Results Review For ONGC, ABB India, Balkrishna Industries, Aarti Industries

  • Stock Market Analysis
  • Editors Pick

ONGC (NS: ONGC ): We maintain our BUY recommendation on ONGC with a target price of INR 169, based on (1) an increase in crude price realization and (2) an improvement in domestic gas price realization. Q2FY23 revenue/EBITDA/APAT stood at INR 383/188/128bn, above our estimates, owing to lower-than-expected statutory levies, lower employee cost, lower DD&A cost, and higher other income. Crude oil production came broadly in line, while gas production came in marginally above our estimate. Total crude oil sales, including JV share, came below estimates and were partially offset by higher-than-expected gas sales.

ABB India (NS: ABB ): ABB’s revenue/EBITDA/PAT came in at INR 21.2/2.1/1.7bn, (missing)/beating our estimates by (3.5)/(4.8)/0.6%. The order inflow was robust at INR 26bn, taking the order book to an all-time high of INR 65bn (+9% QoQ). ABB expects a pick-up in demand from core domestic sectors as capacity expansion picks pace. It is seeing strong demand in the data center segment, which may be a USD 1bn opportunity. Owing to strong demand, ABB’s mature plants are running at ~90% capacity utilization. The company is taking steps to expand capacity organically, through plant optimization and productivity enhancement. The expansion is being undertaken to cater to both local and global demand. This will be aided by a healthy cash position of INR 31.8bn. We believe the punchy valuation would limit further upside on cyclical recovery and, thus, maintain REDUCE with TP of INR 2,579/sh (54x Sep-24 EPS).
Balkrishna Industries (NS: BLKI ): BKT Q2FY23 earnings, at INR4bn, were ahead of our estimate of INR3.2bn due to better-than-expected revenue growth even as margins were in line. While Balkrishna Industries (BKT) enjoys a sustainable competitive advantage over global peers in the OHT segment, the global OHT demand outlook remains uncertain, given the erratic weather conditions in Europe and recessionary trends in both the US and Europe. The weak demand outlook is also highlighted by the fact that dealer partners continue to destock even in Q2. Given the uncertainty, management has refrained from providing volume growth guidance for FY23. While the margin has declined to a multi-quarter low of 20% due to (1) high input costs; (2) a sharp increase in freight costs; and (3) adverse currency movement, we assume it to normalize gradually to 27% by FY25E as these cost headwinds normalize. Given the improved ASP in H1, we raise our FY23 earnings by 7%. However, given the continued macro headwinds both in the US and Europe, we lower our FY24-25 earnings by 4-6%. At 22.7x FY24 PER, BKT stock appears expensive. Reiterate our REDUCE rating with a revised TP of INR2,048 per share (INR2,093 earlier).

Aarti Industries (NS: ARTI ): We maintain our BUY recommendation on Aarti Industries (AIL), with a target price of INR 825/share. AIL's constant focus on Capex and R&D will enable it to remain competitive and expand its customer base. The toluene segment in India is mainly untapped and catered to through imports; AIL will benefit in the long term by entering this segment.

Kansai Nerolac: Kansai Nerolac’s (KNPL) standalone revenue came in at 19% YoY (INR18.1bn, 3-year CAGR: 13%; HSIE: INR18.3bn). In the decorative segment, volume/realization is estimated to have clocked flat/11-12% growth resp YoY in Q2. The underperformance vis-a-vis the top-2 continues and management intends to focus on recouping lost share by (1) increasing salience in premium products and (2) flexing the marketing lever, going forward. The industrial segment is estimated to have outpaced portfolio growth (HSIE: 35%). Profitability came broadly in line (GM/EBITDAM at 28.6%/10.9% vs HSIE: 29/11.5%). We revise our FY24/25 EPS estimates downwards by 6-7% to account for higher brand-building expenses. Maintain ADD with a DCF-based TP of INR520/sh (implying 36x Sep-24 P/E).

Bata India (NS: BATA ): Bata’s Q2 performance vis-a-vis pre-pandemic sales (INR8.3bn; 3-year CAGR: 4.7%) remains weak. On a relative basis, the disappointment is even starker (note: Metro brands/Campus Activewear grew at ~19/25% CAGR over three years resp). EBITDAM missed the estimate despite a GM beat as normalization in the cost of retailing outpaced sales recovery. We’ve highlighted in our IC note too that treading the growth-margin equation across Bata’s volume drivers is likely to be tough to execute. Note: for this cost elevation, Bata has ~2% volume CAGR (3-year) to show. We maintain our SELL recommendation with an unchanged DCF-based TP of INR1,450/sh, implying 36x Sep-24 P/E (FY24/25 EBITDA estimates largely unchanged).

