diwali picks 2020 samvat 2077...performance of diwali stock picks – 2019 samvat 2077 top diwali...

DIWALI PICKS

2020

SAMVAT 2077

A Touch of Light to Your Wealth

Sundaram

Fasteners Cipla HCL

Technologies

TV18

Broadcast

CreditAccess

Grameen

UPL Alembic

Pharma HDFC

Ltd.

HDFC

Bank

Britannia

Industries Infosys

ITC

Samvat 2077 is already beginning on a strong positive note where stock markets are hovering close to its all time high with most sectors witnessing enthusiastic momentum. One of the key contributor remained the banking industry which has acted as strong foundation support to the reviving Indian economy. Key early data points do indicate towards the worst probably being over with gradual resumption in supply-side, phased unlocking programs combined with consumption being aided by the pent-up demand in the system, industry and services overall seem to be coming back to track.

Year 2020 marked a period of high volatility for equity markets on the back of global and domestic cues, the most important being impact of Covid-19. Markets widely oscillated from an all time Nifty high of 12,430 in January 2020 to tanking nearly 40% in a quick span of 2-3 months to 7511 levels at the beginning of the pandemic. Although, a smart recovery followed, where the frontrunners remained IT and Pharma sector in the altered structural post covid-19 landscape. We believe four key sectors to look forward in coming couple of years are – 1) Technology / Digital, 2) Healthcare / Pharma, 3) Financial Services / Investment Products, and 4) Consumption.

Our Samvat 2077 shortlist consists of stock ideas in sectors that are either resilient / or are in the fast growing emerging segments / or are likely beneficiaries of the Covid-19 fall-out stimulus packages. We believe, while delivering returns is essential, it is equally important to protect the downside and manage risks appropriately to achieve the perfect portfolio balance. The point is perfectly re-iterated by our performance delivered on last year Samvat 2076 stock picks in the uncertain and highly volatile market where combined average return delivered by 12 recommended stocks has been ~ 34% (*reference below table) whereas the benchmark index has witnessed a return of 6.9%* in the same period.

On this note we present this year’s Samvat 2077 top stock picks best poised to deliver sound returns, along with performance summary for last year’s Diwali picks.

SAMVAT 2077

*Returns achieved calculated from period high price

Stellar returns expected as economy rebounds backed by government reforms, stimulus packages and continued strong

funds flow into capital markets

Stock Name M Cap

(INR Cr.) Report

Price (INR) Target Price

(INR) Target

Returns Period High Price (INR)

Returns Achieved*

CMP (INR) 6 Nov 2020

Hdfc Bank 719948 1229 1492 21% 1310 7% 1308 ICICI Bank 305628 437 508 16% 552 26% 443 HDFC Life Insurance 119317 608 730 20% 648 6% 591 ICICI Prudential Life 59949 477 559 17% 538 13% 418 Bajaj Finserv 99950 8285 9661 17% 9950 20% 6286 Ashok Leyland 24937 78 97 24% 88 12% 85 Minda Corporation 1560 84 124 48% 122 45% 69 Sundaram Fasteners 9710 460 551 20% 533 16% 462 Tata Elxsi 9651 706 1008 43% 1710 142% 1553 Sterlite Technology 5821 147 211 44% 174.70 19% 147 Reliance Industries 1372018 1416 1722 22% 2369 67% 2029 Mahanagar Gas 8270 963 1177 22% 1247 29% 837

Performance of Diwali Stock Picks – 2019

SAMVAT 2077

Top Diwali Stock Ideas

Samvat 2077

Stock Name Sector M Cap

(INR Cr.) CMP* (INR)

Target Price (INR)

Target Returns

HDFC Ltd. BFSI 384,049 2,138 2,500 17%

HDFC Bank Ltd. BFSI 719,562 1,307 1,510 16%

Britannia Industries Ltd. Consumer Goods 84,360 3,514 4,125 17%

UPL Ltd. Agrochemicals 32,243 422 622 47%

Alembic Pharma Ltd. Pharmaceuticals 19,243 979 1,286 31%

Infosys Ltd. IT 473,966 1,113 1,300 17%

HCL Technologies Ltd. IT 230,689 850 1,015 19%

TV18 Broadcast Ltd. Media 4,766 28 36 29%

CreditAccess Grameen Ltd. NBFC-MFI 10,523 676 843 25%

ITC Ltd. Consumer Goods 212,446 174 228 31%

Cipla Ltd. Pharmaceuticals 63,690 790 950 20%

Sundram Fasteners Ltd. Auto Ancillary 9,710 462 532 15%

Note: *CMP as of 6 November 2020 Source: KRChoksey Research

HDFC

Company overview

HDFC is a pioneer in home loans and is the largest mortgage lender in India. It has an extensive distribution network of 546 interconnected offices (including 188 offices of HDFC Sales) with outreach programs to several towns and cities all over India and over 5600+ branches of HDFC bank as a key customer acquisition machine, with over 3000 employees. Its AUM in mortgages is INR 5,40,000+ Cr with individual home loans contributing more than 70% of book. Apart from core operations in mortgages, it holds substantial interest in other financial services companies including HDFC Bank (India’s largest private lender), HDFC AMC (one of the largest mutual funds), HDFC life (life insurance), HDFC Ergo (general Insurance), Credila (Education focused NBFC), HDB Financial (NBFC through the bank), and other property and investment fund companies. It is currently chaired by Mr. Deepak Parekh and Mr. Keki Mistry is its Vice Chair and CEO and Ms. Renu Sud Karnad is its managing Director.

CMP

INR 2,138 Target

INR 2,500 Potential Upside

17% Market Cap (INR Cr)

3,84,049

Recommendation

BUY Sector

BFSI

MARKET DATA

SHARE PRICE PERFORMANCE (REBASED)

MARKET INFO

KEY FINANCIALS

Source: Company, KRChoksey Research

SHARE HOLDING PATTERN (%)

Key Investment Rationale:

Home loans to drive retail demand: The pandemic has led to structural change in

perceptions for home. There is a significant push from the regulator to make home

loans attractive. This coupled with customer friendly cost saving such as lower stamp

duty and interest rates along with favorable pricing have led to traction in home loans.

While the segments have caught the interest of banks and NBFCs, HDFC Ltd. is well

poised to benefit from the surge. We expect AUM growth to improve to ~12% over

CAGR 20-22E.

Operating performance to remain robust: The cost on the liabilities have come off

aided by lower interest rates, TLRTRO and higher debt flows to well-rated companies.

HDFC has been a key beneficiary with one of lowest lending costs in the industry. This

places it favourably amidst competition. We expect it to be able to maintain NIMs at

above 3% even as incremental individual loans may be higher. We expect strong

operating performance on the back of managed costs and strong NIIs.

Low risk to adverse credit costs and strong Capital base: Under ECL, the provisions

were at INR 12,304 Cr. The provisions carried as a percentage of the Exposure at Default

(EAD) is equivalent to 2.60%. Though the GNPA is 4.2% yet, it has witnessed resolution in

the high-risk segments. We don’t expect incremental adverse credit costs for the

stressed book. This coupled with a CAR of 20% bodes well for HDFC.

