Q1FY20 Result update and detailed analysis by IndiaNivesh
Johnson Controls-Hitachi Air Conditioning India | Q1FY20 Result Update
Johnson Controls-Hitachi (JCH) reported mix set of results. Both revenues and EBITDA were ahead of our estimates, but Q1 PAT was a miss.
In line with strong RAC industry growth, JCH reported strong 19.9% YoY revenue growth to Rs9.5bn in Q1FY20. Growth in revenues is largely driven by Residential AC sales (accounts ~80% of revenues). We estimate that half of the incremental revenue growth in Q1 is driven by business expansion from South India. North and West India also reported strong growth. We also attribute revenue growth to their presence of 122 models (one of the highest in the industry as of now). JCH is currently working on their strategy to slowly moving towards having 100% inverter AC’s in their portfolio. Also, they had set an aggressive target of 50% growth in sales of 5-star inverter ACs over FY2019. This strategy is also driving the growth. On a whole, geographical diversification, and increased focus on inverter AC’s should help JCH report 19% growth for FY20E.
Notably, JCH is working on re-designing the products and optimizing the costs structure. The premium to other peers has reduced over the last few quarters and now JCH commands 5-6% premium only. This indicates that despite being a premium brand, JCH has narrowed down product price gap with its peers.
Despite decline in YoY gross margins, better absorption of fixed costs (as kadi manufacturing plant is running at 75-80% utilization) has helped JCH report 11.6% EBITDA margins in Q1FY20 versus 10.6% a year ago.
PAT margins of the company were restricted to 6.7% in Q1FY20 than 6.4% a year ago, mainly due to (1) 9.6% increase in depreciation expenses to Rs127mn, and (2) 60.6% decline in other income to Rs23mn. JCH is setting-up global design and development center where it intends to spend Rs1.4bn. Already the center has started partly the operations and this center would be fully ready by Sep-19.
Valuation: Given the strong growth prospects for the Indian RAC industry and the company’s strong growth outlook, we expect JCH to report 18.1% revenue CAGR during FY19–21E. Given the expected improvement in utilization, lower imports, better sourcing strategy in place and better absorption of fixed costs, we expect EBIDTA margin to increase to 9.4% by FY21E. Our strong revenue growth and EBITDA margin improvement assumption should translate to 44.2% PAT CAGR during FY19–21E. At the CMP of Rs1,483, the stock is trading at the FY21E P/E multiple of 22.6x. We continue to maintain BUY rating on the stock with price target of Rs2,299. Given the upside, we maintain BUY rating on the stock.
Hindustan Aeronautics | Q1FY20 Result Update
Better than expected revenues from the ROH segment led to strong set of Q1FY20 numbers.
The company executed ROH works for Sukhoi, AL-31FP engines and supply of spares, in addition to deliveries of Chetak helicopters (ahead of schedule), LCA Tejas (1 aircraft produced per month), and Sukhoi aircraft. The enhanced capacities (including ROH facilities) have helped HAL generate strong revenues, despite lack of new order wins in recent times.
In our view, HAL has not won any major platform order in recent times. The company has asked the Indian Air Force (IAF) for an order to supply 1-4 squadrons of Sukhoi. Considering the budget constraints, there is a possibility than an order for 8-10 Sukhoi aircraft could be made to HAL in FY20E (not modeled in our estimate). With negotiations completed, HAL has been awaiting the announcement of the order for 83 LCA Tejas for some time.
Higher contribution of ROH & spare orders to total revenues has helped HAL report improvement in gross margins from 68.5% a year ago to 73% in Q1FY20. This coupled with prudent cost cutting initiatives (other expenses declined 30.2%) helped in YoY EBITDA margin expansion (from 13.3% in Q1FY19 to 29.0% in Q1FY20).
Given the huge receivables outstanding from the IAF, HAL has been facing liquidity issues for some time. As a result, borrowings have increased (finance costs grew from Rs62mn in Q1FY19 to Rs767mn in Q1FY20) and cash and bank balances have declined (from Rs1.3bn in Q1FY19 to Rs593mn in Q1FY20). Further, the company has cut down expenditure towards development projects, resulting in a sharp decline (from Rs3.8bn a year ago to Rs686mn in Q1FY20) in capital expenses and other accounts. On the same lines, design and development expenses (getting capitalized) and documentation expenses have seen a sharp decline (from Rs748mn in Q1FY19 to Rs350mn in Q1FY20). Benefits of the EBITDA margin expansion and lower spending towards new project initiatives have led to such strong YoY growth in PAT margin (from 12.8% in Q1FY19 to 17.2% in Q1FY20). PAT benefitted from the Rs1bn compensation received from KIADB for the land handed over to BMRCL. On adjusting for the same, PAT margin was at 14.1% for Q1FY20.
