Skipper - 2QFY18 Result Update - Well-placed in Power Transmission Space

Skipper - 2QFY18 Result Update - Well-placed in Power Transmission Space

Skipper continued to deliver a strong performance in 2QFY18. Its net revenue grew by 31.9% YoY to Rs5.1bn led by strong volume execution in Engineering Products business. However, GST-led disruption restricted revenue growth in PVC business. Though reported EBITDA dipped by 7.1% YoY to Rs516mn,  adjusted EBITDA grew by 19.9% YoY. Owing to lower margin, higher depreciation and tax rate, its reported PAT declined by 30.2% YoY to Rs232mn, while adjusted PAT rose by 3.9% YoY. We continue to believe that a sizeable order book, huge imminent opportunity and diversification into PVC business continue to place Skipper firmly on a higher growth trajectory. 

Revising our target multiple to 17x (from 15x earlier) on the back of strong revenue visibility and steady margin profile, we reiterate our BUY recommendation on the stock with a revised Target Price of Rs299 (from Rs254 earlier).

Engineering Products Biz Aided Strong Revenue Growth

Volume in Engineering Products business – which forms 90% of its total sales – grew by a strong 27.8% to Rs4633.7mn. However, Skipper’s PVC revenue – which contributes 8.0% to its total sales – declined by 7.0% YoY to Rs427.8mn owing to GST-led disruptions. Notably, the capacity utilisation level of Engineering Products and Infrastructure Products segments stood at 90% and 50-60%, respectively. Infrastructure Products revenue – which accounts for 1.8% of total sales – declined by 24.4% YoY to Rs94.7mn.

GST Disruptions, Higher Input Prices Impacted Segmental Margins

Owing to higher commodity prices, Skipper’s adjusted EBITDA margin declined by 133bps YoY to 13.4%. Margin in Engineering Products business dipped by 150bps YoY to 13.6%, as Skipper executed high-margins projects in 2QFY17. While Infrastructure Products business showed a marginal 40bps YoY rise in EBITDA margin to 15.9%, margin in PVC business dipped by 110bps YoY to 9.3%.

Order Book

Skipper secured new orders worth Rs430mn in 2QFY18 for transmission tower supply. Outstanding order book – which stood at Rs25.8bn as of Sept’17 – is well-diversified between domestic (80%) and international (20%). Notably, order book to sales stands at 2.0x of FY17 sales.

Outlook & Valuation

Looking ahead, we believe that while robust order book provides revenue visibility in T&D business, expansion in PVC business would aid Skipper to sustain healthy earnings profile. We continue to remain positive on Skipper’s fundamentals on the back of improved order inflow traction and diversified opportunities in other verticals. We expect Skipper’s sales and net profit to witness 21.5% and 24.9% CAGR, respectively through FY17-FY19E, while RoCE is seen at 25.3% by FY19E. Revising our target multiple to 17x (from 15x earlier), we reiterate our BUY recommendation on the stock with an upwardly revised Target Price of Rs299.

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2QFY18 Result Updates - Cyient,Ramco Cements,Apollo Tyres,Ajanta Pharma,HDFC,JSW Steel and Sagar Cements

Cyient - 2QFY18 Result Update - Impressive 2Q All-Round

Cyient’s revenue grew by 6.8% QoQ and crossed US$150mn in 2QFY18, exceeding our estimate of 6.2% QoQ growth led by healthy 4.3% QoQ and 33.7% QoQ growth in core and DLM business, respectively. Consistency in core business growth metrics is heartening, in our view especially with 4.3% QoQ growth following 3% QoQ/3.3% QoQ growth in 1QFY18/4QFY17, respectively. While ENGG business grew by a solid 4.3% QoQ in USD terms (following 4% QoQ growth in 1QFY18), DNO business clocked a strong 4.2% QoQ growth in 2QFY18. The DLM business saw a robust 33.7% QoQ USD revenue growth, which is a healthy recovery after the steep 26% QoQ dip in 1QFY18. On a YoY basis, DLM rose by a strong 17.4%.

Cyient maintained its FY18 growth outlook, with double-digit growth likely in services business, 20% growth in DLM, 50bps EBITDA margin expansion and double-digit earnings growth.

Key Verticals Drive Growth

Aided by higher utilisation, Cyient’s revenue surged 6.8% QoQ to US$150.1mn. Implied volume rose by a robust 5.2% QoQ, while implied pricing dipped 0.9% QoQ. In core services, Transportation (+11.2% QoQ), Industrials (+5.5%) Medical & Healthcare (+14.7%) and Communications (+7%) were the key verticals that drove growth. Led by strong revenue and operational efficiency, Cyient’s EBITDA margin rose by 181bps QoQ, which drove a healthy 26.9% QoQ growth in PAT to Rs1.1bn.

