ICICI Life is a joint venture between ICICI Bank, India’s second largest private sector bank in terms of assets, and Prudential Corporation Holdings (British multinational life insurance and financial services company). The ICICI brand and the bank’s wide distribution network, particularly among salaried and affluent individuals, give ICICI Life a big competitive advantage in terms of acquiring new customers. ICICI Life has a more balanced premium sourcing mix with agency channel accounting for ~23% while bancassurance accounts for the rest ~57%. The company offers its customers an extensive multi-channel sales network to access its products and services across India which includes the branches of bank partners, individual agents, corporate agents, employees, offices and website. The company had a network of 521 offices with 10,663 employees and 121,016 advisors across India as of FY16. ICICI Life’s agency channel is the second largest in the private sector, after SBI Life. Overall, the strong distribution capability has thus enabled the company to maintain healthy momentum in new business growth despite facing the brunt of major regulatory changes in the past. ICICI Life has shown positive traction in most of its operational parameters: 1) Value of new business grew by 61.7% YoY in FY17, 2) Persistency, a key parameter for gauging stickiness of the business, continues to rise and stood at 85.7% (13th Month) for FY17 vs. 79.0% in FY16, and is one of the best in industry, 3) High solvency ratio of 2.8x as of FY17, compared with the regulatory requirement of a minimum of 1.5x and 4) Cost and productivity ratios have also improved significantly in the past three years and are now one of the best among peers. We believe the life insurance sector in India is in a sweet spot, where strong structural potential is now overlapping with buoyant equity markets, rising share of financial savings and higher disposable income.
Being a market leader with traditional focus and expertise, we expect ICICI Life to be a key beneficiary of strong growth in the industry over the medium term. Further, we believe the company can deliver strong top line growth driven by market share gains in a fast-paced industry. Also, the company’s operational strategies and focus on digital sales are expected to aid business growth going ahead. Besides, ICICI Life has delivered strong return ratios with average FY15-17 RoE at 31% and return on embedded value (ROEV) at 16%.
The untapped opportunity and penetration in life insurance provides ample scope for the company to grow its portfolio at a rapid pace. As a result, ICICI Life will continue to deliver strong return ratios with RoE at 22% and return on embedded value (ROEV) at 15% in FY19E. We have a BUY rating on ICICI Life with a target price (TP) of Rs450/- where we value the company at 3.5x FY19E embedded value (EV). EV is a common valuation measure in the insurance industry which measures potential future profits from existing business. The higher valuation is justified considering ICICI Life’s superior operational metrics and distribution tie-ups (allowing it to gain market share and improve profitability in still nascent Indian insurance market), fast growing protection premiums, low balance sheet risk and more than adequate capital.
Analyst: Kaushal Patel, Dion Global Solutions Ltd., INH100002771
General disclosure and disclaimer: ICICI Pru Life http://bit.ly/2FROLnk
Essel Propack Ltd (EPL) is the largest specialty packaging and laminated tube manufacturer in the world catering to the FMCG and Pharma space. EPL manufactures tubes for oral care, cosmetics, pharma, food and industrial product. EPL has 36% global market share in laminated plastic tubes. Oral segment contributes 60% towards overall revenues. EPL has presence in eleven countries including USA, Mexico, Colombia, Poland, Germany, Egypt, Russia, China, Philippines and India.
EPL focus is on expanding its presence globally by launching new innovative products for the non-oral care brands. It has developed various new products/tubes including Mystik, Aeir, Clarion, Velvetie, Etain and Green maple leaf which is expected to strengthen its presence in non-oral care segment. We believe these value-added products would aid in new client additions and thus drive revenue and improve operational performance.
