Stock Recommendations



Escorts Ltd (EL) is the third largest agricultural tractor manufacturer in India. It has a strong presence in the north and west market, with an overall market share of 11% as on FY18. The company operates in the sectors of agricultural machinery, construction and material handling equipment, railway equipment. Other product categories include construction equipment, and railway products.

Q1FY19 revenue witnessed a robust growth of 32%YoY led by highest quarterly growth of 39% in the tractor sales and 52%YoY from the construction business. The volume growth in the tractor sales (78% of revenue) was largely driven by higher participation from both strong markets (UP, MP and Northern states) growing at 15%YoY and 32%YoY from opportunistic market (AP, WB, ODISHA). Operating margin expanded 370bpsYoY supported by superior mix, price hike and cost control initiatives. In spite of lean period due to monsoon construction equipment’s revenue grew by 54% due to higher spending in road infrastructure and similarly railway segment grew by 29% due to higher order inflow.

Government initiatives towards increasing farm productivity through farm consolidation and farm mechanization have reflected in the EL’s growth. EL expanded portfolio and technology upgrades in tractors have resulted in improved numbers both in existing and newer geographies. Exports have grown by 58%YoY for the quarter. Revenue from construction equipment grew by 54% and EL outpaced the industry growth of 49%YoY. Railway segments will continue to reflect sizable improvement in FY19. Management has indicated 19-20% CAGR growth in railway in the next three years. We expect revenue and PAT to grow by 16%/25% CAGR over FY18-20E factoring 14%YoY growth in the tractor sales.

The current market share of 11% is pooled from Powertrac and Farmtrac brands at 60%/40% respectively. Recently launched compact tractors and paddy specialist tractors at <40HP category to support volume and market share gain. Overall share of new products in tractors stands at ~20% currently and have better margin than existing products as per the management.

We expect the long term growth as fundamentals of the industry are strong but the pace of the central and state government’s policy roll out would govern the short term industry performance. We believe that the current valuation is justifiable on the back of robust earnings outlook and massive government push. At CMP we value EL at 24x on FY20E EPS with a revised target price of Rs.1091 and maintain our rating as Buy.

Analyst: Saji John, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: Escorts:


HDFC Bank is the second largest private sector bank in India. The Bank has a nationwide distribution network of 4,804 branches and 12,808 ATM’s in 2,666 cities/towns.

HDFC Bank continued to report strong loan growth of 22% YoY led by 26% YoY growth in retail and 18% YoY growth in corporate loans. Retail loan book witnessed secular loan growth across personal loans (up 40% YoY), credit cards (up 33% YoY), two-wheelers (up 41% YoY), CV (up 26% YoY) and business banking (up 24%YoY). Home loans jumped 14% YoY and 21% QoQ as the bank bought-out home loans from HDFC Ltd almost after four quarters. Deposits also grew at a strong pace of 20% YoY mainly led by 25% YoY growth in term deposits. This was attributed to more attractive term deposit rates as well as investors switching from debt funds to bank deposits. Going forward, we expect the bank’s advances and deposits to grow at a CAGR of 20% and 17%, respectively over FY18-20E as the bank is well-poised to capture a higher share of the incremental credit demand.

HDFC Bank’s net interest income (NII) increased at a moderate pace of 15% YoY as the net interest margin (NIM) declined by 20 bps YoY to 4.6%. The decline in NIM was due to faster rise in term deposits (~25% YoY), relatively higher interest reversals on agri NPAs (seasonal) and buy out of low yield housing portfolio from HDFC Ltd. However, the bank has raised its MCLR rates during current quarter which should ease yield pressure in coming quarters. Hence, we expect NIM to remain around 4.6%/4.7% in FY19E/FY20E. Other income increased at a slower pace of 8.6% YoY while lower opex helped the bank to report 18% YoY growth in net profit. Going forward, we expect NII and net profit to grow at a strong CAGR of 20% and 21%, respectively over FY18-20E on the back of healthy credit growth coupled with improving operating efficiency.

HDFC bank continues to maintain strong and stable asset quality as Gross and Net non-performing asset (NPA) ratios remain broadly stable at 1.3% and 0.4%, respectively. Slippages have marginally increased to 2.1% as against 1.7% in Q4FY18 attributable to higher stress in agriculture sector. However, management remains confident of stable trends in asset quality.

HDFC Bank delivered another quarter with stable performance, with its numbers largely in line with our expectations. We are structurally positive on the bank given its top-notch asset quality, robust retail franchise, strong balance sheet growth and best-in-class management pedigree. Further, we expect the bank to maintain superior return ratios with RoE of ~19% and RoA of ~2% over FY18-20E. As a result, HDFC bank will continue to enjoy premium valuation within the banking space. Hence, we maintain BUY rating on the stock with a revised upward target price (TP) of Rs2,388 (4.4x FY20E P/ABV).

Analyst: Kaushal Patel, Dion Global Solutions Ltd., INH100002771

For Disclosures and Disclaimers: HDFC Bank:


KEC International Limited is a global infrastructure Engineering Procurement and Construction (EPC) major. It has presence in the verticals of power transmission and distribution, cables, railways and water and renewable. The Company has powered infrastructure development in 100 countries across Africa, Americas, Central Asia, Middle East, South Asia and South East Asia.

