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PremiumSensex Today | Market Close Highlightss: Benchmark indices closed in in the red on Thursday. Among sectoral indices, IT, Pharma, Healthcare and FMCG were the biggest losers, while Realty, Auto, Media and Metal ended the day in the green.
Global stocks took a breather Thursday after recent sharp gains as investors processed the latest earnings news and looked forward to a meeting of the European Central Bank and economic growth data from the US.
Europe’s Stoxx 600 index slipped and the blue-chip Euro Stoxx 50 traded flat after soaring to a 23-year high on Wednesday.
Investors are also keen to gauge when central banks could embark on cutting interest rates, after policymakers pushed back against the possibility of swift and early easing. The ECB will keep rates on hold later in the day, but its statement and post-meeting news conference will be parsed for clues on the path forward. Similarly, US data is expected to show the economy expanded at a 2% annualized rate in the fourth quarter. A slew of other figures are also due, including inventories, new home sales and weekly unemployment claims, which should offer a snapshot of the economy before the end-January Federal Reserve meeting
A key focal point for risk assets is the US Treasury markets where long-dated yields have been on the rise.
Earlier in the day, Chinese and Hong Kong shares extended gains, trading off the People’s Bank of China’s plan to cut banks’ reserve requirement ratio next month.
Doubts persist about the effectiveness of such monetary stimulus, with analysts pointing out that RRR cuts have not in the past boosted Chinese stocks. However, the pledge has offered some support to industrial metals prices, while oil advanced to trade near a one-month high.
In the US, investors will parse a slew of US economic data — including gross domestic product — due Thursday, as they mull when the Federal Reserve will cut interest rates.
US data released Wednesday showed business activity expanded in January by the most in seven months. That bodes well for stocks, according to Renaissance Macro’s Neil Dutta.
Elsewhere, oil advanced to trade near a one-month high after US crude inventories dropped by far more than expected and China announced plans for more stimulus.
Benchmark indices closed in in the red on Thursday. Among sectoral indices, IT, Pharma, Healthcare and FMCG were the biggest losers, while Realty, Auto, Media and Metal ended the day in the green.
At close, Sensex was down 359.64 points, or 0.51% at 70,700.67, and Nifty was down 101.35 points, or 0.47%, at 21,352.60.
Elsewhere, European stocks were steady on a busy day for earnings and before the European Central Bank’s meeting provides further clues about the path of interest rates.
The Stoxx Europe 600 slipped 0.1% by 8:10 a.m. in London. The chemicals and energy sectors were among the gainers, while banks and real estate were among the worst laggards.
The ECB is set to keep borrowing costs on hold for a third meeting while stepping up efforts to convince investors that interest-rate cuts aren’t imminent. All eyes will be on President Christine Lagarde, who will speak at 2:45 p.m. in Frankfurt, 30 minutes after the bank’s policy announcement.
Elsewhere, Asian shares fell and Chinese-related stocks fluctuated as the initial euphoria surrounding stimulus from Beijing subsided.
Equities swung between gains and losses in Hong Kong and mainland China, while a gauge of US-listed Chinese companies advanced almost 2% Wednesday after the People’s Bank of China said it would cut the reserve requirement ratio for banks and hinted at more. Shares slipped in South Korea and Japan.
Still, China could be at an inflection point where local authorities will need to engineer a new growth model, according to Alice Shen, portfolio manager at VanEck Australia Pty.
US equity futures steadied after the tech-heavy Nasdaq 100 advanced for a fifth day. In the US, investors will parse a slew of US economic data — including gross domestic product — due Thursday, as they mull when the Federal Reserve will cut interest rates.
US data released Wednesday showed business activity expanded in January by the most in seven months. That bodes well for stocks, according to Renaissance Macro’s Neil Dutta.
Elsewhere, oil advanced to trade near a one-month high after US crude inventories dropped by far more than expected and China announced plans for more stimulus.
Benchmark indices were in the red on Thursday. All sectoral indices barring Realty and Auto were in the red. IT, Pharma, Healthcare, Bank, and FMCG, were the worst hit. In the broader market, only smallcap and microcap indices were in the green.
At 3 pm, Sensex was down 622.18 points, or 0.88% at 70,438.18, and Nifty was down 162.10 points, or 0.76%, at 21,291.50.
The December quarter earnings of IT players have come mixed. While HCL Tech reported slightly better than expected Q3FY24 earnings, the numbers of Wipro and Tech Mahindra were weak.
The road ahead for them also looks hazy, with key Western markets experiencing a downturn in demand. Elevated interest rates add to the challenge, and the anticipated rate cuts, scheduled to commence only after May, dim the prospects of a rapid rebound in profitability for IT players.
We gathered expert opinions to identify the most favourable stock among these three for investors to consider post their Q3 earnings. (Read the full story here.)
Hindustan Petroleum Corporation Limited (HPCL), the state-run oil marketing company, on Thursday reported a net profit of ₹529 crore for the December quarter of FY24, registering a sharp decline of 89.6% from ₹5,118 crore in the September quarter. On a year-on-year (YoY) basis, HPCL’s net profit jumped 207% from ₹172 crore in the year-ago quarter. HPCL’s standalone total income in Q3FY24 increased 15.5% to ₹1.18 lakh crore from ₹1.02 lakh crore, QoQ. The revenue growth was 2% on-year from ₹1.16 lakh crore. (Read the full story here.)
Vedanta shares were down on Thursday ahead of the announcement of Q3 results today. The market is expecting improvement in EBITDA on rising commodity prices. However, stock market investors and observers would be keen to see what kind of guidance Vendanta declares as rising commodity prices may enable the metal major to report better revenue in the October to December 2023 quarter. According to stock market experts, Vendata's Q3 results in 2024 may come as a relief for the company as a rise in zinc and aluminum prices and cost reduction measures taken by the company are expected to fuel Vedanta's Q3 EBITDA in current financial year. They advised Vedanta shareholders and stock market investors to remain vigilant about the guidance as better Q3 numbers may not display the clear fundamentals of the company. They advised Vedanta shareholders to hold Vedanta shares maintaining stop loss at ₹250 per share. (Read the full story here.)
Piramal Alternatives Trust (PAT), a wholly-owned subsidiary of Piramal Enterprises, will acquire a 10.4% stake in Annapurna Finance for ₹300 crore.
Annapurna Finance is a non-banking financial company, headquartered in Odisha. It is one of the top 10 MFIs in India, with an asset under management of ₹9,233 crore as of September 2023, the company said in a regulatory filing. PAT has entered into an agreement today "to acquire 10.39 per cent stake in Annapurna Finance Private Limited (AFPL) for a cash consideration of ₹300 crore by way of a purchase of equity shares and subscription to optionally convertible debentures amounting to ₹300 crore," it added. (Read the full story here.)
Benchmark indices were in the red on Thursday. All sectoral indices were in the red, while IT, Pharma, Healthcare and Bank were the worst hit. In the broader market, only smallcap was in the green.
At 2 pm, Sensex was down 551.60 points, or 0.78% at 70,508.71, and Nifty was down 159.35 points, or 0.74%, at 21,294.60.
Rating: ACCUMULATE
Target Price : INR 2100
Upside : 5%
CMP : INR 2001 (as on 24 January 2024)
Margins inline with estimates
Operating margins continue to improve sequentially
Revenues for TVS Motor Company (TVSL IN) rose 1% QoQ/ 26% YoY to INR 82.45bn. ASPs were down 1.1% QoQ due to weaker product mix as Q3 saw more festive season-led entry level bike and mopeds sales, though partially offset by improving Apache mix. EBITDA grew 3% QoQ/40% YoY INR 9.2bn, marginally below estimated. EBITDA margin rose 110bps YoY and 20bps QoQ to 11.2%. TVSL’s revenue growth underperformed that of Bajaj Auto’s (BJAUT IN) on YoY and QoQ basis. TVSL's QoQ EBITDA margin rise underperformed BJAUT’s, though gross margin rise outperformed BJAUT. In Q3, TVSL invested ~INR 800mn in Norton and INR 1.2bn in other subsidiaries such as Killwatt, TVS Digital and SEMG.
More EV products and distribution points in process
TVSL sold 48,000 units of EVs in Q3FY24. Through 9MFY24, it sold 144,414 units. Iqube is available at >400 touchpoints and TVSL may double these in the next 2-3 months. It may launch new EV products in the forthcoming quarters as well. Capacity for EVs is not an issue and TVSL may be able to ramp up capacity in a short span of 2-3 months, if needed. TVSL would spend INR 10bn as capex in FY24
Valuation: Maintain Accumulate with higher TP of INR 2,100
TVSL's margin and EBITDA/ vehicle scaling new highs despite EV ramp-up is testament to its improving underlying ICE business margin. We are monitoring volume recovery in the exports markets, upcoming EV 2W and 3W launch, and probable fundraising for the EV subsidiary and strategic investments.
TVSL is a perfect play on: a) consistent domestic 2W market share increase, b) continuous exports growth outperformance and c) structural margin increase potential. Expect a revenue CAGR of 18%, an EBITDA CAGR of 27% and an EPS CAGR of 34%, with margin expansion of 250bps in FY23-26E as demand revives. We largely retain estimates and maintain Accumulate. Our new TP stands at INR 2,100 from INR 2,006 on 26x (unchanged). We ascribe INR 98 to TVS Credit Services.
