Gateway Distriparks: In 3QFY21, Gateway Distriparks' (GDL) EBITDA margin expanded 150bps QoQ to 26.3% and interest costs reduced to Rs 177mn (-18% QoQ) as the company deleveraged its balance sheet. This led to a significant PAT beat (Rs 327mn vs 40mn QoQ). The management has provided an upbeat outlook. In Sep-20, we upgraded Gateway Distriparks to BUY, given the company's improving fundamentals. We raise our FY22/23 estimates by ~6%. Maintain BUY with an SOTP-based target price of Rs 165, at 9x FY23E EV/EBITDA for the rail business. ICICI Lombard: While FY21E is expected to be a muted year in topline growth, ICICIGI is expected to deliver lower CORs. Lower COVID-19 cases and vaccination make us incrementally positive on the health segment. Additionally, changing motor regulations are expected to drive down both claims and tariffs, creating supernormal profitability in the short term. We believe that this period (of supernormal profitability) will be shortlived, as we expect IRDAI to restrict TP pricing growth, thereby limiting profitability. We believe the market is not factoring in this risk; accordingly, we rate ICICIGI a REDUCE with a revised target price of Rs 1,230 (DDM derived Sep-22E P/E of 27.9x and a P/ABV of 5.4x). IRB Infra: IRB reported stellar 3QFY21 with revenue at Rs 15.5bn, beating our estimate by 15%. The outperformance was driven by 32% QoQ recovery in toll collections and improved EPC execution with 41.5% QoQ growth. There were no new order wins during the quarter. The company registered a profit of Rs 695mn, 37% beat. While toll collection...
Indigo Paints - IPO Note Indigo Paints Ltd (IPL) the fifth largest company in the Indian decorative paint industry in terms of revenue from operations for Fiscal 2020 and the fastest growing amongst the top five paint companies in India.
Our target price is Rs 1,735, valued at 20x Dec-22E EPS (13% CAGR over FY21-23E following ~70% in FY21). Mindtree: We maintain ADD on Mindtree, following broad-based growth (a second successive quarter of non-T1 growing ahead of T1) and a stellar 3Q operational performance (offshore + utilisation led). Margins have increased an astounding 13pp since the pre-COVID trough and management expects the >20% EBITDA to continue. Growth accelerated beyond the T1 account as deal TCV was a robust USD 312mn (9MFY21 TCV at >USD 1bn up 20%). While Travel & Hospitality vertical bounced back, it is still ~45% off the 4Q levels. The BFSI vertical performance was soft (relative to larger peers), but the narrative changes in Tech & Media vertical and CPG, Retail & Mfg with greater than mid-single-digit sequential growth. The near-term growth outlook remains positive and blends well with the favourable operational outcome of the strategic initiatives (annuity, partnerships, tail rationalisation and re-skilling focus).
We have raised our FY22/23E earnings estimates across our coverage by 12.0/13.1%, as we forecast a sustained improvement in metrics around growth, credit losses and margins. However, we also remain sanguine of the imminent reforms in the regulatory, supervisory and governance architecture of large NBFCs (and HFCs). Our coverage universe is likely to clock a 3.4/1.9% sequential growth in NII/PPOP. As with banks, GS-III will be of little relevance in light of the SC stay and the focus will be on pro forma metrics. On a sequential basis, NBFCs (including HFCs) are likely to see margins reflate on the back of a fall in funding costs and lower drag from excess liquidity buffers. Disbursals are likely to rise materially, on a QoQ basis, as underlying asset sales revive in line with economic activity.
