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Tata Motors - Company Update - Chip shocker amidst best-ever demand Tata Motors (JLR) indicated that acute global semiconductor shortage is impacting
its production. Taking cognisance of the same, we are revising down FY22E volumes
by ~102k units assuming the challenges will persist till Q3FY21. Hence, we are
revising down FY22E PAT by ~65%, but retaining FY23 estimates.
Tata Steel - Company Update - Primed for performance
We attended Tata Steel (TSL) Investor Day and got insights into its long-term
strategic focus. Key points: i) Capacity aspiration of 35-40mtpa by CY30 in India. ii)
Capital prudence expected with a firm focus on returns. iii) Thrust on maintaining
leadership in key products; iv) Unwavering commitment to sustainability. v)
Innovation through technology.
Sobha - Company Update - Q1FY22 sales: Decent performance Despite the covid-19 induced lockdown, Sobha turned in a relatively good
performance, clocking ~0.9msf pre-sales in Q1FY22; volumes were up 38% YoY but
down 33% QoQ (Q4FY21 had witnessed highest ever bookings in the company’s
history). By value, sales (company’s share) were at INR5.7bn (up 45% YoY, down 35%
QoQ). Realisations were up 2% YoY (down 5% QoQ). There were no formal project
launches during the quarter (~3.2msf in FY21).
Crompton Consumer - Company Update - Gaining greater ground with
rigour
In this edition of Annual Report Insights, we spotlight Crompton’s moves that are
pumping up its growth and balance sheet. Takeaways: robust process, asset-light
approach and quicker TAT complemented its premium brand and market reach amid
a consolidating market.
Automobiles - Sector Update - Cost pressure to persist
Q1FY22 volumes were impacted QoQ due to lockdowns (2W, M&HCV most
affected). This along with commodity inflation would continue to weigh on EBITDA
margins QoQ. Price hikes and value engineering would take off part of it though.
Overall we expect the margins to decrease 100–200bps QoQ.
India Equity Research July 7, 2021
FIRST CALL DAILY REPORT
Edelweiss Research +91 22 4009 4400 [email protected]
Sectoral Movements %Change Ticker 4-Jul-21 1 D 1 M 3 M 1 Y
Nifty 15,818 -0.1 0.4 6.7 46.5
Banking 40,281 1.0 0.1 8.0 57.2
IT 28,649 -1.0 5.0 6.8 81.5
Pharmaceuticals 25,898 -0.6 4.4 17.0 59.1
Oil 16,148 0.0 -6.8 8.0 25.7
Power
2,687 0.5 -9.3 5.8 66.7
Auto 23,610 -1.8 -2.4 5.5 44.6
Metals 18,614 -0.5 -2.2 19.0 154.6
Real Estate
2,811 -0.5 0.2 6.7 72.1
FMCG 13,601 -0.5 3.0 5.6 20.7
Capital Goods 22,919 0.2 -2.2 8.5 71.6
MARKETS Change in % 04-Jul-21 1D 1M 1Y
Nifty 50 15,818 -0.1 0.4 46.5 Nifty 200 8,376 -0.1 0.3 49.8 Nifty 500 13,574 -0.1 0.7 53.4
INDIA STOCK PERFORMANCE
GLOBAL 04-Jul-21 1D 1M 1Y
Dow 34,577 -0.6 -0.2 33.6
China 3,523 -0.2 -2.1 5.3
EM Index 1,347 -0.6 -2.5 27.9
UPCOMING EVENTS CALENDER
MACRO Change in %
04-Jul-21 1D 1M 1Y
Fx (INR/USD)
74.6 -0.3 -2.3 0.2
!0-yr G-sec 6.2 1.4 2.4 5.8 Oil (USD) 74.4 -0.2 4.1 72.7
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Sales Traders Says Currency Conversations
Bond Vectors Valuation Vista
40,000
50,000
60,000
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7,000
8,500
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(x)
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Nifty Index MSCI EM Index - Local Currency (RHS)
EventDate
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08-07-21
07-07-21 Redington to consider bonus issue
Tata consultancy services results
FIRST CALL
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Media - Sector Update - Broadcasters to fare better For media at large, Q1FY22 marked a disruption due to the raging second covid
wave. Multiplexes operated for two–three weeks of April and have shut screens
since. Despite few states allowing screens to reopen now, lack of content forced
screens to remain shut. Broadcasters too faced disruption in shooting original
content and a sequential dip in ad revenues. We expect revenues for ZEEL and Sun
TV to grow 34.2% and 20.9% YoY, and PVR and INOX to post EBITDA losses of
INR615mn and INR209mn.
Metals & Mining - Sector Update - A record quarter in store Despite covid-19 related disruptions, Q1FY22 is likely to be a record quarter for most
companies in our coverage. Key points: i) A QoQ volume dip likely for most
companies. ii) Ferrous companies (flats oriented) are likely to fare better. iii) Debt
reduction likely. iv) Higher iron ore and crude derivatives’ cost to weigh on
performance.
Specialty Chemicals - Sector Update - Surge in input prices to drive
revenues We expect specialty chemicals companies to post robust results in Q1FY22 off a low
base (covid-19 had posed challenges in Q1FY21) and a surge in input cost. Our
coverage universe is likely to report revenue growth of 48% YoY and EBITDA/PAT
growth of 52%/75% YoY.
Home Decor - Sector Update - Strong recovery takes a breather
Q1FY22 is likely to mark a pause in the home décor industry’s sharp recovery since
Q2FY21. While growth momentum sustained at most companies in April, May took
a hit as lockdowns returned. Recovery resumed in the last 15 days of June though.
All in all, we estimate an aggregate 30% QoQ drop in revenue (up ~80% YoY off a low
base) with a higher fall in EBITDA and PAT due to negative operating leverage across
segments coupled with inventory losses (plastic pipes) and an uptick in raw material
cost (wood panel space).
