Time to cherry-pick in the mid-cap space

By Morningstar |  29-03-18 | 

Director of fund research Kaustubh Belapurkar, speaks to ET NOW, on what fund managers are buying. 

Large-cap stocks seem be in favour. What is exactly happening in that space?

There has been a fair bit of activity in the large-cap space because money has been coming in from retail investors. A number of large-cap names that are coming up are unusual; such as Tata Steel, Power Grid, Bharat Petroleum, TCS and NTPC.

Idea Cellular came up purely because there was a Qualified Institutional Placement, or QIP, and lot of managers subscribed to it.

SBI continues to see buying despite the pressure on the prices post the Punjab National Bank scam.

The difference is that last year we saw mostly banks being bought but this year the flavour has changed. We are seeing a number of basic material companies, auto and technology stocks also being bought by managers.

Are you seeing large ticket exits for some of the large private corporate banks like ICICI Bank or Axis Bank because there has been a fair amount of price correction there too? 

The interesting thing is that there may have been some buying of public sector banks after the price correction.

SBI and BoB have been added a fair bit and even PNB has seen some minor additions. I think the fund managers need to see a substantial price correction to get into some of these counters. The likes of HDFC Bank and ICICI Bank, continue to see addition. Axis Bank is another name which saw a fair bit of addition.

There has been some profit booking on private banks like Kotak Mahindra, IndusInd and Yes Bank. Financials is not something that has been sold extensively.

Having said that, the enthusiasm with which the managers were buying in 2017 has definitely come off because they are already loaded up in positions and they want to look at other counters and sectors which are better buys at this point of time.

A correction played out in Metals globally and it rubbed off on us too after Trump announcing those tariff hikes. There is enough proof that the commodity is in an upcycle but are you seeing any capital protection within Metals? 

Interestingly, we are betting on domestic demand picking up in Metals. You can see additions in Tata Steel, Jindal Steel and Power, Hindalco and SAIL. Metals saw a fair bit of buying in the month of February too.

What is your sense when it comes to the connection between crude oil prices and some of the large-cap upstream and downstream oil and gas companies?

In the oil and gas segment, the interest has been limited over the last few quarters. We have not seen any large additions like the ones we saw last year.

Companies like BPCL and HPCL continue to see minor adding though nothing exceptional. IOC is one counter where we have actually seen selling in the previous month. I think it is a mixed bag. There is obviously a wait-and-watch situation to see around what level oil prices stabilise or if they continue to go up. I think managers will take some time before they take a call to get back more aggressively into these counters.

What is the kind of churn that you are seeing happening when it comes to large caps as a whole? 

Since large caps saw a fantastic run up in January, where clearly a lot of these stocks moved up, managers did not mind taking some profit off the table. Despite the correction in February, a healthy amount of money was made over the last year or two. The focus is now slowly shifting. You can see a lot of buying happening in power utilities, commodities, basic materials and cement. Banks are no longer the darling of the Street from a fund managers' perspective. That trend has definitely changed. 

What is the outlook on IT, based on the management commentary as well as the way the currency is shaping up? 

IT remains a very staggered play. I do not think too many of the midcap names really have got into much buying. The one name that pops up was Cyient that has seen some buying. But beyond that buying was prevelant in the large-cap IT space and Infosys particularly was that one counter that saw a lot of activity.

TCS has been playing a little bit of catch up now but Wipro still remains a flattish bet for manager.

So I think it is going to be a very stock specific play right now. It is not going to be broad-based buying from managers as yet.

What should be one's strategy when it comes to mid caps in the current market scenario? 

Fund managers have been rightfully watchful of the midcap space not just now but over the past year when valuations clearly ran up and there was lot of exuberance shown. So managers have been extremely selective in this space.

While large caps remain the largest pie of what managers are buying, select midcaps do see buying. Investors are seeing value in Triveni Turbines and Voltas. Managers will continue to cherry-pick midcaps as it is not going to be an all-in sort of trade. They will be very careful about where they allocate money on the mid-cap side.

