Q1FY20 Result update on Dr. Reddy’s, Bharat Electronics, Eris Lifesciences Music Broadcast & Escorts

South Indian Bank’s shares plunge 18% after Q1 profit declines 77%

# Detailed analysis over past predication by IndiaNivesh

Dr. Reddy’s Laboratories | Q1FY20 Result Update

Q1 below estimates; one-off income complements earnings

Dr. Reddy’s Q1FY20 earnings missed our estimates on the EBITDA and profitability front, adjusting for the one-time income from Celgene (US$50mn for the gRevlimid settlement in Canada) despite in-line sales growth. Gross margin at 51.7% (vs our estimate of 54.5%) was impacted due to the inventory provision for delays in specific product launches. This led to the adjusted EBITDA margin to be at 20.5% (below our estimates of 22%) despite lower R&D expenses in Q1 (expected to rev up in the next 9 months). The management guided for normalcy in gross margin at 54–55% for FY20 as PSAI manufacturing supply disruption resolves in Q2 and new launches in the US come to fruition.

Further, in a bid to streamline its operations, Dr. Reddy’s has sold off an antibiotic plant in the US, a domestic API plant, a Cloderm franchise, 3 brands to Encore Dermatology and 2 neurology products. The divestment is a prudent move, in our view, considering the company spends ~Rs6bn annually on proprietary products. This should gradually come down as the company focuses more on complex generics R&D. With US$50mn from gRevlimid settlement in Canada, US$110mn from Encore, and ~US$70mn for gSuboxone from Indivior, the net debt could reduce further (current net debt/equity is 0.04x). The management hinted at inorganic growth avenues through product/asset buyouts in the US.

We believe Dr. Reddy’s is well placed to see broad-based earnings growth aided partly by the earnings in the last few quarters, in addition to the following factors: (a) improving ANDA approval momentum, with the company looking at building a wider portfolio and gain share in the US; (b) higher contribution to profit from markets like India (double-digit growth) and Russia, and refocus on its legacy API business; (c) ability to leverage its US R&D to launch products over the medium term with the China opportunity; (d) efforts to aid better capital allocation through non profitable asset sell-offs and get into royalty/licensing model. These factors should drive a more sustained recovery in earnings, particularly in an environment where investors remain cautious over US-driven earnings growth. While we acknowledge the concerns around the delays in gNuvaring, FY20 is expected to witness over 30 launches, which could include healthy a contribution from gDiprivan, and potential launches like gTreanda and gSensipar followed by gCopaxone in FY21E. We maintain our BUY rating with a target price of Rs2,970.

Q1FY20 Result Snapshot: Sales were up 3% at Rs38bn, EBITDA margin was at 20.5% and PAT was at Rs4bn (adjusted for one-time income of Rs3.5bn). While the India business reported strong growth (up 15% YoY), the US business grew 2% YoY (US$237mn vs our estimate of US$243mn), due to the impact of slow-moving inventory. Businesses in Europe (up 19% YoY) and the rest of the world (up 10% YoY) performed in line with expectations. Lower sales from PSAI (down 16% YoY) and the inventory provision for delays in product launches in the US, led to a contraction in the gross margin by 400bps at 51.7%. 

Bharat Electronics | Q1FY20 Result Update

Mixed set of numbers, amid reports of order inflows worth Rs19bn in Q1

Despite a miss on the Q1FY20 revenue and EBITDA estimates, a higher than expected other income helped BEL report PAT slightly above our estimates.

BEL reported order inflows (OIs) of ~Rs19bn in Q1FY20 (including a radar order Rs1.9bn from Armenia and a ~Rs1.5bn SDR order from Indian Navy). BEL ended Q1FY20 with an order book of ~Rs516bn, reflecting an OB/LTM sales ratio of ~4.4x.

Execution of projects such as the Integrated Air Control and Command Systems (IACCS), L-Tropo, waterfront support facility (Port Blair), and other smart city projects contributed to Q1FY20 revenues of Rs20.4bn (down 1.7% YoY).

