Stock Recommendation


Avenue Supermarts Ltd (DMart), founded by Mr Radhakishan Damani, is a Mumbai based company which owns and operates the supermarket DMart. As of December 2018, DMart has 164 stores with retail business area of 5.3 million sq. ft. The company offers a wide range of home and personal products under one roof with a focus on Foods, Non-Foods (FMCG), general Merchandise and Apparel product categories.

For Q3FY19, DMart reported a strong revenue growth of ~33% YoY supported by consistent growth in new store additions. DMart has added 4/9 new stores in Q3FY19/ 9MFY19. We believe higher number of store additions will be in last quarter like in previous years and expect to add total 22 stores in FY19E Vs 24 stores added in FY18. The company is now considering leased stores also to accelerate growth. Like-for like growth in revenue had declined in FY18 due to increase in matured stores, but higher contributions on account of rapid acceleration in new store addition will support growth going forward. We moderately reduce our revenue growth and factor 30% CAGR over FY19E-21E.

During the quarter, due to price cuts, Gross Margins (GM) declined by 170bps. This along with higher operating costs resulted in 200bps reduction in EBITDA margin to 8.3%YoY (+30bps QoQ). As a % of sales, employee expenses has declined to 1.6% (1.7% QoQ/YoY). Going forward, we assume improvement in GM is very limited due to D’Mart’s ‘Every Day Discount’ model and assume it to be in the range of 14.8%-15% for the long-term. EBITDA margin is likely to sustain in the current level which was at its peak of 10.3% in Q3FY18.

PAT growth declined to 2%YoY in Q3FY19 due to drop in Gross and EBITDA margins along with lower other income. However, further reduction in debt (paid Rs999cr till Q3FY19 out of total allocated amount of Rs1,080cr from IPO proceeds) will reduce interest cost and support PAT margins. We anticipate PAT growth will be lower at 22% in FY19E Vs last 5Yr CAGR of 54% considering pressure on margins. But it is expected to improve thereafter supported by new store additions and reduction in interest cost.

We factor PAT growth of 34%CAGR over FY19E-21E. We assume the historical high growth in earnings to slowdown in the current fiscal to ~22% YoY due to margin pressure. But it is likely to improve post FY19 due to store additions, debt reduction and tail winds from GST & recent tightening of e-com policy. We arrive at a target of Rs1,479 (earlier Rs1,513) on a DCF basis implying 54x FY21E P/E and downgrade to Hold due to reduction in margin.

Analyst: Dilish K Daniel

Geojit Financial Services Ltd., INH200000345

Avenue Supermarts Ltd:

Granules (Inc) is a leading generic player in the Indian pharmaceutical industry with 2/3rd of its revenue generated from North America and Europe and the rest accomplished from emerging markets like India.

Q2FY19 revenue grew by 47% YoY driven by higher sales in API (Active Pharmaceutical Ingredient) (~90%YoY) and Formulations (FD) (~35%YoY) segments. This is primarily due to good sales from paracetamol API in the domestic markets and new launches in the US. On a YoY basis, sales in API and FD registered a growth of 90% and 35% resp. while it was muted in PFI. However, the management has given guidance for revival in PFI sales from Q4FY2019 onwards. Share of profits from the Joint ventures (Biocause& Omnichem) is also up by ~160% on a YoY basis.

On the financial front, Q2 FY19 EBITDA improved by 26% YoY while EBITDA margin saw a de-growth of 300bps YoY on account of higher R&D expenses (Rs27crs written off) and recognition of Rs5crs as provision for doubtful debts. Raw material price also increased due to reduced API supplies from China, but is not an immediate concern for granules as any hike can be passed to the customers. Profit share from Biocause stood at Rs15.5crs ramped up by ibuprofen sales while Omnichem reported a loss of Rs2.5crs which is primarily attributed to the seasonality of the business.

In the US front, Granules have been successful in launching Metformin XR and Methocarbamol under their own label which means they can directly sell it there without any other marketing partners. Recently they also got approval for Methylphenidate Hydrochloride Extended- Release Tablets USP, 10 mg and 20 mg filed through its US agent First Time US Generics LLC, which is a therapeutic equivalent to the reference listed drug “Ritalin SR Sustained-Release Tablets, 20 mg” of Novartis Pharmaceuticals Corporation. GPI (US) has registered a revenue of Rs46crs in Q2FY19 with a PAT of Rs7cr. The company is further expecting to file 4 ANDA’s in oncology segment in the US/Europe in next year.

We expect consolidated revenue to grow at 20%CAGR over FY18-20E led by increase in new launches in the US. We also increase our FY19E and FY20E PAT estimates by 19%& 18% respectively on improving capacity and JV profits and factor 20% CAGR growth in PAT over FY18-20E. Considering the lower valuations, management’s focus on improving debt profile and successful passing of RM cost, we expect earnings to remain healthy in the long term and upgrade the rating to Buy with a revised target price of Rs116 at 13x FY20E EPS.

