Apex Frozen Foods Ltd (Apex) is an integrated producer and exporter of processed, ready-to cook shrimps which operates in Andhra Pradesh. It has presence across the value chain – Hatchery, Farming, Processing and Exporting of Shrimp. Apex has own processing capacity of 9,240 MT (at Kakkinada, AP), leased processing capacity of 6000MT (at Bapatla, AP), 1,800 acres of farm land, breeding capacity of over 1bn SPF seeds, cold storage of 1,500 MT of finished goods and own reefer fleet for transportation of goods. Apex supplies ready-to-cook products to food companies, retail chains, restaurants, club stores and distributors spread across USA, UK and European countries. Apex strategically focuses on the market of the USA, the largest importer of aquaculture products in the world. Apex is setting up a new processing plant with a total capacity of 20,000 MT along with 5,000MT of cold storage in East Godawari (AP), expecting to complete by Q4FY19.
During FY14-18, Apex has almost doubled its processing capacity to current 15,240MT. In FY18, utilisation was at ~93% and to capitalise growing shrimp demand, Apex is currently setting up a new processing facility of 20,000MT (expects to complete by Q4FY19), to become one among largest players.
Apart from processing capacity, Apex has 1,800 acres of farm land (added ~600acres in FY18), breeding capacity of over 1bn seeds (adding one more unit in FY19E to 1.4bn), cold storage of 1,500MT of finished goods and own reefer fleet for transportation. ~18-20% of total raw material is sourced from in-house farming (cost advantage of ~Rs70-80/Kg). Backward integration also ensures supply and allows flexibility in production plans based on customer needs
To diversify the risk of being depend on single market (US), the company is gradually increasing its non-US share. Share of EU in overall revenue mix has increased to ~25% in H1FY19 from 18.2% in FY17.
Apex is eyeing a larger share on value-added products going forward. Out of the upcoming 20,000MT new capacity, 5,000MT is for value-added products which will fetch more realization. Considering the additional cost on value addition, margin gain of ~$1 per kg is expected.
Apex’s revenue has grown at robust 31%CAGR over FY14-18 vs. industry growth of ~12%. EBITDA/PAT margins expanded 470bps/530bps in the same period. PAT grew at stupendous 53% CAGR, resulted in strong RoE of 38% in FY18.
The recent declining trend in shrimp realisation due to extended winter in the US coupled with strong supply has started to stabilise from Q2FY19. While PAT is expected to de-grow in FY19, 11% CAGR is expected over FY18-20E. Excluding high growth period of FY18, earnings growth is strong at 44% CAGR. We initiate Apex by valuing at 14x (1Yr Avg-1SD) on FY20E EPS and arrive at a target of Rs434. We recommend Buy.
Analyst: Vincent K Andrews
Geojit Financial Services Ltd., INH200000345
For Disclosures and Disclaimers: Apex Frozen Foods Ltd: https://goo.gl/KC3HeD
State Bank of India (SBI) is the largest commercial bank in India with a strong domestic presence with more than 22,090 branches and international presence with 198 branches across 37 countries.
Loan growth was higher at 12% YoY in Q3FY19 mainly led by 16% YoY growth in the domestic loans, which constitute 92% of the total loan book. Within domestic credit, corporate advances grew by 21% YoY largely driven by the infrastructure sector (↑20% YoY). Retail segment continued exhibiting strong growth (↑18% YoY) led by robust growth in home loans (↑26.5% YoY). SME continued to grow at a slower pace of 8% YoY as the bank remained cautious in lending to SME after witnessing high levels of stress from this segment. Going forward, we expect advances to grow at a moderate CAGR of 10% over FY18-21E led by healthy momentum in domestic loan growth.
Net interest income (NII) increased at a strong pace of 21% YoY in Q3FY19 supported by healthy loan growth and 34 bps YoY improvement in net interest margin (NIM) to 3.0%. We expect NIM to improve to 3.2% by FY21E on the back of NCLT resolutions, asset re-pricing and the improving credit to deposit (C-D) ratio. We expect operating profit to grow at a CAGR of 10% over FY18-21E supported by improving NIM coupled with higher other income.
On asset quality front, the bank surprised positively in Q3FY19 as it reported lowest slippages of Rs6,500cr in the past 13 quarters. Of the total fresh slippages, the corporate segment accounted for 29% and the rest were from SME (35%), agri (25%) and retail (11%). Lower slippages coupled with higher write-offs helped the bank to report improved asset quality ratios. Hence, Gross and Net non-performing asset (NPA) ratios improved by 124 bps and 89 bps sequentially to 8.7% and 4.0%, respectively. Higher NPA provisions helped the provision coverage ratio (PCR) to improve by 389 bps QoQ to 75%. We believe asset quality improvement is imminent and project Gross/Net NPA ratios will moderate to 6.9%/3.5% by FY21E.
We reiterate SBI as our top pick amongst PSU banks. Overall, the long-term structural value of the bank remains intact and we expect RoE and RoA to improve to 11.2% and 0.7%, respectively by FY21E as asset quality pressure abates and revenue growth momentum remains strong. Hence, we continue to maintain BUY rating on the stock with a similar target price (TP) of Rs345 using the sum of the parts (SOTP) methodology, where we value its standalone business at Rs276 (P/ABV of 1.4x for FY21E) and subsidiaries at Rs69.
