1. NTPC: Late payment surcharge boosts profitability; Capitalization picking up; Maintain Buy

(NTPC IN, Mkt Cap USD16.3b, CMP INR117, TP INR163, 39% Upside, Buy)

Standalone (S/A) 2QFY20 adj. PAT increased ~24% YoY to INR34.8b (16% beat to our est.). PAT has been adjusted for INR3.3b fixed charge (FC) under-recovery (u/r) this quarter. The beat was on account of rise in late payment surcharge income. Also, reported PAT was up ~34% YoY to INR33b.

–          FC u/r stood at INR3.3b (flat YoY). U/r in 2QFY20 was on account of coal availability issues at Talcher/Sipat and capital overhaul at Farakka. On YoY basis, the number was flat given the restart of Unchahar and better coal availability at Mauda/Solapur. NTPC expects to recover FC in 2HFY20 and plans to supply imported coal to plants facing continued shortage.

–          Given the rise in over-dues, NTPC has booked late payment surcharge income of INR6.5b. Correspondingly, its interest cost was impacted by INR3.3b given the higher WC related borrowings. Company has noted that it has received timely payments for its billed revenue post implementation of the LC mechanism. Over-dues >45 days now stand at INR70-75b.

–          Share of JV PAT stood at INR1.2b (v/s INR1.4b in 2QFY19). Performance of subsidiaries improved with profit of INR0.2b (v/s loss of INR0.9b).

–          For 1HFY20, Adj. PAT excl. FC u/r is up 11% YoY to INR64.8b. F/C u/r in 1HFY20 stood at INR4.5b (v/s INR8.2b in 1HFY19). Current receivables were elevated at INR194b (v/s INR128b in 1HFY19).

Capitalization to pick up pace, under-recoveries to decline; Re-iterate Buy

–          Even if the late payment surcharge and related interest costs were adjusted, we believe that NTPC’s underlying numbers are strong and reflect the benefit of FY20-24 tariff regulations. Management is keen to reduce its over-dues and while this may reduce the subsequent surcharge income/profitability, we believe it is positive as it (1) reduces the possible risk of these dues ballooning, and (2) would free release to invest in core activities. While NTPC’s plant availability was impacted in 2QFY20, given that these plants are at pit head, fuel supply can be ramped up for the remainder of the year (if operational issues at mines do not persist). It’s ~5GW capitalization for FY20 also appears on track. We expect capitalization to pick up pace and drive regulated equity CAGR of 16% over FY19-22E. Capitalization should outpace capex and boost RoE. Our DCF-based TP is INR163/sh. Maintain Buy.

  1. MAHINDRA & MAHINDRA: Above est.; Superior operating performance despite weak volumes

(MM IN, Mkt Cap USD10.1b, CMP INR580, TP INR680, 17% Upside, Buy)

–          Total volumes declined ~16% YoY. Realizations grew 2.1% YoY to ~INR571.3k (v/s est. ~INR580.2k). Net revenues (incl. MVML) declined 14.5% to ~INR109.4b (v/s est. ~INR111b). EBITDA margins declined 40bp YoY (flat QoQ) to 14.1% (v/s est. 12.2%). Margin beat was driven by better mix, price increases and lower RM costs. PBIT margins for Autos declined ~210bp YoY (-70bp QoQ) to 5.8% and for Tractors, it declined 90bp YoY (flat QoQ) to 19.3%. Adj. PAT declined 19% YoY to ~INR13.5b (v/s est. ~INR14.7b). It is yet to adopt new tax regime.

–          1HFY20 revenue/EBITDA/PAT has grown -9%/-16%/19%. CFO in 1HFY20 has declined ~90% due to weak operating performance and increase in working capital. With capex (incl. investments in subsidiaries) stable at ~INR27.9b, FCFF was negative at ~INR26.5b (v/s -INR11.5b in 1HFY19).

–          Takeaways from the earnings call: (a) MM’s festive season retail sales for Tractor declined 4%, while it grew 23% for the Auto segment; (b) 2HFY20 PV industry outlook – UVs to grow 12-13%, cars to decline 8-10% and overall PVs to decline 5-6%; (c) Tractors should decline 7-8% (v/s earlier guidance of up to 5% decline)  in FY20; (d) Inventory – Autos 5-6k units short of target and Tractors are at targeted level but would further reduce by 1-1.5k in 3QFY20; and (e) It has reduced discounts in Auto segment post the festive season.

–          Valuation and view: We are upgrading our EPS estimates by 8-9% to factor in the strong margins. M&M’s UV business is facing cyclical headwinds, along with rise in competitive intensity. Further, we expect it to face headwinds in the diesel portfolio during the BS6 transition. The stock trades at implied core P/E of ~11.3x/10.4x. Maintain Buy with TP of ~INR680 (Sep’21 SOTP-based)

  1. GAIL INDIA: EBIDTA miss led by weak Trading and LPG business

(GAIL IN, Mkt Cap USD8b, CMP INR127, TP INR150, 18% Upside, Buy)

One-offs in trading and gas transmission combined with poor LPG & Liq HC resulted in EBITDA of INR15.6b (-47% YoY) missing our estimate. Depreciation was higher by 25% YoY, which was offset by higher other income (+20% YoY).

–          PBT was at INR15.4b and the company paid tax at the rate of 30.7% in the quarter. The company is still in the process of evaluating the new tax rate option. PAT was lower by 46% YoY at INR10.6b.

–          For 1HFY20, EBITDA was down 26% YoY to INR38.2b and PAT declined 27% YoY to INR23.5b.

Gas transmission EBIT declined 10% YoY to INR8.0b. Volumes were 3% higher YoY at 109mmscmd (our estimate: 108mmscmd).

