Stock Recommendations – January 2021

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TTK Prestige Ltd (TTK), incorporated in 1955 is the flagship company of TTK group promoted by T.T. Krishnamachari. The company mainly operates in the Kitchen Appliances segment with a wide range of product categories including Pressure Cookers, Cookware, Gas Stoves and Domestic Kitchen Electrical Appliances and has entered the Cleaning solutions segment from FY18. The company has 5 manufacturing plants, 2 dedicated R&D centers, strong distribution network consists of 590 Prestige Xclusive stores in over 320 cities, 24 regional sales centers, 350 authorized service centers and employs over 2500 employees, the ‘Prestige brand’ has a strong brand recall among kitchen products across India and is today a total kitchen solutions provider. The company also exports and has an overseas subsidiary (TTK British Holdings Limited) in UK.

Started with a single product manufacturing in 1959, TTK has now become a total Kitchen solution provider consisting of kitchen ware, various household electronic appliances and modular kitchen. The share of pressure cooker in the product mix has now reduced to ~31% from ~47% over the last decade. The ‘Prestige brand’ has a strong brand recall among kitchen products across India supported by consistent & relatively higher ad-spending (7.3% in FY20).

Product innovation has been the main strategy of the company that contributes to growth and market share gaining. Supported by strong research base, TTK has been launching new variants of its existing products as well as new products at regular intervals. Recently, TTK launched an innovative range of Pressure Cookers (Svachh India’s first pressure cooker which controls spillage). In the current FY also TTK is geared to launch 100 new SKUs (Stock Keeping Units). Additionally, factors like preference to branded products, growing urbanization, rising disposable income and GST is resulting in a gradual shift to organized players, which will benefit TTK.

EBITDA margin is largely stable as pricing is built on a cost plus. Any cost escalation passes to the consumer which shows pricing power and margin improvement will be through efficiencies. Currently, the main raw material (aluminum) prices are benign and does not expect any cost increase due to discontinuation of imports from China. Relatively high ad-spend also provide a comfort to protect margins. TTK has a strong balance sheet with net cash of ~Rs.350cr.

Covid-19 is expected to have an impact on FY21E earnings. But, gradual relaxations along with good monsoon, end of loan moratorium, increased penetration of cooking gas through PMUY would support demand. Expect revenue/PAT to grow at 6%/13% CAGR over FY20-22E. Factoring gradual improvement in volumes, we value the stock at 40x FY22E (2Yr avg=40x) with a Target of Rs. 6,870. Recommend Buy considering healthy Balance Sheet and return ratios.

Analyst: Vincent Andrews, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers, and web link for the research notes: TTK Prestige Ltd:  http://bit.ly/3ha7def

Vinati Organics Ltd (VOL) enjoys global leadership in two specialty chemicals, with market share of 70% in IBB (isobutyl benzene) and 80% in ATBS (2-Acrylamindo 2-Methylpropane Sulfonic Acid). Focus on R&D VOL is expanding its product portfolio by achieving synergy benefits from existing products through backward integration/forward integration. Recently VOL has commissioned Butyl Phenol, with 4 products coming out of this project the company is expected to gain Rs400cr revenue from this product at full capacity. Over last 3-year revenue and profitability grew by 17% & 33% CAGR respectively.

Q2FY21, Revenue de-grew by 11% YoY due to lower off-take from ATBS & new product Butyl phenols. Revenue growth from ATBS was impacted by decline in oil prices and overall realization on account of pass through of lower commodity prices. ATBS contributes 57% (FY20) of overall sales, while ATBS applications includes Oil & Gas, water treatment, paints & coating, textiles, adhesives. Revenue contribution from Oil & gas segment is around ~20%, which is expected to be subdued in the near to medium term. Considering this management has indicated a de-growth topline for FY21E. However, IBB volumes continued to steady on account of improved off-take due to current pandemic. All other products namely IB, HPMTBE, customized products saw stable demand. However, the new product Butyl phenols yet gain momentum. We expect Butyl phenols to start contributing towards revenue growth starting FY22E. New CPAEX plans include Rs.200cr for new products in next 1 year which is expected add Rs300cr to top-line. We lower our revenue growth estimates by 15% & 9% for FY21E & FY22E and we expect revenue to grow by 34% CAGR over FY21E- FY23E.

EBITDA margin declined by 240bps YoY to 38.3% due to weakness in ATBS segment and higher cost. Profitability declined by 44% YoY to Rs.62cr. Going forward, revival in high margin ATBS will take some more time. We lower our EPS estimates by 26% & 16% to factor-in likely earnings volatility in the near term. However, we expect PAT to grow by 42% CAGR over FY21E-22E led by revival in ATBS, stable growth in IBB & other products and Butyl phenols contributing towards overall top-line.

We continue to maintain a positive outlook on VOL, given its investment in new capacities for introduction of new products, leveraging growth opportunities in existing product portfolio, strong balance sheet and healthy RoE & ROCE of 26% & 25% (avg. last 5years). We value VOL at P/E of 26x as we roll forward to FY23E and maintain to Accumulate with a target price of Rs.1256.

