Results Review For ITC, Larsen & Toubro, Maruti Suzuki, SBI Life Insurance

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ITC (NS: ITC ): ITC delivered in-line revenue growth with a few positives in key segments. Revenue was up 12% YoY with cigarettes/FMCG/hotels/agri/paper growing 10/6/260/-7/25% YoY. Cigarette revenue growth was 10% with volume growth of 9.5% (HSIE 8%). Given the positive exit growth rate for cigarette volumes and potential for price hikes, we expect a sustainable cigarette recovery in H2FY22. Cigarette EBIT growth was at 10%. FMCG business registered steady 6% growth (HSIE 8%) and clocked 11% two-year CAGR. FMCG EBITDA margin was at 10% (+30bps YoY, >300bps in Q2FY20) despite commodity headwinds. Paper continued to deliver revenue/EBIT growth of 25/24% YoY (HSIE 13/20%). With the resumption of normalcy and higher mobility, we expect demand trends to improve to achieve cigarette recovery and FMCG sustainability. We maintain our EPS estimates for FY23/FY24 while cutting 2% for FY22. With FMCG sustaining healthy performance (growth + margin), we increase our EV/revenue multiple to 4x (earlier 2x). We value ITC on a SoTP basis to derive a target price of INR 280 (implied PE of 20x PE Sep-23E EPS). Maintain BUY.

Larsen & Toubro Ltd (NS: LART ): Larsen & Toubro’s (LT) Q2FY22 financial performance came in line with our estimates. The execution was muted, owing to the supply chain bottleneck in the international market and cyclone Tauktae affecting projects in the western part of India. Project awarding took a backseat, declining 22% YoY, despite robust tendering (+19% YoY). Hyderabad metro may require further equity infusion of INR 10bn by Mar-22 with LT having the option to either refinance or bring in a new investor or rope in the state government. We maintain BUY on LT with a SOTP-based target price of INR 2,246/sh (Sep-23E), given its (1) strong order book (INR 3.3trn, ~3.7x FY21 core EPC revenue), (2) likely execution ramp-up from Q3FY22, (3) healthy balance sheet, (4) robust services business, and (5) focus on cash generation (INR 270bn of core cash).
Maruti Suzuki (NS: MRTI ): Maruti’s Q2 PAT, at INR 4.75bn (-65% YoY, +8% QoQ), was impacted by the ongoing semiconductor shortage. While the supplies will improve from the beaten-down levels of Sep-Oct, the pick-up is expected to be gradual. The OEM continues to have a backlog of 200,000 units (production impacted by 116K units in Q2). CNG now accounts for ~18% of industry sales (vs. 11% YoY), with MSIL targeting 300K CNG units in FY22E. We reiterate BUY with a target price of INR 8,420 (at 27x Sep-23E EPS, we roll forward out TP timeframe from Jun’23).

SBI (NS: SBI ) Life Insurance: SBILIFE’s total APE was in line with estimates; however, strong growth in NPAR (+366bps YoY share in the mix) resulted in a 129-bps margin beat. We remain positive on the new product launch in the NPAR segment that has a superior margin profile and competitive features. The company's three growth levers continue to remain in place: (1) mammoth distribution network of the parent SBI (24k+ branches); (2) healthy share of protection; and (3) lowest opex ratio (2QFY22: 8.8%). Following a margin beat, we build in higher margins and raise our FY22E/23E estimates. We expect SBILIFE to deliver a healthy FY21-24E VNB CAGR of 24% and retain our BUY rating on the stock with an increased TP of INR 1,485 (2.9x Sep-23E EV).

IndusInd Bank (NS: INBK ): IndusInd Bank’s (IIB) Q2 earnings were 8% above our estimates due to lower-than-expected provisioning, while PPOP growth (+12% YoY) was broadly in line. As seen across other lenders, IIB too witnessed strong upgrades and recoveries during the quarter (4.1%); however, its gross and net slippages were amongst the highest (5%/1%), driven by 8% gross slippage in the retail book, indicating that the portfolio has not yet stabilised. Provisioning was elevated (3.2%) as the bank continued to build contingent provisions against its stressed pool (restructured book, telecom exposure, etc.). Strong deposit mobilisation (CASA +26% YoY), alongside muted loan growth (~10% YoY), continues to build up a negative carry for IIB. Prolonged consolidation of the loan book (two-year CAGR at 5.8%) and continued elevated stress (credit costs at >3% for seven straight quarters) reflect a franchise that is yet to stabilise its asset side of the balance sheet. We revise our FY22E/FY23E earnings estimates downward by 3% each to factor in moderately higher credit costs and maintain REDUCE with a revised target price of INR 894 (1.2x Sep-23 ABVPS).