Our target price is Rs 1,110 at 18x Dec-22E (15% EPS CAGR over FY21-23E). HCL Technologies: We maintain BUY on HCL Tech (HCLT), based on solid 3Q and a strong outlook across multiple growth vectors. Large deal momentum (>13% YoY and 13 transformational deals >USD25mn TCV in 3Q) and pipeline at nearly an all-time high (many USD 200-300mn deals) supports the growth outlook. Operational highlights include offshore-led improvement in ER&D; and IT & Business services margins and continuity in strong cash generation with OCF/EBIT at 114% (119% in 2Q). P&P; business traction (>14,000 customers 6,000 sales transactions across new and renewals) is expected to continue (beyond 4Q weak seasonality), supported by new product releases (15+ in 3Q), strong deal activity (USD 91mn net new license bookings) and more cross-sell/up-sell transactions across products/services. The absence of large acquisitions and subsequent accretion to FCF/payout are upside risks to valuations.
We believe that this would be positive for companies such as CONCOR and Gateway Rail, while roadways will be impacted, which could impact demand for new trucks in the medium term. The Indian Railways (IR) is targeting to increase its market share from the current ~28% to 44% in the longer term (FY51) as per the National Rail Plan (NRP) document released recently. The IR has set near-term targets of 33% in 2026, 39% in 2031, 43% in 2041 and 44% in 2051. We believe that the IR has carried out detailed work in assessing these market share targets (which was released in their 1,178 pages document). Under the base case of the railways, it proposes to double the speed of trains to 50kmph gradually and reduce tariff on selected commodity items by 30%. IR is projecting Container tonnage to increase from 54MT to 234MT over FY18-31 (CAGR of 12%).
Top picks are Alkem, Aurobindo, Cipla and Lupin We like Alkem (the best play on acute recovery), Aurobindo (building complex pipeline, Covid upsides), Cipla (strong India franchise, inhalers monetisation) and Lupin (chronic focused portfolio, inhalers, operating leverage). We see several growth catalysts across key markets and product categories (inhalers, biosimilars, complex injectables) playing out over the next 2-3 years for Indian pharma companies. The investments made over the last few years leave them well placed to capitalise on these opportunities. With cost bases pruned and operating leverage benefits, the sector is poised to grow at ~21% earnings CAGR and witness ROCE improvement of 430bps to 15% over FY20-23e. This, coupled with strong balance sheets (near debt-free), should support valuations, in our view. BSE HC Index has outperformed Nifty by ~47% in the past one year and trades at ~29x 1-yr forward, ~30% above its historical average and ~22% premium to Nifty (vs. 10-yr average of 31%).
Despite benign expectations for 3QFY21E, we raise our FY22/23E earnings by 7% and 10% for our coverage universe, reflecting: (a) lower-than-anticipated eventual loan losses from COVID-19, (b) better-than-expected growth impulses accruing to large private sector banks, (c) reversal of the drag from unwinding of large liquidity buffers, and (d) gradual return of business volume-led pricing power. Our cumulative credit cost forecasts (FY21-23E) have eased by ~130bps for our coverage universe, reflecting this optimism. However, we remain conservative, relative to broader consensus estimates. Any incremental narrative, which suggests better-than-expected growth and asset quality outcomes, poses an upside risk to our forecasts. Our banking coverage universe is expected to clock negligible QoQ growth in NII and PPOP in 3QFY21E, on the back of sequentially flat NIMs and a gradual volume-driven rebound in opex and fee income. Against the backdrop of an in-force SC stay on marking of NPAs, we believe that investors will focus on pro-forma GNPAs, trends in collection efficiency and the likely restructuring pipeline. Incremental provisioning is likely to moderate at AXSB and ICICIBC, which have already built significant buffers; while small and mid-sized private banks are likely to continue witnessing elevated provisions.
