Jubilant Foodworks Ltd (NS:JUBI): Jubilant posted revenue growth of 37% YoY (HSIE 34%, +5.5% two-year CAGR). SSG was at +26% (-20% in Q2FY21, HSIE +26%), two-year CAGR at +0.5%, despite price hike and delivery charges (implying volume contraction). System recovery was at 112% vs. 82% in Q2FY21 and 94% in Q1FY22, reflecting less impact of the second wave of COVID. Dine-in is at 82%, having seen recovery from 37% in Q1FY22, 54% in Q2FY21. GM was down 54bps, resulting in 66bps YoY dip in EBITDA margin to 26% (HSIE 24.4%). The company is committed to aggressive store expansion across brands. Investments in technology and digital marketing will further empower their brands and operations. Jubilant is a strong franchise among QSR peers, and its success in new initiatives and capital allocation will remain the key monitorable for the stock. We maintain our EPS estimates. Despite giving our best assumption and valuation to all the new brands/initiatives (India and international), the best value comes to INR 300/share. Our target price on Jubilant is INR 3,300, based on 60x P/E on Sep-23E EPS for Domino’s India and INR 300/share for ex-Domino’s India business. With no big surprises in earnings (unlike for other discretionary companies), we believe a large part of the recovery is priced in (trading at 88x/73x P/E on FY23/24). Maintain SELL.
Navin Fluorine International Ltd (NS:NAFL): We retain our ADD rating on NFIL with a target price of INR 4,025 on the back of (1) earnings visibility, given long-term contracts, and (2) tilt in sales mix towards high-margin high-value business. EBITDA/APAT were 7/8% above our estimates, owing to lower-than-expected raw material costs, higher-than-expected other income, offset by a higher-than-expected opex and depreciation.
Sonata Software (NS:SOFT): We maintain our BUY rating on Sonata, following strong growth of 11% QoQ (~5% organic) in the IT services segment (IITS) and better margin performance. Revenue from Microsoft (NASDAQ:MSFT) related services (~50% of IITS) is driving growth (+10.6% QoQ), which is further expected to come in high teens. The Microsoft Dynamics modernization program is a multi-year opportunity and Sonata is constantly investing in this area. Travel vertical has recovered but will accelerate with an increase in leisure travel (currently at ~50% of a pre-COVID level). The IITS EBITDA margin expanded 365bps QoQ, despite supply-side concerns, led by offshoring (~69%), higher utilization (89%), and lower sub-contracting cost. The company has stepped up the hiring of freshers and attrition has touched 23-24% level; the target margin range for IITS is ~23-24%. DPS was weak (seasonality), but the growth in DPS will be driven by higher cloud adoption (~77/75% of DPS is revenue is from cloud/annuity). Sonata’s growth profile is sturdy, led by the Microsoft ecosystem, recovery in travel, and strong DPS business. We increase our EPS estimates by +3.6/3.3% for FY22/23E. Our target price of INR 1,050 is based on 22x Dec-23E EPS. The stock trades at a P/E of 21.9/18.6x FY23/24E.
Mastek (NS:MAST): We maintain a BUY on Mastek, despite a soft Q2 (though in line with estimate), based on an expected recovery in the UK government business and ongoing turnaround in the US business. The softness in the quarter was mainly due to project completion in the NHS (health segment) and the contract awarding has been slow; excluding NHS, growth was ~9% QoQ. We expect the growth trajectory for Mastek to revive, based on (1) a strong footing in the UK government business; (2) cloud migration/transformation agenda, which is driving Evosys growth; (3) expected recovery in the NHS, based on deal wins; and (4) healthy recovery in the US geography and UK private segment. The deal pipeline is healthy, with around 25 deals of > USD 5mn+ in the pipeline and a large deal of ~USD 40mn (three-year deal) is near closure. Mastek closed a large deal in Europe, which is expected to ramp up from Q4, providing revenue visibility. The next phase of growth will be driven by US geography; the company is looking for an M&A for a head start. The EBIT margin was maintained but there will be headwinds due to planned investments, higher attrition, and an increase in freshers’ hiring. We have cut our EPS estimate by 2-3% and our TP of INR 3,300 is based on 24x Dec-23E EPS. The stock is trading at a P/E 25.2/20.5x FY22/23E, which is a discount of ~36% to the tier-2 IT average.
HeidelbergCement (DE:HEIG) India Ltd (NS:HEID): We maintain ADD on Heidelberg Cement (HEIM) with an unchanged target price of INR 250/share (8.5x Sep’23E consolidated EBITDA). We like HEIM for its strong retail positioning, robust margin, and healthy balance sheet. Delays in major capacity additions would, however, subdue its sales growth beyond FY24E, thereby restricting valuation rerating. In Q2FY22, while revenue rose 12% YoY to INR 5.76bn, EBITDA/APAT fell 8/5% YoY to INR 1.16bn/ 0.6bn respectively, due to rising cost inflation. Unitary EBITDA cooled off 17/15% YoY/QoQ to INR 946/MT. The company guided that cement prices would increase by ~INR 100/bag during H2 to pass on the soaring energy costs.
Click on the PDF below to read the full report: