Downside risks: delay in resolution of Dahej (OAI) and Indrad (WL), slower growth in India and launch delays in the US. We resume coverage on Torrent Pharma (TRP) with a Buy. Torrent has re-rated substantially in the past three years on the back of strong execution particularly in branded markets. Despite rich valuation, we recommend Buy as TRP offers a solid India franchise, robust earnings growth and superior return profile which justifies the premium over peers. TRP would generate Rs56bn of FCF over FY19-22E. Our TP of Rs 2,250 is based on 15x FY22 EV/EBIDTA implying a target PE of 28x.
Key downside risks: Delay in resolution of facilities, delay in approvals; adverse outcome on drug price fixing lawsuit in US; Key upside risks: higher growth in India and EM markets, resolution of plants. We resume coverage on Dr Reddys with a Neutral rating and a TP of Rs 3,440 based on 20x FY22 EPS. With improved performance across geographies we believe the multiple is well justified. While DRL has a rich pipeline of products for the US market, approval and launch timeline for key products - gNuvaring and gCopaxone does remain elusive. Despite factoring in these launches along with sustenance of good performance in non US markets and margin expansion as per company outlook, upside is limited from current market price.
We re-iterate our Buy on Indigo as (1) The carrier will benefit from improving industry dynamics in the medium term. Air India has once again been put up for divestment by the GoI (2) Crude prices remain benign which will allow for better cost management. Efficiency gains from the Neo fleet will further benefit (3) Valuations at current levels (6.7/4.9x FY21/22E EV/EBITDAR) are undemanding. Any resolution of the ongoing dispute amongst the two promoters will lead to a re-rating of the stock. IndiGos 3QFY20 results were ahead of expectations - the demand environment improved in Nov-Dec, post a soft October, which led to the earnings beat. The revenues grew ~25% YoY due to an improvement in yields (+10 QoQ) and higher ancillary revenues (+29% YoY). We roll forward and set a Dec-21 TP of Rs 1,750 (@6x EV/EBITDAR). Maintain BUY.
PEPL is going all out (1) On building lease assets & (2) Increasing Non-South exposure with JV/JD tie ups. It's banking on the consolidation theme and picking up distressed projects in non-south markets. Large capex outlays on new lease assets will be cash flow dilutive over next 3-4yrs and requires timely funding from existing lease assets monetization and deployment of capital in cash flow dilutive under construction projects. Office assets under construction/upcoming launches of 15/25mn sqft are aggressive with overall office portfolio expected to increase from 10mn sqft to 50mn sqft over next 5-6yrs. We retain NEU with increased (new leases addition) TP of Rs 358/sh. We maintain NEU on PEPL with SOTP of Rs 358/sh (vs. Rs 348/sh earlier). We have increased our FY20/21E EPS estimates by 35%/18.9% to factor in better than expected deliveries in residential projects. PEPL posted strong 3QFY20 results.
Sonata's platformation strategy to provide IT services around IPs is yielding results. Growth in IP-led revenues is improving employee productivity and aiding margin expansion. Sonata is expanding Microsoft D365 platform and IP-led related services to new clients across verticals and geographies, which will drive growth. We like Sonata's IP-focussed business model, high RoE (~35%) and dividend yield of ~5%. The stock trades at a P/E of 11.0x FY21E, which is at 20% discount to Tier-2 IT median valuations. We expect IITS' USD revenue to grow 11.8/11.5% with margin of 23.3/23.7% in FY21/22E. Risks include deceleration in top-account, delay in collections and slowdown in US/Europe. We maintain BUY on Sonata based on strong performance in 3QFY20. IP-led strategy, strong Microsoft partnership and expansion of Microsoft D365 offerings is driving growth and aiding margin expansion in IT services business. DPS growth momentum will continue led by Microsoft and there is scope for margin expansion. We upgrade our FY22E Rev/EPS estimate by 6.1/5.1%. Our TP of Rs 422 is based on 12x (~4% premium to 5Y avg.) Dec-21E EPS.