Wipro: We maintain ADD on Wipro, following a strong revenue performance (the best in nine years) and better-than-expected margin performance. Revenue growth of 3.4% QoQ CC was broad-based and 4Q growth guidance of +1.5-3.5% indicates continued growth momentum. The deal pipeline remains strong and the company won 12 deals of TCV greater than USD 30mn. The total TCV stood at USD 1.2bn, which includes Metro AG (TCV of USD 700mn). Wipro under the new structure will be more agile and will focus on accelerating growth, supported 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 ~149% of net income), and, (4) 246bps QoQ improvement in IT services margin. We increase our FY22/23E EPS by +6.6/6.3% and target multiple to 20x (vs. 18x earlier) to factor in better growth visibility. Our target price of Rs 470 is based on 20x Dec-22E EPS (~20% discount to INFY). The stock is trading at 23.2/20.8x FY21/22x EPS Infosys: We maintain BUY on Infosys (INFY), following a strong 3Q print (best 3Q in 8 years) and the highest-ever deal wins translating into growth leadership in tier-1 IT. TCV of large deal wins (including largest-ever Daimler deal) stood at USD 7.1bn (net new TCV at USD 5.2bn). Growth in 3Q was led by NorthAm-BFSI (Vanguard ramp-up), E&U;, Life sciences vertical and NorthAm-Manufacturing/Communications. INFY scores high on growth visibility based on a staggering 3.5x growth in 9MFY21 net-new large deal TCV over the...
3QFY21 Outliers: Havells, Crompton and V-Guard Pent-up demand driving recovery: Our coverage universe is expected to post 15/27% revenue/EBITDA growth in 3QFY21 (-2/-1% in 3QFY20 and +8/+30% in 2QFY21). Easing of restrictions across the country and the lower number of COVID cases lifted sentiments, leading to a revival in demand. Companies are seeing the benefits of pent-up demand from 1HFY21 and revival in housing activities that are driving B-C products. GT and e-comm have been sustaining robust growth while MT remained slow due to weak footfalls. Continued work from home is driving demand for large home appliances. Recovery in semi-urban and rural markets was quick while the recovery in metros remains gradual. We expect the urban recovery to gain pace over the next few months. Category leaders have been continuing to gain market share, and top 5 players of most categories are further strengthening leadership
Pent-up wedding demand + stable gold prices to aid fresh purchases: Pent-up wedding demand and stable gold prices is likely to aid fresh purchases. Value growth continues to lag volume growth courtesy elevated gold prices (+30%). Most big-box jewellers' sales are expected to grow by 5 to 15% in 3Q (channel checks). Assessing ex-pent up demand remains key. Revenue pick-up and costrationalisation to ensure margins hit near pre-COVID levels. Ex-apparel all categories pivot to growth: Ex-apparel, all consumer discretionary categories are likely to pivot from recovery to growth phase. Our universe is expected to deliver 9% YoY growth. We expect 15% agg. growth (ex-Apparel). While Apparel lags the discretionary pack, recovery remains encouraging, with most hitting 70-80% of base quarter sales. Ticket sizes, though normalising remain elevated from pre-COVID levels; ergo footfall recovery yet has some catching up to do. Losses are ebbing for apparel retailers, but this improvement continues to hinge on multiple crutches 1. Over-reliance on online platforms and rental concessions.
Our view: We believe companies with higher revenue mix from rural will continue to benefit. Ecomm will continue to gain pace as consumers remain wary about venturing into crowded MT stores. Hence, companies with a strong presence and diversified offerings in e-comm will do well. We expect recovery in categories like Liquor and QSR to continue to be strong, driven by easing of restrictions and strengthening demand for home delivery. FMCG sector has underperformed Nifty by ~20% in the past six months, and we see a balanced risk-reward for the FMCG sector for FY22/FY23 with earnings led stock returns. Aggregate revenue/EBITDA to grow by 8/7%: Our FMCG coverage universe is expected to deliver growth of 8/7% YoY in revenue/ EBITDA (ex-GSK, 6/6%) in 3QFY21 (vs. 5/8% in 3QFY20 and 7/5% in 2QFY21). Recovery in demand continued across segments as easing of restrictions lifted sentiments. Discretionary categories like personal care, OOH, liquor, and tobacco, which were laggards in 1HFY21, saw healthy recovery. However, growth for categories like packaged foods, essentials and hygiene segments witnessed moderation, while growth in healthcare continued to remain healthy. Despite the reduced growth divergence within categories, the divergence between urban and rural recovery continued to remain significant. Rural demand was the key driver of growth across channels and categories. However, we expect the divergence in demand to continue normalising and urban to bounce back, going forward. Categories like hair care and discretionary personal care saw a recovery, which was driven primarily by the value segment. While MT improved QoQ, growth momentum sustained for...