However, some near-term headwinds being faced by Cyient’s largest customer, UTC owing to work load rebalancing is a prime concern, which the Management expects to return to growth from 1QFY19 onwards. Another negative was decline in order book, which fell 28.1% QoQ in terms of orders executable within FY18. However, management believes its order backlog remains healthy, and 2HFY18 should see a rebound in order book growth.

Outlook & Valuation

At CMP, the stock trades at a PE of 12.1x FY19E EPS, which we believe to be reasonable given healthy core business metrics, margin expansion, strong traction in most verticals, strong client relationships, decent dividend yield, quality balance sheet and healthy EPS growth (18.9% CAGR) over FY17-FY19E. We retain our BUY recommendation on the stock with an upward revised Target Price of Rs605 (Rs565 earlier), as we slightly raise our FY19 EPS estimate by 5.6%
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Ramco Cements - 2QFY18 Result Update - Better Realisations Drive Healthy Performance

Ramco Cements (RCL) reported a better-than-estimated operating performance (though down on YoY) in 2QFY18, mainly aided by higher volume and better realisation. Reported EBITDA stood at Rs2.6bn (-14% YoY and +5% QoQ), which came above the expectation. Sales volume grew by 6% YoY (flat on QoQ basis) to 2.15mnT mainly aided by decent demand scenario in Eastern and AP/Telangana markets. RCL has been consistently increasing its sales volume in Eastern region. Operating cost/tonne surged by 9% YoY and 4% QoQ to Rs3,554 mainly due to substantial increase in Power & Fuel/tonne to Rs802 (+36% YoY and +3% QoQ) and freight cost/tonne (+11% YoY and +5% QoQ). Exhaustion of low-cost petcoke inventory and new purchase at higher price led to spike in fuel prices. Cement EBITDA/tonne at stood at strong Rs1,229 in 2QFY18 vs. Rs1,509 in 2QFY17 and Rs1,173 in 1QFY18. EBITDA margins stood at 25.7% in 2QFY18 vs. 31.6% reported in 2QFY17. Upgrading our EBITDA estimate by 7% and 9% for FY18E and FY19E, respectively to factor in higher realisation and better volume, we reiterate our BUY recommendation on the stock with an upwardly revised Target Price of Rs810 (from Rs760 earlier). 

Higher Sales Volume Aided Revenue Growth

RCL’s consistent endeavour to target markets beyond Southern region paid off in terms of better-than-estimated sales volume growth (+6% YoY to 2.15mnT) and also led to healthy revenue growth (+6% YoY to Rs10.3bn vs. our estimate of Rs9.3bn). However, demand scenario in its key Tamil Nadu market witnessed a significant slowdown due to drought and shortage of sand. 

Operating Performance Remained Healthy

A better-than-estimated NCR enabled RCL to register higher-than-estimated operational performance with EBITDA rising by 5% QoQ (-14% YoY) to Rs2.6bn. Against the expectation of sequential decline, NCR increased by 3.8% QoQ (flat on YoY basis) to Rs4,783/tonne. Notably, EBITDA margin and EBITDA/tonne continued to remain impressive at 25.7% and Rs1,229, respectively, which is unmatched by its core peers. Looking ahead, we believe that sustained effort to improve operating synergies through various means is likely to pay it off in ensuing years as well. 

Outlook & Valuation

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).

Other 2QFY18 Result Updates  :2QFY18 Result updates Kotak Mahindra and others

2QFY18 Result Updates - Kotak Mahindra Bank, Emami , Mindtree,Ambuja Cements, HCL Technologies & Hindustan Unilever

Kotak Mahindra Bank - 2QFY18 Result Update - Performance Continues to be Stable; Maintain BUY

Kotak Mahindra Bank (KMB) has reported a healthy performance in 2QFY18 as both standalone and consolidated net profit recorded a healthy growth. Its standalone PAT grew by 22.3% YoY and 8.9% QoQ to Rs9.9bn on the back of healthy growth in customer assets (+20.7% YoY & +6.1% QoQ), best-in-class NIMs (4.3%) and strong growth in core fee income (+28.6% YoY & +0.6% QoQ). Further, the Bank’s consolidated PAT surged by 20% YoY  and 7% QoQ to Rs14.4bn backed by strong bottom line growth recorded by Kotak Prime (+15.4% YoY & 13.6% QoQ to Rs1.5bn), Kotak Life (+57.7% YoY and -2.9% QoQ to Rs1bn) and Kotak Securities (+22.9% YoY and -5.6% QoQ to Rs1.2bn). Customer assets growth was aided by 17.5% YTD and 6.4% QoQ growth in Corporate portfolio, 17.1% YTD and 13% QoQ growth small business & personal loans and 12.7% YTD and 6.7%% QoQ growth in CV/CE portfolio. Notably, the Bank has started getting benefitted from the full integration of erstwhile ING Vysya Bank (IVB) especially in post demonetisation period.

