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Bharti Airtel Ltd.

Bharti Airtel Ltd. (Airtel) is a leading provider of telecommunications services with over 47.4cr customers in 18 countries across Asia and Africa. The company ranks amongst the top three mobile operators globally and its network covers over 2bn people. Airtel is India’s largest integrated communications solutions provider and the second largest mobile operator in Africa. It’s retail portfolio includes high speed 4G/4.5G mobile broadband, Xstream Fiber that provides speeds up to 1Gbps. It also offers secure connectivity, cloud and data center services, cyber security, IoT, advertising technology and cloud based communication.

* During Q1 FY22, Airtel’s revenue came in at Rs. 26,854cr, up 21.2% Y-o-Y. EBITDA stood at Rs. 13,189cr against Rs. 7,266cr in Q1 FY21, with a margin of 49.1% in Q1 FY22 against 43.4% in Q1 FY21. PAT stood at Rs. 941cr against a loss of Rs. 15,811cr in Q1 FY21. Mobile 4G data customers increased by 4.61cr Y-o-Y and stood at 18.44cr in Q1 FY22.

* Airtel has raised Rs. 21,000cr through right issue to expand its network and prepare for the launch of 5G services with fiber and data center business. A mega fundraising will give Airtel more firepower to compete in the fiercely competitive Indian telecom market. Airtel plans to launch its 5G services during FY22-23.

* The four year moratorium allowed on statutory payout will help Airtel to participate aggressively in the 5G airwaves sale which is likely to be held by the end of 2022. We estimate that it will help the company with as much as Rs. 11,500cr in annual cash flow funds. Airtel’s chairman Sunil Mittal has said that the company will opt for the four-year deferred options for adjusted gross revenue and spectrum payment.

* Airtel continues to gain market share with strong customer additions. By leveraging favorable macroeconomic conditions such as the dive to digital, growing data consumption, expanding into tier-2 and tier-3 cities and utilizing DTH and other digital services, the management is confident of an upward momentum in revenue in the long term.

* It is expected to be one of the key beneficiaries from the subscribers moving out of troubled incumbent. The subscriber migration from its rival incumbent would be gradual, thereby assisting in expanding its revenue & subscriber market share.

* Airtel’s chairman, has maintained that it will improve the ARPU to Rs. 200 levels by the end of FY22 and then gradually to Rs. 300-350 levels over the medium term. Apart from getting benefited from the structural shift from the 2G to 4G services, the company is likely to take tariff hikes to improve the ARPU levels.

Valuation: Through series of fund raising in the past and maintaining robust operating and financial performance, Airtel has strengthened itself for any challenges arising from RJio. Investment in Airtel will be a long term play and thus we are assigning a “BUY” rating on the stock with a target price of Rs. 1,024 per share.

Larsen & Toubro Ltd.

Larsen & Toubro Ltd. (L&T) is an Indian multinational conglomerate engaged in EPC projects, Hi-Tech manufacturing and services. It operates in 50 countries worldwide. The company encompasses multiple business - buildings & factories, transport infrastructure, heavy civil infrastructure, smart world & communication, water & renewable energy and power transmission & distribution. Originally founded in 1938, L&T had 118 subsidiaries, six associates, 25 joint ventures and 35 joint operations companies. Today L&T counts itself among the top construction firms in the world.

* In Q1 FY22, L&T reported a 61% Y-o-Y growth in standalone revenues to Rs. 13,109cr. Standalone net profit for the quarter stood at Rs. 749.97cr reporting a growth of 166% Y-o-Y. Its EBIDTA margin declined 276 bps Y-o-Y from 15.7% to 12.9%. Despite the second wave of Covid-19 disrupting operations at numerous locations, the company's multi-fold growth is attributed to healthy project execution.

* The company has a total order book of Rs. 3,237bn as of Q1 FY22 with domestic and international orders contributing Rs. 2,574bn and Rs. 663bn, respectively. Total order inflow in Q1 FY22 was Rs. 266bn, an increase of 13% Y-o-Y. The company’s major order inflow comes from infra, hydrocarbon, power, heavy engineering and industrial machinery business.

* The Indian government formulated Rs. 111lakh crore in FY20 to be spent over the next six years, according to a National Infrastructure Pipeline (NIP) report. According to NIP, spending on water, metro rail, highways, renewable energy, electricity T&D, and urban infrastructure will certainly increase in the coming years. L&T with its vast reach and expertise across different segments is expected to greatly benefit from the spending.

* Over the last few years, L&T has exited a number of capital inefficient assets and non-core businesses in order to lower debt levels and achieve higher efficiency in capital utilization. Last year the company sold its Electrical & Automation division to Schneider Electric for a post-tax consideration of Rs. 11,000cr, making it the largest non-core asset divestment in the company's history.