EPL has gradually shifted its focus from the oral to non-oral category given its huge market potential and growth opportunities globally. The company is looking to expand its presence in categories such as cosmetics, consumer goods and pharmaceuticals. This will also aid in de-risking its business model and reduce dependence on oral care segment. Further, as margin in non-oral care category is higher than oral care segment, going ahead margins are likely to expand. The revenue contribution from non-oral care has increased from 35.2% in FY12 to 40.4% in FY17 and targets to increase it to 50% over the next 2 years.
Capability augmentation in both laminated and plastic tubes, revival of Russian operations and new customer additions mainly in the non-oral care segment would drive revenue growth in Europe going ahead. Further the company is implementing various cost-effective programs which would help improve margins. Moreover, the acquisition of Essel Deutschland Germany (EDG) will help Essel to unlock synergies in European operations in terms of cross selling, sourcing flexibility and better capacity utilization at all of its Europe plants. Further, AMESA region, largest contributor to overall sales (40% in FY17), is expected to grow at a CAGR of 9% over FY17-20E driven by growth in Indian business helped by recovery in the FMCG industry. Sales from EAP region (22% of sales in FY17) is expected to register a CAGR of 10% over FY17-20E on the back of recovery in demand from China, healthy pipeline, setting up of a manufacturing base in the region and key management changes. Americas is expected to grow by 8% CAGR over FY17-20E helped by non-oral care business and improved sales from Colombia.
Marquee clients, strong global presence, robust innovation track record and increasing presence in non-oral care segment will drive strong growth for EPL going ahead. Further, focus on strengthening capabilities both in terms of market outreach and technology introductions bodes well for the company. Consequently, we forecast consolidated revenue/PAT to grow at a CAGR of 12%/21% over FY17-20E. We expect EBITDA margin to improve to 20.8% by FY20E. We have a BUY rating with a target price of Rs. 341 based on 17x FY20E EPS.
Analyst: Abhishek Kumar Das, Dion Global Solutions Ltd., INH100002771
General disclosure and disclaimer: Essel Propack http://bit.ly/2mQpgdD
Bharat Electronics Ltd (BEL) is a Navaratna enterprise having 40% market share in Indian Defence Electronics. BEL’s core capabilities are in radar & weapons systems, defence communication & electronic warfare. It also manufactures civilian products such as electronic voting machines.
Historically, a large part of defence capital spends (45-60%) has been in this defence electronics segment. BEL has limited competition from other private players due to its niche capabilities and strong technological tie-ups (both national technical laboratories & joint ventures with global defence players). The strategic nature of projects, capital intensive nature & high gestation periods act as strong barriers for competition. BEL has historically worked closely with India’s defence laboratories, especially on projects in radars, electronic warfare, and missile systems. This relationship helps BEL stay ahead of the curve on future products that the armed forces require. BEL’s 47% of its employees are scientists/engineers and it invests ~10% of its annual revenues on R&D. BEL plans Rs5bn in capex for defence‐system integration facility in Andhra Pradesh, which will enable BEL to expand its bullet system business. In addition, the company will adopt a new state‐of‐the‐art XR5 technology for image‐intensifier tubes to be used in passive night‐vision devices.
The current order backlog is Rs41, 746cr which 5x FY17 sales provides strong visibility for next 4years. Going forward, orders related Akash missile system, LRSAM, EW systems, mobile cellular communication system and commander TI sight is expected boost the order inflow further for FY18E. Further, incremental revenue from EVM project also expected to boost its revenue further. We factor order book to grow at 15% CAGR over FY17-FY20E. We build in a revenue growth of 15% CAGR over FY17-FY19E.
BEL’s EBITDA grew by 23% CAGR over FY15-17 led by high margin domestic order execution in the sales mix. While, EBITDA margins expanded from 16.6% to 20.5% over the same period. Going forward we factor EBITDA margins to be at 20.3% for FY18E -20E.
