AUGUST 2, 2017
Monthly Market Strategy October 2018
TABLE OF CONTENTS
Equity Market Outlook
Theme 1 : Pharmaceuticals Aurobindo Pharma Ltd Laurus Labs Ltd Theme 2 : Information Technology Tech Mahindra Cyient Ltd Persistent Systems Ltd Theme 3 : Defensives/Consumption driven stocks Maruti Suzuki India Ltd ITC Ltd Arvind Ltd The Phoenix Mills Ltd Amber Enterprises India Ltd 1M Portfolio : September 2018 October 2018
One month Model Portfolio Performance
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Monthly Market Strategy October 2018
Teena Virmani MONTHLY OUTLOOK FOR OCTOBER 2018 [email protected] +91 22 6218 6432 Return of volatility September was a volatile month with domestic markets witnessing sharp correction led by continued rupee depreciation, higher crude prices, default from large financial institution IL&FS, higher yields and corresponding stress in NBFCs during the month. High valuation consumption related sectors also witnessed selling pressure owing to lesser risk reward ratio. Spike in bond yields, higher crude and depreciated currency has also resulted in valuation de-rating for sectors where earnings are likely to get impacted in near to medium term.
India is currently facing weaker macros with twin deficits and depreciated currency. Any slip on fiscal deficit given election year, higher inflation and rising crude can further pressurize INR in coming months, in our view. Under the given circumstances, we recommend investors to focus on companies that are capable of delivering strong earnings growth.
Market valuations have corrected in recent months and are trading at 20/17x FY19/20 estimated earnings but volatility is likely to remain owing to negative global cues as well as domestic factors such as elections, pressure on CAD and fiscal deficit from higher crude prices. Ideal approach is to use this volatility to add stocks that are likely to benefit from currency depreciation as well as healthy growth in respective domains (IT and Pharma), consumption growth as well as various defensives that have corrected in recent months and available at attractive valuations. Key risks to our recommendation would come from adverse outcome of further crunch in liquidity, state elections, further rise in oil prices & yields, shortfall in earnings or decline in liquidity from FIIs and domestic mutual funds.
Market performance – sector wise (September 2018) 3.0% 1.9%
0.0%
-3.0% -1.8%
-3.7% -4.5% -6.0% -6.4% -6.4% -9.0% -9.0% -8.8% -9.4% -12.0% -12.2% -12.0% -13.3% -15.0% -15.6% -18.0%
Source: Bloomberg
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Monthly Market Strategy October 2018
GLOBAL MARKETS Global markets remained weak during the month amid heightened fears surrounding the state of trade between the U.S. and other major economies. Rising oil prices, higher yields in US, risks of currency contagion spreading to other emerging markets impacted markets negatively during the month. US economy outlook strengthening but interest rate gap has widened with peers US markets have moved up during the year till date due to front loading of tax reforms, economic recovery and higher government spending. However, during the month, markets remained volatile with trade war related concerns. US administration had imposed 10 percent tariffs on $200 billion worth of Chinese imports, which would rise to 25 percent by year-end. China also retaliated by announcing levies targeting over 5,000 American products worth $60 billion. US Fed raised its target overnight rate to a range of 2 percent to 2.25 percent, up from 1.75 percent to 2 percent. This marks the central bank's eighth rate hike since 2015. Fed officials also upped their outlook for economic growth for this year and next. They now expect US economy to grow by 3.1 percent in 2018 from 2.8 percent earlier. They also see the economy expanding 2.5 percent in 2019, up from 2.4 percent. Fed rate hike has widened the gap with its peers as ECB still maintains a policy rate of -0.4 percent till June, 2019 and Bank of Japan is still sticking with its current rates till 2020. Thus, this hike can force the emerging markets to tighten their monetary policy to defend their currencies.
US Fed rate (%)
2.5
2.0
1.5
1.0
0.5
0.0
Source: Bloomberg
US unemployment growth (%) 12.0
9.0
6.0
3.0
0.0
Source: Bloomberg
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Monthly Market Strategy October 2018
Trade war and impact on currencies The trade war between US and China is resulting into a currency war among countries with sharp depreciation being witnessed in emerging market currencies.
US dollar has strengthened compared to other emerging market currencies on the back of continued strength in the US economy and subsequent rate hikes by the US Fed and trade war related concerns between US and China. The steps taken by the government on tax cuts and deregulation are promoting economic growth. However the interest rate differential between US and other regions is increasing and putting pressure on the exchange rates. Fed has been indicating faster policy normalization while the rate hikes in EU have been pushed to mid-2019. This divergence in monetary policy stance is resulting in strengthening of US dollar vis-à-vis emerging markets.
Apart from US dollar strengthening, adverse risk of trade war, escalating geopolitical tensions, political and economic uncertainties in Turkey, Argentina and Brazil have sparked the fears of contagion spreading to other emerging markets particularly the ones with current account deficit.
Indian rupee has depreciated by 14% since the beginning of 2018. The higher current account deficit due to higher crude prices, rising US Fed rates and a slowdown in FII inflows into the Indian capital market is already weakening the Indian currency. The trade war has further increased the woes of the Indian economy with rupee depreciating by 2% further in September month itself.
Emerging market currencies – Performance CYTD (%)
30.0%
2.9% 0.4%
0.0%
2.8%
3.0%
4.8%
5.9%
-
-
- 8.9%
-30.0% -
-
10.5%
-
14.2%
14.4%
15.1%
-
-
- 24.9% -60.0% -
-90.0% 62.6%
-
107.7% - -120.0%
Source: Bloomberg
China market impacted by trade war Chinese economy held up well during August 2018 despite escalating trade tensions with the United States. Industrial production expanded 6.1% annually while nominal retail sales grew 9.0% on an annual basis, a slight acceleration from the 8.8% expansion registered in July.
However, stocks faced selling pressure owing to trade war related concerns. With the latest round of tariffs on $200 billion worth of Chinese imports to the U.S. at a 10 percent rate before rising to 25 percent, the GDP growth of the country is likely to be impacted adversely as the economy is already reeling under high debt, slowdown in property market and potential corporate defaults. The BATs – Baidu, Alibaba and Tencent – which had become a proxy for the Chinese economy have underperformed the FANG stocks – Facebook, Amazon, Netflix and
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Monthly Market Strategy October 2018
Alphabet (parent of Google) owing to concerns of slowdown in economy, high valuations as well as trade issues between US and China. Chinese authorities had been trying to rein in the country's rising debt but as the trade war drags on, China appears to be using investments to boost the economy again.
Oil prices continue to move up Oil prices rose sharply during the month as reserves’ drawdown in the US and supply disruptions from Venezuela and Iran pushed prices higher. During the month President Trump urged OPEC members to lower the prices. OPEC and allies have ruled out any immediate additional increase in crude supply to offset a shortage of Iran supplies due to US sanctions which are set to take effect in November. Once these sanctions are in place from November 2018, there is a possibility of further increase in brent crude prices if OPEC countries fail to increase supplies in the market.
As per our analysis, every $10 increase in per barrel price of crude has the potential to increase our import bill by $11.3 bn per annum and erode 40 bps of GDP. Higher crude prices would also increase raw material cost, working capital requirements and operating cost for user industries such as lubricant manufacturer, chemicals industry including consumer staples and paints.
Brent Crude (US$/barrel)
85
75
65
55
45
35
Source: Bloomberg
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Monthly Market Strategy October 2018
DOMESTIC MARKETS September was an eventful month with domestic markets witnessing sharp correction led by continued rupee depreciation, higher crude prices, default from large financial institution IL&FS, higher yields and corresponding stress in NBFCs during the month. High valuation consumption related sectors also witnessed selling pressure owing to lesser risk reward ratio. Spike in bond yields, higher crude and depreciated currency has also resulted in valuation de-rating for sectors where earnings are likely to get impacted in near to medium term.
