Axis (Enam) :: Diwali Muharat Top Picks - 2019

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Axis/ Enam: Diwali muhurat top stock picks 2018

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Buy CEBBCO (Commercial Engineers & Body Builders Company Ltd) report by ENAM

Poised to Grow
Company Background
CEBBCO is one of the leading designers and manufacturers of vehicle bodies
for the commercial vehicles industry in India. It also provides wagon
refurbishment and manufactures component for railway wagons and coaches.
Recently, CEBBCO has also forayed into wagon manufacturing.

ENAM - >> Update | MphasiS

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Focus on client diversity increases: MphasiS’ (MPHL) Q4 results showed muted growth in the HP biz (62% of rev) but witnessed a pick-up in its Direct biz segment (38% of rev; up ~19% QoQ). A ~25% QoQ growth in the non-ES part of HP biz indicates MPHL’s efforts to capture growth outside of its traditional HP biz.

Volume growth driven largely by the ITO segment (~27% of rev; up ~10% QoQ) given Applications and BPO (61% & 12% of rev resp.) stayed flat. We have recently noted the parent’s (HP) increasing focus on infra Mgmt Svcs and believe MPHL (~70% of ITO biz is HP driven) to benefit as a result.

MPHL continued its focus on margins and we believe levers such as utilization & replacement of sub-contractors with own employees would provide further upside to EBIT margin from the current level of ~14% (FY11).

Valuations: We have upgraded our FY12 revenue / EPS estimates by ~6% / 1% to Rs 56.4 bn / Rs 36 respectively, largely to incorporate INR depreciation. We revise our TP to Rs 370 (vs. Rs 355 earlier) based on 10x FY12E EPS.Maintain BUY with an upside of 16% from CMP of Rs 315. The stock currently trades at 8.6x FY12E earnings.

Our estimates are based on INR/USD of Rs 46.5 for FY12E adjusted for Oct year-

ENAM - >> Tata Steel | Update

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We are revising our long standing negative stance on Tata Steel and upgrading the stock to BUY. Our earlier negative call was largely based on concerns regarding the European ops, which have played out over the last 1 year. Since current stock price factors in zero EBITDA from Corus, we believe valuations are compelling.

q       Domestic steel prices firm: Domestic steel prices have not declined along with global prices on INR depreciation and production disruption due to iron ore mining issues in India. Tata Steel’s domestic ops are best placed to benefit from it as it has 100% captive iron ore. Though we do not rule out a slight correction in domestic steel prices, we expect the recovery in Chinese steel prices to support steel prices in India.

q       Benga coking coal (Mozambique) to yield results soon: We are also bullish on the Benga coking coal project due to Rio Tinto’s focused development program (Tata steel holds 35% with 40% off-take rights). As per Rio Tinto, production will start from end FY12, which will support profitability of Corus to some extent in FY13.

q       Domestic volumes to grow in FY13, driven by the 2.9 mnt brownfield expansion scheduled to be completed by end-FY12.

q       Operating environment for Corus to remain challenging due to weak steel demand in Europe. Q3FY12 will particularly report very weak profitability, as decline in RM cost will come through with a lag. Our EBITDA per ton estimates for FY12 and FY13 are at USD 16 and USD 31 respectively.

Upgrade rating

Our EBITDA/ton estimates for domestic ops are at USD 420 in FY12 and USD 300 in FY13. We have factored in the impact of MMRD Bill (doubling of royalty and 26% tax on captive coal mining) for India ops in FY13. Without considering the impact of MMRD Bill, our FY13 EPS estimates would have been Rs 58 (vs. Rs 48 currently). We raise our FY13 EV/EBITDA target multiple to 5.5x from 5x earlier, in-line with recent rebound in valuations of comparable steel stocks. Upgrade the stock to BUY with a revised target price of Rs 481 (vs. Rs 420 earlier), 20% upside from CMP of Rs 403. The stock currently trades at 4.9x FY13 EV/EBITDA.

Key risk to our call – Further deterioration in European macro situation.

ENAM - >> Update | Ranbaxy

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Ranbaxy has finally put an end to the long drawn uncertainty around launch of generic Lipitor (Atorvastatin), as it launched the product in US on 30^th Nov’11. Owing to its ongoing issue with the US FDA at Poanta Sahib (originally Atorvastatin was filed from this facility), Ranbaxy has done a site transfer to Ohm Labs, USA. Further, Ranbaxy has entered into a profit sharing agreement with Teva during its 180-day exclusivity.

