While the customer acceptance of the new products in the white spaces' will be gradual, we re-iterate BUY as Hero has successfully defended market share in the 2W segment in the current downturn. We value the stock at 16x Dec-21 EPS, in-line with its average trading multiple. Management laid out the road map at the CIT (Center of Innovation) visit. CIT is gradually ramping up (since its commencement in 2016) and has helped reduce lead times for new product development by 25%. Hero has invested $600mn in R&D; over the last few years, which is now bearing fruit. With the launch of the Xtreme 160cc bike, Hero will now address 96% of the Indian 2W market and compete effectively in the premium segment.
We are NEUTRAL as (1) AL has a well capitalized balance sheet and is better prepared to withstand the current downturn. The OEM has lowered capex spends to manage cash flows (2) While any introduction of a scrappage scheme will aid sales in FY21, the expected commissioning of the DFC will impact demand over the medium term. Ashok Leyland reported yet another weak quarter as EBITDA margin declined to 5.6% (-460/-20bps YoY/QoQ). The industry awaits the announcement of a scrappage scheme, which will aid demand in FY21. We reiterate NEUTRAL with a TP of Rs 75 (13x on Dec-21 EPS).
Strategic flip-flops in expansion, 2. Uncomfortable leverage, high pledges and 3. Lack of execution makes us uncomfortable on FRL, valuations notwithstanding. Hence, we downgrade the stock to NEUTRAL with a DCF-based TP of Rs. 370/sh (earlier Rs. 500/sh; implying 11x FY22 EV/EBITDA). The TP cut is a function of 1. 5-8% EBITDA cut in FY21/Y22 to account for higher cost of retailing, 2. Lower profitability beyond FY22 too. Our previous BUY recommendation on Future Retail (FRL) was predicated on our belief that the retailer finally seems to have zeroed-in on its core after rummaging through multiple formats. However, we must admit its constant strategic flip-flops in assigning a core growth engine in a short span of time has left us stumped and certainly can be un-nerving for an investor. Ergo, we downgrade the stock to NEUTRAL (earlier BUY) with a revised TP of Rs. 370/sh (Implying 11x FY22 EV/EBITDA)
During FY20E, SRCM vol growth will flatten after 8-yr of steady growth (industry leading 11% CAGR) as SRCM is focused on trade sales. This has also helped SRCM's strong margin expansion in FY20E (~Rs 470/MT YoY) to industry best of ~Rs 1,470/MT. In our view, while sales ramp-up from its east, south & west expansions should drive 9% vol CAGR in FY20-22E, volatile pricing in these markets should prevent further margin expansion (with downside risks on higher vol growth). Thus, we estimate its RoCE/RoE to marginally cool off by ~100-200bps in FY21/22E. Our EBITDA forecasts are in-line consensus nos. We value standalone cement biz at 15x EV/EBITDA (in-line industry leader UltraTech's target valuation) - for SRCM's industry leadership in cost & return ratios and strong capex management - leading to SOTP value of Rs 19,900. As the stock currently trades at an expensive 19.8/18.4x FY21/22E EBITDA, and at an EV of USD 280/MT, we downgrade our rating to SELL from Neutral. We downgrade Shree Cement (SRCM) to SELL with a TP of Rs 19,900 (SOTP based: Cement (India)/power biz at 15/5x Sep21E EBITDA, and UAE subsidiary at 1x BV). Our TP implies cement EV of USD 222/MT. In 3QFY20, SRCM reported strong results (Rev/EBITDA in-line our est).
SEL 3QFY20 performance was a disappointment as funding constraints limited execution of projects. With conclusion of InfInfravit deal funding issues will get resolved. Group standalone debt reduction by 50% will augur well for reinstating financial markets confidence in the group. Whilst it will take time for SEL to revert to historical levels of quarterly execution, we believe 3QFY21E onwards things should normalize. We maintain BUY. Key risks (1) Delay in new order inflows; and (2) Further delay in execution ramp-up. We maintain BUY on SEL with a reduced TP of Rs 175sh (vs. Rs 241/sh earlier). We value SELs EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stakes market cap. TP reduction is owing to FY20/21E EPS cut by 43/24%.