Next Read :Equity markets are down.it is Time for action
Prevoius Read : IndusInd Bank - Q4FY18 Results Update - Operating Performance Remains Healthy

Equity markets are down.it is Time for action

By Dhirendra Kumar | Mar 23, 2018
Equity markets are down.Time for action
A market crash is a great time to buy tomorrow's stocks at yesterday's prices

Nine-and-a-half years ago, just when the global financial crisis was getting bad to worse on an almost daily basis, I had written the following editorial for the sixth anniversary issue of Mutual Fund Insight. At that point when I was writing this in early October, the Sensex was down by more than 40 per cent for the year and was plunging down further. It would eventually lose almost two-third of its value by March next year. And yet, it was clear even then that the decline was an investment opportunity.
 Here are some excerpts from the October 2008 editorial:
Six years ago, when I sat down to write this 'First Page' for the first time, the BSE Sensex was at about 3,000 points. More to the point, we were in a deep bear market. At that point, the Sensex was 50 per cent lower than it had been 18 months before that. Not just that, the Sensex was at a one-decade low since it had first reached 3,000 points on February 29, 1992. Things looked quite bleak back in 2002 and I must admit that many people thought that it was an act of foolishness to launch a mutual fund magazine. ... I've always thought that launching this magazine at a time when the investing world was at a low point was a good idea, just like investing at a low point is a good idea. 2002 was a bleak time, not just for the stock markets but for fixed-income investing, too. In fact, our first cover headline, 'Are the Good Times Gone?' referred not to stocks but to debt funds. However, as we all know, the good times in the stock markets were just beginning.
Today, as I write this column the stock market is in the grip of yet another bear market and the Sensex is less than half of what it was just a few months ago. However, it is still more than three times what it was six years ago. If you had put Rs 1 lakh in the Sensex at the time, it would grow to Rs 3.5 lakh today.
More importantly, a vast bulk of equity mutual funds have made fantastic profits for their investors over this period. Back in October 2002, there were just about 50 diversified equity funds in India. Till now, as many as 40 of those would have given you better returns than the Sensex. Rs 1 lakh invested in these would have been more than the Rs 3.5 lakh that you would have got from the Sensex.
A lot of people believe that the real moral of the last few months is that falling stock markets can harm your financial well-being. ...The real moral of this story is how well-off long-term investors fare better even after such crashes.
...The long-term investor's returns gets a big boost from market crashes. Crashes are a great opportunity for buying tomorrow's stocks at yesterday's prices. If you missed out in 2002, don't miss out now.
When I read that today, a 2008 editorial that is looking back at 2002, I think the key thing I said was that a market crash is a great time to buy tomorrow's stocks at yesterday's prices. Of course, if you are invested in a good fund, that is exactly what your fund manager will be doing on your behalf. I've invested - and given investment advice - through many crashes and mini crashes since the original Harshad Mehta crash of 1991. But I have never, not even once, seen a crash which did not turn out to be a buying opportunity, an opportunity to enhance the returns that one gets from the equity markets.

Equity markets are down, and that's great news.
Next Read : Lemon Tree Hotels IPO Review
Previous Read : Equity Markets are down.It is time for Action.

Electric Vehicles : The Future of transportation

We all know that the world will be running on Electric Vehicles by 2030.

Since you want to reap long term benefit, considering 15–25 yrs, let's take a look…

Being in the stock market, we can all sense that electric vehicle car part makers will benefit heavily and considering that India’s first vehicles will roll out by 2020, it makes infinite sense to spot multibaggers in this space.

Typically, the following parts make up an electric vehicle:

Body Battery Regenerative Braking Drive System Microcontroller Of course, tyres and other routine auto parts too.

About Electric Vehicle Batteries

If electric vehicles are to succeed, the batteries should help the car run longer miles long and be cost-effective.Such batteries must power the car for a reasonable number of miles. There is already talk about developing Aluminum air batteries that will last 1,000 miles and cost the consumer about INR 3 per mile.

As technology advances, these costs will come down.

But before we experience Aluminum air batteries, we have to work with Lithium Ion batteries.

Lithium ion batteries, the first to get off the block, contain liquids, and this makes make them heavy. Sooner or later these will have to be replaced but we have to make do with them in the present.

On a side note, IBM is working on Lithium Air and other research labs are working on Aluminum air batteries that will use their respective metals as fuel. After a certain number of miles (One Aluminum Air battery lasts 1,000 miles), the batteries will have to be replaced.

So, while picking stocks, let’s focus on 2 prominent materials that will be used to manufacture EV batteries — Lithium (for the immediate future) and Aluminum (for the distant future).

