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COAL INDIA: Better FSA realization, e-auction volumes drive beat

(COAL IN, Mkt Cap USD18.1b, CMP INR210, TP INR278, 32% Upside, Buy)

–          Coal India’s (COAL) revenue declined 7% YoY to ~INR204b (our estimate: INR191b) in 2QFY20 due to lower sales volumes (-11% YoY at ~122mt, in-line). However, FSA realization was up 12% YoY on account of higher sales to the non-power sector and lower grade slippage.

–          Cash cost (ex-OBR) increased 8% YoY to INR1,318/t, given negative operating leverage on lower volumes. The company’s wage bill was up 1% YoY at INR90.7b.

–          Adj. EBITDA (ex-OBR) declined 17% YoY to ~INR42b (our estimate: ~INR37b). The beat was driven by increased FSA realization and higher-than-expected e-auction volumes.

–          PBT declined 16% YoY to INR42.8b. Adj. PAT, however, was up 14% YoY to INR35b (our estimate: INR23b) due to a lower tax rate.

–          For 1HFY20, adj. EBITDA/PBT were up 1% YoY at INR117b/INR113b. Adj. PAT increased 19% YoY to INR81.5b on a lower tax rate. Cash flow from operations post tax though was down 46% YoY at INR49.3b on WC deterioration.

Valuations attractive; Maintain Buy

–          COAL’s key subsidiaries such as SECL and MCL have faced production issues in recent times, with YTD (Apr-Oct) dispatches down 7% YoY. While we expect a recovery in volume growth for the remaining five months of FY20, we build in flattish volumes for FY20 (610mt).

–          Over the medium term, we expect volumes to continue growing at 5-6%. Besides, COAL has managed to keep cost under control on the back of productivity measures and shutting down of old mines. Ongoing efficiency measures, along with growth in volumes, should drive 4% adj. EBITDA CAGR over FY19-21 – despite a high base of FY19.

–          The stock trades attractively at ~3x FY21E EV/adj. EBITDA (v/s historical average of 7x), P/E of 7-8x (v/s average of ~14x) and offers a dividend yield of ~9%. We value the stock on 4.5x FY21E EV/EBITDA at INR278/sh. Maintain Buy.

MOTHERSON SUMI: Above est.; Beat led by SMP/PKC but India a big disappointment

(MSS IN, Mkt Cap USD5.9b, CMP INR135, TP INR167, 24% Upside, Buy)

–      Consol. revenue grew 5% YoY to INR159.2b (v/s est. INR153.6b), drivn by PKC and SMP businesses. Consol. PAT grew 4% YoY to INR3.9b (v/s est. INR3.4b). 1HFY20 revenue/EBITDA/PAT grew 9.5%/-5%/-12%. 1HFY20 CFO increased 533% to INR14.3b, driven by reduction in working capital while lower capex led to FCF at INR4.2b (v/s -INR10.3b in 1HFY19).

–      India business disappointed with revenue declining 17% YoY, partly impacted by pass through of lower copper prices (-7% YoY). EBITDA margins declined 170bp YoY (-190bp QoQ) to 15.1% (v/s est. 16.6%). PAT declined 36% YoY to INR1.8b (v/s est. INR2.5b).

–      SMP sales grew 20% YoY to EUR1.01b (v/s est. EUR0.97b), led by greenfield plants & Reydel. EBITDA margins were stable YoY (+160bp QoQ) to 4.2% (v/s est. 2.5%). Ex the green-field plants and Reydel, revenues declined 1% to EUR660m. EBITDA margin was at 9.8% (+50bp YoY, +120bp QoQ).

–      PKC revenues grew 12% YoY to EUR307m (v/s est. EUR288m). EBITDA margins were at 11.7% (v/s est. 9.2%), a growth of 290bp YoY (+160bp QoQ).

–      Key takeaways from the call: (a) The Hungary plant ramp-up is as expected and break-even should happen soon. (b) Alabama focus is to support Daimler on its on-going launches, post which it would focus on improving efficiencies and profitability. Company doesn’t expect any material scope of further increase in losses hereon. (c) SMRPBV’s order book stood at EUR18.4b (v/s EUR18.2b as at Mar’19), as it has won new order of EUR3.8b in 1HFY20, which was offset by EUR3.7b orders going into execution. (d) PKC performance is being driven by ramp-up in China and rolling stock business, which helped to offset impact of weak EU M&HCV volumes. (e) MSS needs to master the US market as it is a very important market and key for future growth of the company.