Valuation : We value the core business at 2.1x FY22E P/ABV at INR 1,182 and subsidiaries

INR 1,318 taking our target to INR 2,500, implying an upside of 17%.

SENSEX 41,893

NIFTY 12,264

Particulars (INR Cr) FY17 FY18 FY19 FY20E FY21E

NII 9,635 10,498 11,646 16,375 18,546

PPOP 15,305 13,149 12,600 29,772 32,173 PAT 10,959 8,727 17,726 21,597 22,906

EPS (INR / Share) 66.5 56.1 102.2 120.8 128.1

BVPS (INR / Share) 407.3 454.6 497.4 544.2 589.0

NIM (%) 2.74% 2.51% 2.45% 3.07% 3.13%

Advances Growth YoY (%) 20.9% 12.1% 11.6% 8.4% 9.3%

Shares outs (Cr) 180

Equity Cap (INR Cr) 1,00,133

Mkt Cap (INR Cr) 3,84,049

52 Wk H/L (INR) 2500/1473

Volume Avg (3m K) 4,609

Face Value (INR) 2

Bloomberg Code HDFC IN

Particulars Sep-20 June-20 March-20

Promoters 00 0.0 0.0

FIIs 70.0 70.2 70.9

DIIs 18.7 18.5 18.0

Others 11.3 11.3 11.1

Total 100 100 100 NII CAGR between FY20 and

FY22E

26.2%

PAT CAGR between FY20 and FY22E

13.7%

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NIFTY HDFC

HDFC Ltd.

HDFC Bank

Company overview HDFC Bank is India’s leading private sector bank, with 5,500 branches across 2,764 towns and cities in India. HDFC Bank, established in 1994, commenced its operations as a Scheduled Commercial Bank in January 1995. It is promoted by Housing Development Finance Corporation (HDFC) and Foreign Portfolio Investors (FPIs) holding around 37% stake. The bank caters to a wide range of banking services including commercial and investment banking on the wholesale side and transactional/ branch banking on the retail side. The bank has three key business segments such as retail banking, wholesale banking and treasury. Its retail lending business comprises of around 52% of its loan book while the rest 48% comprises of corporate lending. HDFC Bank has maintained its reputation of renowned customer services helping them build the brand name they have today among other private peers. The bank has been led by MD Aditya Puri since its inception until he retired this year passing the baton to Mr. Sashidhar Jagdishan.

CMP

INR 1,307 Target


16% Market Cap (INR Cr)

7,19,562

Recommendation

BUY Sector

BFSI

MARKET DATA


MARKET INFO

KEY FINANCIALS



Key Investment Rationale:

Poised to grow at CAGR 20% over FY20-22 with wholesale and new products: We

expect the bank to grow at CAGR 20% over FY20-22 driven by secured retail and

wholesale outperforming the industry. In H1FY21, the wholesale advances grew 30%

YoY. While the caution is likely to remain in unsecured, the secured retail including

autos and MSME is poised for traction. The bank has not been averse to deposits

despite excess liquidity. We expect the strong franchise to continue to fuel its growth

at reasonable costs.

Credit costs provided for the stress till date: The management has assessed the likely

bad assets based on the trends and history of likely stress. We believe the bank has

provided for the legacy stress and there is unlikely to be any carry forward of stress

from the current pool of recognized assets. The bank reported GNPA at 1.01%, lower on

account of the Supreme Court standstill on recognition of NPAs. Excluding the same,

the GNPA would have been 1.38%. Similarly reported NNPA were 0.1% against the likely

0.35% and reported PCR was 85% vs likely 75%. The bank has provided INR 1241 Cr as

specific provisions and additional INR 1130 Cr for the unrecognized GNPAs.

Valuation and View: With the traction in advances, lower incremental credit costs,

strong operating profits, improved risk adjusted NIMs, we expect NII growth of

16%/20%; PPoP at ~18%; PAT at 23%/20% and ability to maintain RoAs at 1.9% in FY21/22

respectively. We raise our target to INR 1,510 (from INR 1,427), implying a P/ABV of 3.7x

FY22E P/ABV (higher from 3.5x on improving growth momentum and low adverse risk

to credit costs), upside of 16%. It is currently trading at 3x FY22E P/ABV.

Particulars (INR Cr) FY17 FY18 FY19 FY20E FY21E

NII 40,095 48,243 56,186 65,249 78,423

PPOP 32,625 39,750 48,750 57,788 67,971

PAT 17,487 21,078 26,257 32,339 38,958

EPS (INR / Share) 33.7 39.2 47.9 58.8 70.8

BVPS (INR / Share) 204.8 273.9 311.8 355.0 408.1

NIM (%) 4.4% 4.4% 4.4% 4.2% 4.0%

Advances Growth YoY (%) 18.71% 24.47% 21.27% 21.80% 20.60%

Shares outs (Cr) 550

Equity Cap (INR Cr) 1,86,112

Mkt Cap (INR Cr) 7,19,562

52 Wk H/L (INR) 1,335/739


Face Value (INR) 1

Bloomberg Code HDFCB IN

Particulars Sep-20 June-20 March-20

Promoters 26.0 26.1 26.1

FIIs 37.4 37.0 36.7

DIIs 23.9 22.1 22.0

Others 12.7 14.8 15.2

Total 100 100 100 NII CAGR between FY20 and

FY22E

18.1%


21.8%

SENSEX 41,893

NIFTY 12,264

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NIFTY HDFC Bank

HDFC Bank Ltd.

Company overview Britannia Industries is one of the leading food companies and among the most trusted food brand with a over 100-year legacy, starting its operation in 1892 from Kolkata. Britannia products are available across the country in close to 5 million retail outlets and reach over 50% of Indian homes. Britannia caters to six product segments like Biscuits (~80% contribution to sales in FY20), Bread, Cakes, Rusk, Cream wafers, Centre Filled Croissants and Dairy products. Its major brands such as TIGER, Good-Day, 50:50 has an estimated market share of 33% in the Indian biscuits industry. Britannia bread operates through 13 factories and 4 franchisees and is India’s largest player in organized sector with annual volume turnover of ~1 lakh tons. Company’s dairy products directly reach to 100,000 outlets. Company’s direct reach has grown over period of time and now it has reached directly at 22.3 lakhs touch points. It has presence in over 60 countries like Middle East, North America, Europe, Africa and South East Asia. Britannia is 2nd largest biscuit player in UAE. Company’s strategic expansion plan is based on one new market a year. It has local manufacturing base outside India in Nepal, UAE and Oman and plans to set up and operate through local market in Africa and South East Asia. In FY20 the consolidated revenue reached INR 116bn, with EBITDA margin at 15.9%

CMP

INR 3,514 Target


17.4% Market Cap (INR Mn)

