first call 07jul21

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Tata Motors - Company Update - Chip shocker amidst best-ever demand Tata Motors (JLR) indicated that acute global semiconductor shortage is impacting

its production. Taking cognisance of the same, we are revising down FY22E volumes

by ~102k units assuming the challenges will persist till Q3FY21. Hence, we are

revising down FY22E PAT by ~65%, but retaining FY23 estimates.

Tata Steel - Company Update - Primed for performance

We attended Tata Steel (TSL) Investor Day and got insights into its long-term

strategic focus. Key points: i) Capacity aspiration of 35-40mtpa by CY30 in India. ii)

Capital prudence expected with a firm focus on returns. iii) Thrust on maintaining

leadership in key products; iv) Unwavering commitment to sustainability. v)

Innovation through technology.

Sobha - Company Update - Q1FY22 sales: Decent performance Despite the covid-19 induced lockdown, Sobha turned in a relatively good

performance, clocking ~0.9msf pre-sales in Q1FY22; volumes were up 38% YoY but

down 33% QoQ (Q4FY21 had witnessed highest ever bookings in the company’s

history). By value, sales (company’s share) were at INR5.7bn (up 45% YoY, down 35%

QoQ). Realisations were up 2% YoY (down 5% QoQ). There were no formal project

launches during the quarter (~3.2msf in FY21).

Crompton Consumer - Company Update - Gaining greater ground with

rigour

In this edition of Annual Report Insights, we spotlight Crompton’s moves that are

pumping up its growth and balance sheet. Takeaways: robust process, asset-light

approach and quicker TAT complemented its premium brand and market reach amid

a consolidating market.

Automobiles - Sector Update - Cost pressure to persist

Q1FY22 volumes were impacted QoQ due to lockdowns (2W, M&HCV most

affected). This along with commodity inflation would continue to weigh on EBITDA

margins QoQ. Price hikes and value engineering would take off part of it though.

Overall we expect the margins to decrease 100–200bps QoQ.

India Equity Research July 7, 2021

FIRST CALL DAILY REPORT

Edelweiss Research +91 22 4009 4400 [email protected]

Sectoral Movements %Change Ticker 4-Jul-21 1 D 1 M 3 M 1 Y

Nifty 15,818 -0.1 0.4 6.7 46.5

Banking 40,281 1.0 0.1 8.0 57.2

IT 28,649 -1.0 5.0 6.8 81.5

Pharmaceuticals 25,898 -0.6 4.4 17.0 59.1

Oil 16,148 0.0 -6.8 8.0 25.7

Power

2,687 0.5 -9.3 5.8 66.7

Auto 23,610 -1.8 -2.4 5.5 44.6

Metals 18,614 -0.5 -2.2 19.0 154.6

Real Estate

2,811 -0.5 0.2 6.7 72.1

FMCG 13,601 -0.5 3.0 5.6 20.7

Capital Goods 22,919 0.2 -2.2 8.5 71.6

MARKETS Change in % 04-Jul-21 1D 1M 1Y

Nifty 50 15,818 -0.1 0.4 46.5 Nifty 200 8,376 -0.1 0.3 49.8 Nifty 500 13,574 -0.1 0.7 53.4

INDIA STOCK PERFORMANCE

GLOBAL 04-Jul-21 1D 1M 1Y

Dow 34,577 -0.6 -0.2 33.6

China 3,523 -0.2 -2.1 5.3

EM Index 1,347 -0.6 -2.5 27.9

UPCOMING EVENTS CALENDER

MACRO Change in %

04-Jul-21 1D 1M 1Y

Fx (INR/USD)

74.6 -0.3 -2.3 0.2

!0-yr G-sec 6.2 1.4 2.4 5.8 Oil (USD) 74.4 -0.2 4.1 72.7

Explore:

Sales Traders Says Currency Conversations

Bond Vectors Valuation Vista

40,000

50,000

60,000

70,000

80,000

7,000

8,500

10,000

11,500

13,000

14,500

16,000

Jul 20 Oct 20 Jan 21 Apr 21 Jul 21

(x)

(x)

Nifty Index MSCI EM Index - Local Currency (RHS)

EventDate

Avenue Supermarts results10-07-21

08-07-21

07-07-21 Redington to consider bonus issue

Tata consultancy services results

https://edelweissresearch.com/Research/Download/11318






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Media - Sector Update - Broadcasters to fare better For media at large, Q1FY22 marked a disruption due to the raging second covid

wave. Multiplexes operated for two–three weeks of April and have shut screens

since. Despite few states allowing screens to reopen now, lack of content forced

screens to remain shut. Broadcasters too faced disruption in shooting original

content and a sequential dip in ad revenues. We expect revenues for ZEEL and Sun

TV to grow 34.2% and 20.9% YoY, and PVR and INOX to post EBITDA losses of

INR615mn and INR209mn.

Metals & Mining - Sector Update - A record quarter in store Despite covid-19 related disruptions, Q1FY22 is likely to be a record quarter for most

companies in our coverage. Key points: i) A QoQ volume dip likely for most

companies. ii) Ferrous companies (flats oriented) are likely to fare better. iii) Debt

reduction likely. iv) Higher iron ore and crude derivatives’ cost to weigh on

performance.

Specialty Chemicals - Sector Update - Surge in input prices to drive

revenues We expect specialty chemicals companies to post robust results in Q1FY22 off a low

base (covid-19 had posed challenges in Q1FY21) and a surge in input cost. Our

coverage universe is likely to report revenue growth of 48% YoY and EBITDA/PAT

growth of 52%/75% YoY.

Home Decor - Sector Update - Strong recovery takes a breather

Q1FY22 is likely to mark a pause in the home décor industry’s sharp recovery since

Q2FY21. While growth momentum sustained at most companies in April, May took

a hit as lockdowns returned. Recovery resumed in the last 15 days of June though.