Rating: BUY
Target Price : INR 209
Upside : 30%
CMP : INR 161 (as on 24 January 2024)
Onwards and upwards
Conversion, competition and cyclicality – LTFH conquers all
L&T Finance Holdings (LTFH IN) stands at the cusp of structural growth and return profile expansion, led by complete metamorphosis, with exits from non-lending businesses (wealth management: 2020, mutual fund: 2022) and rapid deceleration in wholesale piece. A full-fledged, digitally enabled retail franchise (91% retail: Q3FY24) backed by prominent leadership, right channel mix (rural: urban at 50:50) and diversified product profile with strong positioning (market share: tractor 15%, two-wheeler 10%, micro finance: ranks in top-three) make the business model immune to competition and cyclicality.
Capacities and capabilities bolstered by tech to prop scale/ growth
The synthesis of: (a) broadening customer acquisition funnels via mature products (tractors, rural, two-wheeler loans), (b) increasing throughput with harvesting existing customers via cross-selling/ upselling (38% of disbursements) growth products (consumer loans, home loans, LAP, SME loans), (c) launching contiguous product offerings (rural LAP, rural household business loans, agri-allied loans) backed by leveraging customer data base (15mn: rural, 7.5mn urban), deeper geographic presence (1,850+ branches) and increased dealer touch-points (3,000 farm equipment, 6,500 two-wheeler dealer partnerships) should drive sustainable growth engine.
In tandem, futuristic digital infra capability (PLANET APP) built externally for seamless customer experience and internally to prop in-house operating systems by optimizing talent pool in AI/ML, credit, risk and tech (to enhance productivity) may aid structural growth.
Refined credit underwriting fostered by tech to guard asset quality
LTFH’s asset quality, fostered by tech built, is guarded by five vectors: (1) changing product mix, (2) customer mix focus on prime customers, (3) sharpened credit underwriting: analytics-based strong focus on 0 DPD collections, (4) collections team and (5) moreover, the fag end of INR 70bn wholesale piece entails zilch credit risk (Q2: net stage 3: INR 1.8bn, Stage 2: INR 25bn, largely 0dpd, 50% provision on troubled real estate loan), thus strengthening business prospects.
Strengthening retail backed by earnings CAGR, upgrade to BUY
The next round of valuation re-rating is an inevitable outcome of execution and enhancement of return profile. The halving of wholesale piece and vigorous 4x incremental addition in retail AUMs in FY22-23 with anticipated retail share at 98% may drive NIMs+ fees (140-150bps expansion), operating leverage with opex/AUM at average 4.6%, promising <4% GNPA, steady-state 2.6% credit cost, in turn driving RoA to 2.8% and RoE to 14% by FY26E. So, we upgrade LTFH to BUY with new TP at INR 209 (from INR 149), valuing LTFH at 2x FY25E P/ABV.
Rating: BUY
Target Price : INR 1660
Upside : 18%
CMP : INR 1408 (as on 24 January 2024)
Approximating turnaround tarmac
All-round beat driven by Manufacturing
Tech Mahindra (TECHM IN) reported revenue growth of 1.2% QoQ USD, beating our/street estimates of 1.4/1% QoQ decline. This was partially due to one-time pass-through and service revenue contributing ~1%. Similar was the case with margin – Q3 EBIT margin was 5.4%, ahead of our/street estimates of 4.8% each. We reckon Q3 to be the one to mark a turn-around for TECHM under Mohit Joshi’s (CEO) regime. Growth was led by strong traction in Manufacturing (up 2.9% QoQ USD; traction continuing since the past three quarters), retail (6.1%) and others (9.1%). Telecom, technology and BPO continued to be weak. Europe and RoW saw a turnaround.
Margin improvement – Key positive
EBIT margin was at 5.4%, up 80bps QoQ versus our estimate of 4.8% and median consensus estimate of 5.5%, aided by utilization improving by 200bps QoQ and 150bps from lower employee cost. SG&A was up ~110bps QoQ, in contrast with most results announced yet. Margin also carried one-time impact of ~160bps from contract termination of long-tail, low-margin accounts. Also, EBITDA margin for IT Services improved 84bps QoQ. Adjusted EBIT margin was 7%. TECHM's new strategy focused on improving margins via subcontracting cost reduction, value-based pricing and pyramid rationalization.
Three-pronged strategy already in force
Mohit Joshi’s three-pronged strategy to improve long-term outlook includes: 1) better revenue growth by improving engagement in top accounts (lacking so far); revamping engagements with smaller accounts, 2) margin improvement, via centralized delivery model and 3) building organization structure (to high agility and robust processes).
Valuations: Retain BUY; TP revised to INR 1,660
We factor in Q3 print and raise FY25E/26E EPS 7%/6% as we expect FY25 to a turnaround year with internal issues being sorted out. Expect USD sales/ EBIT/PAT CAGRs of 5.3%/12.7% / 12.4% in FY23-26E. We retain Buy with raised TP of INR 1,660 from INR 1,360, on 20.7x (five-year average + 1sd; from 18.3x earlier, on a quick show of results) Dec-25E EPS.
Rating: ACCUMULATE
Target Price : INR 165
Upside : 15%
CMP : INR 144 (as on 24 January 2024)
Characteristically weak quarter
Weak core performance; monitor related volatility
DCB Bank’s (DCBB IN) Q3 PAT at INR 1.27bn (up 11% YoY/flat QoQ) came in line with estimates, supported by higher other income and curtailed credit cost but underlying core saw softer trends. Core profitability was down >4% QoQ, given 21bps QoQ NIM decline (below the guided range, decline more than peers that have reported earnings thus far). Asset quality trends are stable, supporting earnings. The discussion hereon will rather be focused on: a) NIM trajectory – further funding cost strain likely, b) growth trajectory, which may feed into operating leverage benefit and c) recovery trends and credit cost delivery. While DCBB has been wading through challenges, the pressure points on core are disappointing. We believe, consistent delivery is the key trigger.
NIM decline feeds into softer core; trajectory, the key
DCBB saw softer core profitability (down >4% QoQ), led by 21bps QoQ NIM drop, largely due to funding cost impact, which was further impacted by lower lending yields (a disappointment). With this, NIMs (at 3.48%) fell below the guided range, and with likely further strain on funding cost, expect NIMs to be under strain, near term. We believe sustained focus and growth delivery are critical as these may drive operating leverage benefits – essential to improve return ratios.
Asset quality as expected; monitor volatility
Q3 slippages were higher at INR 4.3bn (4.6% versus 4.5% QoQ, higher than for peers, largely led by higher slippages in the mortgage segments (a large chunk came out of moratorium). That said, recovery/upgrades were higher, which curtailed the GNPL rise. While gross slippages have been elevated, recoveries have entailed lower credit cost, with DCBB sounding confident on higher recoveries hereon – a trend that may warrant further monitoring.
Valuations: Downgrade to Accumulate; TP revised to INR 165
While DCBB has performed well this cycle, we see structural operational limitations (long walk on liabilities, investment requirement) to cap returns – RoE of 12-13% in FY25E. Moreover, volatility between the quarters is a challenge and thus, we refrain from ascribing higher structural multiples, and see DCBB as more of a tactical play than a structural story at this juncture. We introduce FY26E estimates and roll over to September 2025E, leading to revised TP of INR 165 (from INR 147, multiples unchanged). Post our upgrade, the stock had outperformed >20% in the past three months, thus rendering limited upside – Downgrade to Accumulate from BUY.
Rating: ACCUMULATE | CMP: Rs2,590 | TP: ₹2,764
Q3FY24 Result Update – Strong growth visibility; Upgrade to Accumulate
Quick Pointers:
§ VAM prices at USD 900-1000/ton, 3Q24 usage at USD900/ton (USD2000/ton in 3Q23), input costs unlikely to soften further
§ Pioneer/growth segments sustain strong momentum amidst rising usage of innovative construction aids
§ Rural continues to grow ahead of urban led by rising availability, distribution and awareness about PIDI’s products
We cut our FY25/26 EPS estimates by 2.7%/4.2% as PIDI will have just 60bps margin expansion and double digit topline growth in a volume growth and innovation led strategy. PIDI continues to grow strongly in Tier3/rural ahead of urban by increasing distribution and awareness of its products. PIDI has taken high single-digit price cut since March23 (~6% in 3Q24) to sustained volume growth and ward of competition. PIDI aims at growing at 1.5xGDP growth in volumes led by 1) rising construction activity & govt capex 2) rising share of growth and pioneer categories (45% of sales now) 3) sustained innovation across segments and 3) gains from deeper distribution reach/awareness and usage in all emerging construction aids. We estimate 25% EPS CAGR over FY23-26 and assign DCF based target price of Rs2704 (Rs2704 earlier). Although we expect moderate returns in near term given premium valuations (51.2x FY26 EPS), we upgrade the stock to Accumulate. We believe PIDI provides a better medium term opportunity than APNT.
