Maintain NEUTRAL. While RE vols have stabilized over 3QFY20, driven by Mr. Dasari's initiatives of launching small format stores as well as entry variants, the stock is trading at ~29/26x on FY20/21 estimates, factoring in the above. Going ahead, margins will be volatile due to the BS-VI transition. Also, competition is expected to increase over FY20-22, with new launches in the mid-size lifestyle segment from Jawa, Bajaj Triumph and Harley Davidson (in international markets). RE reported in-line results, with EBITDA margins at 25.2% (-430bps/flat YoY/QoQ). Volumes are sustaining at lower levels of ~60K units p.m. and system inventories are below two weeks (ahead of BS-VI rollover). We maintain NEUTRAL as near term positives are factored in. We have a TP of Rs 19,650 as we value the core RE business at 22x Dec-21 EPS (at 20% premium to mass market OEMs).
BFSI and Healthcare verticals continued to lag the overall growth with an unchanged' muted outlook, impacted by few large banking accounts (capital market segment). Within BFSI, growth was insurance-led; NorthAm large banks' outlook was less muted than Europe large banks that face bigger macro risks, yet stable budgets seen for CY20. Outlook for CMT vertical mixed with positive commentary for Communications segment (+ve for TechM), offset by content services business impact in Technology. CTSH lags industry growth impacted by BFSI, Healthcare verticals and CTSH-specific factors (business re-calibration following the leadership change). Our checks suggest no material increase in competitive intensity. Prefer INFY, HCLT and TechM from tier-1 IT. Cognizant (CTSH) posted revenue above its guided-band at USD 4.28bn, +0.8/3.8% QoQ/YoY (decelerated to +4.2% YoY CC vs. 5.1% YoY CC registered in 3Q). CY19 revenue stood at USD 16.78bn, 5.2% CC (includes 3.2% organic) and CTSH guided for 2-4% YoY CC (1-3% organic) after -110bps impact from the exit of certain content services business in CY20E. 1QCY20E revenue guidance stood at +2.8 to 3.5% YoY CC, which factors -60bps impact from content services.
We believe that GGL will pass on partial benefit of falling RMC to industrial customers. This will ensure sustainability of volumes but will keep Gross Margins under pressure. The company will enjoy operating leverage led by increased volumes, which enable GGL to maintain per unit EBITDA (~Rs 4.3/scm over FY20-22) compared to Rs 4.96 in 1HFY20. We change our FY20/21/22E EPS estimates to factor in the 9M performance by -0.9/+0.4/1.2% to Rs 12.4/12.3/14.1 (vs the consensus of Rs 13.8/21.6/29.5). We downgrade GGL to Neutral despite an in-line EBITDA/PAT in 3QFY20, owing to 5.9% lower volumes than anticipated. Our TP is Rs 273, 20x Dec-21x EPS, versus the consensus TP of Rs 267.
HPCL is doubling its existing capacity at Visakh from 8.3mmtpa to 15mmtpa by FY21E (outlay Rs. 210bn) and increasing it from the current 7.5mmtpa to 9.5mmtpa (outlay Rs 50bn) at Mumbai. This will drive the earnings for its refinery business. We remain constructive on HPCL in a falling crude price scenario as it will (1) Reduce Govt's intervention in auto fuel pricing, (2) Reduce working capital, (3) Put subsidy burden overhang to rest. Our SOTP target is Rs 315 (6x Dec 21E EV/e for standalone refining and pipeline, 7x EV/e for marketing and Rs 51/sh from other investments) vs the consensus TP of Rs 340/sh. HPCL reported an in-line revenue/gross profit in Q3. However, EBITDA/PAT were below our estimates by 18.2/26.1% owing to higher operating expenses. We maintain BUY given the impending 55% increase in refining capacity and stable marketing margins.
