Top Research Picks India Strategy: Grand Alliance sweeps Bihar polls - Nitish-Lalu landslide has a compelling narrative Oracle Financial Services: License sales growth drive margins – upgrade to BUY Tata Motors: JLR margins subdued, but worst over – BUY Eicher Motors: RE margins beat estimates, VECV disappoint BHEL: Margins weak but priced in; maintain HOLD Punjab National Bank: Soft Q2: Loan growth muted, slippages elevated Bank of Baroda: Ballooning slippages deflate earnings Other Research State Bank of India: Easing asset quality stress a key positive – BUY Mahindra & Mahindra: Poor rain hits tractor sales; auto launches to fuel growth Britannia Industries: Rich product mix buoys margins, BUY Cummins India: Slow exports a short-term blip – maintain BUY Info Edge: Sales in line; investments continue to drag earnings Sadbhav Engineering: Strong execution, traffic growth drive Q2 beat Union Bank of India: Mounting asset stress – maintain SELL Finolex Industries: Volume-led revenue beat Morning Buzz INDIA 9 November 2015 This report has been prepared by Religare Capital Markets Limited or one of its affiliates. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Transcript
Top Research Picks
India Strategy: Grand Alliance sweeps Bihar polls - Nitish-Lalu landslide has a compelling narrative
Union Bank of India: Mounting asset stress – maintain SELL
Finolex Industries: Volume-led revenue beat
Morning Buzz INDIA
9 November 2015
This report has been prepared by Religare Capital Markets Limited or one of its affiliates. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Grand Alliance sweeps Bihar polls Nitish-Lalu landslide has a compelling narrative Bihar’s election result is a surprisingly decisive mandate in favour of the Grand Alliance (GA) comprising the JDU, RJD and Congress. Despite our initial assessment in August of “Advantage NDA”, on-the-ground feedback after Phase 1 of polls suggested the BJP-led NDA was fast losing ground, and our roadtrip to Bihar in late October reinforced these findings.
Nonetheless, the GA’s landslide victory came as a surprise (178 seats vs. 58 for NDA). Apart from scoring over the NDA on issues such as a credible CM face, almost no anti-incumbency against Nitish Kumar, a pro-reservation image and a high degree of vote transfer amongst alliance partners, the GA’s final victory was likely led by its popularity among women, youth and EBC voters.
NDA lost the plot after a good beginning: We had made an on-the-ground assessment of the political milieu in Bihar in late August. At the time, the Modi-led NDA campaign was hitting the right notes, centered around development and job creation. That led us to believe that the party had an advantage (read our report “The Battle for Bihar – A Defining Moment in Indian Politics” dated 25 August 2015).
However, after the first phase of assembly elections, on-the-ground feedback suggested that the NDA was effectively scoring a series of self-goals – the party’s narrative had shifted from the development plank to controversial issues including the RSS chief’s statement on reservations, the beef ban and related communal violence in Dadri (Uttar Pradesh), and the killing of Dalits in Haryana. Worst of all, the NDA’s negative campaign against Nitish Kumar, a popular Chief Minister with virtually no anti-incumbency in the state, backfired.
Clear, decisive verdict a surprise: In late Oct’15 just before the third phase of elections, we visited Bihar with a delegation from the institutional investment community as part of our Great India Roadtrip series. Even then, it was amply clear that the GA was swiftly gaining ground.
Our analysis was based on issues resonating with people in the state: a credible CM face, almost no anti-incumbency against Nitish Kumar and the GA’s pro-reservation image. The GA’s victory can also be attributed to its popularity among women, youth and extremely backward caste (EBC) voters. However, the alliance’s landslide victory has surprised us. The GA perhaps had more than a 75% vote transfer among its partners. The late surge in women voter turnout helped it the most. In addition, the ‘jungle-raj’ plank of the NDA does not seem to have resonated with the youth, especially those born after the mid-1990s.
Implications for national politics: The results may embolden smaller regional parties to band together in state elections against the NDA (West Bengal, Kerala, Assam and Tamil Nadu in 2016 and UP, Punjab, Goa, Uttarakhand and Manipur in 2017). This may be seen as a weakening of leadership at the Centre.
Strategy INDIA
9 November 2015
REPORT AUTHORS
Jay Shankar Chief India Economist +91 11 3912 5109 [email protected]
Seats won Party Won Coalition Won
Bharatiya Janata Party 53
NDA 58 Lok Jan Shakti Party 2
Rashtriya Lok Samta Party 2 Hindustani Awam Morcha (Secular) 1
Janata Dal (United) 71 Grand
Alliance 178 Rashtriya Janata Dal 80
Indian National Congress 27
Communist Party of India (Marxist-Leninist) (Liberation) 3 Independent 4 Total 225 Source: Election Commission of India
PRICE CLOSE (06 Nov 15) INR 3,946.35 MARKET CAP INR 334.6 bln USD 5.1 bln
SHARES O/S 83.9 mln
FREE FLOAT 17.8%
3M AVG DAILY VOLUME/VALUE 0.1 mln / USD 3.2 mln
52 WK HIGH INR 4,446.60
52 WK LOW INR 3,136.10
BUY TP: INR 4,400.00 11.5%
Oracle Financial Services OFSS IN
License sales growth drive margins – upgrade to BUY
OFSS’s Q2 revenues increased 6.2% YoY to Rs 10bn led by a 9.3% growth in the product segment (82% of revenue) which saw new license sales surge 103% YoY to US$ 16mn. Higher license sales were a key revenue driver in the products business, boosting EBITDA margins by 467bps YoY to 42%. OFSS has seen consistent new license growth over the past four quarters thus we upgrade the stock to BUY (from HOLD) with a revised Sep’16 TP of Rs 4,400 (from Rs 4,000) set at 21x one year forward P/E (19x earlier).
