Bajaj Auto (NS:BAJA): Bajaj Auto’s Q2 EBITDA margin, at 16% (+80bps QoQ), was aided by RotDep/MEIS benefits of INR 1.4bn that were received by the OEM (pertaining to prior quarters). The management has disclosed plans to launch electric vehicles–it will launch two 2Ws (including Husqvarna scooter) as well as a 3W in the next 12-15 months. Besides, Bajaj is setting up a capacity of 0.5mn units at its Akurdi facility for EVs (timelines are awaited). We maintain BUY with a target price of INR 4,350 (at 20x Sep-23E EPS). Bajaj benefits from its export presence, which is now over 50% of sales, as well as its strong R&D capabilities.
Marico (NS:MRCO): Marico posted steady revenue growth and beat in EBITDA margin. Revenue/EBITDA grew 22/9% YoY (HSIE 20/3%). Domestic revenue and volume grew 24/8% YoY, 15/9% on two-year CAGR - a strong performance. PCNO saw volume growth of 7% YoY, maintaining its long-term average growth. VAHO grew 16%, mainly driven by volumes in the mid and premium brands. Saffola clocked 46% value growth; however, volume remained muted due to trade destocking, given the volatility in edible oil prices. International continued its momentum (up 14% YoY, 12% in Q2FY21), but Vietnam continued to face COVID-led disruptions. The gross margin, at 42.5% (down 556bps YoY and 143bps QoQ), was broadly in line (HSIE 42%), with pressures from vegetable oil and crude. Copra prices were stable. Marico continued its investment in core brands and innovation in the food segment. We expect the growth momentum to sustain and margin pressure to ease in H2FY22. We maintain our EPS estimates and value Marico at 45x PE on Sep-23E EPS to derive a target price of INR 600. Maintain ADD.
United Spirits (NS:UNSP): UNSP reported a strong beat on revenue and EBITDA margin. Net revenue was up 14% YoY (HSIE 8%) while volume was in line at 20.5mn cases, up 3% YoY. The super-premium portfolio continued to grow strongly, leading to P&A realisation growth of 14% to INR 1,605/case. Thereby, the gross margin expanded 207bps YoY to 44.2% (HSIE 44.6%) despite input cost pressure. The company saw a strong EBITDA margin expansion of 483bps to 17.4% (adjusted EBITDA margin 16.4%, HSIE 15.2%), led by operating leverage. UNSP’s EBITDA was up 58% YoY vs. 30% expected. Employee cost was up 19% YoY (-11% QoQ) to INR 1.66bn. A&P spend was down 3% YoY (+6% in Q2FY21). India is a spirited market with long-term premiumisation drivers. The new CEO is aiming for double-digit revenue growth on a sustainable basis through various initiatives for the P&A portfolio. It will also lead to better operating margin print in the coming years. We raise our EPS estimates for FY22/FY23/FY24 by 5% each. We value UNSP at 50x P/E on Sep-23E EPS (standalone) to derive a target price of INR 950 (including INR 48/share of non-core assets). Maintain ADD.
Gujarat Gas Ltd (NS:GGAS): Our BUY recommendation on Gujarat Gas (GGL) with a price target of INR 790 is premised on (1) volume growth at 15% CAGR over FY21-24E; (2) portfolio of mature, semi-mature, and new geographical areas (GAs); and (3) compelling valuations, given superior return ratios among the city gas distribution players. Q2FY22 EBITDA was 36% below our estimate and APAT was 42% below, owing to 46% below-than-expected per unit EBITDA margin due to higher spot gas cost, higher-than-expected operating expenses, offset by 17% higher volumes and lower-than-expected employee expenses and interest cost.
Lupin (NS:LUPN): Lupin’s Q2 results disappointed, primarily due to a subdued gross margin and higher other expenses. Revenue was in line, with the US showing signs of stabilising (+7% QoQ). However, the EBITDA margin dipped to 13.5% (-330bps YoY, -70bps QoQ), the lowest in the past seven quarters. Lupin has again revised its EBITDA margin guidance downward, from 17-18% to 16%+ in H2FY22, despite the reduction in R&D guidance (~50-100bps) and savings in specialty burn (~75bps, Solosec write-off). While there is reasonable progress in its pipeline and it has meaningful opportunities such as gSpiriva, gSuprep, gRevlimid, Peg-F (US) and gFostair (UK) to drive growth in the near to medium term, its inability to improve cost efficiencies and sustain savings is proving to be a dampener. We cut our estimates by 20%/14% for FY22/23 to factor in the Solosec write-off and lower margins. We roll forward to Sep’23 EPS and revise our TP to INR915/sh, based on 21x Sep’23e (vs 23x earlier). REDUCE.
Dalmia Bharat Ltd B (NS:DALB): We maintain ADD on Dalmia Bharat (DBEL) with an unchanged target price of INR 2,240/share (13x Sep’23E consolidated EBITDA). In Q2FY22, while consolidated net sales (adj for prior-period incentives) rose 9% to INR 25.21bn on steady volume growth, elevated opex pulled down adj EBITDA/APAT by 19/53% YoY to INR 5.65/1.09bn. Unitary EBITDA fell 24% YoY to INR 1,108/MT. Despite the accelerated Capex spend, DBEL reduced debt by 17% (vs Mar’21) to INR 32bn, using its cash balances. The company is confident of (1) passing on soaring fuel price impact and (2) its major Capex (58% expansion by FY24E) and green power additions remaining on track.
