Stock Recommendations – December 2019



Sector: Capital Goods

KEC International Limited is engaged in the construction of utility projects. Its geographical segments include India and Outside India. Its Power Transmission and Distribution business includes providing end-to-end solutions in power transmission and distribution. Its Cables service offerings include extra-high voltage (EHV) cabling solutions provided through Cable Selection and Cabling System. It offers services in all the functional segments of railways infrastructure. Its water services include waste water treatment, including treatment of sewage and industrial effluent, and water resource management, including building of canals, construction of dams and water system, and civil works related to thermal power projects.

Q2FY20 revenue grew by 17% YoY to Rs2,809cr which is better than our expectation owing to healthy pick-up in T&D revenue (21% YoY to Rs1,621cr), SAE tower business (95% YoY to Rs356cr) & Railway (35% YoY to Rs568cr). Execution of three large international EPC orders supported SAE tower business to outperform. The company expects the momentum to continue for some more quarters. However, a de-growth was witnessed in civil division by 51% YoY and Solar segment by 92% YoY. We expect railway & SAE business continue to outperform due to improved traction in order inflow and approvals for EPC projects. The company has guided a total revenue growth of 15%-20% in FY20 due to a strong order book.

Q2FY20 order book de-grew by 10% YoY to Rs18,085cr (1.5x TTM revenue) due to 41% YoY fall in H1FY20 order inflow to Rs3,766cr. The fall is mainly due to headwinds in domestic T&D orders and deferment in international tenders. The management remains optimistic on H2FY20 order inflow largely from green energy corridor tenders, railways & civil business and maintains a target of Rs14,000cr inflow for FY20. The order pipeline remains positive as KEC holds strong L1 orders of Rs5,000cr and put together total order book stands at Rs23,085cr.

EBITDA grew by 16.1% YoY to Rs294cr leading to a stable EBITDA margin of 10.5% which is 26bps above our estimate. While improvement in gross margin of 202bps to 30.8% was offset by higher employee cost (33% YoY) and other expenses (27% YoY). Net profit grew by 44.4% YoY to Rs139cr aided by lower interest changes during the quarter to 2.9% of sales against 3.2% in Q2FY19 and lower effective tax rate of 22.9%.

International T&D opportunity is picking up from SAARC, Middle East region which could mitigate the muted trend in domestic T&D orders. Additionally, continued traction in railway, solar, civil & cable business will drive the top line.

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

General Disclosures and Disclaimers:  KEC International Ltd –


Sector: Auto Ancillaries

Bharat Forge Ltd (BFL) is a leading player in the forgings industry. The company is serving several sectors including automobile, power, oil and gas, rail & marine, aerospace, construction, mining, etc.

In the recent ended quarter, the company reported weak set of numbers. Q2FY20 revenue de-grew by 17%YoY due to the slowdown in export (down by –18%YoY) & domestic segment by –36%YoY. The negativity in growth is largely contributed by both CV and industrial segment. The overall volume remains negative at –23% due to lower demand. Additionally, a fragile demand environment for domestic autos and lower visibility towards pre -buying against BS-VI and impending dip in the US class 8 trucks have collectively marred the near term automotive outlook for the company. EBITDA margin declined by 440bps due to higher input cost and lower product mix. PAT de-grew by –19%YoY despite reduction in corporate tax rate.

During the year BFL has secured business win of $50 million across sectors and geographies, and large proportion of the wins are on new product development. We expect the incremental revenue from new business/products to grow from current 5% of sales to 15% in next 2 years. The subdued freight rate and increase in funding cost coupled with the recent revision in axle load norms has impact sentiment in short term. However, we expect domestic CV business to show some pick up owing to pre-buying ahead of BS-VI, and correct the current inventory levels of the OEM’s.

Given its robust business outlook, BFL has undertaken a Greenfield expansion plan of its forging and machinery capacity at Baramati by investing Rs400cr. The center for Light Weighting Technology (LWT) in AP is expected to be fully operational by Q4FY20. Having already secured contract for manufacturing critical component in Aluminium in the 1st phase itself, the facility will provide a fillip to growth as it gradually ramps up.

BFL’s strategy to shift into new technological products owing to change in regulation, and ramp-up in Aluminium forging in US for new product development will bring value migration per vehicle in the long run. However, we expect that the earnings to remain under pressure for near term due to lower visibility for both domestic CV and Industrial export, which together constitutes 34% of revenue mix. In addition, significant decline in US truck sales in FY20 will further add to the woes in FY21 as the same contributes 29% of sales. We lower our Revenue and PAT estimate for FY20 by 7% & 8% to factor in sharp contraction in volume growth & margin.