Downgrade GPL to REDUCE, Brigade to ADD, Prestige Estates to ADD: We downgrade GPL to REDUCE as believe that new launches by other Tier 1 developers will dent market share gains for GPL whilst valuation remains punchy at 65% premium to NAV. We downgrade Brigade to ADD on limited opportunities for it beyond Southern India and Prestige Estate to ADD as it enters new Capex cycle. We maintain BUY ratings on all other stocks with increased NAV. Top picks: DLF, Oberoi Realty, Phoenix Mills, Kolte Patil and Sobha Ltd. Pandemic triggered broad-based recovery: Contrary to the expectations of adverse impact on the sector, given prolonged lockdown, liquidity crisis, and limited government ammunition for fiscal incentives, real estate recovery has surprised positively. While the sector as a whole continues to see muted growth, the pandemic has accelerated market share gains for branded Tier 1 players. The entire ecosystem viz. landowners, financiers, suppliers, buyers and contractors are all backing the organized segment, and on the other side, challenges remain for Tier 2 developers. Supply shrinkage, stable demand, low interest rates, pent-up demand, economic easing and strong IT/ITES sector are driving developers pre-sales to life-time high, largely driven by existing projects. New launches may help sustain the momentum as pent-up demand fades out post 4QFY21E.
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 is our top pick. In the mid-cap space, NCC, ITD, PNC, KPTL, KNR, HG Infra, Ahluwalia and Capacite are our top picks. Industrials sector has returned to pre-covid normalcy with labour availability crossing previous highs. This along with the robust Central/State Government ordering has done heavy lifting for the order book. Ordering has been well diversified across Metro, Water, Railways, Roads, T&D;, Buildings and Mega projects like High Speed Rail. We believe that the growth tailwinds are in favor for the sector. Whilst the cost cutting measures have largely got reversed, but this has been achieved with pruning of excesses and some of the benefits may get retained. Interest rates remain at all time low and shall aid in interest cost savings. Asset monetization is picking pace with interest returning for Toll/HAM projects. Increase in crude prices, commodity prices will have some impact but these are still under control and well covered under the contractual inflation provisions.
Broking. Despite introducing the first phase of upfront peak margin requirement for cash and derivatives, ADTV for cash increased 57.1/-0.8% YoY/QoQ, while derivatives saw a growth of 77.6/38.1%. We expect family-owned smaller scale brokers to cede market share to more organized larger competitors. Strong activity along with market share gain is expected to boost broking revenues. Distribution income is expected to improve as industry active equity AUM grew 8.1/16.4% YoY/QoQ. Commentary around new customer acquisition, new pricing plans, and the impact of regulatory changes will be key to watch. ISEC: We expect ISEC to deliver APAT growth of 77.1/-12.6 % YoY/QoQ. We retain ADD with a TP of Rs 560 (i.e. 23x Sep-22E EPS). Asset management. While active equity has witnessed net outflows of Rs 566.9bn in FY21TD with 3QFY21 accounting for Rs 436.0bn, Nifty-50/Nifty-200 are up 24.3/23.6% just in 3QFY21; this has driven industry equity AUM higher by 16.4% QoQ. Debt schemes continued to receive inflows with 3QFY21 witnessing Rs 1.45tn vs. Rs 818bn in 2QFY21. Higher equity prices are expected to boost treasury profits. Commentary from management around flows and market share will be key. Our top pick in the space is UTIAM. We maintain BUY rating with a TP of Rs 650 (i.e. 20.6x Sep-22E NOPLAT + cash and investments).
