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Asian Paints Ltd: CMP 3,198, Target 3,952, Upside 23.6%

Poised for colourful future

Asian Paints is the market leader in India and 9th largest paint company globally. It has a strong hold over the decorative segment with a market share of 55%. It manufactures a wide range of coatings for decorative and industrial use and offer wall coverings, adhesives and services under their portfolio. Over the last few years, the company has forayed into the Home Décor segment including kitchen, bath, wallpapers, furnishing, fabric, decorative lighting and uPVC doors and windows.

Investment Rationale

Industry expected to grow in double digit: The Indian paints industry size is currently ~Rs 55,000cr is expected to grow in double-digit of ~10-12% CAGR in the next 3-5 years. The growth will be largely driven by demand for affordable housing and real-estate, increase in rural spending, reduction in repainting cycle and pickup in automobiles sales.

Decorative segment to drive double-digit volume growth: Asian Paints commands ~55% market share in the organized decorative segment and going ahead we expect double-digit volume growth driven by new products, focusing on premiumization and expanding distribution reach both in domestic and global markets.

Growth of other businesses would bode well: Besides, growing in the decorative segment Asian paints plan is to grow its other businesses. So, we believe the Industrial segment will benefit from pickup in demand for automobiles and coatings sectors. Further, the company is looking to expand distribution reach and innovate new products in domestic as well as international business and at the same time it also has plans to grow its home décor segment from 2.6% in FY22 to 8-10% in next 3-4 years. So, growth in all other businesses would bode well.

Outlook & Valuation

Asian Paints has posted strong financials in the last 5 years wherein its revenue/PAT has grown by 14%/9.6% over FY17-22. Further, we have estimated its revenue/EBITDA/PAT to grow at 19.9%/22.9%/27.8% CAGR over FY22-24E driven by strong demand from housing and real-estate sectors, new product launches as well as focus on premium products and growing across segments. Being a market leader, Asian Paints trades at a premium valuation than peers. We have a buy rating on Asian Paints with a target price of Rs 3,952.

HCL Technologies Ltd.CMP 995 Target 1,333 Upside 34.0%

Digital and cloud a boost to growth

HCL Technologies is a next-generation global technology company that helps enterprises reimagine their businesses for the digital age. HCL offers an integrated portfolio of products and services through three business units such as IT and Business Services (ITBS), Engineering and R&D Services (ERS), and Products and Platforms (P&P). The company’s holistic Mode 1-2-3 strategy forms the backbone of these three business units to help enterprises navigate the digital age with ease.

Investment Rationale

Strengthening its service business segment: In the last two years, HCL has further strengthened its service business (i.e. IT & business services (ITBS) and Engineering & R&D services) due to constant demand of next-generation technologies across various industries. ~90-92% is earned from services business and the remaining from platform business (8-10%). Going ahead, HCL capabilities, strong demand and continuous order flow for its service business will aid overall growth for the company.

Focus on margin improvement: HCL strategy would be to take appropriate cost optimization measures, utilization of manpower and focus on better realization from new and existing projects which would help in further improvement of margin.

Deal momentum remains strong and steadiness in Attrition is positive: HCL’s order book in the past remains strong largely driven by both long term and short term deals for cloud and digital. Going forward, the momentum is expected to continue (as witnessed in Q2FY23) which is positive for the company’s growth. Further, like other IT companies HCL attrition too witnessed an increase upto 23.8%. However, from past 2-3 quarters the trend suggested that its QoQ attrition growth is declining and in Q2FY23 the company posted same attrition levels (23.8%) as compared to Q1FY23. So, going ahead moderation in attrition is positive.

Positive management guidance: HCL Tech management in Q2FY23 has revised its revenue guidance upwards and expects it to grow at 13.5%-14.5% YoY from earlier 12-14% YoY in constant currency. They revised EBIT margin guidance to 18-19% from earlier 18-20%. Further, with strong deal momentum from its service business management remains confident of growing service business to the tune of ~16%–17% YoY in constant currency for FY23.

Outlook & Valuation

We remain positive on the long term growth prospects of the company as it would be driven by strong order book across verticals (such as manufacturing, financial, healthcare and media), continuous demand for service business (digital transformation) as well as robust digital capabilities of the company. Besides, its cost management program, better utilization of employees as well as steadiness in attrition will aid growth for margins. We have estimated its revenue (INR term) and EBIT to grow at a CAGR of 14.9%/16.3% over FY22-24E. Further on the valuation front, HCL Tech is trading at a comfortable valuation of 14.3x FY24E EPS as compared to large-cap peers. We continue to maintain a Buy rating with a target price of Rs 1,333.

