JM Financial Institutional Securities Limited India Morning Brief 31 January 2020 JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters, S&P Capital IQ, FactSet and Visible Alpha Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. World Indices % Change Close Daily Y T D BSE Sensex 41,199 0.6 -0.1 NSE 50 Nifty 12,130 0.6 -0.3 CNX Midcap 18,273 0.2 6.8 S & P 3,276 1.0 1.4 FTSE 100 7,491 0.1 -0.7 Nasdaq 9,270 1.4 3.3 Hang Seng 27,161 -2.8 -3.7 Shanghai Comp 2,977 -2.8 -2.4 Sensex and Total Turnover (US$ bn) Net Institutional Flows (US$ bn) Cash FII Cash MF 27-01-20 -24.4 27-01-20 -21.4 MTD 2209.7 MTD 1.4 YTD 2209.7 YTD -46.9 Derivatives FII Index Stocks 28-01-20 -75.9 -141.9 MTD -1004.5 -810.6 Turn over (US$ bn) BSE %Chg NSE %Chg Cash 0.3 -6.5 4.8 -5.0 F&O NA NA 222.6 35.1 Top Gainers/Losers* Turnover spurt over 5 days avg. BSE Sectoral & Broad Indices Gainers %Chg Company Val-mn %Chg Sector Close %Chg %YTD Tata Motors Lt 6.8 Bajaj Finance 20.56 5.0 Auto 18,463 0.8 -0.1 Bajaj Finance 4.9 Reliance Inds 17.27 4.2 Bankex 35,264 0.3 -3.8 M&M Fin Servic 4.9 Cummins India 11.97 2.9 FMCG 11,897 1.4 4.3 Bajaj Holdings 4.7 Tata Motors Lt 11.85 2.9 Cap.Goods 17,640 1.1 4.1 Tata Motors-A 4.7 Bharti Airtel 9.92 2.4 IT 16,234 0.4 4.9 Aia Engineerin 4.6 Icici Bank Ltd 9.45 2.3 Metal 9,853 0.9 -5.5 Quess Corp Ltd 3.9 Hdfc Bank Ltd 9.06 2.2 Oil & Gas 14,570 0.3 -1.2 Losers %Chg 5 Day Movement Price %Chg Power 1,939 0.8 0.7 Ramco Cement/T -4.7 Au Small Finan 1,048 18.0 Realty 2,513 0.5 10.2 Eicher Motors -4.2 Godrej Propert 1,088 13.4 Healthcare 14,290 0.1 6.4 Nhpc Ltd -4.2 Info Edge 2,835 11.9 PSU 6,752 0.6 -2.9 Astral Poly -3.4 Century Textil 620 9.4 BSE100 12,278 0.7 0.3 Varun Beverage -2.8 Astral Poly 1,187 9.2 BSE200 5,120 0.6 0.8 Glenmark Pharm -2.7 Pfizer Ltd 4,334 8.6 BSE500 15,892 0.5 1.4 Note: *From BSE200 Contents of Morning Brief Quarterly Result Reviews Bajaj Auto | Favourable mix and commodity costs drive margin expansion (Vivek Kumar, [email protected], Tel: (91 22) 66303019) Tata Motors | Operationally in-line; sustainability of JLR margins - a key (Vivek Kumar, [email protected], Tel: (91 22) 66303019) Marico | Sombre outlook; possibly approaching uncharted territory (Richard Liu, [email protected], Tel: (91 22) 66303064) Crompton Greaves Consumer Electricals | ECD continue to drive growth and profits (Achal Lohade, [email protected], Tel: (91 22) 66303081) TTK Prestige | Multiple headwinds take a toll (Achal Lohade, [email protected], Tel: (91 22) 66303081) Strides Pharma Science | Blowout quarter; strong US execution aids convincing beat (Anmol Ganjoo, [email protected], Tel: (91 22) 66303056) Trident | Dismal performance in bath segment; earnings contingent on improving utilizations (Ashutosh Somani, [email protected], Tel: (91 22) 66303083) Greenlam Industries | Export springs a surprise; announces new greenfield capacity (Achal Lohade, [email protected], Tel: (91 22) 66303081) Dabur India | Performed well in a slowing market (Richard Liu, [email protected], Tel: (91 22) 66303064) Colgate-Palmolive India | Weak volume delivery (Richard Liu, [email protected], Tel: (91 22) 66303064) Persistent Systems | A story in transition (Pankaj Kapoor, [email protected], Tel: (91 22) 66303089) Weekly/Monthly Update India Power and Infrastructure | Power and Infrastructure Snippets 30 Jan'20 (Subhadip Mitra, [email protected], Tel: (91 22) 66303128)
Transcript
JM Financial Institutional Securities Limited
India Morning Brief 31 January 2020
JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters, S&P Capital IQ, FactSet and Visible Alpha Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and
Research Analyst Certification.
