Stock Recommendations – April 2021

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Amara Raja Batteries Ltd (ARBL) is India’s second largest Lead-acid battery manufacturer. Its segment includes 70% from automotive & rest from industrial with a market leadership in Telecom segment. During Q3FY21 revenue grew by 12%YoY led by sustained demand recovery both in OEM and replacement sales. Demand for batteries in the aftermarket sales recovered sharply and supplies were ramped up in the quarter, supported by strong OEM export. Both the automotive brands continued its growth momentum across vehicle segments. Similarly, the industrial channels like telecom and UPS are doing well. EBITDA margin came lower at 15.6%(-60bps) due to lead price inflation, by 80bps sequentially and 160bpsYoY. However, continuous cost control initiative offset further decline. Additionally, PAT came at 18%YoY supported by increase in other income.

 ARBL’s investments in capacity expansion is in line with the future demand for 2W and 4W. AMRL has inaugurated its “Advance lithium Technology Research Hub” with a Pilot plant facility for cell development project based on the technology transferred from ISRO. The company has already got approval for the storage application for major 2W/3W OEM Players. The board approved an investment of Rs350cr to Rs400cr to complete the third Green field unit of automotive battery and other technology and maintenance capex. The company has also announced capex of Rs500cr. towards setting up lead acid recycling plant of 1 lakh tonnes per annum capacity (Rs280cr.) and captive 280 MW solar power plant (Rs220cr.). The strategic investments is focused on improving operational efficiencies, cost optimization and technology up gradation. The planned investments in solar and lead recycling plants will aid reducing costs and provide long term support to key raw material procurement. .

Despite increase in lead price globally we expect the cost reduction method and superior product mix to expand margin going forward. We believe that the company’s capacity addition in newer technology and lead recycling plant will reduce material cost for the battery manufactures. ARBL higher penetration in the unorganized sector and reasonable pick up in the telecom sector is likely to expand margin and factor 60bps improvement from FY21E.

Despite pressure in margin due to lower material cost pass through to OEM, comparing to its peer Exide, the company continues to be a second formidable player behind Exide in the OEM & Aftermarket sales. This is largely led by the strong franchise network and operational efficiency. We believe the auto sector is likely to show pick up in H2FY21 owing to lower base and new launches. Considering the strong financials and larger visibility we value ARBL at 20x FY23 EPS and recommend Buy rating.

Analyst: Saji John, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers:Amara Raja Batteries Ltd:   http://bit.ly/316CGH0                                 

KNR Constructions Ltd (KNR) is a leading EPC player largely focusing on national and state highway projects. KNR has successfully executed ~6,000 lane km road projects across 12 states in India.

The order book is strong at Rs7,664cr which is 3x TTM revenue supported by Rs4,000cr of order inflows in 9MFY21. The order visibility improved as the NHAI bid pipe line is strong and KNR is targeting to get Rs3,000 to Rs4,000cr of fresh orders in Q4FY21. Most of these orders are from the states of AP, Karnataka, Kerala and Punjab, where the company has a geographical advantage. Currently, irrigation works constitute 45% of the order book, provides better margin visibility. Most of its under-construction road projects would be finished by Q2FY22 and KNR is also looking for diversifying its order book to water and urban infra projects. Govt’s strong thrust on infra and NHAI’s strong order pipeline supports growth prospects in the long term.

Q3FY21 revenue grew by 23% YoY to Rs683cr as execution efficiency normalized to pre-Covid level. The management expects FY21E/FY22E topline of Rs 2,500 and Rs 2,800cr. KNR has bid for 15 projects, totaling of Rs20,000cr and expects to get 2 to 3 HAM projects. KNR has collected receivables of Rs540cr from Telangana irrigation projects and balance of Rs200cr is left of the old liability. We expect top-line to grow at a CAGR of 26% over FY21E-FY23E on account of pick up in execution. EBITDA margin declined by 259bps YoY to 19.7% due to higher subcontracting expenses (134% YoY), employee cost (33% YoY) and other expenses (24% YoY). While higher other income (281% YoY) supported by interest income received from old projects and lower tax rate of 26.9% (vs 31.6% in Q3FY20) led to 66% YoY growth in Adj.PAT to Rs78cr.

Healthy balance sheet, strong execution capability with better operational margin to support valuation. While increasing execution efficiency and pick up in order inflow improved the outlook for FY22. We value standalone business at a P/E of 15x FY23E EPS and BOT/HAM projects at 1xP/B to arrive at SOTP target price Rs259 & maintain Buy rating.

Analyst: Antu Eapen Thomas, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: KNR Constructions Ltd :        http://bit.ly/3tGT90H

Coromandel International (CRIN) is one of the leading private sector fertilizer producers in the country with significant presence in South India. They are one of the leading producers of NPK and SSP grade fertilizers.