Pharmaceuticals - Sector Update - Supernormal domestic; steady margins In Q1FY22, we estimate pharma would report ~14%/19% revenue/PAT growth. Key
trends: i) Domestic to outperform (+31% YoY, volume led) driven by low base and
covid-19 treatments. Cipla, GNP, CDH and DRRD to benefit. ii) Cost savings to keep
EBITDA margin healthy. iii) US: Volume recovery offset by price erosion; good
launches at DRRD, LPC and GNP, albuterol ramp-up for Cipla and LPC; Ilumya uptake
offset by Absorica for SUNP. CIPLA and ALKM to report good numbers.
Consumer Staples - Sector Update - Q1FY22 : Six weeks of aberration We estimate revenue and EBITDA of our coverage universe to grow 10.5% and 2.3%
on two-year basis (Q1FY22 vs Q1FY20) compared to 19.3% and 15.9% on two year
basis for Q4FY21 (Q4FY21 vs Q4FY19).
Sadbhav Engineering - Result Update - Balance sheet remains stretched Sadbhav Engineering (SEL) posted 23% QoQ decline in Q4FY21 top line; however,
exceptional items and tax write-back boosted profitability with PAT rising 341%
QoQ. Toll collection fell 8% QoQ. Order book declined QoQ to ~INR93bn; fall in
revenue (down 28% YoY) means book-to-bill remains optically elevated at 5.7x.
Working capital cycle deteriorated to 527 days (489 at end-Q3FY21).
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KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 346 12 month price target (INR) 405 Market cap (INR bn/USD bn) 1,229/16.5 Free float/Foreign ownership (%) 57.6/15.6
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Chip shocker amidst best-ever demand
Tata Motors (JLR) indicated that acute global semiconductor shortage is impacting its production. Taking cognisance of the same, we are revising down FY22E volumes by ~102k units assuming the challenges will persist till Q3FY21. Hence, we are revising down FY22E PAT by ~65%, but retaining FY23 estimates.
We expect global pricing power led by supply constraints and a sharp jump in used vehicle prices. We assume JLR will prioritise production of most profitable models in FY22. Maintain ‘BUY’ with a revised TP of INR405 (earlier INR436) as we roll over to Dec-22E. Sustained supply constraint is a key risk as H2 volumes are higher than H1.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 24,97,94
8
28,96,87
5
35,79,21
4
39,11,21
8
EBITDA 2,52,967 3,35,736 4,54,777 5,42,141
Adjusted profit (2,55,055
) 39,844 1,33,407 1,83,419
Diluted EPS (INR) (66.6) 10.4 34.8 47.9
EPS growth (%) 33.1 nm 234.8 37.5
RoAE (%) (23.3) 7.1 20.5 22.7
P/E (x) nm 30.5 9.1 6.6
EV/EBITDA (x) 7.0 5.5 3.6 2.6
Dividend yield (%) 0 0 0 0
PRICE PERFORMANCE
Semiconductor shortage heating up; demand outlook best ever
JLR press release indicates: 1) Loss of production of 30K in Q1FY22. 2) Expects production to fall by 50% versus earlier planned. 3) Expects EBIT loss and operating cash out flow of GBP2bn. 4) Demand outlook is extremely strong with outstanding retail orders of 110K units–highest in the company’s history–constituting three months of sales cover.
Million dollar question: Will things normalise from Q4FY22?
As new capacities are expected to come on-stream over the next 12-18 months, we expect some shortage of semiconductors to persist till then. However, we are assuming normalisation (as it existed till Q4FY21 – JLR lost ~7K units of production). This is our base assumption and remains a key variable. It’s pertinent to note that H2 and especially Q4 are generally most important quarters for JLR. Hence, there is scope to limit the damage if the company is able to normalise supply as it existed in Q4FY21.
Explore:
Outlook and valuation: Short-term pressure; maintain ‘BUY’
India and JLR are on the cusp of a strong demand and product cycle tailwind. This should facilitate balance sheet improvement--key driver of our Braveheart call (refer to Jumpstart). Hence, we maintain ‘BUY/SO’ with a TP of INR405 (JLR at 6.5x EBIT, India at 15x EBITDA). The stock is trading at FY22/23E PER of 30.5/9.1x.
We have assumed normalisation of shortage by Q4FY22 and hence perceive the impact to be temporary in nature. We expect JLR to accelerate its cost efficiency programme and focus on optimising its product mix to limit the impact.
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-485
-355
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35
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Automobiles TTMT IN Equity
36,000
39,400
42,800
46,200
49,600
53,000
100
155
210
265
320
375
Jul-20 Oct-20 Jan-21 Apr-21 Jul-21
TTMT IN Equity Sensex
India Equity Research Automobiles July 6, 2021
TATA MOTORS COMPANY UPDATE
Chirag Shah +91 (22) 6623 3367 [email protected]
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KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 1,157 12 month price target (INR) 1,300 Market cap (INR bn/USD bn) 1,393/18.8 Free float/Foreign ownership (%) 65.6/11.8
What’s Changed
Target Price ⚊
Rating/Risk Rating ⚊
INVESTMENT METRICS
Primed for performance
We attended Tata Steel (TSL) Investor Day and got insights into its long-term strategic focus. Key points: i) Capacity aspiration of 35-40mtpa by CY30 in India. ii) Capital prudence expected with a firm focus on returns. iii) Thrust on maintaining leadership in key products; iv) Unwavering commitment to sustainability. v) Innovation through technology.