World Indices % Change
Close Daily Y T D
BSE Sensex 41,199 0.6 -0.1
NSE 50 Nifty 12,130 0.6 -0.3
CNX Midcap 18,273 0.2 6.8
S & P 3,276 1.0 1.4
FTSE 100 7,491 0.1 -0.7
Nasdaq 9,270 1.4 3.3
Hang Seng 27,161 -2.8 -3.7
Shanghai Comp 2,977 -2.8 -2.4
Sensex and Total Turnover (US$ bn)
Net Institutional Flows (US$ bn) Cash FII Cash MF
27-01-20 -24.4 27-01-20 -21.4 MTD 2209.7 MTD 1.4
YTD 2209.7 YTD -46.9
Derivatives
FII Index Stocks
28-01-20 -75.9 -141.9
MTD -1004.5 -810.6
Turn over (US$ bn) BSE %Chg NSE %Chg
Cash 0.3 -6.5 4.8 -5.0
F&O NA NA 222.6 35.1
Top Gainers/Losers* Turnover spurt over 5 days avg. BSE Sectoral & Broad Indices Gainers %Chg Company Val-mn %Chg Sector Close %Chg %YTD
Vodafone Idea Ltd 251.1 -20.1 Tvs Motor Co Ltd 2.7 -19.4
Canara Bank 7.5 -18.3
MW Position 0.0 0.0
Vodafone Idea Ltd 251.1 36.3 Yes Bank Ltd 221.4 66.2
Gmr Infrastructure Ltd 137.9 60.2
Itc Ltd 94.0 9.1
#Contribution to Change in Sensex, MWPL – Market wide
position limit, ** One day prior data
Bajaj Auto | Favourable mix and commodity costs drive margin expansion
Result Update BUY INR 3,550 In 3QFY20, Bajaj Auto (BJAUT) EBITDA margin stood at 17.9% (+230bps YoY, +130bps QoQ),
led by lower commodity costs, favourable mix and exchange rate. The company is witnessing early signs of pre-buy before the BS6 transition. BJAUT is planning to shift the entire production to BS6 during Feb’20 for a smoother transition. Demand recovery post the regulatory transition remains a key monitorable. Outlook for exports remains steady with 10-12% YoY growth. We estimate revenue / EPS CAGR of 7% / 13% over FY19-22, driven by a volume CAGR of 3%. The stock is currently trading at 16.7x NTM EPS as against 5yr avg. multiple of 18.5x. We maintain BUY with revised Dec’20 TP of INR 3,550 (17x forward earnings). Sharp INR appreciation and inability to retain domestic market share are key risks to our call.