Apollo Tyres (NS: APLO ): Apollo’s consolidated margins in Q2 improved 40bps QoQ, led by margin improvement in both India and Europe, which was in turn driven by price hikes and improved mix. In India, Apollo continues to work on profitable growth that has seen it raise prices ahead of the industry (8% in Q1 and 5% in Q2), albeit at the cost of some market share loss in TBR. With the industry having now followed its price hike, it expects to recover its lost share. In Europe, it continues to increase its share of UHP tires whose mix has now improved by 300bps to 42%. The demand outlook in India across segments remains healthy. While Europe's demand outlook is weak, players like Apollo are benefitting from the vacuum left by Russian tire exports in Europe post the geopolitical crisis, and hence, Apollo’s Europe business continues to see healthy growth in a weak demand macro. With input costs likely to have peaked in Q2 and backed by industry pricing discipline, we expect Apollo’s margin to gradually normalize in the coming quarters. On account of a strong operating performance in Q2, we raise our estimates for FY23-25E by 14-17%. Reiterate ADD with a revised TP of INR316/sh (from INR 260 earlier).

Radico Khaitan (NS: RADC ): Radico reported a miss on revenue and EBITDA despite a beat in P&A. Net revenue was up by 7% YoY (three-year CAGR at 10% vs. 8% for UNSP), a miss, on account of lower volume for regular portfolio. P&A saw recovery post a lull in Q1FY23, with volume growing 22% YoY (19% on three-year CAGR adjusting royalty volume). However, the realization was below expectation at INR 1,550/case. The regular portfolio saw volume contraction (-13/-3 YoY/three-year CAGR), rationalizing the volume of a few popular brands after seeing high-cost pressure. GM remained under pressure, contracting 431/201bps YoY/QoQ to 41.6% (HSIE 43%). GM is expected to improve towards the end of FY23 on the back of price hikes, higher royalty revenue benefits from backward integration, and a better product mix within IMFL. The operating margin has come down by >500bps from FY21 to 12% in H1FY23. With investments in backend capabilities, we model full recovery in EBITDA margin to ~17% by FY25. We remain positive about Radico’s constant product innovation and success in the luxury portfolio. However, with an overall slowdown in consumption, the demand for mid-price P&A and regular portfolios will remain in check. Capex execution and industry demand remain key monitorable for the stock. Owing to the miss in Q2 and the gradual recovery in the margin, we cut our EPS by 12/4% for FY23/24. We value Radico at 28x P/E on Sep-24 EPS to arrive at a TP of INR 900. Maintain REDUCE.

Mahanagar Gas (NS: MGAS ): Our ADD recommendation on Mahanagar Gas (MGL) with a target price of INR 950 is premised on (1) lower volume growth compared to peers and (2) uncertain long-term volume growth visibility since no new geographical areas (GA) won in the 9/10/11th round of CGD bids. Q2FY23 EBITDA, at INR 2.5bn, and APAT, at INR 1.6bn, came in below our estimates, owing to the marginally lower-than-expected volume and higher gas cost.

KNR Constructions: KNR posted a strong quarter; revenue/EBITDA/APAT of INR 8.2/1.6/0.8bn beat our estimates by 5/9/0%. FY23 revenue guidance was unchanged at INR 35bn (with a buffer of +-5%), with the EBITDA margin pegged at 18-19%. At the standalone level, the gross/net debt stood at INR2/1.3bn as of Sep’22, with net D/E at 0.05x, vs. INR 1.3/0.8bn and net D/E of 0.03x, as of Jun’22. The balance HAM equity requirement is INR 5.6bn as of Sep’22 with INR 3/1.6/1.1bn to be invested in H2FY23/FY24/FY25. KNR incurred a Capex of INR 750mn in H1 vs. FY23 guidance of INR 1-1.2bn. The NWC days stood at 54 as of Sep’22 (vs. 60 as of Jun’22). The irrigation receivables as of Sep’22 stood at INR 9bn vs. INR8.5bn as of Jun’22. We maintain a BUY with an increased TP of INR 367/sh (18x Sep-24E EPS, HAM 1x P/BV).

