Tata Global Beverages (TGB) is the 2nd largest branded tea company in the world. In FY17, TGB derived 71% of its turnover from branded tea sales. TGB has transformed itself from being a mere tea player to a global beverage giant through acquisitions and strategic alliances with global brands like Pepsi and Starbucks. Its brands have presence in over 40 countries. It is a global natural beverage player with ~60% of the consolidated revenues coming from markets outside India such as UK, USA, Canada etc. Notably, Tata Coffee is a 57.48% subsidiary of TGB.
TGB has a robust portfolio of global & regional brands. In FY17, branded business contributed ~88% to the total revenues. In terms of brand-wise sales mix, 45% of its sales come from Indian tea, 29% come from Tetley, 14% come from Eight O’ Clock and 12% come from Others. In India, TGB continues to maintain leadership position in packaged tea segment (No. 2 in world). While tea (tea portfolio includes black, green, herbal and fruit ones) is the mainstay of TGB with 71% of revenue coming from branded tea sales, it has growing interests in other businesses including coffee & water. We expect tea revenues to grow at ~6% CAGR over FY17-20E led by strong innovative premium product portfolio coupled with increasing awareness about health and wellness.
Green and herbal tea categories enjoy higher margins when compared to the conventional black tea. Globally, the green tea and fruit/herbal tea is expected to witness a CAGR of ~9% & 7% respectively over the next five years. With 37 flavoured green tea, 27 specialty tea and 180 herbal blends in portfolio, TGB has enhanced its focus on green and herbal tea categories to offset the decline in the black tea category.
TGB has put in-place a new strategy to drive growth and improve profitability. Under the core business rejuvenation, the company while focusing on the power brands (Tata Tea & Tetley) will expand its product offerings in premium and non-black categories. It is also planning to foray in large tea consuming Asian markets such as Singapore, Malaysia and China. To renew Nourishco, the company launched several new products/variants under Tata Gluco Plus and Himalayan water brands leading to sharp improvement in operating performance. It is further exploring options to launch Himalayan water in the US. Besides, TGB is looking to further increase store count at Starbucks. Moreover, the company is also undertaking business restructuring like exiting from loss making geographies and pruning losses from stressed markets to improve profitability.
We expect TGB to gain market share across geographies led by its innovative premium product offerings. As a result, revenue/PAT is estimated to grow at ~6%/23% CAGR over FY17-20E. Given TGB’s focus on reviving growth and profitability, we factor 220bps increase in overall EBITDA margin over FY17-20E. We have a ‘BUY’ rating on TGB with a Target Price of Rs.308 by valuing at 27x FY20E EPS.
Analyst: Abhijit Kumar Das, Dion Global Solutions Ltd., INH100002771
General disclosure and disclaimer: Tata Global Beverages Ltd http://bit.ly/2ocEevW
KEC International Limited is a global infrastructure Engineering Procurement and Construction (EPC) major. It has presence in the verticals of Power Transmission & Distribution, Cables, Railways and Water & Renewable. The Company has powered infrastructure development in 63 countries across Africa, Americas, Central Asia, Middle East, South Asia and South East Asia.
Q3FY18 revenue grew by 26% YoY to Rs 2,405cr (above estimate) led by superior execution in T&D business (20%YoY), Railway (98% YoY) and SAE tower (41% YoY). However, solar business continues to remain impacted with anomalies in various taxation policies of the government while cable business impacted due to high GST rate of 28%. EBITDA margin improved by 64bps YoY on account of 5% drop in other expenses while gross margin reduced by 420bps YoY to 27.7%. Further, decrease in depreciation by 9% and lower tax out go elevated the earnings by 79% YoY to Rs112cr. We increased FY18E/19E PAT estimate by 5%/3% respectively owing to strong operational performance and healthy execution.
9MFY18 order book grew by 53% YoY to Rs 17,148cr supported by a significant growth of 105% YoY in new orders. Orders from T&D, railway, cables is picking up as the impact from GST is settling down. Management expects that the order intake for railways to exceed Rs 3,500 cr in FY18. In February, KEC received an order of 2,035cr of which over 85% is contributed from railway segment. Further, KEC holds strong L1 orders of Rs 4,000cr (70% from domestic) and is expected to convert into the order book in the coming quarters. We expect KECs order book to grow at a CAGR of 29% over FY17-19E.
Sharp increase in outlay for roads, rail and power in the Union Budget has raised the prospects for KEC. Additionally, government is moving fast towards optimal electrification of railway network. 4000 km are targeted for commissioning during 2017-18. This will enhance the demand outlook for equipment suppliers & EPC players.
Execution is back on track and margin is expected to stabilize on account of cost control measures. Management expect traction in ordering activity from SEBs mainly from south India and Bihar. Further, railway electrification orders will pick up and revenue from railway is expected to double in FY19. Healthy order book & improvement in margins will drive the earnings growth. We factor adj. PAT to grow at CAGR of 30% over FY17-20E. We roll over our valuation to FY20E EPS with a target price of Rs406, based on a P/E of 16x FY20E earnings and assign ‘Accumulate’ rating.