Know that lithium and graphite (for the anodes) are used in Lithium Ion batteries.

Electric Vehicle Battery Stocks that may become Multibaggers in long term .

*MOIL* — supplies manganese which is used to make aluminum, steel and also will be a key ingredient in EV batteries.

*HBL Power Systems* — makes batteries for the defence and industrial sectors. Has presence in USA, Middle East and Europe. Can easily handle lithium batteries and changes in technology. Everything looks cool about it except for the fact that its price is a bloody laggard.

*Hindustan Copper* — mines copper and nickel, which are used in batteries

*Graphite India* — Graphite is used in EV batteries, but this stock has appreciated way too much

*Ashok Leyland* — will make electric buses and batteries in collaboration with SUN Mobility. Maybe it will take over Sun Mobility and start making batteries

Other quality battery makers like *Everready, Amara Raja and Panasonic* too will jump in the fray.

*Eon Electric*, a small company, also makes Lithium Ion batteries along with mobile parts and optic fibre cable stuff. Please study it in depth before  making any decision.

*Hindalco, Vedanta, National Aluminum* stocks have massive potential going forward irrespective of the fact whether Aluminum Batteries are made or not because aluminum is lightweight and will be used to make the car’s body.

*HEG* should do well too as it is into graphite electrodes (along with power and carbon), but its share price has jumped 3 times in the last 12 months.

*Rain Industries*, mines carbon which is used in making many electrical accessories for EVs.

*Himadri Specialty Chemicals* (suggested by Geordie Job Pottas, an independent equity researcher)

You may want to look at this languishing stock that has the potential to vroooom (but I’m unsure of the management) —  Orient Abrasives, which is into mining metals for creating aluminum and many components for EVs too look good.

One may make a good SIP basket-ing any of the above stock with appreciated balance sheet and returns!

Lemon Tree Hotels IPO review

The upcoming IPO of Lemon Tree Hotels consists purely of Offer for Sale (OFS). Through this OFS, the company is offering 18,54,79,400 equity shares with face value of Rs 10 per share. The IPO size is worth Rs 1038.7 crore. The price band is in the range of Rs 54-56 per share. The minimum lot size consists of 265 shares. The issue will remain open for subscription from March 26-28, 2018. The company will get listed on both BSE and NSE.

The objectives of the OFS are to achieve the benefits of listing the equity shares on the stock exchanges and facilitate the sale of up to 185,479,400 equity shares by the selling shareholders. The listing will also provide a public market for the company's equity shares in India.

The company will not receive any proceeds from the issue and all the proceeds will go to the selling shareholders. Some of the selling shareholders include Maplewood, Whispering Resorts, Palms International and RJ Corp.

Company Background

The company operates in the mid-priced hotel sector, consisting of the upper-midscale, midscale and economy hotel segments. It launched its first hotel with 49 rooms in May 2004. It operated 4,697 rooms in 45 hotels across 28 cities in India as of January 31, 2018. It has created three brands to serve three hotel segments –

- Lemon Tree Premier which is targeted primarily at the upper-midscale hotel segment catering to business and leisure guests who seek to use hotels at strategic locations and are willing to pay for premium service and hotel properties.

- Lemon Tree Hotels which is targeted primarily at the midscale hotel segment catering to business and leisure guests and offers a comfortable, cost-effective and convenient experience; and

- Red Fox by Lemon Tree Hotels which is targeted primarily at the economy hotel segment.

The average occupancy rate in the hotels across these three brands stood between 74-77% in FY17.

These hotels are located across India in metro regions, including the NCR, Bengaluru, Hyderabad and Chennai, as well as tier-I and tier-II cities, such as Pune, Ahmedabad, Chandigarh, Jaipur, Indore and Aurangabad.

The company’s operations are spread across the value chain and range from acquiring land to owning, leasing, developing, managing and marketing hotels. It undertakes the business through: (i) direct ownership of hotel properties, (ii) long-term lease or license arrangements for the land on which it constructs the hotels, (iii) long-term leases for existing hotels which are owned by third parties, and (iv) operating and management agreements. As of January 31, 2018, its portfolio consisted of 19 owned hotels, three owned hotels located on leased or licensed land, five leased hotels and 18 managed hotels.