843,600 Recommendation

BUY Sector

Consumer Goods

MARKET DATA


SENSEX 41,893

NIFTY 12,264

MARKET INFO

INR Million FY18 FY19 FY20 FY21E FY22E

Revenue 99,901 1,10,547 1,15,996 1,21,722 1,30,199

EBITDA 15,017 17,334 18,432 24,296 25,649

PAT 10,042 11,591 14,026 18,540 19,842

EPS (INR) 41.81 48.21 58.32 77.09 82.50

EBITDA Margin (%) 15.0% 15.7% 15.9% 20.0% 19.7%

NPM (%) 10.1% 10.5% 12.1% 15.2% 15.2%

KEY FINANCIALS


Particulars Sep-20 Jun-20 Mar-20

Promoters 50.6 50.6 50.6

FIIs 16.0 14.7 14.7

DIIs 11.5 12.7 13.4

Others 21.9 22.1 21.3

Total 100 100 100


Revenue CAGR between FY20 and FY22E


5.9% 18.9%

Britannia Industries

Shares outs (Mn) 240

Equity Cap (INR Mn) 44,380

Mkt Cap (INR Mn) 843,600

52 Wk H/L (INR) 4,015/2,100

Volume Avg (3m K) 769

Face Value (INR) 1

Bloomberg Code BRIT IN Key investment rationale

New launches will bolster performance:

New product launches and innovations continue to remain the company's focus. The management prioritized sale of premium segment products such as Good Day, Milk Bikis, Marie and Digestive Milky Choice in 2020. Besides on low-price point, newly launched Winkin Cow Lassi in 2 flavours and a layer cake for INR 5, both of which has received good response from the market. We believe its strategy to grow and improve profitability by launching new premium products and controlling operational overheads bolster performance in medium to long term.

Expansion plan (“One New Market a Year”) on track; augurs well for future growth

The company plans to invest ~INR 700 Cr to build new manufacturing facilities and expansion to existing facilities over the next 2-3 years. Three Greenfield facilities include Tamil Nadu, UP and Bihar and two brownfield facilities include existing facilities in Odisha and Maharashtra. The company is also planning to expand its dairy business in which it has limited presence. After establishing presence in Nepal, the company is eyeing to enter Bangladesh market in next 1-2 years. The strategy of continuous expansion augurs well for future.

Focus on strengthening of distribution channels; especially in rural markets

Currently the direct reach of Britannia is 22.3 mn outlets as of September 2020 (19.7 mn in March 2020). Number of rural distributors were 22K outlets for the quarter compared to 19K in March 2020, which helped the company to increase its market share considerably. Rural share was ~30% of the total revenue in FY20. Among all states, UP, MP, Gujarat, Rajasthan (Hindi Belt) grew in a CAGR range of 17-22% between (YTD FY18 to YTD FY21). The company’s focused efforts on distribution & processes will help them get back on high growth trajectory and consistently enhance value for all stakeholders.

Valuation

Britannia is as a BUY with target price of INR 4,125, a 17.4% upside, after applying P/E multiple of 50.0x to the FY22 EPS of INR 82.5 per share. The company commands a well-deserved valuation premium on account of strong brand image, consistent improvement in margins and the essential nature of its products like biscuits.

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BRIT NIFTY 50

Company overview UPL Ltd. is amongst the leading agrochemical company, globally with presence in more than 138 countries. Its major offerings include high-quality seeds and crop protection solutions like Herbicides, Fungicides and Insecticides. Geography-wise, Latin America is the major market and contributes about 47% of the revenues, followed by Rest of the World (17%), India (16%), Europe (11%) and North America (9%), as of Q2FY21. It has global manufacturing and R&D facilities with 11 plants in America, 13 plants in Europe and 17 plants in Rest of the World. In FY19, UPL Ltd. acquired Arysta LifeScience in an all-cash USD 4.2 Bn deal. The combined entity has emerged as the world’s fifth largest crop protection solutions company. Currently, the acquisition has been successfully integrated, resulting into cost and revenue synergies like cross-selling through expanded geographic reach, optimizing manufacturing footprint and increasing procurement efficiency.

CMP

INR 422 Target

INR 622 Potential Upside


322,427

Recommendation

BUY Sector

Agrochemicals

MARKET DATA


SENSEX 41,893

NIFTY 12,264

MARKET INFO

KEY FINANCIALS



Promoters 27.9 27.9 27.9

FIIs 37.2 40.6 43.5

DIIs 16.2 13.4 11.5

Others 18.7 18.4 17.2

Total 100 100 100



Adj. PAT CAGR between FY20 and FY22E

8.1% 21.4%

UPL Ltd.




52 Wk H/L (INR) 617/240


Face Value (INR) 2

Bloomberg Code UPLL IN

Particulars (INR mn) FY18 FY19 FY20 FY21E FY22E

Revenues 1,73,780 2,18,370 3,57,560 3,84,031 4,18,091

EBITDA 35,050 38,130 67,730 82,567 94,071

Adj. PAT 21,237 19,420 23,990 27,938 35,372

EPS Diluted (INR) 41.6 38.0 31.3 36.4 46.1

EBITDA Margin (%) 20.2% 17.5% 18.9% 21.5% 22.5%

NPM (%) 12.2% 8.9% 6.7% 7.3% 8.5%

Leader in bio solutions with strong performance across geographies: UPL is amongst the leader in bio solutions space and the largest supplier of organic portfolio of products in the world. Its leadership is evident from the robust performance across regions. In Q2FY21, Latin America grew 12.4% YoY on the back of strong volume growth witnessed in Chile, Argentina and Paraguay and partially offset the adverse exchange impact. Europe grew 6.2% YoY due to benefit of integration; North America grew 8.7% YoY due to better weather conditions; India grew 17.9% YoY driven by herbicides in Rice and Soybeans supported by intensification of monsoons while Rest of the World grew 27.2% YoY due to higher contribution from South East Asia with new product launches as well as better weather conditions in South Africa, Australia, New Zealand. Improvement in operating matrix indicating management efficiency: Driven by new product launches and differentiated solutions, the management has guided for healthy growth in revenues. EBITDA margin is also expected to improve going forward and remain in the range of 23 to 25% in the next few years. Efficiencies in cost control and revenue growth will facilitate operating margin expansion, going forward. In Q2FY21, company was able to maintain EBITDA margin at Q2FY20 level, at around 18.6% (+14bps YoY, -474bps QoQ) through cost savings in overheads & employee cost. Deleveraging and strengthening of the balance sheet: As of 30th September 2020, UPL’s net debt was INR 238.4 bn, higher by INR 17.8 bn compared to 31st March 2020 mainly due to an increase in working capital of INR 29.2 bn, in line with the seasonality of the business. However, the company has targeted to reduce the net debt in H2FY21 and maintain an investment grade credit rating. The management intends to keep Net debt/EBITDA at 2.0x by FY21 as against 2.9x currently. Valuation: We have a BUY recommendation on UPL Ltd., with a Target Price of INR 622/share, which implies a potential upside of 47% over the CMP. The company’s pipeline is valued currently at USD 2.0 bn to USD 2.5 bn of peak sales, reaching maturity in the next five to eight years. Moreover, the company has highlighted that they expect USD 5.0 bn of additional market value from products becoming off-patent in the next five years, and the company’s backward integration and scale will facilitate it to grabe a large share of this market.

