Stock Recommendation- January 2020

                                                                                                                                                                     

Sector: Aqua Culture

Apex Frozen Foods Ltd (Apex) is an integrated producer and exporter of processed, ready to cook shrimps which operates in Andhra Pradesh. It has presence across the value chain – Hatchery, Farming, Processing and Exporting of Shrimp. Apex has own processing capacity of 9,240 MT (at Kakkinada, AP), leased processing capacity of 6000MT (at Bapatla, AP), 1,800 acres of farm land, breeding capacity of over 1bn SPF seeds, cold storage of 1,500 MT of finished goods and own reefer fleet for transportation of goods. Apex strategically focus on the market of the USA, the largest importer of aquaculture products in the world.

For Q2FY20, revenue grew by 5.4% YoY aided by growth in both volumes (~2% YoY) & realisation (~2%YoY). Apex had completed its new capacity of 20,000MT (more than 2 times its existing capacity) in Q1FY20 and has commenced commercial production in Q2FY20. Currently the new facility is used only for non-US and non-EU markets as the company is awaiting certain regulatory approvals which is expected by December. From the new facility, 5,000MT is for ready to eat, for which the company expects no major delay in utilisation as the customers are already in place. And, the company is shifting its leased capacity of 6,000MT to the new facility. Apex expects the optimum utilisation of the new facility by next 1.5-2years time. Apex is also expanding to other markets like China and Canada. We have reduced our volume assumptions to factor delay in utilisation of the new capacity. We expect revenue to grow at 17% CAGR over FY19-21E aided by new capacity addition and entry into newer markets.  

For Q2FY20, EBITDA margin improved by 410bps on account of multiple factors including improvement in realisation, benefit from backward integration, savings in storage and processing cost which were paying to third-party and stable currency (foreign exchange deficit was higher last year). The company has commenced two new hatcheries in North and South of AP in FY19 and has started phase II construction at one facility (Ongole, South AP) recently. The company is shifting its lease facility of 6,000MT capacity to its new own facility which will reduce the processing and storage cost by ~7-8cr. Apex has also in-house farming and ~18-20% of total raw material is sourced from this. Further, the value-added products (ready to eat) from the new facility will improve realisation and margins going forward. We expect adjusted EBITDA/Kg will improve from Rs60 in FY19 to Rs79 in FY21E.   

Considering the improved outlook on industry and the company, we increase our valuations to 13x on FY21E EPS and maintain Buy rating.

Analyst: Vincent K Andrews

Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please click the link: Apex Frozen Food – http://bit.ly/2ZfC53M

Sector: Life Insurance

ICICI Prudential Life Insurance Company Limited is a joint venture between ICICI Bank and Prudential Corporation Holdings Limited. The issuer offers protection for life and health along with pension products and services.

In Q2 FY20, the gross premium income rose 6.6% on a YoY basis to Rs. 8,191cr driven mainly by group premium growth at 80.4% YoY, which contributed 11.8%, retail renewal premium grew by 2.3% on a YoY basis contributing 62.9% of the total premium. The gross premium growth was partially offset by a de-growth in the retail new business premium at -1.9% growth on a YoY basis and contributed 25.3%. For H1 FY20, APE (Annualized premium equivalent) declined by 0.4% YoY to Rs.3,369 due to weak macroeconomic conditions. Asset under management (AUM) continued to grow at a healthy pace of 13.3% YoY and reached Rs.165,512cr at the end of Q2 FY20.

In H1 FY20, value of new business (VNB) grew 20.2% YoY to Rs.709cr, and margin improved 350 bps YoY to 21.0%. Expense ratio (excluding commission) increased by 80 bps to 11.3%. For the last quarter, profit after tax rose 0.5% on a YoY basis to Rs.302cr, while solvency ratio declined further to 211% in H1 FY20 (compared to 234% in H1 FY19). For H1 FY20,13^th month persistency ratio by premium declined to 83.6% (compared to 84.6% in FY19) mainly impacted by linked business, while 49^th month ratio remained stable at 63.7% (compared to 63.8% in FY19). Embedded value (EV) witnessed a solid growth of 17.8% YoY to Rs 22,680cr, with Value of Inforce (VIF) growing 18.6% YoY and contributing 34.1% to EV.

Introduction of one-day claim settlement initiative has reduced average claim settlement time to 1.2 days for Q2 FY20 compared to 2.3 days in FY19. The company has better diversification with contribution of protection business increasing to 14.8% of overall APE in H1 FY20 (vs. contribution of 9.3% in FY19), whereas ULIP declined 16.4% YoY for the same period owing to higher ticket size and volatile markets. The company will continue to focus on annuity and protection business. Interim dividend reduced to Rs. 0.8 for H1 FY20 (vs. Rs. 1.6 for H1 FY19), as the company plans to invest in protection business.