C&B volumes up 10% YoY; GM expands 156bps QoQ; Consolidated Revenues grew by 4.4% YoY to Rs31.3bn (PLe: Rs32.7bn) Gross margins expanded 1104bps YoY to 52.9% (Ple: 50.5%) EBITDA grew 49.7% YoY to Rs7.4bn (PLe:Rs7.9bn); Margins expanded 718bps YoY to 23.7% (PLe:24.2%) PBT grew 64.7% YoY to ₹6.9bn(PLe: Rs7.5bn) Adj PAT grew 66.8% YoY to Rs5.1bn (PLe:Rs5.5bn) Standalone – Sales increased 4.6% to Rs28.3bn, GM improved 1186bps YoY/172bps QoQ to 52.9%. EBITDA grew 51.4% to Rs7.08bn; Margins expanded 772bps YoY/187bps QoQ to 25%. PBT grew 72.1 % to Rs6.9bn. Adj. PAT grew 76.5% to Rs5.2bn. Consumer and Bazaar Sales grew by 4.9% YoY to Rs25.4bn; EBIT grew by 43% YoY to 7704.3mn. Industrial Products sales grew by 6.2% YoY to Rs6.4bn; EBIT grew by 93% YoY to756.5mn.
Concall Takeaways: 1) Demand trends remain strong with double digit volume growth 2) Rural/ semi-rural markets grew ahead of urban markets 3) Domestic B2B Subs grew 15% led by robust growth in Industrial & Project verticals, margins declined due to initial losses in Groupo Puma (Rs40mn) and Rs50-60mn higher ad spends in ICA Pidilite 4) International markets growth was led by Middle East and Africa 5) PIDI has increased the number of plants making tile adhesives from 2 to 10 in 2 years 6) PIDI has now entered TN and Karnataka (AP and Odisha earlier) even as the focus remains on economy segment in rural markets 7) 1/3rd Growth is contributed by the innovation led products introduced in the last 24months 8) NBFC pilot to start operations in one city in south India in next 15 days.
Rating: ACCUMULATE
Target Price : INR 1385
Upside : 6%
CMP : INR 1306 (as on 24 January 2024)
Weak demand leads to mellow showing
Revenue rises 7% YoY, driven by the cable segment
Havells India (HAVL IN) Q3FY24 revenue rose 6% YoY at a three-year CAGR of 12% to INR 44bn, 5% lower than our estimates, led by steady volume growth in cable and wires. B2B performed better on rising infra spend and upcycle in construction activities while B2C demand remains subdued, due to lower rural spending.
Q3 revenue up for cables and Lloyd; ECD & lighting remain muted
In Q3FY24, revenue from cables & wires rose 11% YoY to INR 15.7bn, led by robust volume growth in cables (Polycab C&W volume up 17% YoY and KEI up 14% YoY in Q3), which, in turn, was led by infra capex and pickup in private capex. Fans underperformed due to the impact of change in energy norms and high base. Lighting revenue grew 2% YoY to INR 4.3bn, due to lower LED prices (decline halted from November) while switchgears revenue was up 1% YoY to INR 5.2bn, given the drop in exports and the telecom segment. Lloyd grew 7% YoY while other revenue rose 16% to INR 2.7bn in Q3FY24.
EBIT margin down 30bp YoY to 9.1%, losses from Lloyd grow
Q3 EBIT margin showed a negative trend, dipping 30bp YoY to 9.1%, owing to disproportionate ad spend in the quarter. EBIT margin from switchgears fell by 60bp YoY to 24.1%, due to the decline in telecom OEM orders while cables margin fell 110bp YoY to 10.4%. ECD margin shrank 190bp to 11.2%, and Others margin contracted 150bp to 1.6%. Lighting margin was the only positive, up 150bp to 14.2%. Lloyd continues to post operating losses, with margin dipping 30bp YoY to
-10.1% based on lower-than-expected sales.
Valuation: reiterate Accumulate with a lower TP of INR 1,385
We lower our EPS by 9% in FY24E and by 4% in FY25E, due to prolonged weakness in consumer demand and margin compression in FY24E. We lower our TP by 6% to INR 1,385 based on 42x (from 45x) December 2025E P/E. We reiterate Accumulate as capacity expansion should aid B2B revenue growth in H2FY25 and FY26. The positive shift in consumer sentiments and turnaround in Lloyd may further aid in the price movement. We expect an earnings CAGR of 27% during FY23-26E, with an average ROE of 21% and ROCE of 20%.
Benchmark indices were in the red on Thursday. Among sectoral indices, IT, Bank and Pharma and Healthcare were the worst hit, while all other indices were in the red barring Realty.
At 1 pm, Sensex was down 733.05 points, or 1.03% at 70,327.25, and Nifty was down 196.55 points, or 0.92%, at 21,257.40.
Rating: BUY
Target Price : INR 8600
Upside : 19%
CMP : INR 7213 (as on 24 January 2024)
Impressive margins despite adverse mix
Domestic outlook strong, exports yet to deliver
Bajaj Auto’s (BJAUT IN) Q3 EBITDA improved 37% YoY/ 14% QoQ to INR 24.3bn, with margin improvement of 30bps QoQ to 20.1%, ahead of our estimates. Average selling price (ASP) dipped 1.4% QoQ owing to lower contribution of 3W, partially offset by improved mix within exports (higher share of LATAM). The RM cost/vehicle dipped 1.2% QoQ. EBITDA/vehicle remained flat QoQ at INR 20,200 (near life-high) also aided by operating leverage. Export demand continued to be hit by unfavorable macro factors, though improving steadily.
Demand holding up well even post festive season
BJAUT expects domestic 2W industry to grow 8-10% going ahead. Pulsar continued to do well and has gained share in the +125cc segment. The management expects a minor sequential increase in RM costs in Q4FY24. Softening of RM costs in Q3 was passed on to customers via price cuts for select models and to exports markets. Bajaj expects Triumph capacity to increase from 20k per month to 30k per month by end of FY25 (this would be negative for Eicher (Sell rating) . BJAUT expects to launch a new EV 2W product in Q1FY25, which may aid market share gains. It also expects to achieve 15,000 units per month run rate. BJAUT is working on a CNG motorcycle (launch in FY25).
Valuations: Recommend Buy; TP raised to INR 8,600
We are impressed by BJAUT’s margin resilience despite adverse mix (3W volume contribution down 300bps QoQ). This validates the fact that its margin performance is not overtly dependent on 3W performance (BJAUT did mention in recent years that its domestic 2W profitability delta has been the highest owing to superior mix). Domestic 2W retail market share gain has been impressive at 150bps YoY to 12% YTDFY24. Domestic 2W industry volumes have held up post festive season as well. We expect these to grow in high single-digit in FY25E.
Monitor exports recovery, which may be delayed. BJAUT with TVS are amongst the few listed OEMs that may post double-digit volume growth in FY25E. We up FY25E/26E EPS 2.5-6% on margin and volume upgrade and retain Buy with TP raised to INR 8,600 on 23x (from INR 7,054 on 20x earlier), led by resilient profitability, strong capital allocation (leading to increase RoE) and improving volume growth outlook and market share gains.
Rating: REDUCE
Target Price : INR 1170
Upside : 5%
CMP : INR 1112 (as on 24 January 2024)
An ordinary quarter
Muted volume growth, realization per case outperforms
United Spirits (UNSP IN) reported ordinary growth in Q3 – Prestige & above (P&A) volumes grew just 6% YoY in 9MFY24. UNSP reported stronger growth in realisation per case in P&A segment, led by product mix change/pricing, as the P&A realisation grew 7.4% YoY in the same period (9MFY24), largely led by growth in the luxury portfolio. Competitive intensity remains high in the mid/upper prestige segment to gain market share versus local peers, as per our assessment. But at overall portfolio level in P&A, UNSP grew in line with peers, helped by luxury brands. Constant move to renovate brands in the mid and upper-prestige segments led to traction in select cities, which drove volume growth. Realization per case would continue to prop growth, as UNSP is the leader in Scotch, with a strong recall across brands like Black & White, Black Dog and Johnnie Walker.
EBITDA margin may remain in a narrow band of 16.2-16.5%
UNSP indicated stable-to-slightly negative impact on gross margin going forward, as negative impact from higher cost of extra neutral alcohol (ENA) may be offset by 1) stable glass prices, 2) operating efficiencies and 3) potential price hikes. Overhang from higher advertisement and promotion (A&P) spend remains – as A&P spends, as a percentage of revenue, may move up sharply QoQ in Q4FY24E (currently at 8.9% basis 9MFY24) due to 1) launch of Don Julio tequila and 2) spends in IPL. This in turn may limit EBITDA margin improvement to 16.2-16.5% in FY24E. Expect EBITDA margin of 16.3% in FY24E, up 260bps YoY, which is healthy in our view.
Valuation: Maintain Reduce with higher TP of INR 1,170
UNSP’s core alcobev segment may post healthy revenue CAGR of 12.4% in FY24E-26E, led by realisation per case growth and partially due to volume growth. However, UNSP’s core alcobev valuation is already trading at fair valuations of 49x basis FY26E PER, factoring in healthy growth prospects. We marginally up FY25E/26E revenue 0.7%/1.6%, factoring in 1) higher realisation per case growth & 2) slightly better profitability and thereby raise FY25E/26E earnings 1.6%/2.4%. We retain Reduce and roll over to March 2025E SoTP-TP of INR 1,170 from INR 1,100, valuing the alcobev business at 53x one-year forward P/E (unchanged). We value the IPL segment at INR 83bn and WPL segment at INR 2.5bn. Implementation of the UK FTA leading to higher volume growth in P&A (luxury) and better profitability remain key drivers for upgrade.