Bond market crisis impacted equity markets too After the defaults by IL&FS in the past month, liquidity crisis fears started gripping the debt market which had its adverse impact on equity markets too. There are concerns being raised of a contagion impact of further defaults in case of more cash worries in the market, especially when the yields on bonds are rising. The distress selling in DHFL bonds at higher yields sparked concerns of liquidity crisis over likely further defaults in the bond market, especially after IL&FS had been unable to make repayments on two of its bond maturities.
10-year GSec yield (%)
8.5
8.0
7.5
7.0
6.5
6.0
Source: Bloomberg
10-year GSec Bond yields have moved up to 8.2% - led by liquidity crunch, advance tax outflows in second half of the month and government’s borrowing plan in H2FY19. Sharp spike in GSec yields has now moved up the cost of capital thereby impacting valuations. Recent spike in the bond yields now calls for rate hike in October meeting from RBI despite sub-5% inflation and expectation of moderation of growth in H2FY19.
Yields are likely to remain high owing to rising crude prices, rate hikes by central banks, trade war tensions, uptick in core inflation, pass through of MSPs and possibility of fiscal slippage at the centre or state level.
As per our currency team, the bear handshake between credit and equity markets is an ominous development for Rupee. Rising oil prices, elevated levels of yields in DM and EM had caused an outflow from the markets and now the funding squeeze in the under developed debt market in India can cause further damage to Rupee and we could see Rupee depreciating towards 75.00 levels on spot. Any slip on fiscal deficit given election year, higher inflation and rising crude can further pressurize INR in coming months, in our view.
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Monthly Market Strategy October 2018
Currency depreciation coupled with higher crude prices to impact sectors in Q2FY19 Impact of INR depreciation and its corresponding impact on overall cost is likely to be reflected on sectors during Q2FY19/H2FY19 with sectors like IT/Pharma/textile/speciality chemicals/steel/upstream companies getting positively impacted and negative impact is likely to be seen for aviation, downstream companies, cement, tiles, selective FMCG companies/power sector.
IT companies would enjoy both translation and margin gains in the near term but we believe it will be short lived and eventually companies will pass on the currency benefits to clients over time.
Pharma sector is also likely to benefit positively as nearly 40% of revenues for most of the leading players come from US and over 70% revenues are generated outside India (dollar bills), hence rupee depreciation is also expected to benefit and cushion the earnings growth this year.
For Steel sector, rupee depreciation has lifted import parity price, thereby giving room to the domestic steel manufacturers to hike prices. We expect, domestic steel prices to stay firm in the near term. Margins of domestic players are expected to remain strong in 2HF19, supported by weaker Rupee and strong demand. Downstream oil and gas sector which includes refining companies like IOC, BPCL and HPCL are negatively impacted due to higher crude oil prices and depreciated INR as their raw material cost, operating cost, working capital and interest cost increases. On the top of it, market is concerned about pricing freedom of these companies especially during election heavy year. Upstream companies like ONGC and Oil India are getting benefited with higher crude oil price and weaker rupee. Additionally, from 1st Oct’18, domestic gas prices are expected to rise which will be positive for these companies but will be negative for city gas distribution companies if they fail to pass on.
However, the rise in gas prices along with rupee depreciation is expected to be negative for building material companies like tiles as companies would find it difficult to pass on the cost pressures of higher power cost due to lower than expected demand growth. For cement, aviation, power etc the cost pressures are going to increase with rupee depreciation and higher imported coal prices or higher ATF prices.
Despite moderation in inflation, RBI likely to hike rates in October CPI inflation moderated to 3.69% in August compared to 4.17% in July led by softer food and core inflation. However, the food inflation is likely to inch up higher led by MSP increases for the Kharif output. Core inflation (including petrol and diesel) moderated to 6% in August from 6.2% in July. Even as the fading of adverse base effect will continue to moderate core inflation lower, our economist estimates average core inflation at 5.7% in FY19.
We remain watchful of the INR depreciation and higher crude prices as it increases the risk of imported inflation in the near to medium term. Though a sub 5% inflation and expectation of moderation in growth in 2HFY19 would have provided some room for the MPC to remain on hold, our economist believes that the MPC will deliver a 25 bps of repo rate hike in the October policy, possibly with a tweak in the policy stance to take into account the forex and crude price risks.
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Monthly Market Strategy October 2018
FII’s remained net sellers for the month FIIs remained net sellers for the month due to trade war fears, rise in US yields coupled with rupee depreciation and sold stocks worth Rs79 bn (till 25th Sep). Buying from mutual funds has come down and stood at Rs.74 bn (till 25th Sep). For CYTD, FII’s remained net sellers to the tune of Rs.133 bn and MFs remained net buyers to the tune of Rs.843 bn.
FII & Mutual Fund investment (Rs cr) 40,000
30,000 FII MF
20,000
10,000
-
(10,000)
(20,000)
Source: Bloomberg
Recommendation Market valuations have corrected in recent months and are trading at 20/17x FY19/20 estimated earnings but volatility is likely to remain high owing to negative global cues as well as domestic factors such as elections, pressure on CAD and fiscal deficit from higher crude prices. Ideal approach is to use this volatility to add stocks that are likely to benefit from currency depreciation as well as healthy growth in respective domains (IT and Pharma), consumption growth as well as various defensives that have corrected in recent months and available at attractive valuations. Key risks to our recommendation would come from adverse outcome of further crunch in liquidity, state elections, further rise in oil prices & yields, shortfall in earnings or decline in liquidity from FIIs and domestic mutual funds.
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Monthly Market Strategy October 2018
Preferred picks
Domestic Cyclicals / Investment oriented sectors Sector Stocks
Automobiles Maruti Suzuki Building Material Kajaria Ceramics, Century Plyboards, Shankara Building Products Capital Goods, Engineering Genus Power Infra, L&T, Voltamp, Bharat Electronics Construction Dilip Buildcon, Nagarjuna Construction, PNC Infratech Consumber durables Amber Enterprises Metals & Mining Jindal Stainless (Hisar), MOIL Ltd, National Aluminium Oil & Gas Petronet LNG Others CDSL, Mold-tek Packing Ltd, Insecticides India, Mahindra Holidays & Resorts India, VIP Industries, Wonderla Holidays and Carborundum Universal, Maharashtra Seamless Ltd, Essel Propack, Quess Corp Real Estate Phoenix Mills, Arvind Ltd Transportation Adani Port, Container Corp, VRL Logistics and Cochin Shipyard
Source: Kotak Securities - Private Client Research
Export oriented / Defensive sectors Sector Stocks
FMCG ITC, Marico IT Cyient Ltd, Persistent Systems Paints Akzo Nobel India, Kansai Nerolac Paints Ltd
Source: Kotak Securities - Private Client Research
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Monthly Market Strategy October 2018
Cyndrella Carvalho THEME 1: PHARMA SECTOR [email protected] +91 22 6218 6426 The sector is on radar as we expect earnings growth potential to meaningfully revive. We look at the sector from four aspects 1) compliance status for various large facilities of many large players receiving clearance and many of the plants are at better quality process handling status than earlier. 2) This leads to ANDA approval cycle improving meaningfully and take care of base earnings from US business for many players, along with niche and complex product pipeline focus 3) Domestic market which contributes nearly 30% of revenues to the sector is set to reflect a double digit growth over coming two to three years. Large players are expected to grow above this industry average over this periods 4) nearly 40% of revenues for most of the leading players come from US and over 70% revenues are generated outside India (dollar bills), hence rupee depreciation is also expected to benefit and cushion the earnings growth this year.
We break the pharmaceutical generic space into three major segments i.e – 1) US Generics, Domestic Branded Generics space and ROW markets business 2) CRAMs space 3) API space. In the extremely generic space we prefer Aurobindo pharma in near term to play the injectable opportunity and recent acquisition of Sandoz generics business. The API model has seen some green shoots with China shutting certain chemical base, however situation is still evolving and not very clear in terms of capacities coming back on stream. We like the unique opportunity poised by Laurus Labs in this space as it is forward integrating itself in formulation segment with all major capex in place.