The company has registered strong results with robust growth in new business despite the market volatility. The company’s focus on premium growth, while maintaining its solvency levels should be the key for the upcoming few quarters. We value the stock at 2.6x FY 21E embedded value (EV) and maintain our BUY recommendation.

Analyst: Abhijith T Cherian

Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please click the link: ICICI Prudential – http://bit.ly/2ENQwTu

Sector: Auto – Tractors & Construction

Escorts Ltd (EL) is the third largest Agricultural tractor manufacturer in India. It has a strong presence in the North and West market, with an overall market share of 11.9% as on FY19.  Revenue for the quarter 2FY20 de-grew by 5%YoY, below our estimates. This was largely on account of 6%YoY decline in tractor volume. However, excess monsoon and higher reservoir level and likely strong Rabi crop output may result into early reversal of down-cycle in the industry. EL’s construction business also registered a negative volume growth of 20%YoY whereas Railway segment grew by 25%YoY in order book. EBITDA margin contracted by 170bps due to high operating cost and lower product mix. However, Adj PAT grew by 11% YoY owing to exceptional income and reduction in corporate tax. Government’s subsidy towards farm mechanization in Telegana, Assam and Maharastra will be a driving factor for volume growth in H2FY20.

In the last 3 years (FY16-19) industry witnessed a strong CAGR growth of 15% compared to the historical average growth rate of 5-6%. During this period state government subsidy for tractors in south and west market was all-time high. Following a significant decline over the last 10 months tractor industry has shown good sign of pickup since the beginning of the festive season.  EL’s expanded portfolio & technology upgrades in tractors have resulted in improved numbers both in existing and newer geographies. Exports have grown by 98%YoY for the quarter. We are forecasting a moderation in the domestic tractor volume growth in FY20E. However, we expect the EL to register single digit volume growth for FY21. We lower our revenue estimate for FY20 by 1.3% to factor lower product mix and improve PAT by 6% to factor tax benefits.

EL’s market share more or less remained flat at 11.2% in Q2FY20. However, due to lower product mix, the margins came below expectation. The current market share is pooled from Powertrac and Farmtrac brands at 60%/40% respectively. Recently launched compact tractors and paddy specialist tractors at <40HP category has led to 1% increase in market share from the opportunistic market. Overall share of new products in tractors stands at~20% currently and have better margins.

We expects the trend of underperformance in south and west region to witness   some respite owing to record level improvement in reservoir level. The Initial pick up in volume looks demanding for H2FY20, considering the rise in food inflation and government action towards rural development. However, in view of early cyclical reversal we rollover our valuation to FY22 and value EL at 14x FY22E EPS and upgrade our rating to Accumulate.

Analyst: Saji John

Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please click the link: Escorts –http://bit.ly/395LmjG

AARTI Industries Ltd (ARTO) is a global leader in Benzene based derivative products. The company has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints & pigments. Q2FY20 Revenue declined by 22% YoY, as Specialty chemicals and Pharma business de-grew by 20% & 5% YoY. The decline in specialty business revenues was largely on account of fall in raw material prices and nonavailability of raw material which impacted the volumes. In Pharma segment, certain high value products were impacted. While contribution from downstream products continue to be on upward trajectory from 70% to 75% YoY. The capacity augmentation is on track with an investment of Rs1,200cr, NCB capacity to increase from 75000 to 108000 MTPA. The expanded capacity will cater to increasing domestic demand and for downstream captive consumption. ARTO will continue to benefit from backward integration, expansion of product portfolio and shift in volume due to Chinese shut down in the medium term. However, given lower than expected top-line growth, we lower our revenue estimates by 23% & 21% for FY20E & FY21E. We factor revenue to grow by 7.4% CAGR over FY19- FY21E. Gross margin improved by 1000bps YoY to 48.9% led by lower cost and better product due to demerger of HPC business. Improvement in EBITDA margin was limited to 480bps YoY to 23.4%, on account of higher cost. PAT grew by 16% YoY to Rs142cr. We upgrade our EBITDA margins estimates by 270bps & 260 bps as we factor likely improvement in margins in near on account of lower cost and increase in share of value added products. However, our EPS estimates stands reduced by 7.0% & 4.0% for FY20E & 21E, as we factor in the impact on revenue. Despite this, PAT is expected to grow by 19% CAGR over FY19-21E. In the near term revenue growth is likely to be impacted by lower volume off-take and fall in realization on account of fall in raw material prices. However, we remain constructive on ARTO’s long term growth given strong capacity building focusing on global markets, backward integration and increase in downstream products. We value ARTO at 23x (20x earlier) and upgrade to “Accumulate” from “Reduce”.

Analyst: Anil R.

Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please click the link: Aarti– http://bit.ly/2rpxMqi