All in all, we estimate an aggregate 30% QoQ drop in revenue (up ~80% YoY off a low

base) with a higher fall in EBITDA and PAT due to negative operating leverage across

segments coupled with inventory losses (plastic pipes) and an uptick in raw material

cost (wood panel space).

Pharmaceuticals - Sector Update - Supernormal domestic; steady margins In Q1FY22, we estimate pharma would report ~14%/19% revenue/PAT growth. Key

trends: i) Domestic to outperform (+31% YoY, volume led) driven by low base and

covid-19 treatments. Cipla, GNP, CDH and DRRD to benefit. ii) Cost savings to keep

EBITDA margin healthy. iii) US: Volume recovery offset by price erosion; good

launches at DRRD, LPC and GNP, albuterol ramp-up for Cipla and LPC; Ilumya uptake

offset by Absorica for SUNP. CIPLA and ALKM to report good numbers.

Consumer Staples - Sector Update - Q1FY22 : Six weeks of aberration We estimate revenue and EBITDA of our coverage universe to grow 10.5% and 2.3%

on two-year basis (Q1FY22 vs Q1FY20) compared to 19.3% and 15.9% on two year

basis for Q4FY21 (Q4FY21 vs Q4FY19).

Sadbhav Engineering - Result Update - Balance sheet remains stretched Sadbhav Engineering (SEL) posted 23% QoQ decline in Q4FY21 top line; however,

exceptional items and tax write-back boosted profitability with PAT rising 341%

QoQ. Toll collection fell 8% QoQ. Order book declined QoQ to ~INR93bn; fall in

revenue (down 28% YoY) means book-to-bill remains optically elevated at 5.7x.

Working capital cycle deteriorated to 527 days (489 at end-Q3FY21).










KEY DATA

Rating BUY Sector relative Outperformer Price (INR) 346 12 month price target (INR) 405 Market cap (INR bn/USD bn) 1,229/16.5 Free float/Foreign ownership (%) 57.6/15.6

What’s Changed Target Price

Rating/Risk Rating ⚊

INVESTMENT METRICS

Chip shocker amidst best-ever demand

Tata Motors (JLR) indicated that acute global semiconductor shortage is impacting its production. Taking cognisance of the same, we are revising down FY22E volumes by ~102k units assuming the challenges will persist till Q3FY21. Hence, we are revising down FY22E PAT by ~65%, but retaining FY23 estimates.

We expect global pricing power led by supply constraints and a sharp jump in used vehicle prices. We assume JLR will prioritise production of most profitable models in FY22. Maintain ‘BUY’ with a revised TP of INR405 (earlier INR436) as we roll over to Dec-22E. Sustained supply constraint is a key risk as H2 volumes are higher than H1.

FINANCIALS (INR mn)

Year to March FY21A FY22E FY23E FY24E

Revenue 24,97,94

8

28,96,87

5

35,79,21

4

39,11,21

8

EBITDA 2,52,967 3,35,736 4,54,777 5,42,141

Adjusted profit (2,55,055

) 39,844 1,33,407 1,83,419

Diluted EPS (INR) (66.6) 10.4 34.8 47.9

EPS growth (%) 33.1 nm 234.8 37.5

RoAE (%) (23.3) 7.1 20.5 22.7

P/E (x) nm 30.5 9.1 6.6

EV/EBITDA (x) 7.0 5.5 3.6 2.6

Dividend yield (%) 0 0 0 0

PRICE PERFORMANCE

Semiconductor shortage heating up; demand outlook best ever

JLR press release indicates: 1) Loss of production of 30K in Q1FY22. 2) Expects production to fall by 50% versus earlier planned. 3) Expects EBIT loss and operating cash out flow of GBP2bn. 4) Demand outlook is extremely strong with outstanding retail orders of 110K units–highest in the company’s history–constituting three months of sales cover.

Million dollar question: Will things normalise from Q4FY22?

As new capacities are expected to come on-stream over the next 12-18 months, we expect some shortage of semiconductors to persist till then. However, we are assuming normalisation (as it existed till Q4FY21 – JLR lost ~7K units of production). This is our base assumption and remains a key variable. It’s pertinent to note that H2 and especially Q4 are generally most important quarters for JLR. Hence, there is scope to limit the damage if the company is able to normalise supply as it existed in Q4FY21.

Explore:

Outlook and valuation: Short-term pressure; maintain ‘BUY’

India and JLR are on the cusp of a strong demand and product cycle tailwind. This should facilitate balance sheet improvement--key driver of our Braveheart call (refer to Jumpstart). Hence, we maintain ‘BUY/SO’ with a TP of INR405 (JLR at 6.5x EBIT, India at 15x EBITDA). The stock is trading at FY22/23E PER of 30.5/9.1x.

We have assumed normalisation of shortage by Q4FY22 and hence perceive the impact to be temporary in nature. We expect JLR to accelerate its cost efficiency programme and focus on optimising its product mix to limit the impact.

-615

-485

-355

-225

-95

35

Sales Growth(%)

EPS Growth(%)

RoE(%)

PE(x)

Automobiles TTMT IN Equity

36,000

39,400

42,800

46,200

49,600

53,000

100

155

210

265

320

375

Jul-20 Oct-20 Jan-21 Apr-21 Jul-21

TTMT IN Equity Sensex

India Equity Research Automobiles July 6, 2021

TATA MOTORS COMPANY UPDATE

Chirag Shah +91 (22) 6623 3367 [email protected]

Corporate access

Financial model Podcast

Video

https://www.edelresearch.com/showreportpdf-45392/TATA_MOTORS_-_COMPANY_UPDATE-JAN-20-EDEL

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KEY DATA

Rating BUY Sector relative Outperformer Price (INR) 1,157 12 month price target (INR) 1,300 Market cap (INR bn/USD bn) 1,393/18.8 Free float/Foreign ownership (%) 65.6/11.8

What’s Changed

Target Price ⚊


INVESTMENT METRICS

Primed for performance

We attended Tata Steel (TSL) Investor Day and got insights into its long-term strategic focus. Key points: i) Capacity aspiration of 35-40mtpa by CY30 in India. ii) Capital prudence expected with a firm focus on returns. iii) Thrust on maintaining leadership in key products; iv) Unwavering commitment to sustainability. v) Innovation through technology.

