- P&G HYGIENE AND HEALTHCARE: Blip in sales growth after four strong quarters; structural levers intact
(PG IN, Mkt Cap USD5.5b, CMP INR11895, TP INR11441, 4% Downside, Neutral)
– 1QFY20 (ending Jun’19) net sales grew 7.6% YoY to INR8.5b (v/s est. 9.2b). However, EBITDA declined 13.1% YoY to INR1.8b (v/s est. INR2.1b). PBT declined 12.2% YoY to INR1.8b (v/s est. INR2.1b). Adj. PAT was flat YoY at INR1.4b (v/s est. INR1.4b) due to lower corporate taxes.
– Feminine care business registered strong double-digit growth, while the healthcare business (likely to have been a laggard in 1QFY20) still reportedly grew faster than the market.
– Gross margins expanded 20bp YoY to 60.4% (v/s est. 59.0%). EBITDA margin declined 510bp YoY to 21.4%. Ad spends were up 180bp YoY (off an extremely high base) while other expenses were up 310bp YoY.
– Valuation and view: Lower-than-expected sales and sharp increase in ad- spends (up 26% YoY) led to 13%/11% cut in our FY20/FY21 forecasts. Over the past 2-3 years, company has made efforts to significantly expand distribution, increase ad-spends sharply, launch products and enable price cuts in few products, which should impact near-term earnings. Also, these efforts should boost long-term growth prospects of the feminine hygiene segment (70% sales of PGHH), where growth opportunity is immense (PGHH has strong moats in the category), but where penetration is less than 20%. However, expensive near-term multiples prevent us from turning constructive on the stock. Valuations of 59.5x FY21 EPS does not leave any room for an upside. Maintain Neutral.
2. SRF: Chemicals/Packaging drive operating performance
(SRF IN, Mkt Cap USD2.4b, CMP INR2957, TP INR3460, 17% Upside, Buy)
– In-line EBITDA adjusted for one-time expense: Revenue declined 1% YoY to INR17.4b in 2QFY20, while the EBITDA margin expanded 120bp YoY to 19.3%, driven by Chemicals and Packaging businesses. EBITDA increased 6% YoY to INR3.4b; adjusted for stamp duty of INR288m, it stood at INR3.6b (in-line). Adj. PAT grew 41% YoY to INR2,051m. For 1HFY20, revenue/EBITDA/PAT were up 2%/7%/26% YoY.
– Yet another quarter of strong performance by Chemicals: Chemicals revenue grew 25% YoY to INR6.8b, with margin expansion of 770bp YoY to 19.3%. Capex of INR400m for Specialty Chemicals has been approved. Packaging film revenue declined 5% YoY to INR6.6b, with margin expansion of 230bp YoY to 19.6%. The company plans incur capex of USD50m toward a BOPP plant in Thailand. Technical Textiles revenue declined by a significant 29% YoY to INR3.2b due to the slump in the automotive sector. Segmental margin contracted 890bp YoY to 6.5% due to one-time stamp duty payment of INR288m; adjusting for the same, the margin stood at 15.4%.
– Key takeaways: (i) SRF maintained its growth guidance of 40-50% in Specialty Chemicals for FY20. (ii) It guided for capex of INR10-11b and INR7b for FY20 and FY21, respectively.
– Valuation view: We have baked in the Thailand plant shutdown into our numbers and cut our margin estimates for Technical Textiles. However, we also factor in the beat in Chemicals, which partially offsets the aforementioned estimate cut. Thus, we cut our EBITDA estimates by 8.3%/5.6% and PAT estimates by 5% for FY20/21. We value SRF on an SOTP basis to arrive at a target price of INR3,460. Maintain Buy.
3. GUJARAT GAS: EBITDA/scm in line, Morbi volumes at 5.2mmscmd
(GUJGA IN, Mkt Cap USD2b, CMP INR205, TP INR189, 8% Downside, Neutral)
– GUJGA’s reported EBITDA was at INR3.7b (v/s INR1.6b in 2QFY19) with PBT at INR2.6b. The company has adopted the new tax rate and measured its DTL during the quarter, which led to realization of deferred tax of INR3.0b. PAT was at INR5.2b versus INR0.4b in 2QFY19.
– For 1HFY20, EBITDA stood at INR8.4b (v/s INR4.1b in 1HFY19), supported by the NGT ban at Morbi volumes from 1QFY20. PBT stood at INR6.2b (v/s INR2.5b in 1HFY20), while PAT came in at INR7.5b (v/s INR1.6b in 1HFY20).
– EBITDA/scm was in line with our estimate at INR4.3 (v/s INR2.6 in 2QFY19). EBITDA/scm normalized (from highest ever in 1QFY20 at INR5.6), as the company took a PNG I/C price cut of INR2.5/scm during the start of the quarter. Spot LNG prices averaged USD5.1/mmbtu in 2QFY20 (v/s USD10.4 in 2QFY19 and USD5.4 in 1QFY20).
– Total volumes stood at 9.3mmscmd (40% YoY).
– PNG I/C stood at 7.3mmscmd (+54% YoY). After achieving peak demand at Morbi of ~6.3mmscmd in Jun-Jul’19, post the NGT ban (from 1QFY20), gas consumption has declined to 5.2mmscmd in the current quarter. The decline was primarily due to ceramic demand weakness, aggravated further by monsoon and festive season.
– CNG volumes were in line at 1.5mmscmd (+6% YoY), while PNG Domestic was at 0.5mmscmd (+2% YoY).
