Results Review for Aditya Birla Capital, Indian Oil Corporation, Bharat Petroleum

Published 02-11-2021, 11:22 am
IOC
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KAPT
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VOLT
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JKLC
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KOLT
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NEOE
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By Krishnan ASV

Aditya Birla Capital Ltd (NS:ADTB): Aditya Birla Capital (ABCL) continued its credible makeover journey to drive consolidated return ratios closer to franchise potential over the next three years. ABCL is steadily repositioning its lending business mix towards retail and granular loans (59% of NBFC AUM towards Retail + SME + HNI; 33% of HF AUM skewed towards affordable housing), likely to reflect in sustained improvement in franchise earnings. Both risk (insurance) businesses saw strong growth although prior period claims (spill-over from Q1FY22) dented profitability. Both the risk businesses are steadily building their profitability trajectory - VNB margin clocked in at 7.6% during H1FY22, up 600bps YoY, on the back of mix change and improving loss ratios (ex. COVID impact).

Indian Oil (NS:IOC) Corporation: Our ADD rating on Indian Oil Corporation (IOC) with a price target of INR 145 is premised on (1) recovery in domestic demand for petroleum products in FY22 and FY23, (2) improvement in refining margins in FY22/23, and (3) sustainability of auto fuel gross margins over INR 3/lit.

Bharat Petroleum (NS:BPCL) Corporation: Our ADD rating on Bharat Petroleum (BPCL) with a price target of INR 475 is premised on (1) recovery in domestic demand for petroleum products in FY22 and FY23, (2) improvement in refining margins over the coming 18 months, and (3) sustainability of auto fuel gross margin over INR 4.5/lit. Q2FY22 EBITDA/APAT were 6/26% above our estimates, owing to higher-than-anticipated GRM at USD 6.04/bbl, higher-than-expected refining throughput, higher-than-expected other income and lower-than-expected finance cost.

Cholamandalam (NS:CHLA) Investment and Finance Company: Chola’s Q2 earnings beat estimates despite the muted operating performance, aided by lower-than-anticipated provisioning (0.3% of AUM). The aggregate stressed portfolio (GS-II + GS-III) moderated marginally by 200bps to 19% (Q1FY22: 21%) as borrower income levels were yet to fully recover enough to clear the past arrears completely. Lower provisions dragged coverage to 36.5% (in line with historic trends), although GS-II coverage was high at 13%. While YoY AUM growth softened further to 4.2%, disbursals witnessed an uptick (+35% YoY) and are expected to gain further momentum with a pick-up in economic activity. We believe that these impairment levels, although elevated and likely to normalise by Q4FY22, do not disturb our medium-term thesis on Chola as a formidable franchise likely to consistently deliver 18-20% RoE. We trim our FY22 earnings by 5% to factor in higher credit costs and maintain BUY with a revised target price of INR646 (3.9x Sep’23 ABVPS).

Voltas (NS:VOLT): Voltas saw a beat in UCP revenue; however, the slowdown in project execution led to a miss in EMPS revenue. UCP revenue grew 34% YoY (+9% in Q2FY21, 13% HSIE) to INR 10.1bn (even higher than Q1 revenue of INR 9.6bn). UCP volume was up 24% YoY, maintaining its YTD market leadership at 25.9% (26.8% in Q2FY21). The Trade channel has stocked up on inventory due to supply chain uncertainties. The price hike was taken in October and raw material was secured; however, the margin may see near-term pressure. Project business continued to face execution issues, with EMPS revenue down 28/22% YoY/QoQ (+13% HSIE). Recovery in project business is likely in H2FY22, both in terms of orders and execution. JV (Beko) losses were in line at INR 189mn (INR 71mn in Q2FY21, INR 306mn in Q1FY22), given continued brand investments and input cost pressures. We cut our FY22/23/24 EPS estimate by 5/1/1%. We value the stock on SoTP (UCP/EMPS/EPS P/E at 50/9/15x and Volt-Beko P/S of 4x) on FY24 to derive a TP of INR 1,400, arriving at an implied PE of 43x. Maintain ADD.

Aarti Industries (NS:ARTI): We maintain our BUY recommendation on Aarti Industries (AIL) with a target price of INR 1,330/share. We expect the company’s PAT to grow at a 31% CAGR over FY22-24E. AIL's constant focus on Capex and R&D will enable it to remain competitive and expand its customer base. The toluene segment in India is mainly untapped and catered to through imports; AIL will benefit in the long term by entering this segment. Q2 EBITDA/APAT were 4/2% below our estimates, attributable to significantly higher-than-expected raw material cost, higher-than-expected opex, offset by a 16% rise in revenue, lower-than-expected depreciation, and finance cost.