We believe the company’s focus on increasing capacity while keeping an eye on balance sheet is noteworthy. Furthermore, its sustainability goals are ambitious, best-in-class and ahead of peers. Maintain ‘BUY’ with an unchanged TP of INR1,300 at 4.5x Q2FY23E EBITDA.

FINANCIALS (INR mn)


Revenue 1,562.9 1,908.8 1,689.0 1,586.1

EBITDA 305.0 612.0 410.2 291.4

Adjusted profit 84.4 263.6 153.6 89.9

Diluted EPS (INR) 70.5 220.1 128.3 75.1

EPS growth (%) 65.3 212.4 (41.7) (41.5)

RoAE (%) 11.7 31.1 15.0 8.1

P/E (x) 16.0 5.1 8.8 15.0

EV/EBITDA (x) 6.7 3.0 4.2 5.7

Dividend yield (%) 2.2 2.2 2.2 2.2

PRICE PERFORMANCE

An ode to discipline: Capex with balance sheet focus

TSL’s investor day focused unflinchingly on twin objectives of capacity expansion

while maintaining capital prudence. Key points: i) India capacity expected to be

doubled to 35-40mtpa by CY30 compared to CY20. ii) More profitable Indian

operations expected to get a lion’s share of growth capex. iii) Net debt/EBITDA and

interest coverage targeted at 2x and 4x, respectively, across the cycle. iv) Carbon

adjusted IRR of 12% targeted for growth projects in India. v) Medium target to

maintain RoIC at 15% and a robust dividend yield akin to FY21. TSL has reduced debt

in Q1FY22 further by prepaying overseas debt in Singapore entities. In our view, the

capital allocation is sound and the company is in a good position to take advantage

of its balance sheet following USD4bn of net debt reduction in FY21.

Sweeteners: Sustainability, product leadership and innovation

Apart from focussing on operational excellence, TSL is committed to a long-term

decarbonisation target, energy intensity, water consumption and diversity at

workplace. In our view, the company’s CY30 goals are best-in-class and ambitious,

but all endeavours are being made to achieve them. In its chosen segments such as

Automotive, Branded products and Retail, the company has consistently maintained

leadership by adopting multiple routes to engage with customers.

Explore:

Outlook and valuation: On track, sustainably; maintain ‘BUY’

We are positive on the company’s strategy of pursuing low-intensity capex in select

areas and downstream products. Furthermore, the company has defined and set

benchmarks for maintaining capital prudence for period extending up to CY30. We

find the focus on sustainability goals – emission intensity and water consumption –

quite ambitious, but believe the company is working on necessary enablers to

achieve them. Besides, the company is trying to develop new technology to reduce

coke usage, improve water utilisation and augmenting product leadership.

All in all, we believe that TSL’s strategic path will enable it to maintain an edge over

peers in product and cost leadership, besides maintaining its domestic market share

in the medium term. Maintain ‘BUY’ with an unchanged TP of INR1,300 on 4.5x

Q2FY23 EBITDA.

5

50

95

140

185

Sales Growth(%)

EPS Growth(%)

RoE(%)

PE(x)

Metals & Mining TATA IN Equity

36,000

39,400

42,800

46,200

49,600

53,000

325

510

695

880

1,065

1,250


TATA IN Equity Sensex

India Equity Research Metals & Mining July 6, 2021

TATA STEEL COMPANY UPDATE

Amit Dixit Meera Midha +91 (22) 6620 3160 +91 (22) 4088 5804 [email protected] [email protected]

Corporate access


Video






KEY DATA

Rating BUY Sector relative Neutral Price (INR) 480 12 month price target (INR) 574 Market cap (INR bn/USD bn) 45/0.6 Free float/Foreign ownership (%) 48.2/26.6

What’s Changed

Target Price ⚊


INVESTMENT METRICS

Q1FY22 sales: Decent performance

Despite the covid-19 induced lockdown, Sobha turned in a relatively good performance, clocking ~0.9msf pre-sales in Q1FY22; volumes were up 38% YoY but down 33% QoQ (Q4FY21 had witnessed highest ever bookings in the company’s history). By value, sales (company’s share) were at INR5.7bn (up 45% YoY, down 35% QoQ). Realisations were up 2% YoY (down 5% QoQ). There were no formal project

launches during the quarter (~3.2msf in FY21).

While the second wave impacted housing demand adversely, (refer to,Hot Property – May 2021: Housing demand and supply flag), we expect the sales momentum to revive soon. Maintain ‘BUY’ with SOTP-based target price of INR574.

FINANCIALS (INR mn)


Revenue 37,539 21,098 46,254 37,527

EBITDA 11,151 6,752 12,062 8,914

Adjusted profit 2,815 623 5,862 3,615

Diluted EPS (INR) 29.7 6.6 61.8 38.1

EPS growth (%) (5.2) (77.9) 841.0 (38.3)

RoAE (%) 12.1 2.6 21.9 11.8

P/E (x) 16.5 74.8 7.9 12.9

EV/EBITDA (x) 6.8 10.9 6.1 8.5

Dividend yield (%) 1.4 0.7 1.4 1.4

PRICE PERFORMANCE

Pandemic derails sales momentum; Bengaluru contributed 74%

New sales volume grew YoY across major cities like Bengaluru, Pune, Gurugram,

Kochi etc; sales in Bengaluru recovered 37% YoY (down 26% QoQ). Other cities that

reported strong YoY growth include Pune (165% YoY), Gurugram (119% YoY), and

Thrissur (95% YoY). Bengaluru, Gurugram and Kochi cumulatively accounted for 87%

of sales during the quarter with Bengaluru alone contributing ~74% to sales volumes

(67% in Q4FY21). Overall sales value at INR6.8bn were up 40% YoY while Sobha’s

share of sales value was up 45% YoY at INR5.7bn.

