1. ONGC: EBITDA in line with est., Gas production disappointing (ONGC IN, Mkt Cap USD23.7b, CMP INR136, TP INR190, 40% Upside, Buy)

–     2QFY20 net sales were down 12% YoY to INR245b (in-line), primarily due to lower crude oil realization at USD60.3/bbl (v/s USD73.1/bbl in 2QFY19).
–       EBIDTA was down 16% YoY to INR133b (in-line). During the quarter, another expenditure was at USD6.4/boe (v/s USD7.1/boe in 2QFY19).
–       DD&A was at USD10/bbl in 2QFY20 v/s 7.6/bbl in 2QFY19. The dry well cost was 21% higher YoY due to write-backs, majorly from Mumbai and KG offshores.
–       PBT was 2% higher than est. at INR90.4b (-29% YoY), with higher other income offsetting higher depreciation and interest cost. Company is continuing with the old tax rate; for 2QFY20, tax rate stood at 30.7% (v/s est. 22.5%). Higher tax led to PAT miss of 8% at INR63b (-24% YoY).
For 1HFY20, EBITDA was 7% lower YoY to INR284b. Depreciation was 26% higher YoY to INR124b, resulting in PBT declining 19% YoY to INR181b. PAT stood at INR122b (-16% YoY).

Operational details:

Production: Total production stood at 12.1mmtoe (-3% YoY).
–       Crude oil production was 4% lower YoY at 5.8mmt.
–       Gas production was down 2% YoY at 6.3bcm.
Sales: Total sales stood at 10.32mmtoe (-1% YoY).
–       Crude sold was 3% higher than our estimate at 5.4mmt (flat YoY).
–       Gas sold was 6% lower than the estimate at 4.9bcm (-3% YoY).
–       VAP sold was 9% lower than our estimate at 850tmt (-7% YoY).
Valuation and view
–       We expect crude prices to remain stable ~USD60-70/bbl, fading the fear of government subsidies.
–       We estimate domestic crude oil production at 23.7mmt/24mmt for FY20/FY21, amid new addition of oil, which should majorly help (a) offset depletion from old fields, and (b) maintain stable oil production for ONGC.
–       Our domestic gas production estimates is at 25.9bcm/30.6bcm for FY20/FY21 coupled with production coming online from KG-DWN98/2. Our assumptions are conservative compared to the company’s guidance due to expected delays in execution amidst difficult topology for key projects (like KG-DWN-98/2).
–       ONGC’s (standalone) capex guidance stands at INR320b/INR350b for FY20/FY21.
–       The stock is currently trading at ~50% discount to its 10-year long-term P/E average at 4.9x, with an attractive dividend yield of ~6.3-6.7% and PBV of 0.7x for both FY20/FY21.
–       The stock is trading at 5.0x FY21E consolidated EPS of INR27.3. We value the company at 8x FY21 standalone EPS of INR19.9 (excluding other income) adding the value of investments; we reiterate Buy rating with TP of INR190.

  1. BRITANNIA INDUSTRIES: Largely in-line; weak near-term outlook, expensive valuations prompt rating downgrade
(BRIT IN, Mkt Cap USD10.7b, CMP INR3195, TP INR3458, 8% Upside, Downgrade to Neutral)
–       At the consol. level, BRIT delivered growth of 6.2% YoY in sales (INR30.5b v/s est. of INR31b), 8.3% YoY in EBITDA (INR4.9b v/s est. of INR4.8b), 9% YoY in PBT (INR5b v/s est. of INR4.8b) and 33.2% YoY in PAT (INR4b v/s est. of INR3.2b) in 2QFY20. Standalone sales were up 7.1% YoY to INR29b, with base business volume growth of ~3% YoY (our estimate: +4%).
–       Consol. gross margin expanded 10bp YoY to 40.2%. EBITDA margin expanded 30bp YoY to 16.1% (highest-ever) led by lower other expenses (-50bp YoY), partly offset by higher staff cost (+30bp YoY).
–       For 1HFY20, consol. sales/EBITDA/PAT grew 6.2%/5.1%/19% YoY.
–       Conference call highlights: (1) Market share gap versus the second-largest player continues expanding in YTDFY20. (2) Opportunistic buying of RM led to a sharp increase in overall inventory levels. (3) Inflation outlook remains modest. Current 3% inflation may go to 4-4.5%.
–       Valuation and view: BRIT’s performance was largely in line with low expectations. The company is performing well in terms of gaining market share in the biscuits category and diversifying its portfolio. However, earnings growth is likely to be muted (PBT CAGR of 8.8% over FY19-21), as high-velocity categories like biscuits (over 75% of BRIT sales) take time to recover amidst a weak demand environment. The stock has delivered nearly 11.1x returns (45% CAGR) since our upgrade to Buy in May’13 and is up by 30% over the past three months. While the massive opportunity in the Indian food space and BRIT’s efforts on distribution expansion/product development provide comfort on the longer-term prospects, we believe that near-term valuations at 49x FY21E EPS leave limited room for upside (TP: 3,458, 50x Sep’21 EPS). Against this backdrop, we downgrade our rating to Neutral.