Expansion plans

The company intends to enter new markets such as Mumbai, Kolkata and Patna in order to expand its geographical footprint. There are 3038 new hotels in the pipeline which are spread over 23 additional cities across India, (not present as of January 31, 2018) and one hotel in each of Kathmandu, Nepal and Thimphu, Bhutan. The new hotels in Gurugram, Goa, Kolkata, Udaipur are expected to get operational by FY21. It also intends to expand the hotel portfolio in India’s tier-II and tier-III cities by leveraging its brands.

Financial Performance

The company’s revenue has grown at a CAGR of 17.68% over FY13-17. For the period ending Dec. 31, 2017, it generated revenue of Rs 352.25 crore. However, it has been generating losses all these years due to high interest costs and depreciation incurred on the investment made in new hotels. A turnaround in operations was seen during 9MFY18 as the company generated net profit of Rs 2.85 crore. For FY17, the company’s debt-equity ratio stood at 0.65x. Presently, it has debt of around Rs 1000 crore with debt-equity ratio of 0.79x.

Valuation & peer comparison

As the company is incurring losses, its EPS has been negative and considering FY17 EPS of Rs (0.11), its P/E is also negative. Some of the listed companies from this industry are EIH Ltd. and Indian Hotels Company Ltd. The industry’s average P/E is approximately 90.6x.

Conclusion :

The company’s chain of hotels is quite huge and it has pan-India presence. The nature of its business is capital intensive and it has an asset-heavy model. The occupancy rate has also gradually increased over the years. This has led to consistent growth in the topline of the company.
However, it has been incurring losses due to rising finance costs and depreciation. This rise is mainly due to extensive expansion plans and investment in new hotels and other related fixed assets. The company currently has new hotels in the pipeline, which will get operational within the next 3-4 years and it has plans to expand in new geographical areas. Although during 9MFY18, it has generated profits, the pressure on margins is likely to continue. As this issue consists of OFS, the company will not be getting funds to repay the debt. Considering these factors, subscribing at this level may be risky.

Company has turned the corner for the first nine months of the current fiscal. Although it has carried forward loses for past four years, their depreciated assets have appreciated and the projects completed in these periods have started contributing to top and bottom lines. Based on negative earnings so far, its P/E remains negative. Management is confident of maintaining its occupancy rate that is far better than industry average as India has emerged as the biggest market for such type of hotel chains. Its loyalty programme is continuously rising with “Lemon Tree Smiles”. Considering all these aspects, cash surplus investors may consider investment for long term with averse apporach.

Next Read :ICICI Securities IPO Review

ICICI Securities IPO review

ICICI Securities Ltd. (I-sec) is a leading technology-based securities firm in India that offers a wide range of financial services including brokerage, financial product distribution and investment banking and focuses on both retail and institutional clients. It has been the largest equity broker in India since fiscal 2014 by brokerage revenue and active customers in equities on the National Stock Exchange (Source: CRISIL), powered by significant retail brokerage business, which accounted for 90.5% of the revenue from its brokerage business (excluding income earned on its funds used in the brokerage business) in fiscal 2017. As of December 31, 2017, ICICIdirect, its award winning proprietary electronic brokerage platform, had approximately 3.9 million operational accounts of whom 0.8 million had traded on NSE in the preceding 12 months (Source: NSE). Since inception, it acquired a total of 4.6 million customers through this platform as of December 31, 2017.

The financial savings environment in India has undergone a fundamental transformation in recent years. Strong macroeconomic factors such as growing gross domestic product, rising affluence, increasing formalization of economy, lower inflation and falling interest rates have contributed to the growing shift of household savings towards financial assets. Consequently, India is witnessing increasing retail and domestic institutional participation in Indian equity markets. The recent wave of digitization steered by the support and reforms by the Indian government and augmented by increasing Smartphone penetration and faster data speeds in India has resulted in positive changes in customer out-reach and consumer behaviour. However, activity in capital markets in India remains low compared to global markets as demonstrated by market capitalization to GDP ratio of 69% for India compared to global average of 99% in 2016 (Source: CRISIL). Being one of the pioneers in the e-brokerage business in India, along with its strong brand name, large registered customer base, wide range of products across asset classes, complimentary advisory services, position I-sec to be the natural beneficiary of the growth in digitization and resultant transformational changes in the Indian savings markets.

