.5mmscmd (+7% YoY; +2% QoQ).
We expect GUJGA to report EBITDA of INR2.5b (+11% YoY; -23%QoQ) for 4QFY19.
GUJGA should report adj. PAT of INR921m (+40% YoY; -39% QoQ). We model total volumes of 7.4/8.2mmscmd and EBITDA/scm of
INR4.0/INR4.1 in FY20/FY21. The stock trades at 21.7x FY20E EPS of INR6.8. Maintain Buy with a
TP of INR183 (earlier: INR165). Key issues to watch for PNG industrial usage CNG volumes EBITDA/scm
Bloomberg GUJGA IN Equity Shares (m) 688.4 M. Cap. (INR b)/(USD b) 102 / 1 52-Week Range (INR) 183 / 116 1,6,12 Rel Perf. (%) 14 / 10 / -29
Financial snapshot (INR b) Y/E March 2018 2019E 2020E 2021E Sales 61.7 78.2 95.9 108.9
HPCLCMP: INR274 TP: INR272 (-1%) Neutral HPCL is likely to post good quarterly numbers aided by inventory
gains and improved marketing margins. We model nil subsidy-sharing for OMCs in 4QFY19.
We peg HPCL’s refinery throughput at 4.4mmt for 4QFY19 v/s4.6mmt in 4QFY18 and 4.6mmt in 3QFY19.
We model core GRM at USD2.7/bbl; while inventory gain ismodeled at USD1.5/bbl in refining and additional INR4.3b inmarketing.
We expect HPCL to report adj. EBITDA of INR19b (-33% YoY; -50%QoQ) in 4QFY19.
We estimate PAT at INR13.9b (-21% YoY) for 4QFY19. HPCL trades at 5.4x consolidated FY20E EPS of INR50.8 and 1.3x
FY20E BV, with ~4.9% current dividend yield. EPS change is due tomarketing margin normalization.
We raise our PBV multiple from 1.0x to 1.1x as post-election we donot expect any government intervention. Maintain Neutral with a TP of INR272 (earlier: INR231).
Key issues to watch for GRM Marketing margins Impact of forex and inventory change
Bloomberg HPCL IN Equity Shares (m) 1524.2 M. Cap. (INR b)/(USD b) 418 / 6 52-Week Range (INR) 370 / 163 1,6,12 Rel Perf. (%) 10 / 6 / -38
CMP: INR300 TP: INR388 (+29%) Buy We expect IGL’s volume growth to be similar to the growth in
3QFY19. We estimate sales volume of 5.97mmscmd (+12% YoY, +1% QoQ).
The INR has appreciated in 4QFY19, averaging ~INR70.5/USD v/s INR72/USD in 3QFY19, which is expected to result in EBITDA/scm expansion from INR5.9 in 3QFY19 to INR6.3 in 4QFY19.
We expect 4QFY19 PNG volumes at 1.5mmscmd (+9% YoY; flat QoQ), and CNG volumes at 4.47mmscmd (12% YoY; +2% QoQ).
We expect IGL to report EBITDA of INR3.4b (+23% YoY; +7% QoQ) for 4QFY19.
We expect IGL to report PAT of INR2.2b (+26% YoY; +11% QoQ). We model volume growth of 12%/11% annually during FY20/21 and
EBITDA/scm at ~INR5.9/scm. The stock trades at 23.1x FY20E EPS of INR13.0. Maintain Buy. Key issues to watch for Volumes growth Exchange rate fluctuations EBITDA/SCM
Bloomberg IGL IN
Equity Shares (m) 700.0 M. Cap. (INR b)/(USD b) 210 / 3 52-Week Range (INR) 320 / 215
IOCCMP: INR158 TP: INR203 (+28%) Buy IOCL is most likely to benefit from the upward crude price
momentum in the quarter, resulting in inventory gains. We expect core refining margin of USD3.5/bbl and inventory gain of
USD2.0/bbl in the quarter. We expect additional INR6.2b ofinventory gain in marketing.
We peg IOCL’s refinery throughput at 18.3mmt for 4QFY19 v/s17.2mmt in 4QFY18 and 19.0mmt in 3QFY19, impacted byslowdown at its Panipat refinery.
We expect IOCL to report adj. EBITDA of INR50.9b (-38% YoY; -59%QoQ) in 4QFY19.
We estimate PAT at INR37.3b (-28% YoY) in 4QFY19, with nilsubsidy-sharing for the company.
IOCL trades at 8.7x FY20E EPS of INR18.2 and at 1.2x FY20E BV.Current Dividend yield is 4.4%. EPS change is due to normalization ofmarketing margins.
We raise our PBV multiple from 1.3x to 1.4x as post-election we donot expect any government intervention. Maintain Buy with a TP ofINR203 (earlier: INR183).
Key issues to watch for GRM / petchem margins Capex plans Forex / inventory changes
Bloomberg IOCL IN
Equity Shares (m) 9478.7 M. Cap. (INR b)/(USD b) 1500 / 22 52-Week Range (INR) 181 / 106
1,6,12 Rel Perf. (%) -1 / -4 / -25
Financial snapshot (Cons.) (INR b) Y/E March 2018 2019E 2020E 2021E
Sales 4,215 5,458 6,574 7,179
EBITDA 416 343 361 369
Adj. PAT 226 147 173 181
Adj. EPS (INR) 23.9 15.5 18.2 19.1
EPS Gr. (%) 11 -35 18 5
BV/Sh.(INR) 120 128 136 145
RoE (%) 21 12 14 14
RoCE (%) 14 9 9 9
Payout (%) 56.4 52.2 53.0 52.6
Valuations
P/E (x) 6.6 10.2 8.7 8.3
P/BV (x) 1.3 1.2 1.2 1.1
EV/EBITDA (x) 5.1 6.4 6.1 6.0
Div. Yield (%) 7.3 4.4 5.2 5.4
April 2019 234
Standalone - Quarterly Earning Model (INR Million) Y/E March FY18 FY19
ONGCCMP: INR157 TP: INR193 (+23%) Buy We estimate gross and net realization to decline from
USD66.4/bbl in 3QFY19 to USD63.0/bbl, in line with the decline inBrent. ONGC is unlikely to bear any subsidy burden in the quarter.
We estimate decline of 11% YoY and 2% QoQ in oil sales at5.3mmt, while there should be a growth of 9% YoY and decline of2% QoQ in gas sales at 5.2bcm during the quarter.
We estimate EBITDA at INR135.9b (+19% YoY, -18% QOQ). We expect ONGC to report adjusted PAT of INR74.7b in 4QFY19
(+26% YoY, -10% QoQ). Our Brent price assumption is USD70/bbl for FY20/21. The stock trades at 5.5x consolidated FY20E EPS of INR28.4, with
implied current dividend yield of ~6%. Maintain Buy.
Key issues to watch for DD&A charges Oil & gas production volumes Development plan for the KG Basin
Bloomberg ONGC IN
Equity Shares (m) 12833.3 M. Cap. (INR b)/(USD b) 2021 / 29 52-Week Range (INR) 192 / 128
1,6,12 Rel Perf. (%) -3 / -19 / -30
Financial snapshot (Cons.) (INR b) Y/E March 2018 2019E 2020E 2021E
Reliance IndustriesCMP: INR1,388 TP: INR1,457 (+5%) Neutral We expect RIL to report GRM of USD8.0/bbl in 4QFY19 v/s
USD11.0/bbl in 4QFY18 and USD8.8/bbl in 3QFY19. This implies apremium of USD4.8/bbl over SG GRM.
Refining throughput for the quarter is expected at 16.8mmt (+1%YoY, -7% QoQ). Petchem volume is expected to increase 8% YoYand decrease 3% QoQ in 4QFY19 at 3.4mmt.
Petrochemical segment is expected to suffer due to reducedproduct margins. We estimate Petchem EBITDA at USD379/MT.
We expect RIL to report consolidated EBITDA of INR191.8b (+4%YoY, -10% QoQ).
We expect RIL to report consolidated PAT of INR97.5b (+3% YoY, -6% QoQ).
RIL trades at 19.7x FY20E EPS of INR70.3. Positive developments inthe telecom and retail segments should drive growth further for the company. Maintain Neutral.
Key issues to watch for GRM Petrochemical margins Telecom subscribers Future capex
Bloomberg RIL IN Equity Shares (m) 5922.0 M. Cap. (INR b)/(USD b) 8222 / 120
Double-digit sales growth likely again for sector players EBITDA and PAT to grow over 20%, led by TTAN
Contrasting numbers likely for the two companies under coverage We expect revenue growth of 14.7% YoY for the two retail companies in our coverage in 4QFY19. EBITDA is expected to increase by 21.8% YoY and adj. PAT by 23.0% YoY.