Price realisation rises 2% YoY

Average price realisation during Q1FY22 jumped 2% YoY to ~INR7,626/sft; this was

down 5% QoQ from the INR8,000/sft witnessed in Q4FY21 (which had been the

highest realisations in the past eight quarters).

New launches, cash flows and debt remain key variables

The company did not formally launch any project during the quarter; it has a robust

launch pipeline of 13.35msf projects over the next 4-6 quarters. The company’s focus

on cash flow management (refer to, Sobha - Ground reality: Focus on cash flow) had

helped it reduce net debt in FY21 and we expect this to continue going ahead.

Explore:

Outlook and valuations: Balance sheet key; maintain ‘BUY’

As highlighted in our comprehensive sector report, Real Estate - The Charge of the

Consolidating Brigade, RERA-driven consolidation is throwing up growth

opportunities for organised players such as Sobha. We like Sobha’s strong presence

in the South India realty market and robust execution capabilities.

Revival in housing demand (refer to, Hot Property - Rising like a phoenix), Sobha’s

focus on cash flows and geographical expansion should hold it in good stead. Cash

flow improvement is a key stock catalyst, in our view. We maintain ‘BUY/SN’ with

SOTP-based target price of INR574/share. We derive the TP by applying 10% discount

to its NAV of INR589/share for the residential business plus value of the contractual

business.

-80

-35

10

55

100

Sales Growth(%)

EPS Growth(%)

RoE(%)

PE(x)

Real Estate SOBHA IN Equity

36,000

39,400

42,800

46,200

49,600

53,000

200

270

340

410

480

550


SOBHA IN Equity Sensex

India Equity Research Real Estate July 6, 2021

SOBHA COMPANY UPDATE

Parvez Qazi +91 (22) 4063 5405 [email protected]

Corporate access


Video

https://www.edelweissresearch.com/Reports/Get/9483F84C-BD82-484F-BB49-83C8095AAC3D

https://www.edelresearch.com/showreportpdf-46447/SOBHA_-_RESULT_UPDATE-JUN-20-EDEL

https://www.edelresearch.com/showreportpdf-44356/REAL_ESTATE_-_SECTOR_UPDATE-SEP-19-EDEL

https://www.edelresearch.com/showreportpdf-44356/REAL_ESTATE_-_SECTOR_UPDATE-SEP-19-EDEL

https://www.edelweissresearch.com/Reports/Get/964E0454-B09E-4309-AEBA-8BFDE5B0F590






KEY DATA

Rating BUY Sector relative Outperformer Price (INR) 450 12 month price target (INR) 477 Market cap (INR bn/USD bn) 283/3.8 Free float/Foreign ownership (%) 73.8/16.1

What’s Changed

Target Price ⚊


INVESTMENT METRICS

Gaining greater ground with rigour

In this edition of Annual Report Insights, we spotlight Crompton’s moves that are pumping up its growth and balance sheet. Takeaways: robust process, asset-light approach and quicker TAT complemented its premium brand and market reach amid a consolidating market.

And Crompton’s better translation of growth is evident in its

consistently higher returns and cash flows. We particularly note its rigour to retain competitive edge in leadership products (fans, lighting, pumps) while ramping up smaller market share categories (geyser, cooler, etc). That said, the company’s impressive on-ground strategy execution and potent brand appetite now demands compatible TAM expansion, which would be a key value driver. Retain ‘BUY’.

FINANCIALS (INR mn)


Revenue 45,120 47,500 54,551 61,708

EBITDA 5,969 7,047 8,099 9,291

Adjusted profit 4,947 6,047 6,134 7,153

Diluted EPS (INR) 7.9 9.6 9.8 11.4

EPS growth (%) 22.9 22.2 1.4 16.6

RoAE (%) 34.1 35.7 29.8 30.2

P/E (x) 57.0 46.7 46.0 39.4

EV/EBITDA (x) 47.9 39.7 34.7 30.1

Dividend yield (%) 0 0.6 1.2 1.4

PRICE PERFORMANCE

Reading the market right; consistent in returns/cash translation

While Crompton’s TAM vis-a-vis peers such as Havells is strikingly low (ex-white

goods, wires, switches, etc), it has been far better on return/cash translation driven

by its combination of business model (asset light), higher share of consumer and

greater competitive moat (exhibit 4). During FY20–21, while Havells clearly outshone

on margin expansion, the bulk of it came from sharper ASP cuts; Crompton chose

not to. Apart from latter’s improved working capital, evident in cash flows and

healthy OPMs, we see greater consistency—be it employee remuneration, greater

market penetration (tier II/III coverage) with compatible product launches over

FY20-21 in target categories—both leadership and other segments.

Performance versus visibility: Investor perception and ask matters

Even as Crompton lagged many peers on growth (5Y) given majority matured

segments, low B2B exposure and low TAM, translation (PAT, cash) has been better.

In our view, the company’s professional management has gained investor trust

based on how they tapped into brand potential in recent years. What lies ahead is

the long-term path the company takes in allocating capital to compatible new

segments, which would be the biggest wealth creation opportunity for investors in

our view.

Explore:

Outlook and valuation: Sustaining better results; retain ‘BUY/SO’

Crompton’s FY21 performance spotlights its brand resilience and execution

capabilities, showing up in superior return/cash and bottom-line translation. In our

view, the company’s expanding distribution footprint – to tier ii and iii – augur well

for incremental return/cash flows with robust cost structure. However, we maintain

management’s capability to make decisions pertaining to entering larger and

compatible segments to this high-potential consumer brand remains the best value-

creation opportunity for investors. Retain ‘BUY/SO’ with a TP of INR477 (valued at

45x PE).

