Mindtree's sublime performance operationally (relative to peers) in FY21 is largely sustainable and management guided EBITDA margin >20%. Our target price is INR 2,200, valued at 24x Mar-23E EPS (14% CAGR over FY21-23E following >70% growth in FY21). Mindtree: We maintain ADD on Mindtree, following a strong 4Q (in-line), strong operational efficiency, and broad-based growth momentum. Mindtrees growth trajectory has improved recently with a balanced profile (vs. skewed historically), led by interventions to drive larger/annuity deals and recent wins such as Knauf and Nordex are validation. Although FY21 TCV is higher by ~12%, robust pipeline (at an all-time high) and expectation of strong closures in 1HFY22 will support 16% growth in FY22. The growth acceleration is expected to be led by Europe geography as well as uptick in non-T1 account (17% CAGR over FY21-23E vs. 4% CAGR over FY16-21) even as T1 is expected to grow at 10% CAGR on a high base.
We also have a BUY rating on Maruti Suzuki due to the sustained demand for PVs, given the shift towards personal mobility. After the initial outperformance by the auto stocks, the sector returns are converging with those of the broader market due to moderating domestic growth trends across 2Ws and commodity-based inflation. OEMs expect an impact of ~300bps due to the rising base metal prices, which will limit the extent of margin expansion from improving leverage (as demand normalises over FY22-23E). Amidst this backdrop, we prefer stocks that have a diversified revenue model such as Tata Motors, Bharat Forge, and Bajaj Auto.
We increase our FY22/23E EPS by +4.4/4.7% to factor in better growth visibility for FY22E. Our target price of INR 475 is based on 20x FY23E EPS (~20% discount to INFY). The stock is trading at 20.3/18.2x FY22/23E EPS. Wipro: We maintain ADD on Wipro, following a strong revenue performance and better than expected margin performance. Revenue growth of 3.0% QoQ CC was broad-based and 1QFY22 guidance of +2-4% QoQ growth indicates a continuation of strong momentum. The deal pipeline remains robust and the company won 12 large deals (Telefonica) with a net-new TCV of USD 1.4bn. Wipro clocked a total TCV of USD 7.1bn (USD 2.6bn net new) for 2HFY21, which is impressive and provides growth visibility (~4% YoY growth from new deals). Wipro under the new structure is focusing on revving the growth engine led by large deal wins, leveraging partner ecosystem and higher investments in talent. Key positives include (1) strong guidance, (2) pick-up in deal wins, (3) robust cash generation (OCF of ~137% of net income), and, (4) margin decline of only 64bps QoQ despite wage hike.
While we expect margins for even pipes companies to marginally compress QoQ, it should remain strong YoY. We maintain our BUY on Kajaria Ceramics (TP INR 1,010) and ADD ratings on Astral Poly Technik (TP INR 1,660) and Supreme Industries (TP INR 2,045). We expect tiles and plastic pipes companies to deliver strong performance YoY, aided by both base effect (COVID-lockdown had impacted 4QFY20 volume and profits) and healthy overall demand across both the segments. Tiles companies could affect some price hikes to moderate the impact of surge in gas prices on EBITDA margin QoQ. However, we expect EBITDA margin to remain strong YoY. Similarly, for pipes companies, plumbing demand has remained healthy during the quarter while rising PVC prices have impacted the price-sensitive agri demand
Growth over two years has come at the cost of deteriorating unit economics as (1) reliance on online channel continues to increase (pricing power could get compromised with time) and (2) footfalls/store have consistently reduced. All discretionary categories hit growth; devil lies in nuances: Our discretionary universe is expected to clock 27/48% revenue/EBITDA growth YoY (on a low base) in 4QFY21 as increased consumer mobility/pent-up demand in metros/Tier 1 cities helped OOH categories such as jewellery/apparel and paints. On a two-year basis, F&G; (ex-RR)/jewellery/paints/apparel (ex-RR) are expected to deliver 20/24/11/-3% CAGR. However, devil lies in nuances, especially for apparel retail.
