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Bharti Airtel Ltd.

Bharti Airtel Ltd. (Airtel) is a global communications solutions provider with over 4.8cr customers in 17 countries across South Asia and Africa. It ranks amongst the top three mobile operators globally and its networks cover over two billion people. Airtel is India’s largest integrated communications solutions provider and the second largest mobile operator in Africa. As of 30th Sept. 2021, it had AGR market share of 37.2% and a VLR subscriber market share of 34.8%.

* On the back of higher ARPU and continuous growth in the 4G subscriber base, the company reported a robust set of financial performance during Q2 FY22. India mobile service revenue increased by 6.2% Q-o-Q, while mobility business from Africa region increased by 5.1%. Consequently, consolidated revenue increased by 5.5% sequentially to Rs. 28,326cr. Consolidated EBITDA increased by 6.3% Q-o-Q with 37bps expansion in the EBITDA margin to 49.5%. Reported PAT stood at Rs. 1,134cr in Q2 FY22 as compared to Rs. 283.5cr in Q1 FY22. PAT margin expanded by 295bps sequentially to 4%.

* Airtel demonstrated sector leading operating indicators showcasing strong business momentum. 4G subscriber base increased by 0.81cr Q-o-Q to reach a base of 19.25cr, i.e. 61.8% of its total mobility subscriber base. Mobile ARPU increased to Rs. 153 in Q2 FY22 as compared to Rs. 146 in Q1 FY22. With around 20-25% rise in tariff, which came into effect from 26th Nov. 2021, ARPU is further expected to rise. According to the company management, the current ARPUs are not sustainable and will improve to Rs. 200 in the near term and Rs. 300 in the long run.

* Its another segment catering to the enterprises i.e. the Airtel Business continued its growth momentum by reporting 5.4% Q-o-Q growth, driven by demand for connectivity, connectivity related solutions and CPaaS across global business and domestic businesses. The company’s enterprise portfolio consists of Connectivity IoT, mobile, IQ (customer relationship management), Secure, Cloud, Conferencing and Data Center solutions. In this business vertical, Airtel has 31.7% market share in data market, 44% market share in the mobility market and around 45% market share in IoT services.

* The company continued to maintain a high degree of financial flexibility. As on 30th Sept. 2021, its annualized net debtEBITDA ratio was at 2.96x as compared to 3.18x during the same period last year. Post the quarter close, Airtel successfully completed the rights issue of Rs. 20,987cr.

Valuation: Airtel’s domestic mobile business is expected to demonstrate its operational excellence in the sector. Moreover, its Airtel Business vertical, which offers a gamut of digital solutions to the enterprises, could be the next growth engine for the company. 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. 956 per share.

Buy Bharti Airtel Ltd. CMP 676 Target price 956 Potential upside (%) 41.5%

HDFC Life Insurance Company Ltd..

HDFC Life Insurance Co Ltd. (HDFCLIFE) is one of India’s leading private life insurance companies, with a full range of offerings in the life insurance space. It began operations in 2000 as a JV between HDFC Ltd. and Standard Life Aberdeen and has since grown to become a market leading private life insurer in the country.

* HDFCLIFE reported encouraging numbers in Q2 FY22, with new business premium coming in at Rs. 6,596cr up 12.3% Y-o-Y, driven largely by good traction in new first year policies. Total premium collection was at Rs. 11,631cr up 14.2% Y-o-Y. Renewal premiums saw improvement during the quarter as persistency ratios across all time periods saw improvements, suggesting the increased public awareness for life insurance seen during the pandemic is likely to remain sustainable.

* Annualized premium equivalent for Q2 was at Rs. 2,551cr with the share of protection products reducing to 12.8% in terms of APE. Despite this VNB margin improved to 26.6% (26.1% in Q1) led by good traction in group protection and credit life policies, VNB came in at Rs. 678cr up by 23.9% Y-o-Y. Embedded Value was at Rs. 28,703cr, as of 30th Sept. 2021, up 23%/5% Y-o-Y and Q-o-Q. RoEV improved to 18.4% in Q2 up from 16.5% in Q1. Persistency saw positive movements across all time periods, with 13th and 615 month persistency improving to 91 and 56 respectively. Cost ratios were largely in-line with commission expense ratio increasing to 4.4% in Q2. Total assets under management came in at Rs. 1.9lakh cr

* Covid-19 pandemic has been a tailwind for the life insurance sector, as awareness and the need for life insurance has increased substantially. Aside from the increased business, the pandemic has led to a shift in preference away from savings policies towards pure protection based policies, which are higher margin products for insurers. With the constant threat of new variants like Omicron, we expect the heightened public focus on life insurance to continue in the medium term.