Management Commentary & Guidance

• The Bank has completed process of buying back the remaining 26% stake in Kotak Life from Old Mutual. Under the deal, Kotak Life was valued at Rs48.9bn.
• CASA ratio improved by 390bps QoQ to the record high of 47.8% led by 61.9% YoY and 21.5% QoQ growth in saving deposits. Strong growth in SA deposit was led by acquisition of new customers and some large government business.
• KMB will launch consumer finance business through its NBFC subsidiary i.e. Kotak Prime, which will help the Bank to optimally utilise the excess capital available at Kotak Prime.
• With the positive initial response to the Bank’s Digital 811 Account, the Management believes the traction would continue in FY18 as well. However, standalone opex was partially impacted due to higher advertising cost for same.
• The Bank has not received any materially adverse observation from the RBI in annual supervision audit for FY17.
• The Management has clearly indicated that apart from organic growth, the Bank will be continuously exploring suitable inorganic growth opportunities.

Outlook & Valuation

KMB has undoubtedly proven its competitive edge over its private sector peers with higher fee based income generation, asset quality management and effective management of financial business subsidiaries.  The Bank continues to witness moderation in SMA-2 balance, which clearly suggests stable asset quality trend. Looking ahead, we expect the strong traction in earnings to continue owing to robust growth in loan book, moderate credit cost and healthy margins. Valuing standalone entity at 4xFY19E adjusted BV and expecting subsidiaries to fetch Rs257/share after deducting holding company discount of 15%, we maintain our BUY recommendation on the stock with an unrevised Target Price of Rs1,144.

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Emami - 2QFY18 Result Update - Strong Show; Maintain BUY

Following a disappointing performance in 1QFY18 due to GST overhang, Emami has posted an encouraging set of numbers in 2QFY18. While its consolidated reported sales grew by 9.7% YoY to Rs6.3bn, the underlying revenue grew by 14% YoY excluding the accounting changes post GST. While EBITDA increased by 15% YoY to Rs2bn, net profit surged by 49.7% YoY to Rs986mn. 

We estimate Emami to post 12.3% revenue and 17.2% earnings CAGR through FY17-19E. We believe that Emami would sustain the growth momentum in coming quarters on the back of good monsoons, increased focus on direct distribution, strong new product pipeline and lower base effect. We maintain our BUY recommendation on the stock with a revised Target Price of Rs1,370 (from Rs1,316 earlier).

Smart Recovery in Domestic Business

Domestic business grew by 14% YoY with underlying volume growth of 10% YoY. While international business grew by 22% YoY on lower base effect, CSD channel continued to witness pressure and declined by 20% YoY. While Boroplus reported 38% revenue growth, Navratna witnessed 16% YoY revenue growth led by double-digit growth in volume. Revenue from pain management and male grooming segments grew by 15% YoY and 12% YoY, respectively. However, Kesh King revenues declined by 16% YoY due to significant dependence on wholesale channel. Healthcare segment too witnessed a subdued 2% YoY growth due to low off-take in Pancharistha.

Margins Remain Benign

Consolidated gross margins declined by 40bps YoY to 67.3%, which is impressive in our view, considering sharp spike in prices of Mentha Oil. Although A&P spend remained flat at Rs988mn, underlying A&P (excluding GST accounting changes) increased by 10%. Thus, the resultant EBITDA margins rose by 150bps YoY to 32.1%.

Other Key Highlights

The Management continues to focus on improving its direct distribution reach from current level of 7.9 lakh outlets to 8.3 lakh outlets by Mar’18. Notably, approximately 75% of re-stocking has been made at trade level post GST disruption. New product pipeline remains strong and the Management would continue to aid the brands through higher A&P spend. Although Mentha oil prices have increased, the prices of overall input basket remains under control.

Outlook & Valuation

We expect Emami to benefit substantially from good monsoon as it derives ~50% of its domestic revenues from the rural areas. Also, higher focus on direct distribution reach would aid overall growth. This coupled with market leadership in all flagship brands, robust pricing power and strong new product funnel should hold Emami in good stead in the coming quarters. Based on expected adjusted EPS of Rs35.5, the stock currently trades at reasonable PE ratio of 33.8x FY19E earnings. We maintain our BUY recommendation on the stock with a revised Target Price of Rs1,370 (from Rs1,316 earlier).

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Mindtree - 2QFY18 Result Update - Revenue below Estimate

Mindtree has posted lower-than-expected revenue in 2QFY18. Its USD revenue grew by 3% QoQ to US$206.2mn (+2.1% QoQ in CC terms) vs. our estimate US$211.4mn. The lower-than-expected show on revenue front can be attributed to poor performance of subsidiary Magnet 360 (US$4.5mn, -30% QoQ), even as Bluefin saw a strong recovery (>20% QoQ to US$8.9mn). Vertical-wise, MFG, CPG & Retail vertical grew by a healthy 6.8% QoQ in USD terms, while Travel & Hospitality saw a strong 4.3% QoQ growth. BFSI and Technology, Media & Services both grew by 1.4% QoQ. Despite the impact of wage hike, EBITDA margin expanded by 44bps QoQ led by lower visa cost and operational efficiency. Notably, the Management has maintained its earlier growth expectation of “higher single digit” in CC terms for FY18E. 

