Sell Ramco Cements; target of Rs 521: SPA Financial

Ramco continued to report impressive set of numbers backed by improving volumes and better operating efficiency. While improving demand scenario in AP & Telangana region resulted in 18.9% YoY growth in volumes, EBIDTA/tonne improved by INR 96/tonne to all time high of INR 1509/tonne (amongst the best in industry). Profitability was further boosted by 38.3% YoY decline in interest expenses owing to INR 3.5 bn of debt repayment in H1FY17. Although Ramco remains one of the best bets to play the cement demand recovery theme across South India, we change our rating on the stock from "HOLD" to "SELL" with a target of INR 521, as current valuation factors in most of the positives. Ramco remains one of our best mid cap bets to play to the cement demand recovery theme in South India. Superior operating profitability, dominant market share backed by strong brand recognition ensures buoyant growth prospects for the company. Having split grinding unit near to high consumption markets minimizes transportation costs and helps in timely servicing of the demand. However despite all these positives, we change our rating on the stock from “HOLD” to “SELL” with a target of INR 521 (based on an avg. of 10x FY18 EV/EBIDTA & FY18 EV/tonne of INR 7475), as valuation of 11.7x FY18E EV/EBIDTA & EV/tonne of INR 9046, factors in most of the positives.

Buy VA Tech Wabag; target of Rs 781: SPA Financial

VA Tech Wabag reported better than expected set of numbers aided by improved performance from standalone operations (57.7% of revenues). Consolidated revenues grew by 31.2% YoY led by 38.2% YoY surge in standalone revenues & 22.7% increase in overseas revenues. Margins deteriorated by 46 bps YoY to 7.4% led by 92 bps decline in overseas margins. Wabag bagged orders worth INR 7167 mn in Q2FY17 leading to total backlog of INR 70653 mn (book to bill of 2.5x). 

Long term story in Wabag continues to remain intact with rising focus on clean water for drinking as well as better effluent treatment. We retain our BUY rating on the stock with a target of 781. WABAG with presence across the value chain of water spectrum is the best play on water scarcity theme. Superior return ratios (RoCE of +19%), cash rich balance sheet, asset light business model and technological & locational advantage places it above its peers. Long term opportunity remains immense in Wabag as upcoming opportunities of over INR 700 bn, alone would more than double its order backlog, even if Wabag maintains a strike rate of mere 10%. We continue to retain our BUY rating on the stock with a target of 781 based on 22x FY18E earnings.

Buy ICICI Bank; target of Rs 338: KR Choksey

Reporting mixed set of performance in Q2FY17, ICICI Bank PAT at INR 31 bn stood sequentially higher largely supported by one-off gains from to the tune of INR 56.82 bn emerging from IPru stake sale that helped beef up provisions against elevated asset quality stress. The stringent balance sheet repair put up elevated slippages at INR 80 bn for second consecutive quarter; however, watch-list exposure declined 16% Q-o-Q to INR 324.9 bn . 

Consequently, the overall stressed assets too tapered down; declining to 10.4% of overall asset base. While the provisioning for the quarter stood exceptionally higher (182% Q-o-Q increase), the bank made additional provisions towards standard loans, loss NPAs and floating provisions and stands adequately provided on the wage related front. While the flat NIMs (3.1% - Q2FY17) and higher delinquencies impacted NII, the improvement in portfolio mix (53% emerges form retail/MSME), strong retail lending accretion (21% Y-o-Y growth), cost efficiencies and significant capital on balance sheet with sufficient cushion from value unlocking in subsidiaries should aid ICICI Bank to put up improved operating metrics ahead. 

UPGRADE BUY. Q2FY17 performance stood mixed with headline asset quality standing elevated; yet receiving major support from the one-off stake sale gains. However, higher provisioning for contingent times coupled with stringent balance sheet repair and ameliorating retail franchise are key positives for the strong operating show ahead. While the asset quality disappointment was on expected lines, reduction in watch-list exposure and resultant decline in overall stress loans coupled with huge provisioning buffer brings respite. While asset quality is not yet out of woods, the improvement in portfolio mix, strong retail lending accretion, cost efficiencies and significant capital on balance sheet with sufficient cushion from subsidiaries should aid ICICI Bank put up consistent quality show on operating metrics.