Titan’s (TTAN) jewelry segment sales growth is likely to come in at ~16% YoY, lower than usual, due to higher gold prices in early-4QFY19, which led to delays in gold purchases. In recent quarters, sale of watches have recovered strongly on a like-to-like basis. The company’s overall sales are expected to grow by 15.5% and PAT by 24.5% YoY. EBITDA margins are expected to increase 70bp YoY.
For Jubilant Foodworks (JUBI), we expect sales to increase 10.3% YoY during the quarter, with same-store-sales growth (SSSG) at 8% YoY. JUBI had reported a 28-quarter high of 26.5% SSSG in the base quarter-4QFY18; the base remains challenging at 25.9% and 20.5% for the next two quarters. But for 4QFY19, despite SSSG moderating, a modest increase in operating costs mean that margins are expected to expand by 80bp YoY to 17.2%. Therefore, 4QFY19 EBITDA/PAT growth is likely to remain healthy at 15.9%/16.1%, despite sales growth moderation.
Huge growth opportunity and visibility drive our preference for TTAN We maintain our Buy rating on TTAN. In FY18, TTAN accounted for just over 6% of the INR2t jewelry market in India. Regulations governing the segment, including (a) identity proofs for all transactions over INR200,000, (b) the GST implementation, and (c) the crackdown on black money has tilted the trade decisively in favor of organized players, among which TTAN is a dominant player in terms of scale and trust. Earnings CAGR is likely to be very impressive for the company at 26.3% over FY18-21. We maintain BUY rating on the stock.
We like JUBI’s business model with strong earnings growth potential on recovery. However, with poor visibility of double-digit SSSG beyond the near term, fair valuations of 51.3x FY20E EPS make us wary of turning constructive. We, thus, maintain a Neutral rating on the stock.
Exhibit 1: Summary of expected quarterly performance Sector CMP Sales (INR m) EBDITA (INR M) PAT (INR m)
Jubilant FoodworksCMP: INR1,442 TP: INR1,380 (-4%) Neutral We expect JUBI’s revenue to grow 10.3% YoY to INR8.6b in
4QFY19.
SSSG is likely to moderate to ~8% for the quarter on a very highbase of 26.5% growth.
We believe that 15 Domino’s stores were added during thequarter.
Gross margin is likely to see an expansion of 110bp YoY to 75.4%.
We expect EBITDA margin to be increase by 80bp YoY to 17.2%.Thus, EBITDA should grow by 15.9% YoY to ~INR1.5b.
We estimate adj. PAT to grow by 16.1% YoY to INR791m.
The stock trades at 51.3x/43.8x FY20E/21E EPS ofINR28.1/INR32.9.
Key issues to watch for: Demand outlook for QSR with major events on the anvil Benefits of cost-saving efforts Performance of Dunkin Donuts and margin guidance
Bloomberg JUBI IN
Equity Shares (m) 132.0 M. Cap. (INR b)/(USD b) 190 / 3 52-Week Range (INR) 1575 / 982
1,6,12 Rel Perf. (%) 5 / 9 / 5
Financial Snapshot (INR b) Y/E March 2018 2019E 2020E 2021E
Tier-I marches on Account-specific stress to drag multiple Tier-II companies
Expect unanimous acceleration in YoY growth to pause after four quarters With aggregate Tier-I CC revenue growth of 10.3% YoY in 4QFY19, we expect the
trend of unanimous acceleration to soften after five quarters. While growth rate at INFO and HCLT will continue accelerating, for TCS and TECHM, YoY growth should be comparable to the previous quarter, and acceleration at WPRO should be marginal. For TECHM, Enterprise will be a drag and weaker-than-anticipated 4Q seasonality should play out for Communications.
While currently companies are not worried about deteriorating macros, most firms have cited some weak pockets, which may potentially impact performances in future quarters.
For Tier-II, client-specific issues will drag 4QFY19 performance across companies such as LTI, PSYS, CYL, and TELX; while the supply situation will continue to weigh on margins at MTCL and HEXW.
We expect aggregate INR revenue growth to be 17.7% YoY, while EBTDA is expected to grow 18.1% YoY. PAT growth is expected to be at 12.6% YoY.
Expect HCLT to lead QoQ growth in Tier-I; MPHL and NITEC to continue growth momentum among Tier-II companies At 3% QoQ CC, we expect HCLT to lead the growth in Tier-I due to continued
traction in IMS backed by its double-digit sequential growth in 3Q. While INFO struggled to grow in 4Q in the past, the ramp-up in large
Communication deals should help them circumvent the same this fiscal. We expect 2.3% QoQ CC growth.
We expect WPRO to grow in the upper half of its 0-2% guidance band at 1.5%, and expect 2% QoQ CC growth for TCS.
While TECHM usually experiences seasonality from its Telecom products’ segment in 4Q, the same may not be a strong tailwind; we expect 2% QoQ CC growth. Enterprise should be soft on the high base of 3QFY19 growth in Manufacturing and Retail, pegging our estimate at 1%, and overall company at 1.5% QoQ CC.
Among Tier-II IT companies, momentum for revenues should sustain at NITEC (3% QoQ CC) and MPHL (3.8% QoQ CC). LTI will be dragged by pressures in top BFS accounts; PSYS by weak IP revenues and CYL by deferred ramp-ups in services and regulatory delays in DLM contracts. MTCL should improve growth from 2.5% in the previous quarter (+3.1% QoQ CC) and March quarter’s seasonality should weigh on HEXW (+2.5% QoQ CC).
Supply concerns may weigh on margins of select companies Back-ended nature of investments at INFO will continue to weigh on its margins;
we expect 50bp QoQ decline to 22.4%. Margins should also normalize at WPRO, which is expected to settle between 18-19% (IT Services EBIT). We expect stable margin performance across TCS, HCLT and TECHM.
Among Tier-II, sharp decline in IP revenues will drag PSYS’ margins by ~400bp, the laggard in profitability this quarter. LTI should see normalization of margins
given the ~200bp reduction in utilization. Margins should decline at MTCL too (EBIT of 13%, -60bp QoQ), given investment in people at onsite v/s earlier outlook of flattish margins QoQ. Expect stable margins across the rest of our coverage universe.
Watch out for INFO’s margin guidance; HCLT’s revenue guidance and TCS’ BFS commentary INFO may not see calibration of investments in FY20, yet, margin guidance may
drop further to 21-23%, in our view. Our expectation comes on the back of aweak 4Q exit and the typical margin cycle of low 1Q followed by a gradualincrease. We expect INFO to start the year with revenue growth guidance of 7-9% YoY CC.
TCS’ comments on BFS will be crucial to get a grip on its sustenance of currentgrowth rates. The company has cited in the past that any macro concerns tendto reflect in the BFS vertical more prominently, given TCS’ wide coverage andnature of client spending.
We believe that HCLT should guide for revenue growth upwards of 15% YoY CCdue to contributions from: (1) improved organic growth (8-9% CC), (2) revenuesfrom IBM’s IP purchases (~5.5%), (3) recent mega deal with Xerox (~2%), and (4)residual impact from acquisition integration in FY19 (~0.5-1%).
We expect WPRO to start the year with a guidance of 1-3% QoQ CC revenuegrowth in 1QFY20.
Watchful of weakening pockets at current valuations; Prefer INFO, ZENT While no company has called out a secular slowdown, multiple companies in the
last month have cited pockets of weaknesses. With valuation multiples runninghigh (in the upper half of historical band, if not higher end), continuedaggravation of this trend could weigh on multiples.
We continue with our bottom-up stance for sectoral picks, and prefer INFO inTier-I and ZENT in Tier-II. Over the short-term, tactical valuation catch-up play isan opportunity for WPRO.
Exhibit 1: Expected quarterly performance summary Sector CMP Sales (INR m) EBIDTA (INR m) Net Profit (INR m)
CyientCMP: INR579 TP: INR650 (+13%) Neutral According to a CYL press release, DLM revenue will be materially
impacted due to deferment of a large deal; the impact will beclose to USD5m. Considering this, we expect DLM revenue atUSD20m.
CYL also cited that there will be some delay in orders from one ofthe customers in A&D and the communications business. We expect services business to report revenue of USD146m
Considering cross currency impact of 40bp, we expect CYL toreport growth of 0.4% QoQ CC on a consolidated basis.
We expect CYL’s full-year EBITDA margin to be flat at 14%. Thisimplies marginal expansion in 4Q EBITDA margins. Our 4Q marginestimate stands at 15.3%.
Consequently, our PAT estimate of INR1,287m implies 40%sequential growth, led by lower base of the previous quarter.
The stock trades at 12.4x FY20E and 11.5x FY20E EPS. MaintainNeutral.
