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. 1 August 2017 Research Team ([email protected]) SBI reduces savings rate, sets stage for RBI rate cut v State Bank of India (SBI) cut the interest rate on savings accounts with balance of up to Rs1 crore by 50 basis points to 3.5%—the first time the key rate… Equities - India Close Chg .% YTD.% Sensex 32,515 0.6 22.1 Nifty-50 10,077 0.6 23.1 Nifty-M 100 18,515 0.2 29.0 Equities-Global Close Chg .% YTD.% S&P 500 2,470 -0.1 10.3 Nasdaq 6,348 -0.4 17.9 FTSE 100 7,372 0.0 3.2 DAX 12,118 -0.4 5.5 Hang Seng 10,828 0.7 15.3 Nikkei 225 19,925 -0.2 4.2 Commodities Close Chg .% YTD.% Brent (US$/Bbl) 52 1.0 -5.8 Gold ($/OZ) 1,268 0.7 9.3 Cu (US$/MT) 6,336 0.6 14.7 Almn (US$/MT) 1,896 0.6 11.3 Currency Close Chg .% YTD.% USD/INR 64.1 -0.1 -5.5 USD/EUR 1.2 0.2 11.2 USD/JPY 110.6 -0.6 -5.5 YIELD (%) Close 1MChg YTDchg 10 Yrs G-Sec 6.5 0.0 0.0 10 Yrs AAA Corp 7.5 0.0 0.0 Flows (USD b) 31-Jul MTD YTD FIIs -0.2 0.4 8.8 DIIs 0.3 1.0 4.3 Volumes (INRb) 31-Jul MTD* YTD* Cash 324 301 288 F&O 3,386 5,806 5,041 Note: YTD is calendar year, *Avg Today’s top research idea Market snapshot Cos/Sector Key Highlights Shilpa Medicare (INITIATING COVERAGE): Injecting growth Financials SBIN cuts SA deposits rate, other banks likely to follow suit Pidilite Inds Focus on double-digit volume growth Godrej Consumer Price hike-led sales growth in India, Indonesia drags international performance Shree Cement EBITDA beat driven by better realization and lower other expenses Siemens In-line operational performance; expensive valuations warrant Neutral Interglobe EBITDAR above est. led by higher yields and lower fuel cost Tech Mahindra Significant 1Q beat drives 9.5% FY18 earnings upgrade LIC Housing Fin. Under pressure Shriram Trans. Strong quarter; Reaping the benefits on cost of funds Torrent Pharma. Weak revenue; margins remain stable Coromandel Intl Strong performance; better monsoon to aid growth GE T&D India Operating performance above expectations; Maintain Neutral Hexaware Tech. Beat-and-raise as revenue momentum continues Equitas Holdings Steady shift to secured products; at PAR delinquencies in MF up marginally Automobiles Industry witnesses inventory build-up to meet festive demand Metals Weekly Steel and its input prices moving up across the world Results Flash BHE | CCRI | RADIOCIT Results Expectation JSTL| MRCO | PWGR | SCUF Piping hot news Shilpa Medicare (Initiating Coverage): Injecting growth Product approvals, superior execution to drive earnings; Buy with TP of 805 v We believe that Shilpa Medicare (SLPA) is on cusp of strong growth in earnings led by product approvals in US market. From just an API player, it has forward integrated and transformed itself into formulator with revenue rising from from nil till 9MFY17 to Rs3.3b in FY19E. The products are majorly in oncology space with 23 ANDAs pending for approval. v We expect its base business (CRAMS), which currently forms 52% of total sales, to remain stable and sustainable with 13% CAGR over FY17-20. We value SLPA at a premium valuation of 25x 12M forward earnings due to strong growth visibility from US market, backed by healthy product pipeline, which would also support margins improvement. We initiate with Buy rating and target price of INR805. Potential for US revenue to grow at strong rate Chart of the Day: Shilpa Medicare - Injecting growth Motilal Oswal values your support in the Asiamoney Brokers Poll 2017 for India Research, Sales and Trading team. We request your ballot. Research covered
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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.
Cos/Sector Key Highlights Shilpa Medicare (INITIATING COVERAGE): Injecting growth Financials SBIN cuts SA deposits rate, other banks likely to follow suit Pidilite Inds Focus on double-digit volume growth Godrej Consumer Price hike-led sales growth in India, Indonesia drags international performance Shree Cement EBITDA beat driven by better realization and lower other expenses Siemens In-line operational performance; expensive valuations warrant Neutral Interglobe EBITDAR above est. led by higher yields and lower fuel cost Tech Mahindra Significant 1Q beat drives 9.5% FY18 earnings upgrade LIC Housing Fin. Under pressure Shriram Trans. Strong quarter; Reaping the benefits on cost of funds Torrent Pharma. Weak revenue; margins remain stable Coromandel Intl Strong performance; better monsoon to aid growth GE T&D India Operating performance above expectations; Maintain Neutral Hexaware Tech. Beat-and-raise as revenue momentum continues Equitas Holdings Steady shift to secured products; at PAR delinquencies in MF up marginally Automobiles Industry witnesses inventory build-up to meet festive demand Metals Weekly Steel and its input prices moving up across the world Results Flash BHE | CCRI | RADIOCIT Results Expectation JSTL| MRCO | PWGR | SCUF
Piping hot news
Shilpa Medicare (Initiating Coverage): Injecting growth Product approvals, superior execution to drive earnings; Buy with TP of 805
v We believe that Shilpa Medicare (SLPA) is on cusp of strong growth in earnings led by product approvals in US market. From just an API player, it has forward integrated and transformed itself into formulator with revenue rising from from nil till 9MFY17 to Rs3.3b in FY19E. The products are majorly in oncology space with 23 ANDAs pending for approval.
v We expect its base business (CRAMS), which currently forms 52% of total sales, to remain stable and sustainable with 13% CAGR over FY17-20. We value SLPA at a premium valuation of 25x 12M forward earnings due to strong growth visibility from US market, backed by healthy product pipeline, which would also support margins improvement. We initiate with Buy rating and target price of INR805.
Potential for US revenue to grow at strong rate
Chart of the Day: Shilpa Medicare - Injecting growth
Motilal Oswal values your support in the Asiamoney Brokers Poll 2017 for India
Research, Sales and Trading team. We request your ballot.
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`Injecting growth Product approvals, superior execution to drive earnings
n Shilpa Medicare (SLPA) has been engaged in the manufacture of active pharmaceutical ingredients (APIs) since 1987. However, over a period of time, it has shifted its focus toward creating a niche in pharmaceutical manufacturing. In the process, it has developed a strong capability in manufacturing oncology APIs and formulations. Besides this, SLPA is investing in novel drug delivery systems (NDDS) and biotechnology.
n We believe that SLPA is well poised to deliver robust earnings growth over the next 2-3 years, led by the commencement of sales in the US market and the introduction of more products in the EU market.
n In our view, SLPA has the necessary manufacturing capacity and the US FDA clearances to succeed in both APIs and formulations. It has done well on the compliance part in recent past. The company also has a healthy pipeline of ~23 pending ANDAs (owned and for partners combined).
n We expect its base business (custom synthesis) to remain stable following two years of strong growth, as volume off-take by ICE (JV partner) has reached a steady base.
n The five-year average P/E for SLPA stands at 21x. P/E multiples for many pharma companies are lowered due to slowdown in the US business on account of regulatory hurdles/pricing pressure in the base business. However, we value SLPA at a premium valuation of 25x 12M forward earnings due to strong growth visibility from the US market, backed by a healthy product pipeline, which would also support margins improvement. We expect US sales (just started in 4QFY17) to increase to INR3.3b by FY19, with potential to grow 50% YoY in FY20 as well. On overall basis, we expect revenue and PAT CAGR of 29% and 41%, respectively, over FY17-20E.
n We thus initiate coverage on SLPA with a Buy rating and a price target of INR805 on 12M forward earnings.
Superior execution in US market to drive sales and PAT n With capex in APIs/formulations already behind and regulatory clearances in
place for both these businesses, we expect strong revenue and profit growth over the next 2-3 years. SLPA has about 26 DMFs and 25 ANDAs filed till date.
n There are already two ANDA approvals in place, and the company has a healthy pipeline of ~23 ANDAs awaiting approvals. We expect SLPA to grow its revenues in the US market from nil in December 2016 (no business until then) to ~INR3.3b in FY19, subject to product approvals.