We believe the company’s focus on increasing capacity while keeping an eye on balance sheet is noteworthy. Furthermore, its sustainability goals are ambitious, best-in-class and ahead of peers. Maintain ‘BUY’ with an unchanged TP of INR1,300 at 4.5x Q2FY23E EBITDA.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 1,562.9 1,908.8 1,689.0 1,586.1
EBITDA 305.0 612.0 410.2 291.4
Adjusted profit 84.4 263.6 153.6 89.9
Diluted EPS (INR) 70.5 220.1 128.3 75.1
EPS growth (%) 65.3 212.4 (41.7) (41.5)
RoAE (%) 11.7 31.1 15.0 8.1
P/E (x) 16.0 5.1 8.8 15.0
EV/EBITDA (x) 6.7 3.0 4.2 5.7
Dividend yield (%) 2.2 2.2 2.2 2.2
PRICE PERFORMANCE
An ode to discipline: Capex with balance sheet focus
TSL’s investor day focused unflinchingly on twin objectives of capacity expansion
while maintaining capital prudence. Key points: i) India capacity expected to be
doubled to 35-40mtpa by CY30 compared to CY20. ii) More profitable Indian
operations expected to get a lion’s share of growth capex. iii) Net debt/EBITDA and
interest coverage targeted at 2x and 4x, respectively, across the cycle. iv) Carbon
adjusted IRR of 12% targeted for growth projects in India. v) Medium target to
maintain RoIC at 15% and a robust dividend yield akin to FY21. TSL has reduced debt
in Q1FY22 further by prepaying overseas debt in Singapore entities. In our view, the
capital allocation is sound and the company is in a good position to take advantage
of its balance sheet following USD4bn of net debt reduction in FY21.
Sweeteners: Sustainability, product leadership and innovation
Apart from focussing on operational excellence, TSL is committed to a long-term
decarbonisation target, energy intensity, water consumption and diversity at
workplace. In our view, the company’s CY30 goals are best-in-class and ambitious,
but all endeavours are being made to achieve them. In its chosen segments such as
Automotive, Branded products and Retail, the company has consistently maintained
leadership by adopting multiple routes to engage with customers.
Explore:
Outlook and valuation: On track, sustainably; maintain ‘BUY’
We are positive on the company’s strategy of pursuing low-intensity capex in select
areas and downstream products. Furthermore, the company has defined and set
benchmarks for maintaining capital prudence for period extending up to CY30. We
find the focus on sustainability goals – emission intensity and water consumption –
quite ambitious, but believe the company is working on necessary enablers to
achieve them. Besides, the company is trying to develop new technology to reduce
coke usage, improve water utilisation and augmenting product leadership.
All in all, we believe that TSL’s strategic path will enable it to maintain an edge over
peers in product and cost leadership, besides maintaining its domestic market share
in the medium term. Maintain ‘BUY’ with an unchanged TP of INR1,300 on 4.5x
Q2FY23 EBITDA.
5
50
95
140
185
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Metals & Mining TATA IN Equity
36,000
39,400
42,800
46,200
49,600
53,000
325
510
695
880
1,065
1,250
Jul-20 Oct-20 Jan-21 Apr-21 Jul-21
TATA IN Equity Sensex
India Equity Research Metals & Mining July 6, 2021
TATA STEEL COMPANY UPDATE
Amit Dixit Meera Midha +91 (22) 6620 3160 +91 (22) 4088 5804 [email protected] [email protected]
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KEY DATA
Rating BUY Sector relative Neutral Price (INR) 480 12 month price target (INR) 574 Market cap (INR bn/USD bn) 45/0.6 Free float/Foreign ownership (%) 48.2/26.6
What’s Changed
Target Price ⚊
Rating/Risk Rating ⚊
INVESTMENT METRICS
Q1FY22 sales: Decent performance
Despite the covid-19 induced lockdown, Sobha turned in a relatively good performance, clocking ~0.9msf pre-sales in Q1FY22; volumes were up 38% YoY but down 33% QoQ (Q4FY21 had witnessed highest ever bookings in the company’s history). By value, sales (company’s share) were at INR5.7bn (up 45% YoY, down 35% QoQ). Realisations were up 2% YoY (down 5% QoQ). There were no formal project
launches during the quarter (~3.2msf in FY21).
While the second wave impacted housing demand adversely, (refer to,Hot Property – May 2021: Housing demand and supply flag), we expect the sales momentum to revive soon. Maintain ‘BUY’ with SOTP-based target price of INR574.
FINANCIALS (INR mn)
Year to March FY20A FY21E FY22E FY23E
Revenue 37,539 21,098 46,254 37,527
EBITDA 11,151 6,752 12,062 8,914
Adjusted profit 2,815 623 5,862 3,615
Diluted EPS (INR) 29.7 6.6 61.8 38.1
EPS growth (%) (5.2) (77.9) 841.0 (38.3)
RoAE (%) 12.1 2.6 21.9 11.8
P/E (x) 16.5 74.8 7.9 12.9
EV/EBITDA (x) 6.8 10.9 6.1 8.5
Dividend yield (%) 1.4 0.7 1.4 1.4
PRICE PERFORMANCE
Pandemic derails sales momentum; Bengaluru contributed 74%
New sales volume grew YoY across major cities like Bengaluru, Pune, Gurugram,
Kochi etc; sales in Bengaluru recovered 37% YoY (down 26% QoQ). Other cities that
reported strong YoY growth include Pune (165% YoY), Gurugram (119% YoY), and
Thrissur (95% YoY). Bengaluru, Gurugram and Kochi cumulatively accounted for 87%
of sales during the quarter with Bengaluru alone contributing ~74% to sales volumes
(67% in Q4FY21). Overall sales value at INR6.8bn were up 40% YoY while Sobha’s
share of sales value was up 45% YoY at INR5.7bn.
Price realisation rises 2% YoY
Average price realisation during Q1FY22 jumped 2% YoY to ~INR7,626/sft; this was
down 5% QoQ from the INR8,000/sft witnessed in Q4FY21 (which had been the
highest realisations in the past eight quarters).