Our assumptions

q       Market share – We believe getting a high market share would be very difficult for Ranbaxy. Given Pfizer is targeting 40% market share and an aggressive AG, we assume Ranbaxy can get 30% market share (from earlier 40%).

q       Price erosion – We are assuming a significant price erosion of 50% (from earlier 30%) in the near term.

q       Agreement with Teva – We believe this is for marketing and distribution support (assuming a 50% profit sharing).

Reduce estimates and TP; Maintain HOLD (8% upside from CMP of Rs 435)

Given the profit sharing agreement with Teva, we reduce our CY11E and CY12E EPS by 29% and 20% to Rs 37 and Rs 43 resp. Accordingly, we reduce our value of Lipitor to Rs 16/ share (Rs 43 earlier) and our TP to Rs 468 (Rs 418 for base biz at 20xCY12E EPS of Rs 21 and Rs 50 for settlements) from Rs 495 earlier. At CMP of Rs 435, the stock is trading at 12x CY11E and 10x CY12E EPS.

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ENAM - >> Update: Dabur India

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We recently met with the senior management of Dabur India Ltd. to get an update on the future prospects of the co. Key takeaways from our interaction are furnished below:

q       Growth to step up in H2FY12: Distribution realignment and competitive pricing pressure impacted the growth of consumer care business excluding foods (54% of revenue) in Q2. However, a combination of price hikes and increase in brand investments is expected to improve revenue growth to 16% in H2FY12.

q       Competitive intensity in shampoo remains elevated with premium brands entering the popular price point (Dove being launched at Re 1 price point). Mgmt also commented that price hike in toothpaste category has been less than adequate given the cost inflation. The fruit juice category has been witnessing influx of new players (including MNCs), which could queer the pitch in this category as well. Together the three categories constitute ~30% of Dabur’s domestic revenues.

q       Brand investment to rise: ASP spends are expected to rise owing to heightened competitive intensity and new product introduction. We are factoring in higher ASP spends at 12.3% of net sales in H2 as against 11.3% in H1.

q       Operating margin likely to remain under pressure: We are factoring in a 110 bps YoY decline in the EBITDA margin in H2.

Considering the above factors, we have marginally lowered our earnings estimates by 2% each for FY12 (to Rs 3.7) and FY13 (to Rs 4.5). However, we believe Dabur continues to maintain its competitive position for over 3/4th of its portfolio and temporary shortfalls should be perceived as a BUY opportunity.

Dabur has underperformed the Sensex by 13% over the last three months and trades at 1-yr fw P/E of 22.5x, below its 5-yr historical median of 25x. Maintain BUY with a revised TP of Rs 109 (vs. Rs 112 earlier) based on 24xFY13E earnings. At CMP of Rs 95, the stock trades at 26xFY12E and 21xFY13E EPS. Our TP implies an upside of 15% from CMP.

ENAM - >> Dec 2011 | Oil & Gas

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Burgeoning under-recoveries coupled with government & OMCs’ inability to take significant hits would result in higher subsidy burden on upstream companies. We expect FY12 upstream subsidy burden at 54% versus historical and H1FY12 levels of 33%.

Upstream stocks under threat: We expect 17-44% YoY dip in FY12 EPS for ONGC & OIL due to higher subsidy burden. ONGC would receive partial reprieve due to higher profits from OVL and Rajasthan Block. Huge cash levels of ONGC & OIL would increase the risk of government pushing for cross-holding of PSU shares to adhere to its own divestment plans.

GAIL offers a good defensive bet as threat of higher subsidy burden on GAIL is negated by very low profitability of its LPG production business. Its recent stock price correction offers good entry opportunity for investors looking at safe havens.

OMCs’ valuations are attractive (especially BPCL) but fundamental concerns over cash crunch would remain in the interim. OMCs are trading near their lows of CY08.

Key Assumptions: Crude at USD 112/ bbl for FY12 & USD 105/ bbl FY13; USD/INR at 47.6 and 46.5 for FY12 & FY13.