Analyst: Dilish K Daniel

Geojit Financial Services Ltd., INH200000345

Granules India Ltd:

Exide Industries Limited (EIL) is a leader in storage battery business with a market share of 60% in India for automotive lead acid batteries is focusing on cost control initiatives and technological upgradation as strategies to improve bottom line. Newer cost effective brands like Boss/Dynex at competitive price are expected to support market share gain from the unorganized players. During Q2FY19 revenue grew by 15%YoY driven by growth in automobile, Home UPS and industrial batteries. EBITDA margin contracted by 30bps owing to currency depreciation and higher fuel cost. Reported PAT increased 98.1%YoY to Rs268cr due to an exceptional income from sale of property. However, adjusted PAT was at Rs191cr, de-grew by 9.7%. We expect the margin to show some resilience from Q3FY19 onwards due to softening lead price. On account of higher auto sales and early ramp up of E- rickshaws we expect the revenue & PAT to grow by 15%/16% CAGR over FY18-20E.

Automotive industry (PV, 2/3W) witnessed a growth of 10%YoY in Q2FY19. We expect the demand scenario for 2W to remain robust for FY20 led by normal monsoon, higher MSP and new product launches by OEMs. EIL will  be the direct beneficiary from any structural change in the auto demand owing to its leadership position (~60% market share) in the automotive battery. Notably demand for premium vehicle (>150cc) is grown by 16%YoY.

We expect margins to improve from current 13.5% to 15.3% over FY18-20E. Margin expansion is justifiable once 1) new technology up-gradation becomes fully operational 2) rebound in OEM & CV segments 3) concentration on more profitable segments 4) Strengthening distribution network by introducing sub distributor led model (cluster of small retailers) and 5) stable lead price & cost saving initiatives. Newer cost effective brands like Boss/Dynex at competitive price are expected to support market share gain from the unorganized players.

Higher lead price and rupee depreciation remains a concern for EIL in the near term. Over the last 3months the price started to soften by >11% (from Rs165/Kg in June 2018 to Rs.140kg) which will benefit EIL in subsequent quarters. We remain positive on the long term outlook of EIL owing to higher acceptance of battery engineering. At CMP we value EIL at 20x (3yr historical average) FY20EPS and insurance business at 2x FY18 EV (Embedded value) Rs51/share and revised our target price to Rs276 and upgrade our rating to Accumulate.

Analyst: Abhijit Kumar Das

Dion Global Solutions Ltd., INH100002771

Exide Industries Ltd:


Tata Consultancy Services Ltd (TCS), the country’s largest software exporter has delivered muted performance in Q3FY19 with consolidated revenue growth of 0.7% QoQ in dollar terms due to cross-currency headwinds. However, constant currency (CC) revenue growth stood at 1.8% QoQ/ 12.1% YoY in an otherwise seasonally weak quarter. The CC growth YoY (the highest in 14 quarter) was driven by continued acceleration across key verticals and geographies. Vertically, the growth was powered by BFSI (8.6% YoY), retail (10.5%), Telecom (10.8%) and lifesciences (15.7%), while UK (25.1%) & Europe (18%) led growth geographically. Further sustained momentum in digital business (grew strongly by 52.7% YoY) with revenue contribution increasing to 30.1% in Q3FY19 as compared to 28% in Q2FY19 also aided growth.

Tepid revenue growth along with higher sub-contracting cost led to 90bps QoQ decline in EBIT margin came to 25.6% which was below the guided range of 26-28%. Margin was also hurt by currency volatility and incremental onsite hiring. However, net profit grew by 2.6% QoQ mainly aided by higher other income. Despite pressure on margin in Q3FY19 and expectation of higher sub-contracting cost in short to medium term as the company tries to capture demand opportunities (digital technologies) and overcome supply (talent) constraints, the management is confident of sustaining margin in the target range in FY19 owing to expanding participation in digital transformation. However, we have reduced our EBIT margin estimate by 30bps each for FY19E/20E given miss in margin in Q3FY19 and increase in sub contacting cost.

Deal wins continued to stay robust for the company with the company bagging strong deal wins of USD 5.9bn during the quarter as against USD 4.9bn in Q2FY19 largely driven by increasing traction of digital business. Of the recent deal wins in Q3FY19, BFSI vertical accounted for USD 2bn and retail USD 800mn led by increasing spending by clients on digital technologies. The key BFSI (banking, financial services and insurance) vertical continued with its growth recovery, and management commentary suggests the momentum should continue. Driven by strong deal wins along with healthy deal pipeline and sustained traction in digital business due to enterprise-wide adoption of digital technologies by clients, management exuded confidence of continued growth momentum. Resultantly, we factor revenue CAGR of 13% over FY18-21E.

We have revised downwards our earnings estimate for FY19E/20E led by miss in margin in Q3FY19 and sustained investments to tap demand opportunities. However, strong order-book/pipeline, robust commentary and traction in digital, the company will continue to trade at premium valuation, we believe. Hence, we maintain ‘HOLD’ rating on the stock with a revised rolled-over target price of Rs2,036 and value at a P/E of 20x FY21E EPS.

Analyst: Abhijit Kumar Das

Dion Global Solutions Ltd., INH100002771

Tata Consultancy Services Ltd:



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