Stock Recommendation



Bharat Electronics Ltd (BEL) is a Navaratna enterprise having 37% market share in Indian defence electronics. BEL’s core capabilities are in radar and weapons systems, defence communication and electronic warfare.

FY18 revenue grew by 20% YoY led by execution of projects including integrated air command and control systems, naval fire control system, Akash weapon system, weapon locating radar, electronic voting machine/ VVPAT, Schilka Upgrade, 3D Tactical Control Radar, hand-held thermal imager, Submarine Sonar Suite (USHUS 2), Ship Based EW System (Varuna) and mobile ELINT. However FY18 order intake declined by 38% YoY due to delay in finalisation of key orders Akash phase-2 and LRSAM. Despite the delays, the current order backlog is healthy at Rs40,115 crore which is 4x FY17 sales and provides strong visibility for the next four years. Akash missile system and LRSAM orders are expected to be received in FY19E. We expect revenue to grow by 12% CAGR over FY18-FY20E.

Gross margins declined by 190bps YoY to 46.9% in FY18 due to execution of low projects. While EBITDA margins declined by 90bps YoY to 19.6% due to higher employee cost and other expenses. Other income declined by 55% YoY and tax expenses increased by 13% YoY (increased to 28% vs. from 25% in FY17). Consequently PAT declined by 6% YoY to Rs1430cr. We lower our margins estimates by 130bps and 30bps for FY19E and FY20E to factor in the near term margin pressures. Consequently we lower our PAT estimates by 19.6% and 14.5% for FY19E and FY20E.

BEL is a market leader in defence electronics. The key risk in this defence sector includes delay in order inflows and execution approvals given complexities which may bring volatility in earnings. Given strong order backlog of Rs40115cr (4x FY18 sales) and strong technological and execution capabilities we remain positive on BEL.

We expect BEL to emerge as a key beneficiary from GoI focus on indigenous procurement. However, considering the earnings downgrade, we lower our valuation to P/E 17x (22x earlier) on FY20E. We maintain Buy rating on the stock with a target price of Rs131.

Analyst: Anil R, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: BEL:

                                                                Indian commercial bank in the private sector headquartered at Kerala having 1252 branches and 1684 ATMs spread across different States in India with a loan book size of ~ 92,000Cr.

Interest income witnessed 15% growth and contributed towards 22% increase in Net Interest Income. PAT increased by 25% YoY mainly due to 87% reduction in provision which was at Rs.199cr against Rs.370cr in Q4FY18. NII grew by 22% YoY supported by healthy loan growth of 24% YoY. Net Interest Margins remained stable QoQ at 3.1%. The GNPA ratio was stable at 3% and NNPA ratio slightly increased to 1.72% in Q1FY19 against 1.69% in Q4FY18. We factor 18% CAGR growth in NII over FY18-20E supported by strong loan growth. We expect fresh slippages again to decline with 30% CAGR in earnings over FY18-20E.

Loan book grew by 24% YoY in Q1FY19, supported by robust growth across segments. Corporate loans grew by 32% while retail and SME grew 20% and 17% respectively on yearly basis. Federal Bank has improved its market share (deposit) by 8 bps to 0.97% and advances also by 8 bps to 1.07% YoY with the help of aggressive marketing strongly supported by digital and retail banking. Deposits grew by 16% YoY, low cost CASA ratio increased by 3bps YoY to 33.47%. Corporate, SME and retail loans will continue to see strong traction and we factor 22% CAGR in loan book over FY18-20E.

GNPA is stable at 3% QoQ and NNPA ratio has slightly increased from 1.69% in Q4FY18 to 1.72% in Q1FY19.  The fresh slippage reported in corporate segment was at Rs207 against Rs169cr and in SME at Rs90cr against Rs.114cr in Q1 FY18. Fresh slippages increased by 8.4% to 461cr YoY. But, the fresh slippage reported in the last quarter was at Rs.872cr and which is declined significantly by 89% to Rs.461cr. The sequential decline in slippages helped to reduce the provisioning by 87% to 1992cr in Q1FY19 against Rs.3715cr in Q4FY18.

We remain positive in the wake of lower slippages coupled with strong earnings growth. We factor 30% CAGR in earnings supported by 22% CAGR in loan book over FY18-20E. We value FB on FY20E Adj PBV at 1.6X and maintain our target price of Rs101 and recommend Accumulate.