Apart from this, we also find the business model of Sun Pharma is uniquely placed with a very good basket of patented products focused on US market which could yield better earnings and longer sustainability of growth over two to three years. Dr Reddys also offers key niche filings like gSuboxone, gNuvaring and gCopaxone to play with over coming year which would drive significant improvement in terms of earnings. CRAMS space is a different business model as it is insulated from the risk of generic price erosion and works closely with the research end of the sector. We prefer Divis Labs with a balanced focus on both APIs and CRAMs. On other side we also quite admire the model of Dishman Cabogen Amcis and Suven Life Sciences. Both these companies have their niches established in their respective segments.
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Monthly Market Strategy October 2018
Aurobindo Pharma Ltd - Accumulate Analyst: [email protected]
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 744 830 11.5% 827 / 527 436179
Investment Argument Price Performance ARBP has significantly scaled up its injectables filings with cumulative filings at 91 ANDAs, of which 41 ANDAs are pending approval. We expect the 160 Aurobindo Pharma Nifty injectables momentum to continue through FY2019, with interesting launches 140 such as fondaparinux (launched), and ertapenem (approval received 1Q/2Q FY18). We expect the injectables pipeline to further evolve with the expected 120 approvals for aztreonam (FY2019) and potentially, iron sucrose (FY2020). 100 We also expect ARBP to file triamcinolone injection and Copaxone 20/40mg filings in FY2019, and while Copaxone market will likely turn competitive by the 80 time ARBP launches, we believe triamcinolone injection will likely be a limited 60 competition opportunity with potential to add US$20-25 mn sales on a steady- state basis from FY2021. Apart from the generic injectables strategy, we expect ARBP to launch two 505(b)(2) RTU (ready-to-use) injectable products in FY2020, namely, cyclophosphamide RTU and vancomcycin RTU, both of which are likely to be Source: Bloomberg long-tailed, >US$25 mn opportunities for ARBP. ARBP announced the acquisition of Sandoz’s US dermatology and oral solids Share Holding Pattern (%) business for up to US$1 bn in cash, implying ~5X FY2020E EV/EBITDA, and Others driving ARBP’s US sales to US$2.1 bn in FY2020. 14.49% Risks & Concerns Exports contribute major part of ARBP’s revenues. Any regulatory or currency risk DII can be critical for the company. 15.64% Company Background Promoter 51.88% Aurobindo Pharma Limited, manufactures generic pharmaceuticals and active pharmaceutical ingredients. The revenues for FY18 were spread as US (45%), EU (26%), ROW (6%), ARV (5%) and API (18%). The company’s robust product portfolio FII is spread over 7 major therapeutic/product areas encompassing Antibiotics, Anti- 17.99% Retrovirals, CVS, CNS, Gastroenterologicals, Anti-Allergies and Anti-Diabetics, supported by an outstanding R&D set-up. Source: Bloomberg
Financials (Rs mn) FY18 FY19E FY20E ROAE and ROACE to remain strong Sales 164,998 185,448 270,747 40 ROAE (%) ROACE (%) Growth (%) 9.3 12.4 46.0 EBITDA 37,885 39,885 60,930 30 EBITDA margin (%) 23.0 21.5 22.5 PBT 32,579 31,582 44,011 20 Net profit 24,399 24,637 33,451 EPS (Rs) 41.8 42.2 57.3 Growth (%) 6.1 1.0 35.8 10 CEPS (Rs) 51.2 52.7 69.3 Book Value per share (Rs.) 199.4 236.2 287.1 0 Dividend per share (Rs) 3.8 3.0 3.0 FY16 FY17 FY18 FY19E FY20E ROAE (%) 23.2 19.3 21.8 Source: Company, KIE ROACE (%) 23.6 20.3 21.9 Net cash (debt) (29,094) (34,689) (100,213) Revenue / PAT to remain strong
200,000 25
Valuattion Parameters FY18 FY19E FY20E 20 150,000 P/E (x) 17.8 17.6 13.0 15 P/BV (x) 3.7 3.2 2.6 100,000 EV/Sales (x) 2.8 2.5 2.0 10 EV/EBITDA (x) 12.3 11.8 8.8 50,000 5
Price Performance (%) 1M 3M 6M 0 0 8.5 23.9 33.4 FY16 FY17 FY18 FY19E FY20E
Source: Bloomberg, Company, KIE Source: Company, KIE
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Monthly Market Strategy October 2018
Laurus Lab Ltd - Buy Analyst: [email protected]
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 433 500 15.6% 580 / 415 45879
Investment Argument Price Performance Laurus presents a unique business model offering a hybrid of rapidly growing synthesis business, an emerging formulations business along with a steady 160 Laurus Lab Nifty ARV business. While the recent quarters have seen delays to the strategy on account of Hep-C declines and China cost push, we expect ARV revenues to 140 continue to grow in high single digit over the next two years with increasing contribution from EU/US formulations, first supplies to ARV tenders in LMIC 120 countries, as well as LMV/RTV API supplies from 2QFY19. This, along with strong scale-up of the synthesis business, particularly for 100 Aspen and C2 Pharma, will likely drive profitability. Laurus has filed a total of 13 ANDAs, and is targeting 10 more ANDA filings in 80 FY2019, with tenofovir having been launched in 4QFY18 (Rs 51 mn revenues in 1QFY19) and three other ANDAs expected to be launched in FY2019. Over the past three years, Laurus has made meaningful investments in capacities with gross block of Rs 8 bn yet to generate revenues (units 2, 4, 5 and 6) with operating costs of Rs1.4bn in FY2018 (Rs 274 mn in 1QFY19), Source: Bloomberg including its formulations investments, which we expect to break even only in FY2020 (FY2018 loss of ~Rs1 bn). Share Holding Pattern (%) Laurus has now received approval for its TLD combination and we expect it to enter the LMIC tender market from 3QFY19, with ramp-up in FY2020, once TLE, Others TLE400 and TEE formulations are approved in key markets. 14.49% With target price to Rs 500, ~16X June 2020E EPS. DII Risks & Concerns Any regulatory or currency risk can be critical for the company. ANDA approval 15.64% delays and prolonged margin pressure due to China. Promoter 51.88% Company Background Laurus Labs is a leading research and development driven pharmaceutical company in India. The company has grown consistently to become one of the leading FII manufacturers of Active Pharmaceutical Ingredients (APIs) for anti-retroviral (ARV) 17.99% and Hepatitis C. Laurus Labs also manufactures APIs in oncology and other therapeutic areas. Its strategic and early investments in R&D and manufacturing Source: Bloomberg infrastructure have enabled it to become one of the leading suppliers of APIs in the ARV therapeutic area.
Financials (Rs mn) FY18 FY19E FY20E ROAE and ROACE to remain strong Sales 20,690 23,916 28,341 20 ROAE (%) ROACE (%) Growth (%) 7.1 15.6 18.5 EBITDA 4,133 4,540 6,493 15 EBITDA margin (%) 20.0 19.0 22.9 PBT 2,374 2,335 4,172 10 Net profit 1,676 1,716 3,087 EPS (Rs) 15.9 16.2 29.2 Growth (%) (11.7) 1.9 80.2 5 CEPS (Rs) 5.0 5.6 8.2 Book Value per share (Rs.) 139.8 157.8 186.2 0 Dividend per share (Rs) 0.0 0.0 0.0 FY16 FY17 FY18 FY19E FY20E ROAE (%) 11.3 10.4 15.7 Source: Company, KIE ROACE (%) 11.7 11.2 16.2 Net cash (debt) (9,768) (10,297) (9,859) Revenue / PAT to remain strong
30,000 25
Valuation Parameters FY18 FY19E FY20E 25,000 20 P/E (x) 27.2 26.7 14.8 20,000 15 P/BV (x) 3.1 2.7 2.3 15,000 EV/Sales (x) 2.3 2.1 1.8 10 EV/EBITDA (x) 11.4 10.9 7.8 10,000 5,000 5 Price Performance (%) 1M 3M 6M 0 0 (2.2) (4.3) (14.0) FY16 FY17 FY18 FY19E FY20E
Source: Bloomberg, Company, KIE Source: Company, KIE
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Monthly Market Strategy October 2018
Nipun Gupta THEME 2: IT SECTOR [email protected] +91 22 6218 6433 The volatility in exchange rates and positive commentary on improving deal activity over last few months has brought the focus back on Indian IT companies. INR has depreciated by around
6.5% v/s the USD in last three months. Companies would enjoy both translation and margin gains in the near term but we believe it will be short lived and eventually companies will pass on the currency benefits to clients over time. Apart from the short term benefits the INR depreciation would allow companies to reinvest in strengthening its market share penetration in new markets or new service lines in long term. From mid to long term perspective we believe demand acceleration with revenue growth is important for IT stocks. Given this, we recommend Tech Mahindra, Cyient and Persistent where relative valuations are still inexpensive with sustainable growth.