New launches, cash flows and debt remain key variables
The company did not formally launch any project during the quarter; it has a robust
launch pipeline of 13.35msf projects over the next 4-6 quarters. The company’s focus
on cash flow management (refer to, Sobha - Ground reality: Focus on cash flow) had
helped it reduce net debt in FY21 and we expect this to continue going ahead.
Explore:
Outlook and valuations: Balance sheet key; maintain ‘BUY’
As highlighted in our comprehensive sector report, Real Estate - The Charge of the
Consolidating Brigade, RERA-driven consolidation is throwing up growth
opportunities for organised players such as Sobha. We like Sobha’s strong presence
in the South India realty market and robust execution capabilities.
Revival in housing demand (refer to, Hot Property - Rising like a phoenix), Sobha’s
focus on cash flows and geographical expansion should hold it in good stead. Cash
flow improvement is a key stock catalyst, in our view. We maintain ‘BUY/SN’ with
SOTP-based target price of INR574/share. We derive the TP by applying 10% discount
to its NAV of INR589/share for the residential business plus value of the contractual
business.
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-35
10
55
100
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Real Estate SOBHA IN Equity
36,000
39,400
42,800
46,200
49,600
53,000
200
270
340
410
480
550
Jul-20 Oct-20 Jan-21 Apr-21 Jul-21
SOBHA IN Equity Sensex
India Equity Research Real Estate July 6, 2021
SOBHA COMPANY UPDATE
Parvez Qazi +91 (22) 4063 5405 [email protected]
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KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 450 12 month price target (INR) 477 Market cap (INR bn/USD bn) 283/3.8 Free float/Foreign ownership (%) 73.8/16.1
What’s Changed
Target Price ⚊
Rating/Risk Rating ⚊
INVESTMENT METRICS
Gaining greater ground with rigour
In this edition of Annual Report Insights, we spotlight Crompton’s moves that are pumping up its growth and balance sheet. Takeaways: robust process, asset-light approach and quicker TAT complemented its premium brand and market reach amid a consolidating market.
And Crompton’s better translation of growth is evident in its
consistently higher returns and cash flows. We particularly note its rigour to retain competitive edge in leadership products (fans, lighting, pumps) while ramping up smaller market share categories (geyser, cooler, etc). That said, the company’s impressive on-ground strategy execution and potent brand appetite now demands compatible TAM expansion, which would be a key value driver. Retain ‘BUY’.
FINANCIALS (INR mn)
Year to March FY20A FY21E FY22E FY23E
Revenue 45,120 47,500 54,551 61,708
EBITDA 5,969 7,047 8,099 9,291
Adjusted profit 4,947 6,047 6,134 7,153
Diluted EPS (INR) 7.9 9.6 9.8 11.4
EPS growth (%) 22.9 22.2 1.4 16.6
RoAE (%) 34.1 35.7 29.8 30.2
P/E (x) 57.0 46.7 46.0 39.4
EV/EBITDA (x) 47.9 39.7 34.7 30.1
Dividend yield (%) 0 0.6 1.2 1.4
PRICE PERFORMANCE
Reading the market right; consistent in returns/cash translation
While Crompton’s TAM vis-a-vis peers such as Havells is strikingly low (ex-white
goods, wires, switches, etc), it has been far better on return/cash translation driven
by its combination of business model (asset light), higher share of consumer and
greater competitive moat (exhibit 4). During FY20–21, while Havells clearly outshone
on margin expansion, the bulk of it came from sharper ASP cuts; Crompton chose
not to. Apart from latter’s improved working capital, evident in cash flows and
healthy OPMs, we see greater consistency—be it employee remuneration, greater
market penetration (tier II/III coverage) with compatible product launches over
FY20-21 in target categories—both leadership and other segments.
Performance versus visibility: Investor perception and ask matters
Even as Crompton lagged many peers on growth (5Y) given majority matured
segments, low B2B exposure and low TAM, translation (PAT, cash) has been better.
In our view, the company’s professional management has gained investor trust
based on how they tapped into brand potential in recent years. What lies ahead is
the long-term path the company takes in allocating capital to compatible new
segments, which would be the biggest wealth creation opportunity for investors in
our view.
Explore:
Outlook and valuation: Sustaining better results; retain ‘BUY/SO’
Crompton’s FY21 performance spotlights its brand resilience and execution
capabilities, showing up in superior return/cash and bottom-line translation. In our
view, the company’s expanding distribution footprint – to tier ii and iii – augur well
for incremental return/cash flows with robust cost structure. However, we maintain
management’s capability to make decisions pertaining to entering larger and
compatible segments to this high-potential consumer brand remains the best value-
creation opportunity for investors. Retain ‘BUY/SO’ with a TP of INR477 (valued at
45x PE).
-5
10
25
40
55
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Consumer Durables CROMPTON IN Equity
36,000
39,400
42,800
46,200
49,600
53,000
225
275
325
375
425
475
Jul-20 Oct-20 Jan-21 Apr-21 Jul-21
CROMPTON IN Equity Sensex
India Equity Research Consumer Durables July 6, 2021
CROMPTON CONSUMER COMPANY UPDATE
Amit Mahawar +91 (22) 4040 7451 [email protected]
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Cost pressure to persist
Q1FY22 volumes were impacted QoQ due to lockdowns (2W, M&HCV most affected). This along with commodity inflation would continue to weigh on EBITDA margins QoQ. Price hikes and value engineering would take off part of it though. Overall we expect the margins to decrease 100–200bps QoQ.
While commodity pressure might have peaked out, supply constraints (chip shortages) are likely to persist for a while. Hence, we expect companies to prioritise production of most profitable models. Meanwhile, a depreciating INR should provide cushion to exporters. Top picks: Tata Motors, M&M and Bajaj Auto.
