Stock Recommendation – June 2019

Jyothy Laboratories Ltd (JLL) is an Indian FMCG player with products across fabric care, dishwashing, mosquito repellents and personal care. Over the years the company has evolved from a single product proprietary firm into a multi brand company selling products across India. The company has strong focus on brand creation and the major brands include Ujala, Maxo, Exo, Henko, Pril, Margo, Neem, Check, Mr. White and Maya. JLL has plans to foray into ayurveda products also.

For Q4FY19, revenue growth was moderate at 6.3%YoY. For FY19, revenue grew by 8.4%YoY. The lower growth was attributed to the adverse seasonality in insecticide segment, impact of flood in Kerala (Rs25-30cr) and slowdown in CSD business (Rs15-20cr). Except Dishwash segment (grew ~22%YoY), the other segments saw a lacklustre growth (Fabric care-2.2%, Personal care-2.8%) while Household insecticide segment de-grew by 4.4%YoY. Management expects stable demand to continue. JYL’s strong focus on investment behind brands and innovations, strong penetration in rural markets, market share gains in key brands will continue to support future volume growth. JYL plans to introduce the recent launch ‘T-shine’ product to other states also after reaching a good market share in Kerala. Management has guided for 12-14% revenue growth for FY20E. We trim our revenue estimates to factor in lower growth in the recent quarters and expect 10.6% CAGR in revenue over FY19-21E.

Gross margin declined by 220bps YoY in the quarter to 44.5% and EBITDA margin declined by 210bps largely due to high base effect. PAT grew by 11.1%YoY during Q4FY19 and 20.3%YoY for FY19. Management has guided for 16% EBITDA margin for FY20E. We expect EBITDA margin to be at 15.3% in FY20E factoring the margin pressure in the quarter.

JLL, in recent quarters has launched new products, Maxo Genious (re-launch), Henko Stain Care, Henko Matic, ‘Pril Tamarind’ in Dish wash, ‘Maxo Agarbathi100% natural’ in household insecticide segment and new ‘Margo Glycerine’ in personal care. Additionally, the company continuously push for its power brands through advertisements and promotions. While factoring lower growth and margin pressure in the quarter in the estimates, we expect stable demand environment to continue given expectation of near-normal monsoon and higher MSP and other rural initiatives of the government. We also lower our valuations to 26x on FY21 EPS (earlier 27x) to consider pressure on margin and growth, but upgrade to Accumulate considering recent fall in stock price.

Analyst: Vincent K Andrews

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers, and web link for the research notes: Jyothy Laboratories Ltd: Click here

Asian paints (APNT), is the market leader in the Indian paint manufacturing industry with a market share of ~53%. The Company is engaged in the business of manufacturing, selling and distribution of paints, coatings, products related to home decor, bath fittings and providing of related services. The Company’s business segments are Paints and Home Improvement. The Home Improvement segment includes its bath fittings business. It manufactures a range of paints for decorative and industrial use. It operates in over 20 countries and has over 30 manufacturing facilities, servicing consumers in over 65 countries.

In Q4FY19, revenue grew by 12% YoY to Rs5,018cr supported by double digit volume (~10%) growth in decorative paint. Additionally, inferior product like distemper, putty and low value emulsion have seen good growth compared to premium products while higher trade discounts impacted the revenue growth. Industrial business witnessed mixed growth, the Auto OEM segment registered slowdown on the back of deceleration in the auto industry. The Industrial Coatings JV, continued to grow well led by good performance in the Protective coatings. International business, Oman, UAE and Bahrain and Nepal registered good topline growth while Egypt, Ethiopia, Sri Lanka and Bangladesh continued to see challenging environment. We expect volume is likely to grow at double digit due to capacity addition. Management pointed that growth is likely to remain uncertain in the near term to due to volatility in oil prices and rupee.

In FY19, company has took total price hikes of 7.45% however, this hikes was below required to offset input cost inflation. Consequently, gross margin declined by 248bps YoY to 41.4% in FY19. Higher RM cost due to rise in oil prices and increase in overhead expenses related to the commissioning of the two new plants dragged EBITDA margin by 230bps YoY to 16.4% in Q4FY19. Volatility in raw material prices is likely to continue in the near term while increase in employee cost and other expenditure pertaining to the new plant will restrict margin expansion. We reduce FY20E EBITDA margin by 40bps to 19%.

Q4FY19 earnings de-grew by –2 YoY to Rs487cr as weak operating margins and additional impact of higher depreciation for the new plants and increase in interest expenses by 68% YoY impacted earnings growth.

We expect volume to grow at double digit due to pick up in demand for distempers and low-end emulsion. However, margin pressure and high valuation will impact stock price. We therefore revise our rating to Reduce and value at a P/E of 40x on FY21EPS.

