We initiate coverage on BANDHAN with a BUY (TP of Rs 367), UJJIVAN with a BUY (TP of Rs 356), USFB with an ADD (TP of Rs 40) and CREDAG with an ADD (TP of Rs 797). Fast growth, high return ratios, and social impact have drawn investors to microfinance over the years, despite the business being inherently risky. In the past two years, while broader credit growth has slowed considerably, microcredit growth has fared better. The microfinance sector had seen benign asset quality trends until 1QFY21. However, it had the highest proportion of loans under moratorium, and PAR 30 for the industry has started to inch up. COVID-19 may prove to be the biggest credit event in recent times. Nevertheless, we believe that certain microfinanciers prospects remain intact, and they provide attractive long-term investment opportunities
Based on our analysis, Lupin, Glenmark, JB Chemicals, & Cipla are likely to gain market share among listed players, and Mankind & USV could gain market share among unlisted players. Cardiac is the largest therapy (Rs183bn in size) in the Indian pharma market (IPM), accounting for ~13% share in it and growing at 10% CAGR. We expect it to remain a dominant therapy for the next 10-15 years and gain 300-400bps share in the same period. Taking into cognizance the importance of this therapy, we deep dive into the Indian cardiac market to identify the potential winners in this space
The nationwide lockdown impacted operations of the majority of chemical companies in 1QFY21, but the pick-up was rapid in 2Q. Plants are currently operating at the utilisation of 70-90% of the pre-COVID level. Plant utilisations of companies that cater to end-user industries engaged in essential services such as pharmaceuticals and agrochemicals are higher. Companies are continuing with their Capex plans despite the implications of the COVID-19 pandemic, owing to a positive demand outlook. Most of the companies believe that the Indian chemical industry is in a sweet spot given: (1) the opportunity arising out of 'China Plus One' policy of MNCs and the government, (2) rising domestic demand, and (3) export opportunity. We hosted a CXO-Chemical Conference-2020 and invited senior management of seven listed chemical and agrochemical companies and an industry expert.
We initiate coverage on two prominent names in these regions: Birla Corporation (BCORP, target price Rs 1,191) and Heidelberg Cement (HEIM, target price Rs 234) with BUY recommendations. Top picks- UltraTech and Ambuja (large caps), JK Cement and Birla Corp (mid-caps). We believe the north and central cement markets in India are in a sweet spot. Despite muted demand, cement prices in these regions have been buoyant, driven by troika of considerable regional consolidation, high clinker utilisation, and a limited influx of new entrants. Companies in these regions are also enjoying low input cost inflation (high PPC sales and higher usage of low cost WHRS power). We believe these benefits will continue to sweeten profitability, validating our preference for companies in these regions
At the same time, Appliance companies are seeing traction across B-C products and gradual improvement in B-B. Our thesis seems to play out for most companies, and it gives us confidence in our earnings estimates. We hosted a Consumer Conference-2020 and invited senior management of various FMCG and Appliance companies. Most companies have witnessed a sequential recovery in July, Aug, and Sep and are confident on sustaining healthy growth in the coming months, provided there are no further lockdowns. Category leaders are gaining market share by capitalising the situation. A quick resumption of production, smoother supply chain, rapid new launches, and trade-friendly strategies have supported the big players. FMCG companies have continued to enjoy traction on packaged foods, health and hygiene
We maintain BUY on ITD with an unchanged target price of Rs 68/sh, (1) given large order book (~4.4x FY20 revenue), (2) strong balance sheet and (3) bottom valuation (6.8x 2 yr fwd EPS). ITD Cementation: ITD numbers were better than expectation on account of execution beat and cost controls. Labour availability has improved to 70-80% of pre-COVID level. Order backlog is robust at Rs 126bn (4.4x FY20 revenue) aided by FYTD21 order wins of Rs 13.5bn. Besides, ITD is L1 in orders worth Rs 15bn (total order book at Rs 141bn). Although, NWC days and consolidated net debt (Rs 3bn vs Rs 1.8bn at FY20-end) have increased QoQ, balance sheet remains robust.