Volumes, Pricing both Pull their Weight

From volume and pricing perspective, Mindtree’s blended volume rose by 1.8% QoQ, while blended pricing grew by 1.2% QoQ. While onsite volume declined by 0.3% QoQ, offshore volume grew by 2.4% QoQ. Onsite and offshore pricing grew by 2.6% QoQ and 1.4% QoQ, respectively. 

Mindtree added a gross of 856 employees in 2QFY18, while on a net basis, it added 349 people to its rolls. Mindtree’s total headcount stood at 16,910 as of 2QFY18-end. Notably, employee utilisation saw a rise, with ex-trainee utilisation rising to 74.6% (from 73.8% in 1QFY18).

Outlook & Valuation

While Bluefin witnessed an improved performance, Mindtree’s other subsidiary Magnet 360 continues to face growth challenges. The Management has maintained the earlier growth outlook given post 1QFY18 result, which implies CC revenue growth in “higher single digit” as against “low double digit” growth envisaged at the beginning of FY18. Margin expansion efforts remain work-in-progress at this point. We believe it will be a challenge for Mindtree to achieve revenue growth along with margin expansion especially considering the current challenging business environment. The Management intends to consistently use share buy-back method as part of its capital allocation policy, which could prevent major stock price downside, in our view. We believe valuation at 15.5x FY19E EPS is too steep and unjustified. In our view, the recent run-up in the stock price is not backed by a major improvement in business fundamentals. Thus, we retain our REDUCE recommendation on the stock with an unchanged Target Price of Rs480.

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Ambuja Cements - 3QCY17 Result Update - Soft Quarter; Expecting Traction Ahead

Ambuja Cements (ACL) has delivered a dismal operating performance during the quarter, with its reported EBITDA growing by 10% YoY to Rs3.2bn vs. our estimate of Rs3.9bn. While all components of operational cost came broadly in-line with our estimates, a significant surge in raw material cost (+107% YoY and +18% QoQ) dragged its operating performance, owing to reversal of Rs446mn relating to contribution towards DMF following Supreme Court’s order. Adjusting for this, ACL’s EBITDA grew by 25% YoY to Rs3.6bn. EBITDA/tonne came in at Rs628 vs. Rs629 and Rs1,010 in 3QCY16 and 2QCY17, respectively. Notably, sales volume grew by 10% YoY (-17% QoQ) to 5.04mnT mainly aided by favorable demand in Northern and Eastern markets and lower base effect. Though reported performance slipped our estimates owing to reversal of Rs446mn, we continue to believe that ACL is likely to gain traction ahead with the pick-up in demand and likely synergies from group restructuring. We have marginally tweaked our EBITDA estimate by 1% and 3% for CY17E and CY18E, respectively mainly to factor in surging fuel prices. Rolling over our valuations to CY19E, we upgrade our recommendation on the stock to BUY from HOLD with a revised Target Price of Rs320 (from Rs265 earlier). 

Better Volume Aids Yearly Revenue

ACL’s revenue grew by 14% YoY to Rs22.8bn mainly due to 10% YoY growth in sales volume to 5.04mnT (-17% QoQ) on the back of decent demand scenario in Northern and Eastern (barring Bihar) regions. Further, average realisation/tonne came in-line at Rs4,528 (+4% YoY and -3% QoQ). Notably, ACL could not book Rs380mn towards VAT incentive due to pending notification from state governments for continuity of scheme post GST roll-out.

Higher Input Cost Drags Operating Performance

A higher-than-estimated spike in raw material cost mainly due to reversal of Rs446mn (as the Supreme Court disposed ACL’s special leave petition relating to contribution towards DMF) dragged ACL’s operational performance as EBITDA grew by a mere 10% YoY to Rs3.2bn (-48% QoQ). Adjusted EBITDA grew by 25% YoY to Rs3.6bn. Operating cost/tonne rose by 4.6% YoY and 7.1% QoQ to Rs3,899 owing to spike in fuel prices. Looking ahead, we expect ACL’s operational performance to improve owing to likely increase in realisation and higher utilisation.

Outlook & Valuation

Looking forward, we expect ACL to get decent traction on the back of strong brand equity, premium product portfolio and value-based pricing coupled with expected pick-up in demand. Further, with the recent addition of new mining leases through e-auction, we believe that ACL is serious to add new capacity and regain market share, which bodes well for the Company. Further, successful completion of group restructuring and likely merger with ACC may aid ACL to improve its operating synergies, going forward. Rolling over our valuations to CY19E, we upgrade our recommendation on the stock to BUY from HOLD with a revised Target Price of Rs320 (13x CY19E EBITDA).