-5

10

25

40

55

Sales Growth(%)

EPS Growth(%)

RoE(%)

PE(x)

Consumer Durables CROMPTON IN Equity

36,000

39,400

42,800

46,200

49,600

53,000

225

275

325

375

425

475


CROMPTON IN Equity Sensex

India Equity Research Consumer Durables July 6, 2021

CROMPTON CONSUMER COMPANY UPDATE

Amit Mahawar +91 (22) 4040 7451 [email protected]

Corporate access


Video


https://www.edelweissresearch.com/Podcasts?Search=Crompton+Consumer&FromDate=&ToDate=




Cost pressure to persist

Q1FY22 volumes were impacted QoQ due to lockdowns (2W, M&HCV most affected). This along with commodity inflation would continue to weigh on EBITDA margins QoQ. Price hikes and value engineering would take off part of it though. Overall we expect the margins to decrease 100–200bps QoQ.

While commodity pressure might have peaked out, supply constraints (chip shortages) are likely to persist for a while. Hence, we expect companies to prioritise production of most profitable models. Meanwhile, a depreciating INR should provide cushion to exporters. Top picks: Tata Motors, M&M and Bajaj Auto.

Q1FY22: Tractor resilience stays; M&HCV, 2W and PV in slow lane

Sequentially, M&HCV, 2W and PV volumes plunged 55%, 38% and 31%, respectively, due to a combination of supply-chain issues and lockdown in many parts of country due to second wave. Tractors are the only expectation with volumes remaining resilient (down ~1% QoQ) led by a good monsoon and liquidity in farmers’ hands. With unlocking happening, pent-up demand should support near-term performance. But watch out for its sustenance. While we continue to monitor supply-side constraints (chip shortage, for instance), M&HCV truck demand should recover in ensuing months driven by a resurgence in replacement demand, economic recovery, improved liquidity and extremely subdued volumes

Input cost pressure continues to weigh on margins and earnings

We estimate gross margins would decline by 50–100bps QoQ as rising input price pressure is offset by pricing discipline (lower discounts/price hike) and value engineering initiatives. Consequently, EBITDA margins are expected to contract 100–200bps QoQ due to negative impact of operating leverage.

Ride Autos on specific stocks

Given uncertainty with respect to commodity prices, supply constraints and pace of volume recovery, we prefer stocks that can demonstrate pricing power (driven by favourable model cycle) or exploit the supply-constraint challenge to manufacture the most profitable models.

Our top picks are Tata Motors (cyclical volume recovery + product cycle tailwind),

Mahindra & Mahindra (strong tractor franchise + turnaround in auto business) and

Bajaj Auto (exports + dividend yield support). We recommend a ‘BUY’ on each of

them.

India Equity Research Automobiles July 6, 2021

Autos: Q1FY22 preview SECTOR UPDATE

Chirag Shah +91 (22) 6623 3367 [email protected]


Broadcasters to fare better

For media at large, Q1FY22 marked a disruption due to the raging second covid wave. Multiplexes operated for two–three weeks of April and have shut screens since. Despite few states allowing screens to reopen now, lack of content forced screens to remain shut. Broadcasters too faced disruption in shooting original content and a

sequential dip in ad revenues. We expect revenues for ZEEL and Sun TV to grow 34.2% and 20.9% YoY, and PVR and INOX to post EBITDA losses of INR615mn and INR209mn.

Uncertainties over movie releases would blight multiplexes’ prospects in the near term in our view. Our top pick is ZEEL.

Broadcasters: Positive outlook

The quarter saw disruption in shooting of original content, which would negatively

impact channels with shows that need to be viewed sequentially. Viewership should

shift to channels such as Sab and Star, which have game and reality shows that can

be viewed anytime. Sun TV too would gain as it has a strong movie library. We

expect ZEE to suffer a blip in viewership and its viewership share to remain around

18%. Ad revenues would dip QoQ due to the second wave impact. Since the base

was hit by hard lockdown during first covid wave. We expect ZEE’s and Sun TV’s ad

revenue to increase 110% YoY and 100% YoY, respectively, and subscription

revenue to increase 11% YoY for ZEE and remain broadly flat for Sun TV.

Multiplex: Screens to remain closed

The industry saw only two–three weeks of operation in April, and screens have remained

shut since. Producers continue to sit on inventory despite some states such as Telangana,

Punjab and Gujarat opening up, as major markets such as Maharashtra, Delhi and Tamil

Nadu remain closed. This has led to screens remaining closed for most part of the quarter.

Rental negotiations are still underway, but it is difficult to get the same concessions on

rent and CAM as last year. It is likely that there would be a reasonable discount for rent

and lesser discount on CAM as these are cash outflows incurred by the owners.

Outlook: Broadcasters to revive in near term

Broadcasters have continued to create content albeit the disruptions and rise in

cost due to the second covid wave hurt. We find that advertisers have continued to

spend unlike the first wave and will, going forward, continue to improve ad spends.

ZEE has seen a blip in market share in Hindi and Tamil due to disruptions in shooting

of original content, which led to a shift in viewership to the likes of Sab with shows

that can be watched in any sequence. But ZEE has resumed its shows, and we expect

it to add four–five new Hindi shows over coming months. We expect this will pull

its viewership back. Sun TV is coming up with new reality shows such as MasterChef,

which will drive its viewership apart from its strong movie library. Multiplexes will

see content coming in once major markets such as Maharashtra and Tamil Nadu

open up.

India Equity Research Media July 6, 2021

Q1FY22: Results preview SECTOR UPDATE

Abneesh Roy +91 (22) 6620 3141 [email protected]


A record quarter in store

Despite covid-19 related disruptions, Q1FY22 is likely to be a record quarter for most companies in our coverage. Key points: i) A QoQ volume dip likely for most companies. ii) Ferrous companies (flats oriented) are likely to fare better. iii) Debt reduction likely. iv) Higher iron ore and crude derivatives’ cost to weigh on performance.

All in all, we expect another robust quarter for almost all companies with margins sustaining or breaching the record-Q4FY21 levels. We believe Tata Steel is best positioned owing to its: i) favourable product mix; ii) turnaround in Europe; and iii) domestic iron ore security. We maintain Tata Steel (TP: INR1,300), Hindalco (TP: INR475) and Jindal Stainless (TP: INR140) as our preferred picks.