* The pandemic has also 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.

* On 35 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.

Valuation: We expect HDFCLIFE to improve its performance metrics on the back of tailwinds in the sector and the Exide Life deal. Additionally, we expect it 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 4.4x (based on FY23 EV) to arrive at a target price of Rs. 833, thereby assign a “BUY” rating.

Buy HDFC Life Insurance Company Ltd CMP 639 Target price 833 Potential upside (%) 30.3%

Hindustan Unilever Ltd.

Hindustan Unilever Ltd. (HUL) is India’s largest fast-moving consumer goods company. It is a subsidiary of Unilever, one of the world’s leading suppliers of food, home care, personal care and refreshment products with sales in over 190 countries and an annual sales turnover of Euro 51bn in 2020.

* With 44 brands spanning 14 distinct categories such as fabric solutions, home & hygiene, life essentials, skin cleansing, skincare, hair care, colour cosmetics, oral care, deodorants, tea, coffee, ice cream & frozen desserts, foods and health food drinks, the company is a part of the everyday life of millions of consumers across India. Its portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Glow & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s, Horlicks and Pureit.

* On the back of 4% Y-o-Y volume growth and 7% pricing growth, the company reported an 11.4% Y-o-Y growth in the consolidated top-line in Q2 FY22 to Rs. 13,046cr. Gross margin contracted by 144bps Y-o-Y to 51.5%. However, mainly on account of calibrated price hikes in home care and beauty & personal care (soaps category), sequentially the gross margin expanded by 112bps. Consolidated EBITDA increased by 10.3% Y-o-Y with 31bps Y-o-Y contraction in the margin. Reported PAT increased by 10.5% with 18bps contraction in the margin, which stood at 16.7%.

* Home care segment grew by 15% Y-o-Y driven by high double-digit growth in fabric wash. Household care continued to perform well and grew on a strong base. Calibrated price increases partly offset the high inflation in input costs. Beauty & personal care grew 10% led by skin care, colour cosmetics and hair care. Foods & refreshment grew by 7%. Tea grew on a very strong base and further strengthened its market leadership. Focus on market development in nutrition is yielding good results. Health food drinks volumes grew double-digit and it continued to gain penetration sequentially. Overall, the company witnessed market share and penetration gains in 75% plus of the portfolio

* Over FY21-24E, we are forecasting a top-line growth of 8.9% CAGR to Rs. 60,760cr in FY24E. EBITDA and PAT are forecasted to grow by 8.5% and 8.4%, respectively, with margins of 24.4% and 16.8% in FY24E. RoE is likely to expand by 211bps to 18.9% in FY24E as compared to 16.8% in FY21.

Valuation: Business environment continues to be challenging with unprecedented levels of input cost inflation and subdued consumer sentiments mainly in the rural areas. With ease in pandemic restrictions, recovery in consumption continued at good pace in the urban markets. Overall we are cautiously optimistic about the overall demand recovery in the near term. Despite strong fundamentals, over the last three months HUL’s share price has corrected around 16.2%. Thus we assign a “BUY” rating on the stock with a target price of Rs. 2,821 per share.

Buy Hindustan Unilever Ltd CMP 2,302 Target price 2,821 Potential upside (%) 22.6%

ICICI Bank Ltd.

ICICI Bank Ltd. (ICICIB) is the second largest private sector bank in India and has been identified as a systematic important bank in the country. With the network of 5,277 branches, the bank has strong geo-graphical presence in the country. In FY21, ICICIB reported PAT of Rs. 16,193cr which grew at a 33.7% CAGR over FY18-21. Business growth as well as profitability of the bank improved significantly over the last few fiscals despite the pandemic related challenges. Assets quality remained stable, while the bank also made a significantly progress in digital banking activity.

* ICICIB reported strong performance in Q2 FY22 with PAT growth of 30% Y-o-Y driven by healthy loan growth of 17% Y-o-Y, margin expansion and lower NPA provisioning. NII grew by 24.8% Y-o-Y as NIM improved by 11bps Q-o-Q to 4% owing to lower reversals, high growth in high-margin unsecured portfolio. NIM is expected to expand further led by increasing share of high margin unsecured portfolio and deployment of surplus liquidity. While low CoF remains a key competitive advantage for the bank, ICICIB reported 12bps Q-o-Q decline in cost of deposits to 3.53% during the quarter. CASA ratio at 46.1% in Q2 FY22 stood among best in industry peers.