Analyst: Antu Eapen Thomas, Geojit Financial Services Ltd., INH200000345
General disclosure and disclaimer: KEC International Ltd https://goo.gl/gwb52N
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 FY17. EL is operating in the sectors of Agricultural machinery, construction & material handling equipment and railway equipment. The Company offers more than 45 variants of tractors from 25 to 80 HP. Its brands of tractors include Escort, Farmtrac and Powertrac. It has four manufacturing plants in Faridabad and one subsidiary unit in Poland in the name of Farmtrac Europe. It also manufactures diverse range of equipment like cranes, loaders, vibratory rollers and forklifts for the construction industry having a market share of 9%.
Q3FY18 revenue grew by 12%YoY led by 12% volume growth in the tractor business (80% of the revenue) which was largely driven by the sales from the strong market (UP, MP, & Northern states) and opportunistic market (AP, WB, ODISHA). EBITDA margin expanded 350bpsYoY driven by cost control initiatives and better tax offset under GST. Revenue from Construction equipment’s grew by 26% due to increase in road infrastructure spending & Railway grew by 30% due to higher order inflow. Adj. PAT grew by 65%YoY.
Government initiatives towards increasing farm productivity through farm consolidation and farm mechanization have reflected in the EL’s growth. EL expanded portfolio & technology upgrades in tractors have resulted in improved numbers both in existing and newer geographies. Exports have grown by 10%YoY for the quarter. Share of new products in tractors stands at ~20% currently and have better margin than existing products as per the management. Revenue from Construction equipment’s and railway segments will continue to reflect sizable improvement in FY19. Management has indicated 15-20% CAGR growth in Railway in the next 3 years. We expect revenue and PAT to grow by 16%/34% CAGR for FY20 factoring 15%YoY growth in the tractor sales.
EL has outperformed the tractor industry growth rate (15%) leading to an increase in market share from 10% to 11% in FY17, in which the Farmtrac and Powertrac brands has 5%/6% market share respectively. Lastly, addressing the lower penetration in opportunistic market (southern India) has resulted in 50bps improvement and also +100bps in the strong market (northern India), mainly driven by focussed support on its top dealers. Q3FY18 market share stands at 10.4% for tractors and 8% for construction equipment’s.
Margin expansion through new launches & cost initiatives and further government support for better agricultural output is expected to be earning growth catalysts. We believe that the current valuation is justifiable on the back of robust earnings outlook, massive government push and normal monsoon. We value EL at 23x on FY20E EPS with a revised target price of Rs.973 and maintain our rating as Accumulate.
Analyst: Saji Thomas, Geojit Financial Services Ltd., INH200000345
General disclosure and disclaimer: Escorts Ltd https://goo.gl/PkhzTv
TVS Motor Company Limited is a 2-wheeler manufacturer in India, with a revenue of over 13,000 Cr ($2 billion) in 2016-17. It is the flagship company of the Rs. 40,000 Cr ($6 billion, in 2014-15) TVS Group. The Company manufactures a range of 2-wheelers from mopeds to racing motorcycles. The Company’s products include domestic range of two-wheelers, three-wheelers and international range of two-wheelers with manufacturing facility mainly from south India. The company has four manufacturing plants, three located in India (Hosur, Tamil Nadu and Mysore, Karnataka and Nalagarh, Himachal Pradesh) and one in Indonesia (Karawang). Today TVS Motor functions through a strong nationwide network of more than 3500 touch points including dealers, authorized service centres and other certified points across all the states in India.
Q3FY18 revenue grew by 24%YoY due to 15% volume growth and better product mix. PAT grew by 16%YoY. EBITDA margin expanded by 50bps due to reduction in fixed. Vehicle price are likely increase by ~1-2% to factor in increase in commodity price. TVS outperformed the domestic as well as exports industry in Q3FY18 with improving market share. Motor cycle and scooter grew by 26% and 22%YoY in volume respectively. 3W volume grew by massive 71%YoY owing to higher exports from the new geographical market.
The company registered 18%YoY in premium segment on its flag ship brand Apache 150 during Q3FY18 and also the executive segments remained robust at 45%YoY due to lower base and festive season. The management has highlighted that they have plans to launch two new vehicles one each in scooter and motorcycles by end of this fiscal year. We factor 19% CAGR in revenue over FY17-20E driven by improvement in export, revival in rural demand and growth in the urbanisation for high margin premium motor cycles.
New products launches are targeted towards filling gaps in their product portfolio and would improve product mix. As per the management recently launched Apache RTR 310 (tie-up with BMW) is working well for the company. The Management has maintained its target EBITDA margin at 10% in FY19. We expect the EBITDA margin to improve by 240bps at 9.5% by FY20 owing to superior product mix and new launches and cost control measures. Expect to gain market share in domestic MC/Scooter, led by increased network expansion and other value added services.
We expect the earnings to grow by 39%/23% for FY19E/FY20E factoring better traction in volume across segments, new launches, superior product mix and robust export growth. Higher raw material price and competition in the premium segment will put pressure on the margin for the near term. Currently TVS is trading at premium valuation of 32x/26x on FY19E/FY20E EPS. We value at 29x FY20E and upgrade our rating to Buy from reduce with a revised target price of Rs.715.
Analyst: Saji Thomas, Geojit Financial Services Ltd., INH200000345
General disclosure and disclaimer: TVS Motors https://goo.gl/haeWFz