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HCL Technologies - 2QFY18 Result Update - Subdued Show

HCL Technologies (HCLT) has reported a subdued performance in 2QFY18. Coming in below our estimates by 1%, its USD revenue grew by 2.3% QoQ (+0.9% QoQ in CC terms), with the under-performance coming on account of decline in India business, which adversely impacted revenue by US$20mn. Adjusted for this, USD revenue grew by 3.4% QoQ (+1.8% in CC terms). EBIT margin also came in below our estimate by 81bps owing to lower-than-expected revenue growth. However, the IT major has maintained its revenue growth and margin estimates for FY18E, with EBIT margin to be in 19.5-20.5% range and CC revenue growth guidance at 10.5-12.5%.

Engineering Services emerged as the key growth driver, clocking a healthy 4.7% QoQ growth in USD revenue (+4.4% in CC terms). The key IMS segment saw a 2.1% QoQ growth in USD revenue (-0.2% QoQ in CC terms). Continued decline in attrition in Software Services segment to 15.7% (vs. 16.2% in 1QFY18) is a positive, in our view.

Guidance Reiteration – A Positive Factor

Led by lower revenue from India business, HCLT’s USD revenue grew by a muted 2.3% QoQ (+0.9% QoQ in CC terms), However, maintenance of its earlier 10.5-12.5% CC revenue growth guidance for FY18E is a positive sign, which implies decent traction in ensuing quarters. We continue to remain positive on HCLT’s better-than-peers growth outlook, particularly in context of a challenging business environment.

From vertical perspective, Financial Services (+2.7% QoQ in USD terms) and Manufacturing (+3.8%) witnessed better traction. On the other hand, Retail & CPG (+0.2% QoQ) and Public Services (-1.4%) saw pressure owing to challenges being faced in the former and volatile nature of the latter, which led to revenue decline. Geographically, Europe was the out-performer with a robust 8.7% QoQ growth in USD terms, while the Americas grew by 1.7% QoQ. The RoW witnessed a steep 11.2% QoQ revenue dip owing to weak India business.

Outlook and Valuation – Highest growth among top-tier IT, BUY stays

We expect HCLT to out-perform top-tier peers in FY18E in terms of growth. While the IT major’s strong positioning in the high potential engineering services business will drive growth, the recent focus on IP partnerships is likely to change the nature of its balance sheet and investment requirements, apart from increasing amortisation, thus impacting EPS. Nonetheless, we believe underlying growth will take care of these factors. Valuation at 12.9x FY19E EPS leaves room on the table for investors. We retain our BUY rating on HCLT, with a revised target price of Rs1,000 (Rs1,030), as we slightly reduce our EPS estimates post the lower-than-expected performance in 2QFY18.

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Hindustan Unilever - 2QFY18 Result Update - Secular Growth Story in Place

In line with our estimates, Hindustan Unilever (HUL) has posted an impressive set of numbers in 2QFY18. While net sales increased by 6.5% YoY to Rs82bn on the back of 4% volume growth, EBITDA surged by 19.7% YoY to Rs16.8bn aided by 230bps YoY expansion in EBITDA margins to 20.2%. Notably, net profit – before exceptional items – grew by 14.2% YoY to Rs12.4bn, in line with our estimate. Adjusted for accounting adjustment for GST, underlying domestic consumer business witnessed an encouraging 10% YoY growth in value terms. 

We expect HUL to post revenue and earnings CAGR of 10.9% and 18.3%, respectively through FY17-19E. Though the valuations appear to be high at 46.2x FY19E earnings, we believe that HUL will sustain such high multiples on the back of recovery in volume growth, continued premiumisation strategy, expansion in margin profile and long-term benefits of GST. Hence, we maintain our BUY recommendation the stock with a revised Target Price of Rs1,429 (from Rs1,295 earlier).

Broad-based Growth in the Quarter

Underlying volume growth stood at 4% in 2QFY18 vs. flat volume growth witnessed in 1QFY18. The Management stated that transition to GST adversely impacted early part of the quarter with demand normalising towards the latter part. Further, the wholesale and CSD channels are stabilising at a gradual pace. HUL has undertaken price reduction to the tune of 3-4% to pass on the benefit of lower taxes to the consumers post GST. On comparable basis, while Home Care revenue increased by 13% YoY, Personal Care revenues grew by 8% YoY.

Margins Continue to Move Northwards

HUL’s gross margins improved by 360bps YoY to 52.1% aided by continued premiumisation trend and stable input costs, although the input prices have increased on QoQ basis. A&P spend for the quarter grew by 20% on absolute basis to Rs10.2bn and rose by 140bps to 12.5% of sales, to support new brands like Ayush. Continued focus on cost rationalisation resulted in 80bps YoY decline in other expenses to 15.1%.