Valuation: In Sep-2018, we initiated coverage on HAL with a REDUCE rating at the then CMP of Rs929, with target price of Rs782. We have not majorly revised our earlier estimates since initiation, but given the sharp correction in the stock price (below the target price), the rating on the stock is revised to ACCUMULATE. At the CMP of Rs658, HAL is trading at FY21E P/E multiple of 9.7x, and it might look attractive. However, unless the company wins large platform orders (e.g. 83 LCA Tejas) in the next 2-3 quarters, which gives improved revenue visibility, we may further revise down our estimates and rating downwards. We continue to maintain cautious view towards the stock owing to poor fundamentals, as HAL is expected to (1) report 18.6% YoY earnings de-growth, and (2) low RoE of 14.8% in FY21E.
VA Tech Wabag | Q1FY20 Result Update
Wabag continued to report bad set of numbers in Q1FY20. Post completion of AMAS and RAPID projects, there were no major projects contributing to revenues, as a result the consol. revenues declined 33.6% YoY (and lower to our estimate of Rs7,345mn) to Rs4,565mn. 3 projects, Koyambedu, Chennai, HMEL, Bathinda and Dangote, Nigeria -ETP & RWTP contributed to ~25% of Q1FY20 revenues.
Despite 33.6% revenue miss, share of revenue from projects in engineering phase, which enjoy higher margins contributed to 8.2% EBITDA margins v/s our expectancy of 6.1% (sharp revenue miss led to 9% YoY decline in EBITDA to Rs375mn). Better control over other expenses (down 53.5% YoY to Rs306mn) helped Wabag report improvement in YoY EBITDA margins.
EBITDA miss coupled with 83.1% increase in YoY finance costs led to 95.8% decline in PAT to Rs6mn. Increase in YoY finance costs is due to (1) higher WCDL borrowing as mandated by banking regulations and (2) higher BG & LC charges related to new projects. Reported PAT margins were at 0.1% versus 2.1% a year ago.
The only positive is Wabag winning Rs27bn of orders in Q1FY20 (i.e. ~50% of higher end of OI guidance for FY20E), which will come up for execution in FY21E. Despite that PAT CAGR during FY17-21E would be 1.2%. Won the largest under Namami Gange for Rs11.87bn (Rs2.47bn for sewage treatment on HAM model and Rs9.4bn for sewerage network on DBO model), thereby taking the total order wins under Namami Gange mission at Rs30bn. The OB of Wabag at Q1FY20-end stands at Rs110bn (OB/LTM sales ratio at 4.3x).
Receivables continue to be major concern as receivables from APGENCO/ TSGENCO/ Tecpro stood at Rs4.1/ 1.4/ 0.69bn (Q1FY20-end). Management in Q1 concall sounded optimistic of receiving Rs2.1bn from APGENCO in FY20E and the entire money from TSGENCO in FY20E. We do not see any sign of Receivables issue getting addressed in FY20E.
Outlook & Valuation: We expect Wabag to miss its revenue guidance for third consecutive year in FY20E. Notably, works at ~30% of the current order have not started. Also, Engineering works on 3 large International projects have just started (account for ~16% of OB). We expect traction from order book to be seen only from H2FY20E onwards. Accordingly, we now expect 9%/ 1.2% revenue/ PAT CAGR during FY19-21E. Also, if the Balance sheet woes continue for some more time, then Wabag may have to explore the possibility of fund raising. At the CMP of Rs281, Wabag is trading at an FY21E P/E of 14.2x. Wabag’s PEG ratio (FY19–21E) stands at 0.12x. Post-tax cost of debt stood at 9.4% in FY19. Even factoring in the additional 5% toward cost of equity, it works out to be 14.4% and ROE is at 9.6%. The company did not generate returns higher than the cost of equity and had reported negative CFO in FY19. CFO-to-EBITDA conversion ratio stands at 27% / negative 1.2% in FY20/ 21E. We continue our cautious view on the stock, reflecting apprehensions about FY20 revenue guidance, possibility of further BS deterioration & negative CFO. On assigning 12x P/E multiple we arrive at revised target price of Rs236 and REDUCE rating.