Our estimates remain largely unchanged, even after DCBB's soft performance over 3QFY20. We model a considerable improvement in credit growth and operating efficiency beyond FY20E. These reflect our confidence in the bank's calibrated approach to growth. We expect oplev to be the biggest driver of return ratio improvement. DCBB stands to gain from an uptick in economic activity and a sustained downturn will pose a significant risk to our estimates. DCBB reported an in-line qtr and overall performance was lackluster (asset quality deterioration and slowing growth). Better cost control and a slight margin uptick were positives. MAINTAIN BUY with a TP of Rs 249.
Favourable structural changes at ICICIBC continue (better quality corporate underwriting, balance sheet retailisation and P&L fortification). While the pace of asset quality improvement may slow in the near term, as with some of its peers, the broader trajectory remains unchanged. Improving asset quality, moderating LLPs and better growth trends underpin our stance. A sustained improvement could trigger further re-rating. ICICBC reported an inline qtr across all parameters. PAT jumped on a/c of lower provisions. Reported asset quality improved slightly, as a result of higher recoveries, even as slippages saw a rise. The 8% QoQ rise in exposure to BB and below rated a/cs was not too surprising. Maintain BUY with an SoTP of Rs 587 (2.2x Dec-21E core ABV of Rs 202 and sub-value of Rs 142).
We reiterate BUY on UTCEM with a higher TP of Rs 5,600 (15x its Sep-21E EBITDA, implying EV of USD 220/MT). In our view, UTCEM deserves premium valuations for its capacity & cost leadership and balance sheet discipline. The stock currently trades at 13.3x/11.9x FY21/22E consol EBITDA and at an EV of USD 192/179 per MT. We reiterate BUY on UTCEM with a TP of Rs 5,600 (15x its Sep-21E EBITDA, implying EV of USD 220/MT).
Zensar's organic growth has slipped (~5% in FY20E vs. ~9% in FY19) due to high exposure to stressed verticals like Hi-Tech, Manufacturing and Retail. BSFI is doing well led by deals wins in Insurance and focus on large African banks. Retail performace has been disappointing and is taking longer than expected to recover. Deal pipeline is healthy at USD 1bn, ~50% of the pipeline are large deals (TCV >USD 5mn) but conversion and execution remains the key. Margin recovery target is aggressive considering the ongoing restructuring and higher onsite revenue mix. We build 7.1/6.1/6.4% Revenue/EBIT/PAT CAGR over FY19-22E. The stock trades at a P/E of 13.5/10.2x FY21/22E, which is reasonable but better growth and margin visibility will lead to re-rating. We downgrade Zensar to NEU (from BUY), post disappointing 3QFY20, growth challenges and weak execution. Deal pipeline is healthy and TCV wins have improved but not reflecting in growth. Margin recovery is slower than expected and Retail/Legacy drag is weighing on growth and margins. We cut FY22E Rev/EPS by 10.5/19.9% and reduce P/E multiple to 11x vs. 12x earlier. Our TP of Rs 177 is based on 11x (~14% discount to 5Y average) Dec-21E EPS.
Our view: The deal is negative in the near term as SILs PBT will reduce by Rs 1.2bn (at 6% income yield on Rs 21bn cash outgo) whilst new business PBT of Rs 664mn will accrue. Net basis PAT will be lower by Rs 314mn (Value - Rs 11.1bn at 35x target P/E, 1.9% Mkt cap). Over longer term with better visibility emerging on Public/Private electrification capex, improving liquidity scenario in the overall market & relative easing of global trade tensions, this acquisition will gear the company to cater to local as well as global markets. EVENT: Siemens has entered into a definitive agreement for an all cash debt free acquisition of 99.22% stake in Delhi based C&S; Electric Ltd. at an EV of ~Rs 21bn ($297 million). Revenue/PAT of the C&S; for FY2019 was Rs 12,411/329.3mn. As on Mar-19, C&S; had networth of Rs 5,100mn and total debt outstanding of Rs 2,668mn.