Maruti Suzuki India Ltd:CMP 8,724 Target 9,898 Upside 13.5%

Festive season to drive growth

Largest player in the industry: Maruti Suzuki (MSIL) is the largest player in the passenger vehicle industry commanding a market share of 43% in the domestic market with nearly 1.6 million vehicles sold in FY22. It exports nearly 14% of its volumes to over 90+ countries.

Investment Rationale

Passenger Vehicle industry (PV) to register double digit growth in FY23: After two years of consecutive decline (FY19-22 volume CAGR of -3.1%), the domestic PV industry witnessed a healthy rebound in FY22 led by easing lockdown restrictions and strong pent up demand. Further, In FY23 the passenger vehicle industry is expected to grow by 12-15% on the back of economic activities picking up pace to pre-covid levels, easing of semi-conductor chip shortages and rise of demand in festive seasons.

Long term growth prospects remain promising: We expect the growth momentum to continue for the PV industry on the back of a low base, improving demand scenario and easing supply side issues. Long term industry growth driver remains in place with low penetration of cars, rising affordability, and increase in shift to personal mobility.

Industry leader (MSIL) to benefit: MSIL would be the biggest beneficiary of positive industry growth trend given its leadership position, strong presence in the entry level segment, and wide distribution presence.

Active plans to recoup lost market share: The market share loss for MSIL (down ~780bps over FY19-22) is mainly due to lost market share in the fast growing utility vehicle segment. However, with the launch of new variants Grand Vitara and Brezza and furthermore planned, MSIL expects to strengthen its portfolio and recoup its lost market share to 50% in next 3 years.

Margins and profitability set to improve: Increasing volumes, better mix and higher operating leverage would aid margin improvement for MSIL and translate into better profitability. Shareholding Pattern (%) (%) Dec-21 Mar-22 Jun-22

Outlook & Valuation

We estimate MSIL’s Revenue/EBITDA/PAT to grow at 19.5%/56%/62.7% CAGR over FY22-24E. We recommend a Buy rating on the stock with a target price of Rs. 9,898 valuing the company at 30x (10yr Average) FY24E EPS.

UltraTech Cement Ltd: CMP 6,272 Target 7,438 Upside 18.6%

Leadership and expansion, a key to growth

Largest cement manufacturer: UltraTech Cement is the cement flagship company of the Aditya Birla Group. It is the largest manufacturer of grey cement and ready mix concrete (RMC) and one of the largest manufacturers of white cement in India. It is the third largest cement producer in the world, excluding China. It has a total capacity of 120 MTPA of grey cement and 22 integrated manufacturing units, 27 grinding units, one clinkerisation unit and 8 bulk packaging terminals.

Investment Rationale

Strong demand opportunity in Cement sector: The demand for cement sector is expected to grow by a CAGR of 8-9% from 345-350 MT to 500-550 MT over FY22-27. We believe the growth will be driven by government spending on infrastructure development as in the Union Budget 2022-23, the government has provided higher allocation for infrastructure, affordable housing and road projects. Besides, pickup in rural and urban housing as well as growth in industrial and commercialization will further aid demand for the cement sector.

Capacity expansion plan to drive growth: UltraTech is well placed across India and in the next 3 years it has plans to expand its capacity which will be a mix of brownfield and Greenfield projects. The company’s capacity will increase to 160 MTPA by FY25 from 120 MTPA in FY22. This will aid in strengthening its position as well as capitalize on the opportunity arising from industries like housing, roads and infrastructure.

Plans to gain share in the east: UltraTech is a market leader in most of the regions in India such as west, north, central and south. It holds a market share of ~25% in terms of grey cement capacity in India. Going ahead, with an organic expansion plan of ~40-42 MTPA capacity pan India, it would strengthen its market position across regions as well as gain share especially in the east. .

Consistently reducing debt: In the last 3 years, UltraTech focused on re-paying debt as its plan was to further strengthen the Balance sheet. Thus, its Debt/Equity and Net Debt/Equity reduce to 0.2x & 0.1x in FY22 from 0.7x & 0.6x in FY19.

Outlook & Valuation

On the financial front, we expect its revenue/EBITDA/PAT to grow at a 16.6%/20.1%/27.7% CAGR over FY22-25E, which would be driven by improved realization, utilization & addition of capacity. Besides, product mix, decline in fuel and other raw material costs would aid margin growth. From an investment perspective, we are positive on the stock and have assigned a Buy rating with a target price of Rs 7,438.

United Spirits Ltd:CMP 826 Target 1,093 Upside 32.3%

Continued focus on premiumization to drive growth

Headquartered in Bengaluru and promoted by global leader Diageo PLC, United Spirit Ltd. (USPL) is one of the largest alcohol beverage companies in India. It is engaged in the manufacturing, sale and distribution of beverage alcohol. It has a comprehensive brand portfolio with over about 80 brands of Scotch whisky, Indian manufactured foreign liquor (IMFL) whisky, brandy, rum, vodka and gin. USPL has a strong distribution network of more than 70,000+ outlets, and its route to the consumer is superior in the industry with almost 1 in every 2 branded spirits bottles being sold in India coming from the company’s portfolio. It boasts of a pan-India manufacturing presence with 47+ facilities and produces and sells around 79 million cases in FY22.