Oberoi Realty (NS:OEBO): Oberoi Realty (ORL) registered strong Q2FY22 performance with the presales volume of 0.4msf (+3.4x/+4.8x YoY/QoQ) for a value of INR 8.3bn (+2.5x/+4.9x YoY/QoQ) due to strong demand across all projects. Revenue recognition for Three Sixty West (TSW) is expected from Q3FY22 with OC expected in 30-45 days. To pass on the elevated input cost, ORL has taken price hikes on its Goregoan Elysian Phase-2 project by INR 500-1000psf with plans to hike prices for TSW after OC. For its non-MMR strategy, ORL will be cautiously taking 2-3msf projects via land acquisition with a total investment of less than INR 10bn. We believe recent share price rally factors in much of its growth story, namely, (1) foray into new markets outside the Mumbai Metropolitan Region; (2) focus on short-cycle redevelopment projects; (3) strong brand pull; (4) preferred developer of the first choice in MMR markets; and (5) a strong balance sheet. Thus, accordingly, we change our rating to ADD (earlier BUY). We have considered calibrated price hikes across projects, reduced cap rate from 10% to 8% for rental assets, and added a 10% NAV premium for non-MMR foray, leading to an increase in our NAV-based TP to INR 1,060.

JK Lakshmi Cement (NS:JKLC): We maintain our BUY rating on JK Lakshmi Cement (JKLC) with an unchanged target price of INR 780/share (8x Sep’23E consolidated EBITDA). We estimate healthy cash flows would support its major expansion in Udaipur, without stressing its balance sheet and keeping RoE buoyant at ~19-20%. In Q2FY22, while JKLC’s consolidated revenue rose 7% YoY to INR 12.1bn, EBITDA/APAT fell 14/6% YoY to INR 1.94/0.84bn on sales loss and elevated input costs. JKLC is confident of margin recovery in H2. The upcoming 10MW WHRS plants should aid margin FY23E onwards.

Kalpataru Power (NS:KAPT) Transmission: Kalpataru Power (KPTL) reported a revenue/EBITDA/APAT miss of 17/23/30% on account of higher commodity prices and freight rate, which led to delayed client dispatches and lower revenue booking. KPTL secured new orders worth INR 20bn in FYTD22, taking the order book (OB) to INR 124bn. Management has reduced revenue guidance from 10-15% FY22 topline growth to 5-10%. It expects to achieve a near-net cash status by FY22, with INR 7bn of cumulative cash flow from the transmission asset divestment and Indore real estate project. We have cut the EPS estimate to factor in weak inflows and maintain BUY with a reduced SOTP target price to INR 552 (Sep-23E).

Neogen Chemicals Ltd (NS:NEOE): Our BUY recommendation on Neogen Chemicals (NCL) with a target price of INR 1,470/sh is premised on (1) increasing contribution of the high-margin CSM business to the revenue, (2) capacity-led expansion growth opportunity, (3) constant focus on R&D, and (4) improving return ratios and strong balance sheet, going forward. Q2 EBITDA/APAT was 11/39% above our estimates, attributable to a 23% rise in revenue, lower-than-expected finance cost, lower-than-expected tax rate, offset by higher-than-expected raw material cost.

Kolte Patil (NS:KOLT) Developers: Kolte Patil Developers (KPDL) reported strong presales of 0.67msf (+91/+68% YoY/QoQ). In value terms, sales grew by +2.2x/+73% YoY/QoQ to INR 4.3bn. KPDL is well on the path to cross 2.5msf presales guidance for FY22. In value terms, the contribution of non-Pune sales was maintained at ~35%, the same as the previous quarter. Contribution to sales from premium inventories was at an all-time high and with a price increase of 2-4%, average price realisation was up by 15%/2% YoY/QoQ. Collections were also robust at INR 3.7bn (vs INR 2.8bn in Q1FY22). We increase our FY22/FY23 estimates by 7.4/11.6%. Maintain BUY with a revised TP of INR 377 (Sep-23E), given a comfortable balance sheet, traction in Mumbai, and an accelerated launch pipeline.

JMC Projects: JMC Projects (JMC) reported a loss of INR 2.1bn on account of INR 2.9bn non-cash write-offs in its road asset portfolio. We believe that it is more off-balance sheet cleaning as (1) KEPL (FY20 loss funding of INR 400mn) saw force majeure termination due to non-collection of tolls, (2) WEPL (FY20 loss funding INR 200mn) may get restructured, and (3) VEPL (FY20 loss funding INR 200mn) may be monetised by FY22 as per JMC guidance. The order inflow was robust at INR 44.3bn, taking the order book (OB) to an all-time high of INR 187bn. JMC rerating may continue, given (1) an all-time high OB (~5x FY21 revenue); (2) potentially stronger balance sheet, post-restructuring of BOT assets by Q3FY22; and (3) likely growth outperformance on the back of robust order backlog. We upgrade our FY22/FY23/24 EPS by (6.3)/3.8/5.1%. We maintain BUY with a target price of INR 155 (11x Sep-23E EPS).

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