Buy

Key highlights : Share swap ratio fixed at 40 shares of AL for every 100 shares of HFL, resulting in dilution of ~2.8% for AL. This would result in increase in promoter’s stake in AL to 51.3% (from 50.4%). 2) AL has invested ~Rs 3.5bn in preference shares (apart from ~7.5% equity interest) on which there were no interest servicing in the past few years. This will get cancelled on the merger. 3) This deal is subject to various approval from regulatory authorities and shareholders.

However given the government’s thrust on the manufacturing sector and the Make-in-India initiative, we believe HFL’s foundry business will gain strong traction and become EPS accretive for AL’s business in long term. This merger will also help to diversify AL’s revenue streams and achieve better operational efficiencies.They will wait for shareholder approval before incorporating HFL’s financial in their estimates.They maintain BUY with a TP of Rs 104 (14.5x on FY18E EPS ex HFL) as expect marginal impact on EPS due to tax shield from accumulated losses at HFL.

Suprajit Engineering (SEL) has acquired 100% stake of Wescon Controls, Wichita, USA, through its wholly owned subsidiary Suprajit USA Inc from Shell Topco LP managed by a PE fund Nova Capital, UK. SEL is strategically working towards diversifying its revenue streams by acquisition of different business (earlier acquisitions being Pricol’s speedo cable biz and Phoenix Lamps). We believe this acquisition is a strategic fit for SEL business as it will help to cater non auto cable business, which currently contributes only 3% to total revenue. This is expected to increase to 20% post the acquisition. As per the estimated EV of USD 44.4mn, the deal valued at ~7x EV/EBITDA and 1.1x EV/Sales looks fair.

Post this acquisition, we foresee SEL’s topline growing by ~21-22% with marginal improvement in EBIDTA margins. However, higher depreciation and interest cost will result in only 1%/5% growth in earnings in FY17/18E. As the acquisition has been partly funded through debt, Net D/E could go up marginally to 0.7/0.3 in FY17/18E. They upgrade our TP of Rs 224 (18x SEL’s consolidated FY18E EPS) to include Wescon’s numbers. BUY

 

Key takeaways : Over CY05-15, while Castrol’s realization improved at 11% CAGR, its volume declined by 1.7% CAGR. This we believe is led by (a) lengthening drain intervals, (b) not aggressively pursuing low margin OEM business and (c) tepid economic activity in recent years, impacting CV segment (45-50% of total volumes). Taking cognizance of the continued volume decline, Castrol management reset its focus on profitable volume growth in the last few quarters.The volume trend has reversed in the last six months – volumes grew 7% in 1HCY16. The growth has been broadbased, with continued high single-digit growth in the personal mobility segment and recovery in the CV segment.India’s economic indicators have improved and the economic recovery should feed turnaround in CV volumes. Seasonally, 2H is usually weaker than 1H, however, management expects volume growth to sustain year-on-year. Of CSTRL's total volumes, CVs contribute ~47%, personal mobility ~40% (v/s 10% a decade back), and industrials ~13%. With personal mobility continuing to grow at high single digits, revival in the CV cycle would help to sustain volume growth.

Valuation : Maintain Buy: Motilal Oswal assume volume growth at 6%/7% in CY16/CY17 and largely stable realizations. CSTRL’s >80% payout policy, RoE/RoCE of ~100% and FCF to PAT conversion at >80% reflects its superior balance sheet and high quality cash flows, which warrant higher valuation multiples, in our view. The stock is trading at 28x CY17E EPS of INR15.7.Their fair value estimate is INR518 (33x CY17E EPS; in line with last 3-year average), implying 18% upside. Maintain Buy

Escorts Limited recently interacted with Escorts management. Company is in the process of completing its divestment of major part of its Auto Products business. Its focus is increasing on its core business of Agri Machinery (EAM). It also increases its efforts to expand the most profitable railway business. We believe that company’s recent strategic initiatives in terms of reducing exposure in loss making entities, increasing efforts for expansion of profit making business and more focus on cost rationalization would pay off over next 2-3 years. Escorts’ auto ancillary segment has been bleeding since long, particularly its OEM segment. Management has planned sale of OEM and exports division of the segment initially, while retaining after sales with company for a year’s period. However, over a period, it would completely exit from its auto parts business.