Cipla (NS: CIPL ): Cipla’s Q2 results were largely in line with estimates as strong growth trends in India, South Africa, and EM markets were partially offset by a lower gross margin (~80-100bps impact, inventory provisioning). EBITDA margin, at 22.2%, largely came in line with company guidance. India business continues to remain on a strong footing (+16% YoY) and is expected to outperform the market growth by 100-200bps over the next few years. The US business witnessed improved traction and grew ~1% QoQ, led by market share gains in Albuterol and Arformoterol. Its respiratory pipeline in the US (Abraxane, gAdvair, and gDulera), along with gRevlimid, offers good growth visibility in the medium term. Maintain BUY.

Torrent Pharma (NS: TORP ): Torrent’s Q2 results were marginally below estimates due to subdued gross margin (~100bps impact), primarily on account of higher acute mix in India, inventory provisioning, and price erosion in the US. Barring Germany (-4% YoY, customer consolidation), most key markets such as India, Brazil and US reported healthy growth. While the US business has largely bottomed out (USD35mn, -3% QoQ), the outlook remains subdued until the key facilities are resolved. Ex-US, we expect Torrent to outperform the industry growth in most key markets. The company repaid debt of INR4.9bn in H1 and is on track to reduce it by ~INR10bn in FY22. We reduce our EBITDA estimates by 4-5% for FY22-23e and roll forward our TP, based on Sep’23e estimates. Our revised TP is INR3,240/sh, based on 16x Sep’23 EV/EBITDA. Maintain ADD.

ABB India (NS: ABB ): ABB reported strong revenue/EBITDA/APAT at 17.8/1.7/1.2bn (3/32/38% above our estimates), aided by pent-up demand from the previous quarter. Higher commodity prices were neutralised by better price realisation. ABB, over the years, has reduced topline dependency on large projects through participation in different market segments. Along with visibility in private Capex, opportunities in two-wheeler batteries and Hydrogen technology, penetration in tier-2/3 cities via e-Mart, and ordering potential in water, infra and clean energy segment aided by government policies, this augurs well for ABB. However, the risks of inflation in key commodities, supply chain disturbance owing to semiconductors, plastics and other key materials, forex volatility, and a third COVID wave remain. We believe most of the potential upside on cyclical recovery is already priced into the lofty valuation and, thus, maintain REDUCE with revised a TP of INR 1,689/sh (45x Sep-23 EPS).

Persistent Systems (NS: PERS ): We maintain ADD on Persistent Systems (PSYS), following a robust Q2 and a healthy deal momentum. PSYS’ growth leadership is premised on (1) strong new deal wins (USD 149mn new win TCV with total book to bill of 1.4x in Q2), driven by (1) healthcare & life-sciences and hi-tech verticals; (2) improved client mining reflected in strong scale-up in >USD 5mn+ client bucket; (3) robust headcount addition (~2.1K added in H1 and continued freshers’ hiring in H2); and (4) traction in Salesforce and Azure practice. The company has converted a large IP contract into T&M, which will be margin accretive; however, the margin would be offset by higher ESOP charges (~80% of employees covered under ESOP) and the ongoing war for talent (targeted EBITDA margin is ~16%). We increase the EPS estimates by 4.2/5.3% for FY23/24E and multiple to 35x (from 32x earlier). Our target price of INR 4,350 values PSYS at 35x Dec-23E, supported by a 30% EPS CAGR over FY21-24E.