Lower than expected revenues led to a lower EBITDA margin for Q1FY20. Current quarter margins benefited from the absence of outsourcing works and the impairment of intangibles. Margin movement on YoY basis was restricted due to the actuarial valuation of Rs300mn. Provision reversals led to better than expected other income, which in turn led to better than expected PAT of Rs2,047mn (vs our estimate of Rs2,023mn). Reported PAT margin expanded 138bps YoY to 10.0% in Q1FY20.

Valuation: With existing OB (at the end of Q1FY20) at Rs516bn and the Akash order win expected soon, BEL is expected to report strong execution (revenue/PAT CAGR of 16.2%/13.7% during FY18–21E). The margin expansion scenario leads us to believe that ROE/ROCE would continue to expand to 18.3%/21.1% by FY21E (highest since FY17). At the CMP of Rs93, BEL is trading at FY21E EV/CFO and a P/E multiple of 18.4x and 11.0x, respectively. We maintain our BUY rating with a target price of Rs137, considering the sustained turnaround in the CFO cycle and the continued expansion in the return ratios (implying FY21 P/E multiple of 16.2x).

Eris Lifesciences | Q1FY20 Result Update

Q1 better on margins, but sustainability critical

Eris reported a better than expected Q1 result, led by higher than expected growth in base business sales (up 7.5% YoY; chronic portfolio up 26% YoY) and Strides’ portfolio (up 16% YoY). EBITDA margin expanded 270bps YoY at 38%, led by strong improvement in personnel cost. The Guwahati plant currently contributes 61% of sales in Q1FY20 and is expected to increase contribution to ~70% in FY20E. While we expect a better utilization rate due to the shift of acquired products, the management is yet to explain the lower employee costs, as they included the entire sales force of Kinedex in the payroll and also gave out increments and bonuses in Q1. Currently, the MR productivity is Rs4.4mn and is guided to be higher with better traction of CNS portfolio going forward leading to a guidance of better than IPM sales growth. We expect Eris to grow 12% sales CAGR, and maintain gross margin at ~83% and EBITDA margin at ~36% in FY20/21E. The stock trades at 15x and 13.5x PE of FY20/21E, respectively. We observe that the sales contribution from the top 10 brands has reduced to 76% in FY19 from 81% in FY17, growing at 11.7% CAGR. Further, ranks of most top 10 brands have also slipped in FY19. We value the company at 18x and upgrade our rating to BUY with a revised target price of Rs530.

Q1FY20 result snapshot: Sales grew 9% YoY to Rs2.7bn (above our estimate of Rs2.4bn), led by strong growth in the chronic segment. However, the base business grew 8% YoY, in line with IPM growth, despite 85% of portfolio being in the chronic segment. Gross margin for the quarter stood at 83%, in line with our estimates, but lower employee spend led to higher EBITDA margin (38%, up 270bps YoY).

Music Broadcast | Q1FY20 Result Update

Volumes fall as national advertisers defer spending. Reiterate BUY

Music Broadcast Ltd (MBL) reported a 7.8% revenue decline in Q1FY20 owing to ~12% volume decline in the top 12 stations. A ~5% price hike during the quarter was not able to make up for the national advertiser-led volume decline reflecting in the 14.2% YoY EBITDA decline. Owing to heavy dependence on metro markets, MBL trailed its peers as HT Media (including Next MediaWorks frequencies) reported flat revenue while MyFM (DB Corp) reported 19% YoY growth. The management is hoping for the spending to improve in H2. We cut our estimates due to the delay in utilization improvement. We reiterate our BUY rating on the stock with a revised target price of Rs80 per share.

Q1FY20 revenue breakup: The company reported revenue at Rs698mn, down 7.8%/14.8% YoY/QoQ. The volume in the top 12 stations dropped by ~12%, which was partly compensated by the ~5% price hike in general. The remaining stations saw a ~7% volume decline. MBL’s volume decline was slightly ahead of the industry owing to its heavy dependence on metro markets. Themanagement indicated that they met 95% of their budgeted volume target in the Apr-Mar period while the performance nosedived in Jun-Jul. MBL’s EBITDA fell 14%/30% YoY/QoQ, as it saw 10% YoY reduction in employee cost.