It would sell the plant and machinery while retaining land and building assets for future development. This strategic decision strengthens our positive view on the management’s commitment to enhance the returns by focusing on profitable segment and divesting loss making entities.They maintain our volume and financial estimates for FY17E/FY18E. Accordingly, maintain target price of Rs 415/share, valuing it at 12xFY18E EPS and they reiterate “BUY” on Escorts.

The board of Ashok Leyland (ALL) approved the amalgamation of Hinduja Foundries (HFL), a Hinduja group company (in the business of grey iron castings & supply of automotive components) with Ashok Leyland, subject to statutory approvals. Based on the swap ratio, the amalgamation will result in dilution of ~2.8% for Ashok Leyland, and increase promoter stake from 50.4% to 51.3%. HFL is one of the largest producers of cylindrical blocks & heads, with tractor segment contributing 55% of company’s revenues & ALL contributing ~35%. As of FY16 (12 month), HFL’s revenues stood at | 577 crore, EBITDA loss of | 155 crore & PAT loss of | | 171 crore. Although the impact of the deal might be low (equity dilution offset by tax saving resulting from accumulated loss of ~| 1046 crore of Hinduja Foundries), the deal is a deviation from managements’ recent years practice of strengthening balance sheet. Assuming, the deal gets all the regulatory/ statutory approvals, the impact of the deal will be EPS accretive in FY18 due to tax shield provided by accumulated loss of Hinduja Foundries. However, if the turnaround in HFL is not as per management outlook, the deal could be a drag on ALL’s earnings & return ratios in FY19E.

Valuation : Although, the deal does not fit into the company’s strategy of improving balance sheet, we believe the growth triggers outweigh the potential negative impact of the deal. We value core business at 8x EV/EBITDA (earlier 9x) to factor in the negative potential drag on earnings & return ratios post FY18E. Based on SOTP valuation, we arrive at a target price of | 95. We have a BUY recommendation on the stock. The upside risk to our estimates could be the implementation of the scrappage policy to discard 15+ year vehicles

Net sales grew 14.3% YoY to | 1245.2 crore driven by growth in PMC division (grew 20.7% YoY to | 1171.1 crore). However, sales was below our estimate of | 1363.0 crore mainly on account of lower than expected revenues in PMC division (| 1171.1 crore in Q1FY17 vs. our expectation of | 1259.5 crore) and real estate division (| 17.3 crore in Q1FY17 vs. our expectation of | 51.8 crore) • The EBITDA margin contracted 40 bps YoY to 3.5% and was below our estimate of 4.5% mainly due to higher un-allocable expenses (| 21.0 crore in Q1FY17 vs. our expectation of | 12.6 crore) • PAT grew 14.4% YoY to | 45.4 crore. However, it was below our expectation of | 59.4 crore mainly on account of higher effective tax rate (34.5% in Q1FY17 vs. 30.3% in Q1FY16) and EBITDA margin miss.

They are positive on NBCC’s business model given the huge set of opportunities, going ahead and expect its revenues/earnings to grow at of 34.4%/27.5% CAGR over FY16-FY18E. We also like NBCC given its negative working capital, cash rich balance sheet (| 1133.5 crore as on FY16) and strong return ratios (RoE of 26.3% & RoCE of 40.7% in FY18E), going ahead. Consequently,they maintain BUY recommendation with revised SOTP based target price of | 281 (implying 33.5x FY18E EPS).

MBL's revenue grew by ~17% yoy to Rs7.13bn, mainly owing to pick-up in execution of old projects. EBITDA rose by ~15% yoy to Rs746mn and margins came in flat at 10.5% (yoy). Its net profit remained flat on yoy basis at Rs295mn owing to 48% jump in interest cost. Revenue growth is expected to improve further with the commencement of newly bagged Hybrid Annuity Model (HAM) projects, which account for 55% of...