Analyst: Sreenish S R, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: Federal bank:


Tata Consultancy Services Ltd (TCS) is the country’s largest software exporter has delivered solid performance in Q1FY19, ahead of our expectation with strong revenue growth of 6.8% QoQ on consolidated basis (CC revenue growth of 4.1%) led by broad based growth across verticals, continued strong growth in UK (8.2% QoQ in CC terms) & continental Europe (5.3%) and recovery in the US BFS space. USD revenue however grew at a meagre pace of 1.6% QoQ weighed down by cross currency headwinds (impact of 250bps QoQ). Further sustained traction in digital business and ramp up of deal wins aided the growth. Digital business currently contributes 25% to the overall revenue and has grown by 9.1%QoQ in CC terms. Deal signings during the quarter stayed robust with a TCV of USD4.9bn mainly coming from BFSI and retail space.

EBIT margin also came in better than expected at 25% down by only 40bps QoQ despite wage hikes (180 bps), as the benefit of rupee depreciation (+70bps) and operational efficiencies (70bps) restricted the decline. Net profit during the quarter increased by 6.3%QoQ largely driven by higher other income (23%). Given the beat in margin in Q1FY19 and increasing visibility on momentum in revenue growth and traction in deal sizes in digital business, we increase our EBIT margin estimate for FY19E/20E by 40/30bps to 25.6/25.8%.

North America (51% of overall revenue) staged a smart recovery in Q1FY19 with a growth of 3.7% QoQ, the highest in 12 quarters powered by rebound in BFSI and retail verticals. The management alluded confidence in sustaining growth momentum in BFSI vertical (31% of overall revenue) in the medium term particularly in the US on the back of increasing focus of large US banks in scaling digital transformation. This is clearly visible from the strong deal wins of USD 4.9 bn in Q1FY19, of which BFSI vertical accounts for the most (USD 1.6 bn) and North America (USD 2.7 bn). Given positive commentary on the growth outlook of BFSI and retail verticals, continued momentum in digital business and robust deal pipeline, we factor revenue CAGR of 14% over FY18-20E.

We revise upward our earnings estimate for FY19E/20E to factor in the beat in performance in Q1FY19, reset of USD/INR rate to Rs. 69 and management’s positive commentary on the demand outlook. Given visibility on revenue growth momentum, recovery in US BFSI and retail segment and TCS’s differentiated positioning, we expect the company to enjoy premium valuation.

Analyst: Abhijith Kumar Das, Dion Global Solutions Ltd., INH100002771

 For Disclosures and Disclaimers: TCS:


Lupin is the 4th largest generic pharmaceutical company globally by market capitalization. The company develops and delivers a wide range of branded and generic formulations, biotechnology products and APIs globally.US and India are key markets for the company as it contributes ~60% to the total revenues.

Lupin’s revenues dropped by 15% YoY to Rs247cr in Q4FY18 on the back of continued dismal performance in US market which was primarily on account of higher than expected price erosion in select products. EBITA margin congested to 20% in FY18 (vs 25.7% in FY17) due to increasing competition while below par operational performance resulted in adjusted net profit declining by 57% YoY to 134 cr.

However, as a hopeful prospect, Lupin Plans to introduce 35 new products in US during FY19 with the aim of rebounding the business on the back of 3-4 exclusive launches like Toprol EL,Renexa and Renvela. Notably, Lupin has a strong pipleline in the US with 134 ANDAs pending its approval from USFDA. By the end of Q4FY19, the company is expecting to come out with two major launches- Ranexa and Levothyroxine. They also witnessed an encouraging growth in Japanese business, domestic formulations and EMEA in Q4FY18. The management being immensely optimistic on the Indian market is looking forward to outperform the market. Europe is another market where the company is focusing on branded space to gain more profit share.
Lupin has also been consistently introducing new products suggestive of their strong base. Therefore, despite of the warning letters issued to their plants, we assume any price erosion can be counterbalanced with those new releases. USDFA resolution of GOA and Indore (unit 2) manufacturing facilities will be a key factor to watch for Lupin. Recently, Lupin’s Pithampur I unit had cleared USFDA inspection in April 2018.They have also succeeded in getting approval from UK MHRA( United Kingdom’s Medicines and Healthcare products Regulatory Agency) for its Goa facility which is observed as positive.
Thus we expect Lupin’s revenue to stage a gradual recovery driven by new product launches, strong ANDAs pipeline and growth in domestic formulation business. At current CMP, the stock is trading at a P/E multiple of 15x on FY19 EPS and we have a Hold rating on the stock.

Analyst: Abhishek Kumar Das, Dion Global Solutions Ltd., INH100002771

For Disclosures and Disclaimers: Lupin:


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