JV formation secures base business of CRAMS n The base business (custom synthesis) has witnessed strong 37% revenue CAGR.
It constituted ~60% of FY16 sales due to higher off-take by JV partner, ICE. n The shift of this business to the JV in December 2016 and the doubling of
capacity under this JV might curtail revenues due to a change in accounting. However, profit would rise with greater consolidated-level efficiency.
Initiating Coverage | Sector: Healthcare
Shilpa Medicare CMP: INR646 TP: INR805(+24%) Buy
BSE Sensex S&P CNX 32,310 10,015
Stock Info Bloomberg SLPA IN Equity Shares (m) 80 52-Week Range (INR) 787 / 517 1, 6, 12 Rel. Per (%) -2/-25/-4 M.Cap. (INR b) 57.1 M.Cap. (USD b) 0.8 Avg Val, INRm 43 Free float (%) 45.3
Financial Snapshot (INR m) Y/E Mar FY17 FY18E FY19E Net Sales 7,836 10,682 14,028 EBITDA 1,754 2,457 3,507 PAT 1,123 1,689 2,435 EPS (INR) 14.0 21.1 30.4 Gr. (%) 6.2 50.5 44.2 BV/Sh (INR) 114.4 134.3 163.1 P/E (x) 46.2 30.7 21.3 P/BV (x) 5.7 4.8 4.0 RoE (%) 14.4 17.0 20.4 RoCE (%) 11.5 12.9 16.4 Shareholding pattern (%) As On Mar'17 Dec'16 Sep'16 Promoter 54.7 54.7 56.9 DII 0.1 0.1 0.1 FII 30.0 26.0 15.2 Others 15.2 19.2 27.8 FII Includes depository receipts
Capex in progress for future growth n SLPA has guided for further INR4.5b capex over two years toward R&D,
enhancing API/formulation capacities and investing in bio-similars. This would strengthen its foundation for future growth.
Valuation and view n Many pharma companies have been de-rated over the past year due to
slowdown in the US business on account of regulatory woes/pricing pressure on the base business. However, we value SLPA at 25x FY19E earnings, given strong growth visibility over FY17-19E, backed by approved products and a strong pipeline pending approvals. The US product pipeline has the potential to drive US revenue growth of ~45% YoY in FY20 as well. Relatively superior margin from the US business would also improve overall margin for SLPA.
n We expect sales, EBITDA and PAT CAGR of 29%, 36% and 41% to INR16.8b, INR4.3b and INR3b, respectively, over FY17-20E. Assuming PAT growth and improving return ratios, we value SLPA at 25x 12M forward earnings. We thus initiate coverage on the stock with a Buy rating and a price target of INR805.
n At CMP of INR647, SLPA trades at 30.7x FY18E EPS of INR21.1 and 21.3x FY19E EPS of INR30.4.
n Our sensitivity analysis indicates downside of 9.9% in bear case, upside of 24.8% in base case and 65% in bull case from the current levels.
Risks n Delay in approval for its products n Longer-than-expected time taken to execute in terms of manufacturing and
selling n Higher-than-expected competition for its key products n Any untoward outcome of future regulatory inspections, which may have an
impact on existing business and/or future product approvals
Stock Performance (1-year)
1 August 2017 5
SBIN cuts SA deposits rate, other banks likely to follow suit Expect reduction in cost of deposits by ~15bp and higher PBT benefit
n The State Bank of India (SBIN) has lowered the rate on savings deposits up to INR10m by 50bp to 3.5% from the existing rate of 4%. According to management, savings accounts with balances of INR10m and below contribute ~90% of overall savings deposits for the bank, and thus, the cut in rates could lead to interest savings of INR44.5b on annualized basis (21% of estimated FY18 PBT).
n In our view, other banks are likely to follow suit, which should lead to FY18E interest cost savings of ~INR136b for the banking sector. In our view, 80% of system SA deposits are below INR10m.
n While banks with low RoA and high SA balance (PSU banks) are likely to be the key beneficiaries of the same, MCLR cuts in the ensuing quarters cannot be ruled out, thereby likely negating the benefit of SA rate cut.
n Among the high SA balance banks under our coverage, we like HDFCB, SBIN and ICICIBC. We expect the emerging private banks to be more aggressive now to mobilize SA deposits. These banks now will have greater headroom to cut rates without losing the customer. We like YES and KMB among the emerging names.
SA rate cut – a step in the right direction… As of FY17, total system deposits of ~INR106t include ~INR34t of savings deposits. Assuming ~80% of SA deposits have balances of INR10m and below, total interest savings (assuming all banks cut SA rates) would amount to ~INR136b for FY18. In our view, for SBI, the 50bp SA rate cut would lower cost of deposits/cost of funds by ~15bp for FY18, leading to FY18 PBT/PAT uptick of INR44.5b (+21%)/INR31b (+21%) and RoA/RoE uptick of 9bp/160bp from our present estimate of 0.43%/8%.
…however, PBT impact will be partially offset by MCLR cut A reduction in savings rates will also bring down marginal cost of funds, leading to a reduction in MCLR for banks with a lagged effect. This should lower yields and partly offset interest cost savings due to a reduction in cost of deposits, thereby fading the positive impact on PBT/PAT.
Prefer SBIN, ICICIBC and HDFCB among large banks Among the high SA balance banks in our coverage universe, we like HDFCB, SBIN and ICICIBC. We expect the emerging private banks to be more aggressive now to mobilize SA deposits. These banks will also now have greater headroom to cut rates without losing the customer. Our back-of-the-envelope calculation suggests that the large private banks (if not passed on) could see profit upgrade of 2-3% from a 50bp cut in SA deposits rate. PSU bank profit upgrade could be 15%.
Exhibit 1: Bank-wise market share of total and SA deposits
FY17 data (INRb) System SBI PNB BoB HDFC Bank ICICI Bank Axis Bank Kotak
Focus on double-digit volume growth All-time high adhesives margins a near-term risk
n Pidilite Industries (PIDI) is cautious on near-term performance, given GST implementation. While it might take a month or so to assess the impact of GST, PIDI perceives it as a positive reform for the Adhesives industry.
n Underlying demand remains healthy, and during our meeting, Mr Puri reiterated time and again PIDI’s long-term target of delivering double-digit volume growth. He also reiterated that current margins are unsustainable, prioritizing volumes over margins.
n While he highlighted the attractive long-term opportunity in a variety of categories, PIDI does not intend to enter Paints unless it gets a disruptive proposition. The company has a strategy of deriving 2/3rd growth from “Growth” and “Pioneer” categories and the remaining 1/3rd from “Core” categories. It will continue to expand reach and make significant investments in R&D to build a strong foundation for multiple years of growth.
Our view: Its track record of consistent delivery on volumes and profits drives our preference for PIDI. We prefer PIDI to Asian Paints (both NEUTRAL-rated stocks), as return ratios have converged – Asian Paints’ RoCE has come off from mid-40s to late 20s in five years while its valuations have expanded. Even fixed asset turns are similar now. Asian Paints’ growth moderation over the last 3-4 years also makes it relatively unattractive.
Prioritizing volumes over margins PIDI is prioritizing volume growth over margins. During our meeting, Mr Puri emphasized the company’s overarching focus on growth, with margins at risk at current high levels: “When we have 12 months of economy without any disruption, we should go to double-digit volume growth.” In CY16, PIDI had expected record volume growth, and had planned accordingly, but demonetization played spoilsport. Mr Puri reminisced about the good old days when the Consumer sector grew at 2x (GDP + Inflation), and how growth fell to 1.5x (GDP + Inflation), and then to the current 1x (GDP + Inflation). Yet, PIDI is confident of double-digit volume growth in the medium term.
Pricing premium vis-à-vis unorganized players to narrow PIDI has candidly stated that its current margins are unsustainable. The company currently enjoys 35% premium over unorganized players; in Adhesives, its margins are at all-time highs. PIDI sees this premium narrowing to 15-20%. Recent price increases by the company have been modest; in 1QFY18, the gap between volume growth and value growth was 1%. PIDI intends to pass on only ~75% of the cost inflation to customers and has lately been passing on the benefits of declines in raw material costs in the form of discounts. VAM prices have shot up due to unusual shutdowns and maintenance problems at suppliers’ end. Prices went up from USD750/MT (recent low when crude prices corrected) to USD950/MT, and are now stabilizing at USD900/MT. A large part of this price rise is due to supply disruptions rather than demand improvement. GST – lot of flux; will take another month or so to figure out actual impact In the run-up to GST, the wholesale channel was impacted the most in June. In July, sales are returning to normal, but are also boosted because of re-stocking post the de-stocking in June. PIDI will need another 30-45 days to see how sustainable the sales growth is and this will also be a function of tertiary consumer demand. PIDI was first off the block in educating the supply chain on GST. The company started billing on 2nd July, while most others are still finding their way and are sending consignments just now. It is too early to figure out the reset in the channel. Most traders are still confused on billing.
