For BPCL, core GRMs are expected to improve further by USD 0.5 to 1.0/bbl by FY22E on account of gradual increase in share of heavy and cheap crude at its Kochi refinery.Additionally, restoration of marketing margins as elections have concluded is a key positive. Our SOTP target is Rs 434/share (5.5x Jun 21E EV/e for standalone refining, 6.0x Jun 21E EV/e for marketing, and pipeline business and Rs 129/sh for other investments). Maintain BUY. Inventory losses and shutdown of BPCLs refinery has resulted in a muted 1Q performance. However, we maintain our BUY owing to its impeccable refining assets and healthy free cash flows (Rs 66.55bn) over FY21-22E.
HG delivered an inline performance during 1QFY20. The NWC days remained stable at 100 as Rajasthan State project contributed 38%/33days to debtor days. HG expects to realize it soon and revert to 60-65days of NWC. About Rs 23bn of orders will move into execution from 3QFY20-end, leading to a strong pickup in revenue from 2HFY20. The EPC bid pipeline is robust (HG plans to bid for ~Rs 500bn in EPC and selectively in HAM, post FC of 2 HAM). HG has received term sheet for 2 HAM projects and FC will get announced in Sep-19. We maintain BUY. Key risks (1) Slowdown in NHAI ordering; (2) High interest rates; and (3) Delay in appointed dates for HAM. HG Infra reported Rev/EBIDTA/APAT beat of (8)/(6.1)/0.1% vs our estimates. Higher EBIDTA margins (+30bps vs estimate), stable interest cost/depreciation resulted in inline profits. We maintain BUY on HG with SOTP of Rs 462/Sh, valuing the EPC business at 15x FY21E EPS.
We downgrade to SELL and lower our PE multiple to 12x (14x earlier) to factor in the challenging demand environment. (1) The domestic CV sales cycle is expected to remain weak, with the pre-buy having a limited impact over 2HFY20 (2) While the company's expansion into new markets/segments is expected to contribute towards incremental volumes, the demand outlook in the US is softening as new order intake has been weak over the year. The export volumes will be increasingly at risk over FY21E. In 1QFY20, Ramkrishna Forgings EBITDA margin at 19% (-200bps YoY) fell to multi quarter low. We expect the domestic demand environment to remain weak. Also, the new order intake for Class 8 trucks remains muted in the US. Downgrade to SELL with a revised TP of Rs 380 (at 12x FY21 EPS, 14x earlier). We lower our earnings estimates by 29/20% for FY20/21 to factor in the above.
BRIT has driven profitable growth in the last few years. However, weak macros and consumer sentiment pose challenges. Also, ICD exposures raise corporate governance concerns, even as they have declined in a quarter by ~30% to ~Rs 5bn (management guided for a capping at current levels). The stock has corrected ~20% since our downgrade (Jul-18). We are admirers of the brand equity, strategy and management execution and like its focus on expanding the addressable market (total snacks co.), but await concrete evidence for an upgrade. BRIT reported a dull show, mostly owing to weak macros. Modest volume growth and a sharp rise in costs led to negative oplev. EBITDA stagnated. BRITs plan to accelerate growth via new launches (~4% of rev.) has hit a speed bump. While management may keep a tight lid on costs hereon, 1HFY20 performance will be weak. 2H holds some hope. Our estimates fall ~5%; we have cut target P/E to 40x (vs 45x) on account of BRITs moderating trajectory. Our TP is Rs 2,674. Maintain NEUTRAL.
Increased profitability along with slower capex pace should keep JKLC's net D/E at comfortable levels (below 1x). Post recent corrections in its stock price, JKLC's valuations are attractive: 7.5x FY21E (EV of USD 69/MT). We thus, upgrade to BUY with TP Rs 381/share. Key risks: Weak future capex execution (as in past) will impact its volume growth visibility, sharp pull back in cement prices. We upgrade JK Lakshmi (JKLC) to BUY (from Neutral earlier), with SOTP based TP of Rs 381 (Standalone at 8x FY21 EBITDA, its 71% holding in Udaipur Cements at 20% disc and ascribe 50% value to FY21E CWIP). Our TP implies EV of USD 81/MT.