Strong license sales: OFSS reported Q2FY16 revenues of Rs 10bn, up 6.2% YoY. Product revenues recovered 9.3% YoY as the income from license sales increased 103% YoY to US$ 16mn. While implementation/AMC revenue grew 4%/(1.3)% YoY, we expect strong license growth to translate into better implementation and maintenance revenues through FY16/FY17. OFSS reported a 12.2% YoY decline in the services business (to Rs 1.5bn) but a 47% growth in the KPO business (to Rs 294mn).
License growth drives margin leverage: Higher growth in license sales boosted EBITDA margins by 467bps YoY to 43.9%. Product margins improved by 698bps to 49% and services margins by 200bps YoY to 21.1%. Net income increased marginally 1.5% YoY to Rs 3.2bn due to lower interest income as cash reserves shrank on high dividend payouts. The employee count rose to 8,876 from 8,795 QoQ/8,948 YoY.
Upgrade to BUY: The sharp uptick in license sales was a key surprise in Q2, albeit off a lower Q2FY15 base of US$ 7mn. OFSS remains a high-quality product company and recovery in new license sales is driving margin expansion and enhancing our confidence on revenue visibility. We believe premium valuations of 20.6x FY17 P/E are likely to sustain given an improving growth and margin profile. We upgrade the stock to BUY (from HOLD) with a Sep’16 TP of Rs 4,400 (Rs 4000 earlier) set at 21x forward P/E.
PRICE CLOSE (06 Nov 15) INR 396.15 MARKET CAP INR 1,276.9 bln USD 19.4 bln
SHARES O/S 3,323.1 mln
FREE FLOAT 65.3%
3M AVG DAILY VOLUME/VALUE 11.8 mln / USD 62.3 mln
52 WK HIGH INR 605.90
52 WK LOW INR 279.10
BUY TP: INR 470.00 18.6%
Tata Motors TTMT IN
JLR margins subdued, but worst over – BUY
TTMT’s consolidated revenues inched up 1% YoY to Rs 613bn while PAT slid 32% to Rs 22.2bn (RMCLe Rs 17.4bn) on muted JLR margins (12.2% vs. RCMLe 14.3%). Standalone EBITDA margins however beat forecasts (6.8% vs. RCMLe 5.5%), resulting in lower-than-estimated losses of Rs 2.8bn. We pare FY16E/ FY17E/FY18E EPS by 15%/11%/7% on lower JLR margins and cut our Sep’16 TP to Rs 470 (from Rs 500). But we restate BUY as the worst seems to be over with a China recovery and new launches set to drive volume growth ahead.
JLR margins below estimates; H2 to be better: JLR’s EBITDA margins slid 722bps YoY/422bps QoQ to 12.2%, falling short of RCMLe (14.3%). However, with volume recovery seen in most regions including China in H2FY16, margins are likely to rebound. PAT too disappointed at £ 153mn (-66% YoY) on higher depreciation and unfavourable revaluation of foreign currency debt and unrealised hedges.
With retail volumes up 24% YoY in October and China posting 9% growth in the month, we expect strong volumes for H2, with FY16 volumes even touching the ~495k mark (+6% YoY). A strong launch pipeline, full ramp-up of Discovery Sport and normalisation of Evoque volumes should lead to a solid 21% volume growth in FY17.
Standalone margins better at 6.8%: TTMT reported a net loss of Rs 2.8bn, lower than RCML estimated losses of Rs 4.9bn, on higher margins 6.8% (RCMLe: 5.5%) as better volumes improved operating leverage. We continue to believe a turnaround in the India business is imminent as the CV cycle recovers.
Estimates cut; maintain BUY: We cut our FY16E/FY17E/FY18E EPS by 15%/11%/7% to build in lower JLR margins (FY17E/FY18E: 14.1%/15.4%/15.9% vs. 15.7%/15.8%/ 16.0% earlier), which leads to a new Sep’16 TP of Rs 470 (Rs 500 earlier). We however retain BUY as we think the worst is over and H2 should see strong volumes led by a recovery in China and other regions, in turn leading to better profitability.