Rating: ACCUMULATE
Target Price : INR 3485
Upside : 5%
CMP : INR 3315 (as on 24 January 2024)
Strong EHV growth, EPC surge continues
Cables – Steady volume growth of 13% in Q3
KEI Industries’ (KEII IN) Q3 revenue rose 16% YoY to INR 20.6bn, in-line with our estimates. Cables & wires (C&W) revenue grew 14% YoY to INR 18.7bn (revenue for cables & wires up 17% YoY for Polycab and 11% for Havells), led by strong growth in EHV, up 81% YoY. Exports doubled YoY to INR 1.9bn in Q3, led by healthy power transmission & distribution and solar demand. Despite strong demand, KEII’s C&W growth was lower than Polycab’s, due to capacity constraints in the cables division (90%+ utilization in cables). Volume growth in C&W stood at 13% in Q3 (Polycab’s volume grew ~20%). Industry grew 12-13% in Q3, as per management. EPC revenue spiked by 69% YoY to INR 3.8bn. Revenue for stainless steel (SS) wires fell 17% YoY to INR 465mn. KEII retained its revenue growth target at 16-17% for FY24, led by industrial demand and distribution expansion.
Cables – Q3 revenue up 14%, led by EHV and house wires
In Q3, EHV cables sales (9% of Q3 sales) surged 81% YoY to INR 1.9bn, in line with the recovery trend since Q2. EHV guidance was retained at INR 5.5-6.0bn, up 50-60% over FY23. Sales for house wires (28%) grew 23% to INR 5.7bn, and for LT cable (37%) 7% YoY to INR 7.6bn. HT cables (18%) was the only segment to see slight growth of 1% YoY to INR 3.6bn.
Valuation: Reiterate Accumulate with higher TP of INR 3,485
We lower FY24E/25E EPS 5%/4% due to delay in new capacity in Gujarat, impacting EHV revenue growth till FY25E. We raise our TP by 17% to INR 3,485 on 35x (earlier 28x) FY25E P/E, at 10% premium to our three-year average one-year forward P/E. We roll forward to December 2025E based on a sustainable earnings CAGR of 26% in FY23-26E – Reiterate Accumulate.
We remain positive on KEII, the second-largest firm in the cables & wire industry, as it is better poised than peers to leverage India’s infrastructure investment. This with growing retail franchisee, lean WC cycle and capacity spike should meet demand. Expect an earnings CAGR of 26% in FY23-26E versus 23% in FY20-23, with an average ROE of 22% in FY24E-26E.
Rating: ACCUMULATE | CMP: Rs1,306 | TP: ₹1,538
Q3FY24 Result Update – B2C business observes green shoots
Quick Pointers:
§ B2C impacted with subdued consumer demand; green shoots observed.
§ Cables business growth momentum continues (up 11.4% YoY).
We downward revise our FY24 EPS estimates by 8.8% mainly due to correction in margins, increased adv. & employee expenses and lower 9MFY24 rev. growth in consumer businesses. Havells India’s (HAVL IN) reported moderate revenue growth mainly with soft performance in the ECD/ Lighting/ Switchgears/ Lloyd segments (2.8%/ 2.4%/1.2%/7.5% YoY), while Cables business reported healthy growth (+11.4% YoY) benefited from infrastructure demand. Management indicated green shoots in B2C segment driven by growing traction in residential sector and favorable low base for summer products in the upcoming quarter. We estimate Revenue/EBITDA/PAT CAGR of 13.9%/24.4%/27.8% for FY23-26E with ECD/Cables/Lloyd segments CAGR of 10.0%/16.7%/16.9% over FY23-26E and EBITDA margin of ~12.3% by FY26E (+300bps). Our FY25/26E estimates stand marginally revised by -1.7%/+0.6%. Maintain ‘Accumulate’ rating at DCF based target price of Rs1,538, which implies 46x Dec’25 EPS.
Revenue grew 6.9%, Adj. PAT de-grew 12.4%: Revenue grew by 6.9% YoY to Rs44.1bn (PLe ~Rs45.2bn). There was soft performance in ECD (rev. up 2.8% YoY) as the festive gains were offset by fans high base. EBITDA decline by 7.2% YoY to Rs3.9bn (PLe: Rs4.4bn). EBITDA margins contracted 140bps YoY to 8.9% including provisions no longer required written back related to e-waste ( ₹395.3mn) (PLe: 9.8%). Adv. & sales promotion spends were higher amid festive season (up 38.2% YoY, 4% revenue) and emp. expenses increased by 15.1% YoY, resulted in lower EBITDA margin against gross margin expansion. In terms of segmental EBIT margin, Cables margin came in at 10.4% (-110bps YoY), Lighting at 14.2% (+150bps), ECD at 11.2% (-200bps) and Switchgear at 24.1% (-60bps YoY). Lloyd continues to see losses at Rs646mn vs loss of Rs600mn in Q3FY23. PBT de-grew by 7.9% YoY to Rs3.5bn. Adj. PAT de-grew 12.4% YoY to Rs2.5bn (PLe Rs3.0bn). Net working capital days came at 42 (Vs 39 in Q3FY23, 39 in Q2FY24).
Concall Takeaways: 1) Weak performance in ECD business as festive gains were offset by fans high base, 2) Consumer demand continues to be subdued, though recent trends suggest some recovery, 3) W&C business sustains healthy growth led by infrastructure demand; cables continue to face capacity constraint while growth is better than domestic wire segment resulting in EBIT margin contraction, 4) Lloyd reported 18.2% CAGR in Q3 over past two years, with management anticipating sustained growth for upcoming season, 5) In Lloyd, 65-70%% contribution came from RAC, 6) Havell has provided lighting solutions to Shri Ram Mandir and Ayodhya, 7) Lighting segment witnessed significant volume growth while, the value growth was tempered by value erosion in LED lighting business, which as per management has bottom-out and expected to grow with volume in coming quarter, 8) Increased adv. expenses in Q3FY24 (4% rev.) was driven by festival season, Cricket World Cup and Q2 spill-over effects, which will normalize in the coming quarter, 9) Capex would remain around Rs6bn in FY24, majorly in W&C capacity enhancement – 25% cable capacity increase & some enhancement in wire capacity as well, 10) Mgmt. observes green shoots in the B2C segment, driven by growing traction in the residential sector and favorable low base for summer products in upcoming quarter.
Rating: SELL | CMP: ₹143 | TP: ₹100
Q3FY24 Result Update – Strong GRMs drive earnings
Quick Pointers:
§ Singapore GRM has risen in Q4-TD, however sustainability of such strong GRMs remains uncertain in the long term owing to weak demand prospects
§ Gross marketing margin came in at ₹4.4/ltr against estimate of ₹3.6/ltr.
Indian Oil Corporation (IOCL) Q3 EBITDA stood at ₹154.9 bn (down 27% QoQ, PLe: Rs82.9 bn, cons est: Rs91.7bn) and PAT at Rs80.6 bn (down 38% QoQ, PLe: Rs29.9bn, cons est: Rs47.8bn). The beat on estimates was driven by higher than anticipated refining margins. Refining capacity utilization stood at 105.1%. The stock is currently trading at 1x FY26 BV and 7.1x FY26 EV/EBITDA. Factoring in the demand concerns and inability to pass on rise in fuel cost we anticipate GRMs at US$6/bbl for FY25/26E and gross marketing margin at ₹4.2/ltr for FY25/26E. Maintain ‘Sell’ rating with a TP of ₹100 (Previous TP ₹94) based on 0.7x FY26E P/BV.
§ Refining throughput and marketing sales grow sequentially: Refining throughput at 18.5 mmt increased by 4% QoQ (PLe: 18.4 mmt). Capacity utilization for the quarter was 105.1%. On a YoY basis, throughput grew by 2%. Marketing sales came in at 20 mmt, up 2% QoQ (PLe: 20.5 mmt). Sales were down 7% YoY. Exports for the quarter were 1.3 mmt, flat QoQ.
§ Strong GRMs beat estimates: IOC reported a GRM of US$13.5/bbl, higher than our estimate of US$9.3/bbl. Core GRM stood at US$10/bbl with an inventory gain of US$3.5/bbl. GRM declined by US$4.6/bbl QoQ. On a YoY basis, GRMs grew by US$0.6/bbl. Singapore GRMs in the current quarter have risen and are averaging at ~US$6.5/bbl. However, uncertainty persists on the sustainability of strong GRMs in the long term given weak demand prospects. Factoring in this, we build in a GRM of US$12/6/6/bbl for FY24/25/26E.
§ Gross Marketing Margins improve significantly YoY: On the marketing front, implied gross marketing margin came in at ₹4.4/ltr above our estimate of ₹3.6/ltr. On YoY basis, gross marketing margins grew remarkably by 6x led by softening of international petrol and diesel prices. In Q4-TD, average gross margins on petrol/diesel stand at Rs11/7/ltr. However, in light of the upcoming elections we build in gross marketing margin of ₹4.2/4.2/ltr for FY25/26E.
