Stock Recommendation- May 2020

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Dr. Lal PathLabs Limited (DLPL) offers diagnostic and related healthcare tests and services in India and internationally. Company had 200 clinical laboratories and 2,569 patient service centers (PSC) and 6,426 pick-up points (PUP) as of March 2019.

DLPL’s strong business model led to a revenue growth of 16.2% CAGR over FY15-19, supported by rise in sample collection (~18.6% CAGR; backed by large network of PSCs and PUPs) along with growing number of patient served (+15.5% CAGR). Factoring in Corona impact for 4QFY20 and early FY21, we estimate revenue to grow at a 14.0% CAGR FY20-22E. North India business contributed ~71% of revenue in FY19.  The company plans to increase its presence in Uttar Pradesh, Bihar, Orissa, Madhya Pradesh, Chhattisgarh, West Bengal, Bengaluru and Pune. The Company’s Hub and Spoke model (centralized diagnostic testing) offers economies of scale and future expansion opportunities, along with large network enhancing company’s purchasing power with suppliers. Additionally, DLPL continues to focus on improving ratio between CC (collection centers) and labs, by focusing on building franchise infrastructure (light asset and consume less OPEX). DLPL continues to grow inorganically with recent acquisition of two labs in Maharashtra (Sangli and Yavatmal area). The debt-free Balance Sheet and solid operating performance should remain the key to propel growth in future.

Covid-19 pandemic continues to shock the markets across the globe, as number of infected patients crossed 1.8mn globally. Lockdown measures continue to disrupt supply (testing kits and personal protection equipment – PPE), and logistics condition in healthcare industry. However, in order to smoothen supply chain condition, the Government has given approval to domestic manufactures (e.g. MyLabsDiscovery Solutions, a Pune based diagnostic company). DLPL is all set to gain from current corona situation, as its Delhi lab is approval for Covid-19 testing (present capacity ~1.5kpd; utilization stood in single digit). Number of walk-in patients has reduced and demand has been subdued across B2B and B2C channels owing to lockdown. Once lockdown gets lifted, logistics and number of walk-in patients would improve as ~60% of business depends on outside Delhi NCR. The company has also identified areas for cost optimization, as 48-50% of total cost is fixed.

We initiate coverage on the stock with a BUY rating and a target price of Rs. 1,762 based on 46x FY22E adj. EPS, considering its strong network and robust business model. Also, company is well placed to benefit from increased demand for coronavirus testing in the medium-term.

Analyst: Joe Varghese Samuel, Geojit Financial Services Ltd., INH200000345 General Disclosures and Disclaimers: Please follow the link: Dr. Lal PathLabs Limited-  https://bit.ly/3eGk0mW 

                               

Colgate-Palmolive (India) Ltd. manufactures consumer products in the oral care and body care area. The company’s products include soaps, cosmetics, toilet preparations, toothpaste, toothbrushes, shaving brushes and glycerine.

Colgate being the market leader in the Indian oral care segment with a market share of about 50% has strong brand recall in both the urban and rural areas which will help drive growth in the new segments that it launches. Colgate has a stable business with its long term revenue growing at 11% CAGR. The company also has a strong Balance sheet with no leverage and cash equivalents of Rs 465cr as on September 2019 enabling the company to operate without any liquidity crunch. With a free cash flow of Rs 850cr as on FY19, the company has enough resources to innovate and develop new products to meet the changing consumer demands over long term. In the current scenario, we expect the volumes to remain low. Colgate also has adequate inventory base to restart its operations without any delay post lockdown.

In the last quarter, the company’s revenue for the standalone business grew by 4.1% YoY to Rs 1136cr with the domestic net sales growing by only 4.3% YoY due to lower volumes. This was mainly due to the slowdown in rural areas. Apart from this, the rising competition and adverse market conditions had impacted the company’s growth. To tackle the rising competition and these market conditions, the company had increased its advertising and promotional expenditure by 13.8% YoY and employee expenses by 8.4% YoY. This additional expenditure had resulted in EBITDA margins contracting by 100bps to 27.8%. Net profit grew 3.6% YoY to Rs 199cr primarily due to lower taxes. Adjusting for the impact of prior year tax reversal of Rs 9cr, the net profit grew 8.7% YoY.

The company has strengthened its brand through the “smile karoaurshuru ho jao” campaign which focuses on consumer optimism along with innovative product launches and higher ad spends. The management believes that the re-launch of Colgate strong teeth has resulted in improved household penetration. Also we expect the launch of black variant of Superflexi toothbrush and Palmolive Luminous Oils shampoo are expected to drive market share in their respective categories.

We estimate PAT to grow at 14.3% over FY19-22E CAGR and EBITDA margin to improve to 30.1% by FY22E. Being a defensive sector stock, the company’s products are always in demand and the stock will always tend to have only a limited downside. We expect a speedy recovery post lockdown. Hence, we recommend Buy rating on the stock with a target price of Rs 1718 based on 42x FY22E adj. EPS.