–      Valuation and view: We are upgrading our EPS estimates by 3-5% for FY20/FY21 to factor in the better-than-estimated performance at PKC and SMP, as well as lowering of estimates for the India business. The stock trades at 29.1x/20x FY20E/FY21E consol. EPS. Maintain Buy.

ALKEM LABORATORIES: DF-led beat on earnings, undertaking efforts to maintain momentum

(ALKEM IN, Mkt Cap USD3.3b, CMP INR1964, TP INR2325, 18% Upside, Buy)

–      Highest-ever quarterly revenue run-rate: ALKEM’s revenue increased ~18% YoY to INR22.6b (our estimate: INR20.2b) in 2QFY20, led by robust growth in domestic formulation (DF) sales (+18% YoY to INR15.5b, 70% of sales) due to strong traction in major therapies. International business grew ~15% YoY to INR6.7b (30% of sales), mainly led by the RoW business (+30.6% YoY). US business grew at 11.7% YoY to INR5.3b.

–      Better operating leverage further drives profitability: Adjusting for one-time RM cost pertaining to R&D, the gross margin was down marginally by ~30bp YoY to 61.1%. However, the EBITDA margin improved ~200bp YoY to 21% (our estimate: 19%), mainly due to controlled cost (other expenses: -250bp YoY). Consequently, EBITDA was up ~31% YoY at INR4.6b (our estimate: INR3.8b). PAT grew at a higher rate of ~55% YoY to INR3.9b (our estimate: INR2.7b) due to a lower tax rate.

–      For 1HFY20, revenue/ EBITDA/ PAT grew by 15%/28%/48% YoY to INR41b/INR7.4b/INR5.8b.

–      Concall highlights: (1) Within DF, the acute segment grew by 15% YoY and the chronic segment by 24% YoY in 2Q. (2) ALKEM is working on cost optimization related to RM procurement, plant overheads and supply chain management. 20-30% of benefits are realized till now. (3) Input prices have softened to some extent and the impact of the same would accrue in the coming quarters. (4) It launched seven ANDAs in 1HFY20; intends to launch ~10-12 inFY20.

–      Valuation view: We raise our FY20/21 EPS estimate by 15%/4% to INR88/INR109 to factor in the outperformance in chronic, the strong benefit of seasonality in DF and healthy traction in the US business. We continue valuing ALKEM at 20x 12M forward earnings to arrive at a price target of INR2,325 (prior: INR2,260). We remain positive on ALKEM, given its improved operating leverage in DF with stable MR strength, increased business from new launches and the expanding market share in approved products in the US market. Maintain Buy.

ASHOK LEYLAND: Above est.; reasonable performance despite sharp volume decline

(AL IN, Mkt Cap USD3.3b, CMP INR79, TP INR95, 20% Upside, Buy)

–       High discounts, mix impact realizations: AL’s volumes declined 44% YoY in 2QFY20, whereas realizations dropped 7.4% YoY to INR1.4m (in-line) due to lower M&HCV contribution and higher discounts. Net revenue fell 48% YoY to INR39.3b. For 1HFY20, revenue/EBITDA/PAT declined 31%/49%/66% YoY.

–       Margins exceed estimate led by lower RM costs: Gross margin improved 90bp QoQ (+310bp YoY) to 31% (our estimate: 30%), benefiting from a better mix (higher share of LCVs) and lower RM costs. EBITDA margin shrank 360bp QoQ (-510bp YoY) to 5.8% (our estimate: 5.2%), but the beat was driven by better gross margins. Adj. PAT declined ~84% YoY to ~INR862m (our estimate: ~INR795m). AL is continuing with the old corporate tax regime. For 1HFY20, CFO was negative at ~INR12.8b (1HFY19: ~INR8.8b) due to high working capital. The increase in capex to ~INR5.4b (1HFY19: ~INR3b) resulted in negative FCF of INR18.7b (1HFY19: -INR12.1b).

–       Key concall takeaways: (a) AL is focused on reducing inventory in the system, which stood at 13.2k units in Oct’19 v/s 18.2k in Sep’19 and 27.5k in Jun’19. (b) At industry level, inventory has bottomed out and thus realizations should strengthen. (c) New CEO appointment would happen before FY-end. (d) AL maintained its cost-saving target of ~INR5b in FY20, of which INR2-2.3b is already achieved in 1H. (e) FY20 capex guided at ~INR18b (prior guidance: ~INR23b); it is looking for further reduction by ~INR2-2.5b. It is investing for regulatory changes and new capabilities.

