investment picks for diwali 2016 - nirmal bang picks diwali 2016.pdf · sr no ashok leyland ltd....

SR NO

Ashok Leyland Ltd.

Ganesh Benzoplast Ltd.

GMM Pfaudler Ltd.

HealthCare Global Enterprises Ltd.

Hinduja Global Solutions Ltd.

IndusInd Bank Ltd.

Lupin Ltd.

Sunflag Iron & Steel Company Ltd.

State Bank Of India

STOCK NAME SECTOR

Automobiles-Trucks/LCV

Logistics

Industrial Equipments

Hospitals

BPO

Bank - Private

Pharmaceuticals & Drugs

Steel & Iron Products

Bank - Public

CMP TARGETPRICE

108

60

745

300

799

1365

1780

60

325

87

36

515

241

556

1203

1508

40

259

1

2

3

4

5

6

7

8

9

INVESTMENT PICKSFOR DIWALI 2016

RETAIL RESEARCH

Ashok Leyland Ltd.

CMP: Rs. 87 | Target Price: Rs. 108 | 52 week H/L: 113/75 | Mkt Cap: Rs. 24802 cr

• Ashok Leyland is one of the largest manufacturers of commercial vehicles and buses in India.• The Bharat Stage-IV (BS-IV) mass emission norms for vehicles will be mandatory across the country from April 1, 2017; this will see pre buying H2 of this FY17. As a result the volumes for the company which were subdued in the first half are likely to witness good growth.• Recently, Ashok Leyland has announced merger with Hinduja Foundries Limited which produces castings, mainly for CVs, tractors, PVs, and construction equipment. Ashok Leyland accounts for ~35% of its revenue. Management sees the acquisition as value-accretive over the next 2-3 years due to operational efficiencies and cost synergies. • The company is confident that in defence they will be able to win the orders in segments like armoured vehicles competing Tata Motors, M&M, etc. Also they said that a lot of product initiatives are in place for the same.• We expect a good performance by the company backed by uptrend in CV cycle on account of pre buying that will drive the volume growth. • At CMP the stock is trading at 17.6x/14.7x PE on FY17E and FY18E EPS respectively.

Ganesh Benzoplast Ltd.


• GBL, incorporated in 1988, runned by 2 brothers Mr Ramakant & Mr Ramesh Pilani, is currently having 2 business, Infrastructure and chemical division .• Company had gone through a difficult period in last 3 – 4 year but now showing sign of turnaround• In Infrastructure division the company has Liquid storage tanks at JNPT, Goa and Cochin port . JNPT has capacity of 220000KL and is running at 100% utilization, whereas Goa and Cochin has capacity of 30000 KL each and is running at 60 % utilization. • The infrastructure division is exceeding well with Revenue of Rs 69.04 cr & EBIT of Rs 32.91 cr in FY16 and Revenue of Rs 21.45 cr & EBIT of Rs 11.99cr in Q1FY16.The EBIT margins of Infra division is equal to best player in Tank farming business.• In Chemical division the company manufactures and exports food preservatives, lubricant additives, API drugs, Sodium Benzoate, Benzoic Acid etc which are very popular among food & Beverage, automobile, paints, Lubricants and pharmaceutical industries. Though the demand of their chemicals is adequate but due to working capital constraints, it is not able to make profit. Since the company is under BIFR, working capital funding from banks is an issue. Chemical division has done Revenue of Rs 50.39 cr & EBIT at loss of Rs 6.21 cr in FY16 and Revenue of Rs 12.13cr & EBIT at loss of Rs 1.46 cr in Q1FY16• In FY16 , the company operating cash flow stood at Rs 41.7 cr which company has utilized for capex in Infra division and reduction in debt. As on FY16 the debt of the company stands at Rs 194cr vs around Rs 254 cr in 2015.Last year company got a write off of Debt of Rs 50cr. Going forward, the management is hopeful of getting further debt write-offs. Write off accompanied with timely payments will lead to reduction in debt • Company has recently increased capacity at JNPT by debottlenecking and further plans to expand at nearby land. Company is also looking to expand Tanker for LPG at Goa farm• Going ahead, the management plans to demerge its 2 business chemical and infrastructure division. Since the company is still under BIFR demerging of the business may take time. However, Demerging will help the company to unlock its value in infrastructure division. • At CMP the stock is trading at 7.18x Q1FY16 annualized EPS.• At CMP the stock is trading at 7.48x EV/EBitda of FY17 earning which looks attractive as compared to its peer Aegis logistics which is trading at 22.24 EV/ Ebitda of FY17 earning.

GMM Pfaudler Ltd.