Q1FY22: Tractor resilience stays; M&HCV, 2W and PV in slow lane
Sequentially, M&HCV, 2W and PV volumes plunged 55%, 38% and 31%, respectively, due to a combination of supply-chain issues and lockdown in many parts of country due to second wave. Tractors are the only expectation with volumes remaining resilient (down ~1% QoQ) led by a good monsoon and liquidity in farmers’ hands. With unlocking happening, pent-up demand should support near-term performance. But watch out for its sustenance. While we continue to monitor supply-side constraints (chip shortage, for instance), M&HCV truck demand should recover in ensuing months driven by a resurgence in replacement demand, economic recovery, improved liquidity and extremely subdued volumes
Input cost pressure continues to weigh on margins and earnings
We estimate gross margins would decline by 50–100bps QoQ as rising input price pressure is offset by pricing discipline (lower discounts/price hike) and value engineering initiatives. Consequently, EBITDA margins are expected to contract 100–200bps QoQ due to negative impact of operating leverage.
Ride Autos on specific stocks
Given uncertainty with respect to commodity prices, supply constraints and pace of volume recovery, we prefer stocks that can demonstrate pricing power (driven by favourable model cycle) or exploit the supply-constraint challenge to manufacture the most profitable models.
Our top picks are Tata Motors (cyclical volume recovery + product cycle tailwind),
Mahindra & Mahindra (strong tractor franchise + turnaround in auto business) and
Bajaj Auto (exports + dividend yield support). We recommend a ‘BUY’ on each of
them.
India Equity Research Automobiles July 6, 2021
Autos: Q1FY22 preview SECTOR UPDATE
Chirag Shah +91 (22) 6623 3367 [email protected]
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Broadcasters to fare better
For media at large, Q1FY22 marked a disruption due to the raging second covid wave. Multiplexes operated for two–three weeks of April and have shut screens since. Despite few states allowing screens to reopen now, lack of content forced screens to remain shut. Broadcasters too faced disruption in shooting original content and a
sequential dip in ad revenues. We expect revenues for ZEEL and Sun TV to grow 34.2% and 20.9% YoY, and PVR and INOX to post EBITDA losses of INR615mn and INR209mn.
Uncertainties over movie releases would blight multiplexes’ prospects in the near term in our view. Our top pick is ZEEL.
Broadcasters: Positive outlook
The quarter saw disruption in shooting of original content, which would negatively
impact channels with shows that need to be viewed sequentially. Viewership should
shift to channels such as Sab and Star, which have game and reality shows that can
be viewed anytime. Sun TV too would gain as it has a strong movie library. We
expect ZEE to suffer a blip in viewership and its viewership share to remain around
18%. Ad revenues would dip QoQ due to the second wave impact. Since the base
was hit by hard lockdown during first covid wave. We expect ZEE’s and Sun TV’s ad
revenue to increase 110% YoY and 100% YoY, respectively, and subscription
revenue to increase 11% YoY for ZEE and remain broadly flat for Sun TV.
Multiplex: Screens to remain closed
The industry saw only two–three weeks of operation in April, and screens have remained
shut since. Producers continue to sit on inventory despite some states such as Telangana,
Punjab and Gujarat opening up, as major markets such as Maharashtra, Delhi and Tamil
Nadu remain closed. This has led to screens remaining closed for most part of the quarter.
Rental negotiations are still underway, but it is difficult to get the same concessions on
rent and CAM as last year. It is likely that there would be a reasonable discount for rent
and lesser discount on CAM as these are cash outflows incurred by the owners.
Outlook: Broadcasters to revive in near term
Broadcasters have continued to create content albeit the disruptions and rise in
cost due to the second covid wave hurt. We find that advertisers have continued to
spend unlike the first wave and will, going forward, continue to improve ad spends.
ZEE has seen a blip in market share in Hindi and Tamil due to disruptions in shooting
of original content, which led to a shift in viewership to the likes of Sab with shows
that can be watched in any sequence. But ZEE has resumed its shows, and we expect
it to add four–five new Hindi shows over coming months. We expect this will pull
its viewership back. Sun TV is coming up with new reality shows such as MasterChef,
which will drive its viewership apart from its strong movie library. Multiplexes will
see content coming in once major markets such as Maharashtra and Tamil Nadu
open up.
India Equity Research Media July 6, 2021
Q1FY22: Results preview SECTOR UPDATE
Abneesh Roy +91 (22) 6620 3141 [email protected]
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
A record quarter in store
Despite covid-19 related disruptions, Q1FY22 is likely to be a record quarter for most companies in our coverage. Key points: i) A QoQ volume dip likely for most companies. ii) Ferrous companies (flats oriented) are likely to fare better. iii) Debt reduction likely. iv) Higher iron ore and crude derivatives’ cost to weigh on performance.
All in all, we expect another robust quarter for almost all companies with margins sustaining or breaching the record-Q4FY21 levels. We believe Tata Steel is best positioned owing to its: i) favourable product mix; ii) turnaround in Europe; and iii) domestic iron ore security. We maintain Tata Steel (TP: INR1,300), Hindalco (TP: INR475) and Jindal Stainless (TP: INR140) as our preferred picks.
Another glorious quarter…
We expect Q1FY22 to be the second consecutive quarter of excellent performance.
Key points: i) Flats-oriented ferrous companies such as Tata Steel and JSW Steel to
deliver record margins on the back of realisation uptick in both exports and
domestic volumes. ii) Overseas subsidiaries of Tata Steel and JSW Steel to deliver
massive outperformance due to higher realisation. iii) The Al division’s EBITDA in
non-ferrous companies would show a good improvement mainly due to higher LME
price. iv) Volumes of non-ferrous companies to be subdued as well owing to covid-
19 related disruptions in logistics and operations. That said, we see scope for
substantial deleveraging at steel companies, particularly Tata Steel and SAIL.