Companies delivered a strong growth rate in 1Q. Factors helping the growth rate were 1) market share gains in a robust spending environment by clients 2) Incremental revenue from digital business with lesser lag from the legacy business 3) strong deal flow which has picked up from past year. We believe Cyient will post robust growth as it transforms to a full scale solutions company which would expand its addressable market. Whereas we expect a turnaround of revenue and margin trajectory making a case for both earning growth and upgrade of valuation multiples.
The key factors that will determine the sector’s earning sensitivity to currency fluctuation are:
Hedging Policy: Even as INR has depreciated, the impact of the same on immediate earnings will be a function of hedging policy and instrument used by the company. This means the quantum of cash flow being hedged and instrument used for hedging. We believe gains would be limited for companies that are heavily hedged at previous currency rates. Exposure to different currencies: Companies have different level of exposure across currencies which can lead to lowering of margin benefits due to cross currency impact. Since the depreciation in USD INR is accompanied with depreciation of other currencies too the gains could be limited in terms of margins. Onsite offshore mix: The onsite offshore mix is an important factor to determine the sensitivity, as it creates a natural hedge reducing sensitivity for companies having higher onsite revenues with higher foreign denominated expenses and reducing exposure to other currencies. Companies having higher offshore revenue would be more sensitive to currency movements and would have bigger benefits due to the recent INR depreciation. Broadly we believe the gains depends on nature of contract (time and material or fixed price), duration of contract and nature of service offerings. Nature of the contract: Companies with greater percentage of annuity deals in revenue would have greater benefit. Generally Time and Material (T&M) contracts are Master Services Agreeement (MSA) based 2-3 year timeframe contracts which do not undergo frequent changes unless client asks for it, whereas fixed price projects depends on the type of contract i.e Application management or an IMS contract which are of longer tenure can undergo re-negotiation in case of significant INR depreciation. Given the above factors we would recommend stocks where relative valuations are still inexpensive and could benefit from demand recovery. We recommend Tech Mahindra, Cyient and Persistent Systems in the IT space.
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Monthly Market Strategy October 2018
Tech Mahindra Ltd - Accumulate
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 746 793 6.4% 780 / 447 730829
Investment Argument Price Performance Tech Mahindra has impressed with progress on margin normalization initiatives, 160 benefits of which will accrue further in FY19. EBIT margins increase was helped Tech Mahindra Ltd Nifty by rupee depreciation, strength in Comviva business and improved utilization. 140 Drag from LCC, Comviva had prevailed leading to little revenue growth to revenue decline in past two years. This growth will accelerate as network 120 spending increases led by 5G spending. 100 Enterprise segment grew by 18.5% YoY, on organic basis revenue grew by 80 ~16%. Revenue growth was led by – manufacturing vertical, BFSI vertical and other segment comprising HCI acquisition and public sector that grew by 4.6%. 60 Digital remains strong and reported 26-27% of its revenue from digital. Digital revenue have grown at a healthy rate of 30% YoY. Outlook remains promising on the back of new deal closures in the telecom vertical and sustained revenue momentum from the enterprise segment. Source: Bloomberg We believe company is well on the recovery path with company’s margin expansion story on track by pricing discipline, operating efficiencies and Share Holding Pattern (%) improving profitability of subsidiaries. Risks & Concerns Others Significant decline in the business at the existing telecom clients could impact 19.0% the revenue growth. Promoter DII 36.0% Rupee appreciation beyond the levels assumed and cross currency movements 7.4% could impact the amrgins. Company Background Tech Mahindra represents the connected world, offering innovative and customer- centric information technology services and solutions, enabling Enterprises, Associates and the Society to Rise™. It is a USD3.5b company with ~98,000+ FII professionals across 51 countries, helping over 674 global customers including 37.6% Fortune 500 companies. It is a part of the USD 16.7 billion Mahindra Group that Source: Capitaline employs more than 180,000 people in over 100countries.
Financials (Rs mn) FY18 FY19E FY20E Client Contribution(%)
Sales 307,730 348,702 380,933 70 Growth (%) 5.6 13.3 9.2 Top 5 Client Top 10 Client Top 20 Client EBITDA 47,170 60,420 70,144 60 EBITDA margin (%) 15.3 17.3 18.4 50 PBT 48,789 54,296 65,319 40 PAT (recurring) 38,000 41,180 49,101 Exceptional items - - - 30 PAT 38,000 41,180 49,101 20 EPS (Rs) 42.6 46.2 54.6 10 Growth (%) 32.7 8.5 18.2 0 Book value per share 211.2 246.8 287.3 FY16 FY17 FY18 ROAE (%) 21.5 20.2 20.5 Debt/Equity 0.1 0.1 0.1 Source: Company
Utilization Rate (%) 90
Valuation Parameters FY18 FY19E FY20E P/E (x) 17.5 16.1 13.7 P/BV (x) 3.5 3.0 2.6 80 EV/Sales (x) 2.3 2.1 1.9 EV/EBITDA (x) 15.3 11.9 10.2
70 Price Performance (%) 1M 3M 6M 1.3 12.2 16.7
Source: Bloomberg, Company, KIE Source: Company
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Monthly Market Strategy October 2018
Cyient Ltd - Buy Analyst: [email protected] Last report at Rs.717 on 30 August 2018
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 745 810 8.7% 887 / 493 84139
Investment Argument Price Performance Cyient is transitioning towards a solution company with its S3 strategy which 190 would enable in garning higher wallet share of clients spends. The Cyient Ltd Nifty addressable market share for its expanded offerings would be much higher than its present addressable market. 150 Company is gaining traction in its key transportation and communication vertical. Within transportation Rail is a key area of strength for Cyient and the 110 momentuem is expected to sustain thus aiding overall revenue growth for the company. DLM after incurring losses turned profitable in 4QFY18 and achieved 2% 70 margins for FY18. By FY21 company aims to gradually exit B2P business and not engage any further in low margin contract manufacturing business. Margins are expected to stabilize at these levels going forward with company investing about 100bps of operating margins into initiatives like New Source: Bloomberg Business Accelerator, wherein the company will make investment in emerging technologies. Share Holding Pattern (%) Management has guided for a double digit revenue growth in the services business in FY19, on the back of strong order backlog and a deal pipeline, Others Promoter which it stated was one of the healthiest. Commentary remains largely 16.1% positive across all the verticals. 22.2% Risks & Concerns Significant appreciation of INR against USD, EUR and GBP. DII 20.3% Sustained slowdown in engineering and service spending. Risk of an expensive acquisition or integration risk.