  1. PAGE INDUSTRIES: Healthy volumes but margins and working capital disappoint
(PAG IN, Mkt Cap USD3.7b, CMP INR23724, TP INR24765, 5% Upside, Neutral)
–       2QFY20 sales grew 12.3% YoY to INR7.7b (v/s est. INR7.4b). Overall volume grew 9.1% YoY (v/s est. 2%). EBITDA was up 4.4% to INR1.5b (v/s est. INR1.6b); PBT declined 7% to INR1.3b (v/s est. INR1.4b) and Adj. PAT was up 23.6% to INR1.1b (v/s est. INR941m).
–       Gross margin was down 180bp YoY to 56%. EBITDA margin declined a sharp 150bp YoY to 19.2%; employee costs as % of sales (up 10bp YoY) was offset by other expenses as % of sales (down 50bp YoY).
–       1HFY20 revenue/ EBITDA/ PAT grew 6.9%/1.1%/3.7% YoY.
–       Balance sheet performance: Working capital has worsened YoY. Inventory was up 21% YoY and was down 4% over Mar’19, debtors increased 18% YoY and were up 11% over Mar’19, and creditors were down 33% YoY and declined 11% over Mar’19. Therefore, NWC was up 36% YoY and was flat over Mar’19. Thus, the sharp improvement in WC expected after the 1QFY20 results have not panned out.
–       Conference call highlights: (1) Expansion of product range and distribution, as well as investments in sales and IT personnel, have pushed up sales in 2QFY20. (2) Festive season footfalls also aided sales growth. (3) Liquidity issues in the channel remain. (4) Overall footfalls have not recovered.
–       Valuation and view: The positive surprise on the volume front was negated by disappointments in EBITDA margin and net working capital, leading to ~3.5% decline in FY20/FY21 EPS. Despite assuming 15% sales growth and 20% PAT growth in FY21, the stock trades at expensive multiples of 51.1x FY21 EPS. There is no clarity on sustained volumes and earnings recovery; while PAT growth is a long way off the 31% EPS CAGR posted between FY08-18. We maintain Neutral with a target price of INR24,765 (45x Sep’21 EPS).

  1. SAIL: Operational miss on lower realization, higher cost
(SAIL IN, Mkt Cap USD2.1b, CMP INR36, TP INR34, 6% Downside, Neutral)
EBITDA was down 27% QoQ at INR11.6b (our estimate: INR6b) in 2QFY20 due to a 2% QoQ decline in realization to INR44,883/t (our estimate: INR42,652). As a result, EBITDA/ton declined 24% QoQ to INR3,684. Sales volumes were also down 3% QoQ to 3.1mt (our estimate: 3.2mt). SAIL reported a loss of INR5.2b at the PBT level and INR3.4b at the PAT level (our estimate: loss of INR10b).
–       Revenue was down 5% QoQ at INR141b (our estimate: INR136b) due to slightly lower volumes and realizations.
–       Reported EBITDA declined 27% QoQ to INR11.6b, which included INR4.3b of revenue booked on higher price finalized for prior-period sales of rails to the Indian Railways. Excluding this benefit, EBITDA was down 54% QoQ to INR7.3b (our estimate: INR6b).
–       Sales volumes declined 3% QoQ to 3.1mt due to subdued market conditions. Crude steel production was about flat QoQ at 3.9mt. We expect volumes to recover in 2HFY20 as demand improves.
–       Product spreads were flat QoQ at INR24,712. Other expenses (ex-staff cost) per ton, however, were significantly higher at INR13,080 (+7.5% QoQ), which impacted the EBITDA margin.
–       For 1HFY20, revenue/EBITDA was down 11%/45% YoY at INR289/INR27b, while post-tax loss was at INR2.7b. For 2QFY20, we estimate revenue/EBITDA to decline 4%/39% YoY to INR330/INR29b.
–       In 1HFY20, cash flow from operations was -INR21.1b due to an increase in working capital (higher inventories due to weak demand). FCF was at -INR42b. Reported debt stood at INR516b.
Weak steel prices to offset the benefit of volume ramp-up
–       We expect sales volumes CAGR of ~8% to 16mt over FY19-21 as demand improves and the company ramps up capacity. Employee cost remains under control. Headcount has been declining led by natural attrition and VRS.
–       Operating leverage benefits from the aforementioned measures though would be more than offset by weak steel prices. SAIL’s average realization in Oct’19 is down by ~INR2,000/t from its 2Q average, which will impact margins. We cut our FY20/21 EBITDA estimate by 28%/10% due to lower realization. We value the stock at 6.5x FY21E EV/EVITDA at INR34/sh. Maintain Neutral.