* The proceeds from the sale of these assets were used to pay down debt and put money into other assets. Multiple catalysts for L&T are expected to emerge over the next few years including asset monetization for Hyderabad Metro and Nabha Power, an increase in order inflows ahead of the elections and improved execution, aided by a better working capital cycle - as the government focuses on capex for economic growth and job creation.

Valuation: L&T will benefit from the government’s continued focus on infrastructure creation. Over FY21-23E, we are anticipating a 10.1% CAGR growth in the top-line to Rs. 164,775cr. EBITDA margin is likely to expand by 50bps, while PAT margin is expected to contract by 111bps. We assign a “BUY” rating to the stock with a target price of Rs. 2,170 per share.

HDFC Life Insurance Company Ltd

HDFC Life Insurance Co Ltd. (HDFCLIFE) is a leading private life insurance solutions provider in India, offering a range of individual and group insurance solutions such as Protection, Pension, Savings, Investment, Annuity and Health. As on 30th Jun. 2021, the company had 37 individual and 13 group products in its portfolio, along with seven optional rider benefits. It began operations in 2000 as a JV between HDFC Ltd. and Standard Life Aberdeen.

* New Business Premium (NBP) came in at Rs. 6,596cr in Q2 FY22, up 12.3% Y-o-Y largely driven by strong traction in first year policies, while single premium policies were subdued at 7.7% growth Y-o-Y. Total premium during the quarter was at Rs. 11,631cr up 14.2% Y-o-Y with renewal premiums growing by 16.8% Y-o-Y. Value of New business (VNB) clocked in at Rs. 678cr up 23.9% Y-o-Y. VNB margin improved to 26.6% from 25.7% in the same period last year. Embedded Value (EV) as on 30th Jun. 2021 was Rs. 287bn, Assets under Management came in at Rs. 1,912bn and the Solvency margin came in at 190%.

* On 3rd Sept. 2021, HDFCLIFE announced the acquisition of Exide Life insurance (Exide Life), for a cash consideration of Rs. 6,687cr and issuance of shares. This deal is expected to add considerable value to HDFCLIFE, not just through the integration of the existing business of Exide Life but also the long term synergies that would emerge down the line. Based on FY21 numbers, Exide Life is expected to add approximately 10% to the topline of HDFCLIFE. Exide Life has a strong presence in South India especially in tier-2 and tier-3 cities, the eventual merger with the company is expected to drive further market share gains for HDFCLIFE along with improvements in its performance through operating leverage kicking in.

* The company is the market leader in the annuity vertical among private players; its market share has grown to 36% in Sept. 2021 from 34.4% in Mar. 2021. We expect the pension business to be a growth driver for the company. HDFC life has indicated they will prefer a cautious approach to underwriting over short term growth, with reinsurance rates being hiked and subsequent hikes in product costs. We expect HDFCLIFE’s focus on risk management to lead to improvements in performance metrics as well.

* The pandemic has impacted profitability in the sector, leading to life insurers needing higher capital infusions to drive growth. We expect this will lead to a consolidation in the industry where the larger players will grab further market share.

Valuation: Going ahead, we expect the company to see improvements in its performance metrics, aided by tailwinds in the sector and the Exide Life deal. Additionally, we expect HDFCLIFE to maintain its leadership position among private players as rising costs would make it difficult for disruptive practices. We value HDFCLIFE at P/EV multiple of 4.5x based on FY23E to arrive at a target price of Rs. 833 and thus assign a “BUY” rating.

Timken India Ltd

Timken India Ltd. (TIL) is a subsidiary of The Timken Company, a US based leading manufacturer of taper roller bearings. TIL is engaged in manufacturing, distribution & sale of anti-friction bearings, components, accessories and mechanical power transmission products for customer across sectors like Aerospace, Construction, Railway, Automotive, Mining, and Energy. The company is debt free with efficient working capital cycle and strong return ratios.

* During Q1 FY22, operating revenue came in at Rs. 467.9cr, up 192% Y-o-Y, but was lower by 1.6% on sequential basis. Strong topline performance was primarily driven by incremental order book. EBITDA increased 559.3% Y-o-Y to Rs. 92.8cr, while margin expanded by over 10ppts to 19.8%. Reported PAT stood at Rs. 56.7cr as compared to Rs. 3.1cr in Q1 FY21.

* With a record high budgetary allocation of Rs 1.1lakh crore for FY22, the total capital expenditure of Indian Railways (IR) is expected to touch Rs 2.15lakh crore in this fiscal - highest ever in a year. As per the announced plans, IR is expected to increase the LHB coach production to 6,500 units in FY22. Also as coach upgradation gathers pace, older trains are gradually upgrading to Cartridge Taper Roller Bearings (CTRB) while new trains are coming with 100% CTRB.

