Natco Pharma (NATCO) is a R&D focussed, vertically integrated pharmaceutical company with an experienced management team and presence across multiple speciality therapeutic segments. NATCO’s business model focuses on innovation in niche products across select therapy areas. NATCO is integrated across the value chain with major focus in active pharmaceutical ingredients (API) and finished dosage formulations (FDF). Backward integration for the critical APIs equips them better to enjoy advantages in terms of cost, quality and logistics.
NATCO has demonstrated their R&D capabilities by their complex and niche product filings in both formulations and API segments. With a talented pool of more than 314 scientists, they operate two well-equipped research facilities, 35 R&D laboratories and allocates around 6% of the revenue (standalone) towards R&D. They have also recently raised a QIP of around Rs 915 crs for plant expansions, strengthening their R&D and complex generics base.
NATCO has adopted a partnership model in the US. Through their partner Mylan they are expecting to generate significant sales from gCopaxone 40mg in FY19. Another partner Alvogen which launched gTamiflu suspension will drive the revenue growth in the flu season (typically Nov- March). Doxil sales with partner Dr.Reddy’s and gFosrenol sales with partner Lupin are other profit generators for the company. NATCO is also giving additional focus on growth in India business considering the fact that the domestic market has less regulatory hurdles. Their strong marketing & distribution network and global partnerships adds to their strength and equips them to manage pricing pressure faced by the sector in general.
By 2020, it is predicted that India will be among the top three pharmaceutical markets by incremental growth and sixth largest market globally in absolute size (Pharmaceuticals, IBEF, March 2018). With India’s cost of production significantly lower than that of the US and almost half that of Europe, Indian companies enjoy a competitive edge over developed market players. NATCO currently holds an API portfolio of more than 37 US DMFs (submission of details to FDA) with over 10 products under development and 43 niche ANDA filings including 20 Para IV filings in the US – with 22 approved ANDAs. With a low cost manufacturing base and a vibrant task force, NATCO is well poised to establish itself as a prospective player in the global scenario.
NATCO is currently trading at a P/E of 17x FY20E EPS. On back of better performance from molecules like Tamiflu, Copaxone, Doxorubicin and Lanthanum in US and better realisations from domestic and emerging markets, we believe NATCO will witness a healthy growth in coming years. We therefore expect consolidated revenue to grow at a 17%CAGR over FY18-20E and EBITDA margins to stabilize around 40% for FY 2019 & 20. We also expect international/domestic niche FD segment to grow by 12%&14% respectively for FY19/20 and factor an earnings outlook of 13%CAGR over FY18-20E. Hence, we value NATCO at 19x on FY20E EPS and arrive at a target price of Rs 908 and recommend ‘Buy’ rating.
Analyst: Dilish K Daniel, Geojit Financial Services Ltd, INH200000345
For Disclosures and Disclaimers: Natco Pharma: https://goo.gl/9qPKt3
HDFC is a leading provider of Housing Finance in India with a network of 297 offices catering to over 2,400 towns & cities spread across the country. Assets under management (AUM) continued to grow at a strong pace of 18% YoY in Q3FY18 mainly led by 21% YoY growth in non-individual segment (28% of total AUM) owing to strong pick-up in lease rental discounting and construction financing. Individual loan book grew by 19% YoY driven by higher incremental loans in the affordable housing segment.
HDFC’s net interest income (NII) continued to grow at a moderate pace of 11% YoY in Q3FY18 mainly due to 19 bps YoY decline in net interest margin (NIM) to 3.2%. With increasing in competition in the housing loan space coupled with increased aggression expected from public sector banks (PSBs) post recently announced recapitalisation plan, we expect NIM to remain under pressure and decline to 3.0% by FY20E. Net profit increased at a strong pace of 17% YoY on the back of 19% YoY decline in provisions. However, reported PAT was higher due to one-off gains of Rs3,675cr. HDFC received Rs5,250cr from its stake sale in HDFC Life. Out of this, Rs1,575cr was provided as additional special provision. Going forward, we expect adjusted net profit to increase at 15% CAGR over FY17-20E backed by higher NII (↑14% CAGR) coupled with lower operating expenses.
