- POWER GRID:In line; Telecom and consultancy aids growth
(PWGR IN, Mkt Cap USD14.3b, CMP INR194, TP INR244, 26% Upside, Buy)
2QFY20 Adj. standalone (S/A) PAT was up 7% YoY at INR25.3b (in-line), led by higher growth in Consultancy/Telecom business. However, it was offset by lower-than-expected profitability of the Transmission segment. Capitalization stood at INR42.7b (v/s INR21.9b in 2QFY19). Capex stood at INR36b.
– Implied transmission segment PAT grew ~6% YoY, lower than regulated equity growth estimated at ~11% YoY.
– Consultancy EBIT rose 62% YoY to INR0.97b. EBIT for the Telecom segment was up 46% YoY at INR1.1b.
– Revenue continued to bear an impact of ~INR250m given the non-recognition of tariff from one private generator project. Change in adjustment for DTA would have also led to some tax leak, in our view.
– Profit from JVs and TBCB subs stood at INR1.3b (v/s INR1.1b in 2QFY19).
– For 1HFY20, S/A Adj. PAT was up 5% YoY; S/A Cash flow from operations (post tax) rose 40% YoY to INR124b on better WC.
Valuations remain attractive; Maintain Buy
Projects worth INR430b are envisaged to be awarded for renewable integration. PWGR’s recent project wins highlight its competitive positioning to win such projects as they arrive. We note that the capitalization run-rate for FY20 may still be at risk given RoW issues. However, we believe this is more than reflected in the current stock valuation. The stock trades at 1.4x/1.3x FY21/FY22E P/BV for steady long-term growth and under-penetrated market. Maintain Buy with DCF-based TP of INR244/share.
- TATA STEEL: Subsidiaries’ underperformance drives a miss; Margins to remain weak over the near term
(TATA IN, Mkt Cap USD6.4b, CMP INR403, TP INR430, 7% Upside, Neutral)
– Tata Steel’s (TATA) consol. EBITDA declined 29% QoQ to INR38.2b (our estimate: INR47.2b) in 2QFY20 due to weaker spreads and FX translation losses. The company reported a loss of INR290m at the consol. PBT level (our estimate: +INR10.6b). Adj. PAT came in significantly higher at INR41.8b (+21% YoY), led by a favorable tax impact of INR42.3b as TATA adopted the new corporate tax rate.
– Standalone: EBITDA/t was down 11% QoQ to INR11,703 due to lower realization (-6% QoQ to INR50,038/t). EBITDA was down 12% QoQ to INR34.8b. We expect EBITDA/t to improve gradually as cost-reduction benefits are likely to be realized from 3Q – we estimate INR12,525 in 2HFY20.
– TSE: EBITDA/t remained weak at USD10 (v/s USD4 in 1QFY20 and USD70 in 2QFY19). We do not expect a sharp recovery in EBITDA, as TSE has exhausted its carbon credits and will have to buy credits from the market. The fall in steel spreads, weak demand and planned summer shutdowns also impacted the margins. The focus remains on savings costs and capex in order to be cash positive.
– Bhushan: Volumes increased 21% QoQ to 1,040kt. EBITDA, however, was down 33% QoQ at INR5.3b, as EBITDA/t declined 45% QoQ to INR5,063 led by lower realization and a weaker mix as exports were higher.
Margins to remain weak over the near term; Maintain Neutral
– We expect the margins to remain weak over the near term but improve gradually, particularly in India, aided by the lagged impact of lower costs and an expected demand recovery as channel inventories are low. The impact of carbon costs, however, would keep the EU margins under check, in our view. We cut our FY20/21 consol. EBITDA estimate by 17%/7% to INR198b/248b to factor in our lower margin estimate.
– While management has guided for USD1b net debt reduction every year, it acknowledged the difficulty in achieving the same this year as market conditions have not been favorable. It aims to curtail capex in 2HFY20 and expects working capital release to support cash generation. Ongoing synergies, higher output, and ramp-up of captive mines in the recently acquired Usha Martin and Bhushan Steel businesses will partially support margins. Maintain Neutral with a target price of INR430 (based on SOTP).
- VOLTAS:UCP going strong; EMP joins the party
(VOLT IN, Mkt Cap USD3.1b, CMP INR667, TP INR785, 18% Upside, Buy)
– In-line earnings: Consol. Revenues were flat YoY at INR14.2b (5% miss), which can be attributable to the miss on revenue in Electro Mechanical Projects (EMP). EBITDA margin declined 20bp YoY to 7.4% (v/s est. 7.8%). On account of higher other income (+57.6% YoY), PBT (before share of JV) grew 16% YoY to INR1.7b (9% beat). BEKO’s JV losses were at INR100m (v/s est. INR110m). Adjusted for the exceptional loss of INR43m (VRS related post tax), PAT was up 7% YoY at INR1.1b (in-line).
