We
continue to maintain our positive stance on the stock mainly on account
of:
(a) RCL continues to remain one of the lowest cost producers; (b)
consistent de-leveraging of balance sheet started paying off; (c) strong
brand equity; (d) expected improvement in utilisation; (e) capacity of
satellite GUs to be increased from 4mnT to 7.1mnT; and (f) better return
ratio vs. industry. Hence, we reiterate our BUY recommendation on the stock with a revised Target Price of Rs810 (12.5x FY19 EBITDA).
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Apollo Tyres - 2QFY18 Result Update
-
Soft Performance Though Indian Operation Improves
Apollo
Tyres (ATL) has reported a dismal performance in 2QFY18 mainly led by
subdued European business, which continued to witness pressure due to
absence of volume up-tick and additional start-up cost for Hungarian
operation. However, Indian operations reported a decent performance with
18% YoY revenue growth mainly supported by 10% YoY volume growth and 8%
YoY up-tick in realisation. While consolidated sales grew by ~12% YoY
and ~5% QoQ to Rs34.2bn broadly in-line with the estimate, a significant
spike in raw material cost – as a percentage of sales – led to 27% YoY
decline in EBITDA to Rs3.1bn. Raw material cost – as a percentage of
sales –
stood at 58% in 2QFY18 vs. 52% in 2QFY17. Notably, there has been a
moderate sequential correction in raw material cost. Subdued operating
performance along with higher interest and depreciation cost led to 46%
YoY de-growth (+59% QoQ) in PAT to Rs1.4bn. We cut earnings estimate by
32% and 13% for FY18E and FY19E, respectively mainly to factor in higher
raw material cost and subdued operational performance. Nonetheless, we
expect ATL to witness decent traction, going forward as the Company is
investing more in diversified and rapid growth areas. Thus, we maintain our BUY recommendation on
the stock with a downwardly revised Target Price of Rs305 (from Rs350 earlier).
Decent Domestic Volume Aided Revenue Growth
Consolidated
revenue grew by 12% YoY to Rs34.2bn mainly aided by 18% revenue
growth in India operations, which was primarily supported by 10% volume
growth and 8% jump average realisation. Strong domestic volume growth
can be attributed to stellar 40% volume growth in OEM segment, while
volume growth from Replacement segment was in mid single digit. OEM
volume growth was driven by a sudden jump in auto volume post the switch
in emission standard to BS-IV from BS-III and transient impact of GST.
Operational Performance Marred by European Biz
ATL’s
Indian operations performed satisfactorily during the quarter.
However, subdued operational performance of European operations due to
start-up cost of Hungarian operations and higher cost continued to drag
its consolidated operating performance. Its consolidated EBITDA declined
by 27% YoY (+23% QoQ) to Rs3.1bn. Notably, sequential decline in input
prices led to QoQ improvement in EBITDA. EBITDA margin stood at 8.9%
compared to 13.7% and 7.6% in 2QFY17 and 1QFY18, respectively.
Outlook & Valuation
Despite
dismal quarterly performance led by continued pressure witnessed in
European operations, we envisage ATL’s performance to improve, going
forward owing to steady stabilisation in Hungarian operations and
shifting to OEM segment. At CMP, the stock trades at 21.1x and 11.1x
FY18E and FY19E earnings, respectively which appear to be attractive. We maintain our BUY recommendation on the stock with a downwardly revised Target Price of Rs305 (12x June’19 EPS).
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Ajanta Pharma - 2QFY18 Result
Update - Growth Momentum to Continue in Domestic Biz; Maintain BUY
Led
by recovery in domestic formulations business and robust performance in
African business, Ajanta Pharma (AJP) has delivered a
better-than-expected performance in 2QFY18. Its revenues, EBITDA and PAT
stood at Rs 5.4bn (vs. our estimate of Rs 4.8bn), Rs 1.8bn (vs. our
estimate of Rs 1.4bn) and Rs 1.3bn (vs. our estimate of Rs 1.0bn),
respectively. EBITDA margin at 34.0% exceeded our estimate of 29.0% led
by better product-mix and recovery in domestic business. Notably, AJP’s
US sales dipped 63% YoY to Rs260mn primarily owing to price erosion in
base business product portfolio following channel consolidation.
Notably, AJP plans to file 12-15 ANDAs with the US FDA in FY18. Domestic
business grew by 12.7% YoY to Rs1.8bn
owing to inventory re-stocking post GST roll-out and new product
launches. Its African business surged by 24.6% YoY on account of strong
growth in institutional anti-malaria business. We expect AJP to sustain
growth momentum owing to new product launches in domestic market and
likely healthy exports post US FDA clearance to its Dahej unit. We maintain our BUY recommendation on the stock with a Target Price of Rs1,500, valuing the stock at 25x FY19 EPS of Rs60.
Key Quarterly Highlights
Domestic (34% of Sales) Biz: Above
industry growth
in domestic business (12% YoY vs. IPM growth of 4%; source IMS MAT
Sept’17) was led by growth in therapies i.e. CVS (16% YoY vs. IPM 6%),
ophthalmology (16% YoY vs. IPM 8%), and pain management (10% YoY vs. IPM
3%). We expect steady growth momentum to continue, going forward as
well driven by improved sales force productivity and new product
launches (15-20 products per year). We envisage AJP’s domestic
formulation business to report a 12.5% CAGR over FY17-19E.