31 July 2017
CornerOffice
Pidilite Industries
Mr Bharat Puri—
Managing Director Mr Puri’s association with Pidilite began as an Independent Director in 2008. He started his career with Asian Paints in 1982 and rose to the position of General Manager - Sales & Marketing. He then moved to Cadbury in 1998 as Director of Sales and Marketing for Cadbury India. In 2002, he was appointed Managing Director South Asia, after which he moved to Singapore in 2006 where he was responsible for Strategy, Marketing and Sales for the Asia Pacific region. In his last assignment, he was President - Global Chocolate, Gum and Candy Categories at Mondelez International, Zurich with worldwide responsibilities for the growth of these categories. Mr Puri has completed his MBA from the Indian Institute of Management, Ahmedabad.
PIDI expects the proportion of official sales to go up post GST. For unorganized players, there will be a dramatic difference between sales post-GST and sales pre-GST. Unorganized players are concerned about the repercussions if the extent of their real sales is detected by the tax authorities. As far as the consumers are concerned, they were in any case paying taxes in the earlier regime. It is just that now CGST and SGST are shown separately on the bill. In the Arts & Stationery segment, business is largely unaffected. However, in the Building Materials segment (Plywood, Hardware, and Paints & Allied Products), business is at a virtual stand-still. The unorganized segment is sizable, and there has been very little supply in the last 20-25 days. Players are adopting a wait-and-watch strategy.
Consistently evaluating new categories, markets for future growth PIDI classifies its business in three buckets: Core, Growth and Pioneer categories. Fevicol and Fevikwik constitute the Core categories. Construction, Waterproofing, and Joinery segments constitute the Growth categories. In the Pioneer categories, PIDI currently has Tiling Adhesives. PIDI targets to grow its Core categories at 1-1.5x GDP, its Growth categories at 2-3x of GDP, and intends to ensure that today’s Pioneer categories become tomorrow’s Growth categories. It targets 2/3rd growth from Pioneer and Growth categories, and 1/3rd from Core categories. There are a lot of Pioneer categories in India. PIDI needs to choose a few, and make it BIG. While the company is spoilt for choice, it will enter only those categories where it believes it has a ‘right to win’. It has invested aggressively in R&D over the last four years – as a cost item, R&D has seen the highest jump. It has set up a research lab in USA through a tie-up with University of North Carolina. It will be looking at technologies and how to make them relevant for emerging markets. PIDI keeps looking at markets similar to India. Some of these, including Turkey and Brazil are 7-8 years ahead of India in a few categories. This enables PIDI to decide category adjacencies for future. The company has set up a separate entity, PLUB Pidilite to focus large institutional (including government) business.
Waterproofing – successfully transitioned from Pioneer to Growth category PIDI is a pioneer in the waterproofing segment. Having created the market, it now sees expanding the market as its task. Eight out of 10 houses in India have waterproofing issues, and the opportunity is immense. Some competition is welcome, as it will help to expand the size of the market. The big competition is from MNCs. World over, new construction constitutes 70% of the waterproofing market and repairs constitute 30%. In India, repairs constitute the major part of the waterproofing market. PIDI believes the key ingredients for success are a strong brand, better-informed service offering, and wide reach. Its Dr Fixit brand has become a dominant brand in the segment. PIDI has often emphasized its ‘four feet on the street’ – two extra feet to educate the consumer on how to use the product. One of PIDI’s strengths is that its sales personnel focus not only on sales but also on servicing and creating demand. The company has resisted suggestions from consultants on consolidation of its sales force and thus expanding margins by a few basis points. For its waterproofing products, PIDI reaches 25,000 paints dealers, next only to APNT. The retail segment constitutes ~70% of Dr Fixit sales. However, institutional business has been a large growth driver. PIDI believes RERA is positive; good builders will now look at waterproofing more seriously. Competition / entry into paints / APNT’s Loctite adhesive launch n PIDI will enter Paints only when it feels it can disrupt the category – does not want to be number-5 in Paints. n APNT’s entry in Adhesives (Loctite launch in 1HCY16) has not created much flutter (corroborated by our own
dealer checks – we had released a note (link) after doing a survey of 46 dealers in Mumbai).
52-Week Range (INR) 1084 / 643 1, 6, 12 Rel. Per (%) 2/13/14 Avg. Val, INRm/ Vol.
425
Free float (%) 36.7
Financials & Valuation (INR b) Y/E Mar 2017 2018E 2019E Net Sales 92.4 106.3 121.2 EBITDA 18.9 21.6 24.7 PAT 12.9 14.7 16.8 EPS (INR) 18.9 21.5 24.7 Gr. (%) 12.4 14.0 14.6 BV/Sh (INR) 77.8 100.0 116.2 RoE (%) 24.6 24.2 22.8 RoCE (%) 16.8 16.5 16.3 P/E (x) 54.7 48.0 41.9 EV/EBITDA (x) 38.5 33.8 29.4
Estimate change TP change Rating change
Price hike-led sales growth in India, Indonesia drags international performance n Godrej Consumer’s (GCPL) 1QFY18 consolidated net sales grew 2.8% YoY to
INR21.7b (est. of +9%). Consol. EBITDA declined by 9.3% YoY to INR3.5b (est. of +2.9%) and adj. PAT by 9.2% YoY to INR2.3b (est. of +1.3%), representing a miss on all counts. Organic consolidated CC sales grew 6% YoY in 1QFY18, with India business exhibiting similar growth on organic CC basis.
n Gross margin shrunk 20bp YoY to 53.4%. Higher adspend (+80bp YoY to 8.8%) and other expenses (+150bp YoY to 17.6%) were partially offset by lower staff costs (-40bp YoY to 11.1%). Thus, EBITDA margin shrunk 210bp YoY to 15.9%.
n India branded business volume growth came in flat YoY. All three key domestic segments reported YoY sales growth, which came in 4% YoY for Household Insecticides, 7% YoY for Soaps and 5% YoY for Hair Color. India primary net sales growth stood at 6%, while secondary sales increased 9% YoY.
n International: Organic CC net sales grew 7%, while EBITDA fell 5% YoY. CC sales fell 11% YoY in Indonesia, but grew 26% YoY in Africa, 4% in LatAm and 24% in Europe. Indonesia, Africa and LatAm saw EBITDA margin contraction of 390bp, 80bp and 610bp YoY, respectively, while Europe saw expansion of 260bp.
n Valuation view: There is no material change to our EPS forecasts. At 42x March 2019E EPS, the stock is by no means undervalued. While earnings growth has been more consistent than FMCG peers (FY17 was 8th straight year of double-digit EBITDA and PAT growth), we believe the stock does not warrant a higher multiple due to its exposure to various geographies, attendant currency risks and relatively low RoE (mid-20s). Maintain Neutral with a revised TP of INR995 (39x June 2019E EPS, 10% premium to three-three average).
Quarterly Performance (Consolidated)Y/E March FY17 FY18E FY18 Var.