Company Background FII Cyient Ltd provides engineering services, data analytics and data, networks and 41.4% operations solutions. The company offers its services to the aerospace and defense, energy, heavy machinery, consumer, medical utility, communications, semi-conductor, and transportation industries around the world. Source: Capitaline
Financials (Rs mn) FY18 FY19E FY20E Order Intake (in USD) -DLM
Sales 39,177 45,733 51,589 35 Growth (%) 8.8 16.7 12.8 EBITDA 5,494 6,331 7,498 30 EBITDA margin (%) 14.0 13.8 14.5 25 PBT 5,649 6,049 7,303 20 PAT 4,286 4,833 5,891 Exceptional items - - - 15 PAT 4,286 4,833 5,891 10 EPS (Rs) 38.0 42.9 52.3 5 Growth (%) 15.5 12.9 21.9 0 Book value per share 208.0 244.7 290.8 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 RONW (%) 19.2 18.9 19.5 ROCE (%) 24.4 23.1 23.7 Source: Company Debt/Equity - - - Order Intake (in USD) -Service 300
250 Valuation Parameters FY18 FY19E FY20E P/E (x) 19.6 17.4 14.2 200 P/BV (x) 3.6 3.0 2.6 150 EV/Sales (x) 1.9 1.6 1.4 100 EV/EBITDA (x) 13.9 11.3 9.3 50
Price Performance (%) 1M 3M 6M 0 3.8 (0.5) 7.2 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company
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Monthly Market Strategy October 2018
Persistent Systems Ltd - Buy Analyst: [email protected] Last report at Rs.827 on 31 July 2018
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 788 1025 30.0% 915 / 629 63072
Investment Argument Price Performance Persistent specializes in software product development and technology 170 services. It helps enterprises to transform their business to software-driven Persistent Systems Ltd Nifty business in North America, Europe, and Asia. It has moved away from effort- 150 based business (low growth prospects) to value-based business (high growth 130 prospects and better margins). Persistent expects to outperform industry-growth rates and report overall 110 double-digit revenue growth for FY19E. 90 Margin improvement and strong revenue visibility makes us positive on its growth prospects. Additionally, cash rich balance sheet, strong free cash flow 70 and healthy return ratios also provide high comfort. Risks & Concerns Wide currency fluctuation and INR appreciation will impact earnings. Source: Bloomberg Volatility in revenues sourced through the partners. Any major slowdown in economy can impact our growth assumption. Share Holding Pattern (%) Company Background Incorporated in 1990, Persistent is founded by Anand Deshpande. It provides Others product engineering services, platform based solutions and IP-based software 25.1% Promoter products to its global customers. It designs, develops and maintains software 31.5% systems and solutions, creates new applications and enhances the functionality of the customer’s existing software products. Sector Background DII Nasscom expects that the future of the industry will lie in 'Digital at Scale' as global 16.3% digital spending is growing at 20% annually. India's digital revenues grew at 30% in FY18. Nasscom has a vision to build a US$1 tn digital economy by 2022 supported FII by growth across all segments — established and new-age companies, technology 27.1% service companies, product companies, consumer internet companies and increased adoption of digital across enterprises, government and MSME in India. Source: Capitaline
Financials (Rs mn) FY18 FY19E FY20E Revenue Breakup (%) Sales 30,337 36,028 40,723 ISV Enterprise IP Led Growth (%) 5.4 18.8 13.0 70% EBIDTA 4,687 6,037 7,222 60% EBIDTA margin (%) 15.5 16.8 17.7 50% PBT 4,292 5,543 6,849 PAT 3,230 4,180 5,205 40% PAT Margin (%) 10.6 11.6 12.8 30% EPS (Rs) 40.4 52.2 65.1 20% Growth (%) 7.2 29.4 24.5 10% CEPS 52.9 67.2 80.3 0% Book Value (Rs / Share) 266 302 349 FY15 FY16 FY17 FY18 Dividend per Share (Rs) 10.0 13.0 15.1 ROE (%) 16.0 18.4 20.0 Source: Company, P&S: People and services, GTS: Global technology solutions ROCE (%) 18.4 21.9 23.8 IFM: Integrated facility management Net cash/(debt) 2,397 5,316 9,259 Net working capital (Days) 38 41 41 Geography: Revenue Mix (%)
India ROW 6% 3% Valuation Parameters FY18 FY19E FY20E Europe P/E (x) 19.5 15.1 12.1 7% P/BV (x) 3.0 2.6 2.3 EV/Sales (x) 2.0 1.6 1.3 EV/EBITDA (x) 12.9 9.6 7.5 North Price Performance (%) 1M 3M 6M America (6.9) 0.7 13.6 84%
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company
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Monthly Market Strategy October 2018
THEME 3: DEFENSIVES/CONSUMPTION DRIVEN STOCKS
Consumption driven defensive stocks at attractive valuations Considering the developments in the financial markets with rising yields and currency depreciation, it is imperative to have an allocation towards defensive stocks driven by consumption and available at attractive valuations. Going by the recent volatility and swings in global markets the ride ahead may be challenging. Hence there is a need to balance individual portfolios with some safer names in them.
We have selected a few names across sectors which have corrected in recent times and are currently available at attractive valuations. With consumer facing business models, these companies are likely to drive growth from strong consumption growth. Other common thread between these defensive stocks is strong management, large addressable market size and high growth visibility on the business side. Most of these stocks are financially very sound having improving earnings profile, healthy return ratios and generating consistent free cash flows.
Stocks looking attractive in valuations are: Companies Growth driver
Maruti Volume growth expected to stay healthy; gaining market share ITC Attractive valuations Arvind De-merger of branded apparel and engineering business will unlock value Phoenix Mills Ltd Strong consumption across its retail assets Amber Enterprises Strong demand for room air conditioner from brands
Source: Kotak Securities - Private Client Research
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Monthly Market Strategy October 2018
Maruti Suzuki India Ltd - Accumulate Analyst: [email protected] Last report at Rs.9397 on 27 July 2018
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 7348 10360 41.0% 10000 / 7294 2219669
Investment Argument Price Performance We expect MSIL's volumes to grow at a strong pace aided by recovery in rural areas, continued robust demand for new launches, expansion of Nexa 230 Maruti Suzuki India Ltd Nifty network and demand in favor of petrol run vehicle. Furthermore facelifts, upgrades and variants of existing models will also drive sales for the 185 company. Management re-iterated its expectation of 8-9% industry growth in FY19 140 and MSIL to witness double-digit volume growth. In July 2018, MSIL shared that they are witnessing 15% higher enquires and 13% increase in bookings. 95 MSIL’s market share in the domestic passenger car market increased from 50 47.4% in FY17 to 50% in FY18 and stood at 52.2% as of end August 2018. MSIL generates one third sales volume from rural areas. In July 2018, management highlighted that rural retail demand is growing by 15%. With strong presence in rural areas and dominance in the entry level car segment, MSIL will be the key beneficiary of rural demand recovery. Source: Bloomberg In recent years, the company made substantial strides in the premium car segment. MSIL has big opportunity to gain market share in the premium Share Holding Pattern (%) segment. Focus on premium products and scaling-up of distribution network will translate into share of premium products in MSIL's product mix Others increase in a meaningful way DII 7.0% We expect MSIL's EBITDA margin to remain impacted in the near term on 11.0% account of commodity price increase and INR depreciation (company is net importer). Risks & Concerns Lower than anticipated growth will jeopardize our revenue and profit estimates. Promoter MSIL benefits from yen depreciation. Any unfavorable movement of yen can FII 56.2% have significant impact on the company's profitability. 25.8% Company Background MSIL, India's largest passenger car company, is a subsidiary of Suzuki Motor Corporation of Japan. Formed as a government owned company (Maruti Udyog Source: Bloomberg Limited), it entered into a JV with Suzuki Motor Corporation. Over the years the company has been one the most successful player in the Indian car market.
