We continue to believe NLL is best-placed to benefit from the lack of third-party API suppliers who manufacture low-volume high-quality APIs, with its strength in complex chemical processes. The steady growth in the CMS portfolio (16% CQGR over the last 5 quarters), the launch of gSalmeterol in the US, and stable pricing in the Prime API segment are some of the key reasons for us to build in 13% revenue CAGR over FY19-21E. On the profitability front too, albeit a bit late, we expect to see a steady ramp up over FY20E as the contribution of Niche API and CMS segments is expected to increase, coupled with alleviated raw material prices and backward integration. Model 650bps margin expansion and expect NLL to deliver 101% EPS CAGR over FY19-21E. We maintain BUY on NLL following a mixed quarter. Our TP is revised to Rs 725 (14x FY21E EPS). The scale up in lucrative products like Salmeterol and Austedo remain key triggers for improvement in operational performance.
With a further 8% fall in the stock price, our conviction on our BUY rating has grown multifold as we realize that the trailing valuation is now 14x FY19 EPS for a business that holds one of the top 5 pharmaceutical franchises in India, which is also the fastest-growing among large peers. Moreover, there is value unlocking at play, with the potential listing of the novel subsidiary and debt reduction on account of divestment of non-core assets. We believe the de-merger will lead to sharp improvement in profitability for the ex-novel business and a healthier balance sheet. We value the novel and specialty businesses at Rs 135/sh. As we understand this listing could take between 12-15 months and is contingent upon several approvals, we have not included it in the TP. Glenmark delivered sub-par numbers in 1QFY20 and only the India segment was able to impress with the highest growth among listed-peers. Valuations are as low as 15/12x FY20/21E P/E, while the India business alone is valued at Rs 450/sh. We believe the post-result fall was an overreaction. Re-iterate BUY with a revised TP of Rs 500 (16x FY21E EPS).
Upstream companies were out of flavor despite realising market price for crude oil, mainly on account of the subsidy sharing with OMCs. We expect oil prices to remain muted owing to the robust supply from US Shale. This is despite production cuts from OPEC and non-OPEC countries. Thus, there is no concern over the subsidy sharing. ONGC will generate OCF yield of almost 28% and divided yield of ~6.3% over FY20/21E. The current valuations are contextually lower at 5.5x FY21 PER (ex-OVL and other investments). Our TP is Rs 184/sh (8x Jun-21E standalone core EPS (adj. for dividend income), + OVL EPS and Rs 32 from other investments) ONGCs 1Q performance was muted owing to (1) Low oil production, (2) Fall in oil realisation, and (3) Adverse impact of Ind AS116. However, we maintain our BUY as we expect re-rating of the stock given that falling oil prices have allayed fears of subsidy. Adjusting for its investments (OVL+ other), the stock is trading at 5.5x Jun-21E standalone EPS. This indicates strong pessimism.
ITD fundamental matrix has not seen any change for good in recent quarters. Margins have deteriorated, debt has increased and NWC remains elevated. New wins have largely been non marine. With no near term positive triggers, re-rating will take time. We maintain NEUTRAL. Key risks (1) High competitive intensity in marine segment with bigger competition from L&T, (2) Sustained cost overruns in projects, and (3) BS and NWC deterioration. We maintain NEUTRAL on ITD with a reduced TP of Rs 78/sh (12x Mar-21E EPS) vs. (Rs 95/sh earlier). TP reduction is on account of 17.3/17.2% FY20/21E EPS cut. Lack of large marine orders wins, higher share of NWC intensive infrastructure order book and limited visibility on debt reduction pose significant headwinds.
With robust 1QFY20 performance PNC has demonstrated strong on ground execution capabilities. This came with improving NWC days. Large order pipeline in UP (specifically the Bundelkhand, Gorakhpur Link and Ganga Expressways) augurs well for new order wins. PNC has guided for ~Rs 60-70bn inflows in FY20E (HAM~50%). Asset monetization of Aligarh Ghaziabad project is on track with PNC receiving NOC from 12/13 lenders (last bank to give NOC by Sep-19) for stake sale to Cube Highways. The company expects the inflow to happen by Dec-19. The plans to increase fund based limits to Rs 10bn and non-fund based limits to Rs 50bn would also enable the company to bid for projects with large ticket sizes. We maintain BUY. Key risks (1) Slowdown in NHAI ordering; (2) Delay in UP state projects awards. We maintain BUY on PNC with a SOTP based TP of Rs 339/sh (18x FY21E EPS). We have not made any changes to our estimates.
