Godrej Consumer Products Ltd
Over the period FY17-20, the performance of GCPL had been lackluster. Revenues grew less than 1% CAGR while the earnings grew by a mere 4.7% CAGR given
A. Flattish growth of the Indian market dented by the poor performance of the Household Insecticides (HI) segment.
B. Management was slow to react to the rapidly changing trends in the hair styling segment in the African market. It grew at a slower pace of 5.1% CAGR to Rs. 2,316 cr over FY17-FY20
C. Negative 20.8% CAGR of the Latin American market which de-grew at 20.8% CAGR to Rs. 556 cr in FY20
D. FY20 global performance was impacted by the onset of the pandemic.
To revive the growth story the management has undertaken a series of measures which we believe should turn the situation around.
* Changes in top management to steer boat in the direction of growth Nisaba Godrej has been given the additional responsibility as CEO and MD from July 2020. Her mandate is to steer the company in the direction of growth. South African born Dharnesh Gordhon, ex CEO Nestle (Nigeria and Indonesia), has been hired to head the operations of Africa, USA, and Middle East. This should provide the much-needed impetus to reenergize the operations of this vertical.
* Resurgent growth of the Indian market vertical We expect the Indian market revenues to grow at a CAGR of 9.6% to Rs. 7,053 cr by FY23 driven by –
A. HI segment expected to grow at 14.7% CAGR to Rs. 3,302 cr
B. Soaps category expected to grow at 8.2% CAGR to Rs. 2,251 cr
C. Subdued growth (1.1% CAGR) of the Hair Color vertical to touch Rs. 648 cr
D. Other category expected to grow at 4.9% CAGR to Rs. 910 cr
BUY Godrej Consumer Products Ltd CMP Rs.688 (35.7x FY23 P/E) Target Price: Rs.900
Larsen & Toubro Ltd.
The Indian economy is set for a revival with improving macro indicators like PMI, IIP, GST collections, auto volumes, electricity generation, export growth, bumper crop production, etc. The government has borrowed an additional Rs.9.0 tn, which is expected to improve ordering activity in H2FY21. With a dominant position and as a leading player across all verticals in the EPC infrastructure space, L&T is well-positioned to see a turnaround with the strong revival in economy and government spending.
❖ Investment Rationale
* L&T takes contracts for all infrastructure verticals, be it highways, city infra, defence, heavy engineering, oil & gas, power, buildings, etc. It generates 65-70% revenue from India, while the rest comes from the Middle East, N. Africa, Europe and America. Such a welldiversified EPC portfolio provides flexibility to cherry-pick profitable projects, optimize the business and maintain a strong project pipeline.
* L&T’s order book stands at Rs.2,989 bn, which is 2.1X of its current market cap, higher than its 10-year average of 1.8X. Despite a challenging environment, L&T has sustained its order book and has a bidding pipeline of Rs.6.0 tn (Rs.4.7 tn domestic and Rs.1.3 tn international). With the labour unavailability, execution delays and supply chain disruptions now over, we are expecting a strong pick up in order execution in H2FY21.
* L&T gets 10-12% of the combined annual capex of government (centre & state) and PSUs. The central government has announced an additional borrowing of Rs.9.0 tn for expenditure and is also pushing PSUs to scale up capex to Rs.1.16 tn in FY21. This is expected to improve the ordering activity and workflow to L&T.
* Pandemic raised the working capital requirement of L&T and its working capital to sales ratio increased from 19% to 27% in the past 12 months. But, cash proceeds from the sale of E&A provided comfort to the standalone balance sheet, which reduced the net debt from Rs.15,788 cr to Rs.5,295 cr during H1FY21.
BUY Larsen & Toubro Ltd CMP Rs.1,059 (12.2x FY23 EV/EBITDA) Target Price: Rs.1,362
The Indian economy is witnessing early signs of recovery from disruptions caused by COVID-19. PMI, IIP, GST collections, auto volumes, electricity generation, export growth, bumper crop production, etc. all augur well a rebound in economic activity. In addition, the government has borrowed additional Rs. 9.0 tn, which is expected to improve ordering activity in H2FY21.
We believe that the stock of ACC is well poised for a re-rating given the strong expected earnings growth and improved profitability emanating from
* above stated buoyancy due to economic recovery
* well timed expansion to 39 mn tonnes (+18%)
* expanding volumes
* cost cutting measures
* healthy cash pile and strong cash flow generation
* benign valuations augur well for a re-rating of the stock
We initiate coverage with a BUY for a price target of Rs. 1,905 (9.8x CY22 EV/EBIDTA) representing a potential upside of 14% over the next 24 months from the CMP of Rs. 1,674.
