The extent of deterioration in asset quality was surprising, given the usual seasonal trends and the creditable progress made by MMFS until now. NIM improvement and growth trends were positives. As always, MMFS' performance is highly correlated with rural macros. MMFS stands to gain from any improvement here. MMFS 3Q earnings were slightly ahead of estimates, even as provisions remained elevated YoY (+11% QoQ). NIMs expanded QoQ after a prolonged fall and AUM growth was healthy. The increase in GS-III disappointed. Maintain BUY with a TP of Rs 425 (2.25x Dec-21E core ABV of Rs 181 + Rs 18 for MIBL)
Given the newly signed long term contracts in the CRAMS BU at Dewas and a growing customer base (Europe now accounts for 50% of order book vs erstwhile 100% from US), we have better earnings visibility for NFIL's high margin CRAMS BU. Hence, we raise our FY21/FY22 EPS estimates by 13.3/13.5% to Rs 46.8/51.8. Post announcement of Rs 4.50bn of capex for Greenfield project at Dahej on Dec 12th, the stock has already surged 35.8%, pricing in the key positives. Our revised TP comes to Rs 1,011 (20x Dec-21E EPS). Maintain SELL. We retain our SELL rating on NFIL as the CMP already bakes in the (1) Earnings visibility from the CRAMS BU, and (2) Earnings potential of the Greenfield project at Dahej. The stock is currently trading at 25.5/22.9x FY21/22E EPS, which is contextually high, given the return ratios of RoE 16.2/18.3/17.9% and RoIC 23.0/23.2/21.0% in FY20E/21E/22E.
While we are NEUTRAL, we recommend buying the stock on corrections as Maruti is benefiting from the BS-VI transition due to its gasoline led portfolio. Further, the industry demand environment is expected to improve from here on. Key Risks: Rising competition from new entrants, particularly in the SUV segment, a delayed recovery. Maruti reported PAT growth of 5% YoY at Rs 15.6bn, reversing the declining profit trend of the past several quarters. On the margin, demand is improving driven by the rural segment. We are revising our TP to Rs 7,280 based on 23x Dec-21 EPS, as we value the stock at 5% premium to its average historic 10 year trading multiple (to factor in a pickup in demand).
Downside risks: delay in resolution of Dahej (OAI) and Indrad (WL), slower growth in India and launch delays in the US. We resume coverage on Torrent Pharma (TRP) with a Buy. Torrent has re-rated substantially in the past three years on the back of strong execution particularly in branded markets. Despite rich valuation, we recommend Buy as TRP offers a solid India franchise, robust earnings growth and superior return profile which justifies the premium over peers. TRP would generate Rs56bn of FCF over FY19-22E. Our TP of Rs 2,250 is based on 15x FY22 EV/EBIDTA implying a target PE of 28x.
Key downside risks: Delay in resolution of facilities, delay in approvals; adverse outcome on drug price fixing lawsuit in US; Key upside risks: higher growth in India and EM markets, resolution of plants. We resume coverage on Dr Reddys with a Neutral rating and a TP of Rs 3,440 based on 20x FY22 EPS. With improved performance across geographies we believe the multiple is well justified. While DRL has a rich pipeline of products for the US market, approval and launch timeline for key products - gNuvaring and gCopaxone does remain elusive. Despite factoring in these launches along with sustenance of good performance in non US markets and margin expansion as per company outlook, upside is limited from current market price.
We re-iterate our Buy on Indigo as (1) The carrier will benefit from improving industry dynamics in the medium term. Air India has once again been put up for divestment by the GoI (2) Crude prices remain benign which will allow for better cost management. Efficiency gains from the Neo fleet will further benefit (3) Valuations at current levels (6.7/4.9x FY21/22E EV/EBITDAR) are undemanding. Any resolution of the ongoing dispute amongst the two promoters will lead to a re-rating of the stock. IndiGos 3QFY20 results were ahead of expectations - the demand environment improved in Nov-Dec, post a soft October, which led to the earnings beat. The revenues grew ~25% YoY due to an improvement in yields (+10 QoQ) and higher ancillary revenues (+29% YoY). We roll forward and set a Dec-21 TP of Rs 1,750 (@6x EV/EBITDAR). Maintain BUY.
PEPL is going all out (1) On building lease assets & (2) Increasing Non-South exposure with JV/JD tie ups. It's banking on the consolidation theme and picking up distressed projects in non-south markets. Large capex outlays on new lease assets will be cash flow dilutive over next 3-4yrs and requires timely funding from existing lease assets monetization and deployment of capital in cash flow dilutive under construction projects. Office assets under construction/upcoming launches of 15/25mn sqft are aggressive with overall office portfolio expected to increase from 10mn sqft to 50mn sqft over next 5-6yrs. We retain NEU with increased (new leases addition) TP of Rs 358/sh. We maintain NEU on PEPL with SOTP of Rs 358/sh (vs. Rs 348/sh earlier). We have increased our FY20/21E EPS estimates by 35%/18.9% to factor in better than expected deliveries in residential projects. PEPL posted strong 3QFY20 results.
Sonata's platformation strategy to provide IT services around IPs is yielding results. Growth in IP-led revenues is improving employee productivity and aiding margin expansion. Sonata is expanding Microsoft D365 platform and IP-led related services to new clients across verticals and geographies, which will drive growth. We like Sonata's IP-focussed business model, high RoE (~35%) and dividend yield of ~5%. The stock trades at a P/E of 11.0x FY21E, which is at 20% discount to Tier-2 IT median valuations. We expect IITS' USD revenue to grow 11.8/11.5% with margin of 23.3/23.7% in FY21/22E. Risks include deceleration in top-account, delay in collections and slowdown in US/Europe. We maintain BUY on Sonata based on strong performance in 3QFY20. IP-led strategy, strong Microsoft partnership and expansion of Microsoft D365 offerings is driving growth and aiding margin expansion in IT services business. DPS growth momentum will continue led by Microsoft and there is scope for margin expansion. We upgrade our FY22E Rev/EPS estimate by 6.1/5.1%. Our TP of Rs 422 is based on 12x (~4% premium to 5Y avg.) Dec-21E EPS.
Our estimates remain largely unchanged, even after DCBB's soft performance over 3QFY20. We model a considerable improvement in credit growth and operating efficiency beyond FY20E. These reflect our confidence in the bank's calibrated approach to growth. We expect oplev to be the biggest driver of return ratio improvement. DCBB stands to gain from an uptick in economic activity and a sustained downturn will pose a significant risk to our estimates. DCBB reported an in-line qtr and overall performance was lackluster (asset quality deterioration and slowing growth). Better cost control and a slight margin uptick were positives. MAINTAIN BUY with a TP of Rs 249.
Favourable structural changes at ICICIBC continue (better quality corporate underwriting, balance sheet retailisation and P&L fortification). While the pace of asset quality improvement may slow in the near term, as with some of its peers, the broader trajectory remains unchanged. Improving asset quality, moderating LLPs and better growth trends underpin our stance. A sustained improvement could trigger further re-rating. ICICBC reported an inline qtr across all parameters. PAT jumped on a/c of lower provisions. Reported asset quality improved slightly, as a result of higher recoveries, even as slippages saw a rise. The 8% QoQ rise in exposure to BB and below rated a/cs was not too surprising. Maintain BUY with an SoTP of Rs 587 (2.2x Dec-21E core ABV of Rs 202 and sub-value of Rs 142).