Outlook & Valuation

We expect HUL to report net sales of Rs340.8bn/Rs385.1bn and net profit of Rs50.2bn/Rs59.4bn in FY18E and FY19E, respectively. Continued strategy of premiumisation and cost rationalisation are expected to result in 240bps improvement in margins from 17.4% in FY17 to 19.8% in FY19E. Based on expected EPS of Rs27.5, the stock currently trades at 46.2x FY19E earnings. We expect HUL to sustain these multiples on the back of revival in volume growth, benefits of GST and strong margin trajectory. Hence, we maintain our BUY recommendation on the stock with a revised Target Price of Rs1,429 (from Rs1,295 earlier).

Other 2QFY18 Result Updates -: 

• 2QFY18 Result Updates ITC YES Bank
• Q2FY18 Result updates Hdfc bank Asian paints

2QFY18 Result Updates - ITC, Yes Bank, CG Consumer Electricals, Jubilant Foodworks and ABB India

ITC - 2QFY18 Result Update - Modest Quarter; Valuations in Favour

ITC has reported muted set of numbers in 2QFY18 with its net sales and net profit growing by 7.2% YoY and 5.6% YoY to Rs102.3bn and Rs26.4bn, respectively. Gross revenues before GST grew by 3.9% YoY to Rs163.9bn. EBITDA margins declined by 80bps YoY to 35.9%.

We estimate ITC to post revenue and earnings CAGR of 9.9% and 12.4%, respectively through FY17-19E. Based on expected EPS of Rs10.6, the stock currently trades at an attractive PE multiple of 25.4x FY19E earnings, which is at a 35% to the consumer sector multiples (ex-ITC). The stock has corrected by >20% post revision in GST rates, thereby providing some margin of safety, in our view. Notwithstanding the near-term concerns, we maintain our BUY recommendation on the stock with a revised Target Price of Rs323 (from Rs336 earlier).

Muted Quarter for Cigarette Biz

We estimate the cigarette volumes to have fallen by ~6-7% YoY during the quarter. Post the revised GST rates and compensation cess, ITC effected a 14% price increase across the portfolio, which led to volume de-growth. We expect the situation to normalise in 2HFY18 with gradual acceptance of the price increase by the consumers. Although the reported cigarette sales are not comparable due to re-classification of line items post GST, segmental EBIT grew by 2.3% YoY to Rs32.9bn. Segmental EBIT was also impacted due to higher costs associated with transition to GST due to non availability of additional duty surcharge credit on transition stocks.

Decent Growth in FMCG Biz despite GST Transition

Reported revenue from the non-cigarette FMCG business rose by 5% YoY to Rs28bn (comparable sales growth of 10%), while it registered an EBIT of Rs205mn vs. loss of Rs33mn in the base quarter. Revenue growth was led by branded foods and personal care segments, but was adversely impacted due to on-going restructuring in lifestyle retailing business.

Mixed Performance in Other Segments

Revenue from Hotels remained largely flat at Rs3bn, although EBIT improved from Rs7mn to Rs42mn. While room revenues increased at a healthy pace due to higher ARRs, F&B revenues were adversely impacted due to ban on liquor near highways. Paperboard revenues fell by 1.7% YoY to Rs13.1bn due to subdued demand in FMCG and cigarette business, but segmental EBIT grew by 18.2% YoY to Rs2.7bn on the back of improved product-mix and cost saving initiatives. Agri-business revenues rose by 4.7% YoY to Rs19.7bn, but EBIT fell by 13.7% YoY to Rs2.6bn due to shortage of leaf tobacco and stronger INR, which impacted exports.

Outlook & Valuation

With this modest quarterly performance, we believe that the worst is behind for ITC. The current stock price is 20% lower from the date on which revised GST rates on cigarettes were announced, thereby providing some margin of safety. We continue to remain positive on the stock considering ITC’s dominant market leadership, pricing power, strong cash flow generation and attractive multiples. We maintain our BUY recommendation on the stock with a revised SOTP-based Target Price of Rs323 (from Rs336 earlier).

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Yes Bank - 2QFY18 Result Update - Operating Performance Improves, but Asset Quality Surprises Negatively

Yes Bank continued to deliver higher-than-estimated operating performance in 2QFY18 driven by sharp sequential growth in NII and other income along with stellar business growth led by consumer loans and business banking portfolio. However, the Bank reported the highest ever fresh slippages to the tune of Rs19.9bn led by substantially higher divergence, as suggested by the RBI in Annual Risk Based Supervision Audit and elevated slippages (Rs7.7bn) from other stressed sectors. The Bank has reported a divergence of Rs63.5bn on gross NPA front in RBI Annual Supervision Audit for FY17, out of which only 19% (Rs12.2bn) slipped into NPA, while the remaining got either resolved or sold.