We have a BUY rating on Crompton, and ADD rating on Havells, Voltas, TTK Prestige, V-Guard and Symphony. Pent-up demand and pre-buying driving recovery: Our coverage universe is expected to post 39/67% revenue/EBITDA growth in 4QFY21 (-13/-13% in 4QFY20 and +31/+57% 3QFY21). Ease in lockdown has driven recovery across categories. B-C demand continued to be the key driver of growth, and companies are focusing on new product launches and improving distribution reach. The early onset of summer, pent-up demand and pre-buying aided growth for cooling products. Housing activity sustained the growth for core appliance categories in 4QFY21
We continue to recommend UTIAM as our top BUY with an increased TP of INR680 (19.8x FY23E NOPLAT + cash + investments) as we roll our earnings forward to Mar'23. AMCs - buoyant capital markets to drive treasury profits: Despite net outflows of INR676bn during FY21, 4QFY21 witnessed inflows to the tune of INR109bn. Nifty-50/Nifty-200 are up just 5.1/6.1% in 4QFY21, which has driven industry equity AUM higher by 6.5% QoQ. Debt schemes witnessed outflows of INR430bn in 4QFY21 vs. inflow of INR1,451bn during the prior quarter as institutions redeem funds towards the year end. Sequentially higher equity prices are expected to boost treasury profits. We continue to monitor trends around sustained reversal in equity flows, management commentary around flows and market share.
Stronger FCF growth (54% in FY21 vs. 22% for TCS) is favourable also due to the pay-out benchmarking. We remain positive, supported by >15% EPS CAGR over FY21-23E, >40% RoIC and ~4% FCF yield. Infosys: We maintain BUY on Infosys (INFY), based on strong growth visibility for FY22 (despite the 4Q revenue miss on offshore impact). INFYs net-new large deal wins of USD 9.3bn (vs. total large deal wins of USD 9bn in FY20) provide high probability to achieve (and outdo) the guided 12-14% CC growth for FY22. Although 4Q deal wins declined sequentially (owing to Daimler deal in 3Q21), net-new large deals were up 19% YoY and digital continues to accelerate >30%, supported by offerings such as Infosys Cobalt. While the supply side metrics are concerning (uptick in attrition/sub-con), large client metrics (USD100mn+) have outperformed peers. 20% higher fresher intake (gross) planned for FY22 will support the demand fulfilment beyond FY22
We believe companies with higher revenue mix from rural will continue to benefit, although urban recovery will also play a key part in driving growth. Despite the recovery in MT, E-comm and GT have sustained their growth momentum. Companies with a strong presence in E-comm and diversified offerings are expected to outperform. FMCG sector has underperformed Nifty by ~35% in last 1 year, and we see a balanced risk-reward for the FMCG sector for FY22/FY23 with earnings led stock returns. Rich valuations and modest earnings growth profile leaves limited scope for PE re-rating. Aggregate revenue/EBITDA to grow by 19/26% YoY helped by base: Our FMCG coverage universe is expected to deliver growth of 19/28% YoY in revenue/ EBITDA (ex-GSK, 16/23%) in 4QFY21 (vs. -6/-9% in 4QFY20 and 10/5% in 3QFY21) with a QoQ growth of -3/+2%. Recovery in demand continued across segments. Increased mobility of consumers drove the demand for discretionary categories like discretionary PC, QSRs and beauty soaps, while health and hygiene categories saw growth moderation. Demand from metro cities and urban areas continued to improve and is likely to be a key monitorable over the next few months in wake of new partial lockdowns. Urban channels like MT saw gradual recovery. Rural and e-commerce demand continued to drive overall growth
Recommendations and stock picks: From a near to mid-term perspective, the government would drive ordering, and private Capex/opex will be late-cycle recovery. Hence, recovery plays with high government exposure will remain in focus. In capital goods, LT and Cummins India is our top pick. In the mid-cap space, KPTL, KNR, PNC, HG Infra, NCC, Ashoka Buildcon and Capacite are our top picks. Ordering tailwinds in place: Unexpectedly, FY21E was a year of all-time high ordering by NHAI and other state/Central government agencies. The road ministry awarded close to Rs 1.4trn (vs. Rs 0.5trn in FY20) of new highways projects and media reports suggest FY22E roads awarding target at INR 2.2trn. Some of the mega projects awarded during FY21E include high speed rail and barmer refinery. Besides these, water projects under rural water were awarded to the tune of INR 450bn in UP alone. With the central election coming up in 1QFY25E, we expect strong ordering ahead of the elections in FY22/23E. The next two years may see robust ordering for the sector.