❖ Investment Rationale
* The company currently has an installed capacity of around 33 mn tons and the capacity utilization for 9M CY20 is at 72%. The company is setting up a greenfield integrated cement plant at Ametha, MP with a clinker capacity of 3 MTPA and a cement capacity of 1 MTPA, expanding its existing grinding unit in Tikaria, UP with a 1.6 MTPA cement capacity and a third grinding unit in UP with a capacity of 2.2 MTPA, and setting up a 1.1 MTPA PSC/ 1.4 MTPA PCC grinding facility at the existing location of Sindri, Jharkhand. All these projects are expected to be commisioned by early CY22 and will be funded through internal accruals at a total capex of around Rs. 3,000 crores
BUY ACC Ltd CMP Rs.1,674 (9.8x CY22 EV/EBITDA) Target Price: Rs.1,905
IDFC First Bank Ltd
IDFC First Bank Ltd (IDFCFB), post-merger, has finally got its act together and is well positioned to benefit from the opportunities arising out of an under-penetrated market and market share gains, from peers that are struggling. We initiate coverage with a BUY for a price target of INR 48 (1.5X FY23), representing an upside of 41.2% over the next 24 months from the CMP of Rs. 34.
Our optimism stems from the following.
* Aggressive write downs of legacy NPAs and adequate provisioning for stressed asset has ameliorated the concerns around asset quality. We expect GNPL and NNPLs trend to remain flat at to 2.5% (-10 bps) and 1.0% (+1 bps), respectively, for FY23.
* Loan book is set to grow at 15.7% CAGR to Rs 1,32,665.3 crore by FY23 driven by faster growth of its retail book to Rs 1,11,933 crore (25% CAGR) and flattish trend in corporate advances. The lending mix is expected to shift in favour of retail lending to 74:26 by FY23. The resultant granularity will bring more stability to the lending book. Both the asset and liability portfolios are considered as separate engines of growth. This focussed approach has resulted in a marked improvement in the quality of the lending book.
* Liabilities are expected to grow at a faster clip of 19.3% to Rs. 1,10,554.4 crore, driven by a faster growth in CASA deposits to Rs 45,327.3 crore (29.4% CAGR). This spurt in CASA deposits along with a churn from bulk deposits to retail is expected to lower the cost of funds to 7.5% (-30 bps).
* The twin impact of change in lending mix and lowered cost of funds should lead to a healthy gradual 140 bps NIM expansion to 4.8% by FY23.
BUY IDFC First Bank Ltd CMP Rs.34 (1.0x FY23 P/BV) Target Price: Rs.48
IRCTC is the only company serving in the online ticketing and catering business (combined 89% of FY20 EBIT) for the Indian railways. In FY20, online ticketing as a digital platform business has seen 302 mn bookings, which equals 73% of the total railway tickets booked in India.
It enjoys a competitive edge in its pricing of packaged drinking water and its e-catering services enjoy strong growth prospects given that customer preferences are shifting towards food aggregators and cloud kitchen services. The recent encouraging announcement of a breakthrough in the production of a Covid-19 vaccine raises hopes that normalcy should return sooner than later. While the FY21 performance will be impacted, we expect a strong pick-up in FY22/23E.
IRCTC at the CMP of Rs. 1374 is trading at 23.8X FY23E. We recommend a buy with a price objective of Rs.2,000 (34.7X FY23) representing a 45.6% upside over the next 24 months.
❖ Investment Rationale
* IRCTC has a monopoly in the online ticketing and catering businesses, which are its top 2 business segments. It is the only entity authorized by the Indian Railways and the Catering Policy 2017 to provide these two services respectively.
* Given that the Indian railways is the lifeline for passenger transport, the positive prospects of a Covid vaccine would mean that the economy could revive sooner than expected. We expect train operations to normalize on the back of resumed consumer confidence by FY22
* The Indian Railways have already begun the process of inviting private players to participate in the operations of 151 passenger trains across 12 clusters. IRCTC has put in bids for 11 of these 12 clusters in the RFQ invited by the Indian Railways. We conservatively expect IRCTC to win one of these bids. Further the railway routes connecting the 4 metro cities (which account for 52% of passenger traffic) are expected to decongest
BUY IRCTC Ltd CMP Rs.1,374 (24.9x FY23 P/E) Target Price: Rs. 2,000
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