We continue to believe that TCS' trinity of growth-scale-durability is challenged as risks to large deal ramp-up and cut in discretionary spend have increased. While TCS' supply metrics are resilient, demand dent is overwhelming with a deeper NorthAm/BFS impact and limited exposure to higher velocity verticals. Gains arising out of vendor consolidation/market-share, pipeline conversion and new business opportunities (accelerated cloud migration, remote solution & cybersecurity) will be offset by cuts to IT budgets, we've factored 6.1/8.5% decline in FY21 Rev/PAT. Valuations at 19.4x FY22E is in-line with its 10-yr avg. We maintain REDUCE on TCS following a miss on rev and slightly better operating performance. Demand-related factors to worsen while supply constraints are expected to recover ahead. The parallels to GFC are apparent (similar trajectory expected in 1HFY21), although this will be more broad-based. TCS estimation of recovery in 3Q-4QFY21 is a steep ask in context of 1HFY21 decline, but premised on its order-book and pipeline. Our TP of Rs 1,680, is based on 19x FY22E EPS (~5% cut in EPS est).
The company has not provided for 1QFY21E guidance, citing uncertainty. We cut our EPS estimates by 0.9/1.5% for FY21/22E. Our TP of Rs 185 is based on 11x FY22 EPS. We maintain REDUCE rating on Wipro based on lower than expected revenue and margin performance. Covid-19 related global slowdown will lead to cut in discretionary spending, pricing discounts and postponement of large deals wins. Headwinds in BFSI (Medium term), stress in Manufacturing (Auto) and ENU (Energy) will offset the improving outlook in Healthcare and Communication.
We have cut FY21/22E EPS by up to 33% and our TP by 11% to INR 1,400 factoring up to 31% lower downstream margins driven by slowing global economy. We use EV/EBITDA to value downstream at Sep-21E EV/e, Retail on peer benchmarked EV/e and E&P, Jio on DCF. RIL stock has corrected by 25% from its peak over the past 4 months driven by global economic slowdown concerns. Our view that the stock price correction is overdone, and the stock should outperform, is premised on 1) Non-cyclical domestic consumer business accounting for 56% of FY21E EBITDA (31% in FY19), 2) The stock factoring only an USD 3.0/bbl FY21E refining margin, 49% lower than Global Financial Crises (GFC) quarterly trough and 3) Interest Coverage ratio of 4.3x and Net Debt/EBITDA of 1.6x in FY22E (12-35% better than the FY19 lows). The stock offers 18% upside at our TP of INR 1,400.
We have BUY rating on ITC and Radico, ADD rating on Jubilant, UNSP and Colgate The impact from Covid-19 on the FMCG sector will be sharper on revenues for cos in 4Q, despite many essential categories have witnessed pre-buying at offtake level in Mar. Lockdown has impacted transportations and channel filling opportunities for the quarter. Trade inventory has reduced for most categories. Lockdown of the last 12 days will impact revenues by 13-15% for the qtr for most cos. Channel filling benefits will add to FY21 revenues (~3%).
Key risks - delay in resolution of Goa WL, lower-than-expected growth in India and South Africa, trade margin cap in India, higher price erosion in the US and delay in key US approvals. Cipla received approval for gProventil HFA (Albuterol Sulfate), its first MDI (metered dose inhaler) approval in the US. This is the first generic approved by the US FDA for Proventil HFA. The approval comes ahead of time (was expected in 2HFY21) as FDA recognizes the rising demand for albuterol products during coronavirus pandemic.
The pharma sector is up ~1% YTD and has outperformed the Nifty Index by 28%. We prefer stocks with high India exposure as it offers greater earnings visibility, supported by reasonable valuations. Reiterate Buy on Cipla. Downgrade Dr. Reddy's to Reduce. Our positive stance on Indian pharma is premised on sectors relative resilience to Covid disruption, favorable currency tailwinds and stable outlook for India and US business. India growth has picked up (~10% growth for IPM as of MAT Mar20) and we forecast 11% growth for covered companies over the next two years. US pricing environment continues to remain benign and the regulatory challenges are well understood.
However, sustained profitability is essential to ensure scale and longevity of operations and business models will continue to evolve on the roadmap to profitable growth. The auto industry in India is expected to witness multiple disruptions, from Mobility services and Electric Vehicles in the medium term. We believe that EVs are at the start up stage of the S Curve, while shared mobility is in the growth stage.
Mar-20 may see materially slower growth. Select management commentary and our understanding of the sector suggest that a significant proportion of disbursals occur towards the end of the qtr. Virus related disruptions will impact this. Further, the dip in growth is likely to be broad-based. Personal loan growth, which has contributed to much of the growth seen over FY19 and FY20 is likely to slow considerably. After the surprising uptick seen in Jan-20, YoY non-food credit growth slowed to 7.3%, and MoM growth slowed to just 16bps. Agri credit growth showed slowing trends at 5.8%. Growth in industry credit slowed to just 70bps, dragging overall credit growth. After accelerating slightly in Jan-20, service credit growth slowed again to 6.9% (this segment has seen the most pronounced slowdown, as it grew at 23.7% YoY in Feb-19). Personal loan growth remained resilient at 17% YoY.
The turnaround time to normalcy may be quick in case of EPC players like L&T, as large part of the migrant labor force is still at site and reliance on global supply chain is limited. KEC and Kalpataru Power have large overseas presence with 40/45% ex-India order book. Dependence on India supply chain may impact overseas execution as 80-90% supply chain resides within India. Leading global capital goods manufacturers have partially shut factories amidst Covid-19 led lockdown and weakening demand. Global supply chains are also getting impacted. Our coverage universe of L&T;, Siemens and ABB have strong balance sheets and are well placed to endure these tough times. The immediate focus is on (1) Safeguarding employee safety and health (2) Business continuity & (3) Strong focus on cash conservation.
Our key picks include: Infosys, Bharti, ICICI Bank, Axis Bank, ITC, UNSP, UTCEM, IGL, CDSL, CIFC. While the CoVid-19 situation remains fluid, we believe that Nifty correction of ~30% already factors in the impact of ~1 month lockdown and return to business normalcy by Q1 end. However, if the lockdown is more severe and the business impact extends well into 2Q, we see further downsides. Recent sharp correction presents attractive opportunity for long term investing into high quality names. While government and RBI have announced stimulus packages, we expect further measures to tide over the crisis. The extent of lockdown, pace of return to normalcy and further fiscal responses remain key monitorables.