Financials & Valuations (INR b) Y/E Mar 2017 2018E 2019E Net Sales 84.3 98.9 123.0 EBITDA 23.7 25.0 31.9 PAT 13.4 16.0 19.1 EPS (INR) 384.4 460.4 547.8 Gr. (%) 5.4 19.8 19.0 BV/Sh (INR) 2,210 2,623 3,125 RoE (%) 18.4 19.1 19.1 RoCE (%) 17.5 17.7 18.0 P/E (x) 48.5 40.5 34.0 P/BV (x) 8.4 7.1 6.0
Estimate change TP change Rating change
EBITDA beat driven by better realization and lower other expenses n Volume growth led by ramp-up in east: SRCM’s 1QFY18 volumes increased
~15% YoY (-1% QoQ) to 5.89mt, led by capacity ramp-up in east, with utilization in excess of 90-95%. Realizations rose ~10% QoQ (+6.7% YoY) due to higher cement prices in north and east markets. However, exit realizations were lower than average realization for the quarter. Revenue increased 15% YoY to INR25.36b (est. of INR24.5b). Cement revenue stood at INR24.4b (+22% YoY), with cement EBITDA at INR6.81b (+4% YoY). Power revenue declined 54% YoY to INR958m, with power EBITDA at -INR14m due to weak merchant power rates.
n Lower other expenses and higher realization drive margin improvement: EBITDA of INR6.8b (-7% YoY) came in higher than our estimate of INR6.21b due to lower other expenses and higher realization. Overall margin shrunk 6.4pp YoY to 26.8% (+5.3pp QoQ) due to an increase in YoY unitary costing on higher freight costs (led by an increase in diesel prices and underlying freight rates) and power & fuel costs (led by a rise in petcoke prices).
n Capex and capacity addition plans: The company is likely to incur capex of INR12-13b in FY18 and INR14-15b in FY19 toward capacity addition, including 1) 3.6mt of GU in Rajasthan, 2) 2mt of GU in Bihar, 3) 0.9mt of GU in Bihar (will get commissioned by 2QFY18), 4) 2.8mt of clinker unit in Chhattisgarh and 5) 3mt of integrated unit in Karnataka.
n Deserves premium valuation: SRCM is the most cost-efficient player in the industry. Its superior execution capability enables it to achieve RoIC of over ~50% (FY19E). SRCM’s gross-block-to-capacity (GB/capacity) – currently at ~USD53/tonne – has been structurally trending downward, as the proportion of brownfield expansion has increased. Its GB/capacity is at 28% discount to peers, which is also reflected in its superior RoCE profile. In our view, SRCM deserves to trade at premium valuations, and we thus value the cement business at 15x FY20E EV/EBITDA to arrive at a target price of INR 22,360. Maintain Buy.
In-line operational performance; expensive valuations warrant Neutral n 3QFY17 operating performance came in line with expectations. On a reported
basis, revenues increased 1.2% YoY to INR26.5b (in line with est. of INR26.3b; revenue from continuing business up 22% YoY), supported by strong growth in Energy Management (+54% YoY) and Building Technologies (+25% YoY) segments. EBIDTA declined 2% YoY to INR2.3b, with the margin at 8.5% (-30bp YoY; est. of 8.4%). Net profit from operations rose 27% YoY to INR1.6b, in line with our estimate of INR1.6b.
n Gross margin expanded 40bp YoY to 34.1% in 3QFY17. EBITDA margin of 8.5% came in line with our estimate of 8.4%. EBIT margin from continuing business expanded 30bp YoY to 6.0% on account of margin improvement across segments, except for Power & Gas and Process industries & Drives.
n Order inflow down 12% YoY; book-to-bill at 1.0x: Order intake for the quarter stood at INR28.5b (-12% YoY; IN32.2b in 3QFY16), led by delay in finalization of large-ticket orders. The company’s book-to-bill stood at 1.0x, with order book position of INR112b.
n Valuation and view: We cut our FY17 estimates by 7% to factor in margin pressure on account of fluctuations in product mix, currency and accounting norm change. At CMP, SIEM trades at 63.9/43.7/38x its FY17/18/FY19E EPS of INR22.7/33.2/38.1. Given expensive valuations, we maintain Neutral with a TP of INR1,335, based on 35x FY19E EPS.
EBITDAR above est. led by higher yields and lower fuel cost IndiGo reported revenue of INR57.5b (in-line; +26% YoY, +19% QoQ) and EBITDAR of INR19.5b (est. of INR17.5b; +28% YoY, +46% QoQ), led by lower fuel cost of INR17.9b (est. of INR19.3b; +31% YoY, +1% QoQ). PAT of INR8.1b (est. of INR6.1b; +37% YoY, +84% QoQ) was further boosted by higher other income of INR2b (est. of INR1.5b; +25% YoY) and lower depreciation of INR983m (est. of INR1.4b; -14% YoY). n EBITDAR above est.: 1QFY18 EBITDAR margin expanded to 34% from 33.4% in
1QFY17, led by higher yield of INR4.33 (est. of INR4.22; flat YoY, +9% QoQ) and lower fuel cost per ASK of INR1.19 (est. of INR1.25; +11% YoY, -5% QoQ).
n Surprised by lower fuel cost: While ATF price grew ~16% YoY, INDIGO’s fuel cost per ASK rose 11% in 1QFY18, which management ascribed to increased contribution of fuel-efficient A320Neo (~16% of fleet) and better fuel procurement strategies.
n Lowered ASK addition guidance: Management has lowered its ASK addition guidance to 20% YoY from 25% earlier for FY18 (incl. planned ATR operation). For 2QFY18, ASKs are expected to increase 15% YoY. Management expects to increase capacity (ASKs) at the rate of 20% over FY18-20.
n Raising estimates: We raise our earnings estimate by ~10/2% for FY18/19 to factor in the revised ASK guidance. We believe lower capacity addition should result in better yields and higher load factor for INDIGO. Thus, for FY18/19E, we increase yield to INR4.21/4.35 (v/s INR4.14/4.3 earlier) and passenger load factor (PLF) to 87/88% (v/s 86% earlier).
n Promoters to dilute stake: To meet promoter holding norms, INDIGO is planning a follow-on public offer, which is likely to be a mix of a fresh issue and an offer for sale. Promoters currently hold 85.8% stake in the company.
n Valuation and view: The stock trades at 13.8x FY19E EPS of INR93.7 and at 8.4x FY19E adj. EV/EBITDAR. We value INDIGO at 14x FY19E EPS to arrive at a fair value of INR1,312. Maintain Neutral.
Financials & Valuations (INR b) Y/E Mar 2017 2018E 2019E Net Sales 291.4 307.6 344.0 EBITDA 41.8 42.2 49.9 PAT 27.5 30.2 32.7 EPS (INR) 30.9 34.0 36.8 Gr. (%) -11.9 9.9 8.3 BV/Sh (INR) 187.9 207.1 232.5 RoE (%) 18.4 17.4 16.9 RoCE (%) 15.2 14.5 14.2 P/E (x) 12.5 11.3 10.5 P/BV (x) 2.1 1.9 1.7
Estimate change TP change Rating change
Significant 1Q beat drives 9.5% FY18 earnings upgrade n Weak but not to the extent thought: TECHM’s 1QFY18 CC revenue declined ~2.1%
QoQ, but was ahead of our estimate of a 3.4% decline, led by stabilization of LCC revenues and above-estimate BFSI performance. Including revenues from HCI (two months), CC revenue declined 0.6% v/s our estimate of -2.2%. EBITDA margin expanded 70bp QoQ to 12.7%, only slightly ahead of our estimate of 12.4%, helped by improvement in LCC profitability. Significant forex gains (INR2.7b v/s estimate of INR1.8b) drove PAT beat (INR8b v/s estimate of INR6.5b).
n Profitability recovery visible: TECHM saw a 4.1% QoQ reduction in Software Professionals headcount (3,407 employees), cost impact from which only accrued toward the end of the quarter. Benefits from the same will fully reflect in 2Q EBITDA margins, more than offsetting 30-40bp impact from wage hikes during the period. Utilization at 77% including trainees was flat for the third quarter and down 100bp YoY, and remains a few points below management’s target. These should drive margin improvement QoQ for the remainder of the year.
n Communications outlook optimistic, but with gestation: TECHM defended its growth in Communications v/s peers, highlighting that it has not lost any business to competitors. Also, stabilization of operations in LCC is largely behind, and the segment is already adding to growth in some geographies. Digital deals are also kicking in and growing in sizes too. Digital is also impacting Enterprise, changing the complexion of pipeline, driving the need for significant organization-wide up-skill.
n Valuation view: Our earnings estimates for FY18/19 are up by 9.5%/1.6%. The significant FY18 upgrade comes on the back of combined effect from forex gains and revenue beat. TECHM trades at 11.4x/10.6x FY18/19E earnings. There remains some tailwinds to improve profitability in the near term, which will feed positively into valuation multiple. Improvement in Communications revenue growth is an option value over and above the same. Our price target of INR490 discounts FY18E earnings by 13x, implying an upside of 26%. Maintain Buy.
