With a long run-way of growth, improving regulatory environment, and strong innovation opportunities, we remain positive on the general insurance sector. Regulatory crack-down on motor TP pricing is key risk. Pvt. multi-line insurers Mar-20/FY20 GDPI grew -16.2/+11.7% YoY to Rs 67.1/911.8bn. Decline in Mar-20 was along expected lines as new policy sales have declined as a result of the lockdown and renewals have been impacted by the forbearance (until 15-May-20) given by IRDAI on premium payments, and extra time (until June-20) allowed for claiming deduction under the IT Act, for the purchase of health cover.
Update on HAM funding and arbitration proceeds: Gross debt outstanding for the 10 HAM assets stands at Rs 20.18bn, with balance requirement being Rs 24bn. On the equity front Rs 2.2/1.67bn is expected to be infused over FY21/22E. Arbitration proceeds of Rs 4.2bn have been awarded (Rs 2.2bn with SEL, Rs 2bn with SIPL). On the Rohtak-Panipat project, SEL has been advised by NHAI to move the case to conciliation committee rather than arbitration. In company's view it is a clear case of an event of default (alternate traffic route is the issue here) as per the CA, and is confident of recovering its entire equity and debt. Sadbhav Engineering Ltd (SEL) has announced a management rejig with Mr Vasistha Patel (VP) being appointed as CEO and Mr Shashin Patel stepping down as Chairman and MD to Vice Chairman in non executive capacity. We perceive this as a positive step with VP getting iron hand on execution and promoter SP dissociating himself from day to day run. SEL BS has deleveraged post the SIPL deal and now VP has immediate challenge of ramping up execution against the COVID-19 headwinds. We maintain BUY with SOTP of Rs 56/sh
Recommendations and stock picks: Outlook on ordering both domestic/international ex roads is likely to be weak. Banks lending will be selective. We have downgraded ABB from ADD to SELL and Siemens from ADD to REDUCE. We have cut PSP/ITD rating from BUY to ADD. We maintain BUY ratings on other coverage stocks. For our coverage universe, we have recalibrated the P/E multiple/EPS estimates lower resulting in TP cuts by 10-60%. In cap goods, LT is our top pick. In the mid cap EPC space, KNR, PNC, HG Infra and Ahluwalia are our top picks. COVID-19 poses multiple headwinds: Industrials companies have been hit hard by COVID-19 pandemic. Execution has started to pick up slowly post almost a month of lockdown. Local Govt approvals are coming slowly as the sector grapples for remobilization of sites. Urban areas are being turned into containment fortresses and it will take time for the works to resume. This will largely impact Metro and Real Estate projects execution. National Highway projects are still executable as they run through interior State districts with limited COVID-19 impact. We believe pure play NH EPC players are best placed to tide through the crisis. Buildings players are worst impacted.
While we continue to hold our constructive view on the sector, we believe flows to mutual funds may improve only in 2HFY21 and earnings will remain under pressure in FY21E FY20 was a difficult year for asset managers as equity flows deteriorated (-50.9% YoY), commissions increased (although managably), and performance deteriorated- as listed AMCs outperforming AUMs declined. Lastly, we have also worked out sensitivity of FY21E earnings to equity AAUMs and yields.
Maintain BUY with TP of Rs 680, at 16x FY22E EPS. Infosys (INFY) delivered rev/margin below estimates in 4Q. While near-term performance will be marred by demand dent across verticals, subsequent recovery will be supported by (1) Strong growth in digital (42% of rev), (2) Resilience in large deal wins (bookings tracking well), (3) Market-share gains from vendor consolidation, and (4) Operational prudence & favourable onsite supply metrics.