Key issues to watch for Update on trajectory of top customer and aerospace Trajectory in Communications Outlook on investments and profitability Outlook for Rangsons
Bloomberg CYL IN
Equity Shares (m) 113.0 M. Cap. (INR b)/(USD b) 65 / 1 52-Week Range (INR) 887 / 571
1,6,12 Rel Perf. (%) -19 / -31 / -33
Financial Snapshot (INR b) Y/E MAR 2018 2019E 2020E 2021E
HCL TechnologiesCMP: INR1101 TP: INR1,200 (+9%) Neutral We expect HCL’s revenue to grow at 3.3% QoQ in USD terms / 3%
QoQ CC, mainly due to continued traction in IMS backed by itsdouble-digit sequential growth in 3QFY19.
We believe that HCLT should guide for revenue growth upwardsof 15% YoY CC due to contributions from: (1) improved organicgrowth (8-9% CC), (2) revenues from IBM’s IP purchases (~5.5%),(3) recent mega deal with Xerox (~2%), and (4) residual impactfrom acquisition integration in FY19 (~0.5-1%).
We expect EBIT margins to be ~19.5%, a decline of 20bp QoQ. PAT is expected to decline by 1.2% QoQ to INR 25.9b. The stock trades at 13.6x FY20E and 12x FY21E EPS. Maintain
Neutral.
Key issues to watch for Overall guidance for FY20, organic and inorganic contribution Mode 1: Demand for IMS services and growth in BFSI vertical Mode 3: Plan to launch more HCL branded products and ability
to sell them in the market
Bloomberg HCLT IN
Equity Shares (m) 1412.9
M. Cap. (INR b)/(USD b) 1555 / 23
52-Week Range (INR) 1125 / 880
1,6,12 Rel Perf. (%) -4 / -7 / -5
Financial Snapshot (INR b) Y/E MAR 2018 2019E 2020E 2021E
Sales 505.7 604.6 698.3 772.7
EBITDA 114.4 140.5 167.2 189.6
PAT 87.8 101.5 110.6 125.2
EPS (INR) 62.6 73.7 81.1 91.7
EPS Gr. (%) 4.5 17.8 10.1 13.0
BV/Sh. (INR) 264.5 309.5 342.4 385.8
RoE (%) 25.0 25.7 24.9 25.2
RoCE (%) 22.6 23.3 21.7 21.6
Payout (%) 12.8 11.5 49.3 43.6
Valuation P/E (x) 17.6 14.9 13.6 12.0
P/BV (x) 4.2 3.6 3.2 2.9
EV/EBITDA (x) 12.5 10.1 8.6 7.6
Div yld (%) 0.7 0.8 3.6 3.6
April 2019 252
March 2019 Results Preview | Sector: Technology
Quarterly Performance (Indian GAAP, INR m) Y/E Dec CY18 CY19 CY18E CY19E
Hexaware TechnologiesCMP: INR359 TP: INR365 (+2%) Neutral We expect USD revenue to grow at 2.5% QoQ, with cross-
currency tailwind of 30bp. HEXW declared revenue guidance for CY19 at 12-14%, ahead of
previous year’s guidance. HEXW cited that most of the growth willbe clocked in during the latter part of the year, due to calendarimpact ad 4Q deal ramp-up.
EBITDA margin at 15.1% is 20bp lower, primarily on account ofsupply situations. Regulators are also engaging in post-approvalchecks, verifying facts with clients.
Our PAT estimate for the quarter is INR1,441m, up 6% from theprevious quarter despite marginal increase in operational income.This is due to lower base of previous quarter.
HEXW trades at 17x of CY19E and 15.1x CY20E earnings. Neutral.
Key issues to watch for 1QCY19 deals TCV Commentary on acquisitions Margin outlook given the recent commentary on supply issues
Bloomberg HEXW IN
Equity Shares (m) 301.8
M. Cap. (INR b)/(USD b) 108 / 2
52-Week Range (INR) 557 / 295
1,6,12 Rel Perf. (%) -8 / -24 / -31
Financial Snapshot (INR b) Y/E DEC 2017 2018E 2019E 2020E
Sales 39.4 46.5 53.6 61.3
EBITDA 6.6 7.3 8.4 9.3
PAT 5.0 5.8 6.3 7.1
EPS (INR) 16.6 19.3 21.0 23.6
EPS Gr. (%) 21.2 16.5 8.5 12.6
BV/Sh. (INR) 66.0 79.7 89.2 99.8
RoE (%) 26.9 26.5 24.9 25.0
RoCE (%) 24.6 24.7 24.7 24.6
Payout (%) 23.5 40.2 44.0 45.2
Valuation P/E (x) 21.6 18.6 17.1 15.2
P/BV (x) 5.4 4.5 4.0 3.6
EV/EBITDA (x) 15.3 13.3 11.3 9.8
Div yld (%) 1.1 2.2 2.6 3.1
April 2019 253
March 2019 Results Preview | Sector: Technology
Quarterly performance (INR m) Y/E March FY18 FY19E FY18 FY19E
December 2018 Results Preview | Sector: Technology
InfosysCMP: INR757 TP: INR870 (+15%) Buy Due to ramp-up in a large Communications deal, we expect
INFO’s 4Q to be better than the usual 3Q. Our estimate is 2.3%QoQ and 12% YoY.
USD revenue growth estimate is 2.6%, with 30bp tailwind fromcross currencies QoQ.
We expect INFO EBIT margin to correct by 60bp QoQ to 22.4%, inline with its outlook of back-ended investments weighing on its profitability.
Our PAT estimate is INR40.1b, +0.7% QoQ and 8.8% YoY. On guidance, we expect INFO to guide for 7-9% CC revenues for
FY20 and 21-23% EBIT margin band (100bp lower). INFO trades at 19.6x of FY20E and 16.7x CY21E earnings. Buy.
Key issues to watch for Guidance on revenues and margins for FY20 Deal wins TCV due to a couple of healthy quarters Attrition rate and color on that for better performers
Bloomberg INFO IN
Equity Shares (m) 4571.2
M. Cap. (INR b)/(USD b) 3461 / 50
52-Week Range (INR) 771 / 542
1,6,12 Rel Perf. (%) -6 / -5 / 17
Financial Snapshot (INR b) Y/E MAR 2018 2019E 2020E 2021E
Sales 705.2 827.4 913.1 1,021.3
EBITDA 190.1 210.7 225.6 253.3
PAT 161.0 161.6 167.9 196.7
EPS (INR) 32.4 36.2 38.7 45.3
EPS Gr. (%) 3.1 11.7 6.9 17.1
BV/Sh. (INR) 143 142.4 142.8 165.7
RoE (%) 24.1 25.5 27.1 29.4
RoCE (%) 24.1 25.5 27.1 29.4
Payout (%) 126.2 67.6 88.9 40.9
Valuations P/E (x) 23.4 20.9 19.6 16.7
P/BV (x) 5.3 5.3 5.3 4.6
EV/EBITDA (x) 16.4 14.1 13.2 11.5
Div Yield (%) 2.1 2.9 2.4 2.4
March 2019 Results Preview | Sector: Technology
Infosys
April 2019 254
March 2019 Results Preview | Sector: Technology
Quarterly Performance (INR m) Y/E March FY18 FY19 FY18 FY19E
MindTreeCMP: INR945 TP: INR1,000 (+6%) Neutral MTCL in previous quarters guided that growth will be in line with
3Q, although we believe it may exceed the previous quarter ledby healthy demand and positive seasonality. We peg our 4QFY19estimate at 3.1% QoQ CC.
With cross currency impact of 40bp, we expect USD revenuegrowth at 3.5% QoQ.
EBITDA margin is expected to decline v/s flattish earlier due toinvestments in people and sub-contractors. We expect EBITDAmargin for 4Q to be 15.3%. Consequently, we expect EBITDAmargin for full-year FY19 to be 15.2%.
Our PAT estimate for the quarter is INR1.9b, which implies asequential growth of 11%. This is due to lower base in theprevious quarter.
The stock trades at 18.7x FY20E and 15.5x FY21E earnings.Neutral.
Key issues to watch for Update on the weak performing Retail and BFS verticals Margin trajectory, going forward, given expected improvement
in organic growth next year too Deal wins during the quarter and growth in Digital
Bloomberg MTCL IN
Equity Shares (m) 167.7
M. Cap. (INR b)/(USD b) 159 / 2
52-Week Range (INR) 1182 / 753
1,6,12 Rel Perf. (%) -7 / -19 / 0
Financial Snapshot (INR b) Y/E MARCH 2018 2019 2020E 2021E
Sales 54.6 70.2 79.1 90.4
EBITDA 7.4 10.6 11.6 13.8
PAT 4.8 7.3 8.3 10.1
EPS (INR) 34.4 45.4 50.7 61.2
EPS Gr. (%) 38.0 32.1 11.6 20.7
BV/Sh. (INR) 166.7 193.1 222.0 257.8
RoE (%) 17.9 24.6 24.4 25.5
RoCE (%) 20.6 30.3 29.1 30.8
Payout (%) 32.0 33.0 35.5 34.3
Valuation P/E (x) 27.5 20.8 18.7 15.4
P/BV (x) 5.7 4.9 4.3 3.7
EV/EBITDA (x) 19.5 13.6 12.3 10.1
Div Yld (%) 1.2 1.6 1.9 2.2
April 2019 256
March 2019 Results Preview | Sector: Technology
Quarterly Performance (INR m) Y/E March FY18 FY19 FY18 FY19E
CMP: INR989 TP: INR1,050 (+6%) Neutral The strong growth in Direct channel, continued recovery in the HP
channel and strong traction from the Blackstone portfolio areexpected to drive 3.5% QoQ CC growth for MPHL in 4QFY19.Digital Risk is the only segment that continues to face challenges.