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UPL NIFTY 50

Alembic Pharma

Company overview: Founded in 1907, Alembic Pharmaceuticals Ltd., is a vertically integrated, research and development oriented pharmaceutical company belonging to Alembic group. Company is headquartered in India and is involved in manufacturing and marketing of generic pharmaceutical products all over the world. Company draws 31% of its revenue from India, 43% from the US, 11% from RoW & 15% from API. In the US, the company has a cumulative total of 133 ANDA approvals (116 final approvals and 17 tentative approvals) from USFDA. Company’s therapy focus in the domestic market is on Cardiology, Antidiabetics, Gynecology, Gastrology, Dermatology, Orthopedics, Ophthalmology, Nephrology, Ant infectives & Cold & Cough.

CMP

INR 979 Target


31% Market Cap (INR Mn)

1,92,432

Recommendation

BUY Sector Pharmaceuticals

Shares Outs (Mn) 197


Mkt Cap (INR Mn) 1,92,432

52 Wk H/L (INR) 1,129/434


Face Value (INR) 2

Bloomberg Code ALPM IN

MARKET DATA


SENSEX 41,893

NIFTY 12,264

MARKET INFO

KEY FINANCIALS

Particulars Sep-20 (%) Jun-20 (%) Mar-20 (%)

Promoters 69.8 72.9 72.9

FIIs 7.0 7.3 8.3

DIIs 9.4 7.2 6.9

Others 13.8 12.6 11.9

Total 100 100 100


16.8% 13.9%



Strong earnings visibility; US market to drive growth

We expect Alembic Pharma’s topline to grow at a CAGR of 16.8% over FY20-22E period and net profit to grow by CAGR of 13.9% over FY20-22E period. We are optimistic of company’s growth prospects on the back of new product introductions in the US, new products filed from recently commercialized Aleor JV, and improvement in the revenue mix with contribution from general and oncology injectables. Growth in the US market to remain intact with 15-20 expected new launches a year for next three years. Company to see continued traction in the Azithromycin for at least two more quarters, which will drive the API business. Recovery in the RoW & domestic market will also continue. Fund raising to reduce debt and expand API/Injectable manufacturing facilities: Recently (in Aug-20), Alembic Pharma carried out fund raising of INR 7.50 bn through a qualified institutional placement (QIP) to reduce the debt and expand API/Injectable facilities. From the total proceeds, company reportedly would utilize ~INR 4.0 bn for debt repayment, while the remaining will be used for expansion activities. It should be noted that, in last 5 years company has spent ~INR 2,7.3 bn on capital expenditure at an average rate of 15% of revenue (highest in industry). In FY21, company’s capex is likely to peak out at INR 7.0 bn and from FY22 onwards it will normalize to ~ INR 3.0-3.5 bn, post which we expect improvement in return ratios. Highlights of Q2FY21: For Q2FY21, Alembic Pharma reported strong Revenue growth of 17.4% YoY (up 8.6% QoQ) led by strong growth in the ROW market and the API segment. EBITDA grew 28.3% YoY (up 8.9% QoQ). EBITDA margin expanded to 30.4% in Q2FY21 (from 27.8% last year). Net Profit rose 35.4% YoY (up 10.6% QoQ) while Net Profit Margin for the quarter expanded 303 bps YoY to 22.9% (up 40 bps QoQ) from 19.8% in Q2FY20.

Valuation and view

The shares of Alembic Pharma are currently trading at a P/E of 17.8x/17.9x on FY21E/22E earnings. We continue to apply P/E multiple of 23.5x on the FY22E EPS of INR 54.7/share in the wake of increased earnings visibility & maintain our target price at INR 1,286 per share; an upside potential of 31.0%.


INR Millions FY18 FY19 FY20 FY21E FY22E

Revenue 31,308 39,347 46,058 55,432 62,863

EBITDA 6,431 8,736 12,230 15,576 15,841

PAT 4,126 5,844 8,291 10,791 10,753

EPS (INR) 21.90 30.94 42.49 54.9 54.7

EBITDA Margin 20.5% 22.2% 26.6% 28.1% 25.2%

NPM 13.2% 14.9% 18.0% 19.5% 17.1%

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Alembic Pharma Nifty

Alembic Pharma

Company overview

Infosys is a top-tier Indian IT services firm that offers a wide range of IT services to clients ranging from application development & maintenance, business process management, infrastructure management, R&D services, IT consulting, digital services including cloud, analytics, IoT and products. Company’s major verticals include Financial Services, Retail, Communications, Energy & Utilities, Manufacturing, Hi-tech and Life Sciences. Infosys earns a lion’s share of its revenue from North America (60.7% in 2QFY21), followed by Europe (24.3%), Rest of the World (12%) and India (3%). Segment-wise, the company earns a major share of revenue from Non-digital (traditional) services (52.7% in 2QFY21), while 47.3% of revenue is accounted for by high-growth Digital services. The company employed 240,000+ people as of 2QFY21-end. Infosys has grown revenue, EBIT and PAT at CAGRs of 11.2%, 7.0% and 6.1%, respectively over the period FY15-FY20.

CMP

INR 1,113 Target



4,739,660

Recommendation

BUY Sector

IT

MARKET DATA


MARKET INFO

Particulars (INR Mn) FY19 FY20 FY21E FY22E FY23E

Net Sales 826,750 907,910 989,829 1,101,311 1,215,555

EBIT 188,800 193,740 233,006 252,914 281,080

APAT 154,040 165,940 189,430 209,494 232,052

EPS (INR) 36.1 38.9 44.4 49.1 54.4

EBIT Margin (%) 22.8 21.3 23.5 23.0 23.1

P/E (x) 30.8 28.6 25.1 22.7 20.5

EV/EBIT (x) 24.6 24.1 19.9 18.3 16.4

KEY FINANCIALS


Particulars Sep 20 Jun 20 Mar 20

Promoters 13.0 13.2 13.2

FIIs 31.3 30.5 31.0

DIIs 25.4 25.9 25.1

Others 30.4 30.5 30.7

Total 100 100 100


10.8% 10.7%

Infosys Ltd.

Shares outs (Mn) 4,259

Equity Cap (INR Mn) 7,10,000


52 Wk H/L (INR) 509/1186


Face Value (INR) 5

Bloomberg Code INFO IN Key investment rationale

Large deal aggression drives revenue visibility, expect double-digit revenue growth till FY23E

Infosys’ large deal TCV has shown healthy growth, with 2QFY21 TCV up >10% YoY and >80% QoQ, reflecting robust recovery post 1QFY21. Over the past 2 years, the IT major’s TCV has risen nearly 3x, with annualised 1HFY21 TCV up >8% vs FY20. The IT major’s aggression on large deals augurs well for improved revenue visibility, with marquee wins such as Vanguard to boost growth. We expect Infosys to achieve 12% USD revenue growth in FY22E, followed by 10.4% in FY23E, aided by large deal execution, a greater number of smaller-sized deals that lend themselves to quicker execution cycles, and client organisations shifting workloads to the cloud.

Margin resilience impresses, expect sustainable EBIT margin at 23% going forward

Infosys doubled down on cost efficiency in 1HFY21, cutting items like travel and sub-contracting, delaying wage hike till 2HFY21, and raising utilisation and offshore revenue share, which had the salutary effect of boosting EBIT margin up >400bps over 4QFY20-2QFY21; 2QFY21 margin stood at 25.3%, its highest in 18 quarters (since 4QFY16). We model for a sustainable margin of ~23%, as cost elements such as wage hikes and travel return in some shape and form, with >20% EBIT growth in FY21 followed by ~10% EBIT CAGR over FY21-FY23.