SUNP remains on track to achieve its double-digit revenue growth guidance for FY20E. However, margins may remain subdued as it spends 3-5% of total revenues on its specialty business, whose revenues are catching up slowly. With higher R&D guidance and the expected launch of Cequa in 3QFY20, EBITDA margins are likely to contract over the following quarters, in our view. However, we do expect a recovery in profitability (24% margin) by FY21E once Ilumya and Cequa achieve scale in the US, while the generics business's growth is supported by quality approvals from Halol. At CMP, the stock is trading at 23.5/17.7x FY20/21E EPS, a ~15% premium to peers. With a significant part of revenues expected to come in from the branded business in 3-4 years, we believe the stock will continue to command a premium. We maintain BUY on SUNP following a beat to our estimates. Our TP is at Rs 545 (22x FY21E EPS). The execution in specialty segment is crucial.
With a lower than expected impact of gMycophenolate competition in the US, coupled with the highest top-line growth in India business among large-cap peers (1QFY20), we maintain our FY20/21E revenue estimates for Alkem and model a 13% CAGR over FY19-21E. The profitability, too, is likely to expand by 100-120bps YoY with lower raw material prices and improving business mix. With moderated tax expectations, we model 25% EPS CAGR over FY19-21E. Alkem remains among the fastest-growing companies in the Indian market while its performance in the US also stands out. At CMP, Alkem is available at 18x FY21E EPS. Considering its stable branded business, healthy cashflows (~Rs 8bn annual FCFF over FY20/21E), and reasonable return ratios (22% RoIC in FY21E), we believe this is unjustified. We maintain BUY on ALKEM despite a big miss on our 1QFY20 estimates. Our TP is 2,180 (22x FY21E EPS) with estimates largely unchanged owing to a sharp recovery expected in the next two quarters following a shift in the seasonally strong quarters (from 1Q earlier to 2Q now).
Maintain BUY as (1) Subros has gained market share in the PV segment in a slowing market (up by 3%) (2) The co is diversifying into newer segments including home AC component supplies and expects the share of other segments to double to 40% in the medium term. (3) With Denso as its strategic partner, the co has relevant technology for next generation products In a sluggish market environment, Subros delivered ~8% YoY revenue growth driven by the ramp up in the home AC segment (post acquisition of Zamil in 4QFY19). Reiterate BUY with a revised TP of Rs 230 (at 15x FY21 EPS, 17x earlier). We are lowering earnings by 11% / 7% over FY20/21E to factor in lower margins. We reduce our multiple due to the slowdown in the pass car industry, which accounts for over 80% of its revenues.
SDL has ~17.1mn sqft of unsold area in ongoing projects and expects to add 10.7mn sqft from new projects in the pipeline, over the coming quarters. Whilst SDL has only 0.3 mnsqft of unsold completed inventory worth Rs 1.2bn we remain cautious on land bank addition of Rs 1.5bn during 1QFY20 (when SDL already has high unsold under construction inventory). Net D/E is expected to reduce to 1.1x by FY20E as there were delays in agreement registration in two projects, which resulted in slower collections. The contracting business is seeing good growth with an order book of Rs 22.3bn. We maintain BUY. Key risks: (1) Further deterioration in NBFC liquidity, (2) Weak order inflow in the contracting business, (3) Dip in collection momentum and (4) Any aggressive land bank addition. We maintain BUY post a stable quarter. Our SOTP-based TP is maintained at Rs 652. We have increased our EPS estimate by 2/2.1% for FY20/21E.
Upstream companies were out of flavor despite realising market price for crude oil, mainly on account of the subsidy sharing with OMCs. We expect oil prices to remain muted owing to the robust supply from US Shale. This is despite production cuts from OPEC and non-OPEC countries. Thus, there is no concern over the subsidy sharing. OIL generates OCF yield of almost 30% and divided yield of ~8.5% over FY20/21E. The current valuations are contextually lower at 2.3x FY21E EV/EBITDA and 4.8x FY21 PER. Our TP is Rs 225/sh (6x Jun-21E standalone + Rs 84 from investments). Maintain BUY. We maintain BUY on Oil India post an in-line 1QFY20. Although we do agree that there are concerns over lack of production growth for OIL, we think that the current valuations (2.3x FY21 EV/EBITDA and 4.7x FY21 PER) indicate strong pessimism.