Marico:: Building in near-term stress:: Enam

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Building in near-term stress
Marico issued an investor update, cautioning investors against
excessive earnings forecast. The mgmt continues to remain
optimistic of the long-term growth prospect of the biz but wishes to
highlight short-term pains, especially over the next 1/2 qtrs.
Key takeaways from the investor update:
􀁺 “Copra’s bull run denotes a structural upward shift; may need
to reset the rules of the game” – The bull run in copra started in
May’10. Demand-supply imbalance & speculative interests have
resulted in ~83% increase in prices during CY11. We believe this
move is not structural in nature, similar to 2008, and prices
could soften in the flush season of Feb’12. Given the recent
decline in vegetable oil prices, we believe the demand-supply
imbalance in Copra will also be restored.
􀁺 “May not take any further increase in retail prices as it may
impact volume growth” – Despite the 32% YTD price hike in
Parachute (~30% of sales), there has been a shortfall in covering
cost inflation. Further price increases in the segment is fraught
with risk of muted volume growth, which is still in the nascent
stage of recovery. Hence, a cap on price hikes will impact margin
recovery in the short run. We have build in 13% vol. growth in
FY12E (vs. 11% in FY11) for the domestic business; while we
have factored in a 125 bps YoY decline in EBITDA margin for
FY12E due to input cost pressure.
Use this continued weakness as an entry opportunity
In view of the near-term pain and continued high input prices, we
have lowered our earnings ests by 8% for FY12E & 7% for FY13E.
Consequently, the TP has been lowered to Rs 140 (earlier: Rs 156).
The 12% price correction, on cautious guidance from mgmt, has not
yet brought the stock to attractive levels. But we believe, further
correction from this point on or weak Q2FY12 should be used as an
opportune entry point. We maintain our HOLD rating.


Parachute (~30% of sales) volumes are expected to be steady in FY12E: Despite the 32%
YTD price hike in Parachute, 1QFY12 volume grew 10% YoY. The volume growth is
expected to remain steady as: (1) consumer preference remains sticky amongst hair oil
categories i.e. Coconut, Amla, Cooling & Almond; (2) Parachute still is the cheapest hair oil
amongst other hair oil categories; (3) the absolute price increase of Rs 7 for a 100 ml pack
(earlier priced at Rs 20) is not significant in the context of monthly grocery budget. In our
opinion, Parachute volume is expected to grow by 11% YoY in FY12E, in-line with 10%
volume growth in FY11.


􀁺 Copra prices likely to trend lower (~40% of RM cost): Copra prices has corrected 10%
from its Jan’11 peak but is still ~83% higher YoY for CY11. The surge in demand for
coconut oil could be attributed to a switch of Palm kernel oil users to coconut oil (for
cooking purpose), as the price differential between the two has narrowed down, even
though supply of copra has been steady. Similar demand-supply imbalance was
noticed in 2008 when crude oil peaked at USD 147. We believe there is a high
probability that this temporary imbalance will be reset in H2FY12E, as coconut oil
premium to palm kernel oil is close to the historical low (refer chart). Edible oil prices
are trending weak, with Sunflower oil (􀂾 3%) & Palm kernel (􀂾 22%) having corrected
from their recent peak in Jan/Feb’11. We have modeled a 230 bps decline in gross
profit margin (to 40.5%) for the domestic business in FY12E. Further, we believe there
remains a probability of margin improvement in H2FY12E.

FMCG Sector- Low risk, Low reward 􀁺 Enam

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Low risk, Low reward
􀁺 Volume growth to moderate in FY12 (vs. FY11) due to rising
inflation, which has impacted urban India more
􀁺 Return of pricing power: Price-led growth to improve sector
revenue growth to 18% in FY12E (vs. 17% in FY11)
􀁺 Margin mean reversal to aid 90 bps improvement in EBITDA
margins over the next two years as RM costs retreat from
recent peaks (contributing 60 bps) along with better fixed cost
absorption (contributing 30 bps)
􀁺 An earnings growth of 19% YoY is expected in FY12 which is
ahead of 13% YoY growth registered in FY11
􀁺 The avg 6- yr growth and fwd PE multiple have been at 17%
p.a. and 23x resp. With similar earnings growth over the next 2
years, risk-aversion has expanded FMCG’s fwd PE to 26x
now. This also translates to an 88% premium to Sensex (vs. 5-
yr historical median of 32%). Thus, FMCG sector is at best a
quasi-cash allocation, with low reward from a 1-yr
perspective
Key Buy Recommendations
􀁺 Godrej Consumer (upside of 14%): Potential for earnings
surprise on: (1) Higher domestic off-take in insecticide and hair
color portfolio; (2) Further decline in palm oil prices; (3) GCPL
and GHPL’s distribution synergy; & (4) Integration of Darling
acquisition. While domestic volume growth has been ahead of
market expectations, we believe recent acquisitions will be
significantly earnings accretive.
􀁺 Dabur (upside of 6%): (1) Expected recovery in volume
growth in H1FY12; (2) Expected margin improvement from
recent price hikes in core brands & moderating RM cost; & (3)
Synergy benefit from international acquisitions (i.e. Hobi &
Namaste).