PRICE CLOSE (06 Nov 15) INR 16,693.30 MARKET CAP INR 453.1 bln USD 6.9 bln
SHARES O/S 27.1 mln
FREE FLOAT 45.1%
3M AVG DAILY VOLUME/VALUE 0.1 mln / USD 20.4 mln
52 WK HIGH INR 21,620.00
52 WK LOW INR 12,629.80
BUY TP: INR 22,100.00 32.4%
Eicher Motors EIM IN
RE margins beat estimates, VECV disappoint
EIM reported above-expected RE margins of 27.7% (RCMLe 27.1%) for Q2FY16, helped by 70bps reduction in RM costs, while PAT at Rs 2.3bn came in a tad below estimates (RCMLe Rs 2.4bn). VECV margins declined 50bps QoQ to 7.3%, translating into below-expected consolidated margins of 15.8% (RCMLe 16.3%) and consolidated PAT of Rs 2.6bn (RCMLe: 2.8bn). With slower ramp up of RE capacity and lower VECV margins, we cut our FY16E/FY17E EPS by 3%/4% and revise our Sep’16 TP to Rs 22,100 (from Rs 22,500). BUY.
RE margins above estimates: Royal Enfield (RE) margins came in above estimates at 27.7% (RCMLe: 27.1%) helped by a 70bps reduction in RM costs. Revenues were up 59% YoY on a 56%/2% increase in volumes/realisations. On a QoQ basis, revenues grew 19% lead by a 20% increase in volumes and a 1% drop in realisations. PAT at Rs 2.3bn came in slightly below estimate (RCMLe Rs 2.4bn) on higher depreciation and taxes.
VECV margins decline 50bps QoQ to 7.3%: VECV margins came in below estimates at 7.3% (RCMLe: 8.2%), declining 50bps QoQ on lower operating leverage as volumes fell 3%. Weak VECV margins translated into consolidated margins of 15.8%, falling short of estimates (RCMLe: 16.3%). Overall PAT at Rs 2.56bn (RCMLe: Rs 2.78bn,+55% YoY/15% QoQ) was slightly below expectations on lower operating numbers and higher depreciation. Depreciation surged 56% YoY to Rs 878mn due to capacity expansion. Effective tax rate stood at 31.1% (RCMLe: 28.9%).
Estimates tweaked; maintain BUY: We revise down our RE volume estimates for FY17 based on management’s guidance of the CY16 exit capacity of 620,000 units, which in turn leads to 3% cut in our volumes for FY17E. We also pare consolidated margins to factor in weak VECV margins, and accordingly cut our FY16/FY17 earnings by 3%/4%. We SOTP-based Sep’16 TP thus stands revised to Rs 22,100 from Rs 22,500 earlier. Maintain BUY.
PRICE CLOSE (06 Nov 15) INR 191.45 MARKET CAP INR 468.6 bln USD 7.1 bln
SHARES O/S 2,447.6 mln
FREE FLOAT 27.9%
3M AVG DAILY VOLUME/VALUE 4.8 mln / USD 16.1 mln
52 WK HIGH INR 300.00
52 WK LOW INR 184.10
HOLD TP: INR 200.00 4.5%
BHEL BHEL IN
Margins weak but priced in; maintain HOLD
BHEL’s Q2 results were significantly below estimates on account of lower gross margins, which management attributed to weaker realisations and higher import content in supercritical thermal projects. Order inflows stood at Rs 25bn for the quarter, and at a healthy Rs 266bn YTD. We pare our FY17/FY18 34%/11% EPS estimates to build in lower gross margins, which leads us to revise our Mar’17 TP to Rs 200 (from Rs 250), implying an exit PE of 15x. Maintain HOLD on limited upside from current levels.
Higher import content hits gross margins: BHEL’s Q2 gross margins slumped 1,000bps YoY to 34.1% on account of (1) lower pricing in currently executed projects; (2) a higher import content of ~65% in supercritical thermal projects (vs. 55% in FY15, and likely ~65% in FY16E); and (3) a 50% YoY increase in prices of CRGO steel. The higher import content can be attributed to joint deeds of undertaking BHEL has signed with customers along with collaborators. Management however expects the import content to come off in the medium to long term, and thus margins to improve from current levels.
Order inflows healthy: BHEL saw order inflows of Rs 25bn for the quarter and Rs 220bn for H1FY16, an increase of 57% YoY. Further, the company has secured the following two orders post Sep’15: (1) a Rs 23bn (1 X 800MW) order from APPDCL, Krishnapatnam, and (2) a Rs 23bn (1 X 800MW) order from APGENCO, Vijayawada. Management stated that the company is L1 in 8,375MW of projects, which aggregate to Rs 240bn.
Investment view: In view of the sharp gross margin contraction, we cut our FY16/FY17/FY18 EPS estimates by 64%/34%/11%, while maintaining our order inflow and execution estimates. We believe the stock is likely to trade at current valuations (of 26x FY17 PE) unless margins show signs of improvement. Maintain HOLD with a revised Mar’17 TP of Rs 200 (from Rs 250 earlier).