We increase our target price to Rs5,054 to factor gRevlimid launch in FY23 and maintain our ADD rating. Key catalysts are launch of gVascepa, approval for gCopaxone and gNuvaring. Meaningful addition: Dr. Reddys settles patent litigation with Celgene (Bristol Myers Squibb) in the US for gRevlimid (USD7.6bn). The drug is indicated for multiple myeloma (cancer). As per the settlement terms, Dr. Reddys is licensed to sell volume-limited quantity after Mar 2022 and without volume-restriction after Jan 31, 2026 subject to product approval from the US FDA. While the details pertaining to launch date and market share are not disclosed, the opportunity can add an NPV of Rs384/share to our target price in a base case scenario (assuming 5-20% market share, 30-45% price erosion between FY23-26).
We increase our EPS forecast by 7-8% for FY21/22 to factor gVascepa launch and our target multiple to 22x (from 20x earlier) to factor improved visibility in the US and API business. We upgrade Dr Reddys to ADD (from REDUCE) and increase TP to Rs4,670. The growth visibility of the US business has improved with the strong momentum of new launches (12 launches in YTD FY21) including niche ones such as gCiprodex (first to market). The dependence of gCopaxone and gNuvaring on FY22 earnings reduces with the new product flow and favourable ruling of gVascepa (now in our estimates). Structural tailwinds in the API business (15% of revenues) will lead to double digit growth over the next few years.
TOP PICKS: KNR, PNC Infra, Ashoka, Ahluwalia, Capacite Infra and KPTL. Despite concerns around COVID-19, for the Infrastructure sector, this period has been mostly Reboot-2.0. (1) NHAI awarding (FYTD21) started with a bang (about to surpass FY20); (2) the largest client NHAI eased working capital for developers; (3) banks are using surplus liquidity and low interest rates to increase allocation to the sector; (4) concerns on NHAI balance sheet seem to be abating; (5) increase in fuel cess to add Rs 1tn to fund infra annually (total Rs 2.3tn); (6) asset monetisation to lead to BS deleveraging; and (7) Atmanirbhar and NIP programs' on-ground execution lends visibility to longer duration Indian Infra buildout. We remain optimistic and see sector rerating at a 4-5x book-to-bill and sub 6/4.6x P/E for FY22/23E when peak ordering is still some time away.
As per current holdings and no scheme reclassification, this shift would lead to an outflow of ~Rs. 350bn from large caps (top 100 stocks by market capitalisation) and inflows of ~Rs. 130bn into mid-caps (next 150 stocks), and ~Rs. 280bn into small-caps (beyond the top 250 stocks). As per our analysis, these inflows would amount to ~1.2% of total free-float of mid-caps and a whopping ~7% for small-caps. SEBIs circular mandating multi-cap funds to allocate at least 25% of their AUMs in mid and small-caps each by early Feb 2021 has come as a surprise, given the large AUMs currently under the multi-cap category. We believe some of the large multi-cap fund schemes might opt to reclassify into (or merge with the existing) large and mid-caps category, given the difficulty of managing sizeable AUMs with a high proportion of relatively less liquid Indian mid and small-caps. However, this mandate would still lead to forced inflows into mid and small-caps over the next four months, especially small-caps, given the sizeable gap between existing and proposed holdings across most schemes.
We believe that the scrapping scheme will be sentimentally positive for auto financiers as it could result in up-trading. However, in the absence of details of the scheme, the impact is difficult to quantify. The government has once again initiated talks to introduce a scrapping scheme, which could be rolled as early as next month (Oct 2020). ~0.6mn M/HCVs were sold between 15-20 years old and an almost similar number in the 20-25 years bracket. In our view, the introduction of this scheme will be supportive of CV sales as the segment volumes are expected to decline to ~200K (-50% from 2019 peak), given the impact of COVID and BSVI-related transition on sales. Over the past two years, auto financiers (banks and NBFCs) have reported slowing loan growth, in tandem with falling auto sales, amidst uninspiring macro.