Another glorious quarter…

We expect Q1FY22 to be the second consecutive quarter of excellent performance.

Key points: i) Flats-oriented ferrous companies such as Tata Steel and JSW Steel to

deliver record margins on the back of realisation uptick in both exports and

domestic volumes. ii) Overseas subsidiaries of Tata Steel and JSW Steel to deliver

massive outperformance due to higher realisation. iii) The Al division’s EBITDA in

non-ferrous companies would show a good improvement mainly due to higher LME

price. iv) Volumes of non-ferrous companies to be subdued as well owing to covid-

19 related disruptions in logistics and operations. That said, we see scope for

substantial deleveraging at steel companies, particularly Tata Steel and SAIL.

…but, lower volumes and higher cost to weigh

Q2FY21 would have been much better, but for higher costs and lower volumes.

Production/sales volume for ferrous companies are likely to be impacted by

diversion of industrial oxygen for medical purposes and sporadic lockdowns owing

to covid-19. As a result, we expect sales volumes of ferrous companies to decline

10% QoQ on average. For non-ferrous companies as well, despite high LME prices,

volume is expected to be down ~14% QoQ on average. On the cost front, we expect

higher iron ore and crude/derivatives’ cost to weigh on profitability.

Outlook: Good times likely to continue

We expect Q1FY22 to mark a successive quarter of blockbuster performance.

Benefits of higher realisation are likely to offset the adverse impact of higher cost

at most companies. Besides, sales volume is expected to stay soft owing to covid-

related operational and logistical disruptions.

That said, we expect Tata Steel to fare better than peers owing to its: i) favourable

product mix, which is oriented towards flats; ii) lower iron ore cost than peers in

India business; and iii) healthy spreads in the European business. As a result, we

expect substantial debt reduction (overseas debt) at Tata Steel. In case of SAIL as

well, we see scope for substantial debt pay-down. Among mining companies, we

expect NMDC to deliver record profitability despite higher royalty cost. Maintain

Tata Steel, Hindalco and Jindal Stainless – BUY on all – as our preferred picks.

India Equity Research Metals & Mining July 6, 2021

METALS & MINING SECTOR UPDATE

Amit Dixit Meera Midha +91 (22) 6620 3160 +91 (22) 4088 5804 [email protected] [email protected]


Surge in input prices to drive revenues

We expect specialty chemicals companies to post robust results in Q1FY22 off a low base (covid-19 had posed challenges in Q1FY21) and a surge in input cost. Our coverage universe is likely to report revenue growth of 48% YoY and EBITDA/PAT growth of 52%/75% YoY.

Revenue growth is likely to remain solid, but challenges pertaining to

lockdowns and logistics may hurt overall volume growth in Q1FY22. Similarly, a jump in raw material prices (vegetable oil-based derivatives and crude derivatives) may put pressure on margins in the near term. Given strong demand in domestic and export markets, we maintain the positive view on the sector with SRF and Galaxy Surfactants as our top picks.

Low base and rising input prices to drive revenues in Q1FY22

Covid-19 related challenges and lockdown issues impacted specialty chemicals players’ production and demand in Q1FY21. A low base and a sharp increase in input cost (fatty alcohol 94% YoY, vegetable oil like soybean 90% YoY, crude derivatives such as benzene 150% and toulene 112%) are expected to drive up revenue growth by 48% YoY in Q1FY22.

That said, the second wave in India posed logistical challenges to exporters with container availability issues affecting volumes. Driven by strong top-line growth, PAT growth for most players would remain solid at 14–96%.

Sustained demand in domestic-/-exports to keep up momentum

Speciality chemicals players may witness volatility in margins in the near term on the back of a sharp jump in raw material prices and delays in passing on the cost to end customers.

However, driven by solid recovery in end-user industry in domestic markets, import replacement and sustained growth opportunity in exports market is keeping the momentum up for specialty chemicals players. We expect industry to continue witness solid growth on the back of ongoing capex and favourable industry scenario.

Outlook: Pick-up in capex to drive earnings

Despite near-term volatility in margins led by rising input cost, we remain upbeat about growth momentum sustaining for speciality chemicals players, and reiterate our belief in the long-term structural growth opportunity that the sector offers. Driven by increased capex intensity as players such as Aarti and SRF are likely to benefit from aggressive capex supported by their respective fund-raising recently. Galaxy and Fine Organics, which have stable growth models, would continue to turn in higher RoCE and FCF.

Our top pick remains SRF (BUY) given its strong growth outlook for FY21–23 and Galaxy Surfactants (BUY) given its hygiene-linked business model and Aarti industries (BUY) given its higher utilisation. We retain ‘HOLD’ on Fine Organics, expecting its margins to remain under pressure in the near term.

India Equity Research Specialty Chemicals July 6, 2021

Q1FY22 Sector Preview SECTOR UPDATE

Rohan Gupta Sneha Talreja Bharat Gupta +91 (22) 4040 7416 +91 (22) 4040 7417 +91 (22) 6620 3320 [email protected] [email protected] [email protected]


Strong recovery takes a breather

Q1FY22 is likely to mark a pause in the home décor industry’s sharp recovery since Q2FY21. While growth momentum sustained at most companies in April, May took a hit as lockdowns returned. Recovery resumed in the last 15 days of June though. All in all, we estimate an aggregate 30% QoQ drop in revenue (up ~80% YoY off a low base) with

a higher fall in EBITDA and PAT due to negative operating leverage across segments coupled with inventory losses (plastic pipes) and an uptick in raw material cost (wood panel space).

Despite a likely weak Q1FY22, management teams of all companies are upbeat on a faster recovery. We prefer Greenlam Industries (GRLM), Somany Ceramics (SOMC) and Supreme Industries (SIL).