PRICE CLOSE (06 Nov 15) INR 132.90 MARKET CAP INR 261.0 bln USD 4.0 bln
SHARES O/S 1,810.3 mln
FREE FLOAT 40.6%
3M AVG DAILY VOLUME/VALUE 4.8 mln / USD 10.5 mln
52 WK HIGH INR 231.50
52 WK LOW INR 123.60
HOLD TP: INR 150.00 12.9%
Punjab National Bank PNB IN
Soft Q2: Loan growth muted, slippages elevated
PNB’s Q2 PAT grew merely 8% YoY to Rs 6.2bn on poor NII growth and lower non-interest income, even as the pressure on earnings was cushioned by a dip in opex and a lower tax rate. Slippages declined marginally to Rs 31bn from Rs 34bn in Q1, but spiraled down 42% QoQ to Rs 16bn on excluding slippages from restructured accounts. GNPA/NNPA ratios were largely stable at 6.4%/4.0%. Loan growth remained muted at 7% while global NIMs improved 7bps QoQ to 3%. Maintain HOLD with a Sep’16 TP of Rs 150.
Asset quality stable: PNB’s asset quality remained stable with GNPA/NNPA ratios of 6.4%/4.0% in Q2FY16 vs. 6.5%/4.1% in Q1FY16. Slippages though elevated declined marginally to Rs 31bn from Rs 34bn in Q1. However, slippages from restructured accounts increased to Rs 14.8bn from Rs 5.4bn in Q1. Total restructured assets declined by 4% QoQ, which pushed down their share to 10% of loans in Q2 from 10.5% last quarter and that of stressed assets by 50bps QoQ to 14%. The bank’s exposure to discoms stood at Rs 93.4bn in Q2. Management is looking at ARC sales in the next few quarters to reduce the stress on asset quality.
Loan growth muted; NIM improves QoQ: PNB’s loan book grew by 6.7% YoY in Q2, weaker than the 9-10% growth in industry credit. Loan growth in retail credit however was strong at 23% YoY, primarily driven by a 28% YoY growth in the home loan segment. Global NIMs increased by 7bps QoQ to 3% as cost of funds declined by 8bps QoQ while yield on advances increased by 20bps.
Maintain HOLD: We pare our FY16-FY18 earnings estimates by 12-13% citing sustained pressure on asset quality and margins. Maintain HOLD with a Sep’16 TP of Rs 150.
Y/E 31 Mar FY14A FY15A FY16E FY17E FY18E
Net interest income (INR mln) 1,61,460 1,65,556 1,91,547 2,16,101 2,45,093
Net revenues (INR mln) 2,07,227 2,24,463 2,46,348 2,77,227 3,13,690
PRICE CLOSE (06 Nov 15) INR 167.05 MARKET CAP INR 384.9 bln USD 5.9 bln
SHARES O/S 429.4 mln
FREE FLOAT 43.7%
3M AVG DAILY VOLUME/VALUE 9.6 mln / USD 27.0 mln
52 WK HIGH INR 228.90
52 WK LOW INR 137.15
HOLD TP: INR 160.00 4.2%
Bank of Baroda BOB IN
Ballooning slippages deflate earnings
BOB’s Q2FY16 PAT plunged to Rs 1.2bn from Rs 10.5bn in Q1 due to a spike in provisions. Asset quality disappointed as stressed asset formation swelled to Rs 71bn, led by ballooning slippages at Rs 70bn. However, no loans were either sold off to ARCs or refinanced under the RBI’s 5:25 scheme in Q2. Loan growth was sluggish at 8% YoY while NIM declined 18bps QoQ to 2.1%. With continued stress on asset quality and margins, we raise credit cost assumptions and restate HOLD with a Sep’16 TP of Rs 160.
Asset quality concerns prevail as stressed asset formation remains elevated: BOB’s slippages rose sharply to Rs 70bn from Rs 19bn last quarter. Slippages were lumpy in nature as the corporate segment accounted for a 70% share (the top 20 accounts formed 75% of corporate slippages). Management commented that ~60% of the slippages were from known stressed sectors like iron & steel (26%), mining (15%), infrastructure (11%), textiles (6%) and electronics (5%). Slippages from restructured assets increased from Rs 3.5bn Q1 to Rs 13.9bn, but incremental restructuring was stable at Rs 1.2bn. Despite the absence of sale to ARC or 5:25 refinancing, stressed asset formation increased to Rs 70bn vs. Rs 66bn QoQ. SMA-2 category loans stood at 4.5% of loans.
Loan growth muted, margins to remain weak: BOB’s loan growth in Q2 stood at 8% YoY, even weaker than the 9-10% growth in industry credit. Retail credit grew by 10% YoY largely driven by 13% growth in home loans. NIMs declined by 18bps QoQ to 2.1% as yield on advances declined by ~30bps to 7.6% while cost of deposits remained stable (5.1%).
Maintain HOLD: We have pared our earnings estimates for FY16-FY18 by ~9% due to higher credit cost assumptions. Maintain HOLD with a Sep’16 TP of Rs 160.
