Skipper - Healthy Performance Continues; Transmission Capex Play

Skipper has delivered a strong performance in 1QFY18 as well with its net revenue growing by 39.6% YoY to Rs4.32bn led by healthy performance in Engineering Products and Infra Projects segments. Reported revenue includes sale of surplus inventory worth Rs500-550mn carried forward from 4QFY17, in absence of which revenue would have grown by 24% YoY. Looking ahead, we continue to believe that a sizeable order book, huge imminent opportunities and diversification into PVC business firmly place Skipper on higher growth trajectory. Notably, the stock has witnessed a sharp rally since our initiation report with BUY recommendation in Feb’17. Remaining positive on Skipper’s fundamentals, we reiterate our BUY recommendation on the stock with an upwardly revised Target Price of Rs254 (from Rs187 earlier).

Strong Engineering Volumes Lift Net Sales

Strong volume in Engineering Products segment led to revenue growth, while glitches relating to GST roll-out restricted revenue growth in Polymer segment. Revenue from Transmission business – which contributes 84% of Skipper’s overall sales – surged by 42.6% to Rs3.36bn. PVC business grew by just 1.9% YoY to Rs384mn, while revenue from Infra Projects business zoomed by 124.4% YoY on low base and faster completion of key projects.

EBITDA Margin at 11.9%; PAT up 51.7% YoY

Led by healthy execution, Skipper’s EBITDA and PAT surged 31.2% YoY and 51.7% YoY to Rs516mn and Rs160mn, respectively. Its overall EBITDA margin declined by 80bps YoY to 11.9% owing to higher commodity prices. Margin in Engineering Products, Polymer and Infra Projects segments declined by 100bps YoY, 100bps YoY and 130bps YoY to 13.4%, 9.3% and 12.5%, respectively.

Foray into Solar Structure Biz

The solar structures – ground-based module mounting, roof top mounting, module mounting accessories and seasonal tilt – will be manufactured at existing Uluberia plant. As per the Management, the required automated machineries have already been installed at the plant.

Outstanding Order Book at Rs26.4bn

The Company has secured new orders worth Rs3.57bn during Q1FY18 for transmission tower supply from PGCIL, Transmission Corporation of Telangana, UP Power Transmission Corporation  and other clients. Its outstanding order book stands at Rs26.4bn, which is 1.5x of FY17 revenue.

Outlook & Valuation

Looking ahead, we expect Skipper’s sales and PAT to witness 15.0% and 24.6% CAGR, respectively over FY17-FY19E, while RoCE is seen at 22.4% by FY19E. Given higher revenue visibility and huge imminent opportunities, we increase our target multiple to 15x FY19 earnings from 12x earlier. We reiterate our BUY recommendation on the stock with an upwardly revised Target Price of Rs254.

Central Depository Services - Predictable, Profitable Business

Central Depository Services’ (CDSL) business is characterised by a high degree of predictability and profitability. It earned >35% of revenue from annual issuer charges in FY17, which are likely to remain stable-to-growing irrespective of market conditions owing to certainty of earning custody charges and an ever increasing number of companies willing to enter the primary market. Further, IPO/Corporate Action Charges revenue witnessed 45% revenue CAGR through FY14-FY17. This revenue stream – linked to overall health of the capital market and number of issuers – will drive corporate action volumes such as bonus share credit and stock-split. CDSL’s total revenue clocked a healthy 18.8% CAGR over FY14-FY17.

Growing Demat Market Share owing to Lower Cost for DPs

CDSL has steadily gained market share in its core business vis-à-vis its lone competitor, NSDL. It has enjoyed higher incremental market share over NSDL for 4 successive years on low operating cost, net worth criteria and technology investment. Its net worth and deposit criteria are Rs20mn and Rs0.5mn, respectively vs. NSDL’s Rs30mn and Rs1mn, respectively. In terms of technology, CDSL has a centralised server, and brokers can purchase a lap top and link it to the server, enabling plug-and-play. On the other hand, brokers registered with NSDL have to invest in a server to interact with NSDL’s IT systems, which is an expensive proposition. CDSL had 12.3mn BO accounts as of FY17-end (vs. 15.6mn for NSDL), clocking ~12% CAGR through FY14-FY17.

New Avenues for Growth – Corporates, KYC, Insurance, Academic Depository

CDSL has invested in new business initiatives to drive growth. Through subsidiary CDSL Ventures (CVL), it provides KYC services to capital market intermediaries (>15mn KYC records, ~67% share as of Apr’17). CVL is also one of the two depositories for National Academic Depository (NAD). Another subsidiary, CDSL Insurance offers repository services for e-insurance policies issued by insurance companies (>325,000 e-insurance accounts, >66,000 electronic policies as at Apr’17). CDSL also provides services like e-voting to corporates, online drafting solutions for succession wills through Myeasiwill (>1,000 registrations as at end-Apr’17), e-Notices, Corporate Bond Repository, KYC search assistance for Aadhaar holders, GST Suvidha Provider and Warehouse Repository (through its subsidiary, CDSL Commodity Repository, incorporated in Mar’17).

Outlook & Valuation

At the CMP, the stock trades at a PE of 29.5x/26.4x FY19E/FY20E EPS, respectively. In light of a highly predictable revenue model, good health of capital markets, strong position and market leadership based on incremental BO accounts, high profitability, steady cash flow and newer business initiatives, we believe the stock is a very good long-term investment. We initiate coverage on CDSL with a BUY recommendation and Target Price of Rs450, which implies a PE of 35x average of FY19E and FY20E EPS.