* Assets quality remained stable with bank reporting lower slippages at Rs. 0.96bn in Q2 FY22. GNPA declined by 33bps Q-o-Q to 4.82%. Healthy PCR at 80% and standard assets cover at 2% provide comfort and will immune the balance sheet from Covid-19 led business uncertainties. Total restructured book stood at Rs. 96.8bn (~1.3% of loan book). ICICIB held provisions at Rs. 19.5bn which stood at ~20% of the total restructuring book. In the view of improving assets quality, healthy PCR and high standard assets provision and increasing share of low risky book, we expect credit cost to remain under check and thereby providing boost to the bottom-line. Domestic advances grew by 19% Y-o-Y in Q2 FY22 on the back of strong growth in business banking (43.1% Y-o-Y), SME book (42% Y-o-Y) , home loans (25% Y-o-Y) and retail credit (27.9% Y-o-Y) and personal loans (18.2% Y-o-Y).

* Going forward, the bank plans to collaborate with fintechs to enhance business potential and capture growth opportunities by providing customer-specific solutions and by targeting new-to-bank customers. Given the strong customer franchise, we believe there is good scope for ICICIB to increase the share of unsecured portfolios, which would aid margins/profitability.

Valuation: We assign “BUY” rating to stock with target price of Rs. 900 valuing standalone banking business at Rs. 710 (at P/ABV of 2.5x FY24E) and subsidiaries valuation of Rs. 190.

Buy ICICI Bank Ltd CMP 736 Target price 900 Potential upside (%) 22.3%

Infosys Ltd.

Infosys Ltd. (Infosys) is a global leader in next-generation digital services and consulting. It provides consulting, technology, outsourcing and next-generation digital services, so as to enable its clients to execute strategies for their digital transformation. Its services enable clients in more than 50 countries and have over four decades of experience in managing the systems and workings of global enterprises

* In Q2 FY22, the company reported a 6.1% sequential growth (+20.5% Y-o-Y) in consolidated total revenue, which stood at Rs. 29,602cr. In constant currency terms, top-line increased by 6.3% Q-o-Q (+19.4% Y-o-Y), which was ahead of market expectations. Growth was broad-based across the geographies and segments. Business from the largest geography i.e. North America grew by 23.1%, while business from the largest segment increased by 20.5% Y-o-Y in constant currency. Digital revenues increased by 42.4% Y-o-Y and formed around 56.1% of the total revenue. Large deal momentum continued during the quarter with total contract value of USD 2.2bn as compared to USD 2.6bn in Q2 FY21.

* EBIT margin of 23.6% was almost flat on sequential basis, but was lower by 180bps Y-o-Y, mainly on account of higher employee costs, which was partially offset by strong operating parameters, cost optimization and operating leverage. Consolidated PAT was up by 4.4% Q-o-Q (+11.9% Y-o-Y).

* Infosys has completed the open market share buyback on 8th Sept. 2021, at an average price of Rs. 1,649 per share (compared to maximum buyback price of Rs. 1,750 per share). Consequently, its share capital has reduced by 1.31%. With this, the company has returned around 82% of the free cash flow for FY20 and FY21 through dividends and buyback. Further, the board has announced an interim dividend of Rs. 15 per share for FY22.

* On the back of stellar performance and robust growth outlook, the company has increased its revenue guidance to 16.5- 17.5% as compared to an earlier guidance of 14-16%

* The IT service sector has been the big pandemic winner and will continue to witness traction, mainly on the back of increased spending by the enterprises on further improving and strengthening their IT infrastructure. Anticipating the robust outlook and to harness the market potential, the company is planning to expand its college graduates hiring program to around 45,000 for the year.

Valuation: At a CMP of Rs. 1,866, Infosys is trading at a TTM P/E multiple of 37.6x. Based on FY23E earnings, it is trading at a P/E multiple of Rs. 30.5x. Considering the robust outlook and company’s growth leadership in the sector, we arrive at a target price of Rs. 2,150 per share, which is 15.2% higher than the recommended price. Thus we assign a “BUY” rating on the company.