Under pressure n LIC Housing Finance (LICHF) reported PAT of INR4.7b for 1QFY18, missing our
estimate by 20%. Sharp sequential decline in margins and largely stable provisions YoY (despite high base in 1QFY17) were the key reasons for the miss. Overall, it was a subdued quarter for LICHF.
n Loan book growth remained in line with past trends at ~15% YoY, with retail loan book growth muted at 9-10% YoY. There was slight shift in mix towards non-core loans. However, after two quarters of INR10b+ disbursements in builder loans, LICHF has reverted to average disbursements of INR4b-5b in this segment. Also, disbursements in the core home loan segment were up 16% YoY. This was a key positive in the results.
n Margins declined sharply (11bp YoY, 47bp QoQ), driven by decline in both retail and non-retail yields. Calculated spreads of 1.46% are the lowest in the last 12 quarters. We believe loan yields would decline a further 30-40bp in the near term. This should be offset by decline in cost of funds, though we expect CoF re-pricing in the medium-to-long term.
n GNPL ratio was up 13bp YoY to 0.72%, with individual portfolio GNPL ratio increasing 7bp YoY to 0.42%. While this is not a concern, credit cost declined only 10% YoY to INR1.05b. Three builder loans amounting to INR1.2b slipped into NPL in the quarter.
n Valuation and view: Despite being the second largest HFC, LICHF has managed to grow at ~15% YoY, consistently. However, over the past 4-8 quarters, growth has been driven largely by non-core loans. With the retail portfolio witnessing moderate growth and sustained yield pressure, topline growth has been sluggish. While we acknowledge that its LAP book is not as risky as peers (INR1m-1.5m average ticket size at 30% LTV), we believe valuation will re-rate only with growth returning in the core home loan portfolio. We cut our FY18/19 EPS estimates by 13%/9%. Maintain Neutral.
31 July 2017 1QFY18 Results Update | Sector: Financials
Beat led by higher margins and volumes n CONCOR’s 1QFY18 reported revenue stood at INR14.5b (est. of INR13.8b; +9%
YoY, -6% QoQ), led by higher-than-estimated volumes. n EBITDA stood at INR3.3b (est. of INR2.6b; +25% YoY, -34% QoQ), led by
improved margins in both EXIM and domestic segments. EBITDA margin expanded to 22.4% in 1QFY18 from 19.6% in 1QFY17, led by 0.9pp improvement in EXIM margin and 6.9pp in domestic margin.
n Reported PAT of INR2.4b (est. of INR1.7b; +36% YoY, -42% QoQ) was further boosted by higher other income of INR936m (+35% YoY).
n Volumes higher than est.: Overall volumes stood at 842.7k teu (est. of 782k teu; +15% YoY). EXIM volumes stood at 712k (est. of 663k; +13% YoY) and domestic volumes at 129k (est. of 118k; +26% YoY).
n Realization trend: Overall realization was at INR17,287/teu (est. of INR17,637/teu; -5% YoY). EXIM and domestic realization stood at INR15,875 and INR25,033, respectively.
n Overall segmental EBIT stood at INR2,959/teu (est. of INR2,373; -3% YoY), led by EXIM EBIT at 3,112/teu (-3% YoY) and domestic EBIT at INR2,121/teu (+457% YoY).
Key questions for management n Volume guidance for 2QFY18/FY18, both for the industry and CONCOR n Reasons for sharp improvement in margins n Impact of increased competitive intensity in the focused market n Capex guidance for 2QFY18/FY18 Valuation and view: We will revisit our estimates post earnings call. Based on our current estimates, it trades at 23.2x/21.3x FY18/FY19E EBITDA. Maintain Neutral.
Strong quarter; Reaping the benefits on cost of funds n Shriram Transport’s (SHTF) 1QFY18 PAT of INR4.5b was largely in line with our
estimate. Strong sequential AUM growth, continued decline in cost of funds and reduction in GNPL ratio (QoQ) were the key positives of the quarter.
n Disbursements have started to pick up post the subdued performance in 2HFY17. AUM growth of 3.6% QoQ is encouraging – we believe that if the economic scenario in 2HFY18 picks up, the company would be able to better its 12-15% AUM growth guidance.
n Calculated NIM on AUM expanded 60bp QoQ to 7.9%. CoF declined 34bp sequentially to 9.44%. This is in line with our fundamental thesis that SHTF will be the biggest beneficiary on CoF reduction among all NBFC peers due to a larger share of high-cost legacy borrowings. Also, yields moderated just 13bp YoY to 14.31%, allaying fears that yields will reduce drastically as the company moves toward financing more younger-vintage vehicles.
n GNPL ratio decreased 13bp QoQ to 8.03%. However, credit costs of INR4b were higher than the quarterly FY17 average of INR3.1b. If one were to normalize the quantum of write-offs, the GNPL ratio would have been flat sequentially. However, the PCR of 71% gives us enough comfort that credit costs will decline sharply over the next two years, despite migration to 90dpd.
n Valuation and view: SHTF’s return ratios are at cyclical lows, with decadal high credit cost and NPLs. However, credit costs over the past two years have been statutory, rather than economic, i.e., write-offs as % of AUM have been steady. Additionally, we believe margin compression fears are overplayed with the company yet to reap significant benefit on CoF. We increase our FY18-19 estimates by 2%/4% to factor in stronger revenue. The stock trades at 1.8x/1.6x FY18/19E BV. Buy with a TP of INR1,330 (2x June 2019E BVPS).
52-Week Range (INR) 1768 / 1144 1, 6, 12 Rel. Per (%) 3/-16/-25 Avg. Val, INRm 389 Free float (%) 28.8 Financials & Valuations (INR b) Y/E Mar 2017 2018E 2019E Net Sales 58.6 63.7 74.5 EBITDA 13.8 14.8 18.3 PAT 9.3 9.0 11.4 EPS (INR) 55.2 53.4 67.3 Gr. (%) -7.7 -3.2 26.0 BV/Sh (INR) 257.1 291.2 334.2 RoE (%) 23.8 19.5 21.5 RoCE (%) 18.6 15.7 17.0 P/E (x) 23.9 24.7 19.6 P/BV (x) 5.1 4.5 3.9
Estimate change TP change Rating change
Weak revenue; margins remain stable n TRP reported sales of INR13.5b (-11% YoY; >10% below est.). The miss is
attributed to a decline in domestic revenue due to GST roll-out. Despite this, gross margin stood at 70.3% (up >500bps QoQ), a positive surprise, as India is the most profitable business. EBITDA margin came in at 22% (+60bp QoQ). R&D as % of sales stood at 7.5% in 1Q v/s 9.8% in 4QFY17 and 6.0% in 1QFY17.
n India biz impacted by GST; pricing pressure continues in US: India business declined ~9% YoY due to channel destocking ahead of GST rollout. Secondary sales remained strong (at mid-teens). The company expects India business to grow in double-digits, led by strategic initiatives undertaken since 2QFY16. US business remained largely flat QoQ at INR2.7b due to continued pricing pressure in base business, offset by recent launches, including gCelecoxib. We expect this business to remain under pressure in FY18 due to further price erosion in base business, partially offset by 5-6 new launches in FY18E (~25 pending ANDAs). TRP is also focusing on in-licensing of products in the US.
n Earnings call takeaways: 1) Plans to file 15-16 ANDAs in FY18. 2) Pricing pressure in US in 1QFY18. 3) Tax rate guidance of 21-22% in FY18. 4) Dahej- formulations facility inspected in Jun-17, and received five 483 observations. 5) Renvela launch deferred for more than a year. 6) Tax rate to stay at ~20% in FY18. 7) According to AIOCD, secondary sales of Novartis brand acquired were ~INR31cr (annualized at June-end). 8) Local currency growth in Germany was ~12% YoY (~8% YoY in reported terms). 9) Capex guidance of INR4b in FY18 and FY19.
n Upside potential capped; downgrading to Neutral: Although TRP remains one of the better plays on India’s growth story (because of chronic heavy portfolio and one of the best margins), challenges in the US business will keep growth and margins under check in the near term. We downgrade the stock to Neutral due to limited upside at current valuations. Our TP is INR1,350@20x FY19E PER (v/s INR1,450 @ 20x FY19E EPS). We cut FY18E/19E EPS by ~6% as we build in the impact of higher pricing pressure in the US and lower EBITDA margin.