PNC Infratech (NS: PNCI ): PNC Infratech (PNC) reported Q2FY23 revenue/EBITDA/APAT at INR 15.6/2.1/1.3bn, missing our estimates on all fronts by 5.5/6.9/4.4%. PNC was impacted by delays in JJM water projects’ DPR approvals on INR 80bn OB. About INR 23/40/17bn of DPR, approvals are pegged to be secured at the start of H1FY23/24/25, which may result in INR 10/25/30bn revenue in FY23/24/25. PNC has maintained its revenue growth guidance of 10-15% YoY and EBITDA margin guidance of 13-13.5% for FY23. With a cash balance of INR 5.2bn and standalone gross debt of INR 2.8bn (vs. INR 3bn as of Jun’22), PNC had a net cash balance of INR 2.4bn (vs INR 1.6bn Jun’22), as of Sep’22. Capex guidance for FY23 is INR 1-1.2bn, with INR 220mn incurred in H1FY23. Given a strong OB and comfortable balance sheet, we maintain BUY, with an increased TP of INR 410/sh (15x Sep-24E; rolled over, 1x P/BV for HAM equity investment).

Sobha (NS: SOBH ): Sobha’s (SDL) reported revenue/EBITDA/PAT of INR 6.7/0.9/0.2bn (miss)/beat our estimates by 4.3/(16.5)/(32)%. It recorded the highest-ever quarterly presales in value terms at INR 11.6bn (+13/+2% YoY/QoQ). Also, collections were the highest ever at INR 13.3bn, driven by the highest-ever residential collection of 10.8bn. This resulted in net debt reducing to INR 18.9bn (vs. INR 21bn in Q1FY23). SDL doesn’t expect any significant improvement in debt, going forward, given the robust BD plan. With an inventory of 23msf (~4 years or current presales), SDL plans to replenish its inventory with 50% coming from its existing land bank and the balance from the new BD. With the robust cash flow, SDL plans to invest INR 3bn towards new land acquisition/annum with INR 20-25bn/annum of GDV addition. SDL expects to see normalization in EBITDA margin on account of improving the prospect of contractual business post-COVID. We maintain BUY with an increased TP of INR 935 (rollover to Sep-24E).

Star Cement: We maintain BUY on Star Cement with a revised TP of INR 120/share (8x its Sep-24E consolidated EBITDA). Star reported healthy 44% YoY volume growth and industry-leading INR 782 per MT margin in Q2FY23. Star will be commissioning 12MW WHRS in Q3FY23, which will aid margin recovery from Q4FY23 onwards. The company is increasing its capacity by 70% to 9.7mn MT by H1FY25E and most of the Capex would take place in FY24/25E. The current robust cash position and healthy cash flow outlook should keep the balance sheet unstressed.

Ahluwalia Contracts: Ahluwalia Contracts (AHLU) reported revenue/EBITDA/APAT of 6.2/0.6/0.4bn, with revenue beating our estimates by 0.7% and EBITDA/APAT missing our estimates by 4.2/4.7%. With H2FY23 revenue guidance at INR 18bn, AHLU maintained 15% YoY growth for FY23, with EBITDA margin (incl. other income) in the range of 12-13%. Margin is expected to improve from H2FY23 with softening of commodity prices, a narrower gap of indices with input prices, and slightly lesser competitive intensity. FYTD23 OB stands at 75.9bn (~2.8x FY22 revenue), excluding L1 in three projects of INR 11bn. On the diversification front, client-wise, government orders form 81.5% of OB and, segment-wise, institutional and hospital are the major drivers, contributing 38.3/32%, with residential/commercial/infra and others contributing 13.2/8.4/8.1%. The total order inflow in FYTD23 has been INR 31.8bn vs. FY23 OI guidance of INR 25-30bn. AHLU stated that it is confident of surpassing the OI guidance by at least INR 10bn. We maintain BUY on the stock, with a TP of INR 557 (13x Sep-24E EPS).

Repco Home Finance: REPCO’s Q2FY23 earnings were 7% ahead of our estimates, largely on account of lower provisioning (63bps). Asset quality continued to improve with only ~20% of the sizeable restructured book (7% of AUM) slipping into NPA, and healthy collections from the rest of the portfolio. Consequently, GS-III/NS-III remained broadly steady at 6.5%/3.9% (Q1FY23: 6.4%/4.2%), as aligned to the RBI’s revised asset classification norms. Loan growth remained muted (+1.5% YoY); however, recent disbursal trends have been encouraging (H1FY23: +81% YoY) and are expected to drive loan growth to near double digits by Q4FY23. NIMs improved to 4.7% (+10bps QoQ) and are expected to sustain further, with incremental rate hikes likely to offset pressure on the cost of funds. Several growth initiatives recently launched by the new leadership team are gradually gaining traction, while simultaneously controlling asset quality; however, we continue to look for the sustained impact of these developments to turn more constructive in our estimates. We adjust our FY23/FY24 forecasts higher to factor in lower credit costs; maintain ADD with a revised TP of INR298 (0.7x Sep-24 ABVPS).

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