Buy Infosys Ltd CMP 1,866 Target price 2,150 Potential upside (%) 15.2%

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

* On the back of strong project execution momentum and leading growth in the technology subsidiaries, the company reported a consolidated top-line growth of 12.1% Y-o-Y to Rs. 34,772.9cr in Q2 FY22. Total operating expenditure increased by 13.9% (a rate higher than top-line growth) thereby leading to a 136bps Y-o-Y contraction in EBITDA margin, which stood at 15.8%. Consolidated EBITDA increased by 3.1% Y-o-Y to Rs. 5,486.3cr. Reported PAT declined by 67% Y-o-Y to Rs. 1,819.5cr. In Q2 FY21, the company reported an exceptional profit of Rs. 8,146cr on account of divestment of its Electrical & Automation business.

* During Q2 FY22, L&T witnessed an order inflow of Rs. 42,140cr, of which 52% of the orders were from international markets. As of 30th Sept. 2021, the company had a consolidated order book of Rs. 3.3lakh cr, with international orders having a share of 23%. Infrastructure segment contributed 74% to the total order book, followed by heavy engineering with 15% contribution.

* Outlook of infrastructure creation in the nation is positive considering the continued thrust of the government through flagship programs like National Infrastructure Pipeline, National Monetization Plan, Gati Shakti Plan, Production Linked Incentive etc. Cumulatively these policy initiatives would make business sentiment positive, assisting the revival in private capex cycle.

* Going forward, L&T intends to continues its focus on profitable execution of its large projects order book, leverage the strong growth momentum in technology portfolio, cost optimization measures through automation & intensive use of digital technologies, release of funds through improved working capital management and a phased divestment of non-core assets

Valuation: L&T will benefit from the government’s continued focus on infrastructure creation. Over FY21-24E, we are anticipating a 10% CAGR growth in the top-line to Rs. 1.97lakh cr. However, EBITDA and PAT margins are likely to contract by 519bps and 61bps, respectively. Thus, we assign a “BUY” rating to the stock with a target price of Rs. 2,170 per share.

Buy Larsen & Toubro Ltd CMP 1,866 Target price 2,220 Potential upside (%) 19.0%

Schaeffler India Ltd.​​​​​​​

Schaeffler India Ltd. (Schaeffler) part of a leading global supplier to the automotive and industrial sectors, the Schaeffler Group, is present in India for over 50 years. It is among the largest industrial and automotive supplier with sales of Rs. 37.6bn in 2020 and 2,794 employees. The company has a market share of 36% in the overall domestic bearing market and a market share of around 60% in the roller bearing market.

* With three well known product brands LuK, INA and FAG, four manufacturing plants and eight sales offices, Schaeffler has a significant presence in India. Two manufacturing plants in Gujarat produce a vast range of ball bearings, cylindrical roller bearings, spherical roller bearings and wheel bearings that are sold under the brand name of FAG. A plant at Maharashtra manufactures engine & powertrain components and a range of needle roller bearings and elements, under the brand INA. The fourth manufacturing location is based out Tamil Nadu, producing a wide range of clutches & hydraulic clutch release systems which are sold under the brand of LuK. Schaeffler also has the largest after-market networks serving the industrial and automotive customers.

* As of 31st Dec. 2020, the company derived 80% of the business from the mobility segment, i.e. its products cater to PVs, CVs, off-road vehicles, tractors, rails etc. Thus it is well placed to benefit from the revival in the mobility segment and in general revival in the automotive sector. On product basis, 60% of the business is derived from the bearings sales and rest from engine & transmission solutions.

* It derived 53% of the business from the automotive sector and the rest from the industrial sector. Also due to its linkage with the global parent company, the company has strong overseas presence. Business from the exports increased by 11% CAGR in the last three years and accounted for 11% of the total business. With is strong presence in the export market and in the domestic industrial sector, Schaeffler is likely to benefit from the government’s flagship programs like Make-in-India, Atmanirbhar Bharat etc.

* During Q3 CY2021, the company reported a 20.7% sequential growth in the total operating income to Rs. 1,487.6cr EBITDA margin increased by 99bps Q-o-Q, thereby leading to a 27.7% rise in EBITDA to Rs. 264.5cr. Reported PAT increased by 33.3% Q-o-Q to Rs. 170.8cr with margin expansion of 109bps to 11.5%.

Valuations: We believe the company would benefit from the revival in the automotive sector and from higher exports to its parent company and to other markets. Also the government policies for boosting indigenization will acts as tailwind for the sector. Thus we assign a “BUY” rating on the stock with a target price of Rs. 10,380.

Buy Schaeffler India Ltd CMP 8,616 Target price 10,380 Potential upside (%) 20.5%

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