ICICI Lombard - IPO Note - Long-term Bet on Strong Growth Prospects

ICICI Lombard General Insurance Company (ICICI Lombard) – a JV between ICICI Bank and Canada-based Fairfax Financial – is the largest private sector non-life insurer in India in terms of Gross Direct Premium Income (GDPI), which stood at Rs107.3bn in FY17 compared to Rs80.9bn in FY16. It offers a wide range of insurance products i.e. Motor, Health, Crop/Weather, Fire, Personal Accident, Marine and liability etc. Among all non-life insurance companies in India, its market share on GDPI basis stood at 8.4%, while amongst 23 private sector life insurers in India, its market share stood at 18% in FY17. With diverse range of products and services, it is well-placed to compete with public sector and major private sector counterparts. 

ICICI Lombard is coming out with an Initial Public Offering (IPO) consisting of 86.2mn shares through 100% book building route. The Price Band of the IPO has been fixed in the range of Rs651-661 per share.  Not more than 47.5% of the Issue will be allocated to Qualified Institutional Buyers, including 5% to MFs. Moreover, not less than 14.3% of the IPO is available for non-institutional bidders, while the rest 38.2% is available for retail investors. The IPO will open for subscription on Monday, September 15, 2017 and will close on Wednesday, September 19, 2017. 

Key Investment Arguments

• Successfully maintaining leadership position among private non-life insurers on GDPI basis.

• Pan-India presence with well-diversified multi-channel product distribution network to access to different customer segments and reduce concentration risk.

• Wide range of insurance products in Motor, Health & Personal Accident, Crop/Weather, Fire, Marine and Engineering space, which contributed 42.3%, 18.9%, 20.1%, 6.9%, 3.2% and 2.1%, respectively to its GDPI in FY17.  

• Robust risk selection and management framework as the Company’s share of losses incurred from catastrophic event since FY13 has been in the range of 1.5%-6.2% vs. average market share of 7.8% by GDPI during the same time period.

Outlook & Valuation

ICICI Lombard has delivered a strong growth in GDPI and has been successfully maintaining its leadership position amongst the private sector non-life insurers through various cycles of industry evolution since FY04. Besides, a healthy RoE in excess of 17%, its GDPI witnessed 26.7% CAGR through FY15-17 vs. 22.8% for Indian non-life insurance industry. Looking ahead, we expect ICICI Lombard to deliver strong performance on the back of lower general insurance penetration in India. At higher price band of Rs661, the Issue is priced at 35x 1QFY18 annualised earnings, which provides a healthy investment opportunity for the long-term investors. Thus, we recommend SUBSCRIBE to the Issue.

Goodluck India - Decent Quarterly Show; Headwinds to Persist in the Short-term

oodluck India (GIL) has reported a reasonably decent operating performance in 1QFY18, marginally topping our revenue and EBITDA estimates. Its consolidated net revenues increased by 16% YoY and 14% QoQ to Rs3.3bn (vs. our estimate of Rs3.2bn), while EBITDA surged by 52% QoQ (down 4% YoY) to Rs265mn (vs. our estimate Rs234mn). Notably, steep rise in the prices of key inputs i.e. steel and zinc led to YoY decline in EBITDA. Though EBITDA margin contracted by 168bps YoY, it increased by 200bps QoQ to 7.9%. As per the Management, GIL could not pass on the entire rise in key input prices during the quarter, as some contracts were short term in nature. With the capitalisation of new assets, GIL’s interest and depreciation cost grew both on YoY and QoQ basis, which along with higher tax outgo (tax write-back in 4QFY17) led to 50% YoY and 54% QoQ decline in PAT to Rs38mn, missing our estimate of Rs80mn. Revenue from Pipe/Steel/Structures segment grew by 33% YoY and 27% QoQ to Rs3.34bn, while the revenue from Engineered goods fell by 17% YoY (flat sequentially) largely due to decline in the forging division. Notwithstanding these short-term headwinds, we continue to believe that GIL is well-poised to cash in on the imminent opportunities in key areas like infrastructure, railways and solar power sectors, going forward. We believe that shifting of focus to value-added products would improve profitability, while improved utilisation would boost revenue and stability in the prices of key inputs would aid margin growth. We reiterate our BUY recommendation on the stock with an unrevised Target Price of Rs114.

Volatility in Key Input Prices Continues to Drag Performance

Despite 16% YoY rise in revenues, GIL’s EBITDA fell by 4% YoY due to a steep increase in the prices of key inputs (as a percentage of sales) which rose by 20% YoY to reach 73.4% of sales compared to 70.8% in 1QFY17. As per the Management, GST roll-out resulted in lower off-take in Jun’17 and the trend was felt in Jul’17 & Aug’17 as well, which would have detrimental effect in 2QFY18E. However, with the normalisation in the steel prices and expected pick-up in volume, we expect a better performance in 2HFY18E.

Outlook & Valuation

Looking ahead, we believe that stability in the prices of key inputs would aid GIL to sustain margin growth. We expect GIL to cash in on the imminent opportunities in Engineering/Structure & Precision Tubes segments led by increased thrust of government towards infrastructure development. We reiterate our BUY recommendation on the stock with an unrevised Target Price of Rs114.