Cross-currency tailwind of 30bp would push USD revenue growthto 3.8% QoQ.
This would mark another quarter of strong YoY growth at 13.1%CC.
We expect EBIT margin to marginally dip by 40bp led by supplyissues. Impact from currencies is minimal for MPHL due to hedgegains/losses that are captured in the top line.
Our PAT estimate is INR2.5b (-10.5% QoQ), despite higheroperating profits QoQ, mainly due to lower other income.
The stock trades at 16.1x FY20E and 14.1x FY21E EPS. Neutral.
Key issues to watch for Outlook for Digital Risk Comments on DXC channel and potential pricing risk Traction in Direct International channel and the Blackstone
portfolio
Bloomberg MPHL IN
Equity Shares (m) 193.0
M. Cap. (INR b)/(USD b) 191 / 3
52-Week Range (INR) 1278 / 837
1,6,12 Rel Perf. (%) -13 / -22 / -1
Financial Snapshot (INR b) Y/E MAR 2018 2019 2020E 2021E
NIIT TechnologiesCMP: INR1,349 TP: INR1,400 (+4%) Neutral We expect growth momentum from the previous quarter to
continue. 4QFY19 will have only partial seasonality of GIS as someof it was realized in 3Q; that said, we expect 3% QoQ CC growth in4QFY19.
Cross-currency headwinds would add 50bp to this growth,resulting in 3.5% QoQ growth in USD terms.
With deal wins abnormally high in the previous two quarters,NITEC can do 14-15% growth against 12% base expectations.
We expect EBITDA margins to slightly taper off led by INRappreciation and normalization of utilization levels. Our EBITDAmargin estimate for the quarter stands at 18.2%.
Our PAT estimate is INR1,095m (+9.3% QoQ), primarily led bylower base of 3Q.
The stock trades at 18.1x FY20E and 15x FY21E earnings. Neutral.
Key issues to watch for Traction in Digital and the international business Progress on development of strategy under new leadership Deal wins and outlook for the year
Bloomberg NITEC IN
Equity Shares (m) 61.2
M. Cap. (INR b)/(USD b) 83 / 1
52-Week Range (INR) 1425 / 853
1,6,12 Rel Perf. (%) -6 / 9 / 36
Financial Snapshot (INR b) Y/E MARCH 2018 2019 2020E 2021E
Tata ElxsiCMP: INR982 TP: INR1,125 (+15%) Buy Growth on a YoY basis has been picking up and has increased
from 12.5% in 1QFY18 to 17.8% in 3QFY19, also aided bydepreciation of the INR.
We expect this to be altered led by weakness in its top client. We expectYoY growth of 13.8% in INR terms.
EBITDA margin is expected to remain constant at 25.5%. PAT is expected to remain constant with sequential increase of
1%. The stock trades at 18.1x FY19E and 15.3x FY20E earnings. Buy.
Key issues to watch for Addition of new customers and subsequent realization JLR’s contribution to revenue Outlook on growth and profitability for the year
Bloomberg TELX IN
Equity Shares (m) 62.3 M. Cap. (INR b)/(USD b) 61 / 1 52-Week Range (INR) 1492 / 826
1,6,12 Rel Perf. (%) -1 / -23 / -20
Financial Snapshot (INR b) Y/E MARCH 2018 2019 2020E 2021E Sales 13.9 16.2 18.7 22.1
EBITDA 3.5 4.3 4.7 5.6
PAT 2.4 2.8 3.0 3.6
EPS (INR) 38.7 45.6 48.8 57.8
EPS Gr. (%) 37.7 17.7 7.0 18.6
BV/Sh. (INR) 118.6 149.1 219.6 299.1
RoE (%) 37.2 34.1 26.5 22.3
RoCE (%) 37.2 34.1 39.7 33.4
Payout (%) 31.1 33.0 44.5 37.5
Valuations
P/E (x) 22.8 19.4 18.1 15.3
P/BV (x) 7.5 5.9 4.0 3.0
EV/EBITDA (x) 16.5 12.7 10.7 8.2
Div. Yield (%) 1.1 1.4 2.0 2.0
April 2019 260
March 2019 Results Preview | Sector: Technology
Quarterly Performance (IFRS, INR m) Y/E March FY18 FY19 FY18 FY19E
TCSCMP: INR 2,079 TP: INR2,000 (-4%) Neutral We expect TCS to grow its constant currency revenues by 2% QoQ
(12.1% YoY). 4QFY19 is a seasonally weak quarter compared to3Q. Most pockets for TCS are doing well, with the exception ofAutomotives and Hi-Tech.
We expect USD revenue growth of 2.7% QoQ, on the back of70bp tailwind from currencies.
Despite 1.3% QoQ appreciation of the INR, our EBIT marginestimate of 25.8% is 20bp higher QoQ as pressure from escalatedsub-contractors has abated for TCS.
Our PAT estimate of INR78.4b is lower QoQ by 3% due to lowertotal other income.
Key issues to watch for Outlook and visibility for double-digit growth in FY20 Commentary on BFS Trajectory of margins amid rising sub-contractor expenses
Bloomberg TCS IN
Equity Shares (m) 3940.9 M. Cap. (INR b)/(USD b) 8195 / 119 52-Week Range (INR) 2273 / 1423
1,6,12 Rel Perf. (%) -4 / -15 / 26
Financial Snapshot (INR b) Y/E MAR 2018 2019 2020E 2021E
Tech MahindraCMP: INR792 TP: INR940 (+19%) Buy We expect 1.5% QoQ, 6.2% YoY CC revenue growth at TECHM.
With 70bp tailwind from cross currency movements, our dollarrevenue estimate stands at USD1,288m, +2.2% QoQ.
We expect Communications to grow 2% QoQ CC and Enterprise togrow 1% QoQ CC. Muted growth in Enterprise is on the back of a strong 3Q growth base in Manufacturing, Retail and Healthcare.
Our EBIT margin estimate is 15.9%, -20bp QoQ mainly on accountof changes in currencies.
We expect net income of INR12.1b, in line with previous quarterdespite lower ETR in 3Q (offset by lower other income in 3Q).
Key issues to watch for Commentary on 5G and related impact on TECHM’s
communications vertical Outlook for BFSI and Healthcare in Enterprise Deal wins on the back of two quarters of above-average TCV
Bloomberg TECHM IN
Equity Shares (m) 984.7 M. Cap. (INR b)/(USD b) 780 / 11 52-Week Range (INR) 840 / 603
1,6,12 Rel Perf. (%) -13 / -3 / 6
Financial Snapshot (INR b) Y/E MARCH 2018 2019E 2020E 2021E
WiproCMP: INR262 TP: INR275 (+5%) Neutral WPRO had guided for 0-2% QoQ CC growth keeping in mind the
macro uncertainties. With the quarter passing by relativelyunscathed on the macro front, we expect WPRO’s revenuegrowth to be in the upper half of this band – at 1.5% QoQ CC.
Our USD revenue growth estimate is 2.1%, implying tailwind of60bp from cross currencies.
We expect IT Services EBIT margin to decline by 70bp QoQ to19.1%, owing to INR appreciation and some reinvestment ofprofits to build capabilities.
Overall EBIT margin is expected to remain flat at 18.4%, withrecovery of profitability in the non-IT Services.
Our PAT estimate for the quarter is INR24.8b, -2.7% QoQ and+32.7% YoY, due to lower profitability and swing in forex gains.
For 1QFY20, we expect WPRO to guide for 1-3% QoQ CC in termsof revenues and marginal decline in margins due to one-month ofwage hikes.
Key issues to watch for Performance of Healthcare vertical Comments on sustenance of growth in BFSI vertical The quantum of buyback that is likely to be announced with the
results
Bloomberg WPRO IN
Equity Shares (m) 6020.7 M. Cap. (INR b)/(USD b) 1575 / 23 52-Week Range (INR) 297 / 190
1,6,12 Rel Perf. (%) -15 / -2 / 3
Financial Snapshot (INR b) Y/E MAR 2018 2019E 2020E 2021E
Zensar TechnologiesCMP: INR232 TP: INR260 (+13%) Buy We expect revenue of USD148m in 4QFY19, representing growth
of 1.4% QoQ. This breaks up into 1% QoQ CC growth, a cross-currency tailwind of 40bp for ZENT.