Cash return to shareholders, greater M&A activity to drive cash usage, sustain multiple

Infosys has made 3 bonus share issues since FY14, and carried out 3 share buy backs over the past 3 years, apart from regular dividend payouts. The company’s policy is to return 85% of free cash flow to shareholders over a 5-year period from FY20, post keeping aside cash to fund its internal capex and opex needs. The IT major has also become active on M&A, acquiring 2 firms recently. We believe this is a positive indicator of improved cash usage, which has boosted RoE 350bps over the last 3 years to 25.5%, and is likely to keep the IT major’s PE multiple at elevated levels.

Valuation

We have a BUY recommendation on Infosys, with a TP of INR 1,300. We believe the IT major is well-positioned to ride the increase in IT spend led by cloud movement, with its wide portfolio of offerings and large deal aggression, with margins likely to be resilient, and cash return to shareholders in the form of buy backs and dividends, a recurring theme.



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INFOSYS NIFTY 50

SENSEX 41,893

NIFTY 12,264

Company overview

HCL Technologies (HCLT) is a top-tier Indian IT services firm that offers a wide range of IT services to clients ranging from application development, business process management, infrastructure management, ER&D services, consulting, cloud, analytics, IoT and software products. Its major verticals include Financial Services, Manufacturing, Technology & Services, Retail & CPG, Life Sciences, Public Services and Communications, Media, Publishing & Entertainment. HCLT earns a lion’s share of its revenue from the Americas region (63.1% in 2QFY21), followed by Europe (28.4%) and Rest of the World (8.5%). Segment-wise, the company earns a major share of revenue from IT & Business Services (70.8% in 2QFY21), followed by ER&D Services (15.7%) and Products & Platforms (13.5%) HCLT employed 153,000+ people as of 2QFY21-end. It has grown revenue, EBIT and PAT at CAGRs of 12.5%, 13.5% and 9.4%, respectively over the period FY17-FY20.

CMP

INR 850 Target



2,306,887

Recommendation

BUY Sector

IT

MARKET DATA


SENSEX 41,893

NIFTY 12,264

MARKET INFO

Particulars (INR Mn) FY19 FY20 FY21E FY22E FY23E

Net Sales 604,270 706,780 750,710 820,063 902,449 EBIT 118,540 138,530 155,231 170,579 189,371 APAT 101,230 110,620 123,260 136,583 152,824 EPS (INR) 37.3 40.8 45.4 50.3 56.3 EBIT Margin (%) 19.6 19.6 20.7 20.8 21.0 P/E (x) 22.8 20.9 18.7 16.9 15.1 EV/EBIT (x) 18.8 15.9 13.9 12.5 11.0

KEY FINANCIALS



Promoters 60.3 60.3 60.3

FIIs 24.9 25.6 26.4

DIIs 10.7 10.1 9.2

Others 4.1 4.0 4.1

Total 100 100 100


9.6% 11.3%

HCL Technologies

Key investment rationale

Well-established position in cloud services to drive revenue growth

HCLT has traditionally been strong in the Infrastructure Management Services (IMS) space, and had the 2nd-largest IMS practice among Indian IT firms (>US$ 3 billion) till it stopped reporting data in that format post-FY19. The IT major has built strategic partnerships with all the hyper-scalers – Amazon Web Services, Microsoft Azure and Google Cloud – apart from IBM Cloud, and the shift of workloads on public and hybrid clouds is likely to be a key revenue growth driver for HCLT going forward. We forecast >10% USD revenue CAGR for HCLT over FY21-FY23E, and expect growth in cloud infrastructure services to form a critical component of the growth. IBM’s recent move to hive off its cloud services business into a new firm could also be an additional driver.

P&P business a key differentiator, major opportunities for cross-selling services

HCLT’s Products & Platforms business is a key differentiator for the IT major. P&P accounted for 13.5% of 2QFY21 revenue, has >20,000 customers, works on >20 product categories and employs >3,200 people, with HCLT spending INR 3.5 billion (1.9% of revenue) on R&D expenses. While present focus is on on-boarding clients from IBM product acquisition, there is substantial scope for cross-selling services to product customers, which could potentially play out from FY22-FY23.

Higher P&P EBITDA margin can provide leeway to reinvest into the business for growth

While the P&P business accounted for 13.5% of 2QFY21 revenue, it accounted for ~16% of EBITDA due to higher margin (30.9% vs 26.6% consolidated). HCLT’s EBIT margin stood at 21.7% in 2QFY21, above its guided range of 20-21%, partly aided by higher P&P margin. We believe the IT major can reinvest these margin gains back into the business to drive revenue growth in the core IT services and ER&D businesses, which will in turn drive sustainable earnings growth.

Valuation

We have a BUY recommendation on HCLT, with a TP of INR 1,015. We believe the IT major’s well-established position in cloud infrastructure services, integrated service portfolio in traditional IT services, digital and ER&D services, and P&P differentiator will drive double-digit revenue and earnings growth from FY21-FY23E. Cash return through consistent dividend payouts, and M&A activity should also ensure better cash usage.






52 Wk H/L (INR) 375/911


Face Value (INR) 2

Bloomberg Code HCLT IN

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HCLTECH NIFTY 50

Company overview TV18 Broadcast Limited a subsidiary of Network18, is one of the largest broadcasting companies in India. It runs the largest news network in India which spans across business news (4 channels with market leadership), general news (one each in English and Hindi) and regional news (14 channels across India, including joint venture News18-Lokmat). Marquee brands CNBC-TV18 and CNN-News18 are part of this bouquet. TV18 is home to India’s largest news network and third largest entertainment network with marquee brands like CNBC-TV18, CNN-News18, Colors, MTV & Nick.TV18’s entertainment subsidiary Viacom18 (a joint venture with Viacom Inc.) operates an array of entertainment channels. The entertainment portfolio comprises Hindi general entertainment channels, English entertainment, movies, youth and musical entertainment, kid’s genre and regional entertainment channels

CMP

INR 28 Target




BUY Sector

Media

MARKET DATA


MARKET INFO

KEY FINANCIALS



TV18 Broadcast Ltd.


Equity Cap (INR Mn) 3429

Mkt Cap (INR Mn) 47659

52 Wk H/L (INR) 42/12


Face Value (INR) 2

Bloomberg Code TV18 IN


Subscription to drive growth and to improve overall Revenue Mix

Revenue mix of subscription has improved from 26% in FY19 to 35% in FY20, this was led by the robust growth of 43% in subscription revenue for FY20. The benefit of transparent and non-discriminatory B2C regime created by implementation of NTO continued to grow, this boosted the subscription revenue of TV18 and expected to grow further, this B2C regime has also resulted in a reset in pricing, and strong channel bouquets.