Y/E 31 Mar FY14A FY15A FY16E FY17E FY18E
Net interest income (INR mln) 1,19,653 1,31,872 1,42,758 1,61,405 1,88,022
Net revenues (INR mln) 1,64,281 1,75,892 1,92,358 2,17,356 2,51,211
PRICE CLOSE (06 Nov 15) INR 243.00 MARKET CAP INR 1,886.4 bln USD 28.7 bln
SHARES O/S 7,465.7 mln
FREE FLOAT 41.4%
3M AVG DAILY VOLUME/VALUE 16.4 mln / USD 62.6 mln
52 WK HIGH INR 336.00
52 WK LOW INR 220.15
BUY TP: INR 325.00 33.7%
State Bank of India SBIN IN
Easing asset quality stress a key positive – BUY
SBIN reported strong Q2 results with a 25.1% YoY growth in PAT to Rs 38.8bn led by higher non-interest income and flat provisions YoY. A key positive however was the 30% QoQ decline in stressed asset formation to Rs 127bn, even on inclusion of six refinanced loans of Rs 39bn under RBI’s 5:25 scheme. Loan growth improved to 10% YoY driven by retail and large corporate loans, while NIMs remained stable QoQ at 3%. We maintain BUY with a Sep’16 TP of Rs 325.
Good show on asset quality: SBIN’s Q2 slippages stood at Rs 59bn vs. Rs 73bn in Q1FY16, down 20% QoQ. The bank refinanced six accounts worth Rs 39bn vs. Rs 64bn in Q1 under the RBI’s 5:25 scheme, while fresh restructuring declined to Rs 25bn from Rs 39bn QoQ in Q1. Stressed asset formation (including 5:25) declined 30% QoQ to Rs 127bn, which was is a positive. However, sell-down to ARCs was higher at Rs 4bn vs. Rs 290mn last quarter.
The bank evoked SDR in two accounts worth Rs 30bn, but their refinancing/ conversion of debt into equity would be done in Q3FY16. SBIN is looking to evoke SDR in two more accounts, one each in the power and construction sectors.
NIM stable; loan growth improves QoQ: Overall loan growth improved to 10.5% YoY (~7% in Q1)/4.5% QoQ as corporate loan growth picked up in view of a base rate cut. Retail/large corporate loans grew by 17%/22% YoY and corporate loan growth was driven by infrastructure (mainly completed projects) and large NBFCs. The mid-corporate loan book however declined 5.2% YoY while SME loan growth remained weak at 5% YoY. Domestic NIMs improved marginally to 3.32% as yields largely remained stable QoQ and the cost of funds declined 5bps.
Maintain BUY: We like SBIN over other PSU banks due to its adequate capital levels and high margin structure. Maintain BUY with a Sep’16 TP of Rs 325.
Y/E 31 Mar FY14A FY15A FY16E FY17E FY18E
Net interest income (INR mln) 6,75,834 7,47,957 8,26,025 9,36,641 10,75,866
Net revenues (INR mln) 10,54,655 12,41,109 13,57,973 15,21,080 17,25,450
PRICE CLOSE (06 Nov 15) INR 1,249.55 MARKET CAP INR 776.1 bln USD 11.8 bln
SHARES O/S 613.9 mln
FREE FLOAT 74.8%
3M AVG DAILY VOLUME/VALUE 1.3 mln / USD 24.7 mln
52 WK HIGH INR 1,442.05
52 WK LOW INR 1,092.15
HOLD TP: INR 1,330.00 6.4%
Mahindra & Mahindra MM IN
Poor rain hits tractor sales; auto launches to fuel growth
MM reported an in-line operating performance (M&M+MVML) for Q2FY16, with EBITDA margins coming in at 13.2% (RCMLe 13.5%), down 112bps QoQ as lower tractor volumes led to an unfavourable product mix. However, PAT (MM-MVML) was higher at Rs 9.8bn (RCMLe: Rs 8.2bn) due to greater other income. While weak monsoons have pushed FE growth expectations to FY17, new auto segment launches are likely to drive MM’s near-term sales momentum. Maintain HOLD with a Sep’16 TP of Rs 1,330.
Topline down 4% YoY: MM+MVML’s Q2FY16 net sales declined 4% YoY to Rs 87.9bn, in line with the estimated Rs 86.5bn, but EBITDA margins at 13.2% (+120bps YoY/-112bps QoQ) came in slightly below RCMLe of 13.5% on higher expenses from launch costs related to new products and refreshes. Adj. PAT at Rs 9.8bn (RCMLe: Rs 8.2bn) beat forecasts due to higher other income (Rs 4.9bn vs. RCMLe Rs 3bn). EBIT margins for the FE business declined by 130bps QoQ (+80bps YoY) to 16.4% while auto segment margins were down 50bps QoQ to 9.8%.
Tractor industry guidance lowered; new launches to drive auto volumes: With the second consecutive year of weak monsoons leading to a 19% decline in tractor industry volumes for H1FY16, MM has revised down its guidance to a 5% decline from 5% growth previously. It expects the low base of H2FY15 to help garner some volume growth in H2FY16 in the tractor segment. In the auto segment, TUV3OO has received good response with no visible cannibalisation of other MM products. S101 is set to be launched in Jan’16 and drive growth ahead.
Maintain HOLD: While the FE segment continues to face growth headwinds with any meaningful improvement likely only in FY17 now, MM’s volume growth momentum should pick up with new auto segment launches over the next six months. We maintain our HOLD rating on the stock with a Sep’16 TP of Rs 1,330.