• GMM Pfaudler (GMM) is one of the leading suppliers of Glass Lined Equipment for pharmaceutical (API) Agrochemical, chemical companies. Promoters hold nearly 75% stake with 50% held by Pfaudler Inc and 25% by the Patel family. GMM has a consistent dividend paying track record of 27-30% of its net profit.• A private equity Deutsche Beteilligungs AG acquired Pfaudler Inc in 2014 • Currently only 10% of the revenues of GMM comes from the export markets and negligible revenues from the parent co Pfaudler. With new private equity owner, GMM has been mandated to focus more on the export markets. Pfaudler also intend to use GMM manufacturing base in India for manufacturing Glass Lined equipment over the coming years. Its first reactor is getting dispatched to Pfaudler Inc during the 3rd quarter FY17. After this management is optimistic about further orders from the parent. • GMM also plans to focus on the non- glass lined equipment space and Tailor made equipment to grow its revenues and margins. Currently only 30% of the revenues comes from non-glass lined equipment which management plans to bring it to 50% over a period of time.• On the back of cost reduction and operational efficiency program, we expect operating margins to improve. Main areas of focus would be reduction in employee cost, power and fuel cost and change in products mix. • GMM is a zero debt company with a free cash of Rs. 67 cr. GMM Is planning to us this fund for inorganic growth.• At CMP the stock is trading at 20.8x/17.30x FY16E and FY17E EPS respectively.

Healthcare Global Enterprises Ltd.


• Healthcare Global Enterprises (HCG) is single specialty chain, focuses on comprehensive cancer care.• It operates the largest cancer care network in India in terms of the total number of private cancer treatment centres. Its network consists of 17 comprehensive cancer centres, including centre of excellence in Bengaluru, three freestanding diagnostic centres and one day care chemotherapy centre across India. HCG network operates on a “hub and spoke” model. It also operates 5 fertility centers in JV with BACC healthcare under Milann brand.• Expansion: To further strengthen its leadership position in cancer care segment, the company has rolled out aggressive expansion plans with nine new comprehensive cancer centers (CCC) over next two years and is going to invest around Rs 300 cr for the same. • Specialized nature of cancer disease with higher complexity and cost of treatment have resulted in higher profitability than multispecialty peers. • A CCC normally generally takes 12-18 months to breakeven and hits 20%+ margins by fourth year. In recent past the company has started 9 CCCs (i.e. half of the current base) out of which 3 are in nascent stage and 6 have reached middle double digit margins. We believe by next year these centers would cross 20% margins and 3 new centers would break even giving strong impetus to company’s profitability. • The fertility business is expected to grow at 15% CAGR over the next 10 years with superior margins (24% EBITDA), driven by increasing penetration.• We believe FY18 would be an inflexion point for the company where in it would be able to enjoy the returns on its upfront investments made. Overall we expect the company to maintain its growth rate of 20-22% going forward. At 21x EV/EBITDA the target price comes to Rs 300.

Hinduja Global Solutions Ltd.


• HGS provides is a full suite of business process management (BPM) services. • In 2011, HGS acquired Canada’s Telecom business wherein 1 client used to contribute to 60-70% to the total revenue. With falling oil prices Canada’s economy had got impacted which impacted the telecom business in Canada and in turn this company lowered the IT spend Other than this, the government increased the minimum wage as well as the subsidy was removed.This impacted HGS. To overcome this situation, HGS has shut down centers which has led to decline in the cost of the company. So in Q3FY16 the company had a break even from this particular business and in Q1FY17 this business turned profitable.• Other than this, In 2015, HGS acquired Colibrium business which with its platform helps consumers to buy Insurance products. With this acquisition, HGS is now having a platform +post sales services in insurance business. The sales from this platform has gone up to $15m in FY16 from $12.6 mn in CY14.This business was a loss making business when acquired and now has been turned profitable at operational level. • Apart from this, in 2015, HGS acquired a significant portion of Mphasis Emerging Markets business. With this acquisition, HGS expanded its presence in Bangalore, Noida, Raipur, Chennai, Pune, Mumbai, Vadodara, Indore, Puducherry, Ahmedabad, Bhubaneswar and Mangalore, and also entered the competitive BPO market in terms of employment with its only centre in North India in Noida. This will help the company in capturing rising opportunity from this market• In Q1FY16, the sales of the company grew by 24% yoy led by 14% organic growth and 10% on account of acquisition. • HGS was enjoying the Ebitda Margin of 14.5% in the year FY11. However, after the acquisition of Canadian telecom business ebitda margins depressed to 11.9% in FY12 which further declined to 9.4% after the acquisition of Colibrium business which was loss making at operational level. However, since the management has turnaround the subsidiary business which is now at break even at operational level we expect operating margins to improve going ahead . • At CMP the stock is trading at 6.6x/5.6x FY17E and FY18E EPS respectively

IndusInd Bank Ltd.


• IndusInd Bank is one of the consistent performers in private banking sector having a well-diversified loan portfolio with consumer and corporate mix in the ratio of 52:48 as on Q1FY17.• IndusInd has been delivering consistent improvement in financial performance. Banks Deposits/advances registered a growth of 39%/26% for Q2FY17. Net interest income clocked in a growth of 33.4% with one of the highest NIMs at 4% for Q2FY17 improving 12 bps YoY.• Bank has been guiding annual credit growth of 25%-30%. With higher focus on consumer segment, it aims to maintain CASA deposit ratio ~35%.• GNPA/NNPA for the bank were 090%/037% which is one the best in the industry representing the healthy asset quality.• IndusInd bank also plans to strengthen its branch network and customer base thereby expanding its foot print.• With the robust loan book growth driven by growth in retail loans, change in the loan book mix with focus on non-vehicle segment and reducing cost of funds to remain key driver of the financial performance.• At CMP, Share is trading at 24.4x FY17E PE and 3.9x P/Adj. BV.