Plastic pipes: Double whammy

In Q1FY22, plastic pipes’ players, which have outperformed for last two years, are

likely to face dual challenges—firstly demand is hit due to lockdown and secondly

falling PVC prices are deferring purchases by distributors as they await further price

correction. Within the pipes segment, agri pipes are likely to take a bigger hit,

wherein end-user is more price-sensitive, whereas players with high CPVC exposure

would be better off. All in all, we see a 26%/54%/61% QoQ drop in

revenue/EBITDA/PAT for plastic pipe companies impacted due to slower volumes,

inventory losses and negative operating leverage.

Laminates better placed in wood panel space due to high exports

For the tiles segment, revenue/EBITDA/PAT is likely to fall by 33%/67%/74% QoQ

as volumes are likely to be impacted due to covid-19-related lockdown while profits

are likely to be impacted due to low revenue base, higher gas cost and continued

fixed costs. Competitive intensity from Morbi players continues to be low as they

focus on export orders. During the quarter, wood panel space too is likely to report

a fall in revenue/EBITDA/PAT by 35%/46%/57% QoQ, also impacted by rising raw

material cost. By segment, laminates would perform better as export orders

continue to support sales (>55% exports share for Greenlam Industries).

Outlook: Large players continue to gain market share

Although many small players in the home décor industry are struggling on account

of raw material unavailability, and rising costs (raw material, freight) and working

capital, growth of top organised players has only accelerated with an increase in

market share. In tiles, Morbi players are catering to strong exports, vacating the

domestic market for large players such as KJC and SOMC. In the plastic pipes and

wood panel space, unavailability and huge volatility in raw material prices have led

to a shift in market share from small players to large players.

We believe the much-anticipated demand shift from unorganised to organised

segment could accelerate further if industry demand/macro economy picks up. We

prefer GRLM, SOMC and SIL in light of the valuation comfort, and recommend ‘BUY’

on the three aforementioned companies.

India Equity Research Home Decor July 6, 2021

Q1FY22 RESULTS PREVIEW SECTOR UPDATE

Sneha Talreja Rohan Gupta +91 (22) 4040 7417 +91 (22) 4040 7416 [email protected] [email protected]


Supernormal domestic; steady margins

In Q1FY22, we estimate pharma would report ~14%/19% revenue/PAT growth. Key trends: i) Domestic to outperform (+31% YoY, volume led) driven by low base and covid-19 treatments. Cipla, GNP, CDH and DRRD to benefit. ii) Cost savings to keep EBITDA margin healthy. iii) US: Volume recovery offset by price erosion; good launches at DRRD,

LPC and GNP, albuterol ramp-up for Cipla and LPC; Ilumya uptake offset by Absorica for SUNP. CIPLA and ALKM to report good numbers.

We expect hospitals to remain steady despite a severe covid wave given their preparedness. Increase in occupancy to compensate for lower covid realisation. Diagnostics to benefit from growth in non-covid testing and a covid boost. APHS and Thyrocare to fare well.

Cipla, LPC and DRRD to lead; GNP also strong

SUNP: Ilumya ramp-up offset by Absorica decline. DRRD: good launches in US -

gVascepa and ertapenem; domestic strong on Wockhardt integration and low base.

Cipla: Share gain in gProventil; benefit from remdesivir and budesonide. TRP:

domestic solid; US to struggle. ARBP: QoQ steady; price erosion inching upwards

and R&D increase. Ipca: Sustained uptake in pain and cardio; exports decline on

high HCQs base. CDH: gDoxil share gain, lower Asacol HD offtake. Domestic strong.

LPC: one-time USD50mn income; share gain in gProair; Brovana AG launch offset by

loss in famotidine sales. GNP: Covid beneficiary; Good launches in US. DIVI: Growth

continues; margin buoyant. AJP: Strong domestic; cost back to normal. NTCPH:

Declining gCopaxone TRx, gDoxil competition and no gTamiflu profit share; tepid

domestic oncology. BIOS: 20% QoQ growth in biosimilars on share gains in

pegfilgrastim and trastuzumab. ALKM: strong anti-infective led growth.

Hospitals steady despite covid wave; Diagnostics on a solid footing

APHS: Back-end pharmacy to post 18% YoY growth; vaccine benefit; Gleneagles

consolidation. FORH: Steady hospitals; SRL to get covid boost and JV consolidation.

HCG: ramp up continues. In diagnostics, with non-covid tests back on growth path

coupled with a Covid RT-PCR and allied tests boost would drive up sales 7% QoQ.

Sub Head

FP Table Body

Domestic recovery remains covid-led for now; aids margins in Q1

A few trends are evident: i) Covid-related ailments or side-effects of Covid

medicines continue to drive growth. Several therapies gained importance due to

covid such as anti-infectives, anti-diabetic due to steroid usage and anti-coagulants.

ii) India seeing strong volume growth and would grow at 31% YoY. However, Covid-

related therapies or preventive health continues to drive growth. iii) US: Volume

recovery to be offset by price erosion, which is reverting to pre-covid levels. Good

launches at DRRD, LPC and GNP, albuterol ramp-up for Cipla and LPC, Ilumya uptake

partly offset by Absorica decline for SUNP would keep US steady. iv) Costs

normalized for the quarter barring ten days of lockdown in certain parts of the

country. However, modest savings should keep margins healthy for Cipla, TRP and

IPCA. Cipla, DRRD, ALKM and APHS remain our top picks.

India Equity Research Pharmaceuticals July 6, 2021

Pharma & Healthcare Preview SECTOR UPDATE

Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]


Q1FY22 : Six weeks of aberration

We estimate revenue and EBITDA of our coverage universe to grow 10.5% and 2.3% on two-year basis (Q1FY22 vs Q1FY20) compared to 19.3% and 15.9% on two year basis for Q4FY21 (Q4FY21 vs Q4FY19).

In Q1FY22, first three weeks of April saw sustained growth momentum from Q4FY21; subsequently, covid cases shot up, leading to May being

a challenging month. However, in June, the sector clocked decent recovery. YoY growth will still look good for most companies given wave 2 did not entail hard lockdowns. YoY margins will be under pressure for staples companies due to commodity inflation and exceptionally low ad spends in Q1FY21. We expect strong recovery going ahead spearheaded by sharp rural recovery.