Financials (Rs Mn) FY18 FY19E FY20E Sales Volumes (Units)
Sales 797,627 923,995 1,071,676 2,100,000 Growth (%) 17.2 15.8 16.0 1,800,000 EBITDA 120,615 142,100 176,182 EBITDA margin (%) 15.1 15.4 16.4 1,500,000 PBT 110,034 137,502 177,563 1,200,000 Net profit 77,218 96,939 125,182 900,000 EPS (Rs) 255.6 320.9 414.4 600,000 Growth (%) 5.1 25.5 29.1 300,000 CEPS (Rs) 346.9 417.8 521.5 0 Book value (Rs/share) 1,382.3 1,606.8 1,924.8 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Dividend per share (Rs) 80.0 80.0 80.0 ROE (%) 19.8 21.5 23.5 Source: Company ROCE (%) 28.4 30.0 32.8 Net cash (debt) 352,505 408,149 508,313 Market Share (%) Net Working Capital (Days) (26.9) (21.6) (21.6) 55
50.0 Valuation Parameters FY18 FY19E FY20E 50 P/E (x) 28.7 22.9 17.7 P/BV (x) 5.3 4.6 3.8 46.5 46.8 47.4 45 45.3 45.0 EV/Sales (x) 2.4 2.0 1.6 44.7 EV/EBITDA (x) 15.6 12.8 9.8 42.1 40 40.1 38.4 Price Performance (%) 1M 3M 6M (22.1) (16.2) (17.1) 35 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company
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Monthly Market Strategy October 2018
ITC Ltd - Buy Analyst: [email protected] Last report at Rs.287 on 27 July 2018
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 297 330 11.2% 323 / 250 3443797
Investment Argument Price Performance Cigarette volume increased by 1% in Q1FY19 which saw a significant 170 ITC Ltd Nifty improvement from 4% decline in Q4FY18. ITC’s EBITDA/ PAT growth was reasonably healthy at +19.2%/+18.2% 145 YoY, well ahead of our and consensus estimates with significant improvement in performance in cigarettes/ other segments in the 120 aggregate. 95 The GST council had not touched the GST rate on cigarettes in its latest meet which suggest stability in indirect taxation on cigarettes. 70 The company continues to be largely dependent on cigarettes for its profits; with sectors like FMCG and Paperboard doing well in Q1FY19 and expected to do well in the rest of FY19. ITC remains relatively attractively valued, at 25x PER FY20E, versus 35x- Source: Bloomberg 45x FY20E for larger FMCG companies. We expect that the company to experience a gradual re-rating as growth in cigarette profits rises to Share Holding Pattern (%) double digits over the next few quarters. Other Risks & Concerns Corporate 1% FPIs Regulation remains the largest risk for the company. Other risks are Bodies 20% economic/ competitive in nature. 34%
Company Background Financial ITC is India's largest cigarette company, with c.80% market share. The Institutions/ company is also involved in several other segments, which include non- Banks cigarette FMCG goods, paper, paperboards, and packaging, hotel, and agri- Non- Insurance 11% business. Institutions Companies Sector Background 10% 21% Indian FMCG sector’s size is pegged at Rs 4 Trillion with rural India Source: Capitaline contributing to about a third of the revenues.
Financials (Rs mn) FY18 FY19E FY20E Cigarette Volume Growth (Est., %, y/y) Sales 443,874 502,808 551,334 10 Growth (%) NM 13.3 9.7 5 EBITDA 158,161 182,504 201,778 0 EBITDA margin (%) 35.6 36.3 36.6 PBT 167,611 192,880 211,692 -5 Net profit 108,947 125,372 141,833 -10 EPS (Rs) 9.1 10.4 11.8 -15 Growth (%) 4.0 15.1 13.1 -20 CEPS (Rs) 9.8 11.3 12.7
Book value (Rs/share) 39.3 41.3 44.9
2QFY14 4QFY14 1QFY16 3QFY16 4QFY17 2QFY18 1QFY19 3QFY14 1QFY15 2QFY15 3QFY15 4QFY15 2QFY16 4QFY16 1QFY17 2QFY17 3QFY17 1QFY18 3QFY18 4QFY18 Dividend per share (Rs) 7.1 7.1 7.1 1QFY14 ROE (%) 23.1 25.2 26.3 Source: Kotak Securities - Private Client Research ROCE (%) 22.3 24.8 26.3 Net cash (debt) 121,364 128,528 154,013 Cigarette EBIT Growth (%, y/y) Net Working Capital (Days) 45 36 44 20.00%
Valuation Parameters FY18 FY19E FY20E 15.00% P/E (x) 32.7 28.5 25.2 10.00% P/BV (x) 7.6 7.2 6.6 EV/Sales (x) 7.5 6.6 6.0 5.00% EV/EBITDA (x) 21.0 18.2 16.3 0.00% Price Performance (%) 1M 3M 6M (4.8) 13.9 16.1
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company
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Monthly Market Strategy October 2018
Arvind Ltd - Buy Analyst: [email protected] Last report at Rs.420 on 7 August 2018
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 318 500 57.3% 479 / 313 82227
Investment Argument Price Performance Arvind has a portfolio of 15 international licensed brands and 12 in-house brands targeting different segments and are managed by qualified and 160 Arvind Ltd Nifty experienced professionals. We expect all its brands to be profitable in FY19E, resulting in 230 bps improvement in EBITDA margins of the branded apparel 135 business between FY18-20E. Arvind has adopted verticalization strategy in its textiles business by focusing 110 on garmenting business which would positively impact its RoCE. The process of demerger of branded apparel and engineering business is 85 proceeding as per plan and is presently at the final stage. We believe that the demerger would unlock value of each of the businesses post listing. 60 The company has maintained guidance for 10% growth in textiles business with flattish margin, 20- 24% yoy growth in brand and retail business with 100 bps improvement in margins and 10-12% growth in engineering business with flattish margin. Source: Bloomberg We expect company’s revenue and PAT to grow at a CAGR of 13.3% and 43.5%, respectively in FY18-20E driven by 27% volume CAGR in garments Share Holding Pattern (%) business, 20.6% CAGR growth in branded retail business, all brands turning profitable and improved operating leverage across segments. Others We arrive at sum of the parts (SOTP) based target price of Rs 500 by 17% assigning FY20E EV/EBITDA multiple of 16x to the branded apparel Promoter business, 8x to the textile business and 13x to the engineering business. DII 43% Risks & Concerns 18% Major revision in license terms of foreign brands, Lower export incentive, Raw material or forex volatility. Company Background Arvind Ltd promoted by Lalbhai family, is a leading textiles company with FII presence in textiles, branded apparel and engineering business. The company 22% manufactures and sells about 300 million meters of fabrics and over 30 mn pieces of garments (FY18). The company owns brands such as Flying Machine, Colt, Source: Company Ruggers, etc has licensed brands such as US Polo, Arrow, Tommy Hilfiger, Gap, Calvin Klein, etc. Financials (RS mn) FY18 FY19E FY20E Performance of Power Brand Sales 108,261 121,495 139,008 30,000 Revenue (Rs mn, LHS) 12.5% Growth (%) 17.2 12.2 14.4 EBITDA (Rs mn, LHS) EBITDA 9,650 11,464 14,723 EBITDA Margins (%, RHS) 12.0% EBITDA margin (%) 8.9 9.4 10.6 20,000 PBT 3,904 5,518 8,526 11.5% Net profit 3,158 4,211 6,506 EPS (Rs) 12.2 16.3 25.2 10,000 Growth (%) (1.3) 33.3 54.5 11.0% CEPS (Rs) 26.1 31.7 41.9 Book value (Rs/share) 158.1 171.5 193.9 0 10.5% Dividend per share (Rs) 2.4 2.4 2.4 FY13 FY14 FY15 FY16 FY17 FY18 ROE (%) 8.1 9.9 13.8 Source: Company ROCE (%) 8.8 10.2 13.3 Net cash (debt) (31,171) (30,741) (29,730) Textile and apparel industry in India (US$ billion) Net Working Capital (Days) 105 102 103 300 250 Valuation Parameters FY18 FY19E FY20E 250 P/E (x) 26.0 19.5 12.6 200 P/BV (x) 2.0 1.9 1.6 150 150 137 EV/Sales (x) 1.0 0.9 0.8 108 EV/EBITDA (x) 11.7 9.8 7.6 100 50 Price Performance (%) 1M 3M 6M 0 (20.2) (17.8) (17.0) 2015 2016 2017 2019F
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: IBEF
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Monthly Market Strategy October 2018
The Phoenix Mills Ltd - Buy Analyst: [email protected] Last report at Rs.597 on 28 August 2018
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 561 707 26.0% 732 / 479 85939
Investment Argument Price Performance Rental growth for the company is being driven by the strong operational 250 performance of Market City malls -PMC Chennai, PMC Pune & PMC Phoenix Mills Ltd Nifty Mumbai as well as High Street Phoenix & Palladium. 220 Commercial and hospitality segment also registered healthy YoY growth 190 respectively led by improvement in rentals and ARRs. 160 Growth going ahead is likely to be led by improvement in rentals as well as 130 uptick in residential segment revenue booking. 100 Rental renegotiations and consumption improvement is likely to drive healthy growth in revenues going forward. Residential segment revenues 70 are likely to improve with improvement in market activity in its key regions. Company has closed 4 acquisitions which include land parcels in Bangalore, Ahmedabad, under construction retail assets in Lucknow and Indore Source: Bloomberg between April-July 2018 which is in line with its growth strategy of increasing retail led mixed use development area going forward. Share Holding Pattern (%) Risks & Concerns Oversupply in retail and commercial may keep rentals subdued DII Others Delay in launching residential sales may impact revenues and can keep 2.9% 3.9% borrowings higher on consolidated level.