Gaining strong traction in Digital platform

Digital only subscription which (B2C) is expected to set next wave growth for TV18. This has further benefited from consumption tailwinds that have been boosted during the lockdown. The Broadcaster OTT app VOOT saw an increase in consumption of digital exclusive content. VOOT (Viacoms18's Over the top), its average daily viewership of 45+mins that is the highest amongst broadcasters OTT apps.

Cost optimization implemented and accelerated during the pandemic

Cost optimization is important focus area of TV18 due to Covid-19 and that will drive higher profitability from next year onwards. During the Q2FY21, total operating cost were lower by 15.8% YoY. The decline can be attributed towards lower other expense and operational cost. We continue to review cost-structures on an ongoing basis, concerted efforts to rebase them in the new normal which have driven efficiencies through the system.

Valuations & Outlook

We expect, Ad-revenue to increase led by the festive season later in the quarter and few big ticket events and programmes but the growth on the same will be moderate. Subscription revenue continues to drive growth over ad-revenue on account of new tariff order implementation which normalized and gaining good amount of traction. Stock currently trades at EV/EBITDA of 9.5x on FY22 EBITDA of INR 7430 Mn and EV/EBITDA of 10x on trailing EBITDA. We have valued it at a EV/EBITDA multiple of 11x on FY22 EBITDA to arrive at a target price of 36 per share; an upside of 28.5% over the CMP.


Promoters 60.4 60.4 60.4

FIIs 12.1 12.7 13.1

DIIs 0.3 2.0 1.9

Others 27.2 24.9 24.7

Total 100 100 100

Particulars (INR Mn) FY19 FY20 FY21E FY22E

Net Sales 49427 51,740 49,554 56,032

EBITDA 3135 7,030 6,038 7,431

Adj. PAT 1669 4,164 3,664 4,858

EBITDA Margin % 6.34% 13.59% 12.19% 13.26%

EBIT Margin% 3.66% 10.39% 8.86% 10.12%

PAT Margin % 4.26% 8.05% 7.39% 8.67%

Oct

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9

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TV18 Broadcast Ltd Sensex

SENSEX 41,893

NIFTY 12,264



4.1% 8%

Company Overview

CreditAccess Grameen Ltd (CAGL), a Large Microfinance Institution (MFI) was mainly established to serve women from India’s low income groups (LIGs). CAGL is a leading MFI with INR 112 bn of consolidated AUM as on Q2FY21, highest amongst MFIN members. As on Sep’20, it has offered ~88% of its overall gross loan portfolio of INR 112 bn for income generation loans. It has a wide network of 1,388 branches across 14 states and Union Territory providing loans to ~3.9 mn borrowers. Major portion of portfolio derives from states of Karnataka, Maharashtra and Tamil Nadu, primarily southern India. Strong rural existence, established operating structure with notable AUM growth gaining its sturdy market share in the MFIN industry.

CMP

INR 676 Target




BUY Sector

NBFC-MFI

MARKET DATA


SENSEX 41,893

NIFTY 12,264

MARKET INFO

Particulars (INR cr) FY18 FY19 FY20 FY21E FY22E

Advances 4895.5 6602.8 11098.9 12286.5 14620.9 Total Income 517.9 866.6 1125.5 1439.3 1746.2 PAT 212.5 321.8 335.5 306.8 574.7 EPS (INR) 16.5 22.4 23.3 21.3 39.9 BVPS (INR) 111.9 164.8 197.5 219.5 260.3 ABVPS (INR) 111.8 162.8 194.7 217.8 258.2 P/E 18.6x 21.7x 14.5x 31.8x 17.0x P/ABV 3.4x 3.1x 1.7x 3.1x 2.6x

KEY FINANCIALS


Particulars Oct 20 Sep 20 Jun 20

Promoters 74.1 79.9 79.91

FIIs NA 5.4 6.2

DIIs NA 8.9 8.4

Others NA 5.9 5.5

Total 100 100 100


Advances CAGR FY20-FY22E

PAT CAGR FY20-FY22E

15% 31%

CreditAccess Grameen




52 Wk H/L (INR) 1,000/306

Volume Avg (3m K) 121.4

Face Value (INR) 10

Bloomberg Code CREDAG IN


Leading NBFC-MFI to grow further with strong rural penetration

Strong penetration across semi-urban/rural areas to support micro loan book growth, as it offers diversified product loans for women borrowers’ life cycle needs. Flexible repayment options, unique disbursements at individual level in a group lending and customised product loans has built customer centricity. We expect downtrend in AUM growth due to conservative approach during 1HFY21 to reverse in the coming quarters as similar to the demonetisation event. AUM has grown at ~50% CAGR during FY18-20.

Geographic expansion to ease concentrated risk; resilient asset quality

Socio-economic environment in rural areas, awareness about importance of good credit history likely to be favorable where majority of women borrowers were disciplined in repayments. GNPA stood at 1.66% as on Sep’20. Overall collection efficiency for CAGL & MMFL stood at 89%/85% as on Oct’20, respectively. Further penetration in northern states, merger with MMFL to boost advances growth with available credit demand in the market.

Sound fundamental performance with steady improvement in operating metrics

It has ~5% of market share in MFIN segment where banks, NBFCs, etc. are also amongst emerging players. Established operating structure, robust growth in advances resulted in improved and consistent operating efficiency over the last few years. Management expects its deteriorated efficiency during pandemic to improve with Opex/GLP ratio at 4.8%-4.9% in the coming years. Profitability has grown at 25.7% during FY18-20.

Valuation

It has a strong parentage of CreditAccess India N.V. as a promoter. INR 800 cr worth of funds raised through QIP issue (allotment at INR 707/share) on 8th Oct’20 which reduced promoter holding up to 74%. Additionally, allotment of NCDs worth INR 100 cr to strengthened its liquidity. It is a good quality stock with strong asset quality (NNPA of 0%), healthy capital & high promoter holding. Accordingly, we assign P/ABV multiple of ~3.26x to FY22E consolidated adjusted book value of INR 258.2/share to arrive at a target price of INR 843/share and maintain BUY rating on the stock. Currently it is trading at a multiple of 3.5x of consolidated adjusted book value of INR 194.7/share.

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CAGL Sensex

Company overview ITC is one of India's foremost private sector companies and a diversified conglomerate with businesses spanning Fast Moving Consumer Goods, Hotels, Paperboards and Packaging, Agri Business and Information Technology. The Company is acknowledged as one of India's most valuable business corporations with a Gross sales value of ₹ 76,097.31 crores and Net Profit of ₹ 15,136.05 crores (as on 31.03.2020). ITC was ranked as India's most admired company, according to a survey conducted by Fortune India, in association with Hay Group. ITC is the country's leading FMCG marketer, the clear market leader in the Indian Paperboard and Packaging industry, a globally acknowledged pioneer in farmer empowerment through its wide-reaching Agri Business, a pre-eminent hotel chain in India that is a trailblazer in 'Responsible Luxury'. ITC's wholly-owned subsidiary, ITC Infotech, is a specialized global digital solutions provider. ITC's world class FMCG brands including Aashirvaad, Sunfeast, Yippee!, Bingo!, B Natural, ITC Master Chef, Fabelle, Sunbean, Fiama, Engage, Vivel, Savlon, Classmate, Papercraft, Mangal-deep, Aim and others.