Buy Bajaj Finserv; target of Rs 3500: Dynamic Levels

Over the last few years, BFL has established itself as one of the premier non-banking financial companies (NBFCs) in India. It has consciously built a diversified lending business covering retail consumers, small and medium enterprises and commercial borrowers. The business model of BFL is built on well-defined customer segmentation, multiple product offerings and extensive use of data analytics within a robust risk management and operational excellence framework. BFL had a strong year aided by a diversified product mix, robust volume growth, prudent operating cost management and low NPAs. With assets under management of 44,229 crore, BFL has emerged as one of the leading NBFCs in the country. We initiate coverage Bajaj Finserv as a BUY @2900 with a target of Rs 3500 representing a potential upside of 20% from the buy price, Bajaj Finserv share price is trading at a PE of 22.49.

Buy Lupin; target of Rs 1769: KR Choksey

Lupin’s Q2FY17 revenues were in-line with our estimates. Revenues grew by 32% YoY to INR 42.1 bn (as compared to our estimate of INR 41.9 bn). US business posted robust growth of 70% YoY and de-growth of 9% QoQ in USD terms from USD 172mn in Q2FY17 to USD 292mn in Q2FY17 (and USD 322 mn in Q1FY17) on account of robust sales from gGlumetza and limited competition gFortamet. Lupin launched 2 products in the US market. Indian business posted a healthy growth of 12.1% YoY to INR 10 bn on account of seasonality. 

South African sales grew by 27% YoY to ZAR 252 mn. Germany sales grew by 31% to EUR 6.4 mn and Philippines sales de-grew 16% to PHP 448 mn. Latam region de-grew by 9% to INR 1 bn with Brazil growing by 11% to BRL 31 mn and Mexico posting de-growth of 32% YoY to MXN 93 mn. Japanese sales were up 10% YoY in Yen terms to JPY 6.7 bn and 35% YoY in INR terms to INR 4.4 bn. EBITDA for the quarter stood at INR 10.3 bn up 55% YoY with EBITDA margins at 24%. R&D as a % of sales was at 13.6% at INR 5.7 bn. 

PAT for the quarter stood at INR 6.6 bn up 58% YoY on account of lower tax rate. We remain confident on Lupin’s ability to generate superior returns, sustain robust revenue growth over FY16-18E on account of a high quality and loftier US pipeline through Gavis acquisition coupled with risk mitigation strategy employed in form of tech transfer and enhanced remediation efforts for its Goa facility; successful integration of Gavis into Lupin’s pipeline and enhanced footprint in the Japanese markets. 

We maintain our rating of ‘BUY’ valuing the company at a higher multiple on account of enhanced R&D initiatives, robust US pipeline and a robust growth trajectory across all key markets. We reduce our earnings estimate by our 14% / 5% for FY17E/FY18E EPS respectively on account of slower than expected ramp-up in Gavis portfolio and higher competition in key products; with a revised target price INR 1,769 (earlier INR 1,863) at 24xFY18E EPS of INR 74.

Accumulate Lupin; target of Rs 1650: Prabhudas Lilladher

Post the USFDA visit of Goa plant in March 2016, Lupin received resolution on all pending observations of USFDA. Previously too, the company had received resolution in Q1FY17 on the observations of the USFDA post their visit of the Goa plant in June 2015. 

With the resolution in Goa to lead new approvals and delayed launch of competitors in metformin XR benefitting Lupin, we increase our estimates for sales by 13% and 15% and PAT by 37% and 38% in FY17E and FY18E respectively. Domestic formualtions growth is also increased to 16.5% from 14% in FY17E‐18E. 