buy ING Vysya Bank: Impressive Performance With Strong Set Of Nos:: Enam

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IMPRESSIVE PERFORMANCE WITH STRONG SET OF NOS
ING Vysya Bank’s (ING) PAT grew 91% YoY to Rs 913 mn, which was
above our estimates. Improvement in NIMs (3.3% in Q4FY11, up 20 bps
QoQ); strong growth in CASA balances (34.6% in Q4FY11, up 116 bps
QoQ) along with improved asset quality (Gross NPA at 2.3% in Q4FY11,
down 36 bps QoQ) drove this robust operating performance. Decline in
provision expenses (down 96% YoY) provided traction to PAT growth.

Crude Impact on India Inc: Enam

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Scenarios for Crude Oil

􀂄 In this report, we have scanned 3 extreme scenarios for
crude, and identified key stocks which are most/ least
vulnerable in these scenarios:
􀂉 Crude at USD 130 for much of FY12 and the Govt fully absorbs
it into the Fisc, ie no deregulation.
􀂉 Crude at USD 130 for much of FY12 and the Govt increases
prices of diesel by a politically palatable Rs 2-4, AND gives a
directional roadmap.
􀂉 Crude has seen much speculative activity, even more than in
2008, and hence moves down to USD 80 by end of FY12 as
things ease in MENA (refer chart alongside)

Enma: Essence of the Week ; Feb 7, 2011

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MARKET OUTLOOK
Domestic markets continued to reel under a spate of negative
newsflow. In the telecom spectrum controversy, political scoresettling
seems to be getting the better of prudence in policy
making. Globally, Egypt and its neighbouring countries are
witnessing unprecedented political upheavals. This has brought
political risk to the fore in EM investing, even as the US enjoys
growth from its trough compared to its peers ie Europe &
Japan.
Thus, in the backdrop of such tumult we continue to
recommend the bar‐bell risk reward portfolio approach as
enumerated in our strategy report dated Jan 11. Which
translates for largecaps (> $ 5 bn) now at CMP:
Defensives: RIL, ONGC, Infosys, Maruti, Mundra, PGCIL, Tata
Power, Canara Bank, Cairns, and Coal India.
Outsize 1 yr returns: L&T, Axis Bank, ICICI Bank, PFC, Hero
Honda.
We provide short notes on 2 Buy Ideas ICICI Bank and Tata
Power.

Enam : IBREL Q3FY11 result review

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IBREL Q3FY11: 

Q3 revenues were significantly higher on a QoQ basis (up 33%) and IN LINE with our expectations. With itshigh volume Panvel project having crossed the threshold last quarter, revenues was expected to show stronggrowth in Q3.Indiabulls Real Estate Ltd (IBREL) reported consolidated revenues of Rs 4.0 bn, operating profit of Rs 1.2bn and net profit (after minority interest) of Rs 766 mn for Q3FY11. Post acquisition of Bharat and Poddar Mills, IBREL now has cash/ liquid investments worth Rs 27 bn (Realty biz: Rs 8 bn & Power biz: Rs 19 bn). However, debt has also gone up for the company to Rs 26 bn(realty biz) from Rs 16 bn last quarter. IBREL sold2.27 mn of residential space totaling Rs 8.7 bn in Q3 and also leased0.25 msf of additional area at its Jupiter Mills property. Total IPIT leased portfolio now stands at 1.41 mn sq. ft. IBREL has 60 msf (49.97 mn resi & 9.55 mn commercial) under development of which 17.19 msf (15.4msf residential and 1.79 msf commercial) is under construction. IBREL has also recd. Board approval for restructuring of the power biz. - de-merger of the power biz by transfer of IBREL’s shares in Indiabulls Power (1.2 bn shares) to IBREL’s shareholders (402 mn) resultingin an issue of 2.95 shares for every 1 in IBREL. At CMP of Rs 123, the stock trades at a discount of 30% to our fair value. We maintain our TP of Rs 175 with a 43% upside.