CMP

INR 174 Target



2,124,465 Recommendation

BUY Sector

Consumer Goods

MARKET DATA


SENSEX 41,893

NIFTY 12,264

MARKET INFO


Revenue 443,298 457,844 468,073 525,456 606,596

EBITDA 155,410 173,055 179,043 201,546 233,699

PAT 112,233 124,643 151,361 164,428 190,830

EPS (INR) 9.20 10.17 12.31 13.38 15.52

EBITDA Margin (%) 35.1% 37.8% 38.3% 38.4% 38.5%

NPM (%) 25.3% 27.2% 32.3% 31.3% 31.5%

KEY FINANCIALS



Promoters 0.0 0.0 0.0

FIIs 18.9 16.8 17.0

DIIs 39.3 38.4 38.2

Others 41.9 44.9 44.8

Total 100 100 100




13.8% 11.8%

ITC Ltd.




52 Wk H/L (INR) 266/135


Face Value (INR) 1

Bloomberg Code ITC IN Key investment rationale

A resilient business model

ITC with diversified operations across non-cyclical sectors, a resilient business model, strong brand leadership position in cigarette business, product innovation track record & premiumization drive is establishing itself as a FMCG major. Despite the ongoing COVID-19 related slowdown, we see recovery signs in recent months and the current valuation attractive. Besides, we expect the cigarette business to revive in the future with strict regulation from government on curbing the sale of illegal cigarettes.

FMCG – Others: Next big Catalyst

In Q1FY21, the Packaged Foods Business delivered a strong performance, up by 10% YoY driven by Atta, Noodles, Biscuits and Fresh Dairy. The share of FMCG segment stood at 28% in Q1FY21 vs 21% in Q1FY20; we expect the revenue contribution to reach ~35% by FY23-24. In H1FY21, company launched eight variants of frozen foods and the range was extended to 70+ cities. Recently, Aashirvaad Svasti Lassi , 2 innovative immunity drinks was launched. We are optimistic on FMCG segment driven by its double-digit growth momentum, and profitability led by economies of scale

Cigarette business, the money-spinner, offers liquidity to emerging FMCG

Currently, all factories are operational, and production has been scaled up to pre-COVID levels. Sales & distribution operations have normalized. While the cigarette business faces multiple challenges, it offers capex (~INR 70,000 Cr invested in the last 10 years) for growing FMCG business.

Valuation

In a challenging macro environment, we take a conservative stance to value ITC shares using an SOTP (Sum of the parts) approach implying 9.1x EV/EBITDA on FY22E to Cigarette business; 12.5x EV/EBITDA on Hotel segment; an average 5.5x EV/EBITDA on Agri/Paper business; and 6.4x on EV/Revenue on FMCG segment - to arrive at a target price of INR 228 per share; an upside of 31.2% over the CMP.

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80

130

No

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ITC NIFTY 50

Company overview Established in 1935, Cipla is a global pharmaceutical company headquartered in Mumbai, India and serves markets of India, South Africa, North America, and key regulated and emerging markets. Company’s strengths lies in the therapy areas of respiratory, anti-retroviral, urology, cardiology, anti-infective and CNS segments. Company’s 46 manufacturing sites around the world produce 50+ dosage forms and 1,500+ products to cater to 80+ markets. Cipla is ranked 3rd largest in pharma in India (IQVIA MAT September’ 20), 3rd largest in the pharma private market in South Africa (IQVIA MAT September’20) and is among the most dispensed generic players in the U.S. Company’s paradigm-changing offer of a triple anti-retroviral therapy in HIV/AIDS at less than a dollar a day in Africa in 2001 is widely acknowledged as having contributed to bringing inclusiveness, accessibility and affordability to the centre of the HIV movement. As of FY, company had revenue contribution of 39% from India, 23% from North America, 18% from SAGA, 9% from Emerging Markets, 5% from Europe, 4% from Global API & 2% other revenues.

CMP

INR 790 Target


20% Market Cap (INR Mn)

6,36,897 Recommendation

BUY Sector

Pharmaceuticals

MARKET DATA


SENSEX 41,893

NIFTY 12,264

MARKET INFO


Revenue 1,52,193 1,63,624 1,71,320 1,96,047 2,13,910

EBITDA 28,264 30,973 32,060 48,031 50,911

PAT 14,881 15,279 15,465 27,197 30,649

EPS (INR) 18.5 19.0 19.2 33.7 38.0

EBITDA Margin (%) 18.6% 18.9% 18.7% 24.5% 23.8%

NPM (%) 9.8% 9.3% 9.0% 13.9% 14.3%

KEY FINANCIALS


Particulars Sep-20 (%) Jun-20 (%) Mar-20 (%)

Promoters 36.7 36.7 36.7

FIIs 20.1 18.6 17.9

DIIs 19.7 21.3 22.7

Others 23.5 23.4 22.7

Total 100 100 100


Revenue CAGR between FY20

and FY22E

PAT CAGR between FY20 and

FY22E

11.7% 40.8%

Cipla Ltd.




52 Wk H/L (INR) 829/355


Face Value (INR) 2

Bloomberg Code CIPLA IN


Leader in respiratory therapies; benefiting from COVID-19 related complications

Cipla is de-facto leader in respiratory therapies in India with a market share of 25.7% (rank 1). In inhalation category, Cipla’s market share stands at 68.9% (rank 1). It also has a significant market share in therapies like Urology with a market share of 16.3% (rank 1) and Cardiology with a share of 5.5% (rank 4). Cipla’s comprehensive COVID-19 portfolio consists of Cipremi (Remdesivir), Actemra (Tocilizumab), and Ciplenza (Favipiravir) which helped company in posting strong growth in Q2FY21 in the domestic market.

Financial performance highlights buoyant fundamentals

Cipla posted strong 14.6% YoY Revenue growth (+15.9% QoQ) in Q2FY21 with broad based growth across geographies, mainly India, SAGA & North American regions. EBITDA margin expanded 266bps in Q2FY21 to 23.4% (from 20.7% in Q2FY20) mainly due to tighter cost control despite lower gross profit margin. Net Profit grew 41.2% YoY (+15.1% QoQ), ending the quarter with Net Profit Margin of 13.2%, an improvement of 248bps YoY.

Near term growth drivers

Key factors to watch out for Cipla in near term are approval of Advair Diskus, ramp-up in albuterol and contribution of COVID-19 drugs. Company has 250 ANDAs as of 30th Sep, 2020, with 66 ANDAs pending for USFDA approval.

Valuation

After a steller H1FY21 performance, we have revised our estimates for Cipla upwards for FY21E/FY22E. We now expect Cipla to report Revenue/PAT growth CAGR of 11.7%/40.8, respectively, over the period of FY20-22E. The shares of Cipla are currently trading at a P/E of 23.4x/20.8x on FY21E/22E earnings. We are optimistic of company’s growth prospects and raise our target P/E multiple to 25.0x (previously 24.5x) on FY22E EPS of INR 38.0/share and raise our target price to INR 950/share (earlier INR 894/share), an upside potential of 20%.