Investment Rationale

Alcohol industry well poised to recover: The Indian alcohol beverage industry has had a rough ride over the last two years hit by the pandemic. However, easing lockdown restrictions and increase in consumer confidence have led to a healthy recovery over the last 4 quarters. Going forward, we continue to remain constructive on the long term growth prospects of the industry, given the low per capita consumption, favourable demographics and growing social acceptability of alcohol beverage consumption. We believe organized players like USPL stands to benefit from steady growth in the conversion from country liquor to IMFL given increasing health concerns associated with the consumption of country liquor. Not only this but the growing prevalence of premium alcohol beverages led by the rise in disposable income, increased travel and rising aspirations would drive growth in realizations and margins.

Premiumization to next phase of growth: USPL believes the next phase of growth in India’s Alco industry will be driven by premiumiuzation. Hence, the company has has done a commendable job by increasing focus on the fast-growing premiumization trend and expects premiumization to account for 90% of the revenue mix. The premium (Prestige & above) segment volume share has increased from 37% in FY16 to 54% in FY22 and the sales share has increased from 51% in FY16 to 73% in FY22. This has resulted in a marked improvement in EBITDA margin from 10.7% in FY16 to 16.1% in in FY22. The continued focus on premiumization coupled with cost optimization measures and better pricing would aid margin improvement and also help partially offset the recent increase in key raw material prices.

Repayment of loans alleviates high debt concerns: USPL has managed to reduce its debt considerably over the past five years through internal accruals and better working capital management from ~Rs. 4,200 cr in FY16 to Rs. 264 cr in FY22. This has resulted in a lower interest burden for the company and aided margin improvement. The current debt-to-equity ratio stands at a comfortable 0.1x in FY22 as against 1.5x in FY16.

Outlook & Valuation

We like USPL in this segment given the positive industry growth prospects coupled with the company’s tie-up with global giant Diageo, constant focus on premiumization and renovation. We expect USPL Revenue and PAT to grow at 9% and 31.4% CAGR over FY22-24E. We recommend a Buy on the stock with a target price of Rs. 1,093.

Dalmia Bharat Ltd: CMP 1,509 Target 1,968 Upside 30.4%

Capacity expansion and focus on carbon negative footprint, Key growth triggers

Dalmia Bharat is a fourth largest cement manufacturing company in India having a strong presence in south and east India. It has 14 manufacturing units with an overall installed capacity of 37 MT and serves customers across 22 states with 32,000+ dealers and sub-dealers. Dalmia portfolio is diversified amongst Portland Pozzolana (36% of revenue), followed by Portland Composite (25% of revenue), Ordinary Portland (21% of revenue) and Portland slag (18% of revenue).

Investment Rationale

Strong demand opportunity in Cement sector: The demand for cement sector is expected to grow by a CAGR of 8-9% from 345-350 MT to 500-550 MT over FY22-27. We believe the growth will be driven by government spending on infrastructure development as in the Union Budget 2022-23, the government has provided higher allocation for infrastructure, affordable housing and road projects. Besides, pickup in rural and urban housing as well as growth in industrial and commercialization will further aid demand for the cement sector.

Capacity expansion well on track: Most of the players in the cement industry are expanding capacity as there is huge expansion opportunity across pan India. So also, Dalmia has planned expansion by setting up new green-field and brownfield plants as well as debottlenecking of current facilities. The strategy is to expand capacity to 40MT by FY23 and 49MT by FY24 from currently 37MT in Q1FY23. Total clinker capacity stood at 20.9M in Q1FY23.

Diverse product portfolio: Dalmia has a diverse product portfolio and offers different variants of cements which cater to individual and institutional clients. Its portfolio is divided amongst Portland Pozzolana (36% of revenue), followed by Portland Composite (25% of revenue), Ordinary Portland (21% of revenue) and Portland slag (18% of revenue). Going forward, their focus is to improve its margin profile by concentrating more on product mix and sales of premium products along with investing in low-carbon technology which will aid in driving growth.

Financials are seeing improvement: Dalmia Bharat has reduced its debt from FY18-FY22 i.e. from Rs 6,322cr to 3,119cr and its debt/equity have reduced from 0.7x to 0.2x by FY22 which is positive. Also, its return ratios have seen improvement wherein its ROE improved from 3% in FY18 to 7.7% in FY22 and ROCE improved from 5.2% in FY18 to 6.4% in FY22.