During the last quarter, CRIN’s total revenues grew by 7.8% YoY with robust sales growth for both the Nutrient and Crop Protection segments. The rabi season has seen good sowing and harvesting activity which has aided the offtake for both its segments. The share of unique-grade fertilizers grew from 38% in Q3FY20 to 50% in Q3FY21 with aided the overall EBITDA margin expansion from 13.2% in Q3FY20 to 14.1% in Q3FY21. Despite the sequential increases in the price of phosphoric acid (Key raw material) this year, the company has been able to expand its EBITDA margins as the company continues to ramp its backward integration of phosphoric acid. The crop protection business (14.4% of total revenues) saw a 10.6% growth YoY to Rs.511cr in revenues during the quarter with new product launches contributing to revenue growth in both the domestic and export markets. The share of new products now contributes to 25% of the crop protection revenues. The company is also focusing on acquiring or manufacturing off-patented molecules in the coming years. The management has guided a double-digit growth for the segment in the near term with the focus on expanding its product portfolio. 

The announcement by the finance ministry to allocate a further Rs.65,000cr to settle outstanding fertilizer subsidy dues will enable CRIN to improve its working capital cycle in the near term. The introduction of DBT 2.0, which will transfer the subsidy directly to the farmer will further improve the working capital cycle. However, there is no time frame given as to when DBT 2.0 will be implemented in the country. The company will spend Capex of Rs.400-Rs.500cr in the next two years to de-bottleneck its manufacturing plants and invest in new products in the crop protection segment.

We expect revenue/net profit to grow at a CAGR of 11%/16% during FY20-FY23E. Normal rainfall is forecasted for the coming year, which will help the company maintain robust volume growth in the fertilizer and crop protection segments. Going forward, the company will look to increase the share of the high-margin crop protection segment in the total revenues with new launches and diversification of the product portfolio. The recent increase in subsidy allocation by the government will help improve the working capital cycle in the short term thereby enabling the company to generate free cash flow and strengthen its balance sheet. We, therefore, upgrade our rating from “Accumulate” to “Buy” with a rolled forward target price of Rs.914 based on 16x FY23E EPS.

Analyst: Joe Samuel, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers:Coromandel International: http://bit.ly/394dDsf

PI Industries manufactures plant protection & specialty plant nutrient products and solutions under its agri-inputs business. It is also one of India’s leading custom synthesis (CSM) companies engaged in providing contract research and contract manufacturing services to global innovators.

In Q3FY21, standalone revenue grew by 31.1% YoY to Rs. 1,114cr, with sustained growth from both domestic (+26.2% YoY) and export business (+32.7% YoY). Domestic business was driven by continued growth momentum from Isagro and robust demand for PI brands such as Herbicides, Fungicides and Plant Nutrients. Nominee herbicide and Osheen insecticide recorded highest ever sales owing to rice and cotton crops. In the exports markets, growth was driven by efficient capacity utilization, raw material planning and strong demand from key commercialized molecules. The company maintained a strong order book of USD 1.5bn, with sustainable growth in the next 3-4 years. PI Ind’s Reported EBITDA grew by 46.2%YoY to Rs. 271cr and margins increased by ~260bps on the back of an increase in sales, better capacity utilization (back to pre-COVID levels), favorable product mix and strong cost control measures in Q3FY21. Resultantly Adj. PAT rose by 62.5% YoY to Rs. 196cr, driven by higher sales and other income, improved working capital management and lower tax rate during the quarter.

Demerger of B2C business of Isagro to Jivagro expected in Q4FY21, while the merger of CSM business of Isagro with PI expected in Q1FY22, post regulatory approvals. The Upgradation of Isagro’s production facility is expected to be completed in the next few months. The company declared an interim dividend of Rs. 3 per share. A Capex of Rs. 320cr was incurred by the company so far this financial year. Regarding CSM export business, one more MPP plant to be ready in Q4FY21 with 5-6 pipeline molecules to be commercialized in the next fiscal year. The management remains positive on the business outlook and also highlighted strong growth expectations in the coming quarters.

With new product launches, strong order book, commercialization of new plants in the near-term and strong demand for branded products, the growth momentum should continue in upcoming quarters. The company has also managed to keep costs under control and effectively managed inventory levels to meet upcoming demand. The recent QIP of ~Rs.2000cr will enable PI Industries to scale up its existing business and diversify into new segments such as pharma and speciality chemicals. The supply-side issues in China could open up opportunities for PI Industries to attract new clients in the long term. We reiterate our BUY rating on the stock and roll forward our valuation with a revised target price of Rs. 2,680 based on 37x FY23E adj. EPS.

Analyst: Joe Samuel, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers:PI Industries Ltd:http://bit.ly/3r9poUG

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