Results Review For Tech Mahindra, Colgate Palmolive, Tata Elxsi, Crompton Consumer

  • Stock Market Analysis

Tech Mahindra (NS: TEML ): We maintain BUY on Tech Mahindra (TechM), based on decade-best Q2 and healthy net-new deal wins (TTM +25%). TechM delivered growth of 7.2% QoQ CC (better than expectation) and was broad-based across CME and enterprise. The net-new TCV stood at USD 750mn; there were more of mid-sized deals, but the pipeline remains robust. The key attributes that underscore our positive stance are (1) healthy deal wins in the enterprise vertical (~USD 1.8bn TTM); (2) healthy growth in BPS; (3) highest ever fresher intake in a decade; (4) double-digit growth in telecom, led by 5G (telecom TCV is ~2x on TTM basis); and (5) continued growth momentum in enterprise led by technology, BFSI, and manufacturing verticals. The margin was flat QoQ but supply-side challenges remain; rising attrition, increase in sub-contracting cost, and peak utilisation levels will limit margin expansion. We increase our EPS estimate by 4.0/5.7% for FY23/24E to factor in growth acceleration. Our target price stands at INR 1,710, based on 21x Dec-23E EPS (earlier 20x). The stock is trading at 20.7/18.1x FY23/24E (~20% discount to tier-1 1Y forward P/E multiple).

Colgate (NS: COLG ) Palmolive: Colgate’s Q2FY22 net revenue and EBITDA were below our estimates. Net revenue grew by 5% YoY (HSIE 8%), +5% two-year CAGR (similar trajectory achieved in the past four quarters). Volume growth was ~2% YoY (HSIE 5%) and 2.5% on two-year CAGR. Its go-to-market approach continues to see the adoption of new business models and approaches as it expands its brands across different platforms. Overall penetration trends remain strong and are favourable quarter on quarter. Gross margin contracted by 130/232bps YoY/QoQ to 67%, after expanding for the past four quarters. While the company took price hikes at the end of the quarter, its impact was not visible. A&P grew by 13/16% YoY/QoQ in Q2FY21, while employee/other expenses were up 8/4%. EBITDA margin contracted by 221bps YoY to 29.6% (+541bps in Q2FY21, +87bps in Q1FY22) vs. HSIE 31%. We cut EPS estimates for FY22/FY23/FY24 by 1-2%. We value Colgate at 42x P/E on Sep-23E EPS and derive a target price of INR 1,800. Maintain ADD.

Tata Elxsi (NS: TTEX ): We maintain our REDUCE rating on TELX, based on diminishing margin of safety at 56x FY23E and following an in-line revenue performance. The margin came in better than expected, led by higher-than-expected offshoring (~75%), but we believe it has reached the peak level, considering supply-side concerns. While we remain positive on the company’s prospects and growth leadership in ER&D (+26/29% revenue/EPS CAGR over FY21-24E), the unfavourable risk-reward can be construed from (1) lower revenue growth in the IDV segment impacted by project completion and delay in decision making, (2) reducing growth premium vs. ER&D peers, and (3) diminishing margin due to supply-side challenges and increased hiring of freshers to manage attrition (13.9%). The near-term prospects remain strong with FY22E revenue growth expected at 32%, which would subsequently normalise to ~25% in FY23E. Our TP of INR 5,275 is based on 44x Dec-23E EPS, supported by an EPS CAGR of 29% over FY21-24E.

Crompton Greaves (NS: CGPO ) Consumer Electricals Ltd (NS: CROP ): Crompton's Q2FY22 was a marginal miss in revenue but beat in margin. Revenue was up 14% (HSIE 20%) with ECD clocking 18% growth (HSIE 21%, 18% two-year CAGR). Lighting was a dragger (mainly due to B-G business, B-C up by 19% YoY), reporting 2% growth (HSIE 18%, flat two-year CAGR). Within ECD, fans registered 17% growth (20% two-year CAGR) with premium fans growing >40%. Crompton gained market share in fans (2.7% in premium and 1.8% overall) during the last 12 months (only player gained as per retail pulse). Appliance business continued to deliver excellent growth (34% CAGR), while the pump was slow at 8% growth. However, margin performance was the showstopper. Crompton clocked a 15.5% EBITDA margin (HSIE 14.7%), only a 30bps YoY dip, despite the high commodity inflation and unfavorable base (+373bps in Q2FY21). EBITDA grew by 12% YoY and 29% on a two-year CAGR. The growth outlook remains positive with the expectation of sustaining a healthy margin. We maintain our estimates and value Crompton at 42x P/E on FY24E EPS to derive a TP of INR 575. Maintain BUY.