§ Significant growth in 9MFY24 performance: EBITDA grew 304% YoY mainly on account of higher gross marketing margins in 9MFY24. Net profit for the period was Rs347.8bn against a net loss of ₹18.2 bn in 9MFY23. Cumulative GRMs stand at US$13.3/bbl vs US$21.3 in 9MFY23. However, average gross marketing margins grew remarkably to Rs6.2/ltr against a gross marketing loss of Rs2.6 in 9MFY23.
Rating: BUY | CMP: Rs144 | TP: Rs160
Q3FY24 Result Update - Margin performance a key monitorable
Quick Pointers:
§ Core PPoP in-line; softer NIM neutralized by higher fees.
§ Loan growth guidance of doubling the book over 3-4 years maintained.
DCBB saw a mixed quarter; core PPoP was broadly in-line at Rs1.86bn but NII was lower by 1.4% due to 8bps miss on NIM that was offset by higher fees. Slippages were higher led by mortgages, although recoveries were stronger. Deposit growth at 3.6% QoQ was mainly led by SA accretion of 10.6% leading to increase in CASA ratio, which has declined for the system. Despite tight liquidity environment, bank maintained growth guidance of 18-20% since its customer base is not facing major challenges. We trim loan CAGR over FY24-26E by 1% to 18%, however, LDR is comfortable at 82.7%. While NIM could remain under pressure for 1-2 quarters, bank expects NIM to revert back to normalized level of 3.65-3.70% that would be led by share of LAP enhancing to 60-70% (of mortgages) from 50%. We maintain multiple at 1.0x on Sep’25 ABV and keep TP unchanged at Rs160. Retain ‘BUY’.
§ Core PPoP in-line; lower NII offset by higher fees: NII was a miss at Rs4.74bn (PLe Rs4.81bn) due to lower NIM as loan growth was in-line. NIM was a miss at 3.65% (PLe 3.73%) owing to higher funding cost. Loan growth was in-line at 18.2% YoY, while deposit growth was 19.3% YoY (PLe 18.8%). Other income was higher at Rs1.24bn (PLe 1.1bn) led by better fees at Rs980mn; opex was largely in-line at Rs3.86bn. Core PPoP was broadly as per expectations at Rs1.86bn. Gross slippages were higher at Rs4.28bn (PLe Rs3.75bn), while recoveries too were stronger at Rs33.9bn (PLe Rs28.5bn). GNPA increased QoQ by 7bps to 3.43% although PCR improved QoQ from 63% to 65%. Provisions were Rs410mn (PLe Rs400mn). PAT was Rs1.27bn, while core PAT was Rs1.08bn (PLe Rs1.09bn).
§ Focus to increase share of LAP: Sequential loan growth of 4.5% QoQ was led by agri (+6.4%) and mortgages (+5.9%). Management reiterated guidance to double balance sheet over 3-4years that would be led by SME/MSME, mortgages, tractors and gold loans. Bank has stopped disbursal of low yielding products like invoice discounting and migrated to higher yielding products. Focus is to increase share of LAP within mortgages from 50% to 60-70%; pre-COVID contribution of LAP was ~75%. Deposit performance was better since overall accretion at 3.6% QoQ was largely driven by healthy SA growth of 10.6% and as a result CASA inched up QoQ from 25% to 26% largely led by retail SA. Aim is to increase share of RTD and CASA.
§ NIM guided to revert back to pre-COVID levels: Reported NIM for Q3’24 declined sharply by 21bps QoQ to 3.48% due to catch up in deposit cost; bank expects funding cost to go up for another 4-5 months. However, we expect the pace of deposit cost increase to taper down. DCB is targeting a steady state NIM of 3.65-3.70% which would be achieved by enhancing share of LAP within mortgages; yield differential between LAP and HL is 100bps. Slippages rose QoQ mainly led by mortgages as entire OTR pool had come out of moratorium in Q2FY24; this should normalize in coming quarters.
Shedding previous day's gains, benchmark indices were in the red on Thursday. Among sectoral indices, IT, Bank and Healthcare were down over 1%.
At 12 pm, Sensex was down 539.96 points, or 0.76% at 70,520.35, and Nifty was down 153.10 points, or 0.471%, at 21,300.85.
Rating: BUY
Target Price : INR 1311
Upside : 20%
CMP : INR 1089 (as on 23 January 2024)
Progressing well
Strong revenue drives earnings beat, delivery on core, critical
Axis Bank’s (AXSB IN) Q3 PAT of ~INR 60.7bn surpassed estimates on higher-than-expected revenue traction (better NII and higher core fee), even as opex (up 2.6% QoQ) was sticky. The key discussion points hereon will be: a) NIMs, which declined 10bps QoQ (as expected) – the trajectory is critical given limited levers, b) opex outcomes, which continue to run elevated and are a challenge and c) softer core deposit traction – Q3 again saw reliance on bulk deposits – even as some markers on deposits (outflow rate, quarterly average balances etc.) improved. While performance in the past few quarters enabled AXSB to converge with frontline banks’ performance, volatility has been a concern and delivery hereon on deposits growth, funding cost and consistency may be critical to drive a re-rating
NIMs as expected; trajectory hereon, the key
NIMs were 4.01% (down 10bps QoQ), as expected. With deposits cost likely to rise further (growth at a cost has been challenging plus repricing impact still pending), and given limited yield levers, LCR at 118% plus CD ratio already at 93%, NIMs may be under strain, Thus, the liability franchise may warrant higher scrutiny, which has rather been a slow-moving piece for AXSB, albeit improving.
Asset quality trends stable; no major red flags visible
Slippages were curtailed at 1.8% (versus 1.6% QoQ). The credit cost (annualized) was 54bps (versus 70bps QoQ), benefiting from better recoveries. Within various segments, asset quality appears to be quite comfortable. Through the cycle, AXSB has created sufficient buffer to cushion from negative surprises, if any – Coverage of +75% on stress pool. With NIMs likely peaking out and opex sticky, credit cost is the key variable for RoA delivery.
Valuations: Recommend BUY; TP raised to INR 1,311
AXSB, in the past three years, has hinged on the strategy to strengthen fundamentals. That said, the volatile performance, first led by softer aspects, then by asset quality strain and lower PPoP, has taken the sheen off of fundamental changes, thus undermining underlying valuations. The progress in underlying business performance reinforces our belief of improved delivery, but consistency is the key. We introduce FY26E estimates and roll over to September 2025E, leading to raised TP of INR 1,311 (from INR 1,246), with INR 83 as subsidiary value. Key monitorables are: a) consistent delivery on core PPoP, b) capital raising plans (if any) and c) building on merger benefits from Citi portfolio.
The two-wheeler maker reported a 68% YoY rise in standalone net profit at ₹593.35 crore in Q3FY24, compared to a net profit of ₹352.75 crore during the year-ago period. TVS reported a 26% YoY rise in its net standalone revenue to ₹8,245 crore during the quarter under review compared to the ₹6,551 crore it had earned in the year-ago period. The company's operating revenue increased by 26% YoY to ₹8,245 crores for the quarter ended December 2023, compared to ₹6,545 crores reported in Q3FY23.
The realty major reported a 27% increase in consolidated net profit at ₹655.71 crore in the December quarter on higher income and less expenses. Its net profit stood at ₹517.94 crore in the year-ago period. Total consolidated income rose to ₹1,643.51 crore in the October-December quarter of the 2023-24 fiscal from ₹1,559.66 crore in the corresponding period of the previous year. On a standalone basis, DLF's net profit rose 57% to ₹463.66 crore Q3FY24 from ₹294.86 crore in the year-ago period. Total standalone income rose to ₹1,117.40 crore in the latest December quarter from ₹973.89 crore in the year-ago period, according to a regulatory filing.
The company reported a consolidated net profit of ₹522 crore in Q3FY24, compared to a net loss of ₹2,501.95 crore in the corresponding quarter of the previous year. The company had also registered a net loss of ₹6,511.16 crore in Q2FY24, primarily attributed to impairment charges. Tata Steel's year-on-year (YoY) comparison reveals a 3% decrease in revenue from operations, amounting to ₹55,312 crore. This marks a slight dip from the ₹57,084 crore recorded in the corresponding quarter of the previous year.
The state-owned bank reported a 30% rise in net profit at ₹723 crore for Q3FY24, on the back of improvement in core income and reduction in bad loans. The lender had earned a net profit of ₹555 crore in the corresponding quarter a year ago. Operating profit of the bank improved to ₹1,780 crore compared to ₹1,540 crore in December 2022. Total income increased to ₹7,437 crore during the quarter under review from ₹6,006 crore in the same period last year, IOB said in a regulatory filing.
The company reported a rise of 37% in standalone net profit at ₹2,042 crore, beating estimates of a 33% YoY rise to ₹1,987 crore by leading brokerage firms. At ₹2,042 crore, Bajaj Auto's net profit rose 37 per cent YoY compared to ₹1,491 crore in the year-ago period. The company's revenue from operations jumped 30.1 per cent to ₹12,114 crore, compared to ₹9,315 crore in the corresponding period last year.
Shedding the previous day's gains, benchmark indices were down in the red on Thursday.