Consequently, we prefer ICICIBC, AXSB and KMB amongst the large caps. We prefer CUBK amongst the pack of smaller regional banks. We maintain our REDUCE rating on RBK and KVB, despite their sharp underperformance. Recent events (YES and COVID-19) are likely to have multiple order and far reaching impacts on the banking sector. COVID-19 will obviously impact growth and asset quality. The events at YES have impacted depositor sentiment, causing them to become more risk-averse, we believe. Consequently, the less obvious (but equally important) impact is expected to play out on the liabilities side. In such a scenario, we believe deposit flows will become more polarised. Larger banks, with strong granular liability franchises, reasonable asset quality performance and sufficient capital are likely to emerge stronger.
Further, the increase in axle loading norms has raised effective system capacity by over 15%. Also, we expect railways to gain market share over FY21-22E, post the DFC which will impact demand for MHCV's. We prefer stocks which are market leaders in their respective segments and have a cash rich balance sheet. Due to the COVID impact, we expect volumes in FY21E to decline in double digits across automobile segments. Over FY20-21, this will imply a fall of 30-40% in volumes. We expect a recovery in volumes from 2HFY21 onwards, as the situation gradually normalizes. In the logistics segment, while volumes for container rail operators will be impacted due to the downturn, the phased commissioning of the Dedicated Freight Corridor will partially offset the impact of the above. We believe that the CV recovery will be further pushed out as fleet utilization levels are expected to remain low over FY21E.
Extended lockdown drives estimates/TP downgrades for FY21/22E: Despite sharp correction in retail stocks, we see few value buys as for most, price performance is reflective of reduction in earnings power, esp. in apparel. (EBITDA cuts for FY21/FY22 range from -14 to 57%/-7-30% across universe). Subsequently TP cuts across universe range from -6 to -42%. We maintain our BUY rating on V-MART & ABFRL and SELL rating on D-MART. Impact of Covid-19 and FY21 template: Retail is likely to be among the worst hit sectors by COVID-19. Revenue declines across coverage is likely to range between 3-14% in 4Q. Impact on profitability (EBITDA) will be even higher (-14% to severe losses in FY21 ex-DMART) given the high fixed cost base in biz models. In this backdrop, Assessing 1. Foregone vs recoverable revenue, 2. Inventory fungibility/quality across seasons, 3. Capital to cover fixed costs and 4. Leverage position will assume centre stage.
Recommendations and stock picks: We upgrade Ramco Cements to BUY (from ADD earlier) and Shree Cement to REDUCE (from SELL earlier), post the recent stock price corrections. We maintain BUY ratings on all other stocks. We prefer UltraTech among pan India players and NCG exposed JK Cement and JK Lakshmi in midcaps. The SEM based companies (especially Dalmia) are also trading at attractive valuations post recent stock decline and should see rerating as demand recovery accelerates in 2HFY21 onwards. Sales hit hard in the peak quarter: The Covid-19 led countrywide shut downs in late March pulled down cement sales during 4QFY20. We estimate sales volume for our coverage universe to fall 10% YoY (+2% QoQ). In our view, the lockdown eroded ~15-20% of expected sales for 4QFY20.
4QFY20 Preview: Appliances cos have seen strong growth in Jan-Feb (particularly for RAC) in anticipation of supply constraints from China in peak season. However, Covid-19 led lockdown has resulted in revenue loss for the last 10-12 days of March. Generally, March is important for channel filling for summer driven appliances. Thereby, it has higher weightage for the quarter. Covid-19 has taken away the advantage of healthy pre-buying by the distributors. Our coverage universe is expected to post 6/9% revenue/EBITDA decline in 4QFY20 (+13/-6% in 4QFY19, -2/-1% in 3QFY20). Covid-19 impact on cooling products: We believe Covid-19 will have massive impact on cooling appliances (RAC, Air Cooler, Fan, Stabilizer) for summer-2020. Lockdown being in the peak season has already impacted channel filling opportunity in March along with consumer demand in the last 15-20 days. Summer started late this year (by 10-15 days) but extension of lockdown will have significant impact on the demand. Transportation, installation and financing will be key challenges even after govt. opens the lockdown gradually. Thereby, we foresee bleak outlook for cooling products for summer-2020