– 1H performance: Consol. revenue/EBITDA/PBT grew 14.2%/12.9%/20.5%.
– UCP segment going strong: Revenue grew 19% to INR5.3b (in-line). PBIT margin expanded 250bp YoY to 8.8% (v/s est. 8%). In the Room AC business, YTD, Voltas has grown 42% v/s industry’s secondary sales growth of 33%. Further, market share for Voltas in the Room AC segment stands at 24.4% YTD v/s 24.1% for 1QFY20. Management expects strong momentum in the AC business to continue in 2HFY20. We have built in 13.8% YoY growth in the UCP segment for 2HFY20, which is easily doable, in our view. Our confidence is based on (a) our expectation of inventory build-up at dealer level going into the summer season. Company level inventory is down from last year levels, and hence, channel refilling should aid growth; and (b) the next two quarters (4QFY20 in particular) having a favorable base. For FY21, we have built in some cushion to our UCP growth expectation to 12% from 15% earlier.
– EMP segment’s visibility improves with strong order wins: Voltas has witnessed strong order wins worth INR26b (+125% YoY) in 2QFY20, led by (a) a large-sized order from Qatar, and (b) strong order wins in the domestic market across infrastructure, water, metro and rural electrification segments. Thus, order book jumped 38% YoY to INR65.7b, with OB/Rev ratio improving to 1.9x v/s 1.3x in 1QFY20. Company expects strong order wins in 3QFY20 as well, given its L1 position. We increase our revenue expectation for the EMP segment to 15.8% CAGR over FY20-22 v/s 8.8% earlier.
– Further room for margin expansion, led by operating leverage: Over FY16-19 (which includes two bad summer seasons), while revenue CAGR stood at 7.6%, EBITDA/adj. PAT (before JV losses) CAGR was at 12.2%/17.3%. We see further scope for operating leverage to play out over the next 2 years, given (a) improved outlook for the EMP segment, (b) strong control over employee cost (1.5% CAGR over last 5 years), and (c) softening of pressure from commodity price inflation and import duties. We have built in 90bp expansion in blended EBITDA margin to 11.2% by FY22E from FY20E’s 10.3%.
– Valuation and view: We increase our FY21/FY22E EPS estimates by 1%/4% on account of higher revenue estimate for the EMP segment, offset by some cushion of the UCP segment (given strong growth in FY20). As a result, our SOTP-based TP has increased to INR785 (earlier: INR770), based on Sep’21E EPS. Voltas is our top pick in the consumer durables space with EBITDA/PAT CAGR of 18.8%/20.8% over FY20-22E.
– Key risks: Weak summer season and higher working capital in the EMP segment.
- ADITYA BIRLA CAPITAL: Growth slows down across segments
(ABCAP IN, Mkt Cap USD2.6b, CMP INR85, TP INR110, 30% Upside, Buy)
– 2QFY20 consol. PBT grew 31% YoY to INR3.7b, while consol. PAT grew 37% YoY to INR2.6b due to a lower tax rate.
– NBFC: Company continues to run down its lending book, it was down 4% QoQ (flat YoY) to INR483b. Margins improved 70bp YoY to 5.3% as the company increased the share of retail and SME loans (up 300bp YoY to 54%). The company continues to grow its ‘digital and unsecured’ book, the share of which increased 250bp YoY to 8.5%. GNPL ratio increased 15bp QoQ to 1.85%; however, PCR declined 500bp to 33%. Management has guided for 15-20bp increase in the GNPL ratio in 3QFY20. In 1HFY20, RoA/RoE of this segment (excluding one-time DTA impact of INR550m) was 2.2%/15%.
– AMC: ABCAP has managed to maintain its overall share at ~10.5%. However, equity AAUM declined 4% QoQ to INR885b as the company lost some market share. PBT margin increased 5bp YoY to 27bp, leading to 18% YoY growth in PBT to INR1.75b.
– Others: In 1HFY20, (1) HFC loan book grew 20% YoY to INR121b; RoA/RoE was 1%/10%. (2) Net VNB margins in LI improved 250bp YoY. The Embedded Value of this segment stands at INR50b (up 14% YoY).
