Stock Recommendation- February 2020

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Rating: Buy 

Sector: Fertilizers                  

Target Price: Rs.656

Coromandel International was incorporated in 1961 and was publicly listed in 1964. The company is promoted by EID Parry Ltd which holds a 61% stake and is part of the Murugappa Group, one of India’s largest conglomerate groups. The Company has 16 manufacturing facilities located across India and also operates a network of retail outlets across Andhra Pradesh, Telangana, Karnataka and Maharashtra. CRIN is the 2nd largest phosphatic fertilizer manufacturer in India and derives 80% of its revenues from the fertilizer segment. CRIN also manufactures crop protection products like fungicides, pesticides and insecticides and has over 1000 global registrations. In addition, the company also produces specialty nutrients and operates more than 800 retail stores across its home markets of Telangana, Andhra Pradesh and Karnataka.

Coromandel International is the largest privately owned phosphatic fertilizer manufacturers in India with a market share of 16%. It has considerable presence in its home markets of Andhra Pradesh, Telangana and other nearby states where it enjoys a 65% market share. CRIN produces different varieties of NPK (Nitrogen Phosphorus Potash), SSP (Single Super Phosphate) and DAP (Di-Ammonium Phosphate) fertilizers. In FY19, the share of unique-grade fertilizers was at 38%, up from 30% in FY15. Central government schemes like the Pradhan Mantri-Kisan scheme announced last year to double farmer’s income will boost demand for fertilizer products.

The Direct Benefit Transfer scheme (DBT) rolled up in 2017 provides more transparency in the subsidy settlement process. DBT leads to faster reimbursement of subsidy payable to the fertilizer manufacturing companies. This in turn will reduce receivable days of CRIN and help ease working capital pressures that have impacted fertilizer companies in the past. The company has undertaken backward integration by expanding the capacity of its phosphoric acid plant. Phosphoric acid is an important raw material and this expansion will help boost margins in the long run.

CRIN’s PAT is expected to grow by at a CAGR of 17% over FY19-FY22E on the back of increase in the share of unique grade phosphatic fertilizers and lower raw material cost. The better than expected rainfall in CRIN’s home markets of Andhra Pradesh and Telangana are expected to improve volumes in the coming quarters this year. EBITDA margins are expected to expand by 250 bps by FY22E as raw material costs are expected to decline due to backward integration. We Initiate coverage valuing CRIN at 16x on FY22E EPS with a target price of Rs.656 and recommend to Buy. 

Analyst: Joe V Samuel

Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Coromandel International Ltd – http://bit.ly/2ReFMEy

Rating: BUY                    

Sector: Auto Ancillaries

Target Price: Rs.7,918

WABCO India ltd (WIL) is a leading supplier of technologies and services that improve safety, efficiency and connectivity of commercial vehicles (CV) in India. Wabco will be a direct beneficiary once the BS-VI enabled vehicle kick in from 1st April 2020.  The content per vehicle is expected to increase by 20% from the current level. The company holds 85% market share in the air braking and safety products. In addition, the company is working on Automated Connected & Electric (ACE) technologies in view of the electrification in the CV segment. After acquiring Telematics LLC, WIL has expanded its portfolio to fleet management solution (FMS) and is highly accepted among the fleet operators. Government’s action towards increasing 25% current load capacity of heavy trucks has led to improved realization for large size air brake compressors.

For the year FY20, the M&HCV demand remains sluggish on account of slew of factors like lower spending for road & construction activities and implementation of Axle load norms. However we believe government action towards faster implementation of scrap page policy is expected to spur the demand for CV. As per the Road Ministry, there are ~700,000 Commercial vehicles registered before year 2000 that are currently on the roads. We believe that the policy would potentially lead to replacement of trucks that are over 20 years old, which augurs well for the company.

WABCO enjoys leadership position in their product segment. Its technological leadership among auto ancillary companies and its technological prowess make it one of the few companies that have bargaining power with original equipment manufacturers (OEM).  Kit value per vehicle comparing to its European CV market is far lower for India and provides significant room for incremental growth once the Euro or BS 6 vehicle commence operation. Other advanced active safety features will become mandatory in the near future like Electronic Stability Control (ESC) Advanced Driver Assistance Systems (ADAS) and active steering.

We expect the demand to remain weak in the near term but long term growth outlook remains promising on the back of economic growth, rising income levels and government thrust on increasing rural income and its focus on infrastructure and construction. Amid weak demand outlook and market volatility WABCO has corrected 28 percent from its 52week high and expect the slowdown in the CV sector have been factored in the price.

However, given the strong fundamentals and expected structural change in the industry we value WIL at 48x (5yr Historical average at 50x) FY22 EPS.