At 11 am, Sensex was down 688.01 points, or 0.97% at 70,372.30, and Nifty was down 194.05 points, or 0.90%, at 21,259.90.
The two launches by Hero MotoCorp Ltd – Xtreme 125R and Mavrick 440 – will strengthen the two-wheeler major's portfolio amid the current trend of premiumization in the market. The Xtreme 125R, available at a starting price of ₹95,000, fills a crucial gap in Hero’s line-up. Key competitors for this model include Bajaj Pulsar and TVS Raider.
To be sure, Hero’s wholesale market share in the two-wheeler segment dropped to 30% in the nine-month ended December, compared to an average of 36% from FY18-22, notes Jefferies India. This comes on the back of lacklustre demand in the entry level segment, where Hero primarily operates. As such, the launch the Xtreme 125R could play a significant role in helping Hero recapture some of its lost market share. (Read full story here.)
The IT major reported a 61% year-on-year decline in its net profits, which plunged to ₹510.4 crore in the December 2023 quarter, from ₹1,296.6 crore in the year-ago period. Revenue from operations came down 4% year-on-year from ₹13,734.6 crore in Q3FY23 to ₹13,101.3 crore during the period under review. The Q3 earnings for Tech Mahindra are in line with expectations. Sequentially, Tech Mahindra reported a 3% rise in net profits at ₹494 crore during the quarter ending September 2023. In terms of revenue, 2% quarter-on-quarter growth was reported from ₹12,864 crore in Q2FY24.
Rating: REDUCE
Target Price : INR 246
Downside : 5%
CMP : INR 260 (as on 24 January 2024)
Valuation pricing in emerging green shoots
Volume growth drives domestic business
Rallis India (RALI IN) reported a 5% deceleration in topline to INR 6bn versus INR 7bn estimated, led by pricing pressure globally. Domestic crop care business grew 6%, led by 7% volume growth. International business declined 24% YoY to INR 1.9bn. Gross and EBITDA margin expanded 309bps and 191bps to 42.5% and 10.4% respectively, led by: (a) 800bps improvement in geographical revenue mix in favor of domestic business, (b) timely liquidation, (c) shorter procurement cycle for raw material purchases and (d) cost control.
International business – Outlook improving
Excluding the crop protection (CP) business, CRAMS (contract research and manufacturing services) has started to see traction. The current strategy is to add new clients/ products to create possibilities, so as to garner more business, which can become meaningful 2-3 years later, to scale-up the CRAMS business. Polymer business has regained traction and may see significant volume growth in 2-3 years. Within the CP business, while demand slackening continues, the next 12 months may be better than the trailing 12 months.
Valuation: Reiterate Reduce with higher TP of INR 246
Driven by efforts on various fronts to turnaround the business, RALI may taste success FY25 onwards if the macroeconomic scenario turns supportive. If macro remains against the industry, RALI may still outperform others. Turnaround in the seeds business seems sustainable based on management commentary.
But the stock at current price is factoring in all the possible benefits that can accrue to RALI in the near future. We introduce and roll forward valuations to FY26E. We reiterate Reduce with TP higher at INR 246 (from INR 219 earlier), based on 18x (unchanged) FY26 EPS of INR 13.6.
PMSY – Rooftop solar to bask in the sun
The government announced Pradhan Mantri Suryodaya Yojana (PMSY), a new rooftop solar scheme targeting 10mn households. While details are still embryonic, we assess the opportunity size/sectoral beneficiaries.
Solar panel manufacturers, power financing plays to benefit
Pradhan Mantri Suryodaya Yojana (PMSY), at scale (as and when that happens), is set to benefit manufacturers of solar panels, capital goods, structural steel pipes, and consumer durables & electrical companies as also power financing players. We estimate the total opportunity size for solar panels, based on the current announcement, to be 10GW, at total investment of ~INR 554bn.
Distribution utilities may see a hit of INR 87bn in revenue
Upon full execution, PMSY has the potential to generate surplus income for rural households after the investment pay-back period is over through sale of surplus power to the grid. For a 3kw installation, we estimate an income rise of 6.7% of the monthly average rural income, if the household does not use air conditioning units and doesn’t get any free power presently. We see a funding opportunity of INR 250bn, mainly benefiting power finance companies. Among losers, expect distribution utilities to see a hit of INR 87bn in revenue, as 4% of their sales are projected to transition to solar rooftop due to the installation of 10GW capacity.
PMSY: Top beneficiaries are Tata Power, REC, IREDA, PFC
Our top picks to benefit from PMSY are Tata Power (Accumulate, TP INR 288), REC (Buy, TP INR 582), IREDA (Not Rated), PFC (Buy, TP INR 326), KEI Industries (Accumulate, TP INR 2,700), Havells India (Accumulate, TP INR 1,480) and APL Apollo (Accumulate, TP INR 1,679)
Government’s existing rooftop solar scheme lackluster
The National Portal for Rooftop Solar (solarrooftop.gov.in) was launched by Prime Minister Narendra Modi on 30 July 2022. The portal makes it easier for residential consumers to apply for and install rooftop solar systems.
Till date, only 56,733 have benefited from the scheme, with total capacity added at 269.2MW and total subsidy of INR 3.18bn. A total of 66 DISCOMS have been onboarded to the scheme. The scheme, has not seen much progress till date.
Rating: ACCUMULATE
Target Price : INR 8610
Upside : 5%
CMP : INR 8196 (as on 23 January 2024)
In-line Q3; building hope on Q4
In-line Q3; delayed ramp-ups to likely ensue in Q4
Tata Elxsi (TELX IN) posted an in-line Q3, with QoQ dollar growth at 2.8%, slightly ahead of consensus estimates by 0.7%. EBIT margin at 26.8% was a tad miss on streets expectations by 30bps and in line with ours. Growth was broad-based, except for Media & Communications, wherein spending was laggard, and thus the caution on demand. But this was offset by robust demand in Lifesciences (+3.9% QoQ CC). Transportation saw a steady performance of 1.9% QoQ CC growth. Softness in growth was due to delayed ramp-ups and Q3 weakness. But talent addition (+350 employees QoQ) in a weak Q3 is possibly a reflection of ramp-ups finally ensuing in Q4.
Design-led growth and AI-led capabilities prop deal momentum
Digital propelled the Industrial Design business that saw sharp 11.7% QoQ and 17.9% YoY CC growth. This also paves way for downstream value in Systems Integration business, reflecting in related 11.7% QoQ / 20% YoY CC growth. TELX is building capabilities in AI via new deals. It already has an AI component in its automation and ADAS offerings and adding gAI aids faster time to market. TELX bagged four key deals in Q3, one in design services, two in product engineering and one in Lifesciences, thus backing demand momentum.
Valuations: Maintain Accumulate; TP raised to INR 8,610
We favor TELX given: a) its digital design prowess, b) industry-leading operating margin (~30% EBITDA), c) marquee clientele (75% offshore mix) and d) strong return ratios (RoE/RoIC at 41%/93%). Orderbook continues to be robust in Transportation and Medical verticals. However, the soft outlook for Media and Telecom sector may continue to weigh on growth. We slightly raise FY25E/ 26E earnings by 0.6% / 1.7% respectively. We maintain Accumulate with raised TP of INR 8,610 (earlier INR 8,490, on 51x Dec-25E EPS of INR 168 (five-year average + 0.5std. deviation). In FY23-26E, expect USD revenue/EBIT CAGRs of ~16%/18%, implying an EPS CAGR of ~15%.
Rating: BUY
Target Price : INR 582
Upside : 34%
CMP : INR 435 (as on 23 January 2024)
Indestructible value creation
Optically low PAT given one-offs in Q2; NIM/growth surprise
Barring high one-offs in Q2 (INR 5.2bn with respect to reversals, dividend income), REC’s (RECL IN) Q3 earnings were strong on all counts. This was led by: (a) 16bps QoQ NIM uptick, on strong disbursements (up 11%QoQ) and steady CoF at 7.28% sequentially (7.23%: Q2), led by favorable liability mix (~41% borrowings from corporate bonds; 9% from capita gain bonds – amongst only one in four to raise these – being priced favorably); (b) Provision at mere INR 0.6bn with resolutions of three assets; and (c) decadal-high 21% YoY loan growth largely led by renewables, LPS, infra portfolios. RECL is upbeat on growth guidance of 16% YoY, NIM steadying at 3.5% and anticipated provision reversal for FY24, which signal strong book value accretion and continued robust upside for the stock.
Renewables, non-power prop loan; sanction pipeline strengthens
RECL saw robust loan growth of 4.9% QoQ/21% YoY, led by infra loans (up 46% QoQ), renewables (up 11.5% QoQ/30.5% YoY). Renewables at 6.7% of assets (~INR 333bn) may climb to INR 3tn by FY30E, led by the recent INR 280bn MoU signage and the government’s agenda to take the share to 30% of mix by FY30. Also, Q3 saw 57% of overall sanctions from renewables. RECL continues to prop talent, skillset, effective pricing, focusing on state-backed assets (DISCOMs led by RBPF loans), quality renewable corporates, GoI-led rooftop solar loan (estimated INR 300bn funding opportunity) and high-ticket infra projects, propping business visibility. Expect higher 18% loan CAGR in FY24E-26E.
