Asian Paint Ltd (APNT) is the market leader in the manufacturing of paint in India. It operates in over 16 countries and has over 26 manufacturing facilities, servicing consumers in over 65 countries. 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. APNT has a combined paint manufacturing capacity of around 10 lac kl per annum. The Company’s business segments are Paints and Home Improvement. The Home Improvement segment includes its bath fittings & Kitchen solutions business. Its geographical segments are Domestic and International operations. It manufactures a range of paints for decorative and industrial use.
In Q2FY19, revenue grew by 8.5% YoY to Rs4,639cr (below estimate) due to weak demand on account of flood in Kerala and delayed festival season. However, volume improved by low double digit of 11% which is in-line with our estimate. The company has not completely passed on cost inflation to customers due to reduction in GST rate from 28% to 18% in the month of July2018 and has given substantial rebate to dealers to liquidate the existing stocks which affected the topline as well as bottom-line growth. Management expects that distempers sales is likely to increase on account of Diwali and reduction in GST rate which also will helps to gain market share from the unorganized sector. We expect volume to improve at double digit ahead of festival demand and price hike of Rs2.35 in the month of October may limit inflationary pressure on margins.
Gross margin declined by 160bps YoY to 39.8% in Q2FY19 as rise in oil price and weakness in rupee added pressure on margins. Additionally, increase in employee cost by 9% YoY and other expenses by 10% YoY decreased EBITDA margin by 184bps YoY to 16.9%. Inflation in RM cost is likely to remain in the near term but recent price hike of Rs2.35 has largely factored inflation in raw material price till the month of August,2018 and we expect volume growth and cost control initiative will support margins in the coming quarters.
Q2FY19 earnings de-grew by 3.8% YoY to Rs506cr which is lower than our estimate. Inflationary pressure from raw material prices and increase in interest expenses by 38% YoY dragged earnings growth to negative 3.8%. We reduce FY19E/20E earnings estimate by 7%/9% respectively. We expect volume to grow at double digit ahead of festival season and reduction in GST rate. Margin pressure may remain in the short term and we therefore expect one more price hike in the coming quarter which will negate higher input price. We maintain our Hold rating and value at a P/E of 40x on FY20E EPS.
Analyst: Antu Eapen Thomas
Geojit Financial Services Ltd., INH200000345
For Disclosures and Disclaimers: Mahindra CIE Automotive – https://goo.gl/qCNcdD
Mahindra CIE (MCIE) is among the top global forging players with a strong presence in both Europe and India. Currently 2/3rd of the revenue comes from Europe (split btw CV’s & PV’s) while rest from India (PVs). Q3CY18 registered a revenue growth of 17%YoY led by strong growth from the India business (40% of consolidated sales) at 20%. This was mainly on account of strong demand from CV tractor and 2W industry. On a weighted average, MCIE’s key customers (M&M, Maruti & Tata) grew by 9% in volume. MCIE Europe (constitutes 60% of the revenue) grew by 26%YoY despite weak EU Passenger Cars (~-4%YoY) sales. The growth was largely led by new orders in Gears, Italy, Forging Lithuania and robust growth in EU truck sales. PBT consolidated grew by 38%YoY whereas standalone PAT came up 109%YoY due to 37%YoY revenue growth and margin expansion.
The contribution from the European business to remain strong going ahead with second phase of Metalcastello projects from caterpillar worth 16mn Euro and new crankshaft line in Lithuania for supply to VW with peak revenue potential of ~Euro 8.9mn annually will add color for cheers. European forging business margin expanded during the quarter in spite of being negatively affected by rise in steel price. Company expects most of its customers to have already agreed to increase the price for MCIE. Currently MCIE is operating at 90% capacity utilization and hence it has plan to invest Rs7bn over the next two years (Primarily for MCIE India). We expect consolidated revenue to grow at 15%CAGR over CY17-19E led by increase in volume recovery of its key Indian customers & higher participation from the European wing.
CIE has a solid track record of value creating through consolidation and maintain margin resilient even in downturn. CIE cost control initiative, better utilization of the planned assets through customer profiling, and select price renegotiation has resulted in increase in margins from low single digit to 12% in CY17. We expect the EBITDA margin to expand owing to ramp up of Lithuania and Metalcastello along with productivity improvement (closing UK subsidiary Stokes) and product rationalization in Mahindra Forging Europe business. We believe improved performance from the domestic OEM and pick up in the European market will lead to better utilization of the assets. We expect the EBITDA margin to improve by 180bps to 14.3% over CY17-19E
On the back of strong domestic outlook and new launches from the key customers will generate demands for its products. MCIE Europe business paints a positive stance for the company. However the faster EV adoption in Europe and ongoing trade tussle is watchful for near term.
Analyst: Saji John
Geojit Financial Services Ltd., INH200000345
For Disclosures and Disclaimers: Asian Paints – https://goo.gl/2fqqLH
HCL Technologies, India’s fourth largest IT services company, is engaged in providing software, business process outsourcing and IT infrastructure services.
