HDFC Securities Broker Research reports

Rossari Biotech Ltd. Issue Open: July 13 - July 15, 2020, Price Band: Rs. Rs. 423 - 425, Issue Size: 11,676,471 eq shares (Fresh issue 1,176,471* + Offer for sale of 10,500,000 eq sh)

We expect demand recovery from 2Q-3Q, supported by (1) strong digital playbook, (2) recovery in deal contracting with increase in consolidation deals (advantage Indian Tier-1s) as enterprises consolidate their tech portfolio, and (3) tech budget normalisation in 2Q for impacted verticals. Following -1.5/-6.0% QoQ in 4Q20/1Q21E, we have factored -0.6/+1.5/+2.8% QoQ in revenue over 2Q-4Q21E. The IT sector margin is expected to decline 95bps QoQ. Profitability is expected to be impacted by lower utilisation, pricing, cross-currency (GBP), lower forex gains and should be offset by (1) INR depreciation, (2) lower travel and discretionary spend, (3) deferral of wage increase and variable payouts cuts/deferrals, and (4) lower sub-contracting. We expect the margin trajectory to bottom out in 2Q. Subsequent margin recovery is premised on (1) demand recovery leading to utilisation recovery (onsite utilisation to precede offshore), and (2) continuity in optimal SG&A, including travel and sub-contracting rationalisation. IT sector (coverage universe) is expected to post -6.1/-3.7% QoQ/YoY in 1QFY21E revenue with cross-currency impact of -15 to -70bps QoQ. We expect Tier-1 IT revenue to decline between 5% and 9% QoQ while Tier-2 IT is expected to display a wider divergence (-2 to -14% QoQ). COVID-related economic impact on sectors like travel and transportation, O&G;, retail & CPG (discretionary) will be accentuated in 1Q (dual impact of price/volume cuts and deal deferrals/cancellations), while BFSI, healthcare, retail & CPG (non-disc.) and hi-tech verticals will be more resilient (deal-deferral impact, but resilient on pricing/volume).

We maintain our ADD rating on the stock. We believe that while Subros will benefit from a recovery in volumes at Maruti Suzuki- its largest customer (which accounts for over 3/4th of revenues), the diversification initiatives are delayed due to the COVID outbreak (home AC segment ramp-up is pushed back, CV and other segments will witness sluggish trends).

The bump up in non-food credit growth is unlikely to sustain, given, (1) The growth arising from higher utilisation of undrawn limits is likely to be one time', (2) Demand for personal loans which has been supporting overall credit growth is likely to see a significant fall, which will not be compensated for by growth in other segments, and (3) Banks are likely to turn more risk averse. Our coverage banks reported a credit growth of ~16% over FY16-19 vs. non-food credit growth of ~10% over the same period. We expect our coverage to exhibit a ~7% credit growth over FY21E. Contrary to our expectations, non-food credit grew 7.6% YoY in Mar-20 (vs. 7.3% in Feb-20). Further, MoM growth came in at 4.2% (vs. 3.9% in Mar-19). The increase in Mar-20 accounted for 57% of the increase in FY20. While Mar has a/c for an increasing proportion of incremental (annual) non-food credit, the persistence of this trend in FY20 is surprising, in light of COVID-19 related disruptions. Much of the growth in Mar-20 was supported by credit for industries and services (~87% of incremental Mar-20 credit).

With a long run-way of growth, improving regulatory environment, and strong innovation opportunities, we remain positive on the general insurance sector. Regulatory crack-down on motor TP pricing is key risk. Pvt. multi-line insurers Mar-20/FY20 GDPI grew -16.2/+11.7% YoY to Rs 67.1/911.8bn. Decline in Mar-20 was along expected lines as new policy sales have declined as a result of the lockdown and renewals have been impacted by the forbearance (until 15-May-20) given by IRDAI on premium payments, and extra time (until June-20) allowed for claiming deduction under the IT Act, for the purchase of health cover.

Update on HAM funding and arbitration proceeds: Gross debt outstanding for the 10 HAM assets stands at Rs 20.18bn, with balance requirement being Rs 24bn. On the equity front Rs 2.2/1.67bn is expected to be infused over FY21/22E. Arbitration proceeds of Rs 4.2bn have been awarded (Rs 2.2bn with SEL, Rs 2bn with SIPL). On the Rohtak-Panipat project, SEL has been advised by NHAI to move the case to conciliation committee rather than arbitration. In company's view it is a clear case of an event of default (alternate traffic route is the issue here) as per the CA, and is confident of recovering its entire equity and debt. Sadbhav Engineering Ltd (SEL) has announced a management rejig with Mr Vasistha Patel (VP) being appointed as CEO and Mr Shashin Patel stepping down as Chairman and MD to Vice Chairman in non executive capacity. We perceive this as a positive step with VP getting iron hand on execution and promoter SP dissociating himself from day to day run. SEL BS has deleveraged post the SIPL deal and now VP has immediate challenge of ramping up execution against the COVID-19 headwinds. We maintain BUY with SOTP of Rs 56/sh

Recommendations and stock picks: Outlook on ordering both domestic/international ex roads is likely to be weak. Banks lending will be selective. We have downgraded ABB from ADD to SELL and Siemens from ADD to REDUCE. We have cut PSP/ITD rating from BUY to ADD. We maintain BUY ratings on other coverage stocks. For our coverage universe, we have recalibrated the P/E multiple/EPS estimates lower resulting in TP cuts by 10-60%. In cap goods, LT is our top pick. In the mid cap EPC space, KNR, PNC, HG Infra and Ahluwalia are our top picks. COVID-19 poses multiple headwinds: Industrials companies have been hit hard by COVID-19 pandemic. Execution has started to pick up slowly post almost a month of lockdown. Local Govt approvals are coming slowly as the sector grapples for remobilization of sites. Urban areas are being turned into containment fortresses and it will take time for the works to resume. This will largely impact Metro and Real Estate projects execution. National Highway projects are still executable as they run through interior State districts with limited COVID-19 impact. We believe pure play NH EPC players are best placed to tide through the crisis. Buildings players are worst impacted.

While we continue to hold our constructive view on the sector, we believe flows to mutual funds may improve only in 2HFY21 and earnings will remain under pressure in FY21E FY20 was a difficult year for asset managers as equity flows deteriorated (-50.9% YoY), commissions increased (although managably), and performance deteriorated- as listed AMCs outperforming AUMs declined. Lastly, we have also worked out sensitivity of FY21E earnings to equity AAUMs and yields.

Maintain BUY with TP of Rs 680, at 16x FY22E EPS. Infosys (INFY) delivered rev/margin below estimates in 4Q. While near-term performance will be marred by demand dent across verticals, subsequent recovery will be supported by (1) Strong growth in digital (42% of rev), (2) Resilience in large deal wins (bookings tracking well), (3) Market-share gains from vendor consolidation, and (4) Operational prudence & favourable onsite supply metrics.

Consequently, we prefer ICICIBC, AXSB and KMB amongst the large caps. We prefer CUBK amongst the pack of smaller regional banks. We maintain our REDUCE rating on RBK and KVB, despite their sharp underperformance. Recent events (YES and COVID-19) are likely to have multiple order and far reaching impacts on the banking sector. COVID-19 will obviously impact growth and asset quality. The events at YES have impacted depositor sentiment, causing them to become more risk-averse, we believe. Consequently, the less obvious (but equally important) impact is expected to play out on the liabilities side. In such a scenario, we believe deposit flows will become more polarised. Larger banks, with strong granular liability franchises, reasonable asset quality performance and sufficient capital are likely to emerge stronger.