Asset quality remained largely stable as Gross non-performing asset (NPA) ratio increased marginally by 1 bps QoQ to 1.2% in Q3FY18. While corporate Gross NPA ratio remained elevated at 2.2%, asset quality in individual loans remained healthy with Gross NPA ratio at 0.7%. Net NPA ratio declined to nil (↓15 bps QoQ) on the back of additional provision created from one-off gain. Given HDFC’s conservative lending policy along with 100%+ provision coverage ratio (PCR), we remain relatively comfortable on overall asset quality profile of the company and expect it to remain broadly stable.
HDFC continues to remain our top pick within housing finance companies (HFCs) given its competitive edge over its peers backed by strong growth in business, stable margin and well-managed asset quality. HDFC is envisaged to be a key beneficiary of government’s thrust on the housing sector given its market leadership position. We maintain BUY rating on the stock with a revised upward TP of Rs2,051 based on sum of the parts (SOTP) methodology where we value its standalone business at Rs1,125 (P/ABV of 3.0x for FY20E) and subsidiaries at Rs926.
Analyst: Kaushal Patel, Dion Global Solutions Ltd., INH100002771
For Disclosures and Disclaimers: HDFC: http://bit.ly/2HLOweW
Avenue Supermarts Ltd (D’Mart), founded by Mr Radhakishan Damani, is a Mumbai based company which owns and operates the supermarket, D-Mart. D’Mart today has a well-established presence in 140 locations across Maharashtra, Gujarat, Andhra Pradesh, Karnataka, Telengana, Tamil Nadu, Madhya Pradesh, Rajasthan, NCR, Chhattisgarh and Punjab. As of December 2017, D’Mart has 141 malls with retail business area of 4.4million sq. ft. The company offers a wide range of home and personal products under one roof with a focus on Foods, Non-Foods (FMCG), general Merchandise and Apparel product categories. D’Mart operates distribution and packing centres which form the backbone of its supply chain to support its retail store network. D’Mart has 23 distribution centres and 5 packing centres in Maharashtra, Gujarat, Telangana and Karnataka.
India’s GDP is consumption-led with 60% expenditure in consumption, of which retailers account ~50%. Organised retail penetration is expected to reach 12% by FY20 from current ~9%. Food & Grocery (F&G) constitutes the majority share (~67%) of total retail, but organised retailers are least penetrated at ~3% (USD13bn). However, it is projected to reach ~5% by FY20 (USD31bn). Top 3 retailers contribute ~31% of total F&G and we expect D’Mart’s market share which is currently at ~10% to reach ~13% by FY20.
Opening its first mall in Mumbai in 2002, D’Mart has grown to 141 malls as of Q3FY18E. During this expansion, D’Mart exhibited a strong track record in all of its performance matrices. D’Mart’s revenue and PAT has grown at 37% and 51% CAGR during FY12-FY17 period. D’Mart has registered a strong average Like-for –Like growth of ~24% and revenue per sq.ft has grown at 15% CAGR to Rs31,120 during the same period. D’Mart witnessed a steady growth in its total number of bill cuts which has grown to 108.5mn in FY17 from 43.1mn in FY12. EBITDA margin is high among peers at 8.1% (FY17) despite having everyday discount strategy which shows its strong execution capability. Prudent strategy on store additions, optimum store size and efficiency in operations will support to maintain its strong growth in revenue in the coming years also.
D’Mart offers daily value to its customers with low pricing across all products and categories. This is made available by minimizing its cost of procurement, supply and operation. This strategy helps D’Mart to attract and retain customers.