I-sec also distribute various third-party products including mutual funds, insurance products, fixed deposits, loans, tax services and pension products. All its businesses verticals are supported by its nationwide network, consisting of over 200 own branches, over 2,600 branches of ICICI Bank through which its electronic brokerage platform is marketed and over 4,600 sub-brokers, authorized persons, independent financial associates and independent associates as at December 31,2017.

To unlock value for stakeholders and listing purpose, I-sec is coming out with a maiden IPO of 77249508 equity shares of Rs. 5 each as Offer for Sale (OFS) via book building issue with a price band of Rs. 519 – Rs. 520 to mobilize Rs. 4009.25 cr. to Rs. 4016.97 cr. (based on lower and upper price bands). Issue opens for subscription on 22.03.18 and will close on 26.03.18. Minimum application is to be made for 28 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. I-Sec has reserved 3862475 (5%) shares for purchase by the ICICI Bank retail and HUF stakeholders who were on the books of bank as on 13.03.2018. Issue constitutes 23.98% of the post issue paid up capital of the company. BRLMs to this offer are BofA Merrill Lynch (DSP Merrill Lynch Ltd.), Citigroup Global Markets India Pvt. Ltd., CLSA India Pvt. Ltd., Edelweiss Financial Services Ltd., IIFL Holdings Ltd and SBI Capital Markets Ltd. Karvy Computershare Pvt. Ltd. is the registrar to the issue. Average cost of acquisition of shares by the selling stakeholder is Rs. 5.82 per share. On the net issue size, excluding ICICI Bank stakeholder reserved quota, I-sec has reserved 75% issue for QIBs, 15% for HNIs and 10% for retail investors. Post issue, I-sec paid up capital remains same at Rs. 161.07 crore.

On performance front, I-sec has (on a consolidated basis) reported revenue/net profits of Rs. 812.26 cr. / Rs. 89.19 cr. (FY14), Rs. 1209.51 cr. / Rs. 293.87 cr. (FY15), Rs. 1124.58 cr. / Rs. 238.72 cr. (FY16), Rs. 1404.23 cr. / Rs. 338.59 cr. (FY17). For first nine month of the current fiscal, it has earned net profit of Rs. 399.09 cr. on revenue of Rs.1344.69 cr. If suffered a setback for FY16 in line with general trends of the markets. Its entire equity is issued at par since inception. For last five fiscals, it has reported related party revenue of around 10% on an average in the total revenues. 40% of revenues are from non-broking business.  Issue is priced at a P/BV of 25.05 based on its NAV of Rs. 20.76 (on consolidated basis) as on 31.12.17. For last three fiscals it has posted an average EPS of Rs. 9.25 and an average RoNW of 76.91%. If we annualize latest earnings and attribute it on post issue equity then asking price is at a P/E of 31 plus against industry average of 37 and its peers trading at a P/E of Edelweiss Fin. (184), IIFL Holdings (137), JM Fin. (78), Motilal Oswal (133) and Geojit Fin. (42) (as on 15.03.18). For last five fiscals, I-sec has posted CAGR of 18.8% in revenue and 47.4% CAGR in PAT. For first nine months it has posted growth of 31.5% and 56.3% respectively.

 Here is a quick overview of ICICI Securities IPO recommendations by major brokerage houses.
 GEPL Capital sees several positives for India’s biggest equity broker including benefits from financialization of household savings and distribution of other financial products. “ICICI Securities Ltd (I-Sec) stands to gain from operating leverage. At a P/E of 32xs of annualized FY18 EPS. We believe that I-Sec is at a discount compared to its peers. We assign a Subscribe rating to the IPO,” said the brokerage house in its IPO review.

Jatin Damania of Kotak Securities has put a subscribe rating on the upcoming IPO. “At the higher end of the issue price of Rs 520 per share, the stock is being offered at 31.5x 9MFY18 annualized earnings. In the past two years, the broking industry in India has witnessed growth in terms of increase in new accounts, higher income from distribution business and sharp rise in primary market transactions. Activities in the capital markets business will remain a direct beneficiary of an improving macro environment, shift from physical assets to financial assets and stable government and its policies. Given ICICI Securities presence across the different segment and its customer base helps the company to explore new opportunities. We recommend Subscribe to the issue,” recommended its research note.