Company Background FII Phoenix mills ltd (PML) has emerged as a key beneficiary of growing demand in 30.4% the retail sector with its flagship premium mall High Street Phoenix (HSP) located in central Mumbai. Promoter Sector Background 62.9% Residential and commercial segment of real estate is currently impacted by real estate slowdown. However, retail segment continues to do well in terms of Source: Bloomberg higher consumption/higher occupancies and improved rentals. High Street Phoenix portfolio Consolidated financials (Rs mn) FY18 FY19E FY20E Sales 16,198 17,755 18,684 Hospitality Growth (%) -11.0% 9.6% 5.2% 19% EBITDA 7,774 8,645 9,254 Commercial EBITDA margin (%) 48.0% 48.7% 49.5% 4% PBT 2,871 3,294 3,839 Net profit 2,422 2,746 3,149 Residential EPS (Rs) 15.8 17.9 20.6 7% Growth (%) 27.0% 13.4% 14.7% CEPS (Rs) 28.8 32.7 36.0 Retail 70% Book value (Rs/share) 186.2 201.0 218.4 Dividend per share (Rs) 2.6 2.6 2.6 Source: Company, Kotak Securities - Private Client Research ROE (%) 9.6 9.3 9.8 ROCE (%) 8.9 8.8 9.5 Phoenix mills rental portfolio (mn sq ft) Net debt (cash) 41,909 38,822 35,950 6.0 Palladium(chennai) Net Working Capital (Days) 144.0 144.0 144.0 0.31 0.33 Bareilly 4.5 1 Valuation Parameters FY18 FY19E FY20E Lucknow P/E (x) 35.5 31.3 27.3 1 Chennai 3.0 P/BV (x) 3.0 2.8 2.6 1.1 Bangalore EV/Sales (x) 7.9 7.0 6.5 1.5 Mumbai(Kurla) EV/EBITDA (x) 16.4 14.4 13.2 1.19 Pune 0.9 0.74 Price Performance (%) 1M 3M 6M 0.0 HSP FY11 FY18 (7.7) (13.5) (5.1) Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company
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Monthly Market Strategy October 2018
Amber Enterprises Ltd - Buy Analyst: [email protected] Last report at Rs.921 on 13 August 2018
Current Market Price (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 925 1145 23.8% 1329 / 880 29088
Investment Argument Price Performance Amber Enterprises (AEL) is the leading OEM/ODM for several room AC (RAC) brands in India, with a ~55.4% market share. 110 Amber Enterprises Ltd Nifty The Indian RAC market has been witnessing robust growth trend in the past five years with a CAGR of 9.4% by volumes. In the next five years, the market is 100 expected to witness a CAGR of 12.8% reinforced by the surge in rural consumption, shorter replacement cycles, energy-efficient RACs and availability 90 of multiple brands at various price points. The share of manufacturing in RACs by OEMs/ODMs has been consistently 80 going up from 16% in FY12 to 34% in FY17 and is projected to reach 44% by FY22E. 70 The government has recently raised import duty on ACs which will further spur shift from direct imports to domestic manufacturing, thereby benefiting contract manufacturers like Amber With a view to increase wallet share, AEL is 1) filling product gaps 2) entry into newer brands through components and 3) acquisi tions to add competencies. It Source: Bloomberg added four customers in Q4FY18 and two more additions is in the pipeline. To bolster its component offering, the company has made two acquisitions in FY18 Share Holding Pattern (%) which adds electronic PCBs into its portfolio. Risks & Concerns Others Majority of AEL’s revenue is derived from top 10 customers (92.5% in FY17). The 37.3% loss of, or a significant reduction in purchases by such customers could adversely Promoter affect business of the company. 44.0% Company Background Amber Enterprises Ltd was incorporated as Amber Enterprises India Private Limited and set up its first factory in Rajpura, Punjab, which commenced operations in 1994. Since then, the company has today grown to 10 manufacturing facilities across seven locations in India. DII 7.9% Sector Background FII The RAC penetration level in India (4%) lags when compared to the global level 10.8% (30%) implying the room for growth. Overall Indian market remains at sub-par level when compared to the global average. With increase in rural market sales and Source: Bloomberg product lining strategies, the market penetration is expected to improve in future.
Financials (Rs mn) Consolidated FY18 FY19E FY20E Household Penetration across consumer durables category (%)
Sales 21,281 26,342 31,577 70 Growth (%) 29.4 23.8 19.9 60.0 60 EBITDA 1,835 2,110 2,700 EBITDA margin (%) 8.6 8.0 8.6 50 Net profit 623 1,052 1,459 40 EPS (Rs) 19.8 33.5 46.5 30 20.0 Growth (%) 123.3 68.8 38.7 20 17.0 Book value (Rs/share) 284.3 317.8 364.3 10.0 10 4.0 Dividend per share (Rs) - - - 0 ROE (%) 9.9 11.1 13.6 Room AC Refrigerator WM FPD TV Air Cooler ROCE (%) 16.0 15.1 18.4 Net Working Capital 24.5 24.8 26.0 Source: Company Net Cash 284 964 1,713 Revenue mix (%) Non AC Components Valuation parameters FY18 FY19E FY20E RAC 14% P/E (x) 46.6 27.6 19.9 Components P/BV (x) 3.3 2.9 2.5 11% EV/Sales (x) 1.4 1.1 0.9 EV/EBITDA (x) 15.7 13.3 10.1
Price Performance (%) 1M 3M 6M RACs (4.3) 4.0 (13.5) 75%
Source: Bloomberg, Company, Kotak Securities - Private Client Research Source: Company
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 23 1-Month Portfolio
SEPTEMBER 3, 2018 1-MONTH PORTFOLIO (PF) – SEPTEMBER 2018 NIFTY: 11680 This was the portfolio which we had recommended for September 2018. The recommendation in this portfolio now stands closed.