The Ramco Cements (NS: TRCE ): We upgrade The Ramco Cements (TRCL) to BUY from ADD earlier, with a target price of INR 1,096/share (13x Sep’23E EBITDA). Despite demand headwinds in COVID-impacted south markets, TRCL delivered a 27% QoQ volume rebound (+22% YoY). Op-lev gains from higher utilisation and rising contribution of WHRS and alternative fuel moderated the impact of lower pricing and soaring input costs. Thus, while standalone revenue rose 19% YoY to INR 14.93bn, EBITDA/APAT fell 11/9% YoY to INR 3.94/2.15bn respectively. Despite the soaring fuel cost outlook, management remains confident of a margin rebound closer to Q1FY22 levels on cost pass-through.

Multi Commodity Exchange of India Ltd (NS: MCEI ): We maintain BUY on MCX, following in-line revenue and margin performance. ADTV declined (-8% QoQ) sequentially for the fourth consecutive quarter due to an increase in upfront margin requirements (phase-4 at 100% implemented in Sep-21). Trading volume was down 5.1% QoQ due to continued weakness in bullion (-19% QoQ) and decline in metals (-16% QoQ), while energy volumes were robust (+26% QoQ). We maintain our positive stance, based on (1) increase in algo trading (~50% of volume); (2) strong traction in energy volumes; (3) implementation of cross margin benefits; (4) regulatory approval to launch new products; and (5) additional revenue stream from option contracts. The company has started charging for options contracts, effective Oct-21 (ADTV of INR 60bn, +217% QoQ). The launch of new products (electricity futures, TMT bars and natural gas options) could give a further boost to volumes. The shift to the new trading platform and new revenue streams will lead to a margin tailwind in FY23/24E. We moderate our EPS estimates for FY23/24E by 2.0/6.0% to adjust for lower volume. We assign 35x P/E to Dec-23E core PAT and add net cash (ex-SGF) to arrive at a target price of INR 2,300.

Orient Electric Ltd (NS: ONTE ): Orient Electric reported strong revenue and EBITDA growth, a beat on our estimates. Revenue grew 37%, with two-year CAGR at 17% vs. Crompton and Havells CAGRs of 13% and 20%. ECD segment grew 38%, with two-year CAGR at 22% vs. Crompton/Havells CAGRs of 18/22%. Leading players are sustaining strong growth in ECD. Orient’s ECD growth was mainly driven by the premium, economy and portable fans segments while water heaters (+50% YoY) and small appliances saw pent-up demand. The lighting segment too saw a robust topline recovery, growing 35% YoY, with two-year CAGR at 7% vs. Crompton/Havells CAGRs of 0/18%. The growth in lighting was driven by B-C; however, B-B private business enquiries have increased. Orient also delivered an EBITDA margin of 10.4% (HSIE 9.4%, higher than consensus), a 290bps contraction vs. expectation of a 396bps contraction. EBITDA grew by 7% YoY, with a two-year CAGR at 68% vs. Crompton/Havells CAGRs of 29/37%. We expect the ECD growth momentum and lighting margin expansion to sustain, going forward. We maintain our estimates and value Orient Electric at 38x P/E on FY24E EPS to derive a TP of INR 400. Maintain BUY.

Subros Ltd (NS: SUBR ): Q2 PAT, at INR 51mn (-71% YoY, +65% QoQ), was impacted by the constrained production, particularly at Maruti (NS: MRTI ) (due to the ongoing semiconductor issue). However, the medium-term drivers remain in place, including new order wins for the Maruti-Toyota joint production models from FY23E onwards (~8-10% of revenues) and the expected ramp-up in the home AC segment. We maintain BUY with a target price of INR 410, at 22x Sep-23E EPS.

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