…but, lower volumes and higher cost to weigh
Q2FY21 would have been much better, but for higher costs and lower volumes.
Production/sales volume for ferrous companies are likely to be impacted by
diversion of industrial oxygen for medical purposes and sporadic lockdowns owing
to covid-19. As a result, we expect sales volumes of ferrous companies to decline
10% QoQ on average. For non-ferrous companies as well, despite high LME prices,
volume is expected to be down ~14% QoQ on average. On the cost front, we expect
higher iron ore and crude/derivatives’ cost to weigh on profitability.
Outlook: Good times likely to continue
We expect Q1FY22 to mark a successive quarter of blockbuster performance.
Benefits of higher realisation are likely to offset the adverse impact of higher cost
at most companies. Besides, sales volume is expected to stay soft owing to covid-
related operational and logistical disruptions.
That said, we expect Tata Steel to fare better than peers owing to its: i) favourable
product mix, which is oriented towards flats; ii) lower iron ore cost than peers in
India business; and iii) healthy spreads in the European business. As a result, we
expect substantial debt reduction (overseas debt) at Tata Steel. In case of SAIL as
well, we see scope for substantial debt pay-down. Among mining companies, we
expect NMDC to deliver record profitability despite higher royalty cost. Maintain
Tata Steel, Hindalco and Jindal Stainless – BUY on all – as our preferred picks.
India Equity Research Metals & Mining July 6, 2021
METALS & MINING SECTOR UPDATE
Amit Dixit Meera Midha +91 (22) 6620 3160 +91 (22) 4088 5804 [email protected] [email protected]
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
Surge in input prices to drive revenues
We expect specialty chemicals companies to post robust results in Q1FY22 off a low base (covid-19 had posed challenges in Q1FY21) and a surge in input cost. Our coverage universe is likely to report revenue growth of 48% YoY and EBITDA/PAT growth of 52%/75% YoY.
Revenue growth is likely to remain solid, but challenges pertaining to
lockdowns and logistics may hurt overall volume growth in Q1FY22. Similarly, a jump in raw material prices (vegetable oil-based derivatives and crude derivatives) may put pressure on margins in the near term. Given strong demand in domestic and export markets, we maintain the positive view on the sector with SRF and Galaxy Surfactants as our top picks.
Low base and rising input prices to drive revenues in Q1FY22
Covid-19 related challenges and lockdown issues impacted specialty chemicals players’ production and demand in Q1FY21. A low base and a sharp increase in input cost (fatty alcohol 94% YoY, vegetable oil like soybean 90% YoY, crude derivatives such as benzene 150% and toulene 112%) are expected to drive up revenue growth by 48% YoY in Q1FY22.
That said, the second wave in India posed logistical challenges to exporters with container availability issues affecting volumes. Driven by strong top-line growth, PAT growth for most players would remain solid at 14–96%.
Sustained demand in domestic-/-exports to keep up momentum
Speciality chemicals players may witness volatility in margins in the near term on the back of a sharp jump in raw material prices and delays in passing on the cost to end customers.
However, driven by solid recovery in end-user industry in domestic markets, import replacement and sustained growth opportunity in exports market is keeping the momentum up for specialty chemicals players. We expect industry to continue witness solid growth on the back of ongoing capex and favourable industry scenario.
Outlook: Pick-up in capex to drive earnings
Despite near-term volatility in margins led by rising input cost, we remain upbeat about growth momentum sustaining for speciality chemicals players, and reiterate our belief in the long-term structural growth opportunity that the sector offers. Driven by increased capex intensity as players such as Aarti and SRF are likely to benefit from aggressive capex supported by their respective fund-raising recently. Galaxy and Fine Organics, which have stable growth models, would continue to turn in higher RoCE and FCF.
Our top pick remains SRF (BUY) given its strong growth outlook for FY21–23 and Galaxy Surfactants (BUY) given its hygiene-linked business model and Aarti industries (BUY) given its higher utilisation. We retain ‘HOLD’ on Fine Organics, expecting its margins to remain under pressure in the near term.
India Equity Research Specialty Chemicals July 6, 2021
Q1FY22 Sector Preview SECTOR UPDATE
Rohan Gupta Sneha Talreja Bharat Gupta +91 (22) 4040 7416 +91 (22) 4040 7417 +91 (22) 6620 3320 [email protected] [email protected] [email protected]
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
Strong recovery takes a breather
Q1FY22 is likely to mark a pause in the home décor industry’s sharp recovery since Q2FY21. While growth momentum sustained at most companies in April, May took a hit as lockdowns returned. Recovery resumed in the last 15 days of June though. All in all, we estimate an aggregate 30% QoQ drop in revenue (up ~80% YoY off a low base) with
a higher fall in EBITDA and PAT due to negative operating leverage across segments coupled with inventory losses (plastic pipes) and an uptick in raw material cost (wood panel space).
Despite a likely weak Q1FY22, management teams of all companies are upbeat on a faster recovery. We prefer Greenlam Industries (GRLM), Somany Ceramics (SOMC) and Supreme Industries (SIL).
Plastic pipes: Double whammy
In Q1FY22, plastic pipes’ players, which have outperformed for last two years, are
likely to face dual challenges—firstly demand is hit due to lockdown and secondly
falling PVC prices are deferring purchases by distributors as they await further price
correction. Within the pipes segment, agri pipes are likely to take a bigger hit,
wherein end-user is more price-sensitive, whereas players with high CPVC exposure
would be better off. All in all, we see a 26%/54%/61% QoQ drop in
revenue/EBITDA/PAT for plastic pipe companies impacted due to slower volumes,
inventory losses and negative operating leverage.