African (41% of Sales) & US (5% of Sales) Biz: AJP’s
Africa sales surged by 24.6% YoY on the back of strong growth in
institutional anti-malaria business (Rs1.3bn) during the quarter.
Looking ahead, we expect AJP’s Africa business to witness a muted growth
over FY17-19E owing to likely reduction in institutional
anti-malaria business. While its US sales declined in 2QFY18 primarily
due to price erosion in base business product portfolio, we expect a
gradual improvement on account of new launches from recently approved
products.
Outlook & Valuation
We
believe that AJP’s long-term fundamentals continue to remain healthy
driven by strong traction in the US business (post US FDA clearance to
its Dahej unit) and above industry growth in domestic business. Its
Sales, EBITDA and PAT witnessed 24%, 37% and 44% CAGR, respectively
through FY12-17 owing to strong
growth in domestic formulation business (22% CAGR) and healthy growth in
exports (21% CAGR). We expect AJP’s overall sales to clock 9% CAGR over
FY17-19E (with EBITDA margin at 30-31%), while return ratios to remain
healthy (RoCE & RoE seen at 30% & 23%, respectively in FY19E).
We believe the current valuation (PE multiple of 24.5x FY18E and 20.2x
FY19E EPS) offers an attractive entry point. We maintain our BUY recommendation on the stock with a Target Price of Rs1,500, valuing the stock at 25x FY19E EPS of Rs60.
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HDFC – 2QFY18 Result Update - Disbursement
Growth Continues to Remain Strong; Maintain BUY
Led
by robust growth in both individual and non-individual segments, HDFC
has reported a strong growth in loan disbursement during 2QFY18. Its
overall loan book growth remained healthy at 18% YoY led by continued
pick-up in non-individual loan book (+24.3% YoY and +2.6% QoQ) owing to
strong pick-up in lease rental discounting and
construction financing. Sustained pick-up in growth of high-margin
non-individual loan is encouraging, as the share of corporate loan in
overall loan book increased to 31.1% in Sept’17 from 29.7% in Sept’16.
Reported profit also grew by 15.0% YoY and 35.1% QoQ to Rs21bn led by
strong growth in core operating income along with higher dividend and
trading income. However, YoY numbers are not comparable, as they include
one-time capital gain from sale of stake in HDFC Ergo. Adjusted for the
same, its PAT grew by a healthy 14% YoY.
Key Management Commentary
- Individual
disbursement growth trajectory began normalising in 1HFY18 after sharp
decline in 2HFY17 due to demonetisation, which the Management expects to
improve further in 2HFY18. Individual loan contributed 79% to
incremental growth in
HDFC’s loan book in 2QFY18 compared to 64% in 1QFY18 and 70% in 1HFY18.
- Individual loan book – before adjusting for loans sold in preceding 12 months – stood at 23% in 2QFY18 (15% net loans sold).
- Following a 9bps decline in 1QFY18, retail spread stabilised in 2QFY18 led by
decline in BPLR, while overall spread remained stable at 2.29% in the quarter.
- Gross
NPA in non-individual segment stabilised in 2QFY18 post sharp increase
in 1QFY18, as the Company recognised one of the accounts referred to
NCLT/IBC by the RBI as an NPA.
- HDFC’s
life insurance
subsidiary has launched its IPO at the valuation of Rs582bn and the
Company will receive ~Rs52bn (adjusting for IPO expenses) from Offer for
Sale (OFS). Post the Issue, HDFC will hold 51.7% stake in HDFC Life.
- The
Management has guided that part of the profit from sale of take in HDFC
Life will be used to further increase the standard assets provisioning
of the Company.
Outlook & Valuation
Visible
sign of pick-up in demand for mortgage loan led by improving
affordability, attractive incentive from PMAY scheme and introduction of
RERA augur well for sustained growth in loan book for HDFC over next
3-5 years. Looking ahead,
we expect further improvement in HDFC’s operating performance on the
back of healthy growth in loan book and NII. Further, the performance of
its various financial business subsidiaries/associates has improved
substantially over the last few quarters. We reiterate our BUY recommendation on the stock with an unrevised SOTP-based Target Price of Rs1,995.
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JSW Steel - 2QFY18 Result
Update - In-line Performance; Margins to Remain Strong
JSW
Steel (JSTL) has delivered an in-line performance in 2QFY18 with its
standalone sales volume increasing by 2% YoY and 11.7% QoQ to 3.92mnT
vs. our estimate of 3.95 mnT. Notably, JSTL recorded the highest 2Q
sales volume.