Outlook & Valuation

Dalmia would continue its focus on expanding capacity, product mix and cost optimization measures which would bode well for its future growth. Besides, its long term vision of using green fuels and being carbon negative will aid in margin improvement. On a financial front, we have estimated its revenue/EBITDA growth of 25.4% and 27.8% CAGR over FY22-24E. We are positive on Dalmia Bharat and have recommended a Buy rating with a target price of Rs 1,968.

Kansai Nerolac Paints Ltd: CMP 480 Target 705 Upside 46.9%

Tough times seems limited

Established in 1920, Kansai Nerolac Paints Limited (KNPL) is a subsidiary of Kansai Paint Co. Ltd., Japan. It is the second largest coating company in India and a market leader in Industrial Coatings. KNPL has well established products in both the decorative and industrial segments. It has a pan-India presence with 6 manufacturing plants and more than 28,000 dealers network. In international markets it has presence in Nepal, Bangladesh and Sri-lanka.

Investment Rationale

Huge scope for growth in paints sector: The Indian paints industry size is currently ~Rs 55,000cr is expected to grow in double-digit of ~10-12% CAGR in the next 3-5 years. The growth will be largely driven by demand for affordable housing and real-estate, increase in rural spending, reduction in repainting cycle and strong pickup in automobiles sales.

Focus on growing its business segments: Kansai is the 3rd largest player in the decorative segment while largest player in the Automotive segment. The company is continuously focusing on introducing products in the premium segment and exiting the low margin segment. In addition it is increasing distribution reach in metros and Tier 1&2 cities where the demand momentum is high. Besides, reducing chip shortage concern and recovery in demand for auto would support growth of the industrial segment.

Improvement in margin, a key focus: From the past 2 years, rise in input cost and low demand for products has been impacting margin of the company. However, the company strategy is to improve margin as well as re-gain market share by changing product mix, take price hike (to beat inflation in input cost) and focus more on premium products.

Outlook & Valuation

Kansai Nerolac is one of the players in paints with strong presence in both decorative and industrial segments. Going ahead, we are positive on the growth prospects of the company and have estimated its revenue to grow at 17% CAGR over FY22-24E, driven by positive industry trends, innovative products in both its segments, expand reach and focus on product mix. In addition, its focus would be on managing cost and bringing more operating efficiency which will aid in margin growth. We have recommended a Buy rating with a target price of Rs 705.

Nippon Life India Asset Management Ltd: CMP 272 Target 331 Upside 21.7%

Market share gains on cards

Incorporated in 1995, Nippon Life Asset Management Company (NAM) is one of the leading AMCs in India with a total AUM of ~Rs. 3.79 tn. It is involved in managing the mutual fund (AUM of Rs. 2,833 bn) and managed accounts including Portfolio Management Services (PMS), Alternate Investment Funds (AIF), Pension Funds and Offshore Funds. Nippon Life Insurance (promoter of NAM) is amongst the fortune 500 companies and is Japan’s largest private life insurer. It has 57 Asset Management related operations & 22 Insurance related operations globally.

Investment Rationale

Long term industry outlook remains intact: Over the last decade, the Indian MF Industry has grown at a steady pace from Rs. 6.6 lakh cr to Rs. 38.4 lakh cr, an ~6x increase in a span of 10 years. Further, during FY22, industry saw a healthy growth of 32% in total folios largely due to increasing awareness of investment and higher retail participation. Further, equity-oriented schemes contribute ~49% of the overall industry AUM in FY22 (up from 31% in FY16). By 2030, there are high expectations that the MF industry would reach Rs. 90 lakh cr with a growth of 11.2% CAGR driven by the fact that MF AUM are only 15% of the GDP which is way below the world average of 70% so we believe there is strong scope of penetration to improve.

Maintaining market share: In FY22, NAM’s AUM market share has increased to 7.4% up by 26bps YoY on the back of inflows in equity as well as better fund performance. Going ahead, higher inflow in the equities coupled with more scope of growth in the under penetrated MF market provides the company an opportunity to scale up its business as well as the company's efforts of increasing presence in B-30 cities would further aid in gaining market share.

Focus on diversification of products: The company continues to offer diversified bouquet of product options such as ETFs, PMS, AI and Pension funds which provides investors with diversified options for investment as well as helps in achieving long-term investment goals. In addition, the company would earn a higher AUM which is positive.

Outlook & Valuation

We continue to remain constructive on the Indian mutual fund industry given its low penetration level as compared to major economies, increase in investment awareness, financialization of savings, rise in SIP etc. Further, NAM’s consistent increase in equity assets, industry-leading retail assets, focus on growing SIP book and strong presence in B-30 cities augurs well for the growth prospects of the company. We recommend a Buy on the stock with a target price of Rs. 331.

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