We remain structurally positive owing to IOC's diversified business model and healthy FCF of Rs 690.7bn over FY21-22E. Our SOTP based target price is Rs 181 (5x Dec 21E EV/e for standalone refining, pipeline, petchem and 5.5x Dec 21E EV/e marketing and Rs 28/sh from other investments). Post an inline performance in Q3, we maintain BUY on IOC with a TP of Rs 181. IOC was able to maintain its market share and margins in the quarter while the performance of the refining business was commendable in the midst of the current scenario.
We like VO for its (1) Impeccable product selection (2) High market share globally (3) Best in class return ratios and earnings trajectory. However, in the absence of new product pipeline, we believe current valuations are contextually high at 31.1/26.1x FY21/22E PER. Our TP of Rs 2,040/share is based on a 25x Dec-21E EPS. We downgrade VO to NEUTRAL post an underwhelming performance in 3QFY20. Given a demand slowdown for the high margin ATBS and resultantly lower realizations, we cut our EPS estimates for FY21/22E by 13.5/12.6%.
Marico will continue to see challenges in the near term on account of weak revenue growth and limited GM expansion. Weak rural growth, price cuts, reduction in channel inventory will remain inhibitors for growth recovery. Earnings trajectory will continue be soft for few more quarters. Although stock has corrected recently, we do not see near term triggers for re-rating. Marico reported weak 3Q and commentary for near term was more alarming. Weak consumer offtake, rationalising trade inventory and price cut will continue to dent near term show. Copra tailwinds will soon be behind and EBITDA growth will be challenging in the near term (model 6% EBITDA growth in the next 2 qtrs vs. 17% in the last 4 qtrs). We cut EPS by 4% FY20-22 to factor in growth challenges across portfolio and limited success for new initiatives. We had downgraded Marico in 2QFY20 (@Rs 380) as we thought most near term triggers were priced-in and earnings upcycle will moderate. Despite stock correcting over the last 3-months, we do not see any immediate trigger for upgrade. We value Marico at 35x on Dec-21 EPS, our TP is of Rs 350. Maintain NEUTRAL.
LICHF's performance trajectory across fronts, over the past few qtrs points to structural weakness. Our NEUTRAL stance is premised on the continued rise in bad loans (particularly sharp rise in LICHF's core segment this qtr) accompanied by slower loan growth (as banks appear to be grabbing m-share) and possible margin stress. The dual trend of slowing growth and asset quality deterioration at LICHF persisted into 3QFY20. Maintain NEUTRAL with a TP of Rs 471 (1.25x Dec-21E ABV of Rs 377).
Road EPC players' fortunes are linked to NHAI ordering. High land acquisition cost (~30% of Total NH cost) has led to ballooning of NHAI debt and concerns on sustainable ordering. GOI commitment to Infra build-out in India as envisioned in the NIP program seems positive but lacks financial detailing (Union Budget 2020 may lend some visibility). On the positives, NHAI ordering has resumed. Banking environment is improving with no shortage of capital for companies with strong balance sheet. HAM monetization has picked up and most of projects have received Appointed Date'. Interest rate has been supportive. We maintain our positive stance on the sector going into FY21E. We believe peak ordering is still 2yrs away and P/E valuation is supportive (average peer P/E 8x FY21E EPS a 50% discount to long term averages). Top Picks: KNR, PNC, HG Infra and Ashoka Buildcon. In building segment we prefer Capacite and Ahluwalia Contracts. NHAI finally seems to be firing on multiple fronts to make the Highway ecosystem more stakeholders/investor friendly. Slew of measures have been announced viz (1) Arbitration settlement though conciliation (2) FASTag implementation (3) Tweaking of the ToT model & (4) Improving visibility on awarding. These measures add to positives and will benefit Road EPC players with strong balance sheet.
Regulatory tailwinds like Institutional participation, Indices (cash settled) and new options contracts will boost volumes and increase depth. Globally Institutions account for ~50% of the total derivatives volume. MCX's focus on improving the physical delivery mechanism and local price discovery for key commodities will provide a platform for long term sustainable growth. We estimate revenue/EBITDA/PAT CAGR of 21/45/26% over FY19-22E. The stock trades at P/E of 27.0/21.5 FY21/22E EPS, which is reasonable, considering healthy growth, tight cost control, RoIC of ~50% and huge cash (~22% of Mcap). Risks include regulatory delays, increase in competition and drop in commodity volatility. We maintain BUY on MCX based on in-line revenue and margin beat in 3QFY20. Market share (94%) is steady despite rise in competition. Embedded non-linearity and cost control is leading to margin expansion. Regulatory tailwinds, healthy growth in unique client codes (UCC), launch of Indices and increased volatility will aid volume growth. We assign 30x to core Dec-21 PAT and add net cash (20% discount) to arrive at TP of Rs 1,370.