Cummins India Ltd (NS:CUMM): Cummins India (NS:CUMM) Ltd (CIL) has delivered, yet again, a stellar quarter with revenue/EBITDA/APAT beat at 29/25/26%. Demand outlook is robust with lagging segments like infra, marine, and railways yet to normalise and pick up. The exports market is also witnessing a sharp recovery with CIL targeting a turnover of INR 20bn from it. Good progress is being made on all options in the CIL/CTIL merger, and the company will announce the decision once it has finalised it. We remain positive on CIL due to: (1) new product offerings; (2) global consolidation and increased investment in cleantech; (3) start of a new Capex cycle globally; and (4) exports ramp-up, given that global economies are on a path to recovery. We maintain BUY on CIL with an unchanged SOTP-based target price of INR 1,191 (Sep-23E EPS).
Torrent Power Ltd (NS:TOPO): Torrent Power (TPW) reported consolidated revenue of INR 36.5bn (+16.6% YoY) in Q2FY22. The growth was largely led by improved power demand, lower T&D losses, and improved collection during the quarter. EBITDA increased 31.9% YoY to INR9.4bn due to a fall in T&D losses and lower other expenses. Deleveraging, along with a fall in interest rates, has led to lower interest expenses. After adjusting for one-offs, PAT stands increased by 14.1% YoY at INR3.7bn, surpassing ours and consensus estimates. We have revised our SoTP TP to INR528, factoring in the company’s recent acquisitions of 156MW wind and 50MW solar projects. We maintain ADD, given improved industrial demand, fall in T&D losses, healthy net D/E ratio, and sustainable FCFE of ~INR10bn p.a.
Mahindra and Mahindra (NS:MAHM) Financial Services Ltd (NS:MMFS): MMFS’s Q2FY22 earnings were significantly ahead of our estimates due to large write-backs on the provisioning undertaken in Q1FY22. MMFS’ stressed asset pool (GS II + GS III) has declined moderately to 32%, after peaking out at 35% in the previous quarter, still a long way from the management guidance of ~23-25% by Mar’22. As economic activity improves further and more uniformly, we expect the elevated stress pool to normalise, thus reversing the lion’s share of the additional provisioning undertaken during Q1. While disbursements gathered momentum (+61% YoY), it still remains nearly half of pre-COVID levels. We revise our FY22E earnings estimates upwards by 6% to factor in higher upgrades and recoveries driving lower credit costs. We maintain ADD with a revised SOTP-based TP of INR195 (earlier INR191), implying 1.3x Sep’23 ABVPS. Gradual normalisation of portfolio stress, sponsor-backed funding cost advantage, and inexpensive valuations underpin our ADD rating.
KEC International (NS:KECL): KEC reported robust execution with revenue at INR 35.8bn (in-line), driven by non-T&D segments. Barring supply chain constraints, revenue could have been 10% higher. The order book (OB), at INR 285bn (with L1 of INR 74bn), is at an all-time high. Margin, at 7.1%, was affected by raw material prices and losses in SAE legacy projects. KEC continued to diversify with the acquisition of Spur Infra, T&D EPC orders in Europe, and airport civil work. The overhang in the collection from railways and losses in SAE has started abating. However, stalled projects in Afghanistan with net exposure of INR 1.7bn continue to be an overhang. A well-diversified OB, strong H2FY22 bid pipeline of INR 650bn, and likely improvement in margins may lead to rerating. We maintain BUY on KEC with an unchanged target price of INR 556/sh (15x Sep-23E EPS).
RBL Bank Ltd (NS:RATB): RBL Bank (RBK) disappointed expectations with PAT at INR 0.3bn on account of an all-around miss in operating metrics and sustained steep provisions (4.6% annualised). Provisions have remained elevated (north of 4% for nine straight quarters), largely towards its highly-concentrated retail unsecured businesses (CC+MFI at ~31% of loans). Slippages were elevated at ~8.7% (annualised) for a fourth straight quarter. Our concerns and caution on RBK stem from the disproportionately high concentration of profit pools around two unsecured businesses (two-thirds of the fee income from credit cards), both of which are yet to fully stabilise. For a franchise that has been banking on a single-engine (credit cards at over one-fifth of loans), the impairment in its cards business is disconcerting. We hack our FY22E/23E earnings forecasts further by 78%/20%; we maintain REDUCE with a revised TP of INR181 (earlier INR 184).
Balaji Amines Ltd (NS:BAMN): Our REDUCE recommendation on Balaji Amines (BLA) with a price target of INR 3,630 is premised mainly on the pressure felt on the margins, owing to the rising raw material costs and logistical challenges. Q2 EBITDA/APAT was 11/11% below our estimates, owing to higher-than-anticipated raw material cost, higher-than-expected other expenses, higher-than-expected depreciation, offset by higher-than-expected other income.
Sagar Cements Ltd (NS:SGRC): We maintain our ADD rating on Sagar Cements (SGC) with an unchanged TP of INR 295/share (7.5x Sep’23E consolidated EBITDA). In Q2FY22, while SGC delivered steady volume growth, unitary EBITDA halved YoY (to INR 712/MT) on elevated opex and weak realisation. Thus, while consolidated revenue rose 13% YoY to INR 3.69bn, EBITDA/APAT fell 42/58% YoY to INR 608/211mn. As SGC’s major Capex nears completion, net debt/EBITDA inched up to 2.1x. By the end of Q3, its capacity will increase by 43% to 8.25mn MT. These will both boost volume growth and diversify its regional exposure. The company also expects the margin to rebound in Q3 on slower cost inflation QoQ.
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