Asit C Mehta is also positive on the public offer while pointing out full valuations at the current price. It has recommended investors to Subscribe for Long Term. “ICICI Securities is one of the leading broking houses with highly integrated technology based platform, ICICIdirect. They offer diversified range of financial products and services and have forte in retail broking services, which have ample growth opportunities with increasing investments from the households. At an upper price band of Rs.520, the asking price of ICICI Securities’ stock is at a P/E of 31.55x on FY18E EPS of Rs.16.48 making it fully valued. We recommend to SUBSCRIBE the issue with a long-term perspective,” said the brokerage house’s note on ICICI Securities IPO review.

Way2Wealth is also in the list of brokerage houses with positive ICICI Securities IPO recommendations, although it warned gains might be limited due to premium pricing. “At the price band of `519-520 the issueis priced at ~34.8x its TTM-Dec-17 earnings and ~24.8x its book value as on Dec-17. ISL has delivered exceptional sales and PAT CAGR of 20% and 56% over the past 3 years with return on equity ratios in excess of 30% for each year since FY13 and far superior compared to listed peers. However, as the issue is priced at a premium compared to its peers, we believe it limits the scope of gains in the short term and hence advise investors with a long-term investment horizon to SUBSCRIBE to the issue,” noted analyst Chintan Gupta in his analysis of ICICI Securities IPO.

Considering the status enjoyed by the company and the earnings growth, Investors may consider investment for long term.

 So, if you are a bull right now and have a view that the Indian stock markets will have a healthy upward movement in the next 3-5 years, and most importantly, ICICI Securities will be able to cash it one way or the other, then you should definitely subscribe to it. Conservative or risk-averse investors should avoid it.

Next Read : Bet On Small Caps For At Least 10 Years Says Sumeet Nagar from Malabar Investments
Previous Read : Lemon Tree Hotels IPO Review

Bet On Small Caps For At Least 10 Years Says Sumeet Nagar from Malabar Investments

Market cycles don’t matter if investors bet on the right small-cap stock at the right valuation for the long term. And they need to be more watchful as returns from the stock market are expected to moderate in 2018 compared to the previous year.

That’s the advice from Sumeet Nagar from Malabar Investments, which bets on small businesses and manages assets worth $600 million. Unlike 2017, where the “rising tide carried all boats, even the ones with leaks”, quality will start to matter a lot more, he said on BloombergQuint’s special series Alpha Moguls.

India’s equity benchmarks have fallen off record highs scaled early this year after a global selloff and the Finance Minister’s decision to tax long-term equity gains. S&P BSE SmallCap and MidCap indices have fallen more than 5 percent each compared with 0.5 percent gain in the benchmark Sensex so far this year. The index trades at the highest one-year forward PE multiple compared with Asian peers.

There is a possibility of earnings growth outpacing stock price performances, which will bring valuations to reasonable levels, Nagar said. Rising yields and liquidity reversal from major central banks will test investors, he said.

Investing in small and mid caps can help outperform the benchmarks, he said. But Nagar also cautions that investors must jump in with a long-term perspective because such companies take time to show their mettle.

Malabar Investments made two large bets in Safari Industries Ltd. and Hatsun Agro Ltd. Nagar said the company buys businesses that it can hold for 10-20 years. Cash generation, quality of business and the quality of promoters become the key criteria for stock selection. “Promoters should possess integrity, knowledge of business and capital allocation capabilities, in addition to creating a lower layer of management expertise.”

The focus will stay on small and mid-caps. Even smaller companies that operate well in niche areas can have moats and business advantages, giving attractive returns over a longer period, he said.

Source: BloombergQuint 

Next Read:India Cements - 3QFY18 Result Update - Better Operational Performance on Cost Rationalisation

India Cements - 3QFY18 Result Update - Better Operational Performance on Cost Rationalisation

India Cements (ICL) has reported a better-than-estimated performance mainly owing to substantial reduction in staff cost and lower-than-expected freight cost. EBITDA stood at  Rs1.67bn (-11% YoY and -8% QoQ) vs. our estimate of Rs1.3bn. Cement EBITDA/tonne stood at Rs628 vs. Rs694 and Rs647 in 3QFY17 and 2QFY18, respectively. ICL’s operating cost/tonne (cement) dipped by 4% YoY and 5% QoQ to Rs3,715 due to lower staff cost (-17% YoY and -28% QoQ) and freight cost/tone (-6% QoQ). Sales volume stood at 2.73mnT (+0.6% YoY and +0.9% QoQ). However, average NCR dipped by 5% each in YoY and QoQ to Rs4,343/tonne. On the flip side, continuing to move northwards gross debt surged by Rs1.0bn QoQ to Rs33.6bn (Rs29.2bn in FY17), which can be a key near-term headwind for the stock, in our view. Thus, trimming down our EBITDA estimate by 15% and 11% for FY18E and FY19E, respectively to factor in soft volume and subdued realisation, we maintain our BUY recommendation on the stock with a revised Target Price of Rs220 (from Rs200 earlier). 