* In railways freight applications, TIL enjoys more than 50% market share. Mainly due to its lower field failure rates, it is a technical partner for IRs for dedicated freight corridor. High speed trains is another area where TIL’s products will find ready acceptance. With around two dozen metro projects lined-up, India is massively looking to expand the metro rail coverage. In metro coaches, bearings are required in single/double-stage gear boxes and wheels. TIL currently has more than 60% of share in metro bearings market with potential revenues of Rs 100cr per annum in the next five years.

* To support domestic manufacturing, the government bought policies like “Make-in-India” and “Atmanirbhar Bharat”, pursuant to which it intends to strengthen the foundation and rev-up manufacturing. Additionally, the government has introduced PLI programs to accelerate the manufacturing activities for local as well as export markets. Among the domestic bearing companies, TIL is likely to benefit the most since it has a significant amount of export share (24% in FY21) in its total revenue. In the long run, it plans to achieve an export sales contribution of around 50%.

Valuations: We are anticipating a 22.4% CAGR growth in top-line over FY21-24E to Rs. 2,589cr. EBITDA and PAT margins are expected to expand by 437bps and 362bps, respectively. RoIC and RoE are likely to expand by 296bps and 588bps, respectively, to 12.1% and 19.6% in FY24E. At a CMP of Rs. 1,651, the company’s share are trading at a TTM P/E multiple of 63.1x, which is premium to peers average. However, considering the growth opportunities across the MHCV and the railways and also the export opportunities, we feel the prevailing valuation is justified. Applying a P/E multiple of 45x to the FY24E earning, we arrive at a target price of Rs. 2,132.8 per share. Thus we assign a “BUY” rating on the stock.

Mahanagar Gas Ltd

Incorporated on 1995, Mahanagar Gas Ltd. (MGL) is one of the leading natural gas distribution companies in India. It is the sole authorized distributor of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai, Thane and Raigad district of Maharashtra. Promoted by GAIL (India) Ltd., the largest state-owned natural gas processing & distribution company in India, MGL distributes CNG for motor vehicles and PNG for domestic, commercial as well as industrial use.

* During Q1 FY22, the company reported better than expected performance. On the back of higher than anticipated volume and better realization from the industrial & commercial sales, top-line increased by 140.3% Y-o-Y to Rs. 666.9cr. Sequentially, sales volume declined due the second wave of Covid-19 pandemic. Supported by higher margins (resulting from the lower gas prices vs higher prices of alternate fuels) and lower operating costs, EBITDA increased by 280% Y-o-Y, while margin expanded by around 17ppts to 45.6% in Q1 FY22. With stable effective tax rate, reported PAT increased by 351% Y-o-Y to Rs. 204.1cr. PAT margin expanded by over 14ppts to 30.6% in Q1 FY22.

* On the back of firmed up international gas prices, the government in Sept. 2021 hiked the natural gas prices by 62% to USD 2.9/mmbtu from earlier price of USD 1.8/mmbtu. Higher prices will be effective between Oct. 2021-Mar. 2022. With spot LNG price increasing from USD 6-7/mmbtu in Apr. 2021 to USD 30-35/mmbtu as of early Oct. 2021, we are of the opinion that the domestic gas prices will be again raised in the next revisions.

* At higher gas prices, demand from industrial & commercial will get impacted but demand of CNG and PNG are likely to be stable. MGL with around 85% of the gas sales to the CNG and PNG-residential users is not likely to be impacted much by the gas price hike. In the event of partially absorbing the further increase in the gas prices, MGL may have margin pressures.

* Over FY16-20, MGL’s sales to CNG and PNG-residential customers increased by 4.4% and 9.9% CAGR. Future growth in the sales volume of MGL will be supported by the starting of services in the Raigad region and structural shift from petrol/diesel as fuel to gas as a fuel for the vehicles. In the next five years, the company plans to add another 0.1mn residential consumer and have a CNG operating base of 400 stations.

Valuations: MGL has the highest margin among the city gas distributors. It is less exposed to demand erosion, resulting from the hike in the domestic gas prices. At a CMP of Rs. 1,008, MGL is trading at a TTM P/E multiple of 12.8x, which is at discount to other city gas distributors. With less exposure to the industrial customers, highest operating margin, highest FCF/share and highest dividend yield, we feel that MGL is a value play for investors. Thus we assign a “BUY” rating on MGL’s shares for a target price of Rs. 1,286 per share.

ISGEC Heavy Engineering Ltd

Isgec Heavy Engineering Ltd. (ISGEC) is a diversified player with business areas in both manufacturing and EPC project segments. Its customers are located in 91 countries across six continents. With operations since past 88 years, it addresses the requirements of a wide spectrum of sectors including power, defence, fertilizer, sugar, oil & gas, petrochemicals, automobile components, steel, cement, chemicals, railways, space and ports.

