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Weak P&L: 1QFY17 Consolidated P&L weakened sequentially with revenue at INR9.5b (v/s INR9.6b QoQ), EBITDA at INR1.7b (OPM of 18.1%) v/s INR2.5b (OPM of 26.4%) in 4Q and PAT at INR478m (v/s INR723m). Gearing marginally went down by INR1b QoQ to INR55.8b (net DER of 1.13x). Subnormal presales: Quarterly pre-sales remained subdued at 0.8msf (INR 5.1b) v/s 1.5msf (INR9.9b) in 4Q. Collections up 16%QoQ in 1Q. Leasing and rental runrate was down 1Q, at 0.04msf and INR1.312b respectively. Moderate growth outlook: FY17 guidance comprises 15-25% growth in pre- sales, 10% in collections, 30%-35% in rentals on the back of new completions, and gearing at elevated level of 1-1.25x as capes cycle would continue.
PEPL remains preferred play on Bangalore real estate, which albeit lost momentum, still offers better dynamics. But PEPL’s massive slippage over FY16 (contrary to track record) highlights the magnitude of prevailing weakness in market. Post sharp corrections, stock valuations factor in the concerns of deterioration in capital structure and weakness in operations. At 1.7x/1.6x FY17/18E BV and at an EV of 10x FY18E EBITDA stock offers valuation comfort. Operational normalcy remains near-term trigger. We maintain Buy with target price of INR225.
Merger of HFL to result in ~2.8% dilution, increase promoters stake to 51.3% (+90bp) Swap ratio implies discount of ~38% to HFL's closing price of ~INR54.5 on 14/Sep/16. Though materiality of this deal might be low, it deviates from the managements stated objective of streamlining AL's balance sheet. While we are yet to factor in for HFL in our AL's estimates, given tax shield on accumulated losses we see limited change in FY17/18 EPS. We now value AL at ~8x EV/EBITDA (v/s 9x earlier), to factor in for potential impact of this deal on capital efficiencies.
Short term volatility in volumes notwithstanding, we believe CV cycle has more legs to it and would grow at 12-15% CAGR over next 3 years. Management's focused approach is paying-off in a) market share gains, b) rising ASPs, c) controlled cost, d) reducing working capital, e) significant control on capex and f) debt reduction. ALs valuations at 9.6xFY18E EPS and EV/EBITDA of 6.1x are very attractive, considering strong EPS growth of ~47% CAGR over FY16-18E. We now value AL at ~8x EV/EBITDA (v/s 9x earlier), to factor in for potential impact of this deal on capital efficiencies due to increase in capital employed without commensurate improvement in operating performance. Maintain Buy with target price of ~INR105 (~8x FY18 EV/EBITDA).
VEL has an experience of over 15 years in the chemical industry and is an emerging player in the global arena of the high end Specialty Polymer Compounds and Additives. VEL is the only Indian company that manufactures Organotins (Tin based heat stabilizer for PVC) which is lead free and non-toxic. The company has evolved from trading company to a manufacturing organization. The increasing awareness about lead poisoning which has led the companies and countries preferring eco-friendly and non-toxic substitutes, will boost the topline for a company like VEL. We believe that such factors coupled with the capacity expansion plans of VEL would further drive the stock upside.
Valuation: They believe that VEL is uniquely positioned in compound and additives business with its integrated R&D.; further believe that, increasing demand for toxin free stabilizers, growth in PVC industry, opportunities in export markets and capacity expansion will create enormous opportunities for VEL's revenue/ earning to grow at a CAGR of 41%/49% over FY16-18e. Historically, VEL traded at an average one year forward PE multiple of 14x. At the CMP of Rs.12.7, the stock is trading at 8.9x FY17e and 5.7x FY18e earnings. We are initiating coverage on the stock with a BUY rating and a target price of Rs.31 an upside of 145%.
Mahindra CIE (MCI) is ready to embark on its Phase 2 (2017-20) growth strategy, which mainly focuses on expansion. The company is looking to expand into newer geographies (expand within India & Asean countries) and segments (entry into plastics & aluminium products). It is also redefining its product portfolio and optimising plant locations. Its Phase 1 (2014-17) strategy of consolidation has made good progress in areas of optimising operations, turnaround of various segments, controlling capex, reducing debt, among others. MCI’s announcement on acquiring 100% stake in Bill Forge Pvt Ltd (BFPL) for | 1,331.2 crore is its first step as a part of its Phase 2 strategy. BFPL is a precision forging & machining with focus on 2-W & PV auto components, primarily for steering, transmission & wheelrelated assemblies.
It has six manufacturing plants across India with capabilities in cold & warm forging in addition to hot forging. In FY12-16, BFPL’s revenue, EBITDA, PAT registered CAGR of 13%, 30%, 29%, respectively. As of FY16, its net debt was at | 75 crore while the deal is valued at 11x FY16 EV/EBITDA multiple, which we believe is fairly valued.The acquisition of BFPL is largely positive thereby diversifying its concentration risk (hence increasing our CY17E revenue & PAT by 11% & 18%). However there would be equity dilution of 17%. Thus, we continue to value MCI at 11x CY17E EV/EBITDA & maintain our target of | 225 with BUY rating.