Tata Motors | Operationally in-line; sustainability of JLR margins - a key
Result Update BUY INR 230
Tata Motors reported a consol. EBITDAM of 11.4% (+220bps YoY, -120bps QoQ), driven by YoY improvement in JLR margins. JLR EBITDAM stood at 10.8% (+350bps YoY, -300bps QoQ) owing to favourable mix, lower material cost and cost savings arising from project ‘Charge’. While the near-term impact from China remains uncertain (following the nCoV virus outbreak), overall, JLR profitability is likely to sustain. In the domestic market, due to weak demand and adverse sales mix (decline in MHCV sales), TTMT standalone margin declined c.720bps YoY. Recovery in standalone business stays contingent upon pick-up in infrastructure activities, BS6 pre-buy and
scrappage policy. We estimate revenue CAGR and margin expansion of 7%/ 85bps over FY19-22. Maintain BUY with revised Mar’21 TP of INR230. Key risks to our call are failure of JLR to sustain profitability, inability of JLR to comply with EU 2021 emission targets and adverse
Result Update BUY INR 400 Marico’s 3QFY20 earnings report was expectedly lacklustre. Outlook appears equally sombre
especially on the Value-added Hair-oils business (Dabur fared quite badly as well here) – management has shied away from providing its customary medium-term prognosis for this
segment, even as it remained confident of achieving its medium-term growth targets for the other two segments, viz. Parachute (5-7% volume growth over the medium-term), Saffola (high single-digit volume growth over MT). To be fair, outlooks appears weak across the board (similar
views expressed by Dabur’s management as well) but one of our other fears here has more to do
with the fact that copra is possibly now facing a scenario of stagnating prices, which may preclude any pricing action or further margin-gains in the Parachute business; in a tepid demand scenario, this could translate into a lower-than-trend level profit growth, with attendant impact and pressure on stock-price performance, attractive relative valuation notwithstanding. Our rating remains unchanged for now but the way copra price behaves hereonwards would be extremely critical at this juncture, in our view
Crompton Greaves Consumer Electricals | ECD continue to drive growth and profits
Result Update BUY INR 320 Crompton Consumer Electricals’ (Crompton’s) 3QFY20 adjusted PAT grew 19% YoY (-12% QoQ) to INR 1.1bn (9% above JMFe) on strong performance by the ECD segment (+11 YOY sales growth), partially offset by an 11% YoY fall in the lighting segment’s sales. Excluding B2B lighting, ECD and B2C lighting volumes grew 13% YoY, driven by fans, domestic items and appliances. Except for rural (agricultural pumps) and B2B lighting businesses, management does not see a strong impact of the slowdown and remains optimistic. They plan to focus on revenue growth along with gross margin expansion (through cost efficiencies and pricing improvement) and would reinvest this largely to increase capabilities. We maintain a BUY rating with a Mar’21 TP of INR 320.
TTK Prestige | Multiple headwinds take a toll
Result Update BUY INR 7,000
TTK Prestige (TTK) reported a weak 3QFY20 as revenue fell 1% YoY on a) a high base of 3QFY19 (revenue was up 21% YoY then), b) rural demand weakness, c) low corporate gifting and d) rejig in rural (through microfinance institutions) and modern format retail distribution (diversifying
clientele). While cooker/cookware sales fell 7%/9% YoY, appliances grew 3%, the lowest growth in the past 4 quarters. EBITDA/PBT declined 3%/7% YoY (7%/11% below JMFe) though PAT rose 7% on a lower tax rate. Management said 3QFY20 saw better rural sales than 1HFY20 and expects these to fully recover by FY21, contingent upon the upcoming harvest season. We
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maintain BUY with a Mar’21 TP of INR 7,000 (earlier INR 7,380). Lower-than-expected
growth/margins are key risks to our call
Strides Pharma Science | Blowout quarter; strong US execution aids convincing beat
Result Update BUY INR 680
Strides reported a blowout performance in 3QFY20 with EBITDA margin being the highest ever reported and Gross margin tracking well ahead of guidance. Revenue/EBITDA of INR 7324 mn/ 1808 mn were +5%/+48% vs our estimates. Regulated markets revenue grew by 59% YoY with US revenue convincingly beating our estimates (35% beat). EBITDA margin improved by 419 bps QoQ to 24.7% (JMFe 17.5%) with Gross margin expanding by 615 bps sequentially to 64.4%. Strides is now on track to meet the upper end of its FY20 US revenue guidance (c. USD 240 mn).
The weak performance of the emerging markets & institutional businesses and a delay in the normalization of Arrotex supplies remain mild negatives. Given Strides’ strong portfolio of yet-to-be commercialized ANDAs (c.30 products) & launch momentum in US (c.10 per year), the expected ramp up in the utilization of the Singapore facility, the re-entry into sterile injectables and the foray into soft gelatin capsules, multiple levers for sustainable medium-term US growth are now in place. With Strides having achieved a critical size in regulated markets, we expect the
strong margin performance to continue into FY21.Maintain BUY with a Mar’21 TP of INR 680.