Volume volatility to continue
– Propane is gaining momentum as an alternative fuel in Morbi. Currently, ~40 units at Morbi are using propane as an alternative to PNG as the former costs ~INR5/scm lower than the cost of natural gas. Current propane consumption stands at 0.5mmscmd, which is expected to double over the next 6-9 months, subject to propane prices remaining low.
– We have been conscious on the possible impact of changes in the regulatory and operating environment under marketing exclusivity rights for GAs.
– The marketing exclusivity rights for GUJGA have already ended in Oct’18. Industrial volumes (which now constitutes ~78% of the GUJGA’s total volumes) are most vulnerable to third-party entrants, as competition opens up in the later part of year.
Valuation and view
– GUJGA has recognized the full impact of the lower tax rate in the quarter, and factoring in a tax rate of 25.17% for the next two quarters of FY21, annual EPS for the company stands at INR16.2/9.5 for FY20/21.
– As the company operates around its peak potential and as the spot LNG prices are recovering, we do not see such high EBITDA/scm margins to sustain in the long run. We forecast EBITDA/scm (unchanged) at INR4.5/3.5 for FY20/21, along with concerns around direct sourcing and probable third-party competition.
– We reiterate our Neutral stance on the company and value it at 20x FY21 EPS of INR9.5 to arrive at a target price of INR189.
4. BIRLA CORPORATION: Beat led by lower-than-estimated costs
(BCORP IN, Mkt Cap USD0.7b, CMP INR625, TP INR815, 30% Upside, Buy)
– Margin improvement driven by realizations: Consol. volumes increased 4% YoY to 3.2mt (our estimate: 3.13mt). Cement realizations were up 6% YoY to INR4,810/t (in-line). Net sales grew 11% YoY to INR16.3b (our estimate: INR15.8b). Total cost/t was down 1% YoY to INR4,109 versus our estimate of INR4,204. Thus, EBITDA/t increased 61% YoY to INR975. Accordingly, EBITDA grew 68% YoY to INR3.1b (our estimate: INR2.6b). PAT grew 5x YoY to INR883m (our estimate: INR614m).
– 1HFY20 performance: Sales/EBITDA/PAT increased 13%/ 61%/2.3x YoY. Operating cash flows post working capital and taxes declined 5% YoY to INR4.1b, led by an increase in working capital due to higher receivables (+2 days) and lower payables (-3 days). We expect sales/EBITDA/PAT to increase by 6%/34%/41% YoY in 2HFY20.
– Key highlights: (1) Premium cement accounted for 41 % of sales through the trade channel, as against 37% in the same period last year. (2) The share of blended cement in total sales scaled up to 93% from 87% in the quarter. (3) BCORP is engaging with a global consultancy to streamline systems and processes for both inbound and outbound logistics.
– Valuation view: We raise our (a) EBITDA estimate by 12% for FY20 and by 5% for FY21 to factor in lower costs and (b) PAT estimate by 20% for FY20 and by 5% for FY21. Ongoing capex plans will also keep debt at elevated levels over the medium term. We value BCORP at 6.5x FY21E EV/EBITDA to arrive at a TP of ~INR815 (implied EV/tonne of USD80 on FY21E capacity). Maintain Buy.
5. PRISM JOHNSON: Significant miss led by higher costs
(PRSMJ IN, Mkt Cap USD0.6b, CMP INR78, TP INR100, 28% Upside, Buy)
– Cement profitability increases 4% YoY: 2QFY20 revenues declined 2% YoY to INR13.1b (in line with est.). Cement and clinker volume growth declined ~6% YoY due to heavy monsoons and overall economic slowdown. Cement division’s EBITDA/t (+4% YoY) was lower than expected at INR615 (v/s est. INR967/t) due to higher costs.
– TBK and RMC report EBIT loss: TBK’s revenue remained flat YoY at INR4.1b, while segment volumes increased 1% YoY. TBK’s EBIT loss came in at INR103m in 2QFY20 (v/s loss of INR63m in 2QFY19). 2QFY20 RMC sales stood at INR3.5b (+2% YoY); RMC EBIT loss came in at INR45m (v/s EBIT of INR18m in 2QFY19) due to lower utilization levels during the quarter. EBITDA increased 3% YoY (-55% QoQ) to INR826m (v/s est. INR1.4b), with margin at 6.3% (+0.3pp YoY; -6pp QoQ). Company reported net loss of INR88m (v/s est. INR308m profit), as against INR70m profit in 2QFY19.
– Key highlights from management presentation: (1) The Board has decided to simplify the corporate structure by merging a few subsidiaries into standalone, subject to necessary approvals. (2) Prism has commissioned 7.5MW of solar power capacity. Work in progress in case of 22.5MWWHRS is on schedule and commissioning is expected by Jun’20
– 1HFY20 Performance: Sales/EBITDA/PAT increased 0%/ 2%/-26% YoY. We expect sales/EBITDA/PAT for 2HFY20 to increase 6%/ 1%/-14%. Operating cash flow in 1HFY20 turned to -INR251m (v/s INR3.3b for 1HFY19) due to higher working capital, which increased on account of higher inventory 6 days, receivables of 2 days and decline in payables by 7days.
– Valuation and view: We have reduced our EBITDA estimate for FY20/FY21 by 10%/5% to build in higher costs from the current quarter. As a result, our PAT estimate for FY20 has reduced by 36% (also due to higher depreciation and interest from current quarter). Our SOTP value for PRSMJ is INR100/share. We value the cement business at 7x FY21 EV/EBITDA; RMC at 6x FY21 EV/EBITDA and TBK business at 1x FY21 EV/Sales. Maintain Buy.