Dabur has outperformed in a tough environment as its brand building initiatives are beginning to pay dividends. Mohit Malhotra is focusing on (a) Scaling power brands (8 brands with 65% revenue mix) which have a large addressable opportunity, (b) Deeper rural penetration led by higher direct reach (targeting 55k/60k villages in FY20/21) and (c) Innovation of new products. We remain optimistic for Dabur and expect co will be opportunistic in the rural recovery. Dabur posted healthy 5.6% domestic volume growth (est 5%) despite weak consumer sentiments in rural India. Focused strategy on power brands, innovative launches and increase in rural reach is driving share gains. Rural growth outpaced urban by 400bps for Dabur (in contrast to industry). Oral care growth at 8.5% was much better than category growth and market leader (Colgate posted 4%). Health Supplements and Digestive also posted healthy 12% and 16% growth. Food remained muted due to category issue, will be keen to watch performance in upcoming season. Despite near term headwinds, we believe Dabur will outperform peers owing to (1) Focus on power brands, (2) Expanding addressable market, (3) Healthy growth in natural category, (4) Rising distribution reach and (5) Innovative launches. We value Dabur at 40x on Dec-21E EPS, arriving at a TP of Rs 510. Maintain BUY.
Colgate's market share has largely stabilized but we still don't see signs of gaining meaningful share anytime soon. As a category leader, Colgate needs to drive category growth at a time when natural's fad is again gaining traction. Senior level management churn (Ram Raghavan - MD and Mukul Deoras India chairman) keeps us interested in the story. Ram began his career as a management trainee with Colgate India in 1997. His recent experience as the head of innovation center at Colgate-Palmolive LATAM is exactly what Colgate India needs i.e. product excitement and diversification. We remain NEUTRAL on the company. We will be tracking any revamp in strategy that may trigger our upgrade. Colgates 3Q performance remained weak as net revenue grew by mere 4% (est 4.5%) with 2.3% volume growth (est 3.5%). The co has underperformed most other FMCG cos over the last 12/18 quarters with revenue CAGR of 5/4%. Oral care category was under pressure in urban as well rural markets. EBITDA growth was flat/1.4% in 3Q/9MFY20. We cut EPS by ~3% in FY20/21/22 to factor slower than expected recovery. We value Colgate on 35x P/E on Dec-21 EPS, our TP is Rs 1,392. Maintain NEUTRAL.
PSYS' recent trends have been a tale of two cities with the TSU segment accelerating to mid-teens growth (vs. high single-digit avg. over 10 qtrs), while Alliance & Accelerite units continue to be choppy. PSYS' S&M re-alignment towards client mining, cross-sell and large deals as well as delivery rejig has resulted in strong uptick in TSU. Large opportunity exists to stabilise the volatility in Alliance portfolio (leadership change), but it may be gradual even as T1 account concentration continues to decline. Margins have bottomed-out and are expected to improve with oplev, stability in Alliance and SG&A efficiencies. Expect 10.5/12.5% CAGR in USD rev/APAT over FY20-22E. Key risks include worsening working capital and continued volatility in Alliance business. We maintain BUY on Persistent Systems (PSYS) following an in-line rev. TSU business is on an upswing (sustainable), Alliance business is work-in-progress and margins have bottomed-out. Our TP is Rs 745, at 13x Dec-21E (10-yr avg.) with moderate increase in est (~3%).
Crompton's performance has been luke-warm over the last 4-6 qtrs resulting in stock underperformance (de-rating). We believe both segments (ECD and lighting) need to fire together for the stock to re-rate (possible in FY20). Market share gains in fans, success in appliances, GTM benefits, cost savings program and acceleration in B-B lighting will be the key medium term drivers. Reasonable valuations along with structural long-term initiatives drives our BUY rating. Cromptons weak lighting show continued to overshadow strength in ECD. ECD posted 11% growth despite several macro headwinds (Havells posted flat). Market share gain in fans and strong volume growth for appliances led the growth. While, lighting remained a drag and posted 11% decline in revenues. Price erosion in LED and weak order flows from Govt/EESL continued to impact lighting despite healthy volume growth. We model weak revenue growth for lighting for two more quarters (price erosion happened in July19). Co is committed to invest distribution and branding to drive premiumisation and market share gain for fans and lighting. We cut EPS by 2% for FY20-22 to factor weak lighting show. Weak lighting show is also overshadowing valuation potential of ECD business. We value the co at 35x on Dec-21 EPS, arriving at a TP of Rs 333. Maintain BUY.
