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Initiate coverage with a BUY rating and TP of Rs 480 (18x Dec-20E EPS). Laurus Labs is a young, R&D-driven; company with strengths in complex chemistry and cost-efficient capabilities in API manufacturing. Laurus has grown at a scorching pace with 30% revenue, 32% EBITDA and 40% earnings CAGR over FY12-18. However, price hikes in a key raw material (FCME) and Rs 1bn operating spend on the nascent formulations business led to a nosedive in 1HFY19 (40% earnings drop).
Top Picks: PNC, Ashoka, NCC & Sadbhav. Top Picks Buildings: JMC Projects, Capacite. Tendering has continued to remain weak: Tendering in roads (by NHAI)has been virtually non existent in 9MFY19 as compared to the ~7,400km/Rs 1.2tn of awards in FY18. There is a likelihood of tendering picking up as we close in on the elections (with the model code of conduct to kick in). We could see at best ~Rs 500bn of actual awards over the next 2 months even though projects worth ~Rs 900bn are listed for tendering (EPC share is >70%).
Top picks: Dr Reddy's, Jubilant, Dishman Depreciated rupee, normalized generic price erosion, seasonally strong quarter in the US and focus on cost optimization will enable Indian pharma companies to post better numbers in 3QFY19. We expect our coverage companies to deliver ~8% YoY top line growth, 21% EBITDA margin (flat YoY) and 12% YoY earnings growth. This will be the second consecutive quarter with positive sequential growth in the US business, aided by softening of pricing pressure, exit of many US based companies from commodity products and the presence of a flu season. India branded revenues are also likely to grow 10% YoY and 4% QoQ. The sequential growth is solely driven by a jump in SUNPs revenues post inventory adjustment in 2QFY19. As articulated in our Jun-18 sector note, the pharma sector is recovering from US market woes and has started growing sequentially. With a few companies still in investment phase for their specialty businesses, earnings growth is still slower than anticipated. The cost rationalization efforts taken by SUNP, DRRD, CIPLA and LPC can help counter this incremental spend.
Near term outlook: We expect the stock to remain range bound given the uncertainty surrounding the recognition of and provision for the IL&FS exposure. IIBs 3Q was characterized by robust business growth and healthy operating performance ( PPOP up 27/6% YoY/QoQ). NIMs were sequentially stable at ~3.8% (down ~16bps). Driven by treasury gains (2x QoQ), other income grew ~12%. CASA remained sequentially stable at ~44%, w/w SA dipped ~2% QoQ. Fees (% of loans) dipped by 10bps QoQ to 3%. While overall asset quality deteriorated sequentially, (GNPAs at 1.13%, ~Rs 19.7bn, +11% QoQ) the exposure to IL&FS; remained std (Rs 30bn). Even as IIB additionally provided ~Rs 2.55bn (total provisions ~Rs 6bn incl. floating provisions), it will have to incur further provisions of at least ~Rs 4bn toward the holdco exposure. Our constructive thesis on IIB remains unaltered as it continues to display strong growth and operating performance, which we expect will continue. While asset quality will be adversely impacted by its exposure to IL&FS;, in the near term; we expect IIB to be back on track to achieve RoAAs of 1.62% by FY21E post its acquisition of BAFIN. Maintain BUY with a TP of Rs 1,935 (3.5x Dec-20 ABV of Rs 553).
Chemicals: Momentum to continue We believe, Vinati Organics and Alkyl Amines are likely to be the best performers under our chemicals coverage. Lubrizol's exit from the ATBS market is a key positive for Vinati Organics (Vinati is expected to increase market share from 45% to 65% in ATBS). Alkyl Amines is expected to benefit from the commencement of commercial sales from its recently commissioned Methyl Amine plant in Dahej(30,000 TPA capacity). Alkyl Amines has planned a capex of Rs 3.0bn over the next 3 years providing an implicit opportunity of Rs 4.5bn on the topline.Balaji Amines has aggressive capex plans of ~Rs 3.0 bn for its Mega project in Solapur whose benefits could be visible from FY21E. Navin Fluorine's cGMP CRAMS facility in Dewas is likely to start contributing to its topline by the end of FY19.The situation in China continues to benefit Indian chemical manufacturers. We like Alkyl Amines and Vinati Organics given their presence in niche chemistries, focus on strong SHE practices and mid-term growth visibility. Oil & Gas: Subdued Quarter RIL: We expect GRM of USD 9/bbl vs USD 9.5/bbl in 2Q. The company is to report stable standalone PAT of Rs 88.15bn. Sequential fall in GRM will be mitigated by higher petchem production and forex gains. IGL/MGL: We expect a 12/9% YoY volume growth for IGL/MGL. We have estimated an EBITDA/scm of Rs 5.7/scm (+27bps YoY, +2bps QoQ) for IGL and Rs 7.9/scm (-4.6bps YoY, -21bps QoQ) for MGL. PLNG/GAIL: We expect 5% YoY and 2% QoQ decrease in volumes to 212tbtu...