Trident | Dismal performance in bath segment; earnings contingent on improving
utilizations
Result Update BUY INR 10 Trident’s 3QFY20 adj. PAT came in at INR 784mn, significantly below JMfe of INR 1.3bn driven
by dismal performance in terry towel segment. Home Textile 3Q EBIT margin stood at record low of 2% vs Paper EBIT margin of 30%. Terry towel volumes suffered on account of low promotional sales orders. Capacity utilization for Bed/Bath stood at 68%/42% respectively
during the quarter. The company has maintained its FY20 capacity utilization guidance of Bed Linen at 70% (+/-5%). Utilization guidance for Bath Linen stands reduced to 55%(+/-5%). The company reversed the previously accrued MEIS benefit of INR 487mn as per the directive by GoI.
Net debt as on Dec’19 stands at INR 16.6bn. Capex (as a part of Vision 2025 document) of INR 2.2bn/ 11bn towards paper/yarn facilities is underway. Capex trajectory is likely to eat into FCF generation for years to come while growth will continue to depend heavily on currency
depreciation and subsidies. Declining cotton prices and currency hedges @ 72.9 for FY20 lends support to near-term earnings. We ascribe a P/E of 10x FY22E to arrive at our fair value of INR 9.7/sh. Maintain BUY.
Greenlam Industries | Export springs a surprise; announces new greenfield capacity
Result Update BUY INR 1,200 Greenlam Industries (Greenlam) reported better-than-expected 3QFY20 earnings on the back of
strong volume growth in laminate exports (+21% YoY) coupled with gross/EBITDA margin expansion. Laminates revenue rose 13% YoY in 3QFY20 as volume/realisations grew 8%/5%. Gross margin improved 190bps YoY to 50.3% (+320bps QoQ; 250bps above JMFe) on an improved product mix (increase in premium products) and reduction in raw material costs.
Emerging businesses (doors/flooring) continue to report robust revenue growth, but on a lower base and a profitability turnaround remains elusive. The company announced greenfield capacity
in Andhra Pradesh (1.6 million laminate sheets and boards to be commissioned by end-FY22). We maintain BUY and roll forward to a Mar’21 TP of INR 1,200.
Dabur India | Performed well in a slowing market
Result Update HOLD INR 475
Dabur’s 3QFY20 report was a mixed-bag - revenue trajectory outpaced expectation by a tad but was led more by strong performance in International operations (off a weak base) whilst domestic growth was more or less on expected lines. Operating profit was below expectation on
like-to-like basis even as domestic revenue growth trajectory improved on sequential comparison notwithstanding a tougher comp – Oral-care, Health Supplements led growth in India while Hair-oils and Foods remained weak. International business grew in double-digit on constant currency basis but on an easy base. Management sounded extremely cautious about the near-term and believes that it could take at least two more quarters for greenshoots to emerge (nothing visible yet in Jan), especially with many categories still declining in volume / value terms at an overall level. Dabur’s focus remains on share gains through rural footprint expansion, investment in flanker brands (e.g. hair-oils), capturing adjacent opportunities (e.g. entry into lower-end juice drinks segment). Dabur has outpaced its relevant peers yet again in their respective categories -
Colgate in Toothpaste, Marico in Hair-oils and in that context, the stock would possibly be able
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to sustain its rich valuation. Risks to growth do exist but narrative appears sweeter here vs peers’.
Maintain HOLD.
Colgate-Palmolive India | Weak volume delivery
Result Update HOLD INR 1,490
Colgate’s 3QFY20 volume performance signalled a further deceleration vs the trajectory seen thus far in 1H – this is despite the recent aggression on ad-spends front (+20% over past 6M) which is expected to drive growth higher in the coming quarters. Volume growth deceleration to 2.3% in 3Q vs c.4% in 1H was a function of further moderation in demand conditions, category headwinds in both rural and urban areas, and also some element of marketplace disruptions during the quarter, in our view. Pricing growth picked-up sequentially (+1.7% YoY off a soft
base) which helped deliver value growth that was not too different vs 1H’s level, lower growth in volumes notwithstanding. Colgate has continued to invest behind its brands and that is fairly evident from the financials, but the brand’s 9MFY20 growth is still at half the level of that clocked by Dabur - a key disappointment. Profit performance, though, was still quite in-line with our expectation. A lacklustre earnings report coupled with rich valuation of c.41x NTM EPS (stock had rallied 20% on the back of optimism that new MD Ram Raghavan would get aggression
back into the business) is likely to keep stock subdued in the near-term, we believe. Maintain HOLD.