We estimate an FY22E adj. RoE is at 9.8%, and value GICRE at 0.7x FY22E ABV less 10% discount for an additional 10.8% stake to be sold by GoI. GIC Reinsurance: GICRE is Indias largest reinsurer but continues to make significant underwriting losses (1QFY21 COR: 112.9%). A calibrated approach to underwriting is expected to change this over FY21-23E. While we are not entirely convinced about the pathway to underwriting profitability, inexpensive valuations FY22E P/ABV of 0.5xresult in our BUY recommendation with a 9.8% lower target price of Rs 165.
In the FMCG universe, Britannia, GCPL, Nestle, and HUL (including GSK) outperformed, clocking revenue growth of 27/5/3/4% YoY respectively. Packaged Food and Hygiene products continued to witness higher demand as the rapid increase in the number of coronavirus cases kept consumers cautious. However, we expect the benefit of pantry loading to reduce and growth to normalise for Packaged Food while expecting Hygiene to continue to post strong growth. Most companies have resumed normal operations from June and witnessed the benefit of pent-up demand. Rural growth has been ahead of urban, and this trend will sustain in FY21. However, we remain cautious and selective within the sector due to the unfavourable medium-term risk-reward, given modest absolute growth relative to expectations and valuations. Despite defensive characteristics, we are underweight on the sector in our model portfolio. We recommend BUY on ITC and ADD on UNSP, Colgate and Radico. The HSIE Consumer-Index sales declined by 19% YoY in 1QFY21 (+10% in 1QFY20 and -8% in 4QFY20) as lockdown and weak sentiments continued to weigh heavily on several categories. The three-year CAGR (which normalises all base adjustments over the past three years) in 1QFY21 was +2% YoY, supported by the healthy growth in the past two years. Categories which outperformed our index in 1QFY21 are F&B;, OTC FMCG, Home Care, and Oral Care, clocking 38/33/2/-5% YoY growth. The divergence between the underperforming and outperforming categories was much sharper as consumer purchasing was largely necessity driven. Footwear, Liquor QSR and Paints categories were impacted the most, contracting by 68/58/58/46% YoY.
However, REPCO's strong capital base (CRAR at 26.1%) and comfortable funding position are (remain) positives and drive our ADD rating (target price of Rs 207, 0.7xFY22E ABV) along with relatively inexpensive valuations. REPCOs 1Q earnings were adversely impacted by a sharp fall in margins and elevated provisions. The sequential reduction in Gross Stage III was optical. Further, while the portfolio under moratorium remained sticky at ~35%, borrowers representing 8.7% of loans had not paid a single instalment since March, which was more confounding than promising, given that collection efficiency for the month was between 65-70%.
Interestingly, revenue ramp-up has been smartly executed with consistently improving unit economics, which is amply reflected in the company's steadily improving fundamentals (1) LTL revenue/dealer grew at 11% CAGR, (2) EBITDAM up 15pp+ at 14.6%, (3) cash conversion cycle halved and (4) RoICs improved from -13% to 25% over FY17-20. The pandemic-led demand destruction is likely to have the least impact (within peer set) on Indigo Paints as its exposure to big cities is negligible (Predominantly operates in Tier 2-4 cities). Making inroads into the oligopolistic paints industry remains a herculean task, given strong distribution moats of the top few. Against this backdrop, Indigo Paints (founded in 2000) has been consistently chipping away market share within the ecosystem. The company has clocked 47% sales CAGR over FY15-20 (organic growth CAGR: 40%+; relative market share has moved from near-zero to ~2.5% over FY15-20 in decorative paints).