Lower growth performance is led by seasonality in IMS productspartially offset by continued traction digital.
We expect EBITDA margin to expand gradually from here on ledby mobile levers such as high digital percentage, exit of ROWbusiness, etc. Our margin estimate is pegged at 12% for 4QFY19(+130bp QoQ).
Our PAT estimate is INR860m, an increase of 56% QoQ, led byhigher operational income and lower base of the previousquarter.
The stock trades at 15x FY20E and 12.6x FY21E earnings. Buy.
Key issues to watch for Traction in Digital, large deals and other new initiatives Margin outlook, given restructuring of IMS business Progress on revival of revenue growth post US turnaround
Bloomberg ZENT IN
Equity Shares (m) 226.0 M. Cap. (INR b)/(USD b) 52 / 1 52-Week Range (INR) 352 / 178
Watch out for the interplay! Fourth quarter numbers for telcos are likely to reflect the interplay of (a) revenue/EBITDA accretion of 1-2% each from the recently launched minimum recharges and the shift of subscribers from feature phone to broadband and (b) incumbents’ loss of IUC receipts and market share. We believe that large part of downtrading is now completed, and thus, stability in revenue/EBITDA should emerge, unless RJio initiates a new round of tariff war to accelerate its subscriber growth.
Some calmness after harsh tides After facing pressures for the last 10 quarters, telcos are likely to witness some stabilization in their revenue/EBITDA performance in 4QFY19. The roll out of minimum recharge plans by incumbents (in the third quarter), coupled with the continuous shift of subscribers from feature phones to smartphones (as evident from the TRAI data), bodes well from the APRU accretion perspective. We expect a 15%/18% QoQ improvement in ARPU for Bharti/Vodafone Idea, higher than the subscriber churn of 8%/9% QoQ, resulting in QoQ revenue growth of 1.5%/flat for Bharti India wireless/Vodafone Idea. Growth in Bharti’s India wireless revenue, coupled with an uptick in its Africa biz, should drive consol. revenue growth of 1% QoQ. RJio is expected to continue its strong subscriber-led revenue growth momentum (ARPU to remain flat QoQ to INR129), driving 11% QoQ overall revenue growth.
Bharti Infratel should witness healthy 3% QoQ revenue growth on the back of 3,260 net tenancy adds (as against QoQ deletions in previous quarters), coupled with a modest 1% QoQ uptick in rentals/tenant. TCOM is expected to report flat QoQ revenue; ex-one-offs in 3Q, the data segment should see 3% QoQ improvement, driven by 2%/7% growth in the traditional/growth segments.
EBITDA downtrend may get arrested Revenue stability should partly support EBITDA, but growing network and access cost should marginally dilute the margins. Vodafone Idea should benefit from its ongoing merger synergy exercise. We expect Bharti’s India wireless EBITDA to stabilize (flat QoQ) in 4QFY19 after last 10 quarters of downtrend. Vodafone Idea should see 24% QoQ jump in EBITDA led by synergy gains, while RJio should continue its steady 12% QoQ growth driven by revenue increase.
Bharti Infratel’s EBITDA should also stabilize with 3% QoQ growth, after witnessing tenancy losses for the last five quarters. TCOM’s consol. EBITDA should grow 7% on adjusted third quarter numbers; data segment is likely to grow 9% QoQ, driven by breakeven in growth services.
Company name
Bharti Airtel
Bharti Infratel
Tata Communications
Vodafone Idea
Telecom March 2019 Results Preview | Sector: Telecom
Bharti plans to turn self-sufficient, Vodafone Idea may need more fuel At steep discounted pricing, fund raising in the form of rights issue for both Bharti and Vodafone Idea should get through, in our view. This would turn Bharti self-sufficient, but provide Vodafone Idea a breather for the next 6-8 quarters, without building in any ARPU increase. Bharti Airtel has built strong product/network capability (compared to RJio) (evident in the incremental broadband share), which should allow it to execute its strategy well in terms of market share, network investments and operations, despite the turmoil in the sector. On the other hand, Vodafone Idea may again require large-scale additional funding post 6-8 quarters, if the sector does not revive. This leaves it in a precarious situation.
Exhibit 1: Expected quarterly performance summary Sector CMP Sales (INR m) EBDITA (INR M) PAT (INR m)
Telecom (INR) RECO Mar-19 Var % YoY
Var % QoQ Mar-19 Var
% YoY Var
% QoQ Mar-19 Var % YoY
Var % QoQ
Bharti Airtel 358 Buy 208,135 6.0 1.4 62,894 -9.2 1.1 -7,173 PL Loss Bharti Infratel 314 Neutral 37,426 2.2 2.8 15,479 -2.8 2.9 7,067 11.3 9.0 Tata Comm 606 Buy 42,855 6.9 0.4 6,795 22.3 -19.4 737 79.1 218.7 Vodafone Idea 17 Buy 117,365 91.2 -0.2 14,073 -2.8 23.8 -41,205 Loss Loss Sector Aggregate 405,780 21.3 1.0 99,241 -5.7 2.3 -40,575 Loss Loss
Exhibit 2: Industry wireless subscriber and net addition trend (m)
Source: TRAI, MOFSL
Exhibit 3: Player-wise QoQ ARPU trend (INR)
*Represents Vodafone Idea merged co performance Source: Company, MOFSL
Exhibit 4: Player-wise QoQ ARPU growth trend (%)
*Represents Vodafone Idea merged co performance Source: Company, MOFSL
23 14 6 4 6 6 0 -1 -3 -5-16
5 -15
5 27
-58
6 15 11 10 2 1 2 4 6
1,0801,1001,1201,1401,1601,1801,200
Jan-
17Fe
b-17
Mar
-17
Apr-
17M
ay-1
7Ju
n-17
Jul-1
7Au
g-17
Sep-
17O
ct-1
7N
ov-1
7De
c-17
Jan-
18Fe
b-18
Mar
-18
Apr-
18M
ay-1
8Ju
n-18
Jul-1
8Au
g-18
Sep-
18O
ct-1
8N
ov-1
8De
c-18
Jan-
19
Wireless Subsriber (m) Wireless Subsriber net additions (m)
CMP: INR358 TP: INR410 (+15%) Buy We expect consolidated revenue to grow 1% QoQ/6% YoY to
INR208b, and consolidated EBITDA to grow 1% QoQ to INR63b. This will mainly be led by a revival of India wireless business and an uptick in Africa business.
India wireless revenue is likely to grow 1.5% QoQ to INR103.4b, as the benefits of APRU uptick (from roll-out of minimum recharge plans) will outweigh the decline in subscribers. India wireless EBITDA too is expected to grow 1% QoQ to INR19.6b.
We expect India wireless ARPU to grow 15% QoQ to INR119 and subscriber base to drop 8% QoQ.
Africa revenue/EBITDA is expected to grow 3%/4% QoQ to INR60.9b/INR22.5b.
We expect Bharti to report net loss of INR7.2b. Bharti trades at an EV/EBITDA of 10x FY20E and 8x FY21E.
Maintain Buy.
Key issues to watch Consolidated revenue (expect 1% QoQ growth). Consolidated EBITDA (expect 1% QoQ growth). India wireless revenue (expected to grow 1.5% QoQ). India wireless EBITDA (expected to grow 1% QoQ).
Bloomberg BHARTI IN Equity Shares (m) 3997.3 M. Cap. (INR b)/(USD b) 1429 / 21
Bharti InfratelCMP: INR314 TP: INR290 (-8%) Neutral We expect consolidated revenue to grow 3% QoQ/2% YoY to
INR37.4b, led by healthy rental and energy revenue growth.Consolidated EBITDA is expected to grow 3% QoQ to INR15.5b;margins to remain flat at 41.4%.
We expect 2% QoQ growth in tenancies to 1,77,709. This coupledwith 1% QoQ uptick in rental/tenant should drive 2% QoQ rentalrevenue growth (INR21.4b). Further, 4% QoQ uptick in energy andother reimbursement revenue (INR16.1b) should drive overallrevenue.
Rental EBITDA margin at 67.4% is likely to expand 30bp QoQ;expect 40bp QoQ expansion in energy margin.
PAT is likely to grow 9% QoQ to INR7.1b led by EBITDA growth. Bharti Infratel trades at EV/EBITDA of 9x FY20E/21E. Maintain
Neutral.
Key issues to watch Consolidated net co-location (expect to grow 2% QoQ to
1,77,709). Consolidated revenue sharing per operator (expect to grow 1%
QoQ).