Management Commentary & Guidance

• Out of total divergence of Rs63.6bn; 47% got upgraded on satisfactory conduct, 27% got repaid and 7.3% got sold to the ARC. The rest 19% reported as fresh slippages in 2QFY18.
• The Management has shared last 3 Risk Based Supervision Audit for FY15, FY16 and FY17, which reveals the Bank on an average has witnessed ~16% net slippages to NPA.
• Further, the Bank has exposure to 9 corporate accounts out of total 40-45 accounts referred to Insolvency & Bankruptcy Code (IBC) by the RBI. It has total exposure of Rs14.3bn towards these accounts. Out of which only Rs1.7bn are currently classified as standard asset.
• The Management ruled out any overlap among any divergence reported in the RBI Annual Supervision Audit for FY15, FY16 and FY17. Further, maximum divergences are from Infra & Infra related accounts.
• The Bank continues to maintain credit cost guidance of 70bps for FY18, compared to actual credit cost of 48bps in 1HFY18.
• The Management looks forward to 25-30% growth in loan book in FY18, compared to 12.4% YTD. Further, it expects 3.7- 3.8% growth in NIMs in current fiscal.
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Outlook & Valuation

YES Bank is making sustained progress towards building a strong retail franchise, which in our view would add depth to its balance sheet and boost earnings. Further, recent developments indicate that the Bank has been able to manage the issues of asset quality effectively. Further, the Bank also raised capital to support its aggressive growth plan over next 2-3 years. Looking ahead, we expect the Bank to sustain continued improvement in operating metrics led by dwindling headwinds on asset quality front and improving balance sheet growth especially from retail segment. Hence, we maintain our BUY on recommendation the stock with a revised Target Price of Rs350 based on 2.7x FY19E Adjusted Book Value.

Other Post on YES Bank : Future of yes bank after stock split

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CG Consumer Electricals - 2QFY18 Result Update - A Strong Show; Fundamentals Remain Intact

Led by volume growth, Crompton Greaves Consumer Electricals (CGCEL) has reported a strong performance in 2QFY18. Its reported revenue grew by 6.6% YoY to Rs9.6bn, while adjusted revenue – considering the impact of Excise Duty – grew by 15.9% YoY. CGCEL’s reported PAT grew by 23.3% YoY to Rs0.7bn, while adjusted for non-cash ESOP charge of Rs141mn, its PAT surged by 39.8% YoY. We believe that the expected strong double-digit growth in light electrical industry augurs well for CGCEL. Thus, we maintain our BUY recommendation on the stock with an unrevised Target Price of Rs246.

Strong Growth in Lighting Biz Boosts Adjusted Revenue

Revenue from lighting business – which contributes 35% to CGEL’s total sales – grew by 15.5% YoY. Within the lighting business, LED segment grew by 25% YoY to account for ~70% of its total CGCEL’s lighting sales. Consumer Electrical segment, which contributes ~64% to CGCEL’s total revenue, grew by 2.4% YoY. Sales volume of premium fans also remained strong. The markets witnessed some normalcy following disruption in run-up to and following GST roll-out, which led to notable improvement in two biggest businesses i.e. Fans & Lighting. While leveraging innovation in Anti Dust Fans led to gain in consumption market share in Fans segment, cost optimisation led to healthy growth in B2C lighting growth. The Company expects the business to back to normal by 3QFY18-end.

Higher Margin Aids Bottom-line Growth

CGCEL’s EBITDA margin grew by 133bps YoY to 12.6% in 2QFY18 led by improved margin in electrical consumer durable and lighting products business. While the margin from electrical consumer durable segment improved by 347bps YoY to 17.8% in 2QFY18 (vs. 14.4% in 2QFY17), the lighting products business segment witnessed 90bps YoY improvement in margin to 12.6% in 2QFY18. Stable cost structure owing to continued efforts on operational efficiencies and improved margins led to 23.3% YoY growth in reported net profit to Rs0.70bn.

Outlook & Valuation

We expect CGCEL’s business to recover in next 1-2 quarters, as normalcy is steadily getting restored post GST roll-out. We expect CGCEL’s revenue and earnings to witness 16.4% and 23.5% CAGR, respectively over FY17-19E driven by strong product portfolio of established brands, market leadership and strong distribution network. The Company is expected to deliver RoCE in the range of 30-40% during the same period. We maintain our BUY recommendation on the stock with an unrevised Target Price of Rs246 (Valuing at 35x P/E to its FY19E EPS).

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Jubilant Foodworks - 2QFY18 Result Update - Revenues in line but strong EBITDA beat; Upgrade to HOLD

Surpassing our estimates, Jubilant FoodWorks (JFL) has posted a strong performance in 2QFY18. While net revenues grew by 9.2% YoY to Rs7.3bn in line with our estimates, EBITDA surged by 59% YoY to Rs1bn vs. our estimate of Rs796mn. Led by sharp fall in operating costs, JFL’s net profit surged by 125% YoY to Rs485mn vs. our estimate of Rs239mn. Same Store Sales (SSS) growth came in at 5.5% YoY. Depreciation charge declined by 11% YoY to Rs326mn due to reversal of accelerated depreciation from 1QFY18, thereby aiding earnings growth.