Sectoral drivers: In terms of sectoral performance, the disappointment was led by muted government activity, delayed national campaigns, and limited political advertising. Real estate, education, durables, and e-commerce saw sharp volume decline in the 16-47% range. Auto and BFSI were the only sectors, apart from political spending, which saw volume growth.

Peer comparison: During Q1FY20, Fever FM (HT Media incl. Next MediaWorks frequencies) reported a 0.5% YoY revenue growth, while MyFM (DB Corp) grew by 19% YoY. MyFM’s growth is attributed to its non-metro presence, where the budget allocation has shifted to cheaper and bundled offerings (print+radio).

Valuation: The business slowdown has led to a cut in advertisement spending and optimization by media planners across the board, which we believe will continue to have an impact throughout FY20. Concentrated metro exposure and limited contribution from non-FCT (events, activations, etc.) have magnified the decline in business for MBL. We cut our estimates for FY20 and FY21 to adjust for these factors. The stock is trading at a P/E multiple of 20/16 times FY20/21E earnings and at EV/EBITDA multiples of 9/7x FY20/21. We reiterate our BUY rating on MBL with a DCF-based revised target price of Rs80 per share.

Escorts | Q1FY20 Result Update

Lower volumes impacts earnings, Management guides for a better margin performance going forward; maintain BUY

Escorts reported Q1FY20 earnings lower than our estimates. While the revenues were higher due to better sales mix and price hike, the lower operating efficiencies (due to lower volumes) impacted margins. The management in its con-call guided for a better margin performance going forward. We believe there is a possibility of flattish growth in FY20 owing to the high base and cyclical nature of the tractor industry. We expect CAGRs of 8%, 8%, and 10% in revenue, EBITDA, and PAT, respectively, over FY19–21. We introduce FY21 estimates and value the stock at 16xFY21e. We retain our BUY recommendation with a revised price target of Rs750.

Q1FY20 results: Escorts’ revenue for the quarter at Rs 14.2bn came in higher than anticipated. While tractor volumes were down 14% yoy, its revenues de-grew 6% yoy, suggesting higher blended realisations. Its average realization per tractor came in at ~Rs 519,000, up 8% yoy.  It reported consolidated margins at 10.0%, down 230bps yoy. This was led by a significant increase in its raw material costs as well as lower operating efficiencies. Adjusted PAT came in at Rs 875mn, down 27% YoY.

Segmental performance decoded: The tractor segment (80% of revenues) reported a de-growth of 7% yoy led by 14% yoy de-growth in volumes. It reported a significant impact on its EBIT margins at 10.9% yoy, down 330bps yoy. The construction equipment segment’s (15% of revenues) volumes were down 21% yoy, versus the industry’s de-growth of 27% yoy. It reported flattish EBIT margins. The railway segment revenues (5% revenue contribution) were up 34% YoY.

Construction Equipment: The management guided for stronger H2 performance and a 5% EBIT margin (currently making ~3%). The volumes are flowing from the low end cranes. Making great margins in this segment is a task as inflation is not passed on by the competitors. This segment is guided to add Rs16bn to the revenue by FY22.

Railway Division: The current order book is at Rs4bn, this has to be serviced in the coming 12-14months. The receivable days are 90 days, timely receipt is an added benefit in this segment. 

Valuation: We expect CAGRs of 8%, 8%, and 10% in revenue, EBITDA, and PAT, respectively, during FY19–21. With 0% YoY growth in FY20E and 8% FY21E for tractors, as well as a 16% CAGR for the construction equipment business and railway business, we expect EPS of Rs46 for FY21. The management mentioned that the margin disappointment was more of a one-off event due to lower volumes and inventory corrective action; it does expect to deliver better margins going forward. We value the stock at a multiple of 16x FY21E EPS. At the CMP, the stock trades at 10.1x FY21E EPS. We re-iterate BUY for a price target of Rs750.

Risks: Lower volume growth than anticipated.