Mphasis (NS: MBFL ): We maintain BUY on Mphasis (MPHL) and reiterate it as our preferred pick in mid-tier IT, given the strong growth in the direct business (+9.9% QoQ) and high visibility on delivering industry-leading growth. MPHL’s growth is expected to be driven by (1) growth in the direct business, based on deal wins; (2) continuity of strong growth in large accounts (market share gains in BFSI accounts); (3) increased focus on new client acquisition; (4) healthy deal pipeline (68% of the deals are in new-gen services); (5) steady operating profile (margin guidance maintained); and (6) healthy pipeline in Europe. The DXC decline was steep (-25%) in the quarter and is now contributing only 6.5% to revenue. There will be a convergence of the company’s growth with direct core growth (25% CAGR over FY21-24E) supported by healthy deal wins (fifth consecutive quarter with TCV of more than USD 240mn). The integration of Blink and the ongoing supply-side challenges will have an impact on margins; the target EBIT margin range is 15.5-17%. Our target price of INR 3,450 values MPHL at 30x Dec-23E EPS.
Container Corporation (NS: CCRI ): CONCOR’s Q2FY22 volumes of 980,757 TEUs (+11% YoY, -1% QoQ) were driven by the domestic segment (+34% YoY) while EXIM growth was a modest 6% YoY (-3% QoQ). In the medium term, Concor targets to increase its domestic contribution to 40% of revenue (up from 20% currently), which comes as a surprise – given the modal shift to rail that is expected on EXIM traffic, with the commencement of the DFC. The management has raised its FY22E volume guidance to 15% (vs. 12% earlier), which is in line with our forecasts. We await the finalisation of the land policy by the government as well as clarity on the proposed privatisation timeline (as it is now pushed to next year). We maintain our ADD rating on the stock with a target price of INR 760 at 28x Sep-23E EPS.
Supreme Industries (NS:
): We maintain ADD on Supreme Industries (SIL), keeping the TP unchanged at INR 2,630/share (SOTP-based). In Q2FY22, SIL’s consolidated revenue rose +40% YoY to INR 19.3bn on healthy demand and higher realisation. However, amid soaring RM cost, the gross margin moderated YoY, slowing EBITDA/APAT growth to 22/31% YoY, which came in at INR 3.11/2.29bn respectively. On a two-year CAGR basis, all segments posted volume growth, with industrials and packaging showing higher rebound. The sharp rise in inventories led to a negative OCF in H1. We remain positive on the company, owing to a healthy demand outlook across all its business segments.
IndiaMART InterMESH: IndiaMART posted a flattish quarter with revenue of INR 1.82bn (+0.4% QoQ), lower than our estimate of INR 1.87bn. EBITDA margin stood at 45.6%, missing our estimate by 159bps. The paying suppliers increased by 2.7% QoQ (+4k vs. our estimate of 8k) as high churn was witnessed at the lower end of the pyramid (monthly packages); however, the top suppliers continue to hold ground. We maintain our positive stance, based on (1) higher visibility, given the 20% YoY growth in deferred revenue; (2) strong cash collections of INR 2.2bn, an increase of 31.3/36.2% QoQ/YoY; (3) gradual economic recovery leading to improving business conditions; (4) expected margin expansion on account of growth and cost savings; (5) healthy cash reserves of INR 24.7bn that can be leveraged for further investments; and (6) expected boost to growth from adjacent offerings in accounting, logistics, and SaaS-based solutions. Our TP of INR 9,500 is based on 50x FY24 EV/EBITDA (DCF implied), supported by revenue/EPS CAGRs of +19/14% over FY21-24E. Maintain BUY.
Lic Housing Finance Ltd. (NS: LICH ): LICHF disappointed, driven by elevated provisioning (1.1% of loans, annualised) and interest reversals (INR1.35bn). While asset quality improved across buckets, the aggregate stressed pool (GS-II + GS-III + restructured) still remains elevated (12.6% vs. 13.6% in Jun’21), indicating that the path to normalisation is likely to be prolonged. The company shored up its GS-III provisions significantly to 43%, driving credit costs higher, although GS-II provisioning coverage continues to be subdued (0.2% PCR). Disbursements gathered momentum post the second wave (+29% YoY, +86% QoQ), largely from the core mortgage segment. We downgrade our FY22E earnings by 7% to reflect sub-optimal yields and higher-than-expected credit costs. We maintain REDUCE with a revised TP of INR401 (earlier TP of INR421), 1.0x Sep’23 ABVPS, underpinned by low provisioning buffer, prolonged stress in the portfolio, and increasing competitive intensity in the core mortgage portfolio.
Federal Bank (NS: FED ): Federal Bank (FB)’s Q2FY22 earnings were 20% higher than our forecasts due to a strong operating performance and lower-than-expected provisions. On the back of a granular wholesale portfolio and its secured retail franchise, FB reported an impressive asset quality with slippages at 1.1% and steady early-stage delinquencies (restructured book inched up to 2.6% of loans). The bank continued to showcase strong traction in low-cost deposits (CASA at 36%) and core fee income. FB’s partnerships with FinTechs (with neo-banks, payments firms, and merchant acquirers) offer medium-term catalysts for higher productivity (business growth) and greater efficiencies (profitability), early evidence of which is reflected in the pace of new account additions. We revise our FY22E earnings marginally downwards to account for an increase in credit costs and maintain BUY with a revised TP of INR120 (1.2x Sep-23 ABVPS).
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