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.

Buy pharma stocks: Ambit

Speaking to CNBC-TV18 Pramod Gubbi of Ambit said that the pharma sector will be under pressure. He said pharma has been neglected or has underperformed. Given how things are changing from an investor perspective, they are looking at it as value buy, he said, adding that there won’t be any fundamental changes in terms of the outcome of the US elections. There is a need for Indian companies to move up the value chain and several of them are doing, he said.

Much like pharma, the tech sector is also going through a consolidation after having a good 3-4 years until 2014, he said. There is usually a lag in the advances seen in Indian companies, but they do catch up, he maintained.

It is difficult to gauge the extent of the fall in global markets if Donald Trump wins, he said. There are leveraged positions in the market. Having said that we see that as a buying opportunity, he said. “We don’t see any material changes given the American political and democratic system in terms of checks and balances.”

Sell Bayer CropScience: East India Securities

Bayer CropScience (BCS) registered sales of Rs 10.8Bn, a growth of 9.2% YoY and 35.2% QoQ, indicating pick up in growth. We believe post healthy monsoon, market demand is picking up. Overall performance of BCS was encouraging on back of improving monsoon condition, we believe as season picks up, 3Q & 4Q numbers should improve. 

We expect BCS to post CAGR of 16% in Revenue & 17% growth in PAT over FY16 18E. At current valuation of 43x & 37x FY17 & FY18 expected earnings, we believe stock is overvalued, however managements regular buy back & lower trading volume would support higher price. We maintain our Sell rating on stock with Target price of Rs 4,038.

Sell UPL: East India Securities

UPL posted gross revenue growth of 19% in Q2FY17, mainly on account of strong volume growth of 23% during the quarter. There was a price decline of 5% while exchange impacted positively by 1%. Total net revenues grew by 26% during the quarter. Geographically, India/Latin America contributed highest to the growth with 23%/34% respectively. 

Seed business witnessed a revenue growth of 23%. UPL’s Q2FY16 results were marginally below our estimated. UPL is a leading global generic player in the agrochemical Industry (ranks among the Top-5 post patent agrochemical manufacturers in the world). We expect UPL sales to register CAGR of 14.5% over FY2016-18E, while Adj PAT is likely to show a CAGR of 20.2% during same period. 

Over past few quarters, UPL has seen a strong revival in volume growth, with improving gross margin. At current price stock is trading at 25x & 20x its FY17E & FY18E earnings respectively. Due to recent run up in the price, stock trades near to its fair value, hence we rate stock Sell with TP of Rs 688 per share.