Laminates better placed in wood panel space due to high exports
For the tiles segment, revenue/EBITDA/PAT is likely to fall by 33%/67%/74% QoQ
as volumes are likely to be impacted due to covid-19-related lockdown while profits
are likely to be impacted due to low revenue base, higher gas cost and continued
fixed costs. Competitive intensity from Morbi players continues to be low as they
focus on export orders. During the quarter, wood panel space too is likely to report
a fall in revenue/EBITDA/PAT by 35%/46%/57% QoQ, also impacted by rising raw
material cost. By segment, laminates would perform better as export orders
continue to support sales (>55% exports share for Greenlam Industries).
Outlook: Large players continue to gain market share
Although many small players in the home décor industry are struggling on account
of raw material unavailability, and rising costs (raw material, freight) and working
capital, growth of top organised players has only accelerated with an increase in
market share. In tiles, Morbi players are catering to strong exports, vacating the
domestic market for large players such as KJC and SOMC. In the plastic pipes and
wood panel space, unavailability and huge volatility in raw material prices have led
to a shift in market share from small players to large players.
We believe the much-anticipated demand shift from unorganised to organised
segment could accelerate further if industry demand/macro economy picks up. We
prefer GRLM, SOMC and SIL in light of the valuation comfort, and recommend ‘BUY’
on the three aforementioned companies.
India Equity Research Home Decor July 6, 2021
Q1FY22 RESULTS PREVIEW SECTOR UPDATE
Sneha Talreja Rohan Gupta +91 (22) 4040 7417 +91 (22) 4040 7416 [email protected] [email protected]
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
Supernormal domestic; steady margins
In Q1FY22, we estimate pharma would report ~14%/19% revenue/PAT growth. Key trends: i) Domestic to outperform (+31% YoY, volume led) driven by low base and covid-19 treatments. Cipla, GNP, CDH and DRRD to benefit. ii) Cost savings to keep EBITDA margin healthy. iii) US: Volume recovery offset by price erosion; good launches at DRRD,
LPC and GNP, albuterol ramp-up for Cipla and LPC; Ilumya uptake offset by Absorica for SUNP. CIPLA and ALKM to report good numbers.
We expect hospitals to remain steady despite a severe covid wave given their preparedness. Increase in occupancy to compensate for lower covid realisation. Diagnostics to benefit from growth in non-covid testing and a covid boost. APHS and Thyrocare to fare well.
Cipla, LPC and DRRD to lead; GNP also strong
SUNP: Ilumya ramp-up offset by Absorica decline. DRRD: good launches in US -
gVascepa and ertapenem; domestic strong on Wockhardt integration and low base.
Cipla: Share gain in gProventil; benefit from remdesivir and budesonide. TRP:
domestic solid; US to struggle. ARBP: QoQ steady; price erosion inching upwards
and R&D increase. Ipca: Sustained uptake in pain and cardio; exports decline on
high HCQs base. CDH: gDoxil share gain, lower Asacol HD offtake. Domestic strong.
LPC: one-time USD50mn income; share gain in gProair; Brovana AG launch offset by
loss in famotidine sales. GNP: Covid beneficiary; Good launches in US. DIVI: Growth
continues; margin buoyant. AJP: Strong domestic; cost back to normal. NTCPH:
Declining gCopaxone TRx, gDoxil competition and no gTamiflu profit share; tepid
domestic oncology. BIOS: 20% QoQ growth in biosimilars on share gains in
pegfilgrastim and trastuzumab. ALKM: strong anti-infective led growth.
Hospitals steady despite covid wave; Diagnostics on a solid footing
APHS: Back-end pharmacy to post 18% YoY growth; vaccine benefit; Gleneagles
consolidation. FORH: Steady hospitals; SRL to get covid boost and JV consolidation.
HCG: ramp up continues. In diagnostics, with non-covid tests back on growth path
coupled with a Covid RT-PCR and allied tests boost would drive up sales 7% QoQ.
Sub Head
FP Table Body
Domestic recovery remains covid-led for now; aids margins in Q1
A few trends are evident: i) Covid-related ailments or side-effects of Covid
medicines continue to drive growth. Several therapies gained importance due to
covid such as anti-infectives, anti-diabetic due to steroid usage and anti-coagulants.
ii) India seeing strong volume growth and would grow at 31% YoY. However, Covid-
related therapies or preventive health continues to drive growth. iii) US: Volume
recovery to be offset by price erosion, which is reverting to pre-covid levels. Good
launches at DRRD, LPC and GNP, albuterol ramp-up for Cipla and LPC, Ilumya uptake
partly offset by Absorica decline for SUNP would keep US steady. iv) Costs
normalized for the quarter barring ten days of lockdown in certain parts of the
country. However, modest savings should keep margins healthy for Cipla, TRP and
IPCA. Cipla, DRRD, ALKM and APHS remain our top picks.
India Equity Research Pharmaceuticals July 6, 2021
Pharma & Healthcare Preview SECTOR UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
Q1FY22 : Six weeks of aberration
We estimate revenue and EBITDA of our coverage universe to grow 10.5% and 2.3% on two-year basis (Q1FY22 vs Q1FY20) compared to 19.3% and 15.9% on two year basis for Q4FY21 (Q4FY21 vs Q4FY19).
In Q1FY22, first three weeks of April saw sustained growth momentum from Q4FY21; subsequently, covid cases shot up, leading to May being
a challenging month. However, in June, the sector clocked decent recovery. YoY growth will still look good for most companies given wave 2 did not entail hard lockdowns. YoY margins will be under pressure for staples companies due to commodity inflation and exceptionally low ad spends in Q1FY21. We expect strong recovery going ahead spearheaded by sharp rural recovery.
