1) Languishing throughput, 2) rising cost of retailing and 3) shrinking cost arbitrage between this off-line pipe' (read: department stores) and online folks make us wary about the long-term vitals of this format. Ergo, we downgrade the counter to SELL (earlier NEUTRAL). Note: The de-rating cycle for global department stores has been quite severe and we fail to see why Indian counterparts buck the trend. We revise our DCF-based TP marginally upwards to Rs. 370/sh (earlier Rs. 360) largely mimicking revision in FY21/FY22 EBITDA estimates (+4% each) to factor in better SSSG and revenue per sq. ft on low base. Industry pioneer STOPs performance continues to be lackluster as 1) the department format continues to lose footfalls courtesy struggling legacy standalone stores. 2) Private label-led upside in top-line/profitability is expected to be gradual, if at all as the apparel space continues to fragment, 3) Cost of retailing is inching up (up 96bp/260bp YoY over 9MFY20/2 years), 4) Working capital continues to balloon, 5) Cost arbitrage between this off-line pipe and online folks continues to shrink.
SDL has slowed down new launches and focus is on monetizing existing unsold area (14.8mn sqft). Cash flows have been a drag due to last mile completion of Residential/Lease assets and lower quantum of contractual advances. Whilst residential segment is pain for sector, SDL has shifted focus to <Rs 20mn ticket size which continues to do well. Cash flows run rate recovery, pickup in demand and debt reduction shall lead to re-rating. We maintain BUY. Key risks: (1) Weak order inflow in the contracting business, (2) Muted collection momentum and (3) Capex on land bank addition despite having robust development inventory. Sobha (SDL) delivered Rev/EBIDTA beat (7.5/15%) but high interest cost and deferred asset write down (shift to new tax regime) resulted in PAT miss (8.4%). Operating cash flow on 9MFY20 saw sharp fall despite steady collections and pre-sales. Despite this we believe affordable segment recovery will play out and operating cash flows to normalize from 1QFY21E. We maintain BUY with a TP of Rs 590/sh
We have reduced our earnings estimates to factor in slower growth and lower margins. Portfolio de-risking and re-balancing on the corporate side over the past 2 years has been a positive. However, the risk of further stress materialising from the legacy book remains. We expect sub-1% RoAAs to persist into FY22E. The change in leadership and consequent intent to pursue the path of existing revamp/ push for more changes remains an uncertainty. We thus maintain NEUTRAL in spite of attractive valuations. KVBs 3Q performance was underwhelming with a slight QoQ de-growth in core earnings as margins declined and advances were flat. GNPAs were stable, but PCR saw a considerable improvement. Maintain NEUTRAL with a TP of Rs 58 (0.9x Dec-21E ABV).
After a mixed bag in FY19, this year was expected to be solid for revenue acceleration and recovery in margins. The co has failed to deliver revenue growth but margins have continued to expand. We expect partial recovery in revenue growth in 4QFY20. We believe various disruptions (Demon, GST, Floods) over the last 2 years delayed the benefits from its non-south investment. Co is now investing behind expanding its distribution and differentiating its revenue profile. We expect co's up-front investments on newer products to start accruing benefits once overall consumption improves. V-Guards 3Q performance was mixed with miss in revenue but beat in margins. Slow revenue growth was on account of weak growth in Stabilizers, Cables and Southern market. Fan and Water Heater posted healthy low double growth. Management has witnessed better growth in Dec-Jan as compared to Oct-Nov, thereby 4Q can be slightly better. The co continued its efforts to expand non-South markets in order to diversify its revenue profile. V-Guard also intends to add 3,000-5,000 retailers/year across the country for the next 5 years. Custom duty increase (10% to 20%) will impact competitive edge for V-Guard for Fans and KEA. We cut EPS estimates by 3-4% for FY20-22 on account of slow growth, rising competition in its growing products and custom duty increase. We value V-Guard at 35x on Dec-21 EPS, with TP of Rs 232. Maintain NEUTRAL.
Given the (1) Uncertainty in the ramp up of BSCPL (2) Muted earnings growth prospect (3) Declining return ratios (ROE: 16.1/15.1/13.5%, RoIC: 22.5/21.7/18.8% in FY20E/21E/22E), we prefer Alkyl Amines over Balaji in the amines space. Maintain BUY. We maintain BUY on BAL, post its muted performance in Q3FY20, with a TP of Rs 490 (13x Dec-21E EPS). The operating performance was adversely impacted by lower product realizations but offset by strong volume traction.
