While volumes continue to increase deteriorating mix, and increased competition is expected to keep yields down. Distribution revenues have bottomed out. ISEC is rapidly building loan assets which will drive earnings in the near term. All the above, along with new initiatives and cost control will drive earnings at FY20-22E CAGR of 17.9%. Our rating on ISEC remains a SELL, despite us raising target multiple to 18x (PEG=1), increasing our TP to Rs 435. Our TP implies a FY19-31E APAT CAGR of 17.3%. Risks: Uptick in equity markets coupled with increased retail participation. We attended ISECs sell side analyst day and were impressed by the strong client franchise, innovations and focus on adding value propositions (apart from pricing) for customers. While we appreciate the fundamental strength of ISECs business model, we believe valuations at FY21E/22E P/E of 23.5/20.8x are stretched. We rate ISEC a SELL with TP of Rs 435 (18x FY22E EPS).
SBI Cards and Payment Services Ltd IPO Note Issue Open: March 02 March 04, 2020 (for QIB Bidders) and March 02 to March 05, 2020 (for others), Price Band: Rs. 750 755 (Discount for Employee: Rs.75/- per Share), Issue Size: 137,149,315 eq shares (Fresh issue 6,622,517* + Offer for sale of 130,526,798 eq sh)
Top Picks: KNR , PNC, HG Infra, Capacite & Ahluwalia We hosted the 3rd Annual Infrastructure Investor Forum in Mumbai with 9 corporates participating in the event. The participating corporates were across the spectrum of (1) Transportation Sector (Ashoka Buildcon, HG Infra, JMC Projects, KNR Construction, PNC Infratech, Sadbhav Engineering), (2) Buildings segment (Ahluwalia Contracts, Capacite Infraprojects), (3) Power T&D; (KEC International).
However, we expect 4Q realization to be flattish YoY in Maharashtra and lower in south (-7%) and east (-4% YoY) markets, hit hard by weak pricing in 2Q/3Q. North-east prices are 3% higher YoY in 4Q, as per our checks. Thus, companies with large exposure to north/Gujarat/central markets will continue to enjoy realization tailwinds in 4QFY20. Our pan-India dealers check suggests that cement demand and prices have improved across India during Jan/Feb 2020. This has helped cement prices to cumulatively increase by ~Rs15-30/bag during these two months (higher recovery in East). These suggest strong pricing to sustain across North/Gujarat/Central markets (+7-14% YoY in 4QFY20).
We believe over a longer term the Indian API industry would stand to benefit as regulators encourage investments and incentivise the API industry to reduce dependence on China. Also, the cost arbitrage has narrowed between Indian and Chinese manufacturers given stricter environmental and compliance regulations in addition to increased labour cost in China. Q3 results reaffirms stable base business outlook for the US (for last 6 quarters) and strong trends for domestic formulations business (double digit growth at 11% for covered companies vs 9.5% for IPM). R&D; spends remain calibrated at 7.8% of sales (vs 9%+ in FY17/18) and EBIDTA margins improved 30bps QoQ. We forecast revenue/EPS CAGR of 9%/15% over FY20-22e for our covered universe. Torrent and Cipla are preferred Buys.
We like ACEM for its healthy margin profile and cashflows. Upcoming expansion will arrest market share loss. We maintain BUY with an SOTP based TP of Rs 245 (implies EV of USD 145/MT). We value ACEM's standalone cement biz at 11x its Mar'22E EBITDA and its 50% stake in ACC at 20% holding disc. We value ACEM at 20% disc to its 5-yr mean EV/EBITDA (and in-line ACC's val) for its continued market share loss amid lack of major expansions in past. We maintain BUY on Ambuja Cements with a TP of Rs 245 (SOTP based). In 4QCY19, ACEM reported healthy volume growth and margin expansion (though EBITDA came in 7% lower vs our est). Standalone net sales/EBITDA/APAT rose 10/36/28% YoY to Rs 31.36/5.47/3.33bn resp. ACEM also closed CY19 with record high OCF.
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).