With a new indiv. tax code and Axis Bank embracing open architecture we expect business growth momentum to slow down in FY21-22E. Additionally, we continue to watch out for the renewal of partnership with Axis Bank. We rate MAXF a BUY with an changed TP of Rs 560 (MAXL: Dec-20E EV + 18.8x FY22E VNB). We use a holding company discount of 30%, continue with a 22% discount on VNB for Axis Bank deal, and a 10x multiple to annual leakage at the holding co level. Key risks include lower growth, higher cost over-runs, and supply overhang as a result of promoter pledges. MAXL reported in-line nos with total APE growing 16.0% YoY and 9MFY20 VNB margin was at 21.0% (+60bps YoY)- high costs continue to weigh on margins. We maintain our BUY with TP of Rs 560.
We ascribe a target multiple of 20x (in line with peers) given high exposure to branded formulations market. We resume coverage on Cipla with a Buy rating and TP of Rs510 based on 20x FY22 EPS. The stock has underperformed the sector by 13% in last one year led by sluggish performance in India and SAGA region (one offs led). Recovery in these markets (56% of revenues, healthy underlying trends) will drive earnings CAGR of 10 % over FY20-22e. At 21x/18x FY21/22 EPS, the stock trades at reasonable valuations.
We have cut FY21E APE for IPRU/MAXL/SBILIFE/HDFCLIFE by 4.1/1.7/5.8/4.6%. We have also lowered VNB margins assumptions between 10-70bps across the board. SBILIFE continues as our top pick with reduced TP of Rs 1,120 (Dec-20EV +24.4x FY22E VNB, +22.9% upside), MAXF offers attractive risk reward, TP of Rs 563 (MAXL: Dec-20EV +18.8x FY22E VNB, +16.6% upside). The Union budget 2020 has introduced a new optional personal tax regime and removed dividend distribution tax. These changes are likely to impact both demand and margins for life insurance products. We have reduced our APE growth assumptions for FY21E, VNB margins FY20E onwards and also reduced EVs for FY20E.
While there is no questioning the execution skills of the outfit, its no See's Candy. >100% of the cumulative CFO (ex-working capital) goes towards working capital and capex needs. This acts as gravity to Titan's punchy valuations of 43x Dec-21E EPS. Peers too are expected to play catch up on the design and capital curve over the medium to long-term. Ergo, we largely maintain our FY21/FY22 estimates and our DCF-based TP of Rs. 1,170/sh (implying 42x Dec-21 P/E) While a reasonable wedding season keeps volume declines in check, fresh jewellery purchase (ex-wedding) remains challenged for most big-box jewelers (Per channel checks) given elevated gold prices. Hence, contextually, Titans 3Q performance seems reasonable. That said, growth has increasingly needed capital-heavy catalysts (aggressive gold exchange schemes) to entice consumers to shop, ergo gotten dearer. However, valuations continue to trade near peak. We maintain our FY21/FY22 EPS estimates and DCF-based TP of Rs 1170/sh (implied P/E of 42x Sept-21E EPS). Reiterate NEUTRAL.
We remain constructive on the company as (1) 55% revenues come from MNCs, which ensures stickiness of business, (2) EBITDA margins are stable at >12% since fluctuations in RMC are easily passed through to customers, and (3) Return ratios are strong (RoE/RoIC of 22.0/20.0% in FY21 and 21.4/19.9% in FY22 respectively). Galaxy is a preferred supplier of surfactants to leading FMCG companies. Thus, it is important to value it against FMCG and chemical stocks at extreme ends. Since, its products are specialised but lack branding and pricing power, it should trade at a multiple closer to chemical and at a discount to FMCG companies. Our TP of Rs 1,811 is at 22x Dec-21x EPS (versus the consensus TP of Rs 1,593). Galaxy performed moderately in Q3. However, we maintain our BUY owing to its loyal customer base, stable margins profile and healthy return ratios.
Our stance on SHTF remains unchanged as operational performance was in line with expectations. News on the asset quality front is positive, but we watch for sustainability, considering the broader economic environment. An improvement in demand and better availability of funds could improve SHTF's growth prospects. The possibility of a 3-way merger within the group remains an overhang. Tepid AUM growth at ~5% YoY (flat QoQ) was on expected lines. Asset quality was surprisingly stable QoQ and this is contextually impressive. Consequently, lower provisions led to a 25% PAT beat. Maintain BUY (TP of Rs 1,524, 1.75x Dec-21E ABV of Rs 871).