Telecom: Stability, finally! Reiterate BUY on Bharti and Voda-Idea with revised TPs of Rs 396 and Rs 43 respectively (10x Dec-20E EV/EBITDA for India Wireless). We have increased our target multiple for Bharti from 9x to 10x (in-line with Voda-Idea and Jio) factoring in the likely improvement in industry outlook. Even if the tariff war prolongs, Bharti (with manageable debt, potentially monetisable assets) remains best-positioned. Idea remains vulnerable owing to high leverage and low profitability.Reiterate BUY on BHIN with TP of Rs 345. This is primarily on account of (1) Savings on DDT (~Rs 5bn) and earnings accretion from Indus acquisition (2) Recent price correction (3) Tenancy losses from the Voda-Idea merger are lower than expected, and (4) No re-pricing of tower rentals downwards by telcos despite the bad busines environment. This remains a key risk. Media: Broadcaster, Healthy performance Zee Entertainment (Broadcaster) - Maintain BUY with a revised TP of Rs 511 @ 25x Dec-20E EPS Dish TV (DTH operator) - Our revised TP is Rs 50 @ 7x Dec-20E EV/EBITDA (Rs 58 earlier). Reduction in our TP is to factor likely weak 3QFY19 Entertainment Network and Music Broadcast (Radio companies) - Reiterate BUY with revised TP of Rs 714 on ENIL and Rs 404 on MBL, both based on @ 25x Dec-20E P/FCFE
Our top picks in OEMs space are MSIL (extensive distribution network and strong rural franchise), Ashok Leyland (leadership in high tonnage trucks) and Baja Auto (diversified product and geographical mix). Automobiles sector will report weak number in 3Q led by increase in cost of ownership (higher fuel prices, insurance and financing costs) and higher inventory at dealers level. Channel inventory for 2Ws and PVs remained elevated at 6-8 weeks, forced OEMs to offer aggressive incentives to clear inventories. 2Ws/CVs segment posted 9/5% volume growth YoY while PVs volume declined 1% YoY. In CV segment M&HCV; volume fell by 12% YoY, offset by 17% growth in LCV segment. Auto OEM universe is expected to post 2% YoY revenue growth however, EBITDA could contract 11% YoY.
Top picks in FMCG: ITC, Dabur and Jubilant FoodWorks Consumer sentiments continue to be positive: Our FMCG coverage universe is expected to deliver 11/13% YoY revenue/EBITDA growth in 3QFY19. We believe earnings growth is healthy, given that favorable base now evades (13/17% YoY in 3QFY18) and the last leg (Sep-18) of monsoons were weak. Although, cos will enjoy festive benefits in 3Q instead of 2Q, festive sales were tepid and hence we dont expect robust incremental growth. Rural demand continues to outpace urban in the last 6qtrs. CSD channel (5-6% of FMCG revenues) is recovering from the impact of biometrics implementation, while MT (10% mix) and E-commerce (2% mix) continue to be the growth engines in urban markets. Pricing actions have returned in the sector (1-2%) owing to sharp commodity inflation during 2Q. However, with a reversal in crude prices coupled with INR appreciation, we dont expect another round of price hikes in 4QFY19 instead cos should benefit from GM expansion in 4Q assuming ceteris paribas
Visible pressure on core spreads, though amidst strong market share gain: We assess the performance as largely mixed with a negative bias. While the headline number on margins were fairly flat (3.8% QoQ) we sense competitive pressure on the retail core spreads.
Asset classification of IL&FS; has been kept Standard'. However, the bank continued to make additional contingency provisions of ~| 255 crore in Q3FY19 (| 275 crore in Q2FY19). Accordingly, total provision in relation to exposure to IL&FS; is nearly | 600 crore Higher provision continued to impact earnings with PAT growth of 5% YoY to | 985 crore. Excluding contingent provision, PAT grew higher at ~23% YoY. Q4FY19 provisions to stay higher due to IL&FS; Business growth remained strong. Healthy growth in auto portfolio...