ENAM: India Strategy - Bar-bell Risk-Reward; What to BUY?

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STOCKS to BUY After Recent Correction (click on name for detail report)

Automobiles: Buy Maruti

Banks: Buy ICICI

Buy Canara Bank

Infra: Buy L&T

Buy Mundra Port

Buy Coal India

Power: Buy PGCIL

Stocks Still a SELL: ENAM view  (click on name for detail report)

Cement: Sell ACC

FMCG: Sell HUL

Power: Sell NTPC

Power: Buy PGCIL: Top PICKS post Correction- ENAM: India Strategy

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Power: Buy PGCIL
􀂙 A natural “monopoly” with a “take-or-pay” biz model: PGCIL owns ~95% of India’s inter-regional transmission assets
and operates on a “take-or pay” model. Its earnings are linked to availability of transmission assets and NOT power
flow. Recently, PGCIL’s scope has been expanded from ~1/3 of India’s capacity to about 85% of upcoming capacity
by linking conferring it to link Private sector projects from just CPSUs (like NTPC)

Power: Sell NTPC: Top PICKS post Correction- ENAM: India Strategy

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Power: Sell NTPC
Execution delays + Coal supply risk = Depressed RoE of 12%; valuations rich at 18x P/E for 6% earnings
CAGR
􀂙 Execution Delays to keep RoEs depressed to 12% in FY13 from 15% in FY10

Buy Coal India: Top PICKS post Correction- ENAM: India Strategy

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Resources: Buy Coal India
􀂙 CIL is undergoing a metamorphosis from a mere production driven company to a production plus profitability
focused mining behemoth. It is setting up 111 mn t of new washing capacity for its existing production and ~90% of
incremental production will have dedicated washeries. The proportion of washed coal is expected to rise to 45% of
total production by FY17 as against only 4% in FY10
􀂙 Margin expansion driven by washed coal volumes: Since washed coal realization is ~2.3x that of raw coal, we expect
huge EBITDA margin expansion (45% in FY17 vs 27% in FY10) going forward. Led by better realizations and a
volume CAGR of 6%, we expect EBITDA and PAT to grow at a CAGR of 23% and 22% respectively by FY17
􀂙 Sustainability of washed coal pricing: We believe that washed coal pricing can be absorbed by the regulated power
industry given improved load factor and reduced specific coal consumption, without substantial inflationary pressure
(to lead to ~10% increase in avg. power price). CIL’s washed coal price is equal to the marginal cost of Indonesian
suppliers (USD 45/t) and cheaper by ~30% assuming USD 65/t FOB price for 5,000 Kcal coal

Buy Mundra Port: Top PICKS post Correction- ENAM: India Strategy

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Mundra Port has a mkt share of ~5% of India’s port traffic (2% in FY05), and is expected to be India’s
largest cargo handler over the next 5 years with ~10% mkt share
􀂉 Port Demand-Supply mismatch in India to continue – req additional 200 mn tpa of capacity v/s current
demand of 800 mn tpa
􀂉 As Mundra Port increases utilization to cross 100 mn tpa cargo over the next 4-5 years, cash flows will touch
USD 500 mn p.a.

Infra: Buy L&T: Top PICKS post Correction- ENAM: India Strategy

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Infra: Buy L&T
􀂙 L&T Best Risk-reward: Earnings growth in FY10-12E to continue at 19-20% CAGR despite large base
􀂉 Consistent return ratios of ~20% and key beneficiary of any potential recovery in capex cycle will stem de-rating
potential
􀂉 Earnings growth at limited risk given strong order backlog (3x Sales) and flexibility of in-house project execution
􀂉 Risk of peers undercutting limited given the single-digit ROEs of its major competitors
􀂉 Over the last 6 years L&T has traded at an avg 1-yr forward PE of ~24x vs current FY12E PE of 22x, limiting valuation downside