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135

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v/17

May

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v/18

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Cipla Nifty

Company overview

Sundram Fasteners (SFL) was incorporated in 1962. It is a part of the TVS group, headquartered in Chennai. SFL has a diversified product portfolio and is mainly involved into six product lines I) High Tensile Fasteners II) Cold Extrusion components III) Hot Forged IV) Power metal parts V) Oil/Water pumps VI) Engine component and powertrain parts. Contribution of fasteners in total revenue is 36% and 64% comes from other product lines. SFL’s standalone domestic business generated 66% of the revenue and exports at 34% in Q2FY21. Over the years, SFL has acquired cutting-edge technological competencies in forging, metal forming, close-tolerance machining, heat treatment, surface finishing, and assembly.

CMP

INR 462 Target



97,100

Recommendation

BUY Sector

Auto Ancillary

MARKET DATA


SENSEX 41,893

NIFTY 12,264

MARKET INFO

KEY FINANCIALS



4.8% 13%

Sundram Fasteners Ltd.

Key investment rationale Diversification into non-automotive and reducing dependency on Fasteners: In last few years SFL has reduced its dependency on fasteners business, currently at 36% (specialized fasteners within it is 25% and 8-10% revenue mix of standard fasteners) of total compare to 65-70% a decade back. Other product lines contributes 64% which includes engine components, pump assembly, powder metal and extruded products, wind energy and radiator caps. The company is focusing on higher share from other non-auto (industrial) segment such as defence and aerospace. The Company has earmarked INR 100 cr. of its capacities for defence opportunities. Aftermarket remains strong which is 10%, through strong dealership and distribution.

Long term strategy of making exports 50% of revenue: Exports presently contributes 34% of its standalone revenue in Q2FY21, its 80-85% of export is derived from North America and large part from two major clients Cummins and GM. Management expects 50% revenue contribution to come from export in next five to seven year which will de-risk the business from the domestic market. The company has commissioned Sri City SEZ unit, Andhra Pradesh, for export of high precision engineering components to a leading European manufacturer. We expect healthy performance from exports over domestic and increase of value added products in exports.

Multiple trigger in place for better operating performance: We expect EBITDA margin to remain at ~16% for FY21E and further to improve in FY22E to ~18%, led by favourable commodity price, better revenue mix (higher contribution value added products and specialized fasteners) and gradually increased in its factories operation to three shifts to meet the improved demand. Further, SFL is having sufficient capacity available to capitalize on the demand front in the domestic and export markets, return ratio are expected to improve in FY22 on better operating performance and lower capex spend.

Valuation We maintain our positive stance, on back of diversified set of product portfolio, and strong domestic presence in all segments of automobile. We expect Revenue to grow by CAGR of 4.8% over FY20-22E and net profit to grow by CAGR of 13%. At CMP, stock is trading at PE of 37.3x on FY21E EPS of INR 12.4 and P/E of 23.5x on FY22E EPS of INR 19.7. We have valued SFL at P/E of 27x on FY22E EPS of INR 19.7 to arrive at a target price of INR 532/share.



Particulars (INR Mn) FY19 FY20 FY21E FY22E

Net Sales 45,579 37,232 33,099 40,917

EBITDA 8,005 5,929 5,336 7,488

Adj. PAT 4,575 3,250 2,594 4,147

EPS (INR) 21.8 15.5 12.4 19.7

EBITDA Margin (%) 17.6 15.9 16.1 18.3

PAT Margin (%) 10.0 8.7 7.8 10.1

Particulars 20-Sep 20-Jun 20-Mar

Promoters 49.53 49.53 49.53

FIIs 8.87 8.94 8.87

DIIs 18.56 18.1 18.09

Non- institutions 23.04 23.44 23.52

Total 100 100 100

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SFL Sensex

Shares Outs (Mn) 210

Equity Cap (INR Mn) 210.13


52 Wk H/L (INR) 533/249


Face Value (INR) 1

Bloomberg Code SF IN

ANALYST CERTIFICATION:

We, Parvati Rai (MBA-Finance, M.com), Head Research, Harit Shah (PGDBA-Finance), senior research analyst, and Priyanka Baliga [M.Com, BMS (Finance)], research associate author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Terms & Conditions and other disclosures:

KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited and Bombay Stock Exchange Limited. KRCSSPL is a registered Research Entity vides SEBI Registration No. INH000001295 under SEBI (Research Analyst) Regulations, 2014.

We submit that no material disciplinary action has been taken on KRCSSPL and its associates (Group Companies) by any Regulatory Authority impacting Equity Research Analysis activities.

KRCSSPL prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analyst covers.

The information and opinions in this report have been prepared by KRCSSPL and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KRCSSPL. While we would endeavor to update the information herein on a reasonable basis, KRCSSPL is not under any obligation to update the information. Also, there may be regulatory, compliance or other reasons that may prevent KRCSSPL from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or KRCSSPL policies, in circumstances where KRCSSPL might be acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KRCSSPL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. KRCSSPL accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Our employees in sales and marketing team, dealers and other professionals may provide oral or written market commentary or trading strategies that reflect opinions that are contrary to the opinions expressed herein, .In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest.

Associates (Group Companies) of KRCSSPL might have received any commission/compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of brokerage services or specific transaction or for products and services other than brokerage services.

KRCSSPL or its Associates (Group Companies) have not managed or co-managed public offering of securities for the subject company in the past twelve months.

KRCSSPL encourages the practice of giving independent opinion in research report preparation by the analyst and thus strives to minimize the conflict in preparation of research report. KRCSSPL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither KRCSSPL nor Research Analysts have any material conflict of interest at the time of publication of this report.

It is confirmed that, Parvati Rai (MBA-Finance, M.com), Head Research, Harit Shah (PGDBA-Finance), senior research analyst, and Priyanka Baliga [M.Com, BMS (Finance)], research associate of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific brokerage service transactions.

KRCSSPL or its associates (Group Companies) collectively or its research analyst do not hold any financial interest/beneficial ownership of more than 1% (at the end of the month immediately preceding the date of publication of the research report) in the company covered by Analyst, and has not been engaged in market making activity of the company covered by research analyst.

It is confirmed that, Parvati Rai (MBA-Finance, M.com), Head Research, Harit Shah (PGDBA-Finance), senior research analyst, and Priyanka Baliga [M.Com, BMS (Finance)], research associate do not serve as an officer, director or employee of the companies mentioned in the report.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other Jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject KRCSSPL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform them of and to observe such restriction.

Please send your feedback to [email protected] Visit us at www.krchoksey.com

KR Choksey Shares and Securities Pvt. Ltd Registered Office:

1102, Stock Exchange Tower, Dalal Street, Fort, Mumbai – 400 001. Phone: +91-22-6633 5000; Fax: +91-22-6633 8060.

Corporate Office: ABHISHEK, 5th Floor, Link Road, Andheri (W), Mumbai – 400 053.

Phone: +91-22-6696 5555; Fax: +91-22-6691 9576.

DISCLAIMER

ANALYST Parvati Rai, [email protected], +91-22-6696 5413 Harit Shah, [email protected], +91-22-6696 5555 Priyanka Baliga, [email protected], +91-22-6696 5408

mailto:[email protected]

http://www.krchoksey.com/

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