Analyst: Antu Eapen Thomas

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers, and web link for the research notes: Asian Paints: Click here                                        

Supreme Industries Ltd (SIL) is India’s leading player in plastic products; the wide range of offering includes plastic piping system, packaging, industrial and consumer products. SIL was pioneer in introducing various products including cross- laminated films, HMHD films, multilayer films, SWR piping systems, PP mats etc. The company plans to spend Rs300-350cr for expanding capacities of PVC pipe system/ HDPE pipe system/CPVC and expanding roto moulding capacity.

SIL’s Q4FY19 revenue grew by 4% YoY, led by piping segment which grew by 18% YoY, packaging 13% YoY and Consumer segment 5% YoY. While, it’s Industrial segment de-grew by 10% YoY. The overall volume growth was at 10.5% YoY. Plastic piping and consumer segment volumes grew by 15% and 3% YoY respectively. Packaging volume grew by 14%, industrial segment witnessed 13% de-growth. Overall volume growth for FY19 was at 7% and value growth was at 14% which was lower than our estimates. Management has guided for 8%-10%/12%-15% volume and value growth in FY20E. We lower our revenue estimates by 3% for FY20 and FY21E to factor in the impact on revenue for FY19 and expect revenue to grow by 13% CAGR over FY19-21E.

SIL’s Q4FY19 gross margins declined by 500bps YoY to 30.70% on account of inventory loss due to sharp fall in raw material cost, sub-optimum volumes and inferior product mix. EBITDA margins declined by 630bps YoY to 13.2% due to higher other expenses. The consolidated PAT declined by 37% YoY to Rs123cr. During FY19, operating margins from all the segments were on decline due to weak demand scenario, inferior product mix and inventory loss due to volatility in raw materials. However, we believe that going ahead with improvement in construction sector and stable raw materials prices EBITDA margins will be stable going forward. The management has guided EBITDA margins of 13.5%-15%. We factor EBITDA margin to be at 14.6% and 14.8% for FY20E and FY21E. However, given changes in revenue estimates our EPS estimates stand reduced by 3.5% and 6% for FY20E and FY21E.

The company has a strong balance sheet with the debt to equity at 0.1x in FY19 and strong cash flows to fund its capex from internal accruals. It also has strong return ratios with ROE of 22% for last five years. However, given the near-term demand headwinds and volatility in raw materials price, we believe that near margins will be impacted. We downgrade SIL to “Reduce” from Hold.

Analyst: Anil R

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers, and web link for the research notes: Supreme Industries Ltd.: Click here 

Mahindra CIE Automotive Limited is an auto components supplier with presence in many technologies, which include forgings, castings, stampings, magnetic products and composites. The Company is focused on the automotive market, including cars, utility vehicles, commercial vehicles and tractors. Mahindra CIE (MCIE) is among the top global forging players with a strong presence in both Europe and India. Currently two-thirds of the revenue comes from Europe while the rest is from India.

During Q1CY19, MCIE’s consolidated revenue and PBT grew by 10% and 12% YoY respectively, in line with our estimates. The growth was driven by 15%YoY and 2%YoY from European and India business. Despite weak European car sales, the new orders in Gears and Forging supported the revenue growth. However weak domestic demand lowered the India share. On a weighted average, MCIE India’s key customers (M&M, Maruti and Tata) sales declined by 9% in volume. Meanwhile, on account of strong export from India has helped to retain the margin. During the quarter, MCIE announced acquisition of Aurangabad Electricals (AEL) which is aluminum die casting company catering to two wheelers and cars. MCIE is likely to pay Rs8.8bn all cash deal for the acquisition. The acquired entity reported sales of Rs8.6bn and EBITDA margin of 11.8% during FY19.

The contribution from the European business to remain strong in CY19. The second phase of Metalcastello projects for Caterpillar worth 16mn Euro and new crankshaft line in Lithuania for supply to Volkswagen with a revenue potential of ~Euro 8.9mn will provide higher revenue visibility. European forging business marginally improved by 10bps during the quarter due to RM cost and subdued industry growth. Currently, MCIE is operating at 90% capacity utilization and hence it has plan to invest Rs7bn over the next two years (Primarily for MCIE India). We expect consolidated revenue to grow at 11% CAGR over CY18-20E.

During the quarter MCIE reported domestic EBITDA margin of 16.3% (+120bps) and the international business margin of 13.1% (+10bps). We expect the EBITDA margin to expand owing to ramp up of Lithuania plant along with productivity improvement (closing UK subsidiary Stokes) and product rationalization in Mahindra Forging Europe business. We believe improvement in the performance of new products share and pick up in the European car demand will lead to better utilization of the assets.

On the back of new launches from its key domestic customers and strong demand in the CV segment due to pre buying owing to change in emission norm, will generate demands for its products. However, the near-term headwind due to slower PV growth both in Europe and domestic to remain under check for short term. We value MCEI at 13xCY20E EPS and upgrade our rating to Accumulate from Hold at CMP.

Analyst: Saji John

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers, and web link for the research notes: Mahindra CIE Automotive Ltd.: Click here