Analyst: K Jose Francis, Geojit Financial Services Ltd., INH200000345 General Disclosures and Disclaimers: Please follow the link: Colgate Palmolive (India) Ltd- https://bit.ly/2VqntOT

 HDFC Life Insurance Co. Ltd, a joint venture between HDFC Ltd. and Standard Life Aberdeen, offers protection for life, health, properties and automobile, amongst others. HDFC Life Insurance enjoys leading position among private life insurance players with a market share of 21.4% and an AUM (Asset Under Management) of 1.36 tn.

Company’s has been delivering a strong growth in its performance with total premium collection growing at a CAGR of 23% while its new business premium at 32% and renewal premium at 15%, for FY14-FY19. Company has registered healthy CAGR growth of 21% during FY17-19 in its Embedded Value and 29% growth in VNB (Value of New Business) reflecting the expected level of profitability in future. Company has been showing consistent improvement in its qualitative indices which is much better than its competitors. Company enjoys highest sustainability of the customers with 90% of its customers retaining the policy after the 1st year. Even though economic slowdown and lockdown will impact the sale of new policies in the short-term, strong brand value and being a essential risk management product, recovery will be quick with increase in life insurance penetration post crisis.

During the last quarter, gross premium income grew 14.9% YoY to Rs. 8,001cr. Income from first year premiums increased 23.2% YoY to Rs. 1,543cr, whereas the company registered 13.8% YoY growth in renewal premiums amounting to Rs. 3,766cr (contributing 47.1% of total gross income). Income from single premiums grew 12.2% YoY to Rs. 2,692cr. However, PAT remained largely flat YoY at Rs. 250cr vs. Rs. 246cr in Q3FY19, impacted by higher operating costs. As on December 2019, company enjoys 21.4% market share in new business premium against 21.0% during same period last year. Company also enjoys well balanced product mix compared to its peers. On YoY basis, HDFC Life has registered a strong growth of 45% in Value of New Business (VNB) and also shown an improvement of 260 bps in VNB margin as on 9M FY20.

HDFC Life with its strong brand name and qualitative factors along with improving insurance penetration will aid to revive in its growth post lockdown. Considering the positive industrial outlook and consistent growth, we value the stock at 3.8x FY22 EV per share and upgrade our rating to Buy with a revised target price of Rs.596

Analyst: Cyril Charly, Geojit Financial Services Ltd., INH200000345 General Disclosures and Disclaimers: Please follow the link: HDFC Life Insurance Ltd- https://bit.ly/3bwyfsk

Havells India Ltd (HAVL) is a leading player in fast moving electrical consumer goods in India. Its key verticals include Switchgears, Cable & wires, Lighting & fixtures and Consumer Appliances.

9MFY20 revenue declined by ~1%, largely on account of weak macros, tight liquidity situations and slowdown in infrastructure spending. Switchgear segment was largely impacted by decline in Industrial switchgear owing to sluggish infrastructure and Government driven procurement. In the cable segment, power cables was weighed down weak demand in B2B business and fall in commodity prices. While HAVL’s consumer durables segment was modest growth, on account of general weakness in the consumer sentiments and channel destocking. Revenue from Lloyd business was impacted by decline in LED TV sales on account of higher competition. 9MFY20, EBITDA grew by 11% while EBITDA margins declined by 110bps YoY on account of higher cost. However, supported by corporate tax cuts, decline in profitability was limited by 5% YoY to Rs.556cr. 

Lockdown due to spread of corona virus has impacted the consumer durables sector that too at the time of its peak season. We expect the combined impact of weak macros and lockdown will lead to volatility in earnings in near term. However, HAVL competitive pricing, commissioning of new plant for Lloyd, other initiatives for improving visibility for Lloyd and widening of product range will support growth. Further, consumer spending is expected to reverse faster post the lockdown and HAVL will be a key beneficiary given its presence in entire consumer space and strong brand recall. We lower EPS estimates by 9.2% & 8.6% for FY20E & FY21E, as we factor-in the near term impact earnings.

Historically, HAVL has traded at premium valuation, given its strong brand, focus on premiumization, pricing power and balance sheet. We expect that the demand headwinds to persist in the near term as construction sector continues to face slowdown as HAVL 48% of business being largely related construction activities. But we believe that the demand headwinds, weak discretionary spending and likely impact on earnings have already factored in stock prices. HAVL is trading at average 1 year FWD P/E of 32x which is 25% discount to its historical average of 43x. Despite recent downgrade in EPS estimates, we expect profitability to grow by 20% CAGR over FY20E-22E. We value HAVL at P/E of 37x on FY22E and we recommend Buy rating with a target price of Rs.649

Analyst: Anil R, Geojit Financial Services Ltd., INH200000345 General Disclosures and Disclaimers: Please follow the link: Havells India Ltd. – https://bit.ly/2XV0ayj  

2 COMMENTS

    • IFCI is not under our coverage, hence I will not be able to comment with recommendation. But based on a broad review of the historical, financial and business parameters, the fundamentals seems weak.
      Few stocks we believe can generate wealth in the long-term are: Asian Paint, HDFC Bank, Jubilant Foodwork, Colgate, HDFC Life, Mahanagar Gas, Indraprastha gas, Pidilite, Maruti and PI Industries.

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