Analyst: Kaushal Patel
Dion Global Solutions Ltd., INH100002771
For Disclosures and Disclaimers: State Bank of India Ltd: https://goo.gl/QMJavC
Havells India Ltd (HAVL) is a leading player in electrical consumer goods in India. Its products portfolio comprises of industrial & domestic switchgears, industrial & residential cables, pumps & motors, fans, lighting & fixtures, water heaters, air coolers and other domestic appliances, air-conditioners, TV and washing machines. HAVL enjoys market leadership in all major product categories. Management’s focus on premium products and higher advertisement spends has helped the company to gain high brand recall. HAVL has a robust network of 2500 dealers/distributors and 1lakh retailers and is currently focusing more on expanding its foot prints in Tier 2&3 cities. With acquisition of Lloyd consumer business, company has made significant penetration into consumer durable industry and is expected to bring sharp scalability to HAVL’s consumer business. In recent times, consumer durable segment performance is encouraging and is expected to continue given management’s focus on new launches, product range and design, which in turn will drive future growth.
HAVL’s Q3FY19 revenue grew by 28% YoY, led by broad based growth across segments. Revenue growth was led by Consumer durable which grew by 33% YoY, on back of strong growth from water heaters. Switchgears grew by 21% YoY led by improved industrial segment demand from government electrification projects. Cable & wires grew by 31% YoY but at lower base. Lighting segment grew by 29% YoY. Lloyd business grew by 22% YoY led by higher growth in LED TV sales offsetting muted growth in Air conditioner sales. Going ahead HAVL’s strategy of penetration into existing product categories as well as expanding into new products and re-positioning of Lloyd brand will drive its future growth. We factor revenue to grow by 20% CAGR over FY18- FY20E.
Q3FY19 gross margin declined by 202bps YoY to 37.5% on account of volatility in commodity prices and delay in pass through of higher cost. Margin compression was seen across segments barring Lighting, which saw 100bps margin expansion. Cables &wires witnessed 130bps decline in margin and switchgear by 90bps YoY while Consumer durables segment witnessed 410bps decline in margins. Lloyd’s EBITDA fell by 28% YoY and margins by 120bps due to forex impact and rise in custom duty. Consolidated EBITDA margin declined by 160bps to 11.7%. Going ahead management expects pass through of cost albeit with lag effect and stability in commodity prices will lead to improvement in margins. We lower our EBITDA margins estimates by 30bps &20bps to12.2% & 13.2% for FY19E & FY20E to factor in near term impact on margins. We factor earning to grow by 24% CAGR over FY18- FY20E.
HAVL is trading at average 1-year FWD P/E of 43x which is 19% premium to its 5-year historical average. We expect this premium valuation to continue given its strong brand recall, increasing presence in entire consumer electric segment, expanding retail touch points and strong balance sheet position. We expect earnings to grow at healthy 24% CAGR over FY18-20E. However, considering the near-term impact on margin and premium valuation, we value HAVL at 36x (32x earlier) on FY20E with target price of Rs622 and maintain our Reduce rating.
Analyst: Anil R
Geojit Financial Services Ltd., INH200000345
For Disclosures and Disclaimers: Havells India Ltd: https://goo.gl/FAM29B
Mold-Tek Packaging Limited (MTEP) is an innovator and pioneer in rigid plastic packaging in India and is market leader in this segment. MTEP was established in 1986 by technocrats Lakshmana Rao and A. Subramanyam. Company manufactures injection molded containers for lubes, paints, food and other products. Further, it is the first company to introduce IML technology in India.
MTEP is credited with shifting Indian paint and lubricants industry to plastic pails which until then were using metal containers. Historically, MTEP was supplying plastic pails for paints and lubricants players, which were more or less commoditized and lacked much product differentiation. MTEP adopted In-mold labeling technology in 2011 which was largely accepted globally to add photographic, glossy labels to packaging and thus enhance brand value. Post adoption of IML, EBITDA margin has improved by 830bps to 18.7% and profitability grew by 41% CAGR over FY13-18. MTEP has fully integrated facilities ranging from label making, mold adaptations to in-house robots for use in its production line. MTEP has in house tool room capable for quick maintenance & mold development. Backward integration of design, molds and use of robots in production process has led to cost reduction.
MTEP has a pass-through mechanism to deal with any volatility in raw material prices and any change in prices will be passed onto the consumers albeit with a lag. MTEP’s major raw materials are derivatives of crude which forms 63-65% of overall cost and are highly susceptible to volatility in crude price. With pass through of cost, company’s value-added offering and efficiency of its operations drives earnings growth.
We expect MTEP to capitalize on the long-term growth opportunities aided by growing acceptance of IML by paints & lubes industry and exponential growth in F&F segment leading to margin expansion. Further its ramp-up in capacity for existing clients, superior technology, low cost advantage due to backward integration and long-term client relationship will provide an edge over competitors. Currently management’s focus is on increasing revenue contribution from FMCG customers where margins are higher. Additionally, FSSAI (Food Safety and Standards Authority of India) is expected to come-up with new set of stringent norms related to packaging to control contamination in food products. We believe that this will be one of key growth trigger for higher-end packaging going forward and the MTEP will be the major beneficiary.
During FY10-FY13, MTEP’s P/E valuations hovered in the range 3x-5x. However, during last 5 years, valuation has significantly re-rated and its P/E band has expanded from 5x to above 20x and touched a high of 30x. Consistent re-rating in MTEP valuation has been largely propelled by strong earnings momentum of 41 % CAGR over FY13-FY18. But currently it is trading at 1 year forward P/E of 17x, 16% discount to its last 1-year average of 21x (on account of sharp correction in mid & small cap stocks) which seems attractive given strong earnings outlook going forward. We expect earnings to grow at 22% CAGR over FY19E-21E led by increasing share of IML in revenue mix, exponential growth in F&F segment and incremental volumes from capacity addition for existing clients. We value MTEP at P/E multiple of 17x on FY21E and we have a BUY rating with a target price of Rs312.
Analyst: Anil R
Geojit Financial Services Ltd., INH200000345
For Disclosures and Disclaimers: Mold-Tek Packaging ltd: https://goo.gl/RgTd4X