YoY growth rosy, but need to focus on two-year growth

Wave 2 of covid-19 led to an upsurge in demand for health and hygiene products;

however, the demand wasn’t as high as in wave 1. On the other hand, demand for

discretionary products suffered, but again not to the extent of wave 1. Pantry

loading or panic buying was much less than in wave 1 as there were no hard

lockdowns. Food companies--Britannia, Nestle and Tata consumer--will spearhead

growth from a two-year perspective as they would be least impacted by demand

disruption. Considering the nature of their products, United Spirits and Bajaj

Consumer would be down on a two year basis.

YoY margins under pressure, except for paint and liquor companies

In light of inflationary raw material prices, we expect gross margins of most

companies to dip YoY. Most companies have taken pricing actions to pass on part

of the inflation. On EBITDA front, companies are likely to cut ad spends on QoQ

basis; however, base quarter ad spends were exceptionally low; thus, YoY EBITDA

margin compression is likely for most staples companies. Higher exposure to crude

derivatives—Asian Paints, Berger Paints and Pidilite—is likely to compress their

gross margins, although a soft base will lead to YoY EBITDA margin expansion.

Outlook and Model Consumer Portfolio

Discretionary, out-of-home (OOH) and summer products were disrupted in Q1FY22,

but a YoY dip is unlikely. We expect demand to accelerate for staples (atta, pulses,

coffee, tea), premium edible oils, health & hygiene, nutrition (chyawanprash,

honey, HFDs), naturals and packaged foods. On the other hand, personal care (skin

care, hair care, hair colour) are likely to see YoY growth on a soft base. Almost all

other categories are reviving and are likely to accelerate from Q2FY22. We expect

rural growth to soon revive for FMCG companies riding a good monsoon and

government sops.

We assign the following weightings in our Model Consumer Portfolio--25% each to GCPL, HUL and Nestle; 15% to Asian Paints; and 10% to Dabur.

India Equity Research Consumer Staples July 6, 2021

Consumer Goods Preview SECTOR UPDATE

Abneesh Roy Tushar Sundrani +91 (22) 6620 3141 +91 (22) 6620 3004 [email protected] [email protected]


KEY DATA

Rating NOT RATED Sector relative Neutral Price (INR) 82 12 month price target (INR) NA Market cap (INR bn/USD bn) 14/0.2 Free float/Foreign ownership (%) 53.2/8.3

What’s Changed

Target Price ⚊


QUICK TAKE

Balance sheet remains stretched

Sadbhav Engineering (SEL) posted 23% QoQ decline in Q4FY21 top line; however, exceptional items and tax write-back boosted profitability with PAT rising 341% QoQ. Toll collection fell 8% QoQ. Order book declined QoQ to ~INR93bn; fall in revenue (down 28% YoY) means book-to-bill remains optically elevated at 5.7x. Working capital cycle deteriorated to 527 days (489 at end-Q3FY21).

Muted order inflows, sluggish execution and stretched working capital cycle are major concerns stalling the business, in our view. Asset monetisation and deleveraging are urgently needed for operations to recover. We are discontinuing coverage; our last recommendation was ‘BUY’.

FINANCIALS (INR mn)


Revenue 22,517 16,236 18,925 22,840

EBITDA 2,795 2,114 2,240 2,795

Adjusted profit 681 606 257 583

Diluted EPS (INR) 4.0 3.5 1.5 3.4

EPS growth (%) (63.4) (11.0) (57.6) 127.2

RoAE (%) 4.1 1.9 1.2 2.7

P/E (x) 20.7 23.3 55.0 24.2

EV/EBITDA (x) 9.5 12.9 12.3 9.8

Dividend yield (%) 0 0 0 0

PRICE PERFORMANCE

Execution declines QoQ; order book falls

Q4FY21 top line declined 23% QoQ (up 4% YoY). Write back of provisions no longer

required and exceptional profits lifted EBITDA margin by 370bps YoY and 280bps

QoQ to 16.1%; this, coupled with tax write-back, led to adjusted PAT coming in at

INR668mn. The company did not win any order during the quarter; this led to order

book falling to ~INR93bn; muted execution over the past year means book-to-bill

looks high at 5.7x. The company is bidding for road EPC projects to shore up its order

book.

Focus on asset monetisation

The company has completed the entire equity infusion of INR10.7bn in its HAM

portfolio. While three HAM projects have already achieved PCOD, management

expects four projects in H1FY22 and three projects in FY23 to achieve PCOD. It is

looking to monetise the Ahmadabad Ring Road (ARRIL) project, the Maharashtra

Border Check Post (MBCPNL) project and the three HAM projects that have achieved

PCOD. We believe this is paramount for the company to delever its balance sheet

and improve execution. While toll on ARRIL rose on QoQ, that on MBCPNL fell

sequentially. The company has lodged claims against NHAI for the Rohtak-Panipat

and Rohtak-Hisar projects.

Explore:

Outlook and valuation: Discontinuing coverage

Incremental order intake, pick-up in execution, improvement in working capital cycle, reduction in debt and timely asset monetisation will be the key triggers, in our view. We are discontinuing coverage on the stock. Our last recommendation was ‘BUY’.

Financials Year to March Q4FY21 Q4FY20 % Change Q3FY21 % Change

Net Revenue 4,257 4,089 4.1 5,560 (23.4)

EBITDA 685 504 35.7 736 (7.0)

Adjusted Profit 472 ( 88) (634.7) 151 212.0

Diluted EPS (INR) 2.8 ( 0.5) (634.7) 0.9 212.0

36,000

39,400

42,800

46,200

49,600

53,000

40

52

64

76

88

100


SADE IN Equity Sensex

India Equity Research Infrastructure July 6, 2021

SADBHAV ENGINEERING RESULT UPDATE

Parvez Qazi +91 (22) 4063 5405 [email protected]

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This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.

Aditya Narain

Head of Research

[email protected]

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