However, NSR fell by 3.2% QoQ to Rs38,153/tonne vs. our estimate of
Rs40,879/tonne, which the Management attributed to lower realisation in
coated business led by pressure from cheaper imports. EBITDA surged by
33.2% QoQ (+7.7% YoY) to Rs29.3bn vs. our estimate of Rs29.6bn, while
EBITDA/tonne grew by a healthy 19.2% QoQ (+5.5% YoY) to Rs7,467 vs. our
estimate Rs7,500. EBITDA margin expanded by 369bps QoQ (-264bps YoY) to
19.6% owing to lower overall operational cost especially on raw material
front. Adjusted PAT surged by 26% YoY (+102% QoQ) to Rs8.45bn vs. our
estimate of Rs7.43bn, largely
due to higher-than-estimated other income and lower depreciation cost.
Looking ahead, we expect JSTL’s EBITDA/tonne to improve owing to higher
steel prices and stable input cost. Hence, we maintain our HOLD recommendation on the stock with a revised SOTP-based Target Price of Rs282 (from Rs221 earlier).
EBITDA/tonne Posts a Smart Recovery
JSTL
has delivered a healthy performance despite a sequential dip in
realisation. Though the coking coal prices fell by ~US$15/tonne QoQ
during the quarter, the same is expected to increase by ~US$5-10/tonne
in 3QFY18E. It must be noted
that the same increased to ~US$300/tonne in Apr’17 after averaging at
US$220/tonne in 4QFY17, US$170/tonne in 3QFY17 and ~US$105/tonne in
2QFY17. Further, though the prices fell to US$146/tonne in Jun’17, it
again rose in Jul’17. Meanwhile, the iron ore prices another key raw
material fell by ~Rs200/tonne QoQ in 2QFY18. Hence, the per tonne raw
material cost declined by 7% QoQ to Rs22,395/tonne. Thus all costs
declined in the range of 2.9-17.3% QoQ due to operational leverage.
Outlook & Valuation
We
expect JSTL’s margins to inch-up, going forward as steel prices
continue
to remain firm in global steel markets driven by a surprise demand spurt
in China. Moreover, the steel demand in domestic markets is also
expected to be strong, which would drive the domestic steel prices
further. Despite these positives, the valuations seem to be prohibitive
especially following the sharp run-up in the stock price. However, we
believe that JSTL continues to be the best bet in domestic steel space
due to efficient operations and lean cost structure. We now value JSTL
at 7x EBITDA (from 6x earlier) to factor in the positive changing
environment. Thus, we maintain our
HOLD recommendation on the stock with a revised SOTP-based Target Price of Rs282 (from Rs221 earlier).
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Sagar Cements - 2QFY18 Result Update - Robust Performance Continues
Sagar
Cements (SCL) continued to report a healthy set of numbers in 2QFY18
beating our estimates mainly due to better-than-expected operational
performance. Its reported EBITDA surged by 33% YoY to Rs384mn vs. our
estimate of Rs329mn. A significant reduction in other expenditures/tonne
(-22% YoY and -7% QoQ) and a lower-than-expected raw material prices
led to this outperformance. However, surge in fuel and freight cost led
to 4% YoY rise in operating cost/tonne to Rs3,288. EBITDA/tonne came in
at Rs643 compared to Rs565 and
Rs666 in 2QFY17 and 1QFY18, respectively. Net profit stood at Rs85mn as
against Rs0.4mn and Rs100mn reported in 2QFY17 and 1QFY18, respectively.
We continue to believe that likely improvement in operating synergies
from Bayyavaram GU (Visakhapatnam) in terms of change in product-mix,
saving in lead distance and improvement in conversion ratio along with
likely savings in power cost from WHRS will aid SCL to improve its
operating performance in ensuing years. Trimming down our EBITDA estimate by 4% and 3% for FY18E and FY19E, respectively to factor in realisation drop and higher fuel
cost, we reiterate our BUY recommendation on the stock with a revised Target Price of Rs1,000 (from Rs1,050 earlier).
Strong Volume Aided Revenue Growth
In-line
with our estimate, SCL’s net revenue grew by a strong 23% YoY to
Rs2.4bn mainly due to a stellar 16%
YoY sales volume growth to 0.59mnT. A stable demand environment in
AP/Telangana supported demand. Notably, average NCR stood at Rs3,908
(+5.6% YoY and -2.9% QoQ). Looking ahead, we expect sales volume to be
at 2.6mnT and 3.1mnT for FY18E and FY19E, respectively.
Healthy Operational Performance
A
meaningful reduction in other expenditures and lower-than-expected raw
material prices enabled SCL to report a better-than-expected operational
performance amid spike in fuel and freight cost. EBITDA grew by 33% YoY
to Rs384mn, while EBITDA margin expanded by 122bps YoY to 16.3%.
However, surge in fuel and freight expenditures led to 4% YoY rise in
operating cost/tonne to Rs3,288.
Outlook & Valuation
We
continue to believe that SCL is moving in right direction in its key
markets with potential of further improvement in operating efficiencies
by means of newly commissioned WHRS, new Railway Lines and CPPs. With
successful completion of QIP, SCL is currently focused on completing
ongoing expansion, which will aid SCL to enhance its market reach and
operating synergies, going forward. We maintain our BUY
recommendation on the stock with a revised Target Price of Rs1,000 (9x FY19 EBITDA).
