Stock Recommendation- April 2020


Sector:Paint & Varnishes

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.

On account of a sharp fall in crude oil prices, the cost of the key raw materials dampened which provide a breather to paint companies during the current cautious saga in the market. A reduction in input cost would enable paint companies to cheer for significant improvement in margins. Further, companies is likely to pass the benefit to customers to set the brush for a revival in demand.

In Q3FY20, revenue grew only by 3% YoY to Rs5,420cr due to poor realisation & higher demand for economy emulsion paints but company maintained a low double digit volume growth (~11% YoY) in decorative paint. Revenue from Home improvement segment grew by 20.8% YoY to Rs 126cr which added some colour to top-line. Automotive coatings JV business continued to be impacted by the downturn in the automobile industry while the Industrial Coatings JV business saw some demand pick-up in the Protective Coatings segment. Benign raw material prices benefited the entire coatings business. We expect volume is likely to grow at double digit due to introduction of two new economy emulsion paints and overall price cut of 1% in YTD FY20.

Benign raw material prices led to higher gross margin of 43% an improvement of 193bps YoY. While control over other expenses and advertisement activity supported EBITDA margin improvement of 96bps YoY to 21.9%. Tailwinds on raw material cost and pick up in rural demand we increase FY20E EBITDA margin estimate by 160bps to 21.2%.

Q3FY20 earnings grew by 20.3% YoY to Rs780cr supported by lower interest expenses (-17% YoY), higher other incomes (42% YoY) and reduction in tax rate. The effective tax rate declined from 34.1% in Q3FY19 to 26.7%. We incorporate the new lower corporate tax structure and increase FY20E earnings estimate by 2%.

We expect volume to grow at double digit led by higher share from economy emulsion and pick up in rural demand. However, demand for decorative paints remain tepid which will impact value growth. Benign raw material expenses provide support to margins despite higher advertisement expenses. We roll forward our estimate to FY22E and maintain our HOLD rating, based on a P/E of 44x on FY22EPS

Analyst: Antu Eapen Thomas, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please follow the link: Asian Paints Ltd –

Sector: Chemicals

PI Industries manufactures plant protection & specialty plant nutrient products and solutions under its agri-inputs business. It is also one of India’s leading custom synthesis (CSM) companies engaged in providing contract research and contract manufacturing services to global innovators.

In Q3FY20, standalone revenue grew 20.1% YoY to Rs. 850cr, fuelled by strong growth in domestic and exports. Domestic revenue surged 23.4% YoY to Rs. 206cr, due to volume growth supported by healthy Rabi season. Export business also increased 19.1% YoY to Rs. 644cr. EBITDA was up 25.0% YoY to Rs. 186cr, as EBITDA margin expanded 80bps YoY to 21.8% primarily due to improved product mix and operating costs. Net profit increased at lower rate of 12.2% YoY to Rs. 120cr, with PAT margin declining 100bps YoY to 14.2%, on account of higher depreciation (+35.9% YoY to Rs. 32cr) and taxes (+54.3% to Rs. 49cr) due to change in SEZ share in overall business.

The board has approved of QIP OF Rs. 2,000cr to fund organic growth, scale-up in newer and niche technologies and diversify into adjacent verticals like pharma, speciality chemicals, and others. PI Industries only sources around 1% of its total supply from China, therefore the coronavirus situation in the region may not impact the company’s supplies to a large extent. However, since exports account for around half the revenues of PI, the coronavirus situation currently may pose a threat to the company’s performance in the future. PI Industries has completed acquisition of Isagro in Dec-20. Isagro business will be reorganized by transferring domestic business and rest of the activities will be merged with PI industries. Company has commissioned one multi product plant at Jambusar in Q3FY20, scheduled to commission one plant in 4QFY20E and two plants in FY21E. Capex guidance for FY20 stands at ~Rs. 600cr (Rs. 550cr invested till Q3FY20) and Rs. 250-300cr for FY21

We expect rising capacity and commercialization of new plants in the near-term to fuel growth and estimate revenue/PAT to grow at a CAGR of 22.4%/25.5%, respectively, over FY19-22E. Successful new and niche product launches in the domestic market is expected to drive growth in the long run. The plan to diversify into new verticals with the QIP funding is a welcome move by the company and we expect the company to benefit in the long run. A key risk for the company is the coronavirus situation, which may lead to exports being impacted. However, the exact impact is difficult to quantify at this time. We upgrade our rating on the stock to ACCUMULATE and roll forward valuation with a revised target price of Rs. 1,750 based on 30x FY22E EPS.   

Analyst: Joe V Samuel, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please follow the link: PI Industries Limited –

Sector:Gas Utilities

Mahanagar Gas Limited (MGL) distributes natural gas to domestic customers such as hospitals, nursing homes, hotels, flight kitchens, and restaurants. Mahanagar gas primarily operates in Mumbai and is the official gas distributer in Mumbai and its surrounding regions.