–          The company took one-time hit of INR1.86b for retrospective adjustment in tariffs of HVJ/DVPL.

–          Kochi-Mangalore pipeline is expected to complete by Dec’19. Other East India pipelines are expected to complete by FY22.

Gas trading EBIT declined 77% YoY to INR2.4b.

–          Trading volumes were down 2% YoY at 95mmscmd. Due to shutdown of Zuari fertilizer and Nagarjuna fertilizer plants and delay in commissioning of other fertilizer plants, the company had to sell some contracted volumes at spot, thereby incurring losses and adversely impacting trading EBIT.

–          The company expects gas offtake of ~2mmscmd by the Ramagundam fertilizer plant (expected commissioning in FY20) and an additional ~2.25mmscmd from the Matix fertilizer plant (expected to start from FY21).

Petchem EBIT loss stood at INR0.8b (v/s a gain of INR1.7b in 2QFY19 and a loss of INR2.3b in 1QFY20). Petchem sales were up 19% YoY at 217mmt (~112% utilization) after a planned shutdown in 1QFY20.

–          Volume improvement led to lower depreciation at INR5/kg (-10% YoY), along with a decrease in opex at INR73/kg (-11% YoY).

–          Realization was lower by 23% YoY at INR75/kg, led by continued pressure on petchem margins owing to global supply glut, US-China trade concerns and the ban over single-use plastics.

LPG and Liquid HC business also performed poorly, with EBIT of INR2.4b (-68% YoY) led by higher depreciation and opex. Volumes declined 3% YoY to 329mmt.

Valuation and view

–          Capex was at INR24b for 2QFY20 (capex guidance for FY20/21 stands at INR70b each). Jagdishpur-Haldia-Bokaro-Dhamra pipeline (JHDBPL) capex till 1HFY20 was INR80b (of the total INR130b).

–          We revise down our FY20/21 EPS estimate by 18%/12% to factor in the poor 2QFY20 performance and the increase in the tax rate to 34.0%, as the company is still in the process of evaluating the option of the lower tax rate.

–          We believe that the concerns about US Henry Hub (HH) contracts will subside soon . The completion of three fertilizer plants along the JHBDPL, combined with the contribution from Matix/Ramagundam fertilizer plants’ start-up and Mangalore Chemicals and Fertilizers (MCFL) conversion, will likely de-risk ~60% of the contract.

–          Increase in domestic gas availability could boost gas transmission of GAIL by ~30% by FY23. Also, as India flexes its muscle against industrial pollution, adoption of natural gas by industries bodes well for gas transporters like GAIL .

–          GAIL trades at a 40% discount to its long-term average of 13.8x. The stock has underperformed recently due to concerns about restructuring. Our interactions suggest that pipeline assets might not be taken out of the firm.

–          We expect EBIDTA CAGR of ~6% over FY19-21, with FY21 EV/EBITDA of 3.4x. Transmission segment will likely remain the major contributor to EBIDTA (>35% share), with volumes estimated to grow to ~117mmscmd in FY21.

–          The stock trades attractively at 8.6x FY21E EPS of INR14.8 and PBV of 1.1x FY21E BV of INR117. It also had a dividend payout of ~35%, yielding 3.0% per share in FY19.

–          We value GAIL at 8x FY21E EPS adjusted for other income and then add value of investments to arrive at a TP of INR150. Maintain Buy.

  1. EICHER MOTORS: In-line; Double-digit retail growth during festive season drives upgrades

(EIM IN, Mkt Cap USD8.3b, CMP INR21701, TP INR24900, 15% Upside, Buy)

–          Consol. revenues declined ~9% YoY to ~INR21.9b (v/s est. INR21.4b). Higher other income and lower tax helped PAT to remain flat at ~INR5.7b (v/s est. INR4.5b). 1HFY20 revenue/EBITDA/PAT declined 8%/25%/10%.

–          Royal Enfield’s (RE) net realization grew 2.2% QoQ (+14.5% YoY) to INR131k (v/s est. ~INR129k). EBITDA margin declined 560bp YoY (-90bp QoQ) to 25% (in-line) on higher RM cost (due to adverse mix) and negative operating leverage. PBT declined ~21% YoY, but lower tax led to ~16% growth in PAT to ~INR5.7b (v/s est. ~INR4.8b). For 1HFY20, S/A CFO declined ~17% YoY to ~INR8.3b, impacted by weak operating performance, though there was a reduction in the working capital. Lower capex resulted in ~9% decline in FCFF of ~INR5.6b (v/s ~INR6.1b in 1HFY19).

–          VECV’s realizations increased ~11% YoY (+4.2% QoQ) to INR1.8m (v/s est. ~INR1.7m). EBITDA margins surprised positively, declining just ~380bp YoY to 5.2% (v/s est. 2.5%). PAT declined ~89% YoY to ~INR150m (v/s est. loss of ~INR239m).

–          Earnings call highlights: (a) Festive season sales grew in double-digits, with the North/West doing better than other markets; (b) Inventory is at <3 weeks (including company level inventory). There is waiting period in many markets; (c) Till Oct’19, it has added over 500 ‘RE Studio’ stores. These smaller format stores are selling 8-10 units/month; (d) Service market share (paid service) has gone up for RE, benefiting profitability of dealers; and (e) Spares and accessories are growing in double-digits.

–          Valuation and view: We are increasing our EPS estimates for FY20/FY21 by 16%/8.5%, as we increase volumes/margins for both businesses. The stock trades at ~29.7x/23.4x FY20E/FY21E consol. EPS. Maintain Buy with TP of ~INR24,900 (Sep’21 SOTP-based).

(Report by-  Motilal Oswal Institutional Equities)