– Valuation view: After five years of strong loan growth, ABCAP would be entering a temporary phase of consolidation given the external environment. Thus, we believe its focus will be on retail loans, while the approach to corporate lending would be opportunistic. The AMC business is witnessing slowing AAUM growth while expense control has led to PBT growth. In the Life Insurance business, the HDFCB tie-up is going strong. Buy with TP of INR110 (FY21E SOTP-based).
- ENGINEERS INDIA: In-line; ordering disappoints
(ENGR IN, Mkt Cap USD1.0b, CMP INR111, TP INR146, 32% Upside, Buy)
– Operating performance in line: Engineers India’s (ENGR) sales increased 6% YoY to INR7.2b (in-line) in 2QFY20, supported by growth of 7% YoY in Consultancy segment and 6% YoY in Turnkey Projects segment. EBITDA was up 17% YoY to INR1.1b, with the margin of 14.8% ahead of our estimate of 14.3%. PBT increased 13% YoY to INR1.7b (in-line). With ENGR opting for the new tax structure, a one-time write-down of deferred tax asset worth INR750m was taken and charged to the P&L in the quarter. Thus, PAT came in 31% YoY lower at INR678m (below our estimate of INR1.3b).
– Segment performance: In Consultancy, sales came in at INR3.5b (+7% YoY) and EBIT at INR968m; margin shrank 160bp YoY to 27.4%. Turnkey projects sales increased 6% YoY to INR3.7b, while EBIT stood at INR285m; margin expanded 270bp YoY to 7.7%. Muted execution can be attributed to rains and floods on most of the sites of operations, with execution expected to pick up in 2HFY20. Management expects Consultancy margins to be in the 25-27% range and Turnkey margins to be ~5% in FY20.
– Order inflows disappoint: Order inflows were weak at INR1.7b, while order book (OB) declined 6% YoY to INR108b. Current OB provides revenue visibility of 4x its TTM revenue (down from 4.4x in 1QFY20). Management expects order inflows to be INR16-18b in Consultancy in FY20.
– Valuation and view: ENGR is a market leader in the hydrocarbon segment, where it provides consultancy and turnkey solutions. OMCs’ strong cash flow position post diesel price deregulation, the necessity to upgrade to BS-VI-complaint facilities, and the need to put up additional capacities (given 100% utilization of existing facilities) augur well for the company. We forecast net profit CAGR of 20% over FY19-21. We remain positive on ENGR, given its asset-light business model, strong return ratios and leadership position. We derive a target price of INR146 – assigning INR103 to the core business (18x FY21E core EPS), to which we add INR44 for cash on book.
- BSE: Underperformance led by market volatility
(BSE IN, Mkt Cap USD0.3b, CMP INR541, TP INR750, 39% Upside, Buy)
– Muted performance due to lower transaction income: Operating revenue declined 3% YoY in 2QFY20, with the EBITDA margin crashing to -5.3% (-800bp QoQ) from the levels of >20% two years ago, given the operating leverage in the business and higher other expenses. PAT before the share of profits from CDSL declined 20% YoY to INR368m. The impact from lower operational income was partially offset by a lower tax rate. Transaction charges were down 16% YoY owing to lower income from small caps, while listing fees were also down due to reduced market activity. Operating EBITDA came in at -INR58m (our estimate: INR15m), mainly due to higher other expenses.
– Lower core; all hands on ‘Star MF’: The decline in the core business can be attributed to market volatility. BSE has traditionally been strong in the small-cap segment when it comes to transition fees. However, in the recent quarter, the share of small caps in transition income reduced to 10% from 40-50% three years ago. Moreover, due to muted market activity, listing fees went down significantly. In a good year, BSE generates INR600-700m from IPOs, but this has reduced to ~INR160m on an LTM basis. BSE has been expanding aggressively in the Star MF segment, despite the weakness in the MF business. Total income from this segment stood at INR88m (lower than the previous quarter due to one-time provisioning). Currently, over 15% of all transactions are being done via the BSE Star MF program, with BSE’s market share at 70% in the segment. Overall, it is a fixed-cost model and thus any rise in revenue has a direct impact on profitability. This segment could turn out to be the primary revenue generator over the longer term.
– Valuation view: Our ‘Buy’ thesis on BSE is centered on the value play (a combination of dividend and buyback) at low valuations and option value from new segments (such as the MF platform, commodities and INX) over and above the SOTP value of its core segment. Our SOTP methodology for BSE ascribes value to (1) core operations ex-cash income (INR125/share), (2) implied value from CDSL’s market price @20% holding company discount (INR100/share), (3) owned unencumbered cash (INR300/share) and (4) float income from encumbered/margin money (INR225/share). Our target price of INR750 implies a 39% upside.