During the quarter, revenue was down 0.6% YoY to Rs. 819cr (-4.9% QoQ). Amongst the segments, PNG was worst performer with sales falling 10.8% YoY to Rs. 216cr (- 5.6% QoQ), followed by declines in CNG of 3.7% YoY to Rs. 523cr (-4.6% QoQ). In terms of volumes, CNG stood at 204.6 Standard Cubic Meter (SCM) (+2.4% YoY; +1.0% QoQ) followed by PNG at 76.1 SCM (+4.8% YoY; +3.6% QoQ). While the domestic market APM of LNG was set at US$3.23/mmbtu from Oct 2019-March 2020 versus US$3.6/mmbtu from April–Sept 2019. The management highlighted that the spot prices were on a downward trend due to decline in demand across Asian markets owing to warmer winter. The recent Corona Virus epidemic which has slowed down commercial activities in certain geographies further led to price woes and as of early Feb-20, LNG bids in India and Northeast Asian markets have declined to ~US$3/mmbtu despite stable supply.

EBITDA grew 8.3% YoY to Rs. 259cr in Q3FY20, as EBITDA margin surged 260 bps YoY to 31.6% mainly due to lower costs. The overall cost of sales declined by 5.8% YoY to Rs. 429cr (-6.0% QoQ). In the Union Budget, the government announced the expansion of the gas grid to 27,000 kms from 16,200 kms to aid transparency in pricing and expansion of CGD sector. Additionally, the govt. plans to increase the share of gas from 6% to 15% in India’s primary energy mix, which should further strengthen CGD sector. During the quarter, MGL added pipeline gas connection to 31,000 households. The total count of household stands at 1.24mn. There were 74 additions to industrial and commercial sector. Count of station supply were 248 and pipeline network stood at 5,513. In order to expand its pipeline network, the company plans to bid for CGD in new geographical areas as per the tender released by Petrol and Natural Gas Regulatory Board. 

Given the government’s plan to expand natural gas sector, public transport and individual consumers converting to CNG due to sustainability in comparison to convention fuels, we believe that the company has ample growth opportunities, with upcoming projects in pipeline. The recent correction in gas prices should enable the company to expand its margins in the next few quarters. Hence, we upgrade our rating on the stock to a BUY with a roll forward target price of Rs. 1,342 based on 15.5x FY22E adj. EPS.

Analyst: Joe V Samuel, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please follow the link: Mahanagar Gas Limited –

Sector: Banking/Finance

Kotak Mahindra Bank (the Bank) is the flagship company of the Kotak Group. It is one amongst the fastest growing banks and the most admired financial institutions in India. The Bank offers transaction banking, operates lending verticals, manages IPOs and provides working capital loans. The principal business activities of the Bank are organised into consumer banking, commercial banking, corporate banking, treasury, and other financial services. As of 31st March 2019, the Bank had 1500 branches and 2352 ATMs, covering 744 locations.  Bank has 19 subsidiaries.

In the recent Q3FY20 results banks advances witnessed a growth of 7.5% YoY to Rs. 250,172cr. The increase was driven by strong growth of 20.2% YoY in Home loans and LAP (18.4% of total advances) and 16.8% YoY growth in Agriculture division (11.1% of total advances). This is partially offset by slowdown in Auto loan segment (-11.0% YoY) and subdued growth in Commercial Vehicle segment (+5.5% YoY). Current Account Savings Account (CASA) ratio was up 300bps to 53.7% (vs. 50.7% in Q3FY19), due to traction in savings deposits from 811 digital banking product. Gross Non-Performing Asset (GNPA) increased 32.7% YoY to Rs. 5,915cr, while GNPA ratio increased 44bps to 2.33% due to slippages in 2-3 corporate accounts. The bank also saw slippages in personal loan and credit card portfolio under the unsecured book, leading to 20bps YoY increase in Net Non-Performing Asset (NNPA) ratio to 0.87% in Q3FY20. As per management, uptick in NPAs from unsecured book is in-line with the industry trends. Moreover, asset quality performance for the agriculture and CV portfolios has been stable to improving. Special Mention Accounts (SMA2) ratio declined to 0.13% of advances, after factoring the above corporate slippages. Rise in NPAs and deteriorating asset quality remains a major concern for the bank. Capital adequacy ratio of the consolidated entity improved to 19.4% and tier-1 ratio to 19.0%.

Net interest income grew 17.6% YoY to Rs. 4,442cr, while NIM increased 44bps YoY to 4.7% partly fuelled by decline in cost of funds. Non-interest income grew significantly by 43.6% YoY to Rs. 5,210cr. However, PBT growth was moderated at 6.3% YoY to Rs. 2,889cr on account of higher one-time operating expenses. On the other hand, net income registered a strong growth of 27.4% YoY, aided by lower corporate tax rate.

Slowdown in growth is a resultant of stuttering macro environment and we expect the economy to improve gradually. Growth in 811 digital banking product is expected to reap benefits in the coming years. Resultantly, we cautiously value the bank at 3.6x FY22E BVPS, with a target price of Rs. 1,730 and maintain our HOLD recommendation.

Analyst: RajinRajan P, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please follow the link: Kotak Mahindra Bank Ltd –


    • For Large Cap Stocks:
      Buy – Upside is above 10%.
      Hold – Upside is between 0% – 10%.
      Reduce – Downside is more than 0%.
      Neutral – Not Applicable

      For Mid Cap and Small Cap:
      Buy – Upside is above 15%.
      Accumulate – Upside is between 10% – 15%.
      Hold – Upside is between 0% – 10%.
      Reduce/Sell – Downside is more than 0%.
      Neutral – Not Applicable
      To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL

    • Buy means – Buy at the current price level
      Accumulate means – Buy only when the price goes below the market level


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