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ICICI Bank

FUNDAMENTAL VIEW

* ICICI Bank is India's leading private bank, with operations spread in many countries like United Kingdom, Canada, United States, Singapore, Bahrain, Hong Kong, Sri Lanka, China, Qatar and UAE.

* Apart from corporate and retail banking, its presence in in the areas of Stock Broking, Investment Banking, Life and Non-Life Insurance, Venture Capital and Asset Management, offers an opportunity to ride on diverse financial businesses in India.

* After the lockdown after 2nd COVID wave, its businesses across the verticals have seen improved momentum, which will further accelerate in the second half.

* Slippages are likely to start going down from 3QFY22. Slippages in the retail and SME segment will remain elevated till 2QFY22. The bank is carrying a healthy buffer provision of 1.1%, which will be sufficient to absorb it.

* We believe that ICICI is expected to show improvement across its business verticals. The core banking too will see sustained improvement in its RoE over the next three years, after making a low in FY19.

* We value ICICI Bank at Rs910 - core banking at 2.8x FY23 Adj Book Value, IPRU, ICICI Lombard GI and ICICI Securities at market price with 20% Holdco discount.

Manappuram Finance Ltd

FUNDAMENTAL VIEW

* Manappuram Finance is the second largest gold loan company in India. Gold Loan business offers a very large untapped opportunity, with a superior risk-return profile.

* Gold Loan AUM is expected to grow at CAGR of 8-9% in FY22-24E, after a growth moderation in FY22E due to high base effect.

* Its Micro Finance subsidiary, Asirvad is on strong footing and will continue showing healthy disbursement and client addition. Although collection efficiency was lower in 2QFY22, we expect it to recover in the coming quarters as the impact of COVID wanes.

* MFI business is expected to post a robust growth of over ~20% in AUM.

* Owing to superior yield, the company has shown significant improvement in its return ratios with its RoE improving from 9.5% in FY15 to 26.4% in FY21. The company is in a virtuous cycle of value creation.

* Based on SOTP, we value Manappuram Finance at Rs240/share, which implies consolidated P/ABV of 1.8x based on FY23E. We have valued the standalone Gold Loan business at P/ABV of 2.0x based on FY23E and MFI & Housing Finance businesses at P/ABV of 2.5x and 1x respectively, with 25% holding company discount.

HCL Technologies Ltd

FUNDAMENTAL VIEW

* Within the Tier 1 IT space, HCL Technologies (HCL Tech) is marked by its greater focus towards Digital Technologies, ERD Services (Engineering and R&D Services) and P&P (Products and Platforms) based businesses.

* HCL Tech has created separate business units for each cloud hyperscaler and recently formed a single global digital business by combining digital consulting, application services, and data analytics services. Consequently, it is well placed to capitalize on increased demand for digital transformation initiatives, underlining a $300bn opportunity in the cloud space.

* Recovery in the ER&D driven by Hi-tech and Life Sciences will drive growth for HCL Tech going forward. This will be aided by healthy renewal rates in the Product and Platforms (P&P).

* New Frontiers of Growth: Appointed new country heads in Brazil, Spain, Portugal, South Korea, Taiwan and Vietnam. Mexico and Brazil will start showing results much faster than Asian countries.

* The management is confident of double-digit growth in FY22E. Assigning a PE multiple of 25X on FY23E, we arrive at our target price of Rs1,440, giving an upside of 21% from the current price level.

IFGL Refractories

FUNDAMENTAL VIEW

* IFGL is one of the key player in the domestic refractory market, supplying various refractory castings to almost all the major steel manufacturers in India.

* Refractories, having complex metallurgical properties to sustain high temperatures, are manufactured by handful of players, yielding a stable high margin and RoI. These are key consumable by the steel manufacturers with fixed life cycle and its demand are not just dependent on new melting capacity but also on rising utilization in the steel furnaces.

* IFGL refractories is one of the key beneficiaries of rising steel demand and thereby rising capacity utilization in the domestic melting capacities.

* Timely brownfield expansion at its Vizag plant will aid its growth in the coming quarters.

* The company has net cash in the balance sheet and has a strong track record of generating robust operating cash flow. The company trades at a significant discount to its peers like RHI Magnesita and Vesuvius India. Improving RoIC will lead to narrowing of the valuation gap and rerating of the stock.

 * Assigning a PE multiple of 12x on FY23E, we arrive at a price target of Rs470, with an upside of 56% from the current levels.

Jamna Auto Industries

FUNDAMENTAL VIEW

* Jamna Auto Industris (JAI) is the largest Indian manufacturer of Spring Leaves (a part of vehicle suspension) for commercial vehicles. Apart from conventional Spring Leaves, the company has expended its product offering within the suspension segment and now manufactures Parabolic Spring Leaves, Rear Air Suspension, Lift Axle Assemblies, Bogie Suspension, Z Spring and Stabilizing Bars etc.