Recommendations and stock picks: Whilst the sector may see near-term headwinds, the long-term story remains intact. We continue to believe that Tier 1 developers will gain market share, given buying preference for reputed developers in under construction projects. There would be some resurgence in select Tier 2 developers who have strengthened their balance sheets during FY21E, taking benefit of ready to move in inventory sales. We remain positively biased towards the sector. Top picks: DLF, Oberoi Realty, Phoenix Mills and Mahindra Lifespaces. Second wave of COVID-19 to prolong recovery: As all was going well, the emergence of stronger/infectious COVID-19 second wave may postpone the recovery in real estate to 2HFY22E. Our channel checks with brokers suggest that festive season launches have been postponed to second half as various key cities see increase in COVID-19 cases and respective governments are taking the partial lockdown route to break the infection chain which resulted in slowdown in site visits and footfall. Buying decisions may get postponed until the situation improves. Whilst pandemic fears persist, the macro environment still remains robust with supply shrinkage, stable demand, low interest rates, pent-up demand, economic easing, and strong IT/ITES sector. New launches may help sustain the momentum as pent-up demand fades out.
The rising disposable income will lead to a shift in consumer preferences towards premier products. There will be a shift in consumption from commoditised products towards premier products across all industries. Imports meet a large part of the domestic demand for speciality and downstream chemicals, offering much headroom for growth in local production We hosted a Chemical Investor Forum-2021, and invited senior management of six listed chemical companies. Despite economic challenges that caused GDP growth rate to drop to negative and it is still lower than pre-COVID level, the long-term outlook is that it will be in the higher single digit. This bodes well for the Indian chemical industry and we expect it to grow at the rate of 1.5x GDP growth rate. The catalyst for this is rising income, China Plus One Policy of MNCs and government policy of Aatma Nirbhar Bharat.
The rising disposable income will lead to a shift in consumer preferences towards premier products. There will be a shift in consumption from commoditised products towards premier products across all industries. Imports meet a large part of the domestic demand for speciality and downstream chemicals, offering much headroom for growth in local production We hosted a Chemical Investor Forum-2021, and invited senior management of six listed chemical companies. Despite economic challenges that caused GDP growth rate to drop to negative and it is still lower than pre-COVID level, the long-term outlook is that it will be in the higher single digit. This bodes well for the Indian chemical industry and we expect it to grow at the rate of 1.5x GDP growth rate. The catalyst for this is rising income, China Plus One Policy of MNCs and government policy of Aatma Nirbhar Bharat.
The rising disposable income will lead to a shift in consumer preferences towards premier products. There will be a shift in consumption from commoditised products towards premier products across all industries. Imports meet a large part of the domestic demand for speciality and downstream chemicals, offering much headroom for growth in local production We hosted a Chemical Investor Forum-2021, and invited senior management of six listed chemical companies. Despite economic challenges that caused GDP growth rate to drop to negative and it is still lower than pre-COVID level, the long-term outlook is that it will be in the higher single digit. This bodes well for the Indian chemical industry and we expect it to grow at the rate of 1.5x GDP growth rate. The catalyst for this is rising income, China Plus One Policy of MNCs and government policy of Aatma Nirbhar Bharat.
We also initiate on Sagar Cements (BUY, TP: INR 1,082) enthused by its prudent growth, diversification beyond south market and healthy Opex controls. Post the sharp run-ups in stock prices, we downgrade Shree Cement and Ramco Cements to REDUCE (from ADD rating earlier). Top picks: Ambuja, Dalmia in large-caps; Birla Corp, JK Lakshmi and Sagar Cements in mid-caps. In this report, we highlight long-term trends that are likely to drive the cement industry over the next few years - (1) brighter demand outlook, (2) continued consolidation - as bigger players accelerate capacity additions, (3) industrys continued efforts towards reducing its clinker factor and increasing productivity of WHRS, (4) business agility in the form of exploring multiple fuel sources to optimize cost and the industrys ability to manage its fixed costs. In our view, these will support the industry to maintain its multi-year high margins, and support its valuation re-rating. We expect robust 4QFY21E performance by the industry (aggregate EBITDA to rise 12/35% QoQ/YoY).