Persistent Systems | A story in transition
Result Update HOLD INR 710
Persistent (PSYS) reported 3QFY20 revenue/EBITDA a tad below estimates; while IP sales wereweak for a seasonally stronger quarter, the impact was largely offset by continued traction inServices business where the increased focus on annuity deals appears to be helping. Thus,while
the management was tentative on the near-term outlook – likely due to seasonalsoftness in the IP business (21% of revenues) and continued uncertainties in the Alliancebusiness (27% of revenues) – we expect PSYS to return to a double-digit YoY USD revenuegrowth trajectory from
FY21 after a muted FY19/FY20. Margins too are on the mend; while3QFY20 EBIT margin was below estimates due to lower IP sales, SG&A costs should normaliseby 4QFY20 after the staying elevated due to client/sales-team rationalisation and enhancedmarketing initiated by the new
management team in 2QFY20. Thus, changes in our FY21/FY22 EPS estimates are minor. The stock recovered sharply from its Jul-19 lows (c25% O/P tothe Nifty IT Index) on hopes of a quick turnaround post the management changes. While weappreciate the strategic priorities of the
new team, we expect a visible impact of the portfoliorealignment could take a while + growing
share of annuity deals exposes PSYS to challengessuch as higher DSOs/poor cash conversion. Uncertainty in the Top client (22% of revenues)also needs a close watch. Thus, we maintain HOLD with INR 710 PT (unchanged).
India Power and Infrastructure | Power and Infrastructure Snippets 30 Jan'20
Flash Update
Coal India (CIL) production up 10.7% YoY in Jan’20
Carborundum Uni. Colgate-Palmolive Dabur India Ltd
eClerx Services Ltd Indian Oil Corporation
JK Tyre & Industries LIC Housing Finance
Marico Ltd MCX
Parag Milk Foods Ltd Persistent Systems Ltd Shriram City Union Fin
Tata Motors Ltd TTK Prestige Ltd
AIA Engineering Ltd Aditya Birla Capital Ltd
Bank of India Coromandel Interna.
Hindustan Unilever Ltd ITC Ltd
Kansai Nerolac Paints Kirloskar Oil Engines Magma Fincorp Ltd Power Grid Corpo. State Bank of India Shoppers Stop Ltd Tech Mahindra Ltd Timken India Ltd
Unitech Ltd Vedanta Ltd
V-Guard Industries Ltd Vinati Organics Ltd
Sobha Ltd Suprajit Engineering Thyrocare Techno
Monday Tuesday Wednesday Thursday Friday Saturday
03 04 05 06 07 08
Century Plyboards (I) Glaxos Pharma
Godrej Properties Ltd Hawkins Cooker Ltd Dr Lal Pathlabs Ltd
SRF Ltd Shriram Transport Fin.
Tata Chemicals Ltd Ujjivan Financial Ser.
Adani Ports & Specia Bharti Airtel Ltd
Indo Count Industries J B Chemicals Jindal Saw Ltd
* - Standalone Numbers, # - Consolidated Numbers, NP - Not Published, $ - Operating RoEV for Life Insurance, @ - Book value for ICICI Lombard
PAT/ Avg AUM Price / AUM(%)
upside
EPS P/E P/BCompany Rating
Mkt Cap
(Rs bn)CMP (Rs)
12M
TP (Rs)
ROE$ (%)(%)
upside
Embedded Value@ (INRbn) EV Gr (%)
19-21
P/EV (x) P/BV (x)Company
Mkt Cap
(Rs bn)CMP (Rs)
12M
TP (Rs)
CompanyMkt Cap
(Rs bn)CMP (Rs)
12M
TP (Rs)Rating
Rating
(%)
upside
EPS (Rs) EPS Gr (%)
19-21
PE (x) P/BV (x) ROE (%)
INDIA MORNING BRIEF 30 January 2020
JM Financial Institutional Securities Limited Page 12
APPENDIX I
JM Financial Institutional Securities Limited (formerly known as JM Financial Securities Limited)
Corporate Identity Number: U67100MH2017PLC296081 Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.
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Definition of ratings
Rating Meaning
Buy Total expected returns of more than 15%. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.
Sell Price expected to move downwards by more than 10%
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company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select recipient
of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of JM
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INDIA MORNING BRIEF 30 January 2020
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