During FY17-19, Radico enjoyed an earnings upcycle which has moderated in 9MFY20. However, co's focus on investing in new launches, driving premiumisation and deleveraging B/S has kept the growth momentum steady. Robust cash flow generation over the last 2 years (Rs 5bn cumulative FCF) was redeployed to repay debt (Rs 3.6bn in Dec-19 as compared to Rs 7.9bn in Mar-17). We expect deleveraging to sustain, making the co debt free by FY22. Healthy cash flow and deleveraging will re-rate the stock. Radico Khaitan saw a blockbuster performance in 3Q with P&A; saw 21% volume growth (beating estimates). Liquor industry facing multiple headwinds (slowdown, flooding, liquidity stress and policy changes) in 9MFY20, despite, Radico posted 16% P&A; volume growth to 5.5mn cases. Ease in RM inflation and sustaining healthy volume should re-rate the stock. We value Radico at 22x (45% discount to UNSP) on Dec-21 EPS, arriving at a TP of Rs 527. Maintain BUY.
Key risks: (1) Delayed execution of the DFC, (2) Gateway Rail has received a circular from the DGFT, regarding the basis for availing SEIS benefits of Rs 1bn (received for FY16-18). This matter is being contested and the mgmt is confident of its stance (3) Weaker than expected economic recovery. We initiate on Gateway Distriparks (GDL) with a BUY. We expect rail volumes to grow in double digits from here on due to managements focused approach and the commissioning of the DFC over FY21-22. Further, the co is proactively exiting noncore segments/selling excess land, which will enable GDL to reduce debt by Rs 2.5bn in the near term. We set a Dec-21 based SoTP of Rs 180.
We are concerned about the loss of investor confidence which debt schemes face given significant write-downs/offs on exposures to stressed corporates. While we are hopeful of the market share re-gain, we believe the recovery will take longer than street expectations. Lastly despite our positive bias towards Nippon Life as sole promoter, increased credibility to raise HNI/institutional capital, and valuation discount (26.8% on FY21E P/E) to HDFCAMC, we retain NEUTRAL with an unchanged TP of Rs 321 (30x Dec-21E NOLPAT + cash). NAM printed a broadly in-line 3QFY20, with core operating profits of Rs 1.36bn (+24.7/0.2% YoY/QoQ, 2.3% miss). Higher other income (79.7% beat!) drove profitability to Rs 1.49bn (+36.3/21.7% YoY/QoQ, 13.8% beat).
For the AMC business, we are concerned about fund raising, and regulatory clampdown. We remain wary of increased competition in broking. Lastly, despite much of the negatives in MOHL being factored in, the business needs to display scalability. We maintain a SELL with a TP of 711 i.e. 10/20x Broking/AMC business Dec-21E EPS. Key Risks: any sharp turnaround in fund raising and broking market activity, stronger scale up and lower stress in legacy book at MOHL. Treasury income (Rs 545mn, +82.3% beat), boosted MOFS (ex-MOHL) reported 3QFY20 PAT to Rs 1.49bn (+11.0/-3.1% YoY/QoQ). However 9MFY20 core cap markets/AMC performance remains weak as PBT declined 9.9/9.0% YoY. We tweak our estimates but retain SELL (unchanged TP of Rs 711), as core profit growth remains elusive.
We reiterate that AUBANK represents the virtues of both a bank and an NBFC. The bank's ability to deliver strong operating performance across parameters in a challenging environment, (with considerable consistency, esp. over the trailing 3 qtrs) increases our confidence on RoAE improvement at the bank. However, in view of lofty valuations (6.5x Mar-21E), esp. after the recent run-up (48% since Sept-19), we downgrade the stock to NEUTRAL. While the mgt has indicated that the bank could raise CET 1 in FY21, we have not built this. AUBANKs 3QFY20 performance exceeded our estimates across all fronts. While we remain admirers of AUBANKs strong fundamentals and business potential, were compelled to downgrade to NEUTRAL, post the recent run up. TP of Rs 866 (4.75x Dec-21E core ABV of Rs 177 + Rs 23/sh for the residual AAVAS stake).