Key winners: Consumer, IT, IndustrialsKey losers: LI, AMC, cigarettes; Autos, RE (vs. expectations) FY21 budget tilted more towards fiscal conservatism, underwhelming high expectations given backdrop of weak macros. Fisc induced economic recovery can be pushed back a bit. While R.E. for FY20 fiscal deficit at 3.8% overshot B.E by 50bps, FY21 fisc deficit has been pegged lower at 3.5% - albeit driven by somewhat aggressive assumptions. While govt. followed on its stated path of simplifying tax regime and lowering tax rates, its approach seems more gradual. Focus on rural India has stayed - with allocation for agri+rural development rising 13% YoY - this should be consumption positive. A key disappointment was lack of material measures to heal the strained NBFC and real estate sectors.
Revival in Enterprise coupled with Telecom traction (large deal win and healthy pipeline) is supporting growth. BFSI growth will continue led by strong deal wins, Healthcare and TME will recover gradually. Manufacturing will stabilise led by growth in process industry and Auto sector pain is behind. The synergies between Telecom and Enterprise are now visible and can lead to large multi year transformational deal wins. We expect USD revenue CAGR of 7.9% over FY19-22E led by Telecom/Enterprise CAGR of 8.3/7.7%. TechM trades at a P/E of 14.6x FY21E (in line with Tier-1 median P/E). The risks to our thesis include deterioration in US/Europe macros, Brexit, trade wars and delay in 5G spend. We maintain BUY on Tech Mahindra based on higher than expected revenue and profits in 3QFY20. Growth visibility has revived for Telecom and Enterprise segment based on strong TCV wins for the second consecutive quarter. We increase earnings est. for FY21/22E by 3.5/4.7% based on better visibility and margin recovery. Our TP stands at Rs 910 based on 15x (~10% premium to 5Y avg.) Dec-21E EPS.
Stable taxes in FY19 accelerated cigarette volume growth to 5.5% vs. -5% CAGR during FY15-18. EBIT growth also accelerated to 9% as compared to 7% CAGR during FY15-18. Yet company could not enjoy re-rating as investors have flocked towards ITC's peers (HUL, Dabur and Britannia etc.). Rather cigarette business saw de-rating (>20% fall, based on assigning fair valuation to other segments) over the last 12-months. We expect cig valuation will recover owing (1) Continuation of stable taxes, (2) EBIT margin expansion and (3) Pickup in rural market. We believe cigarette valuation will recover to its average of 18x EV/EBITDA (still lower than 25x for Colgate which is similar wrt market leadership, vol growth trajectory and pricing power). Other catalyst in the business is FMCG, better margin traction will also offer better value for ITC. We continue to believe that valuation discount will narrow down. ITC clocked in-line performance despite continued macro challenges. ITCs performance was in sync with other FMCG companies. ITC-Cig/ITC-FMCG growth was at 5/6% vs. HUL/Dabur/Colgate/Marico posted domestic growth of 4/6/4/-1% in 3QFY20. ITCs cig/FMCG performance was very much comparable to other FMCG cos for the past many quarters. Despite that, stock has de-rated over the last 12 months. We believe de-rating is unwarranted when the co is consistently showing quality earnings. We value ITC on SoTP basis (link to table) and arrive at a TP of Rs 360 (implied P/E of 25x). Maintain BUY.
Most consumer categories remained under pressure in 3Q and recovery seems more gradual for the sector. HUL's management of the situation is far superior to peers. Home Care and F&R are driving both revenue and profitability. BPC is seeing various challenges as BPC volume market degrew by 2% in 3Q. GSK's acquisition is running behind schedule and is expected to be integrated by Mar-20 (vs. Dec-19 earlier). We maintain our NEUTRAL rating as we don't see any near-term triggers for re-rating the stock. HULs 3QFY20 show was respectable amidst challenges of slowdown. Co maintains a cautious near term outlook and is hopeful for gradual recovery in rural demand. Net revenue growth of 4% with 5% UVG was better than many consumer companies despite large scale. Marico/Colgate/Dabur posted domestic volume growth of -1/2.3/5.6%. We are admirers of HULs superior capabilities in managing tough times. We value HUL at 45x on Dec-21 EPS with TP of Rs 1,988. Maintain NEUTRAL.
SBIN's 3Q is not extraordinary if earnings are adjusted for the impact of the large recoveries (recoveries nevertheless). These were on expected lines. Standard exposure to vulnerable sectors remains a source of potential stress. However, we expect the extent of incremental stress to be considerably lower than before. Calc. PCR at ~64%, will enable a reduction in LLPs and hence improvement in RoAEs. This, along with undemanding valuations underpins our stance. SBINs 3Q earnings were significantly ahead of estimates as recoveries boosted core earnings and contributed to a reduction in provisions. Adjusted for this, the qtr was par for the course. Maintain BUY with an SoTP of Rs 418 (1.3x Dec-21E of ABV of Rs 241 + Rs 105 sub value).