  1. ENDURANCE TECHNOLOGIES: Below est.; Pressure in India; EU mixed bag; New order wins continue
(ENDU IN, Mkt Cap USD2.1b, CMP INR1072, TP INR1240, 16% Upside, Buy)
–       Consol. net revenues declined 8.5% YoY to ~INR17.7b (v/s est. ~INR19.8b). Lower tax rates boosted adj. PAT to ~INR1.7b (v/s est. 1.8b), a growth of ~35% YoY. 1HFY20 revenue/EBITDA/PAT grew -4%/ 6%/21% YoY.
–       India business: S/A revenues declined 10% YoY to ~INR12.9b (v/s est. ~INR14.6b) v/s ~17% YoY decline in 2W industry volumes. EBITDA margins expanded ~230bp YoY to 15.2% (v/s est. 15.5%), but was slightly lower than est. as the gross margin beat was more than offset by higher impact of operating deleverage. Lower tax drove PAT growth of 44% YoY to INR1.37b (v/s est. INR1.5b).
–       EU business revenues declined ~5% to INR4.8b (v/s est. INR5.1b). In EUR terms, revenues were flat YoY as against industry volume growth of 2.3% as ENDU was impacted by a higher decline at FCA and Daimler due to diesel decline. EBITDA margins expanded 90bp YoY (+220bp QoQ) to 19.7% (v/s est. 17.3%), driven by mix improvement. Adj. PAT grew 6% to INR325m (v/s est. INR284m).
–       Key highlights from earnings call: (a) New business win of INR1.5b per annum in 2QFY20 (1HFY20 at INR3.4b) with RFQs of ~INR12.25b in hand. (b) New aluminium die-casting plant at Valam to start next month for servicing Kia, Hyundai and RE would contribute ~INR350m in 4QFY20. (c) Have won order for front-fork and 3W brakes (earlier had won 2W disc brakes order) from TVSL. (d) LoI from HMSI for disc brake for supply starting Apr’20. (e) For Bajaj Chetak, got orders for castings, suspension and braking. Content in e-scooter would be lower since no clutch/CVT would be required. (f) EU business has won EUR18.26m new business from VW, Fiat and Maserati.
–       Valuation and view: We have upgraded our EPS estimates by ~10% each for FY20/FY21 to factor in mix improvement as well as weaker volumes for both India and EU businesses. We expect the company to continue outperforming underlying 2W industry growth driven by new products/tech upgrade/customers, which will also aid margin expansion. The stock trades at 25x/21.9x at FY20/FY21E consol. EPS. Maintain Buy with TP of IN1,240 (24x Sep’21 consol. EPS).