PRICE CLOSE (06 Nov 15) INR 3,130.00 MARKET CAP INR 375.5 bln USD 5.7 bln
SHARES O/S 119.5 mln
FREE FLOAT 49.0%
3M AVG DAILY VOLUME/VALUE 0.2 mln / USD 10.9 mln
52 WK HIGH INR 3,435.00
52 WK LOW INR 1,506.85
BUY TP: INR 3,600.00 15.0%
Britannia Industries BRIT IN
Rich product mix buoys margins, BUY
BRIT reported in-line Q2 results with consolidated net sales/EBITDA/adj. PAT growth of 12%/52%/42% YoY and estimated volume growth of 10%. Revenue was slightly below estimates due to a phase-out of excise duty benefits (100bps impact), while EBITDA margins were a tad ahead (+365bps YoY to 14%) led by better gross margins, a richer product mix and lower operating cost. We remain optimistic on BRIT’s ability to deliver industry-leading earnings growth and the stock remains one of our top consumer staples picks.
Consol. net sales growth of 12% YoY: BRIT’s consolidated net sales grew to Rs 21.9bn led by healthy double-digit volume growth (estimated at ~10% YoY) coupled with an improved product mix. Standalone net sales increased 11.9% YoY to Rs 20.1bn which factors in the ~100 bps negative impact from a phase-out of excise duty benefits. Management is confident of driving consumer off-take as it looks to pass along some benefits from benign RM prices and enhance its distribution reach. We remain confident that BRIT can deliver an industry-leading topline CAGR of 15.2% over FY15-FY18.
Consol. EBITDA margin up 365bps YoY: Standalone EBITDA grew 56% YoY to Rs 2.8bn with margins up 400bps YoY to 14.1% led by gross margin gains of 295bps to 41.7%. A&P spend increased by 100bps YoY to 7.8% of sales while employee costs were up 30bps YoY to 2.6%. Conversion costs/other expenses declined by 130bps/105bps YoY. Standalone adj. PAT grew 47% YoY to Rs 2bn. Consolidated EBITDA margins expanded 365bps YoY to 14% (RCMLe 13.7%) and adj. PAT grew 42% YoY to Rs 2.2bn. Revenue growth for subsidiaries stood at 14.2% YoY while higher investment in A&P at 15.3% of sales (+240bps YoY) led to a 40bps dip in EBITDA margin to 13.1%.
Maintain BUY: Valuations at 36x/29x FY17E/FY18E EPS look sustainable on the back of our estimated earnings CAGR of 32.5% over FY15-FY18. BRIT remains one of our top consumer staples picks. Maintain BUY with a Sep’16 TP of Rs 3,600.
PRICE CLOSE (05 Nov 15) INR 1,059.05 MARKET CAP INR 293.6 bln USD 4.5 bln
SHARES O/S 277.2 mln
FREE FLOAT 41.0%
3M AVG DAILY VOLUME/VALUE 0.3 mln / USD 4.7 mln
52 WK HIGH INR 1,247.65
52 WK LOW INR 730.20
BUY TP: INR 1,400.00 32.2%
Cummins India KKC IN
Slow exports a short-term blip – maintain BUY
KKC’s Q2FY16 PAT was in line with estimates (down 2% YoY) even as operating results fell short due to a 9% YoY decline in exports. Management attributed the decline in exports to an uncertain global economy. We are not overly concerned about short-term blips in either the export or domestic business as KKC’s fundamental drivers are exceptionally strong. We model for exports of ~Rs 20bn in FY16, implying 15% YoY growth in H2. Maintain BUY with a Mar’17 TP of Rs 1,400, implying an exit P/E of 35x.
Exports below estimates: Exports at Rs 4.4bn were down 9% YoY in the quarter. LHP exports dropped 50% QoQ/40% YoY to Rs 800mn, while heavy duty engine exports increased 20% YoY to Rs 480mn. Mid-range and HHP engines were flat YoY at Rs 900mn/Rs 2.1bn. Management attributed the weakness in exports to global economic uncertainty, mainly in South America, China, parts of Europe and Russia.
Domestic sales strong: Domestic sales were up 14% YoY in the quarter, primarily driven by 26% growth in the power segment. The industrial and distribution businesses were flat YoY. However, management emphasized that it was seeing improvement in the construction, railway and compressor sub-segments within the industrial segment.
Gross margins decline: Gross margins were down 70bps YoY to 37.6% in Q2 on account of an unfavourable product mix. While management is confident of further improving the cost structure (by 0.5% of sales), translation of savings into margin gains would depend on market conditions and pricing power.
Investment view: We believe the current slowdown is momentary and remain confident of KKC’s strong positioning in both its domestic and export markets. Maintain BUY.