* JAI is undertaking ‘50XT’, under which it plans to achieve RoCE of 50%, new market revenue contribution of 50% and new products revenue contribution of 50% over the next five years.

* The company is planning to launch Cold Pressed U Bolts with superior technology. Out of the 50% of revenue from the new products, it expects 10% will come from the new technologies, which will yield better margin.

* We feel that the company is well placed to capitalize on the revival in the CV demand, both in the domestic as well as overseas market.

* Rising content per vehicle will lead to higher revenue growth for the company in the coming years.

* JAI’s balance sheet has zero debt. Barring the COVID impact in FY20 and FY21, it has operated at superior RoIC of above 25% in FY16-19.

* We value Jamna Auto Industries at PE multiple of 18x based on FY23E to arrive at a target price of120.

Supreme Industries

FUNDAMENTAL VIEW

* Supreme Industries is one of the market leaders in the domestic Plastic industry, with 25 state of the art plants and over ~320,000MT of polymer handling capacity.

* The company manufactures wide variety of Household and Agriculture products like plastic furniture, plastic plumbing water distribution systems, Green House accessories etc.

* The company is well placed to capitalize on recovery in the domestic real estate market. Further, it will also benefit from the higher investment in the irrigation activities by the domestic farmers.

* Supreme produces plastic-based Piping Systems for Housing and Agriculture (accounted for 64.5% of revenue in fiscal 2020), Industrial Goods (12.0%), Consumer Goods (5.6%), Packaging Products (16.3%). Catering to a diverse end-user profile mitigates the risk of slowdown in any segment or industry. Furthermore, revenue is supported by the increasing contribution of value-added products (~40% of revenue).

* The management is confident of 10-15% volume growth in the medium term, led by replacement and new demand. Higher contribution of value added products is likely to offset the margin pressure on account of higher raw material prices.

* We value Supreme Industries at a PE of 35x based on FY23E. Our target price of Rs2950, gives an estimated return of 25% over the next 12-15 months.

Valiant Organics

FUNDAMENTAL VIEW

* Valiant is a small but a niche player in the domestic Chemical/API space and is a market leader in many of key Chemistries like Chlorophenol, PNA (Para Nitro Aniline) etc. New chemistries like Para Anisidine, Para Amino Phenol (PAP) and Ortho Amino Phenol are import substitutes, which is expected to show good pick up on account of ongoing supply disruption and China+1 policy of material sourcing.

* Valiant’s indigenous manufacturing of PAP (Para Amino Phenol), a key starting material for Paracetamol is a testament to its deep understanding of chemistries, given PAP’s complex production technique. Where others have failed or got considerably delayed, Valiant has built a 12,000 MTPA capacity of PAP, which should, at peak utilization, incrementally contribute Rs3-4bn to revenues.

* It has already completed capital investment of ~Rs4.7bn during FY19-21. This will drive the revenue of the company in the coming years. This will also debottleneck the existing product supply and expand its product portfolio.

* Company’s presence across the value chain and multipurpose plants yield flexibility on types of products and quantities, effectively allows Valiant to better manage demand cyclicality, while custom synthesis creates dependence of clients on the company. Its forward and backward integrated model yields stable and higher margin.

* We value Valiant Organics at EV/EBITDA of 15x based on FY23E to reach a target price of Rs1,900.

Vardhman Textiles

FUNDAMENTAL VIEW

* Vardhman textiles is the largest spinning company in India with 1.13mn spindles/664MTPA capacity. The company is forward integrated with a 220mn meter p.a. Grey Fabric and 175mn meter p.a. Processed Fabric capacity. The company also manufactures Acrylic Yarn and Shirting facilities through its subsidiaries.

* Capabilities to manufacture a large variety of Yarns like Blended, Melange, Compact etc., Vardhman Textiles enjoys one of the highest margin in the Industries.

* China+1 policy and ban on Xinjiang Cotton Products by the US Govt. have created excess demand for the Indian Yarn, Garmenting and Home Textile companies, resulting in robust demand for the Yarn in both the global and domestic market. Xinjiang Cotton Made-ups and Garments accounted for ~20% of the global Cotton supplies.

* Major Yarn producing countries like Pakistan, Vietnam, Bangladesh, Indonesia, Turkey etc. has put large downstream capacities in the recent past to grab the global apparel market share, lost by the Chinese exporters. This has resulted in almost entire internal yarn capacities in these countries being used captively by the downstream capacities. Countries like Bangladesh and Vietnam have now become net importer of yarn, leading to a shortage of Yarn in the global market. Vardhman Textiles is one of the key beneficiary of the structural demand-supply mismatch of Yarn.

* Based on DCF, our target price for Vardhman Textiles stands at Rs2,370, which implies a PE of 11.3x based on FY23E.

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