D’Mart currently operates predominantly on an ownership model including longterm lease arrangement. This has helped to control fixed cost per store. Recently, D’Mart has announced an update in its strategy by including leased stores along with ongoing owned assets which will accelerate growth in revenue. We factor that from FY21 onwards leased will gradually account for 50% of addition in stores. Additionally, incremental contribution from e-commerce will enhance the asset-turnover from current level of 2.7x compared to peer average of 1.9x.
Despite low gross margin, EBITDA margin is the highest amongst the peers. Even being capital intensive in the industry, high asset-turnover indicates its efficient business model. Cost efficiency is also high given cluster model of opening stores near the existing stores & distribution centers.
We expect high growth to continue aided by store additions, change in strategy, e-com, debt reduction and tailwinds from GST. As a result we expect high premium to be maintained in the medium-term. We value such long-ended high growth company on a DCF basis, at a target of Rs1,590 implying P/E of 69x on FY20E and recommend Buy rating.
Analyst: Vincent K Andrews, Geojit Financial Services Ltd, INH200000345
For Disclosures and Disclaimers: Avenue Supermarts: https://goo.gl/XLsfU5
Cochin Shipyard Ltd (CSL) is the largest public sector shipyard in India, the sources of its revenue being ship building for navy, coast guard, commercial clients and ship repair income. Since its establishment in 1972 the yard has completed a large number of shipbuilding and ship repair projects for clients both domestic and international and is currently building India’s first Indigenous Aircraft Carrier INS Vikrant. Being the only yard in India to have undertaken the repair of aircraft carriers, CSL has proven track record in building and repairing large ships. The Yard was conferred the Miniratna status in the year 2008.
Cochin shipyard has a current order book of ~Rs2,337cr (as on 31st Dec 2017) and will be awarded Phase–III of Indigenous Aircraft Carrier valued at Rs10,300cr by FY20. It is also the L1 bidder for Anti-Submarine Warfare-Shallow Water Craft (ASW-SWC) which is a contract for 8 ships worth Rs5,400cr. This makes the total order book visibility of CSL approximately Rs18,000cr which is 12x FY17 shipbuilding revenue. Assured revenue from the above mentioned contracts and strong earnings visibility indicates Sales/PAT growth estimate at 22.5/15.7 % CAGR over FY17-20E.
CSL plans to fuel further growth with capacity expansion in the form of Dry Dock (Rs1,790cr) in the existing premises and ISRF (International Ship Repair Facility) (Rs970cr) in Cochin Port Trust premises. This is expected to more than double the operational capability of the yard and enable it to construct and repair large vessels like LNG carriers, new generation Air Craft carriers etc. The Dry dock and ISRF will be completely operational by FY21-22. The CAPEX will be financed entirely through internal accruals and IPO proceeds. To tap into the Sagarmala potential to build small ships for inland waterways CSL has signed a JV with Hooghly Dock and Port Engineers (HDPE), Kolkata to use their facilities. Also its recent MoU with Mumbai port trust to start ship repair operations at Mumbai will supplement its revenues. Also, GoI initiatives like ‘Make in India’ and ‘National Shipbuilding Policy’ which aims to indigenize shipbuilding by 2025, increases the prospects of shipbuilding business in India.
In an industry that is cash strapped and debt laden Cochin Shipyard stands out with a strong balance sheet and cash surplus giving the company a competitive advantage in bidding for new projects and in expanding capacity. We estimate sales/PAT to grow at 22.5/15.7 % CAGR with ship repair and shipbuilding growth at 10 %/27 % over the next two years. In addition to its capacity expansion plans, low debt ratio, efficient working capital structure and strong cash flow will aid in maintaining stable margins going forward. Owing to its strong order book visibility and track record as the market leader in ship repair space we recommend a BUY on CSL with a target price of Rs625 (17x FY20 EPS).
Analyst: Sarath K S, Geojit Financial Services Ltd, INH200000345
For Disclosures and Disclaimers: Cochin Shipyard: https://goo.gl/gFpsCU