  1. GLENMARK PHARMA: Traction improves in US/LATAM segment
(GNP IN, Mkt Cap USD1.2b, CMP INR301, TP INR325, 8% Upside, Neutral)
–       India/RoW drive revenue growth: Sales were up 9% YoY to INR27.6b (our estimate: INR25.2b) in 2QFY20. Growth was primarily driven by India business (+15.2% YoY to INR9b; 32% of sales), RoW (+14.3% YoY to INR3.5b; 13% of sales) and LATAM (+23.1% YoY to INR1.2b; 4% of sales). Europe (+9.3% YoY to INR2.8b; 10% of sales) and API (+7.4% YoY to INR2.7b; 10% of sales) also contributed to the momentum. The US (31% of sales) exhibited moderate growth of 4.6% YoY to INR8.5b due to continued price erosion.
–       Mix change/bonus incentives impact profitability: Gross margin (GM) shrank 100bp YoY to 64.3% due to the change in the product mix. EBITDA margin contracted at a higher rate of 130bp YoY to 14.4% (our estimate: 14.7%) due to a lower GM and higher staff cost (+90bp YoY), partly offset by lower other expenses (-70bp YoY). EBITDA was flat YoY at INR4b (our estimate: INR3.7b). Adjusting for forex gain (INR780m), PAT was up 7% YoY at INR2b (our estimate: INR1.7b) led by a lower tax rate.
–       Concall highlights: (1) Strong traction in Remogliflozin for GNP in India. The company is also targeting various line extensions over next one year. (2) GNP expects a sustainable US quarterly sales run-rate on the back of new launches and limited erosion in Mupirocin cream. (3) GNP guided for 10-15% YoY growth in ROW markets on an annualized basis. The company expects much better growth in FY21, led by addition of products and tender business. (4) Monroe facility would be commercialized from FY21. (5) R&D spend is expected to be flat on a YoY basis for FY20.
–       Valuation view: We tweak our EPS estimate for FY20/21 (+1%/2%) to INR24.2/INR28.5 to factor in better execution in US generics, DF and ROW markets. We continue valuing GNP at 12x 12M forward earnings to arrive at a target price of INR325. While the financial performance for the quarter has been better than expectations, a meaningful improvement in the return ratios is yet to be seen. Maintain Neutral.

  1. AEGIS LOGISTICS: Volume growth across
(AGIS IN, Mkt Cap USD0.8b, CMP INR175, TP INR243, 39% Upside, Buy)
–       2QFY20 revenue came in 10% lower than est. at INR18.2b (+27% YoY), led by 10% lower-than-expected gas business revenue.
–       Company has issued ESOPs of INR1.5b, which led to EBITDA loss of INR0.3b (v/s gain of INR0.9b in 2QFY19). Adjusting for the ESOPs, EBITDA was higher than est. by 10% at INR1.2b.
–       Company has also taken INR20m provision on commission to managing directors (totaling INR40m for 1HFY20) in other expenses for the quarter.
–       PBT for the quarter clocked in loss of INR0.5b (v/s gain of INR0.7 in 2QFY19). Adj. PBT for ESOPs stood at INR1b (12% above est.).
–       PAT loss was at INR0.4b (v/s est. gain of INR0.7b; gain of INR0.5 in 2QFY19).
–       1HFY20: Revenue was up 54% YoY to INR37.7b. Due to issuance of ESOPs in 2QFY20, reported EBITDA was 58% lower YoY to INR0.7b (adj. EBITDA for ESOPs was up 28% YoY to INR2.2b).
–       Liquids EBITDA increased 55% YoY to INR325m in the quarter owing to an improved utilization rate (now at 100%) at Kandla. Gas EBITDA was up 24% YoY at INR995m.
–       Logistics volumes rose 13% YoY to 751kmt, after BPCL resumed stalled volume off-take, due to lack of approval renewals at Haldia (in 1QFY20).
–       Sourcing volumes were at 542kmt (+101% YoY).
–       Distribution volumes increased 46% YoY to 41kmt, driven by strong dealer distribution push in the South and the North-East. Further boost to volumes are expected to be led by the company’s plan to distribute gas cylinders in the north-eastern parts of India from Haldia terminal.
–       Autogas volumes rose 13% YoY to 7.4kmt due to better economies. AGIS operates 114 stations and plans to take this number to ~120 by end-FY20.


Valuation and view: AGIS has several ongoing projects that are likely to support future growth; also, lack of competition may boost project utilization.
–       Company has announced a new 12,000KL liquid capacity at Haldia (with capex of INR100m), taking the total capacity to 156,000KL at Haldia.
–       Expansion of liquid capacity (40,000KL) at Kandla port is likely to be commissioned in 2QFY20. The entire capacity is already tied up (pre-sold).
–       Uran-Chakan (1.2mt) pipeline is completed and is expected to boost volumes for Mumbai terminal from 3QFY20 (HPCL is planning to start moving LPG volumes to Uran). Even IOC has shown interest in using the pipeline.
–       Factoring in the loss reported by the company in 2QFY20 (owing to ESOP expense), FY20E EPS has been revised down by 36%, FY21 (unchanged).
–       AGIS trades at 14.6x FY21E EPS of INR12.0 and 9.1x FY21E EV/EBITDA. We have used the DCF methodology, with WACC of 11.8% and terminal growth of 3.0%, to arrive at a fair value of INR243/share (~39% upside). Maintain Buy.