SRCM currently trades at 15.6x FY21E EBITDA and EV of USD 229/MT. Despite ascribing premium multiples 15x FY21 EBITDA for its industry leading growth, cost and profitability leadership along with low capex requirements, the stock looks fully valued. Retain NEUTRAL. We retain NEUTRAL rating on Shree Cement (SRCM) with SoTP based TP of Rs 19,200 (Cement/power businesses at 15/5x FY21E EBITDA, and UAE subsidiary at 1x BV). Our TP implies cement EV of USD 215/MT.
As the domestic NG ecosystem (CGD network, re-gas terminals, pipeline connectivity, revamp of fertiliser plants) develops, India could derive maximum benefit of LNG prices. Given GAIL's dominant position in India's gas pipeline network, its gas transmission business is likely to remain in a sweet spot. New US liquefaction terminals will not only boost RLNG exports but also keep Henry Hub (HH) prices subdued, enabling GAIL to swap cargoes. Thus, US LNG is not a stress point. Our SOTP target is Rs 201 (7.5x Jun-21E EV/e for the stable Gas and LPG transmission businesses, 5.0x EV/e for the volatile gas marketing business, 6.5x EV/e for the cyclical petchem and LPG/LHC businesses, Rs 36 for investments and Rs 12/sh for CWIP). GAIL reported a stable 1QFY20 led by improved profitability in gas transmission and trading segments albeit a dismal show by petchem owing to a planned shutdown. Maintain BUY.
We had downgraded Divi's after it reported one of its strongest quarters in a decade in 2QFY19, as we had realized that the performance was driven by shortages in certain molecules (like Valsartan) and currency erosion of ~10% during that quarter. For the last 2 quarters, our thesis of margin contraction is playing out and we have further cut our FY20/21E estimates by 8-9% as we are yet to see the impact of ongoing capex. We believe it would be a challenging task for Divi's to cross 36-37% margin in FY20/21E. Still, with our generous estimates of 11/10/11% revenue/EBITDA/PAT CAGR over FY20-21E, Divi's is trading at 32.3/27.7x FY20/21E EPS, a ~50% premium to peer-avg and ~40% above its historical avg, much of which corresponds to periods of 40% plus return ratios. Even so, valuations have rarely crossed 25x one-year forward P/E. With return ratios falling below 20%, current valuations look unsustainable. We maintain SELL on DIVI, following a second consecutive quarter of dismal performance. With sustained erosion in profitability, we have cut our FY20/21E EPS estimates by 8-9%. At 22x FY21E EPS, our revised TP is at Rs 1,320.
Current asset quality trends are inspiring, amidst a bleak landscape. Increasing granularity will only help. Oplev (key to our anticipated RoAA expansion) has kicked in recently and is sustainable, in our view. Valuations are rich, but likely to persist so long as asset quality and growth hold up. Maintain BUY. Our SOTP-based TP is Rs 725 (4.75x Jun-21E ABV of Rs 148 + Rs 19/sh for AAVAS). Our recent interaction with the top management of AUBANK, at their first analyst day, bolsters our constructive stance. Managements intent to eventually convert into a full-fledged bank, via granular growth, was visible (AUBANK has to remain an SFB for at least ten more quarters). A book accretive fund raise is likely (though not immediately).
Our constructive stance on INDOSTAR is driven by increasing retailisation and opportunistic caution on the corporate segment. Indostar's talent is unquestionable, but it faces a severe reality check. We've adjusted growth and LLP assumptions to reflect macro stress, resulting in a ~13% earnings cut. Lumpy stress and losses in the RE book are not ruled out. These, and systemic liquidity issues, pose further risk. In spite of striking asset quality deterioration and an earnings miss, we maintain BUY on INDOSTAR with a TP of Rs 506 (1.5x Mar-21E ABV). Worse than expected asset quality outcomes appear to be priced in.