While we increase our FY22/23 EPS estimates by 5-6% resp. to account for marginally higher revenue/sq. ft, we downgrade the stock to Sell (Earlier Reduce) as the recent run-up leaves no room for an investment case (DCF-based TP: 2,160/sh implying 34x FY23 EV/EBITDA + 2x FY23 sales for e-comm business). D-MART finally hits the growth phase (after a disappointing 1HFY21). The grocer clocked a healthy 10% topline growth (HSIE: 8.5%). While gross margin delivery was strong (15.1% vs HSIE: 14.8%), its underpinnings remain weak (on the back of lower discounting in staples). Non-essential sales remain weak. EBITDAM expanded 52/256bp YoY/QoQ to 9.3% courtesy strong cost control. (HSIE: 9%).
Sector outlook and stock views: Cement demand continues to accelerate led by robust retail demand and rising non-trade sales. We continue to be bullish on regional pricing outlook for north and central regions owing to robust regional utilisation, high regional consolidation and low influx of new players. Hence we expect players in these regions be better placed to pass on the recent spike up in cost inflation. We have revised up earnings estimates for south based Dalmia, Deccan and Orient factoring in robust pricing currently. We have rolled forward valuations on Dec'22E (vs Sep'22E earlier). Post the recent surge in stock prices, we downgrade ACC to ADD (from BUY earlier) and Shree Cement to REDUCE (from ADD earlier). Our top picks are UltraTech, Birla Corp, JK Cement and Dalmia Bharat. Utilisation firms up to 80% in 3QFY21E: Cement demand continued to recover during 3QFY21, firming up utilisation to 80% vs 78% YoY. During the quarter, we estimate aggregate sales volumes for 13 cement companies under coverage to accelerate to 9% YoY, (fastest in the past two years). This is led by volume growth across all markets barring south. While retail sales continued to be buoyant, even non-trade sales have picked up, boosting growth.
FMCG sector has underperformed Nifty by 42% since our cautious stance in April '20 initiation (link). Valuation premium for select stocks has narrowed down to reasonable levels and looks particularly attractive compared to richly valued (~80x forward PE) consumer discretionary segments (Paints, QSR, Jewellery, and Retail). While absolute PE-rating still looks unlikely, we see a more balanced risk-reward now for the FMCG sector for FY22/FY23 with earnings led stock price returns. This report has analysed key strategic initiatives and quality of execution across our FMCG coverage over the past five turbulent years (FY15-20). The report dissects the financial performance and also operational metrics such as track record of new product launches and distribution initiatives. We have ranked companies across the following key parameters, viz., (A) Product Innovation (B) Distribution Initiatives (C) Cost Efficiencies, and (D) Capital Efficiencies.
Our target price of Rs 3,435 is based on 28x Dec-22E EPS (27x earlier) with EPS CAGR at 19% over FY21-23E. Tata Consultancy Services: We maintain ADD on TCS, following a back-to-back stellar performance and positive commentary. Key positives included (1) broad-based (verticals & services) growth outperformance (strongest 3Q in nine years) supported by better conversions, (2) robust deal wins with TCV at USD 6.8bn (ex-PBS Deutsche deal), 9MFY21 TCV higher by 23% and strong bookings/ramp-up expected in 4Q, (3) margin outperformance supported by operating leverage & efficiencies. Management provided double-digit outlook for FY22/CY21 (we have factored in 14.8% for FY22E) and sustainability of momentum for 3-5 years secular cycle of cloud adoption. Strong outlook for BFSI vertical (strongest-ever BFSI deal bookings), investments in hyperscalers units, improving supply-side metrics (stronger linkages with revenue growth and an uptick in contextual masters), and lowest-ever attrition were other highlights.