Bloomberg BHIN IN Equity Shares (m) 1896.7 M. Cap. (INR b)/(USD b) 596 / 9
Tata CommunicationsCMP: INR606 TP: INR700 (+15%) Buy We expect consolidated revenue to remain flat QoQ (+7% YoY);
however, adj. for 3QFY19 one-offs, consol. revenue is likely togrow 3% QoQ to INR42.9b as growth in data revenue is expectedto be offset by muted voice revenue.
Data revenue is likely to grow 1% QoQ to INR33.5b; however,excluding INR910m one-offs in 3Q, data revenue is expected togrow 4% QoQ primarily on the back of Growth segment. Weexpect voice revenue to decline 1% QoQ to INR9.4b.
Adj. for one-offs in 3Q, consolidated EBITDA is likely to grow 7%QoQ to INR6.8b and margins are likely to expand 70bp to 15.9%.Data EBITDA is expected to grow 9% QoQ (adj. for 3Q one-offs)led by break-even in Growth segment. Voice EBITDA is likely todecline 1% QoQ to INR0.8b.
The stock trades at EV/EBITDA of 9x FY20E and 7x FY21E.Maintain Buy.
Key issues to watch Data revenue performance (expect 4% QoQ growth ex one off
gains in 3Q). Data EBITDA margin (expect 80bp QoQ expansion to 18% ex-off
gains in 3Q).
Bloomberg TCOM IN Equity Shares (m) 285.0 M. Cap. (INR b)/(USD b) 173 / 3
Improvement in NTPC’s PAF to result in cost recoveries Valuations at lower end of historical range; prefer COAL, PWGR and NTPC
Conventional electricity generation declined by ~1% YoY in the first two months of 4QFY19 owing to the seasonality led demand decline. For 11MFY19, conventional generation grew by 3.8% YoY, while coal-based generation grew at a faster rate of 4.2% YoY. Hydro grew 6% YoY, while nuclear declined 2.7% YoY during the same period. For 10MFY19, generation grew by ~5% YoY. Day-ahead volumes at IEX declined ~11% YoY due to lower demand and an improvement in coal stocks at power plants in 4QFY19. Average day-ahead prices declined 32% QoQ to INR3.2/kWh.
Within our Utilities Universe, we expect Power Grid’s PAT to increase ~8% YoY to INR24.5b on account of continued capitalization momentum. NTPC’s adj. PAT is expected to be broadly flat at ~INR28b. Reported PAT is expected to increase by ~3% YoY, led by fixed-cost recoveries given improved availability, offset by prior-period revenues witnessed in the previous year. NHPC’s PAT is expected to decline to INR0.9b due to lower other income and charging off expenses on the Lower Subhansiri project. Coal India’s EBITDA (ex-OBR) is expected to decrease ~22% YoY to INR78.7b due to higher cost of production. PAT is expected to decline ~12% YoY to INR54.5b. CESC’s standalone PAT growth will be muted as regulator has not approved the tariff hike for FY19. Tata Power’s adj. PAT is expected to increase 9% YoY to ~INR2.9b on higher profits from coal JVs. Torrent Power’s adj. PAT is expected to decline 17% YoY to ~INR1.8b on account of higher interest expenses and lower other income.
Top picks – Coal India, Power Grid and NTPC The reversal in interest rate cycle should benefit valuation of utility stocks, which have a negative correlation. At current valuations, the sector is trading at the lower end of its 10-year historical P/E and P/BV range. Valuations are heavily discounting the risk to growth potential. Our top picks are Coal India (benefiting from strong earnings growth led by price hike and operating leverage), Power Grid (visibility of earnings growth and best-in-class RoE) and NTPC (capitalization-driven, double-digits regulated equity and earnings growth). We also like NHPC and Torrent Power.
NHPCCMP: INR25 TP: INR31 (+22%) Buy We expect standalone revenue to increase ~23% YoY to INR13.9b
on higher generation across plants. Generation is expected to increase 10% YoY to 2.4BU. We expect PAT at INR0.9b on lower other income and charging off
expenses on the Lower Subhansiri project. Other income is expected to decline 43% YoY to INR1.7b, as the
base included benefit of late payment surcharge. Buy.
Key issues to watch for Commissioning of ongoing projects.
Bloomberg NHPC IN
Equity Shares (m) 10045.0 M. Cap. (INR b)/(USD b) 256 / 4 52-Week Range (INR) 30 / 22
1,6,12 Rel Perf. (%) 2 / 3 / -26
Financial Snapshot (INR Million) Y/E March 2018 2019E 2020E 2021E
Power Grid CorporationCMP: INR200 TP: INR232 (+16%) Buy We estimate PAT to increase by 8% YoY to INR24.5b, driven by
growth in regulated equity. We estimate capitalization of INR73b in the quarter, with full-year
capitalization at INR200b.
Key issues to watch for Capitalization/capex guidance for FY20. Details on competitively bid projects. Development on green energy projects, state JVs, etc.
Bloomberg PWGR IN
Equity Shares (m) 5231.6 M. Cap. (INR b)/(USD b) 1045 / 15 52-Week Range (INR) 217 / 173
1,6,12 Rel Perf. (%) 1 / -3 / -15
Financial Snapshot (INR Million) Y/E March 2018 2019E 2020E 2021E
CMP: INR1,492 TP: INR1,300 (-13%) Sell We expect standalone revenue to grow 33% YoY to INR50.6b,
primarily on the back of strong SSSG and a fillip from new storeadditions.
However, given the company’s focus on price competitiveness, weexpect gross margins to remain flat YoY at 14.8%.
We expect EBITDA margin to expand 40bp YoY to 8.1% on the backof operating leverage. Consequently, we expect EBITDA to grow at robust 40% YoY to INR4.1b.
PAT is expected to grow 34% YoY to INR2.2b driven by robust EBITDA growth.
The stock trades at P/E of 75x FY20E and 56x FY21E.
Key things to watch for Same-store sales growth. New store additions.
Bloomberg DMART IN Equity Shares (m) 624.1 M. Cap. (INR b)/(USD b) 931 / 14
BSECMP: INR613 TP: INR 750(+22%) Buy We expect operating revenues from the BSE to slightly recover
led by volume increase (10% QoQ). However, amid marketvolatility, revenue is expected to decline 24% YoY.
Turnover in cash equities during the quarter was down 31.7%YoY, driving our expectations of a 40% decline in transactionrevenues to INR282m. Revenue from corporate services isexpected to decline 21% YoY to INR489m. Other sources areassumed at INR281m v/s INR216m in the same quarter last year –growth was driven by contribution from monetization of the BSEStar MF platform.
Our EBITDA margin estimate of 5.9% is down 78% YoY.
Due to decline in operations, we have assumed PAT at INR415m,a decline of 37% YoY.
Key issues to watch for Revenues from Star MF platform. Commentary on commodity derivatives launched recently.
Bloomberg BSE IN
Equity Shares (m) 54.8 M. Cap. (INR b)/(USD b) 34 / 0 52-Week Range (INR) 881 / 535
1,6,12 RelPerf. (%) -1 / -16 / -38
Financial Snapshot (INR Billion) Y/E March 2018 2019 2020E 2021E
Net Sales 4.9 4.4 4.8 5.4
EBITDA 1.1 0.3 0.4 0.8
PAT 2.4 1.8 2.2 2.6
EPS (INR) 43.5 34.6 40.0 47.5
EPS Gr (%) 6.0 -20.3 15.6 18.6
BV / Sh (INR) 574 701 712 722
P/E (x) 4.7 17.6 15.2 12.8
P / BV (x) 1.1 0.9 0.9 0.8
RoE (%) 7.6 4.9 5.6 6.6
RoCE (%) 10.7 7.3 8.0 9.0
April 2019 286
Quarterly Performance (INR Million) Y/E December CY18 CY19E CY18 CY19E
Coromandel International CMP: INR491 TP: INR604 (+23%) Buy We expect revenue to grow 25% YoY to INR29,649m in 4QFY19.
Fertilizer volumes are seen growing 6% YoY, which coupled withsignificantly higher realization v/s previous year, should result inrevenue growth of 27.8% YoY in nutrients and other alliedbusinesses. Crop protection business is expected to grow 6% YoY.
Volume growth is expected to be triggered by growth of 75% YoYin urea and traded DAP growing by 31x. NPK & manufactured DAPvolumes are expected to post de-growth of 8% YoY each.
EBITDA margin is likely to contract 40bp to 6.7% due to higherphos acid prices YoY.
Consequently, adj. PAT is expected to grow 17.5% YoY toINR864m in 4QFY19.
The stock trades at 16.8x/14.6x FY20E/21E EPS.
Key things to watch for Outlook for upcoming Kharif season. Phos acid price trend.
Bloomberg CRIN IN
Equity Shares (m) 292.4 M. Cap. (INR b)/(USD b) 144 / 2 52-Week Range (INR) 548 / 340
1,6,12 Rel Perf. (%) 3 / 18 / -26
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
CMP: INR541 TP: INR623 (+15%) Buy We expect consolidated revenue to grow 11.5% YoY to
INR13,320m in 4QFY19. Both animal feed and crop protectionbusiness segment are expected to grow at 14% YoY to INR7,782mand INR2,134m respectively.