Lupin Ltd.


• US – Lupin is one of the large Indian players in US and has strong product pipeline for future as well. Currently, the company has 150 ANDAs pipeline (45 Para IV with 25 FTFs) and in total it is expected to launch 200 products over next 3 years out of that Epzicom (Q4FY17) and Minastrin (Q4FY17; $320 m; FTF opportunity) are near term big opportunities. The company didn’t get much ANDAs approvals last year (due to pending Goa site approval, delay at USFDA agency), however the company expects another 20-25 approvals in FY17 which should drive the growth in 2HFY17. • Complex generics – Lupin is moving up the value chain by investing more and more on complex injectable (which are difficult to replicate and enjoys higher market share and less price erosion), which proves the strong R&D capabilities of the company. It has scaled up complex injectable development and expects to commence clinicals for gRisperdal Consta later this year. It is working on in-house development of two derma and two pediatric specialty products (505b2s).• Other Factors: (A) Management has guided for $300 mn sales in FY18 from Gavis portfolio (B) Lupin’s India business to grow at 16-18% over next few years which is ~1.5x the expected market growth rate • Valuation – At CMP of Rs 1534, the stock trades at 19.9x of FY18E consensus earnings, which is almost 15% discount to its 5 year average and 25% discount from its peak valuations. We believe at current valuations the stock looks attractive. At 23x FY18E the target price comes to Rs 1780

SunFlag Iron and Steel Ltd.


• Sunflag Iron and Steel Company Limited had set up a ‘state of the art’ integrated Steel plant at Warthi, Maharashtra in technical coloration with Mannesmann Demag and Krupp Industritechnik, Germany. Promoters hold 49% stake in the Company. Daido Steel Co, Japan hold 10% stake in the Co, though they are not classified as promoters. Sunflag mainly caters to the demand of the automobile, railways and the defence sectors. • Sunflag Iron has undertaken a capex to the tune of Rs115-120 cr which will get completed in phases by FY17 and FY18. Sunflag is putting in a Pulverized coal injection system in the blast furnace to reduce energy consumption, Sinter plant expansion and refurbishing of the blast furnace to improve productivity.• Sunflag has recently signed a Joint venture agreement with Stumpp, Schuele, & Somappa Springs Pvt Ltd to manufacture high quality Alloy Steel Wire and related products and the manufacturing and the raw material will be done and used from the existing site of Sunflag Iron.• Sunflag reported sales, EBIDTA, PAT and EPS of Rs. 1661 cr, Rs.190, Rs. 55.6 cr and Rs. 3.08 in FY16 as compared to Rs. 1756 cr, Rs. 169.3 cr, Rs 24.4cr and Rs. 1.35 in FY15 respectively. Even with marginal reduction in sales, Sunflag was able to post better numbers with reduction in interest cost and improvement in EBIDTA through cost savings.• Sunflag is trading at 4x EV/EBIDTA based on trailing 4 quarters as compared to 6x EV/EBIDTA for Kalyani Steel. By assigning 6x EV/EBIDTA, we arrive at a target price of Rs. 60 per share in period of 1 year, which is nearly 50% upside.

State Bank of India


• The merger with associate banks which was in consideration since long time has gone through and all the aspects about the same have been unfolded. Rationalization of branches, integration of operations and synergy gains to benefit the performance of the bank. • After the two quarters of asset quality review by the central bank and cleansing up of balance sheet; the bank is ahead of NPA problem and further the same is also been intensely done with associate banks before the books getting merged. The pain is already known and well discounted in the street. • The bank witness loan growth of 12.6% for Q1FY17, where many of other large PSU banks witnessed de-growth or nominal growth. Also, CASA share continues to be above 40% which continue to support net interest margins. • We believe with the economy picking up, lower interest rates, favourable government policy and turnaround early signals of revival visible in some sectors to be beneficial for the bank. • At CMP, the share is trading at 16.1x FY17E PE and 2.2x P/Adj. BV which we believe is attractive.

Disclaimer: Nirmal Bang Securities Private Limited (hereinafter referred to as “NBSPL”) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. We have been granted certi�cate of Registration as a Research Analyst with SEBI. Registration no. is INH000001766 for the period 23.09.2015 to 22.09.2020 .NBSPL or its associates including its relatives/analyst do not hold any �nancial interest/bene�cial ownership of more than 1% in the company covered by Analyst (in case any �nancial interest is held kindly disclose) NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an o�cer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision.

Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.)B-2, 301/302, Marathon Innova,Opp. Peninsula Corporate Park,

O� Ganpatrao Kadam Marg,Lower Parel (W), Mumbai-400013Board No. : 91 22 3926 8000/8001

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