This report has been prepared by Religare Capital Markets Limited or one of its affiliates. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
14,410
19,410
24,410
29,410
310
510
710
910
1110
(INR) Stock Price Index Price
BUY TP: INR 1,400.00 32.2%
Cummins India KKC IN
Results Review INDIA CAPITAL GOODS
6 November 2015 Page 2 of 8
Fig 1 - Actual vs. estimated performance (Rs mn) Q2FY16 Q2FY16E Variance, % Revenue 11,977 12,400 (3.4)
PRICE CLOSE (06 Nov 15) INR 712.45 MARKET CAP INR 86.0 bln USD 1.3 bln
SHARES O/S 120.6 mln
FREE FLOAT 47.0%
3M AVG DAILY VOLUME/VALUE 0.1 mln / USD 1.3 mln
52 WK HIGH INR 1,015.00
52 WK LOW INR 697.05
BUY TP: INR 1,100.00 54.4%
Info Edge INFOE IN
Sales in line; investments continue to drag earnings
INFOE reported in-line Q2 revenues (+18% YoY to Rs 1.74bn) led by 20% YoY growth in Naurki.com. However, consolidated margins remained soft due to continued investments in 99acres.com and higher marketing spends for Jeevansaathi.com. Jeevansaathi has seen strong growth in paid customers this quarter and remains a key monitorable. While management has indicated that competition in Q2 has subdued marginally in real estate, the investments would continue to drive consolidated traffic share. Maintain BUY with a Sep’16 TP of Rs 1,100.
In-line Q2: INFOE’s Q2 revenues grew 18% YoY to Rs 1.74bn driven by Naukri.com (+20%) and 99acres.com (+13% YoY). While EBITDA margins slid 900bps YoY to 19% on higher promotions cost, margins surged 530bps QoQ as marketing spends declined QoQ. PAT came in at Rs 339mn, up 2.1% YoY.
Naukri.com remains steady: Naukri.com reported a healthy 20% YoY growth despite a challenging macro. EBITDA margins for Naaukriimproved 300bps YoY to 53.2% in Q2. While the macro outlook remains mixed, management indicated that there is room for margin improvement over the medium term if growth rates improve from current levels.
Investments in 99acres.com continue: INFOE’s real estate portal, 99acres.com, posted an EBITDA loss of Rs 272mn (Q1: Rs361mn). Management stated that while competitive intensity has moderated in Q2, it’s too early to call it a trend and that INFOE would continue to invest in products/marketing to build traffic leadership.
View: We expect near-term earnings to remain soft on continued investments in 99acres.com. That said, we think most of this weakness is already priced in at current levels, and value unlocking along with traffic share consolidation in key properties would be a key stock catalyst. We largely maintain estimates with a SOTP-based Sep’16 TP of Rs 1,100. Retain BUY.
Y/E 31 Mar FY14A FY15A FY16E FY17E FY18E
Revenue (INR mln) 5,058 6,115 7,390 9,029 11,092
EBITDA (INR mln) 1,666 1,817 1,685 2,880 3,594
Adjusted net profit (INR mln) 1,288 1,941 1,590 2,355 3,178
Sadbhav’s Q2 revenues/PAT grew 25%/275% YoY to Rs 7.5bn/Rs 380mn led by strong execution in the transport segment (BOT/EPC at Rs 4.6bn/ Rs 1.3bn). Toll collections grew by 15.5% YoY on strong traffic growth in Hyderabad-Yadgiri and Dhule-Palesnar projects. With a robust order book of Rs 93bn (at Q2FY16-end) and a strong pipeline of order inflows, Sadbhav is well-placed to deliver on the execution front with upside risks to profitability on account of debt refinancing. Maintain BUY with a Mar’17 TP of Rs 360.
Robust EPC growth: EPC revenues grew 25% YoY to Rs 7.5bn led by Rs 1.9bn/ Rs 945mn/Rs 895mn/Rs 808mn of execution in Rohtak-Hissar/Bhilwara-Rajsamand/ Mysore-Bellary/Shreenathji-Udaipur BOT projects. Mining revenues grew by a modest 7% YoY driven by Rs 400mn of revenues booked from the Amlori mine project. However, irrigation revenues slid 10% YoY/84% QoQ due to seasonality.
Higher traffic drives collections: Toll collections rose 15.5% YoY to Rs 1.7bn led by four new check-posts, a 22% toll hike in Maharashtra Border Check Post Network (MBCPNL), and 5%/9%/12% higher traffic in Bijapur-Hungund/Hyderabad-Yadgiri/ Dhule-Palesner BOT projects. Average traffic growth in BOT projects was 7-8% YoY.
Profitability sustains on high BOT share in execution: EBITDA margins expanded 81bps YoY to 10.8% due to a 62% BOT share in EPC revenues. A high BOT share led to a 44bps YoY reduction in material cost and thus higher operating leverage, which pushed down other expenses by 52bps YoY. Management expects margins to sustain at current levels even as the share of road EPC likely increases in FY17.
EPC orders pouring in: Sadbhav booked two EPC packages of Eastern Peripheral Expressway totaling to Rs 15.5bn in the quarter, resulting in a total order book of Rs 93bn, of which BOT projects constitute Rs 10bn (11%). Management expects FY16 order inflows at Rs 50bn driven by a strong pipeline of NHAI/MORTH orders.