Sturdy asset resolutions, more to follow; expect write-backs in FY24
NIM may be steady ahead as RECL seeks to contain credit cost (aim is 0% net NPA by FY25). RECL did not see any slippage in past eight quarters. It expects write-back in FY24. Stage 3 assets of 2.78% were at six-year low in Q3. Currently, 16 stressed projects (INR 138bn) are in Stage III, of which for three (INR 15.1bn), resolution is being pursued outside NCLT and for 13 (INR 123bn) within NCLT. Q3 saw three asset resolutions – Meenakshi (INR 7bn), DANS Energy, Classic Global. With more in pipeline (TRN Energy, Badreshwar, Lanco, Nagai), expect 2-2.4% GNPA in FY24E-26E.
Valuations: Maintain BUY; TP raised to INR 582
Despite run-up to ~1.5x FY25E P/ABV, RECL’s dream run may continue led by healthy earnings CAGR given high double-digit growth visibility, steady margin in tight funding milieu and sizeable write-back leading to high 18-19% RoE and 2.9% RoAs in FY24-26E. We lift FY24E/25E/26E estimate 5-9% each. Riding on upbeat industry trend and GoI backing, RECL may create further indestructible value for shareholders. BUY – We up TP to INR 582 (from INR 420), on 1.9x FY25E P/ABV (from1.4x).
Rating: REDUCE
Target Price : INR 1323
Downside : 3%
CMP : INR 1370 (as on 23 January 2024)
Entering uncharted territory
Forestville launch major contributor to Q3 sales
Oberoi Realty (OBER IN) booked sales worth INR 7,910mn in Q3FY24, down 18% QoQ and up 24% YoY. It recorded a sales volume of 0.26mn sqft, up 18% QoQ and down 28% YoY. A total of 216 units were booked during the quarter. OBER entered the Thane market with the launch of Forestville on Kolshet Road. The initial phase, featuring three towers, was received. The project contributed pre-sales of INR 2bn with a volume of 0.11mn sqft (116 units) with an average realization of INR 19,250 per sqft. It is expected to contribute INR 5-8bn of pre-sales annually. For Q3FY24, OBER posted revenue from operations of INR 10.5bn, down 13% QoQ and 35% YoY.
Entry into NCR, exploring new opportunities.
OBER acquired a 14.8-acre land parcel from Ireo Residences at Gurugram for INR 5,970mn officially marking its entry in the NCR market. It is planning a luxury residential project there. In the NCR market, OBER’s focus will be on delivering quality products. The company is actively looking for large land parcel opportunities, and it plans to utilize surplus cashflow for land acquisition.
Annuity run-rate to reach INR 18bn
Commerz 3 is building good momentum and is anticipated to yield an annuity income of INR 7.0bn. After reaching a stable state, the combined impact of Commerz 3, the new Oberoi Mall at Borivali, and Ritz-Carlton Hotel should contribute ~INR 12.5bn to the annuity portfolio. This collective effort is poised to raise the total annuity run-rate to ~INR 18.0bn.
Valuation: downgrade to Reduce with a higher TP of INR 1,323
OBER has built a healthy project pipeline and strong rental potential, which would ensure robust cashflow visibility in the near to medium term. The recent foray into the NCR market and a few prospective land parcels in the pipeline reflects beneficial business development activities. Due to ~20% run-up in the stock price in the past three months, we downgrade our rating to Reduce from Accumulate; we increase our TP to INR 1323 from INR 1,272 based on 1.3x one year forward NAV and introduce FY26 estimates. Premium of 30% has been applied to NAV due to its huge launch pipeline.
Rating: ACCUMULATE
Target Price : INR 4413
Upside : 12%
CMP : INR 3948 (as on 23 January 2024)
Margin at three-year high
Operationally as expected
JK Cement’s (JKCE IN) Q3FY24 net sales grew ~18% YoY/9% QoQ to ~INR 26.9bn. Further, EBITDA jumped ~147% YoY/36% QoQ to ~INR 6bn. Net sales and EBITDA were broadly in line with our estimates of ~INR 27bn/INR 5.8bn, respectively. Adjusted PAT surged ~329% YoY/62% QoQ to ~INR 2.9bn.
Blended EBITDA/tonne at INR 1,330 likely to be in top quartile
Grey cement volume rose ~14% YoY/6% QoQ to 4.15mn tonnes, and white cement (including wall putty) volume was up ~10% YoY/3% QoQ to 0.42mn tonnes. Grey cement realization rose ~6% YoY/4% QoQ to INR 5,164/tonne. White cement (including wall putty) realization was flat YoY but grew ~2% QoQ to INR 12,870/tonne. Blended operating cost fell ~8% YoY/3% QoQ to INR 4,756/tonne. Thus, blended EBITDA/tonne, including other operating income, grew ~118% YoY/29% QoQ to INR 1,330. EBITDA/tonne reported by JKCE is the highest in the past three years and may be in top quartile.
Grey cement capacity to rise ~36% by FY26E from current level
The 1.5mn tonnes grinding unit at Ujjain (Madhya Pradesh) was commissioned in end-November 2023. And 2mn tonnes capacity at Prayagraj (Uttar Pradesh) may start by Q2FY25. JKCE announced new growth projects at ~INR 28.5bn capex:1) 3.3mn tonnes clinker expansion at Panna (Madhya Pradesh), 2) cement expansion of 1mn tonne each at Panna, Hamirpur (Uttar Pradesh) and Prayagraj and 3) 3mn tonnes greenfield grinding unit in Bihar. These may be completed in a phased manner by end-FY26.
Valuation: Reiterate Accumulate; TP raised to INR 4,413
Better demand and completion of ongoing projects in the next few months may prop near-term volume. Phase-wise completion of newly announced projects in the next few years bodes well for long-term volume. Lower fuel prices, cost savings measures may contribute to enhanced cost optimization. We reiterate Accumulate and up FY24E/25E/26E EBITDA ~14%/13%/12%. We roll over to December 2025E from September 2025E. And we raise SoTP-TP to INR 4,413 from INR 3,823. We ascribe 12x (unchanged) Dec-2025E EV/EBITDA to grey cement, 18x (unchanged) Dec-2025E EV/EBITDA to white cement (including wall putty) and 15x (unchanged) Dec-2025E EV/EBITDA to the paint business.
Taking stock of Birla Opus’ rollout plan and strategy
Our interactions with paint dealers indicate that Birla Opus is gearing for a phased rollout starting in March 2024 with a nearly complete product portfolio. The company is focusing on: (1) brand building (media spends comparable to APNT), (2) product quality, (3) heavy investments in field-force with a focus on sellouts over and above primary sales and (4) differentiators—(a) smallest tinting machine provided free of cost to dealers, (b) significant investments in sampling, (c) unique retailing strategy (shop-in-shop formats, franchisee showrooms) to the extent possible and (d) better terms of trade. Prima facie, it looks like Birla Opus would not engage in irrational pricing in the retail market (aggressive pricing in the B2B market likely). We expect EBITDA margins of incumbent paint players to correct by 200-400 bps over FY2024-26E as they increase A&P spends and tweak trade schemes and pricing to defend market share. Brace for muted earnings CAGR over FY2024-26E.
Key insights on Birla Opus’ rollout plan and strategy
Grasim has engaged extensively with decorative paint dealers across the country. We gather the following from our dealer/industry interactions.
Rollout plan. Grasim is expected to launch its decorative paint brand, Birla Opus, in March 2024. The rollout would be in a phased manner (in line with the commissioning timelines of manufacturing plants), starting with the North and South regions in 1HCY24 and the West and East in 2H. Punjab, Haryana, Rajasthan and Tamil Nadu are expected to be among the first few states. The company has placed tinting machine orders and expects imports starting this month. The company would cover urban as well as rural markets in the states that they enter from the very beginning. Birla Opus would directly supply decorative paints to dealers, and it would continue to sell putty through its distributor network.
Product portfolio. Birla Opus would be launched with a portfolio of 50+ products that account for 80% of decorative paints industry sales. The portfolio would be expanded to 100+ products in a year, covering 100% of decorative paints industry sales. Grasim has carried out field validations (blind testing) of 100+ products at 200+ sites across 15 cities and covering 400+ contractors; it claims that 80% of contractors ranked Birla Opus as #1 brand in field validations. Given this, it looks Grasim has focused on product quality and invested in rich formulations that fetch high scores on functional parameters.
Marketing plan. Grasim is indicating that its advertising spends would be comparable to those of the market leader. APNT’s standalone A&P spends are Rs11-12 bn (FY2024E), of which 45-50% could be media spends. Our industry interactions suggest that Aditya Birla Group had bid for the title sponsorship of IPL but it lost out to the Tata Group, which had the right of first refusal. It looks like Grasim could spend Rs4-5 bn on advertising in FY2025E, more than the aggregate media spends of Berger, Nerolac and Indigo Paints.