–       Valuation: We cut FY20E EPS by 24% to factor in likely weaker volumes in 2H and higher tax. Valuations at 22.8x FY21 EPS and 11.5x EV/EBITDA are reasonable in view of early recovery cycle earnings. Maintain Buy.

INDIAN HOTELS: Decent performance amidst weak environment

(IH IN, Mkt Cap USD2.4b, CMP INR147, TP INR172, 17% Upside, Buy)

–      In-line consolidated revenue and EBITDA: Consolidated revenue grew 4% YoY to INR10.1b (v/s est. INR10.1b). Adjusting for Ind-AS116 impact, EBITDA grew 16% YoY to INR1,153m. Like-to-like EBITDA margins expanded 120bp YoY to 11.4% due to operating leverage and cost rationalization measures. Reported PBT loss was at INR52m in 2QFY20 v/s loss of INR120m in 2QFY19. Adj. PAT stood at INR716m (v/s est. INR315m), up 1.8x YoY on account of deferred tax benefit. For 1HFY19, revenue/EBITDA (like-to-like)/ PAT grew 4%/16%/27%.

–      Occupancy drives RevPAR growth in standalone business: Standalone revenue grew 5% YoY to INR6b in 2QFY20 on the back of 430bp YoY improvement in occupancy to 68.2%. However, ARR declined 4.5% YoY and contained RevPAR growth to 1.7%. Like-to-like standalone EBITDA grew 12% YoY to INR994m. Subsidiaries (consol. less standalone) drove the consolidated performance (like-to-like) wherein revenue/EBITDA grew 4%/59% YoY to INR4.1b/INR159m. Subsidiary performance during the quarter was driven by the US (cash losses reduced by INR40m) and St James.

–      Key concall highlights: (a) Consolidated net debt stood at INR2,045m as at Sep’19 v/s INR1,925m in Mar’19; company remains confident of maintaining its net debt position at the year end. (b) IHIN plans to start 8 hotels in 2HFY20 under management contract. (c) According to IHIN, resistance to rate hike by corporates is lower post the GST rate cut.

–      Valuation and view: We maintain our estimates and expect revenue/ EBITDA CAGR of 8%/30% in FY20/21. We value the stock at 17x FY21 EV/EBITDA and arrive at SOTP-based TP of INR172, implying an upside of 17%. Maintain Buy.

TATA COMMUNICATIONS: Traditional strength intact, smaller segments leaking earnings though

(TCOM IN, Mkt Cap USD1.5b, CMP INR368, TP INR420, 14% Upside, Neutral)

–      Traditional segment continues improving: TCOM delivered a modest performance in the second quarter, with revenue/EBITDA growth of 3%/1% QoQ (pre-IND-AS 116) exceeding our estimate. Data revenue/EBITDA increased 6%/3% QoQ, as Traditional segment (two thirds contribution to Data) grew strongly, while Growth segment improved off a low base. This was partly offset by an increase in EBITDA loss in Innovation segment and continued downtrend in Voice segment with 9% EBITDA decline. PAT declined 31% QoQ to INR485m with higher tax provisions. For 1HFY20, revenue/EBITDA were up 5%/25% YoY.

–      Concall highlights: (1) FY20 capex guided at USD200-225m, of which a large part would be incurred for network expansion; growth capex would be ~15-20%. (2) Traditional deal pipeline has improved with a margin potential of 35-36%. (3) RJio is not a big threat for Enterprise business, and TCOM is confident of protecting and growing market share in the segment.

–      Modest expectation as smaller segments leak earnings: Hemisphere Properties Pvt. Ltd. (HPIL) demerger is on track and further steps are undertaken for share allotment. TCOM also has surplus land parcel of 757 acres available for monetization across top cities, which should have equally attractive value. Traditional and Growth offer stable EBITDA growth, but increased spends on new product launches and deal expenses in Innovation and Transformation continue taking away the gains. We have marginally upgraded our EBITDA estimates building in a CAGR of 11% over FY19-21.

–      Valuation and view: We value TCOM on an SOTP basis and cut our target multiple to 6x/2x on FY21E Data/Voice EBITDA, given its slow earnings growth, allocation of Traditional and Growth EBITDA to other segments and continued high capex. Subsequently, we arrive at a TP of INR420 (prior: INR520) and maintain our Neutral stance. Additional monetization opportunity of TCOM’s surplus land parcel could provide an option value.