Analyst: Saji John

Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: WABCO India ltd– http://bit.ly/2TLgYFQ

Rating: Buy

Sector: Banking/Finance

Target Price: Rs.1,425

HDFC Bank was incorporated in August 1994. It provides corporate banking and custodial services and is also involved in treasury and capital markets. Also, it offers project advisory services and capital market products, including GDR and currency bonds. HDFC Bank has a banking network of 5,345 branches and 14,533 ATMs spread across 2,787 cities and towns. Total advances of the bank stand at Rs.936,030cr and out of the same the domestic retail advances stand at Rs.4,80,153cr with personal loan contributing- 23%, auto loans- 18%, housing loan-12.9% and credit cards -12% of the domestic retail advances.

In the recent quarterly results, HDFC Bank posted a decent set of results. Loans and advances for 3QFY20 witnessed robust growth to reach Rs.936, 030cr (+19.9% YoY), with domestic retail loans growing at 14.3% YoY and domestic wholesale loans rising by 26.2% YoY. Within domestic retail, personal loans grew 23.3% YoY, home loans rose by 19.9% YoY, while the auto market remained challenging and continued to witnessed subdued growth (+0.7% YoY). Deposits reported a strong growth of 25.2% YoY to Rs.1, 067,433cr (vs. +22.0% in Q3FY19), supported by solid growth in time deposits (+27.7% YoY) and CASA (+21.5% YoY).

In Q3FY20, NIM remained flat QoQ at 4.2%, including the negative impact of 10-20bps owing to a higher liquidity coverage ratio of 140% in Q3FY20 (vs. 133% in Q2FY20). Net interest income increased by 12.7% YoY to Rs.14, 173cr, supported by continued growth in advances. Non-interest income rose by 35.5% YoY on high recoveries and dividends. Cost to income ratio improved by 50bps YoY to 37.9% despite higher expenses on employees, technology, and investments. Net profit rose 32.8% YoY to Rs.7, 416cr in Q3FY20, as the bank continued to benefit from the reduced corporate tax rate.

During the quarter, the bank’s net NPA increased by 17.9% QoQ to Rs.4, 468cr and net NPA ratio increased 6bps QoQ to 0.48%, Total provisions rose sharply by 37.6% YoY to reach Rs.3, 044cr, including one-off provisions of ~Rs.700cr related to a few corporate accounts and accelerated provisions in some accounts.

The bank’s healthy growth in advances and deposits supported by the bank’s expansion plans of ~600 new branches in the fiscal year should drive growth in upcoming quarters. However, we expect asset quality to remain under pressure given challenging economic conditions. We roll forward and value stock at 3.4x FY22E BVPS with a revised target price of Rs.1, 425 and reiterate our BUY rating on the stock.

Analyst: Rajin Rajan P

Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: HDFC bank – http://bit.ly/2Gh4VrN

Rating: Buy              

Sector: IT

Target Price: Rs. 540

Cyient Ltd, formerly known as InfoTech Enterprises is one amongst the leading players in the IT-enabled services space providing services to the Engineering Research and Development (ER&D) segment.

The company enjoys strong foothold among the listed Engineering and Research Development space and generates close to 65% of its revenue from this segment. Company has been instrumental in providing services to aerospace and defence sectors, which has been reporting a soft set of numbers since the last 2 quarters due to client-specific concerns. Both aerospace & defence and the second major vertical of communication is expected to show growth powered by improvement in client spending, after-sales services and 5G deployment. Transportation segment has shown a QoQ growth of 3% Q2 FY20 in US Dollar terms which is expected to improve as new orders start coming in.

The company has initiated a cost optimisation program to achieve sustainable margins for the services business. The move is largely to curtail the sales and administrative expenses and boost margins going forward. We believe the cost optimisation program to end in Q4 FY21E, till the time improvement in margins due to a fall in sales expenses will be impacted by higher wage cost and onetime restructuring cost. Margins expected to be in the range of 14-15% once cost optimisation ends.

Cyient continues to invest in projects which are expected to add to the EPS in the near term. Investment in New Business Accelerator program (NBA) which is an in-house investment vehicle created to provide end to end solution to clients is one among the major project of Cyient. In addition to that the acquisitions in the recent past like Ansem which is a 20% margin business is expected to aid EPS growth in the tune of 1.5%-3% in FY 21E. Cyient has set a long-term vision and aspires to be an IP solution provider by 2030. As per the recent investor day updates the company is planning to change IP solution/services ratio from the current 10/90 levels to 80/20 by the year 2030.

Growth in ER&D spends across the globe and in key services like aerospace and defence, communication and healthcare to propel order intake and improve the revenue from FY21E onwards. We believe negative factors like client-specific concerns and low margins are already factored in the current valuation, which is at a significant discount compared to the long-term average. We expect improvement in growth due to telecom and transportation vertical and value Cyient at 9x on FY22E EPS with a target price of Rs.540 and recommend Buy rating.

Analyst: Rajin Rajan P

Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers : Cyient Ltd– http://bit.ly/2TJJXty

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