YoY growth rosy, but need to focus on two-year growth
Wave 2 of covid-19 led to an upsurge in demand for health and hygiene products;
however, the demand wasn’t as high as in wave 1. On the other hand, demand for
discretionary products suffered, but again not to the extent of wave 1. Pantry
loading or panic buying was much less than in wave 1 as there were no hard
lockdowns. Food companies--Britannia, Nestle and Tata consumer--will spearhead
growth from a two-year perspective as they would be least impacted by demand
disruption. Considering the nature of their products, United Spirits and Bajaj
Consumer would be down on a two year basis.
YoY margins under pressure, except for paint and liquor companies
In light of inflationary raw material prices, we expect gross margins of most
companies to dip YoY. Most companies have taken pricing actions to pass on part
of the inflation. On EBITDA front, companies are likely to cut ad spends on QoQ
basis; however, base quarter ad spends were exceptionally low; thus, YoY EBITDA
margin compression is likely for most staples companies. Higher exposure to crude
derivatives—Asian Paints, Berger Paints and Pidilite—is likely to compress their
gross margins, although a soft base will lead to YoY EBITDA margin expansion.
Outlook and Model Consumer Portfolio
Discretionary, out-of-home (OOH) and summer products were disrupted in Q1FY22,
but a YoY dip is unlikely. We expect demand to accelerate for staples (atta, pulses,
coffee, tea), premium edible oils, health & hygiene, nutrition (chyawanprash,
honey, HFDs), naturals and packaged foods. On the other hand, personal care (skin
care, hair care, hair colour) are likely to see YoY growth on a soft base. Almost all
other categories are reviving and are likely to accelerate from Q2FY22. We expect
rural growth to soon revive for FMCG companies riding a good monsoon and
government sops.
We assign the following weightings in our Model Consumer Portfolio--25% each to GCPL, HUL and Nestle; 15% to Asian Paints; and 10% to Dabur.
India Equity Research Consumer Staples July 6, 2021
Consumer Goods Preview SECTOR UPDATE
Abneesh Roy Tushar Sundrani +91 (22) 6620 3141 +91 (22) 6620 3004 [email protected] [email protected]
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating NOT RATED Sector relative Neutral Price (INR) 82 12 month price target (INR) NA Market cap (INR bn/USD bn) 14/0.2 Free float/Foreign ownership (%) 53.2/8.3
What’s Changed
Target Price ⚊
Rating/Risk Rating ⚊
QUICK TAKE
Balance sheet remains stretched
Sadbhav Engineering (SEL) posted 23% QoQ decline in Q4FY21 top line; however, exceptional items and tax write-back boosted profitability with PAT rising 341% QoQ. Toll collection fell 8% QoQ. Order book declined QoQ to ~INR93bn; fall in revenue (down 28% YoY) means book-to-bill remains optically elevated at 5.7x. Working capital cycle deteriorated to 527 days (489 at end-Q3FY21).
Muted order inflows, sluggish execution and stretched working capital cycle are major concerns stalling the business, in our view. Asset monetisation and deleveraging are urgently needed for operations to recover. We are discontinuing coverage; our last recommendation was ‘BUY’.
FINANCIALS (INR mn)
Year to March FY20A FY21E FY22E FY23E
Revenue 22,517 16,236 18,925 22,840
EBITDA 2,795 2,114 2,240 2,795
Adjusted profit 681 606 257 583
Diluted EPS (INR) 4.0 3.5 1.5 3.4
EPS growth (%) (63.4) (11.0) (57.6) 127.2
RoAE (%) 4.1 1.9 1.2 2.7
P/E (x) 20.7 23.3 55.0 24.2
EV/EBITDA (x) 9.5 12.9 12.3 9.8
Dividend yield (%) 0 0 0 0
PRICE PERFORMANCE
Execution declines QoQ; order book falls
Q4FY21 top line declined 23% QoQ (up 4% YoY). Write back of provisions no longer
required and exceptional profits lifted EBITDA margin by 370bps YoY and 280bps
QoQ to 16.1%; this, coupled with tax write-back, led to adjusted PAT coming in at
INR668mn. The company did not win any order during the quarter; this led to order
book falling to ~INR93bn; muted execution over the past year means book-to-bill
looks high at 5.7x. The company is bidding for road EPC projects to shore up its order
book.
Focus on asset monetisation
The company has completed the entire equity infusion of INR10.7bn in its HAM
portfolio. While three HAM projects have already achieved PCOD, management
expects four projects in H1FY22 and three projects in FY23 to achieve PCOD. It is
looking to monetise the Ahmadabad Ring Road (ARRIL) project, the Maharashtra
Border Check Post (MBCPNL) project and the three HAM projects that have achieved
PCOD. We believe this is paramount for the company to delever its balance sheet
and improve execution. While toll on ARRIL rose on QoQ, that on MBCPNL fell
sequentially. The company has lodged claims against NHAI for the Rohtak-Panipat
and Rohtak-Hisar projects.
Explore:
Outlook and valuation: Discontinuing coverage
Incremental order intake, pick-up in execution, improvement in working capital cycle, reduction in debt and timely asset monetisation will be the key triggers, in our view. We are discontinuing coverage on the stock. Our last recommendation was ‘BUY’.
Financials Year to March Q4FY21 Q4FY20 % Change Q3FY21 % Change
Net Revenue 4,257 4,089 4.1 5,560 (23.4)
EBITDA 685 504 35.7 736 (7.0)
Adjusted Profit 472 ( 88) (634.7) 151 212.0
Diluted EPS (INR) 2.8 ( 0.5) (634.7) 0.9 212.0
36,000
39,400
42,800
46,200
49,600
53,000
40
52
64
76
88
100
Jul-20 Oct-20 Jan-21 Apr-21 Jul-21
SADE IN Equity Sensex
India Equity Research Infrastructure July 6, 2021
SADBHAV ENGINEERING RESULT UPDATE
Parvez Qazi +91 (22) 4063 5405 [email protected]
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Aditya Narain
Head of Research