Strong performance; better monsoon to aid growth n Exhibits recovery in PAT: CRIN reported overall revenue of INR22.7b (est. of
INR22.2b) in 1QFY18, as against INR20.6b in 1QFY17, marking growth of 10.6%. EBITDA margin expanded significantly by 320bp YoY in 1QFY18 to 7.5% (est. of 4.6%) on account of gross margin expansion of 240bp YoY. EBITDA increased 94% YoY to INR1,715m (est. of INR1,025m). Consequently adj. PAT grew from INR75m in 1QFY17 to INR754m (est. of INR364m) in 1QFY18 on account of significant reduction in finance cost (INR441m v/s INR651m in 1QFY17).
n Better monsoon aids crop acreages: The country is witnessing better monsoon in 2017 (southwest monsoon 5% above normal level), leading to an increase of 3% in sowing of Kharif crops. Cotton sowing increased impressively by 29%, followed by pulses (+6.9%) and rice (2.4%). CRIN is set to benefit from better monsoon and increased sowing.
n DBT rollout to prove beneficial: Rollout of direct benefit transfer (DBT) for fertilizers has been pushed to 2018 as distribution of POS machines has not been completed yet due to low availability. However, once implemented, it will significantly ease the subsidy receivables situation for CRIN. DBT rollout is expected to require end-to-end supply chain management and last mile reach, both of which will benefit CRIN on account of the strong brand pull.
n Valuation and view: We believe increased sowing on account of better monsoon, moderating raw material prices, and regular disbursement of subsidy will be the major triggers for margin expansion. We thus maintain our revenue estimates for FY18 and FY19, and raise our EBITDA/PAT by 9.2%/9.9% for FY18E and by 10.2%/11.4% for FY19E. We expect 14% revenue CAGR (FY17-19) and 32% PAT CAGR. Maintain Buy with a TP of INR523, 18x FY19E EPS.
Financials & Valuations (INR b) Y/E Mar 2017 2018E 2019E Net Sales 40.5 47.8 51.1 EBITDA 2.2 4.1 5.1 PAT 1.5 2.4 2.9 EPS (INR) 5.7 9.3 11.3 Gr. (%) 325.3 62.1 21.5 BV/Sh (INR) 40.3 46.1 53.1 RoE (%) 12.4 21.5 22.7 RoCE (%) 15.7 26.0 29.3 P/E (x) 69.3 42.7 35.2 P/BV (x) 9.8 8.6 7.5
Estimate change TP change Rating change
Operating performance above expectations; Maintain Neutral n Performance aided by strong execution: Sales rose 41% YoY to INR12.1b in
1QFY18, meaningfully above our estimate of INR9.5b, led by strong execution of projects in hand. Adj. EBITDA stood at INR1.1b v/s INR21m (one-time tax provision of INR1.8b) in 1QFY17, with the margin expanding 850bp YoY to 8.7%. Adj. PAT stood at INR616m v/s INR360m in 1QFY17.
n EBIDTA margin expands led by better execution, cost rationalization: EBIDTA stood at INR1.1b as against profit of INR21m, with the margin expanding YoY to 8.7% from 0.2%. Operating margin expansion was driven by better operating leverage and cost control (employee cost rationalization). Management guided for 7-8% EBIDTA margin on a sustainable basis due to intense competition in the sector.
n Order inflow and book grow strongly: Order intake rose 98% YoY to INR15.8b in 1QFY18, driven by strong order finalization in the substation segment (46% of order inflow). Order backlog stands at INR84.2b, providing revenue visibility for the next two years. Of the total order book, 40% are from PGCIL, 40% from private and the rest from the state. Key orders bagged in 1Q were (1) 765/230kv GIS substation order from Doosan (INR4.0b), (2) 765kv AIS substation order at Warangal (INR3.3b), (3) Solar project from Odisha from PAN India Infra (INR1.6b) and (4) 765kv 80MVAR reactor order from PGCIL (INR662m).
n Maintaining Neutral; raising estimates: We raise EPS for FY18E/19E by 4/6% to INR9/11 to factor in improved execution of the projects in hand. Maintain Neutral with a revised TP of INR395, valuing the stock at 35x FY19E EPS of INR11.3.
Quarterly Performance
(INR Million)
FY17 FY18 FY17 FY18 MOSL Var.
Y/E March 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1QE Vs Est Sales 8,546 8,340 11,623 11,963 12,093 9,700 12,914 13,124
Financials & Valuations (INR b) Y/E Dec 2016 2017E 2018E Net Sales 35.3 39.5 44.2 EBITDA 5.7 6.4 6.9 PAT 4.2 4.7 5.0 EPS (INR) 13.7 15.7 16.5 Gr. (%) 5.8 14.8 4.8 BV/Sh (INR) 56.3 65.0 77.2 RoE (%) 26.5 25.7 23.1 RoCE (%) 24.2 24.0 22.5 P/E (x) 19.1 16.7 15.9 P/BV (x) 4.7 4.0 3.4
Estimate change TP change Rating change
Beat-and-raise as revenue momentum continues n Revenue momentum intact: HEXW continued its strong revenue momentum in
2QCY17 (USD152.6m; 2.3pp beat). In constant currency terms, revenue grew 4.9% QoQ and 18.2% YoY to USD151.8m. EBITDA margin, including ESOP charges, shrunk 70bp QoQ to 16.2%, marginally below our estimate, due to elevated ESOP charges (INR121m v/s estimate of INR54m). PAT grew 7.5% QoQ to INR1.22b (7pp beat) on the back of better-than-expected revenue, forex gains, and lower tax rates.
n Broad-based traction drives guidance raise: Broad-based growth across geographies and verticals was a highlight for the quarter, with IMS and BPS as the stars among services. After the second quarter of high-teens growth, HEXW upgraded its revenue growth guidance for CY17 to 14-15% from 10-12%. Even flat revenue sequentially for the remainder of the year will put HEXW at the higher end of the band. It expects to sustain EBITDA margins at last year’s levels (16.3%).
n Alleviates concerns around top clients: Sluggish outlook for the second half is a function of weakness in two of its top five clients, ramp-down in one of which was embedded in the 10-12% guidance at the beginning of the year. The situation in new account is expected to impact HEXW’s revenue by 2.5-3% in CY18 – it will still exit CY17 with close to double-digit growth. Margins in these accounts were close to company average, and should thus remain unaffected. Also, HEXW noted it lost only a share of the larger piece and continues to grow in other areas of the relationship.
n Valuation and view: We have upgraded our revenue estimates by 4-4.5% and earnings estimates by 2.5-3.5% for CY17 and CY18. For CY16-18, we expect revenue CAGR of 12.5% and earnings CAGR of 10%. HEXW trades at 16.7x CY17E and 16x CY18E earnings. Our target price of INR250 discounts forward earnings by 14x, factoring the risks in top clients playing out in some measure. Maintain Neutral.
Quarterly Performance (Consolidated)
31 July 2017
2QCY17 Results Update | Sector: Technology
Hexaware Technologies
Y/E Dec CY16 CY17E Est. 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 2QCY17
Steady shift to secured products; at PAR delinquencies in MF up marginally n Equitas reported PAT growth of 126% QoQ (-75% YoY) to INR156m (15% miss).
PPoP exceeded estimate by 31%, helped by lumpy PSLC fees and largely in-line NII. Other income of INR820m (1.6x beat) included INR600m of PSLC fees. However, provisions of INR441m (above est. of INR250m; includes INR240m of additional provision for MF portfolio) led to PAT miss of 9%.
n AUM/loan book grew -2%/7% YoY and 7%/5% QoQ. The share of microfinance AUM fell to 42% of total v/s 46% in 4QFY17, as microfinance disbursements declined 21%/57% QoQ/YoY. Overall disbursements declined to INR10.6b v/s INR13.9b a year ago (largely stable QoQ).
n In line with its strategy, Equitas has lowered unsecured portion of AUMs to 44% v/s 47% in 4Q, with robust growth in secured lending products like UCV (+21% YoY) and M-LAP/LAP (+29% YoY), and new product additions (business, gold, agri loans, etc.).
n Non-MF GNPA % increased to 4.9% v/s 4.5% a quarter ago, while MF portfolio NPA increased from 2.5% to 5%. The RBI’s 90-day relaxation window closure led to higher NPA in non-MF portfolio. Total pool of at PAR delinquencies in MF portfolio increased to INR2.08b v/s INR1.9b a quarter ago.
n GNPA increased 46% in absolute terms, and calculated PCR rose 270bp QoQ to 51.7%. GNPA/NNPA stood at 4.91% (4.99% in microfinance portfolio and 4.85% in non-MF)/2.95%. Coverage ratio on MF portfolio is healthy at 58%.