Expect consolidated EBITDA margins to expand by 20bp to 6.4% in4QFY19. We expect EBIT margins in animal feed segment todecline by 300bp YoY to 4.1%; however, it is expected to improveon QoQ basis by 100bp on account of price hike.
However, we expect adj. PAT to grow 9.5% YoY to INR274m in4QFY19 primarily on account of higher depreciation (INR265m in4QFY19 v/s INR217m in 4QFY18).
The stock trades at 18.4x FY20 and 15.3x FY21 EV/ EBITDA.
Key things to watch for Response to the price hike taken in the animal feed segment. Recovery of provision amounting to INR50m made in the crop
protection segment.
Bloomberg GOAGRO IN
Equity Shares (m) 192.0 M. Cap. (INR b)/(USD b) 104 / 2 52-Week Range (INR) 737 / 462
1,6,12 Rel Perf. (%) 3 / -3 / -33
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
CMP: INR158 TP: INR189 (+20%) Buy We expect consolidated revenue to grow 9.5% YoY to INR12.5b in
4QFY19 with revenue growth of 9% in the standalone business toINR8.6b. Subsidiary (consolidated less standalone) is expected togrow at 10.7% YoY to INR4.0b.
Consolidated EBITDA margin is likely to expand by 140bp to 22.8%in 4QFY19, mainly on account of 150bp margin expansion in thestandalone business to 34% and decline in losses of the subsidiaryto INR57m in 4QFY19 from INR108m in 4QFY18.
Adj. PAT is expected to grow 21.6% YoY to INR1.1b in 4QFY19primarily on account of lower interest cost (INR490m in 4QFY19v/s INR520m in 4QFY18) and higher other income, which is partlyoffset by an increase in depreciation.
The stock trades at 19.9x FY20E and 15.9x FY21E EV/ EBITDA.
Key things to watch for Rate hikes for the corporate segment in the domestic market. Improvement in the US business.
Bloomberg IH IN Equity Shares (m) 1189.3 M. Cap. (INR b)/(USD b) 187 / 3
Info EdgeCMP: INR1811 TP: INR1800 (-1%) Neutral We expect standalone revenue to grow 22% YoY to INR2.9b. Recruitment segment (~70% of business) is estimated to grow
17% YoY to INR2.05b. We estimate a decline in revenue of 99acres sequentially (-7.5%),
in lieu of near-term pressure in the segment. While matrimony business may see some upside (+6% YoY), this
may be at the cost of higher cash burn to match up withcompetition.
Our EBITDA margin estimate for the quarter stands at 30.8%, up120bp sequentially. Margins are positively impacted byseasonality in recruitment business, which will be partially offsetby higher ad spends.
Consequently, we expect PAT at INR899m, an increase of 59%YoY.
Key issues to watch for Outlook on 99acres.com given emerging clarity on RERA. Traction in the recruitment business from segments other than IT. Commentary around monetization in Zomato.com.
Bloomberg INFOE IN
Equity Shares (m) 104.3 M. Cap. (INR b)/(USD b) 189 / 3 1863 1927 / 1125
1,6,12 RelPerf. (%) -8 / 21 / 33
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
InterGlobe AviationCMP: INR1,384 TP: INR1,444 (+4%) Neutral We expect INDIGO to report revenues of INR78b in 4QFY19 and
EBITDAR of INR19.9b (+78% YoY, +25% QoQ).
We model revenue passenger kilometer (RPK) for the quarter atINR18.6b (+23% YoY, +6% QoQ).
We model ATF at INR63.0/liter (+2.1% YoY) for 4QFY19 andexpect INDIGO to report net gain of INR4.4b.
We model Available Seat Kilometer (ASK) at 80.6b/101.7b inFY19/FY20 v/s 63.5b in FY18, and RPK at 69.5b/87.5b inFY19/FY20 v/s 55.5b in FY18, driven by an increase in its fleet size.
The stock trades at 20.5x FY20E EPS of INR67.4 and at an EV of8.5x FY20E adjusted EBITDAR.
Key issues to watch for Induction of new aircraft in the fleet. Fuel costs and their impact on yields.
Bloomberg INDIGO IN
Equity Shares (m) 384.4 M. Cap. (INR b)/(USD b) 532 / 8 52-Week Range (INR) 1520 / 697
MCXCMP: INR793 TP: INR910 (+15%) Buy Total traded volumes at MCX during the quarter stood at
INR17.6t, up 1.2% QoQ and 20.4% YoY.
Volumes since 4QFY18 have seen a strong pick-up after fourquarters of YoY decline, post demonetization. This drives ourrevenue expectation of INR774m, an increase of 9.7% YoY.
There was a healthy jump in gold volumes during the quarter.Volumes from gold increased 25% QoQ while crude volumes wereup 13% sequentially.
Consequently, EBIT margins are expected to expand by 390bpsequentially to 26.1%.
We expect Software charges as a percentage to graduallydecrease; however, we estimate this quarter to be similar as theprevious one.
However, we expect PAT at INR348m, a decline of 17% QoQ, dueto normalization of tax rate and lower other income.
Key issues to watch for Pick-up in options and steps taken to enhance liquidity. Pace of reforms under SEBI. Strategy around new opportunities.
Bloomberg MCX IN
Equity Shares (m) 51.0 M. Cap. (INR b)/(USD b) 40 / 1 52-Week Range (INR) 917 / 644
1,6,12 RelPerf. (%) 9 / 5 / -4
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Navneet EducationCMP: INR112 TP: INR159 (+42%) Buy We expect sluggish revenue growth of 8.3% YoY to INR2,303m in
4QFY19 due to seasonal nature of the publication business.Typically, 1Q is the largest quarter in publishing/supplementarybook business.
EBIDTA margin is likely to expand 180bp YoY to 13% on the back ofdecline in paper prices and high margin stationery exports. EBIDTAis likely to grow by 26% YoY to INR299m in 4QFY19.
We estimate PAT to grow 22% YoY to INR185m.
Key issues to watch for New-series launch under Indiannica – crucial quarter for
Indiannica business. Stationery segment performance, especially orders from
exports. Guidance on syllabus change in Maharashtra and Gujarat from
FY20.
Bloomberg NELI IN
Equity Shares (m) 233.6 M. Cap. (INR b)/(USD b) 26 / 0 52-Week Range (INR) 158 / 99
PI IndustriesCMP: INR1,056 Under Review We expect revenue to grow 19.3% YoY to INR7,458m, aided by
strong growth of 25% in the CSM business . The growth in agri-input business is expected to be 6% YoY.
We estimate 130bp margin expansion to 22.8% on account ofoperating leverage in CSM business. We expect EBITDA to grow26.3% YoY to INR1,701m.
We estimate adjusted PAT to grow 17.8% YoY to INR1,242m in4QFY19 partially contained on account of higher tax rate of 22%v/s 19.3% in 4QFY18 (deferred tax of INR-34m in 4QFY18).
The stock trades at 29.4x/24.4x FY20E/21E EPS.
Key things to watch for Revenue contribution from new launches. Ramp-up in CSM business.
Bloomberg PI IN
Equity Shares (m) 137.9 M. Cap. (INR b)/(USD b) 146 / 2 52-Week Range (INR) 1087 / 692
1,6,12 Rel Perf. (%) 6 / 45 / 0
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Quess CorpCMP: INR740 TP: INR730 (-1%) Neutral We expect revenue of INR23.2b for Quess in 4QFY19, signifying
growth of 22.8% YoY.
With total headcount in north at 190,000 in PS business, weexpect growth of 27.5% YoY. GTS business is expected to grow at31% YoY.
We expect EBITDA margin to gradually increase hereon. Ourestimate for EBITDA margin stands at 5.5%, which is expected toinch up by 20bp sequentially due to normalization of investmentsin the P&S business.
Our PAT estimate is INR822m, a decline of 4% YoY. While benefitswill come from 80JJA, we expect tax rate to normalize at 11% (vs.4% in 4QFY18). PAT margin is 3.1% for 4QFY19.
Key things to watch for Integration of recently acquired entities. Restructuring of operations in the industrials segment. Organic growth momentum and traction in the general staffing
business post-GST.
Bloomberg QUESS IN
Equity Shares (m) 146.1 M. Cap. (INR b)/(USD b) 108 / 2 52-Week Range (INR) 1300 / 581
1,6,12 RelPerf. (%) -5 / -23 / -45
Financial Snapshot (INR Billion) INR million FY18 FY19 FY20E FY21E
S H KelkarCMP: INR155 TP: INR207 (+34%) Buy We expect revenue to grow at a sluggish 4% YoY to INR2,969m in
4QFY19 due to sluggish demand.