AHLU delivered yet another 3QFY20 miss. We continue to remain patient as execution shall start on entire order backlog from 4QFY20E. While Mohammadpur project is in preparatory stage after receiving EC, Rs 5.5bn Charbagh Station redevelopment may get foreclosed due to environment hurdle. New wins of Rs 32.3bn doesn't have environment concerns. Delhi construction ban has lifted. The Robust balance sheet, net cash status and better than peers RoE/RoCE are other comforting factors. We maintain BUY. Key risks include (1) Slow down in government capex; (2) High cost inflation; (3) Stuck projects; (4) Lower than expected leasing in Kota BOT project. We maintain BUY on AHLU with unchanged TP of Rs 388 (15x FY21E EPS) despite 40% 3QFY20 miss on APAT. We downgrade our FY20E EPS by 24% to factor in slow order book to execution conversion and ~Rs 5.5bn of non moving projects. We retain FY21E estimate. Robust order book and strong BS augurs well for re-rating.
The company has received approvals from NHAI, lenders and SEBI for the IRB-GIC deal and is expecting to receive the proceeds during this quarter. The proceeds from this deal should help IRB meet its equity infusion requirement of ~Rs 28bn in under implementation projects. IRB will also leverage this partnership to bid for upcoming BOT and TOT projects, though it will have to bring in 51% of equity under such agreements. Securing Mumbai Pune expressway TOT project will provide further fillip to the revenues from toll collections. We maintain BUY. Key risks (1) Sustainability of toll revenue collection rate in the BOT portfolio, (2) Market acceptability for BOT projects IRB delivered in-line revenue with EBITDA/APAT beat of 9%/17%. IRB-GIC deal is expected to conclude during 4QFY20 with all the approvals in place. We maintain BUY with an SOTP based TP of Rs 172/Sh.
Despite production cut from OPEC and non-OPEC countries, we expect the oil prices to remain muted owing to the robust supply from US Shale and weakening global macros. Thus, we do not foresee subsidy sharing in FY21/22E as well. Besides, ONGC will generate OCF yield of 32.1/35.1% and dividend yield of 9.7% over FY21/22E. Though the stock has remained out of flavor given GoI's stake sale to achieve its disinvestment target, it still remains a key overhang on the stock (in the last 2 years, GoI's shareholding shrank from 67.7% to 62.8%). We value ONGC at Rs 173/sh (8x Dec-21E standalone core EPS (adj. for dividend income) + OVL EPS and Rs 31 from other investments) vs the consensus TP of Rs 184. We maintain BUY on ONGC following an inline performance with our PAT estimate in 3QFY20. The current valuations after adjusting for investments (OVL and others) for FY21/22 are 1.5/1.3x EV/EBITDA, 3.6/3.1x PER. Such pessimism is unwarranted in our opinion.
KNR delivered yet another steady quarterly performance. Order wins are on track with 4QFY20 ask at Rs 8bn to meet the Rs 30bn FY20 order intake guidance. KNR has entered into Kerala BOT stake sale arrangement with Cube Highways for equity consideration of Rs 3.9bn (expected by Mar/Apr'20). For 3 HAM projects Rs 1.7bn investment, KNR expects to receive Rs 3.3bn over the next 4yrs. Strong balance sheet, periodic BOT/HAM equity churn and robust execution capability reinforces our positive stance on KNR. We maintain BUY. Key risks (1) Slowdown in government ordering (2) Higher crude and cement prices (3) Increase in interest rates and (4) Further liquidity tightening in the financial sector. We maintain BUY on KNR with SOTP-based TP of Rs 376/sh (valuing core EPC business 18x FY21EPS at Rs 317/sh, Subsidiaries Rs 60/sh). KNR delivered yet another steady quarter with Revenue/EBIDTA/APAT beat/(miss) of (0.4)/17/(12)% respectively.
Despite near term weakness, we continue to like DCL for its strong focus on remunerative pricing and cost reduction measures. We expect demand revival in FY21E to further aid earnings recovery. Thus, we value the co at 5.7x Sep'21E EBITDA (in-line its 5-yr mean multiple). Maintain BUY with TP Rs 500/share (implies EV of USD 47/MT). DCL currently trades at an extremely low val of 2.7/3.3x FY21/22E EBITDA and EV of USD 25/MT. We maintain BUY with TP Rs 500 (5.7x its Sep21E EBITDA). In 3QFY20, DCL posted weak results (in-line EBITDA), hit by sharp demand contraction in AP/T markets (short term pain in our view).