TTK Prestige (NS: TTKL ): TTK Prestige’s Q2FY22 saw beat on revenue and EBITDA margin. Standalone revenue was up 37% YoY (3% in Q2FY21 and 71% in Q1FY22; HSIE 21%), driven by sustaining work from home led demand and trade stocking ahead of the festive season (which came in Q3 in the previous year). All the channels, including eCommerce, saw strong traction. The gross margin was a miss with a steep 470bps QoQ fall to 40% (HSIE 42%). The price increase was 5-8% in July, the full benefit of which will be visible in H2FY22. Op-lev expanded EBITDA margin by >200bps YoY to 16.8% (-50bps in Q2FY21 and +715bps in Q1FY22; HSIE 14.3%). We expect the company to hold a strong margin in H2FY22. Its market leadership (in five of its six product offerings), wide product range, and strong distribution (aided by a high share of eCommerce) gives us confidence that it will sustain healthy growth amidst the demand recovery. We raise our EPS estimates for FY22/23/24 by 9/10/10% and value it at 42x PE (earlier 40x) on FY24E EPS to derive a TP of INR 11,700. Maintain ADD.

Zensar Technologies (NS: ZENT ): We maintain BUY on Zensar, following a better-than-expected revenue performance, aided by healthy organic growth and acceleration in deal wins. Zensar delivered growth of 12.3% QoQ CC (organic growth of 5.4% QoQ), supported by a recovery in the retail (+18.9% QoQ CC) and insurance verticals (+13.4% QoQ CC) and modest BFS performance (+2.3% QoQ CC). The TCV stood at USD 187.5mn (book to bill at 1.3x) and includes the large City of San Diego deal (USD 122mn, eight-year duration). Even after excluding the large deal, TCV grew 31% QoQ, which implies an improving deal trajectory and organic growth visibility for H2. The margin was lower than the estimate, impacted by wage hike, higher sub-con cost, and fresher hiring. The management has guided for EBITDA margin in the range of 17-18%, which we believe will be a key monitorable. We increase our EPS estimates by 3.4/3.8% for FY23/24E to factor in better organic growth. Our TP of INR 550 is based on 22x FY23E EPS. The stock is trading at a PE of 22/18.4x FY23/24E EPS, a discount of ~20% to tier-2 IT.

Mahanagar Gas Ltd (NS: MGAS ): Our ADD recommendation on Mahanagar Gas (MGL) with a price target of INR 1,135 is premised on its loyal customer base in CNG and commercial establishments, which is less price-sensitive than the industrial customer base and enables the company to maintain higher per-unit margins than peers. Q2FY22 EBITDA, at INR 3.02bn, and APAT, at INR 2.04bn, were 9/10% below our estimates due to higher gas costs and operating expenses, offset by a 64% YoY increase in revenue.

Mahindra Lifespace Developers Ltd. (NS: MALD ): Mahindra Lifespaces Developers Ltd (MLDL) delivered a better-than-expected financial performance with INR 65mn of profit vs INR 105mn loss expectation, aided by land sales in MWC. MLDL announced new JDA land bank addition in Dahisar East with an INR 10-bn presales potential, likely to be launched in FY23. The business development pipeline is robust with INR 30bn presales potential (MLDL is in the advanced stages of negotiations on one outright land buy and two redevelopment projects) and expected closure over 6-9 months. The launch pipeline is healthy for H2FY22, with MLDL looking to sustain the Q2 presales of INR 3bn in each quarter. The industrial business is witnessing robust inquiries and traction due to a strong manufacturing push. Given the strong growth trajectory, robust balance sheet, trustworthy brand, and tailwinds for organised players, we remain constructive on MLDL and maintain a BUY rating with an unchanged NAV-based TP of INR 349/sh.

PSP Projects: PSP Projects (PSP) reported revenue/EBITDA/APAT at INR 3,904/547/366mn for the quarter, 12/26/32% ahead of our estimates. Its entire order book of INR 35bn (excluding the INR 6bn Bhiwandi order) was under execution, which led to strong revenue booking. Excess provision reversals in near-completion projects led to a strong EBITDA margin of 14%. The bid pipeline is robust at INR 30bn, the precast facility is operational and has received INR 300mn of orders, and working capital is under control. We expect PSP to upgrade its revenue growth guidance of 25-30% YoY to 35-40% in Q3FY22 whilst EBITDA margin guidance might stay at 11.5-13%, given high commodity inflation. Bhiwandi project remains a pain point, which the company might terminate, writing off INR 153mn in case the client doesn’t agree for escalation. We maintain BUY on PSP with an unchanged TP of INR 620/sh (13x Sep-23E EPS).

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  • Ajit Pardeshi @Ajit Pardeshi
    where you say buy (ITC) market punished it. where you say reduce market celebrated it.
    Like 0

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