Q1FY19 revenue grew 11% YoY to Rs 2,105cr which is marginally lower than our estimate due to delay in execution of T&D business (-25%YoY). Domestic T&D execution was delayed due to election in certain states. However, robust execution in Railway by 98% YoY, Civil (693% YoY), Solar (662% YoY) and gradual improvement in cable revenue by 18% after many quarters of underperformance supported consolidated revenue growth. We expect railway and civil business will continue to outperform due to improved traction in order inflow and superior execution. However, recent hiccup in T&D execution we marginally reduce FY19/20E revenue estimate by 1%/2% respectively.

Delay in T&D execution and higher subcontracting expenses decreased gross margin by 600bps YoY to 27.5%. However, significant drop in other expenses by 41% YoY improved EBITDA margin by 97bps YoY to 10.3%. Improved operational efficiency and higher other income (79% YoY) lifted earnings growth by 38% YoY to Rs87cr and offset the impact of higher tax outgo and interest expenses. We expect earnings to grow 18% CAGR over FY18-20E in expectation of operational efficiency and healthy execution.

Q1FY19 order book grew by 34% YoY to Rs18,191cr (~2x TTM revenue) whereas order inflow marginally de-grew by 1.5% YoY due to election in certain states in India. However, order pipeline remains positive as KEC holds strong L1 orders Rs3,175cr and is expected to convert into the order book in the coming quarters. We expect order book to grow at a CAGR of 32% over FY18-20E with a stable EBITDA margin of 10%.

Execution is back on track and margin is expected to stabilize on account of cost control measures. Further, traction in railway electrification orders and pick up in civil and cable business will drive the top line. We factor adj. PAT to grow at CAGR of 18% over FY18-20E. We value KEC at a P/E of 14x on FY20E EPS and retain ‘Accumulate’ rating.

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

For Disclosures and Disclaimers: KEC International:


Dalmia Bharat Ltd (DBL) is the fourth largest cement company in India with a total capacity of 25MT focusing in South with 12.1MT and in East and North-East with 12.9MT. DBL is part of Dalmia group which is having diversified interest in cement, sugar, refractory and power sectors. Currently DBL serves ~21 states of the country through 11 plants located in 8 states.

With the restructuring plans the company has initiated in FY17, DBL and OCL India Ltd (step down subsidiary) will be merged into one entity by transferring the business undertakings of OCL into DCBL. DCBL currently holds 75% stake in OCL India Ltd. Management expects the merger process to be completed by December 2018.

DBL reported a healthy revenue growth of 15%YoY in Q1FY19 mainly supported by volume growth of 13%YoY. Blended realisation grew by ~2%YoY. Realisation enhanced on account of improvement in premium mix and trade segment. DBL has launched new super-premium composite cement (Dalmia FBC) which sells at Rs25-30 premium to A category cements and currently contribute ~8% in the total mix. For FY19, management expects better volume growth than of industry. Demand has improved across DBL’s operating regions in Q1FY19 (East-13%, South-16%, NE-17%, total industry -14%). New acquired asset, Kalyanpur Cement (1.1MT in East) is expected to commence production by Q3FY19. Ramp up in new acquired assets along with improving premium mix will support revenue growth. We expect revenue to grow by 15% CAGR over FY18-20E.

Due to surge in raw material (24%YoY), Power and Fuel (8%YoY) and freight (10%YoY), EBITDA margins declined by 490bps YoY to 22%. Pet coke prices has increased due to steady demand and limited supply caused by disruption in refinery operations in US and Middle East and expected to stabilise as these refinery operations resume over next few months. Any further surge in fuel and raw material prices is the key risk. DBL is intending to set up 16MW WHR in various locations (commissioned 9.2MW WHR at Odisha- cost saving of Rs20cr per quarter). DBL also intends to increase alternate fuel share (4% in Q1FY19 Vs 3%YoY), which will reduce fuel cost. We downgrade margin assumptions from 24.7%/26.4% to 22%/23.1% for FY19E/FY20E to factor surge in fuel and slag cost.

Out of the two recent acquisitions, Kalyanpur Cements (1.1MT, Bihar) is expected to commence operations by Q3FY19 and Murli Industries (3MT, Mharasthra) is waiting for approvals. The recently announced new grinding capacity of ~8MT at an estimated investment of Rs3,800cr is expect to complete within 2 years as per management and the total capacity would become 37MT.

The merger process of DBL and OCL is expected to be completed by Dec 2018, leading to additional synergy and tax benefits. Considering expected growth from recent acquisitions/new capex plans at current comfortable D/E ratio while factoring pressure on margins we value at 11x FY20E EV/EBITDA and arrive at a target of Rs2,966 (Rs3,048 earlier) and downgrade rating to Accumulate from Buy.