Analyst: Anil R, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers, and web link for the research notes: Vinati Organics Ltd : http://bit.ly/37BGELI

Petronet LNG is public limited energy Sector Company that imports Liquefied Natural gas. ONGC, GAIL, IOCL and BPCL are the four promoters of Petronet with each of them having 12.50% equity stake.  Petronet set up the country’s first receiving and re-gasification terminal at Dahej, Gujarat and later set up a terminal at Kochi. At 17.5 MMTPA capacity, the Dahej terminal is India’s largest while the Kochi terminal has a capacity of 5.0 MMTPA.             

PLNG’s Q2FY21 revenue fell 33.4% YoY to Rs. 6,236cr (+27.7% QoQ), on lower gas prices partially offset by increase in LNG volumes processed (1.6% YoY to 254 TBTUs). Dahej terminal processed 243 TBTUs, a rise of 1.3% YoY. On a sequential basis, total throughput processed increased by 33.7% and Dahej terminal throughput rose 34.3%, with increase in demand to pre-COVID levels and strong operation efficiency. EBITDA increased 17.5% YoY to Rs. 1,363cr along with margin expansion of 950bps YoY to 21.9%, driven by decline in cost of sales as a percentage of sales by 10pps YoY (inventory impact of Rs. 60cr from the rise in spot prices by US$ 3). However, PAT reduced 15.6% YoY to Rs. 919cr, owing to higher corporate taxes of Rs. 315cr (vs. Rs. 218cr of tax benefit in Q2FY20), partially aided by increase in other income by 60.3% YoY to Rs. 142cr. The company has a strong balance sheet with debt/equity at 0.2 while the company generated a strong cashflow of Rs.4,432cr in FY20. The Dahej terminal operated at 109% compared to 81% in Q1FY21 and Kochi terminal operated at 17% during the quarter. Petronet declared a special interim dividend of Rs. 8.0 per share compared to Rs. 5.5 per share in Q2FY20. The company has planned maintenance activities in 2HFY21 and operating expenses are expected to be same as 1HFY21 for the remainder of the year.

The completion of the long-awaited Kochi-Mangalore gas pipeline will see an increase in the capacity utilization of the Kochi terminal while the company also plans to increase the capacity at its Dahej terminal. The company is in discussions with Oil Marketing and city gas distribution companies to set up LNG retail outlets, which will be further source of revenue. We expect the demand for cleaner fuels to increase on the back of government schemes such as the Pradhan Mantri Ujjwala Yojana Scheme. The stock is currently trading at a 1 year forward PE of 13x, similar to its 5-year average, which is favourable. Hence, we recommend a Buy rating on the stock based on 15x FY22 EPS, with a target of Rs.327. 

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

For Disclosures and Disclaimers, and web link for the research notes: Petronet LNG Limited: http://bit.ly/2WE4iRv

Granules India Ltd is a leading generic player in the Indian Pharmaceutical industry, with 2/3rd of its revenue generated from North America and Europe.

Total revenue in Q2FY21 grew by 22.7% to Rs.858cr with Finished Dosages (50.1% of revenue) growing by 22% during the quarter. Active Pharma Ingredients (API) and Pharma Formulation Intermediates (PFI) grew by 17% and 30%, respectively. The strong showing in the top line was mainly attributed to the continued traction seen in GRAN’s core molecules like Paracetamol, successful new launches, as well as the acquisition of new customers in the API space. Gross margin expanded from 48.6% in Q2FY20 to 57.9% in Q2FY21 as better product mix and increased sales from high margin formulations aided the margin expansion. EBITDA margins saw a 940bps increase on a YoY basis to 29.9% which includes 7.5cr reversal in expenses on account of the Metformin recall in Q1FY21.

The management is confident of maintaining these levels of operating performance going forward as the company looks to further increase its focus on the formulation segment, increasing front end sales in the U.S as well as the backward integration of raw materials. Granules currently has 32 ANDAs approved, six of which are yet to be launched as well as 13 ANDAs awaiting approval. The company has stated that it will look to file 7-8 ANDAs every year. In FY21, three new products are expected to be launched with a market size of $1bn. The focus will be on developing products that are niche/differentiated which have limited competition. During the quarter R&D spend was at Rs.22cr versus Rs.30cr in the corresponding quarter last year. Over FY21-FY22, the company will spend a Capex of around Rs.240cr to produce tablets, capsules and other dosage forms based on MUPS (multi-unit pellet system) technology. The technology will be used to produce high volume sustained-release products.

We expect Revenue/PAT to grow at a CAGR of 25%/40% over FY20-FY22E on the back of increased share of high margin finished dosages, new launches of complex and niche molecules and backward integration of raw materials thereby mitigating price fluctuations. The management has stated that it will look to increase its share of non-core molecules (~30% in Q2FY21) as well as expand its opportunities to other markets. Granules is currently trading at around 20x FY22E EPS and above its 5-year average multiple of around 13x. Hence, we feel the current valuations have factored in the positive outlook for the company. Therefore, we reduce our rating from “Buy” to “Accumulate” based on 18x FY22 EPS with a target price of Rs.443.

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

For Disclosures and Disclaimers, and web link for the research notes: Granules India Ltd: http://bit.ly/2KHAJf4

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