Stock M Cap Current (Rs mn) Price PE (x) Comment (Rs) FY19E FY20E
L&T 1,920,740 1,370 22.5 19.6 Company reported stronger than expected results in Q1FY19. The company has strong ordering and order pipeline dominated by government spending. Grasim 703,754 1,071 23.2 19.5 Grasim is likely to benefit from improved VSF and chemical volumes along with higher volumes in cement. Stock is trading at attractive valuations Tech Mahindra 750,680 766 16.7 13.9 Tech Mahindra reported better than expected results in 1QFY19. Overall outlook remains promising on the back of new deals closures in the telecom vertical and sustained revenue momentum from the enterprise segment Ramp ups from high quality accounts signed in the past 18 months will too power medium term growth. Aurobindo Pharma 417,818 713 17.8 14.9 We believe ARBP is also well positioned to gain volumes in the US where the management expects US$100 mn worth of NBO’s in FY2019 and is well placed to capitalize on any disruptions in US orals (e.g. valsartan) Stock is trading at attractive valuations Petronet LNG 372,000 248.0 15.4 13.3 We believe PLNG’s earnings to rise over the next 2-3 years, driven by higher RLNG volumes from both Dahej and Kochi terminals. Construction of the pipeline to evacuate gas from Kochi is progressing well. Kansai Nerolac 278,124 516 43.4 38.2 Volume trends remain strong for the company and we expect the trend to continue in medium term. Reduction in GST (from 28% to 18%) bodes well for paint companies including Kansai Nerolac. Kansai is one of the most attractively valued paint company Jubilant Foodworks 205,368 1,557 62.3 44.5 Company reported stronger than expected results in Q1FY19 New management’s interventions continue to drive strong momentum in the business. Maharashtra Seamless 32,763 489 7.9 6.8 We believe that MSL valuations can get rerated on back of 1) recovery in demand for seamless pipes in the domestic/international market 2) limited competition from domestic players who are struggling with their highly leveraged balance sheets. PNC Infratech 42,587 166 18.4 14.1 Robust order book of over Rs 150 bn gives very strong revenue growth visibility for the next three years. PNC is targeting over 40% revneue growth in FY18-20E based on its current orderbook and stage of execution. Talbros Auto 3,616 294 13.7 10.4 VTBA’s gasket business that accounts for majority revenues for the company is witnessing robust growth. Given current order book status, revenue growth in this business is expected to continue strong growth in FY19/FY20. In 1QFY19, revenues in the forging business stood at Rs417mn, 115% growth YoY. It is estimated to report 25% earnings CAGR over FY18-FY20E, stock is available at attractive valuation. Source : Kotak Securities - Private Client research
1-Month Portfolio
OCTOBER 1, 2018
1-MONTH PORTFOLIO (PF) – OCTOBER 2018 NIFTY: 10930 We expect the following stocks in 1 month portfolio to outperform the benchmark index Nifty in the month of October 2018. We rate these stocks as “Short Term Buys” with a time frame of 1 month.
Stock M Cap Current (Rs mn) Price PE (x) Comment (Rs) FY19E FY20E
Infosys 3,323,937 732 20.1 17.7 Management is confident of achieving near term financial objectives and is making progress in strengthening lag areas like large deals and digital. Company has developed significant competencies within Digital which has higher gross margin, revenue per person and growth rates.
Vedanta 862,738 232 7.2 6.0 We expect Vedanta to deliver the highest volume growth over the next two years led by zinc, oil & gas and aluminum operations—these businesses account for 90% of VEDL’s EBITDA.
Hero MotoCorp 582,600 2,913 15.9 14.3 Through new products, HMC is making an attempt to improve its presence in the scooter and premium motorcycle segment. Pickup in rural demand, (HMC is large player in rural areas) has led to improved demand for motorcycle.
Marico 426,990 331 46.0 37.2 In Q1FY19, Marico delivered strong performance in an extremely challenging input cost environment, with healthy volume growth across key segments Company continues to maintain/ gain market share in most of its categories Downward trend in Copra prices is healthy for Marico
Grasim Ind 670,242 1,020 22.1 18.6 Grasim is likely to benefit from improved VSF and chemical volumes along with higher volumes in cement. Stock is trading at attractive valuations
Aurobindo Pharma 435,398 743 18.6 15.5 We believe ARBP is also well positioned to gain volumes in the US where the management expects US$100 mn worth of NBO’s in FY19 and is well placed to capitalize on any disruptions in US orals (e.g. valsartan). Stock is trading at attractive valuations
Cummins India 187,110 675 24.3 20.6 Cummins reported margin improvement in Q1FY19 after six quarters of disappointment. We expect the trend would continue in Q2FY19 as well leading to stock re-rating. Currently stock is trading at attractive valuations
Jubilant Foodworks 163,820 1,242 49.7 35.5 Company reported stronger than expected results in Q1FY19. New management’s interventions continue to drive strong momentum in the business.
Amber Enterprises 29,108 927 27.7 19.9 Highest market share in contract manufacturing of room ACs. Hike in import duty on ACs to benefit contract manufacturers
Cyient 84,450 750 17.5 14.3 Continued traction in transportation and communications verticals along with strategic acquisitions would drive revenue growth. Company has taken several steps to facilitate successful execution of its S3 strategy. Stock is trading at reasonable valuations. Source: Kotak Securities - Private Client research
Monthly Market Strategy October 2018
ONE MONTH MODEL PORTFOLIO PERFORMANCE
Portfolio (PF) returns vs Nifty Returns and outperformance of portfolio vis-à-vis Nifty Graph 1 depicts the monthly returns of the portfolio vs monthly returns of Nifty and its outperformance
PF monthly performance vs Nifty monthly performance
One Month Portfolio (LHS) Nifty returns (LHS) Outperformance (RHS) 10 8.7 10.00 7.5 7.5 5.8 5.6 6.0 6.2 6.0 5.2 4.7 5 3.4 5.00 3.0 2.9 2.8 1.7 1.4 1.0 0.2 -0.4 0.2 0 0.00 -0.1 -0.1 0.0 -0.2 -1.0 -0.8 -1.6 -1.3 -1.2 -2.8 -5 -3.6 -4.1 -5.00
-6.4 -6.4
-10 -8.3 -8.8 -10.00
Jul-17 Jul-18
Jan-18
Jun-17 Jun-18
Oct-17
Apr-17 Apr-18
Feb-18
Sep-17 Sep-18
Dec-17
Mar-18
Aug-17 Aug-18
Nov-17
May-17 May-18
Source: Kotak Securities – Private Client Research, NSE
Graph 2 depicts the performance of monthly, 3 monthly, 6 monthly and yearly basis and corresponding outperformance. 3 monthly PF returns are calculated by adding the returns of last three months, 6 monthly PF returns are calculated by adding the returns of last six months, 1 yearly PF returns are calculated by adding the returns of last 12 months. Nifty returns for the same periods have been calculated by using the actual opening and closing value for the said period such as monthly, 3 monthly, 6 monthly and yearly.
PF performance vs Nifty performance
20.0 PF Nifty Outperformance - 16.3 (2.4) 15.0 (2.0) (3.5) (4.0) 10.0 8.5 4.6 (6.0) 5.0 2.5 (8.0) 0.0 (10.0) -1.1 -5.0 (11.7) (12.0) -6.4 -5.9 -10.0 -8.8 (14.0) (14.4) -15.0 (16.0) 1 month 3 month 6 month 1 year
Source: Kotak Securities – Private Client Research, NSE
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 26 Monthly Market Strategy October 2018
RATING SCALE Definitions of ratings BUY – We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE – We expect the stock to deliver 0% - 5% returns over the next 12 months SELL – We expect the stock to deliver negative returns over the next 12 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA – Not Available or Not Applicable. The information is not available for display or is not applicable NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.
Rating scale for 1 month portfolio Benchmark – Nifty Time horizon – 1 month Short term buys – Stocks expected to outperform the benchmark Nifty in the said time horizon
FUNDAMENTAL RESEARCH TEAM Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Research Associate [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 6423
Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6426 +91 22 6218 7021
Teena Virmani Sumit Pokharna Pankaj Kumar Jayesh Kumar Krishna Nain Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap Economist M&A, Corporate actions [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 5373 +91 22 6218 7907
K. Kathirvelu Support Executive [email protected] +91 22 6218 6427
TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale [email protected] [email protected] +91 22 6218 5408 +91 20 6620 3350
DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 27
Monthly Market Strategy October 2018 Disclosure/Disclaimer Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
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