Results Review for ONGC, Berger Paints, Apollo Hospitals, Hero Motocorp

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ONGC (NS: ONGC ): We maintain BUY on ONGC with a target price of INR 208, based on (1) increase in crude price realisation and (2) improvement in domestic gas price realisation (to USD 2.9/mmbtu). We expect oil price realisation to increase to USD 69/bbl in FY22E and USD 71/bbl in FY23E vs. USD 44/bbl in FY21, given the expected global economic rebound, post-COVID. Q2FY22 revenue was 5% below our estimate, owing to a lower-than-expected crude oil price realisation of USD 71.1/bbl (HSIE USD 72.5/bbl) and below expectation crude oil sales. Q2 EBITDA was 3% below our estimate, though APAT was 2x above estimate, owing to lower-than-expected exploration cost, the lower-than-expected interest cost, higher-than-expected other income, and lower tax expenses.

Berger Paints (NS: BRGR ): BRGR’s topline delivery (28% YoY; INR22.3bn) exceeds expectations (HSIE: 22%). Two-year topline CAGR (standalone) lagged that of APNT (16% vs APNT’s 20%). However, BRGR found a better balance between growth margin as (1) lower rebating (especially in lower ASP products); (2) formulation gains; and (3) strategic inventory buying cushioned the RM-inflation led GM decline on a relative basis (H1FY22 GM decline for BRGR was 380bps vs APNT’s 840bps). Value exceeded volume growth, courtesy price hikes (5%). FY23-24 EPS estimates revised downwards by 4-7% to account for lower GM. Maintain SELL rating with a DCF-based TP of INR710/sh (implying 57x Jun-23 P/E).

Apollo Hospitals (NS: APLH ): Apollo’s Q2 EBITDA beat our estimates by ~9%, driven by robust margin expansion. While the core hospitals and AHLL business (ex-diagnostics) witnessed strong sequential growth due to the recovery of the non-COVID business, the outlook for high-growth pharmacy and diagnostics businesses remains intact, partially aided by the integration of Apollo 24/7. With multiple growth drivers in place, we expect Apollo to report strong revenue/EBITDA CAGRs of 19%/24% over FY20-24E. Besides this, it expects to announce two strategic funding partnerships for Apollo HealthCo (Apollo 24/7, back-end pharmacy) in the near term. We raise our estimates by 19%/14% for FY22/23E to factor in Q2 beat/faster-than-expected recovery from COVID and roll forward to Sep-23 to arrive at a SOTP based TP of INR5,295/sh. ADD.

Hero Motocorp (NS: HROM ): Hero’s Q2FY22 PAT, at INR 7.9bn (-17% YoY), is impacted by weak industry demand (volume down 20% YoY) as sales have been impacted by delayed monsoons as well as elevated fuel prices. The management expects H2 demand to improve, driven by a pick-up in the rural segment and opening up of the tourism, hospitality, and dining sector (which will support entry-level bike demand). Further, Hero will launch its EV scooter in Mar-22, with the scooter being produced in the new Chittoor plant (in AP). The OEM has collaborated with Gogoro, Taiwan, for battery swapping and EV products. Further, Hero is scaling up the distribution network for its premium Harley Davidson range. We maintain ADD with a revised TP of INR 3,000 at 17.5x Sep-23E EPS (we are lowering estimates by ~13% to factor in weak Q2 results).

Bharat Forge (NS: BFRG ): Bharat Forge’s (BFL) Q2FY22 was yet another strong quarter, with EBITDA margin exceeding the 30% level (+170bps QoQ) and demand outlook remaining robust – both in India and overseas. The company will benefit from (1) recovery in India infra spends, (2) passing of the USD 500bn+ trillion infra spend bill, which will increase demand for heavy equipment such as construction equipment, trucks, etc., (3) ramp-up in India defense – targeted to reach 10% of turnover in the next two years. We reiterate Bharat Forge as our preferred pick in CVs due to its global OEM base. We maintain BUY with a TP of INR 1,000 on 35x Sep-23 EPS (we roll forward our TP timeframe to Sep).

Endurance Technologies Cn Ltd (NS: ENDU ): Endurance Q2 revenue was up +16% YoY; even after adjusting for commodity price hikes, the auto part company revenue has grown in high single digits vs. a -4% YoY decline for the 2W segment. While Endurance will continue to grow ahead of the 2W market as several of its initiatives have come onstream during H1FY22, including the ABS facilities, the 2W industry demand remains lacklustre. Further, the stock is trading at an elevated valuation (42.9x on FY22E, 32.5x on FY23E) and the valuation gap between mass-market 2W OEMs and Endurance remains elevated at 2x (vs. an average premium of 1.6x). We reiterate our ADD rating on the stock and set a TP of INR 1,820 at 30x Sep-23E EPS (we are rolling forward our TP timeframe to Sep-22).

Dilip Buildcon Ltd (NS: DIBL ): Dilip Buildcon’s (DBL) execution in the quarter was weak, missing our estimate at all levels. Slow execution in large projects; an extended monsoon; spike in commodity prices, especially bitumen, diesel and steel; and no early completion bonus suppressed EBITDA margin to 10.6%. High commodity price volatility has led to price escalation coverage reducing to 50-60% in EPC projects and 40% in EPC HAM, while the rest gets realised with annuity payments. Therefore, going forward, margins are likely to be in the 14-15% range. To fund the equity requirement in HAM, DBL has subscribed to CPPIB NCDs worth INR 10bn. Ex-Cube deal HAMs, all completed HAMs will be monetised via a listed InVIT to get a better equity valuation. We maintain BUY, however, given the margin pressure and cut our EPS along with TP to INR 722/sh (12x Sep-23E EPS, 1x P/BV HAM equity investment).

Teamlease Services Ltd (NS: TLSV ): We maintain BUY on Teamlease, following a better-than-expected revenue (+10.7% QoQ) and in-line margin performance. The robust performance was witnessed across all the business segments with the core/specialised/HR services growing +10.0/+17.4/+12.7% QoQ, supported by strong net associate headcount addition in general and specialised staffing (+11.2/11.5% QoQ). Strong developments in hiring activity across key verticals (eCommerce, telecom, consumer, and BFSI), the addition of 59 new logos, and improved hiring outlook across industries will aid growth in the core staffing segment (90% of revenue). The specialised staffing (8% of revenue) will continue to grow, led by traction in IT hiring, increase in open positions/hiring across domains, and improvement in realisations. We expect margins for general staffing to remain in a narrow band on account of the growth and increasing wage costs. Margin expansion will be led by specialised staffing and positive contribution from HR services. The company made provision of INR 750mn related to PF trust investments in two NBFCs. We believe that the company was late in providing for these provisions as this is an old issue; however, we don’t expect further provisions. We reduce our EPS estimates by -6.6/4.0% for FY23/24E to factor in lower margin for general staffing. Our target price of INR 5,270 is based on 43x Dec-23E EPS (five-year average PE of ~35x). The stock is trading at a PE of 47/36x FY23/24E.

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