We also initiate on Sagar Cements (BUY, TP: INR 1,082) enthused by its prudent growth, diversification beyond south market and healthy Opex controls. Post the sharp run-ups in stock prices, we downgrade Shree Cement and Ramco Cements to REDUCE (from ADD rating earlier). Top picks: Ambuja, Dalmia in large-caps; Birla Corp, JK Lakshmi and Sagar Cements in mid-caps. In this report, we highlight long-term trends that are likely to drive the cement industry over the next few years - (1) brighter demand outlook, (2) continued consolidation - as bigger players accelerate capacity additions, (3) industrys continued efforts towards reducing its clinker factor and increasing productivity of WHRS, (4) business agility in the form of exploring multiple fuel sources to optimize cost and the industrys ability to manage its fixed costs. In our view, these will support the industry to maintain its multi-year high margins, and support its valuation re-rating. We expect robust 4QFY21E performance by the industry (aggregate EBITDA to rise 12/35% QoQ/YoY).
We expect a revenue/EPS CAGR of +22/15% over FY21-23E, following a strong operating performance in FY21E (profit doubled). We initiate coverage on IndiaMART with a BUY rating and target price of INR 9,400, based on 58x EV/EBITDA (DCF implied) at 1.4x the average multiple, supported by top quartile growth/margin performance, high-quality franchise, asset-light business model, negative working capital, robust cash generation (154% OCF/EBITDA) and RoE of 58% (FY21E adjusted for QIP). IndiaMART InterMESH (IndiaMART) has emerged as a winner in the B2B classified space with a 60% market share and 27% revenue CAGR over FY16-20. The quality of the franchise is established by (1) 100% organic traffic, (2) buyers and business enquiries 5-year CAGR of +33/40%, (3) lowest advertisement spend among peers, (4) pricing power, (5) higher ROI for sellers (~2x), (6) and embedded non-linearity. IndiaMART is well placed to ride the digitisation wave in MSMEs (accelerated by the pandemic), enabled by strong network effect, robust technology platform, and excellent execution capabilities. There lies a multi-year growth opportunity as only ~1% of the addressable MSMEs pay for listing services vs. ~4% in China (1688.com Alibaba B2B).
Our target price of INR 3,470 is based on 28x Mar-23E EPS with EPS CAGR at 17% over FY21-23E. Tata Consultancy Services: We maintain ADD on TCS, following a strong 4Q performance, robust growth indicators, and positive commentary (3-5 years structural growth drivers). The near-term growth visibility is high, supported by strong bookings (4Q book-to-bill higher than FY20 and 9MFY21 book-to-bill) and higher mix of smaller deals. We believe TCS calibrated focus on upstream/consulting business will increase its addressable market. The industry-leading execution continues with markers such as decline in attrition (though uptick in sub-con), reversion to normal wage cycle, and investments in up-skilling (enabling partnerships, solution expertise). TCS commentary on supply-side (no concerns) was a contrast to Accentures commentary (reversion of attrition to pre-COVID level), and we believe that the uptick in demand will increase the attrition differential within the sector. Core verticals look healthy with strong bookings in BFSI and Retail & CPG (both in value and volume terms).
Our FY22/23E estimates for our coverage remain relatively unchanged, despite the rapidly strengthening second wave of COVID-19 cases in India. This reflects our belief that our current estimates around credit growth and asset quality already factor in potential speed bumps on the path to recovery. Further, sustained fiscal and monetary policy support and the unexpectedly sharp (at the time) recovery in economic activity over 9MFY21 suggest that the potential fallout of slowing real economic activity on the financial system is unlikely to be material. We expect our coverage universe to clock a sequential PPOP growth of ~10% on the back of improving business traction. With the SC-imposed standstill on NPL recognition lifted, lenders should report a significant rise in slippages and GNPAs. We expect incremental provisions to moderate sequentially across our coverage universe, with lenders having built significant provision buffers during 9MFY21. We expect sequential improvement in business traction in line with rising economic activity.
GAIL, Gujarat Gas and GSPL are our top picks amongst the gas companies. City gas distribution (CGD) companies are expected to deliver robust volume growth in near term. The business was impacted owing to pandemic in 1HFY21. However, the companies have now moved into growth phase from the earlier recovery phase. For most of the CGD companies, overall volumes are more than pre-COVID level and expect to grow at more than 10%. The volumes of D-PNG and industrial customers are higher than pre-COVID level while CNG and commercial segment volumes are still lower than the pre-COVID level. The management expects volumes for CNG to reach the pre-COVID level with increase in mobility and rising private car conversions.