Considering sharp improvement in margin profile due to low store addition, aggressive cost reduction and lower base effect coupled with stable SSS growth, we are revising our revenue/EBITDA/PAT estimates upwards by 4.8%/17%/35%, respectively for FY19E. On account of high operating leverage, we expect recovery in SSS would lead to sharp improvement in margins. Hence, we upgrade our recommendation on the stock to HOLD from REDUCE with an upwardly revised Target Price of Rs1,586 (from Rs922 earlier).

Stable SSS Growth with No Store Addition

SSS grew by 5.5% YoY compared to 7% YoY in 1QFY18. Looking ahead, we expect lower base effect to result in higher SSS growth in coming couple of quarters. While the Company added one new store, it also closed one existing store keeping the Dominos store count intact at 1,125. JFL has reduced the store opening target from 40-50 to 30-40 stores in FY18. Store count for Dunkin Donuts has come down to 52 from 55 in the same period. The Management stated that the consumer response to the recent product changes has been encouraging. The Company has also passed on the benefit of lower GST rates to the consumers.

High Operating Leverage in Play

JFL’s gross margins declined 70bps YoY to 74.1%. Despite rise in the prices of key inputs and higher cheese content in Pizzas, JFL was able to restrict the fall in margins owing to lower discounting and availing of input tax credits. Sharp focus on cost containment coupled with no major store addition resulted in fall in other cost heads i.e. rent (-90bps YoY), employee (-100bps YoY) and other expenses (-310bps YoY). Thus, the resultant EBITDA margins rose by 440bps YoY to 14.1%. 

Outlook & Valuation

Considering the sharp earnings beat coupled with increased focus on cost rationalisation and improved consumer sentiment, we have increased our earnings estimates for JFL. Going forward, while SSS growth would be a key monitorable factor, store expansion, cost rationalisation and reduction in Dunkin losses will also be important factors to watch out for, in our view. Based on expected EPS of Rs28.6, the stock currently trades at 57.6x FY19E earnings. We upgrade our recommendation on the stock to HOLD from REDUCE with an upwardly revised Target Price of Rs1,586 (from Rs922 earlier).

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ABB India - 3QCY17 Result Update - Improving Fundamentals; Robust Order Book

Led by better operating margins, ABB India’s PAT grew by 18.2% YoY to Rs0.83bn in 3QCY17. However, its top-line declined by 13.1% YoY to Rs18.8bn, as all its businesses reported lower revenues following GST roll-out. Though the stock has gained ~25% since our initiation report in Jan’17, we continue to remain positive on the stock owing to improving fundamentals. We maintain our BUY recommendation on the stock with an unrevised Target Price of Rs1,607.

All Business Verticals Reeled Under GST Impact

Though the new GST structure caused an impasse for several SMEs leading to deferrals and delays in the absence of clarity, innovative product-mix and enhanced manufacturing base yielded results in the form of export orders (15% of total revenue) during the quarter. Revenue declined by 13.1% YoY to Rs18.8bn with the decline in revenues in all business verticals i.e. Electrification Products (-2.8% YoY), Industrial Automation (-29.2% YoY), Robotics & Motion (-7.1% YoY) and Power Grids (-14.3% YoY). Looking ahead, the Management expects revenue to come back to normal level as GST clarity issue among the suppliers and vendors is over.

Operating Margin Continues to Improve

ABB continued to report steady improvement in margins led by operational efficiencies and focus on products. Initiatives undertaken in past 3-4 years i.e. increased localisation, rationalisation of supply chain, improving efficiency, better project management and lower input cost aided ABB to report steady improvement in margins. Further, customised offerings, continued focus on cost and differentiated portfolio supported YoY improvement in ABB’s net working capital position. PBIT margins for Robotics & Motion, Industrial Automation and Power Grid expanded by 481bps YoY, 227bps YoY and 482bps YoY, respectively. However, PBIT margins for Electrification products decreased by 11bps YoY.

Order Backlog Offers Strong Revenue Visibility

Though ABB secured orders worth Rs19.3bn in 3QCY17 (vs. Rs29.7bn in 3QCY16), adjusting for one-time large rail order in 3QCY16, fresh orders remained largely flat. Base orders were the key contributor with industry turning to improving operational efficiencies through technology and digital upgrades including robotics automation. Notably, continued uptrend in overseas business and order backlog of Rs121.3bn augur well for ABB.

Outlook & Valuation

Looking ahead, we expect ABB’s earnings to witness 34.5% CAGR through CY16-18E, while RoE is expected to improve to 15.4% in CY18E from 11.5% in CY16. On the back of strong presence in power T&D space, we believe ABB would continue to command higher multiple, going forward. Valuing at 50x CY18E (15% discount to its mean multiple of 60x over 2005-15) earnings of Rs32.1/share, we maintain our BUY recommendation with an unrevised Target Price of Rs1,607.

Other 2QFY18 Result Updates Q2FY18 Result updates Hdfc bank Asian paints