We believe that the current valuation multiples (8.5x EV/e FY21) are already pricing in a full privatisation scenario. We believe that only potential improvement in earnings and cash flows can drive re-rating of the stock. But this will obviously be realized with a lag and is contingent upon the stake acquirer's ability to bring about efficiencies. Our SOTP target is Rs 452/sh (5.5x Dec-21E EV/e for standalone refining, 6.0x Dec-21E EV/e for marketing and pipeline business and Rs 145/sh for other investments). We maintain NEUTRAL on BPCL with a TP of Rs 452 (vs consensus TP of Rs 513) following a performance in-line with our PAT estimates in 3QFY20. 8.2% beat at EBITDA level was due to higher inventory gains of Rs 5.32bn vs est Rs 3.63bn.
We maintain our conviction on GSPL based on (1) Stable volume growth (+5% CAGR over FY20-22E to 42.5mmscmd) (2) Smoothening of cyclicality in its earnings, post acquisition of a controlling stake in Gujarat Gas (3) Steady cash flows (FCF of Rs 32.80bn over FY20-23E) from transmission business that will turn the company's position to a net cash one. We value the transmission business using Discounted Cash Flow (DCF) at Rs 138/sh (WACC of 10.5% and Terminal growth rate of 0%). To this, we add Rs 115/sh as value of its investments in Gujarat Gas, Sabarmati Gas and other investments to arrive at the target price of Rs 253/sh. We maintain BUY on GSPL though the Q3 PAT missed our estimates. Benign spot LNG prices will continue to (1) Drive volume growth from industrial customers and (2) Encourage RIL to continue using LNG. Our EPS estimates for FY20/21/22E stand at Rs 17.3/19.7/21.3 vs consensus EPS of Rs 28.1/25.7/23.7. Our SOTP based TP is Rs 253/share (consensus TP Rs 272).
We reiterate BUY and expect Gulf Oil to outperform industry leader Castrol. However, we believe that the co's performance is now impacted by the slowing industry scenario and moderating growth rates (volumes have declined over Jun-Dec19). We trim down our earnings by ~6% over FY20-22E and reduce our target multiple to 20x (vs. 22x earlier) to factor in the above. Also, the recovery in factory fill volumes is likely to be delayed. Key risk: Faster than expected adoption of EVs. Gulf Oils 3QFY20 adj. volumes declined 2% YoY amidst the downturn in the auto industry. However, EBITDA margin surprised at 18.4% (+260bps YoY) owing to stable input costs. Maintain BUY with a revised TP of Rs 995 based on Dec-21 EPS.
We believe that Brand Factory will continue to reel under the stress of a consumption slowdown for a couple of quarters. Ergo, the management has re-calibrated its expansion plans from 25 to 18 stores in FY20. While Brand Factory struggles, we believe Central will chug along and add 5 stores annually. We revise our DCF based TP downwards to Rs. 500 (earlier Rs. 550) which largely mimics the downward revision in FY21/22 EBITDA estimates by 8.8% and 11% respectively. Maintain BUY FLFL's revenue grew 3.1% YoY to Rs. 16.7bn (4.4% below estimated Rs. 17.4bn). Revenue was mainly impacted by the poor performance of its off-price format Brand Factory. While, top-line disappointed, margins were protected. Gross margins grew by 146 bps YoY to 34.9% (vs est: 34.5%). Adj. EBITDA margins (Pre-IND-AS) stood at 10.2% (vs est: 8.4%). The beat was a function of trickledown effect of a depressed top line. However better than expected cost efficiencies helped reduce the operational beat. The company reported Adj. PAT at Rs 0.57 bn.
Maintain BUY on Hero as (1) Hero has successfully defended market share in the 2W segment in the current downturn (2) The stock is trading at an attractive valuation of 15/14x FY20/21E; however, the extent of price hikes on BS-VI will delay the recovery in our view. We lower our target P/E multiple to 16x (vs. 18x earlier), which is in-line with its average historic trading multiple, to factor in a delayed recovery (2HFY21) and a slower than expected ramp up in the premium segment. Heros 3QFY20 EBITDA margin surprised at 14.8% despite weak volumes. However, the outlook over FY21 remains mixed as management expects a recovery only in 2HFY21 as customers get accustomed to price hikes (12-15%) on BS-VI models. Retain BUY with a revised TP of Rs 2,980 (16x on Dec-21 EPS).