* ISGEC provides state-of-the-art, sustainable engineering solutions to customers around the world. The company manufactures process plant equipment, presses, iron & steel castings and boiler pressure parts. ISGEC also undertakes EPC turnkey projects for setting up boilers, power plants, sugar plants, distilleries, air pollution control equipment, flue-gas desulfurization, civil construction including factories, industrial water treatment facilities and bulk material handling facilities. ISGEC being closely linked to the key sectors of the economy, we feel that it is comfortably placed to benefit from the revival in the manufacturing and infrastructure sectors.

* In FY21, EPC segment contributed 63.7% to the consolidated top-line, this was followed by manufacturing and sugar with 28.8% and 14.5% contribution, respectively. Geographically, it generated 82% of the revenue from the domestic operations, while 18% from overseas. In the last five years, ISGEC generated around 26% of the business from exports.

* On the back of lower business across the segments, the company reported a 30.2% Q-o-Q decline in consolidated revenue to Rs. 1,128.4cr in Q1 FY22. On Y-o-Y basis, top-line increased by 5.4%. EBITDA and reported PAT declined by 60.4% and 78.5% Q-o-Q, respectively, with 325bps and 301 bps contraction in the respective margin, which stood at 4.3% and 1.2%.

* Q1 FY22 performance might have been impacted by the second wave of Covid-19 pandemic, but considering the order book of Rs. 6,765cr (which is 1.2x of the TTM revenue), which is equally supported by the various government policies tailwind (Atmanirbhar Bharat, Make-in-India, PLI scheme, NIP etc.), we feel that the company would report better performance in the residual part of the current fiscal. Over FY21-23E, we are estimating a 9.4% CAGR rise in the top-line to Rs. 6,494.5cr in FY23E. EBITDA and PAT are forecasted to be at 7.4% and 4%, respectively, in FY23E.

Valuations: At a CMP of Rs. 681, ISGEC is trading at a TTM P/E multiple of 22.4x. Considering the robust order book, which is equally supported by the various government policies, we feel it will be one of the key beneficiaries from the revival in the manufacturing and infrastructure sector. Thus we assign a “BUY” rating on the stock with a target price of Rs. 887 per share.

Techno Electric & Engineering Company Ltd

Techno Electric & Engineering Company Ltd. (TEEC) is one of India’s top power Infrastructure companies. It provides end to end solutions across the electricity value chain through Engineering, Procurement and Construction (EPC) vertical, asset ownership and operations and maintenance services.

* TEEC is a strong player in the power infrastructure space, focused on maintaining market leading position in EPC extra high voltage substation segment. Besides remaining strong player in the power EPC, the company strategized to enter into new growing businesses like data center, advance metering infrastructure (AMI) and FGD.

* Revenue from the EPC segment, which accounted for ~90% of total revenue, is expected to increase at brisk pace (~30% CAGR over FY21-FY23E) led by govt’s increased focus on energy transformation and entry into high growth business segments. TEEC’s order book is expected to increase to Rs. 3,200cr by FY23E from Rs. 1,932cr in FY21. It has guided an order inflow of Rs. 2,000-2,500 in FY22E.

* TEEC is setting up data center in Chennai which will be powered by wind assets, thereby improving the RoE (of wind assets) as it is likely to fetch higher tariffs at Rs. 5/unit (currently at Rs. 3/unit). The company has planned investments of Rs. 750cr for data center business and is actively searching for a strategic partner.

* Besides generating income from renting data centers to global e-commerce and internet players, this new business segment will help in better utilization of wind power assets which is struggling to generate low RoCE in the range of 5-10%. Optimistic over strong growth trend in data center sector in India, TEEC has planned to foray into data center in a big way and will utilize its over two decades of experience in the mechanical, electrical project execution ,which accounted for 50-60% of total data centers project.

* The company also expects strong business growth opportunity in the AMI space as central government announced grant towards installation of 25cr smart meters over next five years. GoI’s AMI capex is envisaged at Rs. 1.5lakh crore over the next five years.

Valuations: Owing to strong engineering skills and better project execution capabilities, TEEC has been generating industry leading EBIDTA margin of over 20%. Over the past five fiscals, operating revenue grew by 6.6% CAGR, while profitability remained strong due to high profit margin helping it to maintain healthy return ratios. Debt free position, double digit return ratios and strong cash flow situation (OCF margin at 14% in FY21) reflect strong fundamentals of the company.

Furthermore, cash balance of around Rs. 800cr will support the company to seize business growth opportunities in its expertise related segments. We expect operating revenue will increase to Rs. 1,519cr in FY23E from Rs. 884cr in FY21. RoE is expected to improve to 14.3% in FY23E from 11.2% in FY21. Thus we assign a “BUY” rating on the stock with target price of Rs. 370 per share.

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