n Other highlights: (1) Deposits grew 20% QoQ, helped by strong CASA growth of 80% QoQ; CASA ratio stood at 26% (+900bp QoQ). (2) MF collection efficiency declined marginally to 94.6% v/s 95.4% in 4Q. (3) Management mentioned that PAR delinquencies in microfinance have largely stabilized, and collection efficiency for MF loans disbursed in CY17 is ~99.8%.
n Valuation view: Equitas targets to take MFI share in overall loans to ~30% by FY18. This would be partially offset by high growth in secured products like micro LAP and VF, and newly launched products like housing, business, gold and agri loans. We expect near-term recalibration of the growth strategy to yield positive results over medium-to-long term. We cut our FY18/FY19 PAT estimates sharply (64%/18%) to reflect higher opex toward branch expansion and employee additions, and higher provision requirement for MF book. Reiterate Buy with TP of INR201.
n Revenues stood at INR703m (+12% YoY, +6% QoQ), exceeding our estimate by 12%, led by hikes in ad rates at legacy stations and higher utilization levels (70-80% at 28 legacy stations; 25-35% at newer stations).
n EBITDA surged 16% YoY (+34% QoQ) to INR222m (13% above estimates). n EBITDA margin expanded 100bp YoY (+660bp QoQ) to 31.5% (in-line), led by
operating leverage from employee cost and other expenditure. n Fall in finance cost by 6% YoY (-35% QoQ) to INR39m, coupled with higher
margin, provided impetus to PAT (INR108m; +42% YoY, +140% QoQ).
Valuation and view: We will revisit our estimates post the earnings call. At CMP of INR359, the stock is trading at EV/EBITDA of 13x on FY19E. We have a Buy rating on the stock with a TP of INR469.
Industry witnesses inventory build-up to meet festive demand PV and 2W sales to see healthy growth in dispatches 2W and PV wholesales volume is expected to be healthy, led by inventory build-up to meet festive demand and gradually improving retails post GST implementation. Growth in the CV segment will be largely led by LCVs. Our interaction with mass market 2W channel partners points toward a gradual recovery in retails from the second half of July. Factors such as good monsoon and increase in MSPs have lifted sentiment in rural/semi-urban areas. Pre-festive demand is evident in states like Maharashtra and Gujarat. Key highlights: n MSIL’s domestic dispatches growth is expected to come in at 11% YoY. Demand for
Baleno, Brezza and New Dzire continues to remain robust as these models enjoy a healthy waiting period of 3-4 months. Within the domestic portfolio, CIAZ sales are expected to be weak due to GST impact on hybrid cars (forms ~60% of CIAZ sales).
n Tata Motors’ PV segment is expected to decline 5% YoY, while the CV segment is likely to continue its downtrend with a decline of 3% YoY, led by a 12% fall in HCVs.
n MM’s volumes are expected to increase by 7% YoY, as tractor volumes are likely to increase by 25% YoY and UV volumes by 2.3% YoY. However, 3W sales are expected to decline 27% YoY.
n In the 2W segment (barring BJAUT), HMCL and TVSL wholesales are expected to increase at a healthy 20% and 15%, respectively, led by improving retails in key states and inventory build-up to meet festive demand. BJAUT is likely to record a decline of 2.3% YoY due to weak 3W and exports sales.
n We expect RE volumes to grow at 19.9% YoY to 64k units. n CV manufacturers are expected to see a sharp recovery in wholesales, led by strong
growth in LCV sales. We expect AL to outperform other CV manufacturers, with 9.6% YoY growth (LCVs +30% YoY, HCVs +3.9% YoY), while TTMT and VECV’s CV sales are expected to decline by 3.2% and 2.7%, respectively.
n We prefer 4Ws over 2Ws and CVs due to stronger volume growth and a stable competitive environment. While we expect 2W volumes to benefit from rural recovery in the near term, competitive intensity remains high in this segment witnessing changing customer preferences. For CVs, we expect a gradual volume recovery from 2HFY18.
n Our top picks are Tata Motors, Maruti Suzuki and Amara Raja. We also consider MM as the best way to participate in rural market recovery.
Steel and its input prices moving up across the world n Indian steel: Long product (TMT Mumbai) prices were marginally higher WoW. Sponge iron prices were up
~4% WoW while domestic scrap prices were up ~3% WoW. Domestic iron ore were unchanged. Pellet prices were marginally higher. Domestic HRC prices were up ~1% WoW, while import HRC price offers were unchanged.
n Raw Materials: Iron ore prices (China cfr) were up ~2% WoW. Chinese iron ore port inventories were unchanged. Thermal coal prices were down ~2% WoW. Coking coal prices were up ~3% WoW on strong buying activity in China. China’s pellet import prices were up ~1% WoW, as premium over iron ore remains strong.
n Europe: HRC prices were up ~2% WoW, third consecutive week of increase. EU steel spreads improved on higher steel prices, offset partly by increase in iron ore and coking coal. CIS export HRC prices were up ~8% WoW. Rotterdam scrap prices were also up ~8% WoW.
n China: local HRC prices were up ~3% WoW, while rebar prices were unchanged. Steel inventories were marginally higher. Export HRC/rebar prices were up ~1%/flat WoW, respectively.
n Base metals: Aluminum (cash LME) was unchanged. Zinc (cash LME) was unchanged while lead was up ~3% WoW. Copper was up ~5% WoW. Crude oil (Brent) prices were up ~9% WoW.
CMP: INR195 TP: INR283 (+14%) Buy n Consolidated EBITDA is estimated to decline 26% YoY/24% QoQ
to INR24b on lower steel prices and elevated coking coal cost. n Standalone steel sales are estimated to increase 5% YoY to 3.5mt,
impacted by GST-led de-stocking. n Steel realization is estimated to decline 6% QoQ due to lower
domestic and export prices and lower mix of exports. n Standalone EBITDA/t is estimated at INR6,413, down from
INR9,276 in 1QFY17 and 7,586 in 4QFY17. n Adj. PAT is estimated to decline 59% YoY to INR4.5b. Key issues to watch for: Ø Steel price hikes and impact of coking coal. Ø Domestic steel demand growth.
Bloomberg JSTL IN
Equity Shares (m) 2417.2 M. Cap. (INR b)/(USD b) 472 / 7 52-Week Range (INR) 201 / 124
CMP: INR323 TP: INR360 (+12%) Neutral n We expect sales to remain flat YoY at INR17.5b, with 3% decline in
domestic volumes. In our opinion, Parachute, VAHO and Saffola should post mid-single-digit decline in volumes, mostly led by destocking by trade in the month of June.
n We observe that copra prices are up 59% YoY (data available till May-2017), while kardi oil prices are down 2% YoY. We are modeling 400bp YoY gross margin contraction and 300bp EBITDA margin contraction for 1QFY18 due to the unfavorable base. Price increases will protect margins from 2QFY18.
n PAT is projected to decline by 13.4% YoY to INR2.3b. n We like MRCO’s franchise, portfolio strength, management
quality and multiple growth drivers. Valuations remain fair. The stock trades at 38.3x FY19E EPS of INR8.4; maintain Neutral.
Key issues to watch for: Ø Comments on volume growth trends across key categories. Ø Outlook for raw materials. Ø Margin expansion and guidance for the international business.
Bloomberg MRCO IN
Equity Shares (m) 1289.6 M. Cap. (INR b)/(USD b) 416 / 6 52-Week Range (INR) 330 / 235
1,6,12 Rel Perf. (%) 0 / 8 / 7 Financial Snapshot (INR b) Y/E March 2017 2018E 2019E 2020E
CMP: INR210 TP: INR242 (+15%) Buy n We estimate regulated equity base to increase to 21% YoY to
INR479b. We expect capitalization of INR70b in 1QFY18, driven by Champa-Kuruskshetra and Wardha-Nizamabad.
n We expect PAT to grow 21% YoY to INR21.8b on regulated equity growth.
Key issues to watch for Ø Capitalization/capex guidance for FY18. Ø Details on competitively bid projects. Ø Development on green energy projects, state JVs, etc.