PRICE CLOSE (06 Nov 15) INR 162.90 MARKET CAP INR 112.0 bln USD 1.7 bln
SHARES O/S 635.8 mln
FREE FLOAT 39.5%
3M AVG DAILY VOLUME/VALUE 5.4 mln / USD 15.2 mln
52 WK HIGH INR 253.50
52 WK LOW INR 129.75
SELL TP: INR 145.00 11.0%
Union Bank of India UNBK IN
Mounting asset stress – maintain SELL
UNBK’s Q2FY16 PAT grew 77% YoY to Rs 6.6bn off a low base, supported by higher treasury gains (including a write-back of investment provisions) and lower provisions. Slippages were high at Rs 19bn (Rs 15bn in Q1FY16) and accounts worth Rs 9bn (Rs 6bn in Q1) were refinanced under the RBI’s 5:25 scheme. We expect profitability to remain under pressure and anticipate frequent equity dilution as the bank raises capital to comply with Basel III norms (CET 1 only 7.4%). Maintain SELL with a Sep’16 TP of Rs 145.
Stressed asset formation high: Slippages remained high at Rs 19bn vs. Rs 15bn in Q1FY16 and included one chunky account worth Rs 8bn from the construction sector. Three accounts worth Rs 4bn slipped from the restructured category to NPA. Fresh restructuring dropped to Rs 4bn from Rs 7.5bn in Q1FY16. Stressed asset formation including 5:25 refinancing stood at Rs 32bn vs. Rs 29bn in Q1FY16, and overall stressed loans were ~9% of total loans.
Refinancing on the rise: UNBK has refinanced three accounts (two from steel and one from the power sector) worth Rs 9bn under the 5:25 refinance scheme vs. Rs 6.3bn in Q1FY16. There was no sell-down to ARC during the quarter. Management stated that one account from the steel sector worth Rs 4bn may be refinanced under the SDR route in coming quarters.
Loan growth, margins and capital levels remain weak: UNBK’s loan book grew by a mere 3% YoY due to slower growth in domestic advances. Retail and agriculture lending was strong, up 18%/26% YoY. NIM dipped 5bps QoQ to 2.34%. UNBK’s CET 1 ratio under Basel III norms improved by 22bps QoQ due to capital infusion by the Indian government, but remains weaker than peers at 7.4%.
Maintain SELL: We expect profitability to stay weak with ROE of sub-12% over FY15-FY17. Maintain SELL with a Sep’16 TP of Rs 145.
Y/E 31 Mar FY14A FY15A FY16E FY17E FY18E
Net interest income (INR mln) 78,793 84,439 93,274 1,07,108 1,23,635
Net revenues (INR mln) 1,07,009 1,19,669 1,33,400 1,53,653 1,77,685
PRICE CLOSE (06 Nov 15) INR 292.45 MARKET CAP INR 36.3 bln USD 552.0 mln
SHARES O/S 124.1 mln
FREE FLOAT 47.5%
3M AVG DAILY VOLUME/VALUE 0.1 mln / USD 0.4 mln
52 WK HIGH INR 348.00
52 WK LOW INR 245.10
HOLD TP: INR 330.00 12.8%
Finolex Industries FNXP IN
Volume-led revenue beat
FNXP’s Q2 revenues surged 20.9% YoY to Rs 4.6bn on higher volumes for PVC resin and PVC pipes & fittings. EBITDA margins however declined ~103bps YoY to 11.3% on lower gross margins (-90bps YoY) while adj. PAT (excluding one-offs) rose 64.6% YoY to Rs 226mn (RCMLe Rs 139mn). Management expects the strong volume growth momentum to sustain due to continued demand from farmers, and has guided for 15% volume growth in PVC pipes & fittings for FY16. Maintain HOLD with an unchanged Sep’16 TP of Rs 330.
Volume-led revenue growth: FNXP’s Q2 revenues grew 20.9% YoY on better volumes (PVC resin/pipe volumes: +48.7%/+28.6% YoY) with the company offering a higher offseason discount on PVC pipes this year. However, higher discounts and a correction in PVC prices pushed down realisations for both PVC resin/pipe segments by 16%/13% YoY. As per management, farmer demand was strong due to lower rains this quarter, which facilitated pipe-laying in an otherwise dull period. Higher emphasis by some state governments on irrigation also helped demand to an extent.
Margins down ~103bps: EBITDA margins slid ~103bps YoY to 11.3% on lower gross margins (-103bps YoY) due to higher discounts this year and a lower PVC-EDC delta. Management indicated current higher PVC-EDC delta should aid margins ahead.
One-offs aid PAT: Adj. PAT increased 64.6% YoY to Rs 226mn on higher other income (+17.3% YoY) and lower interest cost (-15.7% YoY). Reported PAT however was higher (+205.4% YoY) due to one-time income tax refunds (Rs 40mn) and electricity subsidy (Rs 244.8mn).
View: FNXP has a strong presence in agri pipes with an extensive distribution network. We expect growth to improve off a low base (particularly for Q3FY16) and better PVC-EDC delta. Maintain HOLD with unchanged Sep’16 TP of Rs 330.
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