J Kumar Q1FY17 performance was broadly in-line with consensus estimates. Revenue increased 11% YoY to Rs 4.03bn led by contribution from JNPT road project. EBITDA margin declined by 164 bps YoY to 16.9% on account of higher construction & employee expenses. Thus, EBITDA increased by 1% YoY to Rs 680mn as the revenue growth was negated by decline in margins. Net profit increased 15.6% YoY to Rs 295 mn led by higher other income. Management states that the company has been de-registered from further bidding in BMC road segment but this wont impact execution of current order-book (which is at ~ 7x FY16 revenues). 

Outlook and Valuation: We expect that FY17-18E would be driven by execution of the large order backlog (~ Rs 100 bn including metro orders; ~7x FY16 revenues). However, we cut our revenue estimate by ~5%/~3% for FY17E/18E on account of delay in execution of the metro order. Our PAT estimates for FY17E/18E are getting revised downwards by 6.7%/5.7%. The stock has corrected by ~48% in the last 6 months after the BMC issue. However, management clearly states that it will not impact its ability to execute current order backlog (as MMDRA/MMRC has awarded Metro orders to JKIL post this issue). Valuation at 9.2x/6.5x on FY17E/18E earnings looks attractive post the recent fall and factors in most of the negative news flow. We reduce our target P/E multiple to 12x (from 13x) to value FY18E earnings (largely due to delay in execution of metro orders and risk of bidding in BMC orders). However, they maintain BUY with revised target price of Rs 300.

Suprajit Acquires Wescon Controls USA: Suprajit acquired US-based Wescon Controls, manufacturer of control cables in the non-automotive Outdoor Power Equipment (OPE) space by purchasing 100% outstanding equity share capital from Shell Topco LP managed by a private equity fund- Nova Capital, UK for an enterprise value of US$ 44.4 Mn.

Expected Synergies from the deal  - Diversification of segments: Suprajit primarily caters to automotive cables through both domestic channels and exports; and with this acquisition, they have the scope to expand to other non-automotive sectors scaling up to 20% of their revenue chunk from a nominal portion. Enhanced geographical presence: Wescon, being positioned in North America, lays road for Suprajit to expand its presence across those regions. Similarly, Suprajit’s presence in Europe and Asian countries will be an added advantage to Wescon. Capacity scale-up and Technological Up-gradation: The overall capacity is expected to reach 250 Mn cables from the current 225 Mn cables. Further, it enables exchange of technical competence between the two. Supply chain strategies to bring in purchasing benefit for Wescon whilst paving way for cross selling strategies for Suprajit. This Suprajit Wescon deal is expected to get consolidated and the full quarter financial impact starting Q3FY17E.

Growth to Unfold on Account of Improving Demand Environment: Stable revenue growth along with healthy margins - Timken has registered turnover growth of 8.8% sequentially & 8.6% YoY growth for Q1FY17 owing to improved volumes. EBITDA margin has contracted by 150 bps QoQ mainly on account of 15.5% rise in raw material costs & 9.5% rise in employee expenses. EBIT margin & Net profit margin have also contracted by 120 bps & 130 bps sequentially to 14.0% & 9.4% in Q1FY17.

Valuation and Outlook : While introducing FY18E, we have also re-visited the financials for FY17E. While global growth outlook remains gloomy, India is one of the few economies expected to deliver growth. Being a market leader in tapered roller bearings, which largely cater to Medium and Heavy Commercial Vehicle (M&HCV), off-highway equipments and railways markets, Timken is well positioned to benefit from the much anticipated economic revival. At CMP of Rs. 547, Timken is trading at 32.5x to its FY18E EPS. Timken, in view of auto industry revival, positive industry sentiments coupled with healthy zero debt balance sheet, is well positioned to grow in times ahead. We ascribe a multiple of 38.5x FY18E EPS, which is trailing twelve months PE and recommend a “BUY” rating for an upwardly revised target price of Rs. 648 representing an upside potential of 19%.