Bloomberg PWGR IN Equity Shares (m) 5231.6 M. Cap. (INR b)/(USD b) 1100 / 17
Quarterly Performance INR m Y/E MARCH FY17 FY18E FY17 FY18E 1Q 2Q 3Q 4Q 1QE 2QE 3QE 4QE Interest Income 10,535 11,153 11,557 11,071 11,957 12,495 13,120 13,069 43,796 50,640 Interest expenses 3,672 3,802 3,933 3,937 4,036 4,116 4,219 4,476 15,344 16,847 Net Interest Income 6,863 7,351 7,624 7,134 7,921 8,379 8,900 8,593 28,452 33,793 Y-o-Y Growth (%) 19.7 22.1 17.7 14.6 15.4 14.0 16.7 20.5 19.1 18.8 Fees and Other Income 15 3 6 5 60 60 60 70 76 250 Net Operating Income 6,878 7,354 7,630 7,139 7,981 8,439 8,960 8,663 28,528 34,043 Y-o-Y Growth (%) 19.2 22.1 17.8 11.8 16.0 14.7 17.4 21.4 18.2 19.3 Operating Expenses 2,739 2,829 2,977 2,815 3,012 3,117 3,243 3,389 11,359 12,761 Operating Profit 4,139 4,525 4,653 4,324 4,969 5,321 5,717 5,275 17,168 21,282 Y-o-Y Growth (%) 21.3 29.3 19.5 26.2 20.1 17.6 22.9 22.0 25.8 24.0 Provisions 1,356 1,390 2,242 4,118 1,700 1,734 1,769 2,642 8,632 7,845 Profit before Tax 2,784 3,135 2,412 206 3,269 3,587 3,948 2,632 8,536 13,437 Tax Provisions 966 1,090 835 86 1,144 1,255 1,382 903 2,976 4,684 Net Profit 1,818 2,045 1,577 120 2,125 2,332 2,566 1,730 5,561 8,753 Y-o-Y Growth (%) 23.1 34.3 -9.5 -78.4 16.9 14.0 62.7 1,340.2 5.0 57.4 Int Exp/ Int Earned (%) 34.9 34.1 34.0 35.6 33.8 32.9 32.2 34.2 35.0 33.3 Cost to Income Ratio (%) 39.8 38.5 39.0 39.4 37.7 36.9 36.2 39.1 39.8 37.5 Tax Rate (%) 34.7 34.8 34.6 41.6 35.0 35.0 35.0 34.3 34.9 34.9 E: MOSL Estimates; * Quaterly nos and full year nos will not tally due to different way of reporting financial nos
June 2017 Results Preview | Sector: Financials
Shriram City Union Finance
CMP: INR2,520 TP: INR2,900 (+15%) Buy n 1QFY18 was a good quarter in terms of growth. SCUF’s AUM is
expected to grow 4.4% QoQ and 18% YoY to INR242b, driven by 16% YoY growth in disbursements.
n Margins are expected to remain largely stable. Hence, NII growth is expected to be 15% YoY.
n Slower growth in operating expenses (10% YoY) is expected to drive 20% YoY PPoP growth.
n We expect asset quality to remain largely stable. We factor in provisions of INR1.7b, as against INR4.1b in 4QFY17 and INR1.4b in 1QFY17.
n The stock trades at 2.9x FY18E and 2.5x FY19E BVPS. Maintain Buy.
Key issues to watch for Ø Trends in asset quality in each segment. Ø Business growth and momentum, and management
commentary on the same. Ø Movement in borrowing costs and margins. Ø Performance of the housing finance subsidiary. Ø Management commentary on impact of GST.
Bloomberg SCUF IN Equity Shares (m) 65.9 M. Cap. (INR b)/(USD b) 148 / 2.2
1. Will try to get IPO out as soon as possible, says HDFC Life; Amitabh Chaudhry, MD & CEO n Not supposed to discuss the timeline but our intention is to get the initial public
offering (IPO) out as soon as possible n Had started work on HDFC Life's IPO last year itself n Lot of the general insurance companies have been filing for IPOs lately. n Chairmen of both HDFC Life and Max Life mentioned that merger is off the
table.
2. Expect improvement in ROA due to healthy profile of new products: Equitas; PN Vasudevan, MD & CEO n 60% of the non MFI book grew by 36 percent in Q1 n GNPA of the non-MFI book has remained steady at 4.5-4.6 percent. n On farm loan front, MFI loans don’t form part of the farm loan waiver
announced in Maharashtra. n Branch expansion has led to increase in operational expense. However, do not
expect significant branch expansion over next 12-18 months n Lending rates in new products are lower. n Expects improvement in ROA due to healthy profile of new products. n Made extra provisions in Q1 of worth Rs 23 crore.
3. Expect to beat industry revenue growth rate: Escorts; Bharat Madan, CFO n Expecting 12-15 percent revenue growth for the industry going forward and
hoping to beat the industry growth rate n Q1 was slightly slow because of the goods and services tax (GST)
implementation n Expects Q2 to be very strong, 18-20 percent growth is expected in Q2 n Company has got a strong order book from railways.
4. Expects better revenue this year: Sharda Cropchem; RV Bubna, CMD n There is a pressure on the margins. n The prices in China increased and demand in Europe and Latin America got
subdued n Speaking about overseas business, weather issues in Europe are short-term
problems and a few of registrations in Europe got expired. n Expects revenue to be better than last year.
1. Pluralism in monetary policy framework n For a long time, India’s central bank and its monetary policy framework were a
mystery. A year ago, that changed, with India formally adopting “flexible-inflation targeting” (FIT) in June 2016. A key feature of FIT is that monetary policy has an explicit inflation target in the long-term but medium-term inflation “projections” become the intermediate target. Thus, the success of FIT depends heavily on the accuracy of medium-term inflation forecasts. Working towards a reliable inflation-forecasting system, the Reserve Bank of India (RBI) introduced a suite of models called the forecasting and policy analysis system (FPAS). Central to the FPAS is the quarterly projection model (QPM), a forward-looking model to assess the medium-term path of the economy. It relies on dynamic stochastic general equilibrium (DSGE), a model based on the principles of New-Keynesian (NK) economics. NK economics has become popular with most central banks around the world
2. The economics of Aadhaar n When it was first launched in 2009, Aadhaar signalled a promise to repair the
corroded plumbing of India’s leaky public delivery systems. The unique biometric identity would help reduce duplicate and ghost entries in the list of beneficiaries of government schemes, and pave the way for direct benefit transfers to them eventually, the then government headed by the Congress party told us. The elimination of false claimants and a chain of government officials who administer public delivery systems would help cut down on corruption and enable the state to do more with fewer resources, we were told. Eight years after its launch, and more than a billion Aadhaar registrations later, much of that promise remains unmet even as the project remains mired in a number of controversies. The Aadhaar project has survived a change in government but has met with a rising tide of questions from the Supreme Court, the national auditor, and from the civil society at large.
3. The economy’s not a steam engine n “Woh toh sirf history baat karta hai, economics bolega kya?,” or “Isn’t his
approach to economics totally different?” — These were some common responses when Sanjeev Sanyal was appointed Principal Economic Advisor to the ministry of finance in February. “Yes, my economics is very different from that of conventional economists as I do not believe in equilibriums. My idea of the economy is of an evolving ecosystem — a complex, adaptive system where there is no predetermined path or perfect end-state. For me, economic management is all about feedback-loops and adaptation,” says the author of The Indian Renaissance: India’s Rise After a Thousand Years of Decline. Basically throwing a fish in the pond and allowing it to swim? “First make sure it is a fish, and then you throw it in the pond. Then you observe how it swims and react,” says Sanyal.
4. It is now time for an RBI rate cut n There is a compelling case for the monetary policy committee to cut interest
rates when it meets this week. This newspaper has generally been conservative on these matters because of the inflation bias hardwired into Indian macroeconomic policy. The best indication of inflation bias is the rapid increase in prices since 2008, despite the fact that most large economies have flirted with deflation. India has been a global outlier. Monetary policy has had to be asymmetrical to quell the persistent inflationary fire. The recent decline in inflation appears to be structural in nature, as is evident from the trend in headline inflation, core inflation and inflation expectations.
International 5. All the money in the world n The New York Times reported on 25 July that SoftBank Group Corp. is
considering a “multi-billion dollar investment” in ride-hailing service Uber Technologies Inc. The report said talks between the two companies were still at a preliminary stage. SoftBank already has a stake in several Uber rivals, including Ola (ANI Technologies Pvt. Ltd) in India and Grab (GrabTaxi Holdings Pte Ltd) in Singapore. The Indian company already has an investment from China’s Didi Chuxing, which also has a stake in Uber (made after Uber exited China after selling its Chinese operations to Didi). SoftBank itself has a huge investment ($5 billion) in Didi. What this means is that SoftBank wins, no matter who does in the market.
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