BEL’s valuations have hovered at lower end of 13x-15x during last 10 years, though its average peak valuation was at 22x. BEL’s 80% of revenue comes from defence orders which largely depend on defence requirements and its procurement policies. During FY13-FY15, BEL’s execution has been hit by declining order inflow, slower approval of Bulk production clearance (BPC) and stretched timelines by clients, leading to lower than historical execution rates impacting its valuations. However, during FY15 its valuation has witnessed significant re-rating; led by earnings growth of 26%.
At CMP, BEL is trading at 20x and 18x FY19E & FY20E EPS of Rs9 & Rs9.8 respectively. BEL will emerge as key beneficiary from on-going defence modernisation programmes & GoI focus on higher indigenous content in defence procurement. Due to improvement in order inflow, robust order pipeline and positive earnings surprise has led to continuous re-rating in the stock. We anticipate that this re-rating to continue. We value BEL at P/E of 22x on FY20E EPS on improved order inflow outlook. We maintain Buy rating on the stock with a target price of Rs216.
Analyst: Anil R, Geojit Financial Services Ltd, INH200000345
General disclosure and disclaimer: BEL https://goo.gl/Mn1RgN
PNC Infratech is one of the leading infrastructure construction, development and management companies in the country with hands-on experience and proven expertise in the execution of major infrastructure projects, including highways, bridges, flyovers, power transmission lines, airport runways, industrial area development and other infrastructure activities. The company has executed/ is executing projects across various states in India including Rajasthan, Punjab, Haryana, Uttarakhand, Uttar Pradesh, Delhi, Bihar, West Bengal, Assam, Madhya Pradesh, Maharashtra, Karnataka and Tamil Nadu. PNC has till date executed 59 major infrastructure projects and is currently working on 17 EPC projects and a sizeable portfolio of 8 BOT projects.
Over the next five years the Government has proposed to invest Rs6.92tn through their flagship programme Bharatmala to construct 83,677kms of roads, i.e., more than 16,000km/year of tenders have to be awarded and built every year. This is going to be a major push to road infrastructure projects. Having said that, after this announcement NHAI has revised highway project award target from 6,500km to 10,000km for FY18 which signifies that more tenders could be expected before Q4FY18. We expect PNC will benefit to get more orders in the coming years.
In Q2FY18 revenue de-grew by 25% to Rs269cr on account of the prolonged delay in getting appointed date for PNC’s major road projects. As on September, 2017 the order book in terms of contracts pending execution was around Rs2,000cr. Recently the company has received the appointed date for major projects like Nagina – Kashipur (Rs1,156cr) and Nanau- Dodon (Rs120cr).Therefore, execution is likely to ramp up going forward and will start contributing to revenue book by Q3FY18 onwards.
PNC’s order book stands at Rs11,148cr (7.7xTTM revenue) which grew by 109% YoY, provide visibility and scalability in the coming years. Additionally, PNC have been awarded five Hybrid Model projects of Rs7,133cr, out of which Dausa-Lalsot-Kauthun (Rs820cr) project is under construction, three of them are in development stage and expected to receive appointed date by the end of FY18 and for the balance one project has recently received the LOI. Currently, PNC has infused equity of Rs10cr and a balance of Rs600cr will invest over the next 2 to 3 years for all five HAM projects. The overall visibility has improved and we expect progress in awarding new road projects by MoRTH, NHAI will drive order book by 19% CAGR over FY17-19E.
EBITDA margin improved by 191bps YoY to 14.8% in Q2FY18 on account of better operating performance and lower other expenses. Whereas, higher depreciation and interest expenses impacted earnings with a de-growth of -53%YoY to Rs17cr. We expect ramp up in execution in H2FY18 to drive profitability.
Robust order book and lean balance sheet provide visibility & opportunity in road segments. We value EPC business at a P/E of 15x on FY20E EPS and BOT/HAM projects at 1.2x P/B to with an Accumulate rating.
Analyst: Antu Eapen Thomas, Geojit Financial Services Ltd., INH200000345
General disclosure and disclaimer: PNC Infratech https://goo.gl/Hr232j