We expect hangover of large competition in Metformin franchise remain a major concern in medium term. Nevertheless, we expect the drag in valuation due to FDA observation to be replaced with optimism of new approvals in core portfolio. We upgrade our recommendation to ‘Accumulate’ and increased TP to Rs. 1,650 (on 20x FY18E earnings) from Rs. 1419.

Buy Bharat Forge; target of Rs 957: Prabhudas Lilladher

With export sales recorded fifth successive quarter of YoY decline, BHFC’s standalone revenues declined 20.7% YoY and 1.5% QoQ during Q2FY17. While the EBITDA margin was lower 70bps YoY, it was higher 80bps QoQ to 27.8%, as the benefits of fixed cost rationalisation and cost reduction were felt. Standalone adjusted profit in Q2FY17 was marginally better than expected at Rs 1.27 bn, a decline of 26.3% YoY. 

However, wholly‐owned subsidiaries sustained the improvement witnessed since Q4FY16. Medium‐term and long‐term outlook for BHFC remains healthy and its strategy for Aerospace, Defence and Auto transmission parts provides reason for optimism. In the near‐term, better domestic CV and PV segment sales would be offset by lower demand in the industrial segment and sluggish North American truck demand. However, the latter is at its bottom and is expected to mark a slow recovery ahead. H1FY17 was subdued for BHFC with a better performance outlook from H2FY17 onwards. We maintain our estimates and price target and reiterate a “BUY”. At the current market price, the stock is trading at 30.7x FY17e EPS and 22.5x FY17e.

Accumulate GSK Consumer; target of Rs 5988: Prabhudas Lilladher

GSK 2Q results were disappointing with 3% decline in MFD volumes amidst continuous pressure on discretionary spending by the consumers. 

GSK is adopting an aggressive strategy to boost volumes by 
1) re‐launch of Horlicks and Boost sachets at Rs5 
2) Re‐launch of Women’s Horlicks and Junior Horlicks and 
3) launch of Horlicks Growth plus to compete with players like Pediasure in the premium segment. 

While we expect gradual recovery in demand in line with our discretionary products, input cost pressures are likely to emerge due to increase in prices of SMP, Sugar and Malted Barley. GSK Asia has reduced the marketing margin on its sales from 16.75% to 15% which will have some impact on Business Auxiliary Income. We expect stunted profit growth in near term and estimate 7.6% CAGR in PAT over FY16‐19. GSK trades at 31.4xFY18 EPS of Rs 183 which is 20% discount to coverage universe which limits downside. Retain “Accumulate”.

Accumulate PNB; target of Rs 140: Prabhudas Lilladher

PNB’s Q2FY17 performance was better than expectations with PAT of Rs 5.5 bn. The bog positive came in from slippages rate trending downward coupled with strong efforts on recovery/upgrades beginning to pay off while keeping the asset quality stable. 

Provisions continued to remain high but were offset by higher treasury gains during the quarter. Recoveries continued to be from small/medium accounts with management guiding for recovery of another Rs 100 bn in H2FY17 v/s Rs 107 bn in H1FY17. 

We have slightly fine tuned our estimates on equity infusion by GOI of Rs 21.0 bn, while also adjusted movement of NPA. Strong recovery/upgrades especially from large a/c can provide delta on asset quality, while operational improvement seems to be on track. We are Upgrading to Accumulate with revised PT of Rs 140 (from Rs 80).

Buy CEAT; target of Rs 1445: Prabhudas Lilladher

Prabhudas Lilladher's research report on CEAT While Ceat reported a YoY decline in its standalone earnings in Q2, the dip was lower than our expectation. The relatively stable input costs and increase in share of more profitable products in its mix would have a positive impact on Ceat’s performance. 

Revenue growth is also expected to be better with higher demand for two‐wheelers and UVs and capacity constraints would be addressed by its ongoing expansion. Higher profitability and increase in cash flow generation would result in an improved balance sheet position from FY18. We maintain a “BUY”, while retaining our estimates and target price.