Sales Volume Growth Remains Soft

Continued pressure in its key markets i.e. TN, Kerala and Maharashtra owing to various reasons led to soft sales volume growth, which stood at 2.73mnT (+0.6% YoY and +0.9% QoQ) in 3QFY18. However, the recent Supreme Court’s order to allow sand quarrying in TN can aid ICL the most to improve its volume in coming months. Further, pick-up in construction activities in Maharashtra markets is likely to aid ICL in the current quarter in improving its sales volume.

Cost Rationalisation Aids Operational Performance

Cost rationalisation through downsizing headcount in non-core division and winding-up of Infrastructure division aided ICL to save on staff cost, which dipped by 17% YoY and 28% QoQ to Rs764mn. Further, QoQ decline in freight cost also aided its operating profit. Thus, despite 11% YoY and 8% QoQ decline, its reported EBITDA at Rs1.67bn exceeded our estimate of Rs1.3bn. Further, the recent surge in Southern realisation and possibility of higher volume in TN are likely to aid ICL to improve its operational performance further in coming quarters. Interest cost rose by 8% YoY and 4% QoQ to Rs924mn, while net profit stood at Rs152mn (-56% YoY).

Outlook & Valuation

An unexpected reduction in staff and freight cost was the key reason for outperformance. However, spike in gross debt in 9MFY18 and no visible sign of balance-sheet deleveraging amid no capacity addition are likely dilute ICL’s growth prospects. However, we consider attractive valuations (7.9x FY18E and 6.3x FY19E EBITDA) as positive. Further, early signs of demand revival in TN are likely to benefit ICL the most. Rolling over our estimates to FY20E, we maintain our BUY recommendation on the stock with a revised Target Price of Rs220 (8x FY20 EBITDA).

Next Read : Heidelberg Cement India -3QFY18 Result Update - Higher Sales Volume Drives 

Previous Read : Bet On Small Caps For At Least 10 Years Says Sumeet Nagar from Malabar Investments

Heidelberg Cement India -3QFY18 Result Update - Higher Sales Volume Drives Performance

Led by higher-than-expected sales volume and higher average NCR, Heidelberg Cement India (HCIL) has reported a healthy performance in 3QFY18. Despite a surge in operational cost, its EBITDA grew by 93% YoY to Rs754mn vs. our estimate of RsRs722mn. Its sales volume grew by a strong 16% YoY and 15% QoQ to 1.22mnT owing to improved demand in Central markets led by pick-up in construction activities following improved sand/aggregates availability. While average NCR stood at Rs3,976/tonne (+7.6% YoY and +0.3% QoQ), EBITDA/tonne came in at Rs620 vs. Rs373 and Rs825 in 3QFY17 and 2QFY18, respectively. Operating cost/tonne surged by 1% YoY and 7% QoQ to Rs3,356 owing to significant spike in freight and input cost. We believe that demand recovery in central region owing to improved sand availability and increase in government’s spending will continue to aid HCIL for healthy volumes, going forward. Further, visible up-tick in realisation is also expected to ensure margin expansion.

Robust Growth in Sales Volume

Sales volume grew by 16% YoY and 15% QoQ to 1.22mnT mainly due to: (a) low base; (b) improved sand availability; and (c) increase in government’s spending in UP. Further, the Management highlighted that the demand continued to remain healthy in Jan’18, as construction works – especially in rural and IHB segments, which were withheld due to sand crisis – are supporting demand. Looking ahead, we expect HCIL’s volume to remain healthy in coming quarters as well.

Decent Operational Performance despite Cost Pressure

Despite a surge in operational cost, its EBITDA grew by 93% YoY to Rs754mn marginally ahead of our estimate of Rs722mn. While operating cost/tonne rose by 7% QoQ due to higher input and freight cost, a reduction in power and fuel cost/tonne (led by WHRS) aided HCIL to contain any further rise in operating cost. EBITDA/tonne came in at Rs620 vs. Rs373 and Rs825 in 3QFY17 and 2QFY18. Considering the recent spike in average realisation in its key markets, we expect its operational performance to improve further in current quarter. PAT came in at Rs318mn as against net loss of Rs36mn in 3QFY17.