Select differentiating factors. (1) Opus’ tinting machine would be the smallest machine in the market (4.5-5.5 sq. ft size), occupying 10-20% less space than smaller machines of the incumbents. Grasim would likely offer tinting machine on zero lease, (2) Grasim is in talks with paint dealers to co-invest in showrooms (franchise showrooms or 400-500 shop-in-shop format with premium decor). In addition, the company would also have a few experience centers, (3) Grasim plans significant investments in sampling (not an industry practice), which essentially means it could give away a lot of 1 liter SKUs of Opus to contractors/painters, (4) Grasim has a large salesforce that would not only focus on primary push but also ensure sellouts (secondary/tertiary sales; not an industry practice to focus on sellouts).
4 Trade terms and commissions. (1) Grasim would offer 2-5% cash discount to dealers for payment made within 10-50 days (Exhibit 5); this scheme on an average offers 5-7 days of extra credit than competitors, (2) Grasim has not disclosed trade commission yet. Based on commissions offered on its recently launched wood coatings portfolio, we believe Grasim’s trade margin could be 400-500 bps better than that offered by Asian Paints.
Pricing strategy. Grasim has not given any indication on its pricing strategy so far. Based on pricing of its wood coatings, it looks like Birla Opus products could be at about 5-7% discount to Asian Paints, especially in case of products with high volume/salience. We expect Grasim to be aggressive on pricing in the institutional market (B2B/Institutional sales account for about 15% of decorative industry sales) to garner market share and achieve some scale early on. We do not expect the company to indulge in irrational/aggressive pricing in the retail/B2C decorative paints market given its investment plan in A&P, product quality, sales network and retailing strategy.
We expect 200-400 bps decline in EBITDA margin of incumbents over FY2024-26E
Grasim has an ambitious goal of becoming #2 player with double digit market share in decorative paints in the medium term. We believe it could be targeting Rs25-30 bn sales in Year 2 (FY2026E). Prima facie, it looks like Grasim would invest heavily in brand building, offer attractive trade schemes and refrain from irrational pricing, especially in the retail/B2C market. Given this, we do not expect EBITDA margins of the incumbent paint players to collapse, but we do expect a 200-400 bps drop in EBITDA margins from FY2024E levels, as we expect incumbents to step up A&P spends (say 100 bps increase), trade schemes (say 100-150 bps increase) and cut prices/compete aggressively to defend market share in the B2B/institutional market. In a nutshell, we expect negligible (or nil) earnings growth for incumbents over FY2024-26E.
Shedding previous day's gains, benchmark indices were in the red on Thursday.
At 10 am, Sensex was down 327.57 points, or 0.46% at 70,732.74, and Nifty was down 78.20 points, or 0.36%, at 21,375.75.
Rating: HOLD | CMP: Rs3,315 | TP: ₹3,268
Q3FY24 Result Update – Growth continue, maintain margins
Quick Pointers:
§ Reported volume growth of 13%/22% in Q3FY24/9MFY24.
§ Healthy order book; maintained 16-17% revenue growth guidance for FY24.
KEI Industries (KEII) maintained its revenue growth guidance at 16-17% with volume growth of >20% in FY24 and expects ~11% margin in the near term, given strong demand outlook in export business and domestic sectors like Infra/Railway/Real estate etc. The company has reported strong rev. in EHV cables (+80.6% YoY), housing/winding wire (+22.5% YoY) & EPC business (+53.7% YoY) besides guided EHV rev. of ₹5.5-6.0bn in FY24. KEI reported strong growth in its export business despite capacity constraints. The company’s strategic focus on export market, however, led to a decline in cable institutional business, which resulted better margins. Management expects revenue growth of 15-16% in FY25 with elevated EBITDA margin of 11%+. We tweak our earnings estimates for FY24/FY25/FY26E and estimate Revenue/EBITDA/PAT CAGR of 15.8%/19.1%/20.4%. Maintain ‘HOLD’ at revised TP of Rs3,268 ( ₹3234 earlier).
Revenues grew by 15.5%, PAT up by 17.2%: Revenue grew 15.5% YoY to ~Rs20.6bn (PLe: Rs20.1bn). C&W segment grew 14.4% YoY to Rs18.7bn, Stainless Steel revenue decline 16.7% YoY to Rs465mn, EPC segment grew 68.7% YoY to Rs3.8bn. EBITDA grew by 19.1% YoY to Rs2.2bn (PLe: Rs2.1bn). EBITDA margin was at 10.5% (PLe: 10.4%). Cables’ EBIT margins expanded by 130bps YoY to 10.6%, while EBIT margins of EPC/Stainless steel contracted by 90bps/230bps YoY to 11.6%/7.8%. PAT stood at Rs1.5bn (+17.2%YoY; PLe Rs1.4bn). Domestic Institutional Wire & Cable sales de-grew by 11.7% YoY, whereas total inst. sales including exports & EHV grew 13.0% YoY. Dealer/distributor driven sales grew by 16.3%YoY to Rs9.5bn. Dealer count is ~1975 vs 1950 in Q2FY24. Pending order book stood at Rs38.3bn in Q2FY24.Gross Debt stood at Rs1.7bn flat YoY. Cash balance stood at Rs4.8bn.
Con call highlights: 1) Company has maintained revenue growth guidance of 16%-17% for FY24 and 15%-16% for FY25, 2) KEI’s brownfield expansion at Chinchpada (Silvassa), with a total investment of ₹1.1bn, expected to generate rev. of ₹8-9bn for housing wire and LT power cables, expected to get fully operational by the end of FY24, 3) Another brownfield capex is going on at Pathredi (Rajasthan) with an investment of ₹1.1bn which will increase capacity for cables and expected to generate rev. of ₹8-9bn, operational by Q1FY25, 4) Company has planned ₹3.0bn capex on greenfield expansion for cable and wires in Sanand (Gujarat), expected commercial production by Q4FY25, 5) KEI has done capex of Rs3.08bn (Silvasa/Pathredi/ Sanand/Others – ₹650mn/ ₹300mn/ ₹1.67bn/ ₹460mn) in 9MFY24 and expected to do ₹1.5bn in Q4FY24. Total capex expected is ₹4.6bn/Rs5bn in FY24/FY25, 6) Total order book is ~ ₹38.3bn, out of that export (EPC+Cables) orderbook is ₹10.7bn, 7) Export rev. in 9MFY24 was Rs.8.4bn against Rs.5.3bn in 9MFY23 (up 58.5% YoY), 8) Capacity utilization during 9MFY24 was 95%/70%/89% in cable/ house wire/ stainless steel divisions.
At 9:20 am, Sensex was down 0.25% at 70,884.47, and Nifty was down 0.15%, at 21,421.45.
Sensex was down 0.05 % and Nifty was at previous day's close during pre-open trade; Tata Steel, Asian Paints, Nestle, HUL, and Tata Motors were the top gainers on Sensex
BANK NIFTY tests its 200-day average and witnessed a sharp recovery of 1000 points from its bottom witnessing higher volatility for the day.
On the higher side the previous day high of 45,500 will act as resistance while on the downside the 44,800 will act as good support.
RSI is witnessing reversal from the lower range and other key technical indicators are bouncing upwards from its oversold levels.
Bank Nifty 46,000 CE has the highest OI while on the downside 45,000 for the put OI for the monthly expiry.
NIFTY-50 has bounced from the support and 50 day average of 21,100 levels and closed near the higher end of the day’s range near to 21,500 levels.
The double top of 21,700 levels will act as strong resistance and crossover of the same will give a breakout for the broader positive momentum
RSI has moved higher from the lower range and crossover of the average will slope it upwards from its congestion range.
Highest call OI is at 21,700 strike while on the downside the highest put OI has moved higher to 21,300 for the monthly expiry.
Fund flows in December 2023. Listed funds witnessed inflows of US$2 bn, completely led by ETF inflows. India dedicated funds witnessed inflows of US$3.1 bn, broken down into US$2 bn of ETF inflows and US$1.1 bn of non ETF inflows, whereas GEM funds saw US$247 mn of outflows, led by US$337 mn of non-ETF outflows, offset by US$90 mn of ETF inflows.
• Emerging market flows. Listed emerging market fund flows were mixed. South Korea, Indonesia and Taiwan witnessed US$3 bn, US$262 mn and US$76 mn of outflows, respectively. China, India and Brazil saw US$10.8 bn, US$2 bn and US$186 mn of inflows, respectively. Total FPI and EPFR activity showed divergent trends for Indonesia, South Korea and Taiwan.
• Country allocations. Allocations to China and India constitute 45% of the average Asia ex-Japan fund portfolio. Asia ex-Japan funds’ allocations to India increased to 19.2% in December from 18.7% in November, whereas allocations to India by GEM funds increased sharply to 17.5% in December from 16.6% in November.
Allocations by Asia ex-Japan non-ETFs to India increased to 19.7% in December from 19.2% in November; allocations to India by GEM non-ETFs increased to 15.9% in December from 15.1% in November.
Zee Entertainment Enterprises Ltd on Wednesday dragged Sony Pictures Networks India (now Culver Max Entertainment Pvt. Ltd) before the National Company Law Tribunal (NCLT), following the inglorious end to their two-year engagement.
The Punit Goenka-led firm moved the tribunal seeking directions to implement the merger, while also initiating legal action to contest Culver Max and Bangla Entertainment Pvt. Ltd’s (BEPL) claims in the arbitration proceedings before the Singapore International Arbitration Centre (SIAC), an exchange filing showed. (Read the full story here.)
