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).
GICRE is India's largest reinsurer but continues to make high underwriting losses (9M COR: 116%). While price hikes in property will improve underwriting profits, high proportion of crop business will add to volatility. We estimate an FY22E adj. RoE at 9.9%, and thus value GICRE at 0.9x Dec-21E ABV less 5% discount. We rate GICRE a NEUTRAL with a TP of Rs 264. Higher losses in agriculture and property led to increased claims ratio i.e. 107.0%, +2,379/-274bps YoY/QoQ; this resulted in highest (since listing) underwriting losses of Rs 27.4bn. 3QFY20 reported loss was at Rs 10.4bn!
BSE cash market share has slipped to 6.4% vs ~13/9% in FY18/19 and currency derivative segment is also facing tough competition. Investments in INX and newer initiatives (commodity & Insurance distribution) have impacted EBITDA margins (1.1% in 9MFY20, down ~7% YoY). We expect revenue growth of 12.0/10.4% in FY21/22E led by rebound in transaction revenue (better market condition, StAR MF and INX contribution). We expect operating leverage to play out with growth (EBITDA margin of 8.8/14.2% for FY21/22E). BSE has net cash of Rs ~20bn (~77% of MCap) and a dividend yield of ~5%, which limits downside. Risks include rise in competition, loss of market share and increase in investments. We maintain NEU on BSE based on revenue and margin miss in 3QFY20. The core revenue stream is under pressure, margin is in the negative territory due to ongoing investments in new initiatives (INX). BSE cash market share has declined to 6.4% but StAR MF platform is witnessing continued traction. We arrive at a SoTP based TP of Rs 590 by assigning 15x multiple to core Dec-21E PAT (Rs 46/sh), Rs 105/sh for the CDSL stake and adding net cash (Rs 439/sh).
Hexaware's low-double digit organic growth trajectory is sustainable supported by (1) IMS/BPM-led differentiation and wins, (2) Cross-sell opportunities from Mobiquity (3 wins in 2HCY19), (3) Strengthening partner ecosystem (Guidewire, Pega, Adobe, AWS, Backbase), and (4) Increased focus to accelerate NN wins and lower client concentration risks (vs. earlier). The risk of intermittent volatility in large accounts is lower now (T10 lowered from 57% of rev to 43% over the past 3 yrs). Expect USD rev/EPS growth at 13.5/12.0% CAGR over CY19-21E. We maintain BUY on Hexaware post its in-line revenue performance. EPS cut (~4%) on margins reset (-60bps). IMS/BPM differentiation/growth leadership, Mobiquity downstream, increased focus on NN wins and strengthening partner ecosystem to support 13.5/12% rev/EPS CAGR. Our TP of Rs 430 is based on 16x Dec-21E EPS (3-5yr avg at 16.5x).
Given the brand equity of AFL's power brands (60% of sales), a recovery in this segment is a foregone conclusion. This coupled with multiple margin levers and an increasingly lighter expansion strategy should ensure AFL's return profile has a U-shaped recovery. (6.3% by FY22 vs -3.7% in FY20E). We remain circumspect on the value fashion play though, given AFL's lack of execution history. Valuations at <1x FY20E Power brand sales seem undemanding. While we maintain our estimates, a DCF-roll-over to FY22 leads to a marginal revision in TP to Rs. 460/sh (earlier Rs. 450), implying 11x F22 EV/EBITDA). Reiterate BUY. Near double-digit (-9.8%) top-line de-growth was par for the course for Arvind Fashion (AFL) as FY20 is all about 1. fixing working capital woes in brands biz via reducing reliance on long-credit cycle accounts (MBOs), 2. Reining in losses of the value fashion play Unlimited. 3). Non-core brand exits.