Outlook & Valuation

Notably, with no meaningful capacity addition coming in the central region in next 2-3 years (except capacity ramp-up at UltraTech’s newly acquired capacity) along with visible pick-up in demand led by rise in construction activities in UP following resolution of sand issues, we believe that HCIL would hit a sweet spot to gain traction in ensuing years. Further, visible de-leveraging of balance-sheet (repaid US$20mn in YTD) and healthy operating efficiencies are expected to result in improvement in return ratios. We maintain our BUY recommendation on the stock with a revised Target Price of Rs205 (9x FY20 EBITDA).


Previous Read:India Cements - 3QFY18 Result Update - Better Operational Performance on Cost Rationalisation
Next Read: Skipper- 3QFY18 Result - Transmission Capex Play- On Right Track

Skipper- 3QFY18 Result Update - Transmission Capex Play; On Right Track

Skipper continued to deliver a strong performance in 3QFY18 with its net revenue growing by 39.6% YoY to Rs4.32bn, led by strong volume execution in Engineering Products business and rising commodity prices. Aided by better execution, its EBITDA and PAT grew by 27% YoY and 31.5% YoY to Rs740mn and Rs292mn, respectively. We continue to believe that a sizeable order book, huge imminent opportunity and diversification into PVC business firmly place Skipper on a higher growth trajectory. Rolling over our estimates to FY20E, we maintain our BUY recommendation on the stock with a revised Target Price of Rs340 (from Rs289 earlier).

Healthy Revenue Growth on Strong Engineering Volume

Though Skipper delivered a robust growth led by strong volume execution in Engineering Products business and rising commodity prices, GST-led disruptions restricted revenue growth in PVC business, which albeit rebounded from Nov’17 onwards. Its Transmission business (85.6% of total sales) grew by a strong 28.6% YoY to Rs4,863mn, while PVC business (9.5% of total sales) grew by 6.4% YoY to Rs593mn owing to GST-led disruptions. Notably, Infrastructure Products business (4.6% of total sales) remained flat (-0.7% YoY) at Rs261mn on high base.

Operating Margin Improves Marginally; PAT Zooms

Skipper’s EBITDA margin rose by 27bps YoY to 13.1% owing to cost benefit initiatives. Notably, interest cost declined by 7.3% YoY to Rs176mn due to lower cost of debt. Interest cost to sales dipped to 3.1% in 3QFY18 vs. 4.5% in 3QFY17. While margin in Engineering Products and Polymer business expanded by 40bps YoY and 50bps YoY to 13.1% and 6.7%, respectively, margin in Infrastructure Products business dipped by 170bps YoY to 12.3%. Aided by improved execution, higher margins and lower interest cost, Skipper’s PAT surged by 31.5% YoY to Rs292mn.

Order Book Continues to Remain Well-diversified

Skipper secured orders worth Rs5.2bn during the quarter from Power Grid Corporation (PGCIL), Telangana-TRANSCO, Tamil Nadu-TRANSCO and Reliance Jio including various supplies across South East Asia. Notably, its order book continues to remain well-diversified between PGCIL, domestic SEBs/private players and international clients. Skipper witnessed significant YTD order inflows from the North East Region, and we expect the momentum to continue with large size T&D investment happening in the eastern states i.e. Bihar and Jharkhand.

Outlook & Valuation

We continue to believe that apart from increased revenue visibility in T&D business on the back of robust order book, expansion into PVC business would aid Skipper to sustain healthy earnings profile, going ahead. Skipper’s sales and net profit are expected to clock 19.6% and 22.3% CAGR, respectively over FY17-FY20E, while RoCE is seen at 25.4% by FY20E. Rolling over our estimates to FY20E, we maintain our BUY recommendation on the stock with a revised Target Price of Rs340  valuing at 17x FY20E earnings of Rs19.9/share.

Next Read KEC International - 3QFY18 Result Update - Improved Project Execution Lifts Earnings

Previous Read : Heidelberg Cement India -3QFY18 Result Update - Higher Sales Volume Drives