Asset quality healing and earnings improvement at AXSB have been admittedly slower than expected, however the broader trajectory remains unchanged. Largely stable NPLs and a reduction in std. stress point to this. Our constructive stance remains premised on the leadership and strategic changes at the bank, better underwriting and a healthy B/S (CRAR at 18.7% and PCR at ~59% calc.). We continue to see a steady climb in RoAAs, in spite of our conservative estimates (17% loan CAGR, ~2.8% slippages and 1.7% LLPs). Maintain BUY. AXSBs 3Q operating performance was in-line with estimates. Elevated LLPs continued, and exceeded our estimates, consequently, PAT was ~17% below expectations. While asset quality was largely stable in spite of higher slippages, the BB and below rated loan pool dipped ~18% QoQ. Maintain BUY with a TP of Rs 988(2.75x Dec-21E ABV of Rs 350 + Rs 27 for subs)
Asset quality deterioration was on expected lines, and from pre-identified stressed pools. However, we remain cautious on RBK's asset quality for the following reasons (1) 3QFY20 saw a sharp ~Rs 7bn rise in BB and below rated corp loans, (2) Recent asset quality trends reflect poorly on underwriting and risk practices , and (3) Broader economic conditions. While the capital raise is a big positive and will support the bank's growth trajectory, it does not entirely mitigate the above risks. We maintain NEUTRAL. Yet again RBKs PPOP was better than expected, due to sharp NIM improvement and one-off staff cost reversals. PAT was above estimates, even as provisions remained elevated. Slippages remained high, and were mostly from anticipated stress. Maintain NEUTRAL with a TP of Rs 348 (1.5x Dec-21E ABV of Rs 232).
LT 3QFY20 performance would have been classified as minor disappointment but for the positives on maintaining order inflow/rev growth guidance. Prospect pipeline for 4QFY20 at Rs 3tn remains robust. With LT win rate of 15% we are looking at Rs 450bn project order inflow (ex Rs 150bn services inflow). Resumption of AP orders, lifting of NCR construction ban and normalization of Mumbai coastal road project shall drive 4QFY20 revenue growth. Total slow moving orders (AP/Maharashtra, now moving into execution from 4QFY20) are ~Rs 350-400bn. NWC may have peaked at 23.5% and is likely to reduce with improving financial liquidity. LT remains a well diversified play on investment recovery. We maintain BUY. Key risks- (1) Delays in government infrastructure spend, (2) Delayed pickup in private sector spend and (3) Stressed payment cycles for government projects. We retain BUY on Larsen & Toubro (LT) despite Rev/EBIDTA miss (7.5/6%). Profit is inline, driven by lower tax rate. LT maintaining its growth/order inflow guidance vis-a-vis consensus expectation of a cut shall drive re-rating. Our SOTP of Rs 1,720 (vs Rs 1,703 earlier) is based on 22x Mar-21E EPS. Minor adjustments in execution and Mindtree consolidation has resulted in FY20/21E EPS upgrade by 0.32/0.53%.
Given the strong distribution footprint of its parent SBI (24k+ branches), improving protection share (9MFY20: 8.0%, +174bps YoY), lowest operating cost ratios (9.1%), and improving margins (VNBM: 20.5%) we expect SBILIFE to deliver strong FY19-22E VNB CAGR of 23.3% p.a. and RoEVs of ~18-18.5%. Lower than expected growth and protection share remain a key risk to our call. SBILIFEs 3QFY20 performance was a mixed bag, as NBP/APE growth was strong at 26.8/16.3% YoY; however decline in protection/NPAR share to 6.8/5.7% (-27/-573bps QoQ) was disappointing. Strong 9MFY20 adj. VNBM at 20.5% (+30bps vs. 1HFY20) compensated. SBILIFE is our top BUY with a TP of Rs 1,230 (Dec-20 EV + 25.4x Mar-22E VNB).