CESC reported better-than-expected Q1FY17 results on the back of higher-than-expected sales and lower finance costs. Net sales came in at | 1888 crore as per the new Ind AS. This is higher compared to estimates of | 1805 crore. The higher-than-expected revenues can be attributed to higher purchase of power from its subsidiary Haldia Energy. CECS’s own generation was down 7.8% YoY while power purchase went up 36% YoY .Reported absolute EBITDA came in at | 387 crore vs. our estimate of | 377 crore. This was on the back of lower other expenses despite the fact that power purchase was at | 684 crore vs. our estimate of | 570.1 crore. Higher-than-expected revenues and EBITDA led PAT to come in at | 174 crore vs. our estimate of | 167 crore.
Valuation : However, factoring in the two scenarios of recovery and non-recovery of | 230 crore annual loss (for negative bidding of | 470/tonne) we have valued CESC on both base and bear scenario by assigning an equal weightage to both cases. Accordingly, we assign a 80% weightage to the base case and 20% to the bear case valuation to arrive at an SOTP revised target price of | 645 for CESC (earlier | 623). However, the price has run up from our last update. Hence, we downgrade the stock from BUY to HOLD recommendation
IL&FS Transportation Networks (ITNL) in 1QFY2017 has not reported consol. numbers as it is in process of migrating to Ind-AS. Despite strong execution, sharp decline in yoy Fee and O&M income led ITNL report 3.6% increase in standalone revenues. High contribution of low margin construction business was seen during in 1QFY2017 (construction/ material expenses reported 19.5/11% yoy increase). As a result, yoy EBITDA margins contracted 302bps to 3.2%. Despite 47% yoy EBITDA decline, reported PAT turned-around on yoy basis to `18cr profit in 1QFY2017, owing to strong other income (up 75.9% yoy to `344cr). Other income benefitted from `102cr of profit booked from 15% stake sale in Gujarat Road & Infrastructure Company Ltd. (GRICL).
Outlook and Valuation: In recent time we have seen management offloading stake in 2 operational BOT projects. ITNL management announced that they intend to offload 3-4 BOT projects, worth `5,000cr in to an Infrastructure Investment Trust (InvIT). As per a recent board meeting outcome, ITNL would issue `5,000cr of Non-Convertible Debentures (NCDs), where current 12% debt cost would be re-financed sub-10% levels, thereby saving ~300bps on interest expenses level. All these initiatives would de-leverage Balance sheet and improve the profitability. We earlier upgraded ITNL to BUY with price target of `93, in anticipation of lowering of consol. BS stress and likely improvement in interest coverage ratio. Since our BUY recommendation, ITNL stock has run-up and our price target is attained. In absence of ITNL’s consolidated financials, we downgrade to NEUTRAL view on the stock.
Suzlon’s 1QFY17 volumes of 204MW (flat YoY) was below our estimates, leading to a loss of Rs 2.6bn (higher than expected). Loss could have been lower (by Rs 1.2bn) had it not been for the new Ind AS norm. With an order book of 1,205MW (to be entirely executed in FY17E), the company remains confident of meeting its FY17E volume guidance of 1.5 - 1.6 GW. The same should also aid in balance sheet healing (primarily debt reduction).
Muted order announcements, so far in FY17E, have cast pressure on the WTG stocks. However we expect the order flow momentum to pick up as most states have finalized their tariffs. Visibility on volumes over the longer run also remains high given continued government thrust, improvement in technology and expected tender based bidding in wind. In this backdrop, we reiterate BUY on Suzlon with a TP of Rs 28/share (10x FY18E EV/EBITDA).
J Kumar Infraprojects (JKIL) delivered 1QFY17 RPAT beat, 7.6% above our estimates (incl. Rs25mn dividend from mutual funds). Net revenue growth of 10% YoY (6.2% below estimates) was on account of subpar execution at the JNPT road project (Rs 300mn), expect strong pickup from 3QFY17E. The Balance sheet remains healthy with net debt at Rs 1.8bn & net D/E stood at 0.13x. QIP proceeds have aided deleveraging.
JKIL has finally received the LOA for the Mumbai Metro line 3 project with bid value of Rs 52bn. The dark clouds on fate of Metro project has cleared now and worst of BMC headwinds may be receding. Whilst litigation on BMC road projects continues, JKIL has been de-registered from further bidding in BMC road segment. Other State Government department, JKIL continues to eligible for bidding. Maintain BUY with TP to Rs 321/sh (15x Mar-18E EPS).
Sobha Developers (SDL) 1QFY17 disappointed on EBIDTA margins as SDL divested Pune land for Rs 1bn consideration at 12.1% EBIDTA margin. Besides IND-AS transition and its resultant impact on JV/JDA land bank contracted EBIDTA margins by 200bps.
Balkrishna Industries’ (BKT) topline at Rs 9.1bn (+7% YoY) was ahead of expectations as volumes improved (+11% YoY). EBITDA margin at 28% (- 452bps QoQ) was lower as higher commodity prices/other expenses offset lower employee cost. BKT enjoys significant cost (30% lower than peers) advantage in the OHT segment and thus is able to generate high margins. The company has sufficient capacity (57% utilisation) to maintain steady volume growth over the next 3-4 years. We believe BKT will grow faster on account of rising penetration in new geographies like India and OEM segment.
They raise FY17/18E earnings by 9-11% to incorporate increase in volume growth guidance to 160-170k in FY17E. Maintain BUY with a revised TP of Rs 972 (earlier Rs 823) based on 14x FY18E EPS. Antidumping duty in US (CVD of 4.7%) is a key risk to our view. The final decision on the same is due by Jan- 17.