Analyst: Vincent K Andrews, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: Dalmia Bharat:


 Natco Pharma Limited (NATCO) is a pharmaceutical company engaged in developing, manufacturing and marketing finished dosage formulations (FDF) and active pharmaceutical ingredients (APIs).  NATCO today has five manufacturing facilities spread across India with dedicated modern research laboratories and capabilities in new drug development.

NATCO’s US formulation portfolio is predominantly focused on high-barrier-to-entry products and is their highest margin contributor. They are also eyeing growth from India, Canada and Brazil to maintain their margin stability. The domestic formulation business witnessed positive growth after 4 quarters of negative performance which drove the numbers in Q1FY19. Hep- C sales was seen getting stabilised at FY 18 Q4 levels (Rs74crs). On the Canadian front, the management is expecting to realise Rs130crs in FY19. They also got two oncology approvals in Brazil (first-time generic in Brazil) and will breakeven in that country by Q3FY19.

Ramp up in the sales of their prime molecule gCopaxone is the key factor to look for in FY19. However, NATCO’s expectation of revenue realisation from gCopaxane was not met in the previous quarter despite the price slashing they had effected. But the management is very optimistic on the opportunity presented by this molecule. There was also a delay in recognition of Tamiflu profits which will be effected in the next quarter (Q2). However, the management has suggested that Tamiflu portfolio will be witnessing a 70% de-growth in the coming quarters which need to be replaced by new businesses.

We believe that EBITDA margin will remain stable on account of their lower RM cost. In Q1FY19, international formulations witnessed a whopping 76% growth on a YoY basis. They are targeting 2-3 FTF’s in FY19 and is expecting revenue growth from molecules such as gTracleer (TAD in next 2-3 months) and gGleevec (TAD in Sep-Oct). We also forecast domestic portfolio to grow by 15-20% in FY19 and expect consolidated revenue to grow at a 14%CAGR over FY18-20E and EBITDA margins to stabilize around 41% for FY 2019 and 20.

On back of better performance from molecules like gCopaxone, gGleevec and gTracleer in US and Sofosbuvir for Hep C in India, we believe NATCO to witness a healthy growth in coming years. We expect international niche FD segment to grow by 22%and27% resp. for FY 19/20E and factor an earnings outlook of 32%CAGR over FY18-20E.  Hence, we value NATCO at 18x on FY20E EPS and arrive at a target price of Rs831 and recommends ‘accumulate’ rating.

 Analyst: Dilish K Daniel, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: Natco Pharma:

                 AARTI Industries Ltd (ARTO) is a global leader in benzene based derivative products. The Company has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints and pigments. ARTO’s ability to adopt latest technology, cost competitiveness, economies of scale and ability to meet the stringent and customized specifications of the varied customers helped to gain strategic supplier tag from its domestic and global clients. Over FY13-FY18, ARTO’s revenue grew by 13% CAGR, EBITDA and PAT grew by 14% and 26% CAGR. Better product mix and cost reduction through forward and backward integration, average last 2 year EBITDA margins were in the range of 20% versus 17% in FY13. Further, expansion into toluene chemistry and strengthening its leadership position in benzene derivatives through downstream products will drive its future growth.

Revenue grew by 36% YoY in Q1FY19, largely led by strong growth across business segments with Speciality chemical business grew by 35% YoY. The revenue growth was supported by pass through of higher RM cost and better pricing power. Speciality segment volumes grew by 12% YoY. The capacity utilization for NCB was at 90% for Q1FY19. The nitrotoluene capacity utilization was at 40% and expected to reach 80%-90% utilisation by FY20. The Pharma segment reported a robust growth of 41% YoY led by better realizations and higher sales of intermediates. While Home and personal care business 35% YoY. Management is looking for Demerger of Home and Personal Care segment which is expected completed by the end of the year. Going forward we expect strong off-take from Specality chemicals and Pharma segment to continue. We increase our revenue estimates by 6.1% and 6.5% and we factor revenue to grow 17% CAGR over FY18- FY20E.

Gross margins declined by 530bps YoY to 38.3%due to higher raw material cost. However, the decline in EBITDA margins was limited to 10bps YoY to 17.4% due to lower other expenses. PAT grew by 42% YoY to Rs89cr. We lower our EBITDA margin estimates by10bps and40bps for FY19E and FY20E to factor in the impact on gross margins in Q1FY19. However, we increase our EPS estimates by 2.9% and 2.5% for FY19Eand FY20E and we expect PAT to grow by 29% CAGR over FY18-20E.

During last 2 year Indian chemical industry outlook has significantly improved as Global chemical giants are de-risking their raw-material sourcing destination from China, due to higher regulatory restriction and to diversify country risk.

At CMP, ARTO is trading at 25.8x and 20.2x FY19E and FY20E EPS of Rs53.3and Rs68.2 respectively. We are constructive on ARTO given capacity additions, launch of new products, and robust off-take from Speciality and Pharma segment. Given robust earnings outlook of 29% CAGR over FY18-20E, we value ARTO at 22x (21x earlier) on FY20E.However, given recent sharp run-up in stock prices we downgrade to Accumulate from BUY with target price of Rs1,493.

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

For Disclosures and Disclaimers:  Aarti Industries:


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