Results Review For Bajaj Finance, Kotak Mahindra Bank, Axis Bank, Ambuja Cement

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By Krishnan ASV

Bajaj Finance (NS: BJFN ): Bajaj Finance’s (BAF) Q2FY22 earnings were 15% below our estimates due to higher-than-expected provisioning at 3.4% of AUM (including a management overlay of INR3.5bn). After a subdued Q1FY22, BAF’s business momentum gathered a strong pace (AUM/total customer franchise up 22%/20% YoY). Asset quality improved sequentially with cumulative GS-II+GS-III at 6.1% (Q1FY22: 7.7%) and negligible addition to the restructured book (0.9% of AUM). We revise our FY22/FY23 earnings estimates by -4%/4% to factor in higher credit costs during FY22 offset by higher AUM growth, going forward. Current steep valuations (8.5x Sep’23 ABVPS) underpin our REDUCE stance with a revised TP of INR 5,498 (earlier INR 5,393).

Kotak Mahindra Bank (NS: KTKM ): Kotak Mahindra Bank’s (KMB) Q2FY22 performance surprised our estimates predominantly on the back of a favourable credit cost outcome (restructuring at 54bps and annualised credit costs at 80bps). However, the greatest surprise, albeit not completely reflected in the P&L this quarter, was the sequential loan growth of 8% (+15% YoY). Gross slippages clocked in at 2.4% (Q1FY22: 2.8%) even as collections and recoveries normalised (net slippages were negative). We believe that current valuations factor in the formidable strengths and best-in-class profitability of the consolidated franchise (ROAs >1.8%) - however, while the growth impulse is welcome, we believe there are trade-offs ahead in terms of sustaining such superior metrics (funding costs and opex ratios) in a high-growth phase. Maintain REDUCE with a SOTP target price of INR 1,835 (standalone bank at INR1,417, 3.6x Sep’23 ABVPS).

Axis Bank (NS: AXBK ): Axis Bank’s (Axis) Q2FY22 earnings were 6% higher than our estimates on the back of steady operating performance and better portfolio metrics (net slippages at 0.5%; restructured book at 0.7% of loans). With PCR at 70% and non-NPA provisions at 2.1% of loans, credit costs are likely to remain subdued (Q2FY22: 1.2%) as the back-book clean-up is nearly complete (BB & below portfolio at 1.9% of loans). The bank is focused on tech investments and digital initiatives in order to ready itself for the next leg of growth in retail and SME segments even as the wholesale book growth remains muted. We tweak our FY22/FY23E earnings estimates by -4%/5% for lower provisioning, offset by continued pressure on NIMs and maintain BUY with revised SOTP-based TP of INR957 (earlier INR 928).

Ambuja Cements Ltd. (NS: ABUJ ): We maintain our ADD rating on Ambuja Cements (NS: ABUJ ) (ACEM) with an unchanged target price of INR 390/share (SOTP-based). ACEM Q3CY21 performance was broadly in line. Its standalone revenue/EBITDA/APAT rose 14/3/0% YoY to INR 32.37/7.03/4.41bn respectively. Sales volume rebound 9% YoY on healthy demand and even realisation fell a modest 1% QoQ (+4% YoY). However, rising input costs pulled down unitary EBITDA by 5/24% YoY/QoQ to INR 1,135/MT. We expect the recently commissioned plant in Rajasthan to accelerate volume growth from CY22E onwards.

SRF (NS: SRFL ): We retain our ADD rating on SRF with a target price of INR 2,380 on the back of (1) continued healthy performance from speciality chemicals business and packaging films business; (2) recovery in the technical textiles segment; (3) strong balance sheet; and (4) deployment of Capex towards high-growth speciality chemicals business over the next 3-4 years to tap the opportunities emerging from the agrochemical and pharmaceutical industry. EBITDA/APAT was 3/3% below our estimates, owing to higher-than-expected raw material costs, higher-than-expected opex and higher-than-expected tax outgo.

Nippon Life India Asset Management Ltd (NS: NIPF ): Revenue came in marginally below our estimates as a consequence of sustained compression in revenue yields. Market share in the high-margin equity segment slightly moderated (-12bps QoQ) as a result of high intensity in NFOs by peers. We expect NAM to focus on improving its performance to continue recouping its lost market share. However, we downgrade our revenue estimates by 1.5/1.3% on the back of a sharp drop in yields in flagship equity schemes. Driven by cost optimisation, we expect NAM to deliver FY21-24E revenue/NOPLAT CAGRs of 16.5/24.5%. We maintain our ADD rating on the stock with a revised target price of INR 470 (36x Sep-23E EV/NOPLAT + Sep-22E cash and investments). The stock is currently trading at FY23E/24E EV/NOPLAT of 36.5/29.5x and PE of 32/27.2x.

IRB Infrastructure Developers Ltd (NS: IRBI ): IRB is a platform ready with likely INR 53.5bn of fund infusion from Cintra and GIC. This shall tackle the twin issues of leverage and growth capital. Post infusion, the net D/E, at the consolidated level, will see a decline to 1.2x from 2.1x currently and growth capital earmarked at INR 15bn will help in winning larger projects with potential asset addition of INR 200bn. This deal at the IRB level is the first of its kind in India and augurs well for creating a long-term asset growth platform for the company. We roll forward the valuation to Sep-23E, taking our SOTP TP to INR 345/sh (higher BOT valuation on better-than-expected toll growth and EPC rollover to Sep-23E). We shall factor in the deal once the infusion takes place.

Symphony Ltd (NS: SYMP ): Symphony's domestic business remained under pressure (miss in revenue) due to high trade inventory. Domestic revenue was at INR 1,350mn (HSIE INR 1,446mn), up 29% YoY, down 15% on a two-year CAGR. The company remained optimistic and is focusing on new launches and initiatives to revive the domestic business. Performance in the stable summer season will reflect the outcome of such efforts. Exports remained volatile on a quarterly basis, registering revenue of INR 50mn (HSIE INR 95mn) with RoW revenue down 1% YoY (non-seasonal quarter). Gross margin expanded 36bps YoY (+103bps in Q2FY21, +212bps in Q1FY22, HSIE -21bps) to 48.6%. EBITDA margin came in at 25% (HSIE 24.3%), growing 21% YoY (HSIE 29%). CT saw a recovery in operating profitability in H1FY22 after showing a dismal margin last year. IMPCO, too, saw margin recovery, while GSK China remained weak. Given the company’s leadership position and innovative product pipeline, we believe it is well-positioned to gain from a strong season (missed the last two seasons). We value the stock at 35x P/E on 24E EPS and derive a TP of INR 1,300. Maintain ADD.

Orient Cement Ltd (NS: ORCE ): We maintain our BUY rating on Orient Cement with an unchanged target price of INR 185/share (7.5x Sep’23E consolidated EBITDA). We continue to like Orient for its healthy operating metrics and strengthening the balance sheet, which should support its upcoming major expansion. Orient reported healthy performance in Q2FY22, as revenue grew 28% YoY to INR 6.13bn, led by 25% volume recovery and 3% higher NSR. Op-lev gains and steady operating metrics moderated the impact of soaring fuel prices, thereby delivering unitary EBITDA of INR 1,048 (down 6/23% YoY/QoQ) Thus, EBITDA/APAT rose 18/63% YoY to INR 1.34/0.57bn respectively. Amid no near term major Capex, debt reduction continues. Net debt/EBITDA cooled off to 0.9x.

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