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

General Disclosures and Disclaimers:  Bharat Forge –


Sector: Capital Goods

Voltas, India’s largest air conditioning and one of the premier engineering solution company was incorporated in the year 1954. The operations of the company are classified as UCP (Unitary Cooling Products like air conditioners, air coolers, refrigeration products), EMP (Electro Mechanical Projects including Domestic Project Groups and International Operations Business Group) and EPS (Engineering Products and Services like Textile Machinery and Mining & Construction Equipments). Voltas continues to be the leader with No.1 position in Room Air conditioner business with a market share of 24.4% as on September 2019.

Voltas recorded revenue growth of 19% YoY to 526 Cr from UCP (Unitary Cooling Products) segment in Q2FY20 (37.1% of total revenue) with increased traction and healthy growth in Air Coolers and other products. Segment operating margin expanded 251bps YoY to 8.8%. Company expects UCP margins to improve further for H2FY20 and targets to achieve ~11.0% operating margin for FY20. Meanwhile, EMP (Electro Mechanical Projects) segment continued to drag down revenue (-10.2% YoY to Rs. 809cr; 57.2% of total revenue) due to lack of funds and stalled projects in the domestic market. Segment margin declined 149bps to 6.9%. However, carry forward order book of the segment surged 34.5% YoY to Rs. 6,567cr with increased order inflow of approximately 2600 Cr from domestic as well as international market. Major orders of domestic project business come from the electrification and infrastructure & metro sectors. EPS (Engineering Products and Services) segment which contributes about 6% to the revenue has seen an improvement in revenue by 10% while margins declining from 39.8% to 31.5%. Net revenue remained flat YoY at Rs. 1,415cr in Q2FY20, as higher UCP segment revenue was largely offset by weaker revenue from EMP segment amid sluggish consumer demand.

Topline and margins remained under pressure due to weak consumer demand and slower economic growth. Net revenue remained flat at Rs. 1,415cr in Q2FY20 and EBITDA margin declined by 20bps to 7.5% with decline in EBITDA by 2.5% YoY to 106cr primarily on higher other operating costs which has increased by 27.0% to Rs. 140cr. However, adj. PAT rose to Rs. 113cr (+8.7%YoY) primarily benefitting from higher other income which grew 57.6% YoY to Rs. 73cr.

The signs of economic recovery and thereby rise in consumer consumption is yet to be seen. We expect the revenue and margins to be under pressure in near term. Hence, we downgrade our rating on the stock to Reduce.

 Analyst: Cyril Charly, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers:  Voltas –


Sector: Banking/Finance

State Bank of India (SBI) is the largest commercial bank in India with a strong branch network of 21,929 branches and 58,567 ATMs/CDMs, with a loan book size of ~Rs22.5 lakh crores, and a deposit base of ~Rs30.3 lakh crores.

In the latest quarterly results, which is of Q2FY20, the total advances increased by 8.7% on a YoY basis, supported by 8.4% YoY growth in domestic advances, which constitute around 86% of the total loan mix. Currently, the retail advances, which constitute around 36% of the total domestic advances grew by 18.9% on a YoY basis, and the corporate loans constituting 40% of the domestic advance mix registered 2.8% YoY growth. The retail advance growth was mainly driven by a robust 42.1% YoY increase in Xpress credit loans and by 18.0% YoY increase in home loans. The CASA deposits witnessed 8.1% YoY growth driven by 12.2% and 7.4% YoY growth in the current account and savings account respectively. The CASA ratio stood at 45.1% in the current quarter compared to that of 45.3% a year ago.

On quarterly financial performance, in Q2FY20, the Net Interest Income (NII) of the bank has increased at a healthy pace of around 18% YoY on account of 9.4% YoY increase in interest income, backed by 26bps YoY increase in yield on advances. On the other hand, the cost of deposits has declined by 8bps on a YoY basis, which resulted in a 23bps YoY increase in Net Interest Margins (NIMs). The non-interest income has marked a strong growth of around 28% backed by the profit on sale of investments, which resulted in ~21% YoY growth in the total income of the bank.

On asset quality front, the Gross NPA ratio improved 276bps YoY to 7.2%, while the net NPA ratio improved 205bps YoY to 2.8% in Q2FY20. The fresh slippages declined massively by 17.9% YoY/45.7% QoQ where corporate segment accounted for about 37.0% and the rest were from SME (17%), agriculture (35%) and retail (11%). The bank’s provision coverage ratio (PCR) improved by 1,049bps YoY to 81.2%, whereas the special mention accounts (SMA) book declined 17.7% YoY, highlighting the improving asset quality. The bank expects 3 accounts to resolve with an expected recovery of ~62.0%. Recovery and up-gradation of bad loans remain a concern, with recovered loans declining 9.2%/31.9%YoY/QoQ. Going forward, we expect the quick resolution of stressed accounts to drive earnings growth.

We believe the increase in SBI’s margins supported by growth in retail banking, faster resolution of stressed assets and listing of subsidiaries will drive earnings momentum going forward. Hence, we continue to maintain our BUY rating for the stock.

Analyst: Abijith T Cherian, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers:  SBI –


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