EBIDTA margin is likely to expand 600bp YoY to 16% on weak base quarter performance (a one-time expense had dragged base quarter margins) but remain flat on QoQ basis at 16% in 4QFY19. EBIDTA is likely to grow by 72% YoY to INR466m.
We estimate adjusted PAT to grow 2.6% YoY to INR237m in 4QFY19.
Key issues to watch for Pricing pressure in key raw materials, impacting profitability. CFF acquisition – cross-selling opportunities. Shift of ingredients from Netherlands to manufacturing plants in
India.
Bloomberg SHKL IN
Equity Shares (m) 144.6 M. Cap. (INR b)/(USD b) 22 / 0 52-Week Range (INR) 264 / 137
1,6,12 RelPerf. (%) -5 / -34 / -58
Financial Snapshot (INR Billion) Y/E MARCH FY18 FY19E FY20E FY21E
CMP: INR2,390 Under Review We expect SRF’s revenue to grow 24.7% YoY to INR20,101m in
4QFY19.
Technical textile business is seen posting a growth of 8% YoY, chemicals & polymers business should deliver 30% growth and the packaging film business should post a growth of 35.3% YoY in 4QFY19.
We expect EBITDA margin to expand 40bp to 17.7% and EBITDA to grow 28% YoY to INR3,558m.
We expect EBIT margin contraction of 150bp (to 16%) in chemicals and polymers’ business. Margin in the packaging film business is expected to contract 170bp (to 12%), while margin in technical textile is expected to expand 40bp to 14%.
Consequently, adj. PAT is expected to grow 26% YoY to INR1,556m.
Key things to watch for Ramp up in specialty chemicals business. Update on Dahej plant shutdown.
Bloomberg SRF IN
Equity Shares (m) 58.4 M. Cap. (INR b)/(USD b) 140 / 2 52-Week Range (INR) 2476 / 1531
1,6,12 Rel Perf. (%) -4 / 32 / 3
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Tata Chemicals CMP: INR595 TP: INR787 (+32%) Buy We expect revenue to grow 12% YoY to INR28,683m in 4QFY19 led
by growth of 14.4% in TCNA (North America), 13.5% growth in standalone business and 12% growth in TCAHL (Africa). TCEHL (Europe) is expected to remain subdued at 4.1% growth YoY.
After multiple on-offs in TCNA in 9MFY19, the geography is expected to resume growth. The EBITDA/MT too is likely to increase to USD45/MT in 4QFY19 from USD37.2/MT on account of subsequent operating leverage.
EBITDA margin is likely to contract 140bp to 18.7% as Rallis and standalone business offset the margin expansion in the US and Africa business. We expect margin expansion of 300bp in the US business and 290bp in TCNA. Standalone business and Rallis are expected to witness a margin contraction of 460bp and 140bp, respectively.
EBITDA is likely to grow 4.4% YoY to INR5,352m. Adj. PAT is expected to decline 16% YoY to INR2,600m in 4QFY19 on account of higher tax rate of 23.9% v/s 9.5% in 4QFY18 .
Key things to watch for Scaling up of the consumer business. Revival in the US business after a subdued 9MFY19.
Bloomberg TTCH IN
Equity Shares (m) 254.8 M. Cap. (INR b)/(USD b) 152 / 2 52-Week Range (INR) 782 / 550
1,6,12 Rel Perf. (%) -3 / -21 / -30
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
CMP: INR3040 TP: INR3500 (+15%) Buy We expect revenues to increase by 22.1% YoY to INR11.2b in
4QFY19.
This is expected to be a function of 24% YoY growth in Staffing and Allied Services, 17% YoY growth in Specialized Staffing and 63% YoY growth in Other HR services.
Growth will be majorly dominated by headcount addition into general staffing business, while IT staffing growth is expected to be muted (relatively). Healthy growth in both general staffing and specialized staffing is expected next year.
We expect margins to marginally improve in specialized staffing, while margins in general staffing are expected to remain flattish. Taking this into consideration, we increase our margin estimate by ~6bp.
Our PAT expectation of INR275m (28% YoY) factors in a zero tax rate owing to benefits from Section 80JJJAA of the Income Tax Act.
Key issues to watch for Outlook on headcount growth in General Staffing business. Momentum in IT staffing business. Penetration of other HR services in existing customers and new
accounts.
Bloomberg TEAM IN
Equity Shares (m) 17.1 M. Cap. (INR b)/(USD b) 52 / 1 52-Week Range (INR) 3339 / 2150
1,6,12 RelPerf. (%) -2 / 23 / 12
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
CMP: INR70 TP: INR93 (+32%) Buy We expect revenue to grow 12.8% YoY to INR13,369m in 4QFY19
driven by 13% growth in textiles segment and 12% growth in paper and chemicals segment.
EBITDA margin is likely to contract by 20bp to 18.1% on account of higher raw material cost. EBIT margin in paper is expected to remain healthy at 37.5% (1,000bp expansion YoY, 60bp contraction QoQ), while in textiles segment the EBIT margin is expected to expand by 30bp to 7%.
EBITDA is likely to grow 11.3% YoY to INR2,413m. Adj. PAT is expected to grow 71.6% YoY to INR873m in 4QFY19 driven by higher other income (INR99m v/s INR-29m in 4QFY18) and lower tax rate (28% v/s 42.2% in 4QFY18).
The stock trades at 7.5x/6.8x FY20E/21E EPS.
Key things to watch for Outlook on paper prices. Utilization improvement of bed linen and towel segments.
Bloomberg TRID IN Equity Shares (m) 497.8
M. Cap. (INR b)/(USD b) 35 / 1 52-Week Range (INR) 76 / 51 1,6,12 Rel Perf. (%) 3 / 18 / -9
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Equity Shares (m) 505.0 M. Cap. (INR b)/(USD b) 468 / 7 52-Week Range (INR) 961 / 538
1,6,12 Rel Perf. (%) -2 / 32 / 6
Financial Snapshot (INR Billion) Y/E March 2018 2019E 2020E 2021E
Sales 173.8 198.7 362.1 401.2
EBITDA 35.2 41.5 75.8 96.4
NP 22.3 23.5 24.5 38.7
EPS (Rs) 43.8 46.0 48.0 75.8
EPS Gr. (%) 4.8 5.1 4.3 58.1
BV/Share 181.6 213.8 256.0 305.9
RoE (%) 26.9 23.5 20.6 27.3
RoCE (%) 19.8 19.0 15.8 15.2
Valuations
P/E (x) 21.2 20.2 19.3 12.2
P/BV (x) 5.1 4.3 3.6 3.0
EV/EBITDA (x) 14.3 12.1 9.0 6.9
EV/Sales (x) 2.9 2.5 1.9 1.7
March 2019 Results Preview | Sector: Agrochemicals
UPL
CMP: INR927 TP: INR1,062 (+15%) Buy We expect revenue to grow 15% YoY to INR65.6b in 4QFY19,
driven by robust growth of 24% in Latin America.
We expect India and Europe to post growth of 5% and 10%, respectively, with North America and RoW business growing at 15% and 11%, respectively.
We expect EBITDA margin to expand 60bp YoY to 22% and EBITDA to increase 18.6% YoY to INR14,449m.
We expect adjusted PAT to grow 4.1% to INR7,964m contained by lower other income (INR380m v/s INR1,180m in 4QFY18).
Key things to watch for Consolidation of Arysta. New launches and share of branded products.
Motilal Oswal India Strategy Gallery
Strategy
February 2019 42
Explanation of Investment Rating Investment Rating Expected return (over 12-month) BUY >=15% SELL < - 10% NEUTRAL > - 10 % to 15% UNDER REVIEW Rating may undergo a change NOT RATED We have forward looking estimates for the stock but we refrain from assigning recommendation * In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
Motilal Oswal Securities Ltd. (MOSL*) is a SEBI Registered Research Analyst having registration no. INH000000412. MOSL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial products. MOSL is a subsidiary company of Motilal Oswal Financial Service Ltd. (MOFSL). MOFSL is a listed public company, the details in respect of which are available on www.motilaloswal.com. MOSL is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock Exchange of India Ltd. (NSE) and BSE Limited (BSE), Multi Commodity Exchange of India (MCX) & National Commodity & Derivatives Exchange Ltd. (NCDEX) for its stock broking activities & is Depository participant with Central Depository Services Limited (CDSL) & National Securities Depository Limited (NSDL) and is member of Association of Mutual Funds of India (AMFI) for distribution of financial products. Details of associate entities of Motilal Oswal Securities Limited are available on the website at http://onlinereports.motilaloswal.com/Dormant/documents/Associate%20Details.pdf
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Registration details of group entities: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100.Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products *MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company Law Tribunal, Mumbai Bench. The existing registration no(s) of MOSL would be used until receipt of new MOFSL registration numbers.