HCL Q2FY19 Consolidated revenues grew 2.1% QoQ to USD 2.1bn (3% in constant currency (CC) terms) with Actian consolidation supporting growth by 1%QoQ. Growth was strong in ER&D services (4% excluding IP partnerships and acquisitions) and IMS (Infrastructure service) constituting 36% of revenue grew by 2.5% sequentially and expects to perform better in H2FY19E. EBIT margin was largely stable at 19.9% (+20bps QoQ) as currency and productivity gains were offset by wage hikes and higher SG&A. PAT at INR 25.4bn (+6% QoQ) was marginally ahead due to higher other income.
HCL expects 3QFY19 to have seasonally strong IPP revenues + ramp-up of the USD 500mn Nokia deal. The momentum could sustain in 4QFY19 (adjusted for seasonality) as deal wins stayed strong in 2QFY19 (‘higher than the average of the last 4 quarters’). HCL has maintained its revenue growth guidance of 9.5%-11.5% in constant currency terms. We expect the cannibalization impact in IMS to normalize in FY20, also helped by an improved traction in deal activity. HCL’s next generation digital service through Mode 1-2-3 strategy expects it to drive efficiency in core business. Notably Mode2 & 3 are newer age technologies like Digital, Cloud, security and IoT along with products and platforms together constitutes 28% of revenue. Revenue from Mode 2 & 3 grew by 5.3% and 10.4% QoQ respectively. The management has indicated that to increase the new age technologies to 40% of revenue.
Continuing with its inorganic growth strategy, the company has made two new acquisitions in April 2018 – C3i Solutions and Actian Corp. While the acquisition of C3i Solutions would strengthen its capabilities in life sciences and consumer packaged goods (CPG) businesses, Actian Corp. would augment its capabilities in the data management products and platforms. Importantly, revenue growth guidance is achieved through organic and inorganic revenue contribution from recent acquisitions (C3i Solutions and Actian Corp). Management believes incremental contribution from recent acquisitions would largely be offset by weakness in India business, pressure in renewals in its legacy business (due to automation & cloud migration). Revival in IMS business in H1FY19 will add color to cheers. We factor revenue CAGR of 11% over FY18-20E owing to healthy deal pipeline, traction in digital business and expected turnaround in IMS business, PAT is expected to grow at modest CAGR of 6% over FY18-20E owing to higher amortization cost and tax rate.
Analyst: Abhijit Kumar Das
Dion Global Solutions Ltd., INH100002771
For Disclosures and Disclaimers: HCL Tech – https://goo.gl/oVgJxZ
Sun Pharma is India’s top drug maker and world’s fifth largest specialty generic pharmaceutical company by revenue with 41 manufacturing facilities spread across 6 continents. Focus on developing and commercializing innovative specialty products coupled with cost control measures in the generics business is the key priority for them. Their specialty portfolio primarily targets Dermatology, Ophthalmic, Oncology and CNS segments. As of today, they have a comprehensive portfolio of more than 422 approved ANDAs.
Sun Pharma has been a large supplier of generic pharmaceutical products to the US for many years (35-40% of the revenue) and going forward, it will be also participating in certain key specialty segments whereby expanding the overall addressable market of the company. While innovative specialty products are the key driver of growth for the overall US market, generics will still play a very important role in reducing the overall healthcare cost in the US. In addition, they have also received clearance for its Halol plant from the USFDA for the inspection conducted at its facility in Gujarat during the month of February, 2018. This clearance is a big boost for the company as this facility caters to the US market and will pave the way for getting new product approvals to overcome the sluggishness in their US growth. The US pharmaceutical market globally is estimated to grow at a CAGR of 4-7% over 2017-22 and expected to cross US$ 600 billion by 2022 (as per company reports).
On the other side, overall pharmaceutical spending in emerging markets, including India, is estimated to grow at 6-9% CAGR to US$ 345-375 billion between 2017 and 2022. Sun Pharma is amongst one of the leading Indian companies operating in these markets and is well positioned to exploit this opportunity. However, in the US they face increasing pricing pressure driven mainly by customer consolidation and higher competitive intensity led by faster pace of ANDA approvals by the USFDA. On the domestic front overall growth was impacted by temporary disruption in the trade channel due to the implementation of the Goods & Services Tax during last year.
Clearance of Halol facility, revival post GST, ramp up of generics and speciality business driven by increased investments augurs well for the company as it improves the launch visibility. Sun Pharma has been investing heavily to build a pipeline of specialty products for the US market. Moreover, expectation of further market share gains in Odomzo and BromSite (launched in FY17) and recovery in India business will support growth. Hence, we recommend ‘HOLD’ rating with a target price of Rs 597 based on 23x FY20E EPS. We have factored a higher multiple considering improved launch visibility and key speciality & generic launches.
Analyst: Abhishek Kumar Das
Dion Global Solutions Ltd., INH100002771
For Disclosures and Disclaimers: Sun Pharma – https://goo.gl/b2QgCP