We have 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. US accounts for 36% of revenues and the key products - gNuvaring and gCopaxone account for ~20% of our FY22 estimates. Despite factoring in these launches along with sustenance of good performance in non US markets and margin expansion as per company guidance, upside appears limited from current market price. Dr. Reddys announced acquisition of select brands of Wockhardt in India and other markets for Rs 18.5bn, which is ~3.7x FY20e sales (Rs 5bn annualised) and ~15x FY20e EV/EBIDTA. The deal adds scale (~17% of India revenues) and deepens Dr Reddys presence in the acute segment. The key 5 brands account for ~50%+ of the acquired portfolio. We expect Dr. Reddys to revive the growth (the acquired portfolio declined 15% yoy due to issues at Wockhardt) with improved serviceability of the products and increased sales & promotion. While we need to analyse the product portfolio in detail, our preliminary analysis suggests that the deal should be 1-2% EPS accretive in FY22. Maintain Neutral. TP of Rs 3,440/sh.
ABB has levers in place to mitigate slow uptick in capex. One offs/legacy project margin hit has been a disappointment and continues to restrict margin expansion. Export growth is panning out well and mitigating domestic weakness. Balance sheet has net cash Rs 19.5bn to fund growth as an when recovery pans out. We believe rich valuation price in these tailwinds and multiple re-rating is contingent on capex recovery. We maintain NEU on ABB. Key risks (1) Delays in Government capex recovery, (2) Slowdown in private investments, and (3) INR depreciation. We maintain NEU on ABB India Ltd. (ABB) with a TP of Rs 1,219/sh (42x ABB continuing business). Whilst ABB is navigating through weak economic undercurrent and holding onto growth, capex recovery will take time to pan out. Strong balance sheet, Automation Products/Solutions expertise and cross cycles experience limits downside.
CUBK's performance over FY20 so far, has been softer than anticipated on key fronts- asset quality and growth (excusable, given systemic trends). However, when we consider CUBK's track record and inherent strengths (strong credit filters, overall prudence and customer franchise) our outlook on CUBK's prospects remains unchanged. CUBKs 3QFY20 operating performance was slightly below estimates with slower business traction and a rise in slippages. NIM improvement and higher recoveries were the silver lining. Net Earnings were in line, assisted by lower tax provisions. Maintain BUY (TP Rs 262, 3x Dec-21E ABV).
JKIL achieved strong performance during 3QFY20. FY20/21E Rev guidance is maintained at Rs 32/36bn. Order book is robust at 2.55x FY20E Revenue. With strong execution visibility on current order book, JKIL is well placed for re-rating. At CMP JKIL trades at 4.8x FY21E EPS. We maintain BUY. Key risks (1) Geographic concentration (2) Order conversion within estimated timelines. JKIL delivered 1/(10)/(4)% 3QFY20 Rev/EBIDTA/APAT beat/(miss). We retain our FY20/21E Revenue estimates while revising FY20/21E APAT estimates by 0.4/(2.6)%. We maintain BUY on JKIL with a TP of Rs 269/sh (vs. Rs 276/sh earlier, 8x Mar-21E EPS).
ITD 3QFY20 performance was subpar as new projects worth Rs 60bn are in initial stages of mobilization. ITD is likely to deliver strong execution from 2QFY21. Debt is expected to stabilize at current levels of Rs 4.5bn. Bid pipeline is strong and dominated by high margin marine projects. ITD has bid for Rs 35bn JNPT marine project, final outcome expected by Mar-20. Stressed projects like Bengaluru Metro are nearing completion. We believe multiple tailwinds are in place. We maintain BUY. Key risks (1) High competitive intensity in marine segment with competition from L&T, (2) Sustained cost overruns in projects, and (3) BS and NWC deterioration. ITDs 3Q/9MFY20 order inflows have been robust at Rs 26/56bn ex Rs 3.5bn L1. Kolkata HC has given green signal to stuck Kolkata metro and ITD maintains no write offs in this project. We maintain BUY on ITD with TP of Rs 80/sh (12x Mar-21E EPS).
