Stock Recommendations – July 2019



 Sector: Construction

NBCC (India) Limited provides civil engineering construction services. The Company operates through three segments: Project Management Consultancy (PMC), Real Estate Development, and Engineering, Procurement and Construction (EPC). The PMC segment offers management and consultancy services for civil construction projects, including residential and commercial complexes, redevelopment of government colonies etc. The real estate development segment focuses on residential and commercial projects, such as corporate office buildings and commercial complexes. The EPC contracting segment covers roads, border fencing, water and sewage treatment plants, and solid waste management systems.

Q4FY19 standalone revenue grew by 8.9% YoY to Rs2,378cr supported by significant rise in real estate sales to Rs224cr v/s nil in Q4FY18 while PMC growth was subdued to 3.6% YoY and EPC revenue declined by 65% YoY to Rs 61cr. Additionally, the management has pointed that orders of Rs1,500cr have already been awarded from its two key redevelopment projects namely Netaji Nagar and Sarojini Nagar, and expects to start execution shortly while third project Nauroji Nagar is still under litigation, next hearing is scheduled for July-2019. In FY19, projects worth ~Rs15,000cr has been awarded to contractors and is further planning to award Rs7,00cr to Rs8,000cr in the next three quarters. Due to delay in getting approvals for redevelopment projects we reduce FY20E/21E revenue estimates by 8%/5% respectively.

NBCC’s order book remain strong at Rs800bn (11.3x FY19 revenue) but large portion of which is not under execution stage. Company received an inflow of Rs124bn in FY19. Out of the total order book only orders of ~Rs300bn to Rs330bn were awarded and remaining portion is not yet awarded due to delay in government approvals and litigation issues. Redevelopment projects constitute 51% (Rs410bn) of the order book, of which projects of Rs55bn only been awarded till now. Company guided that in FY20 orders of Rs150bn to be awarded.

The EBITDA margins declined by 79bps YoY to 4.4% due to rise in raw material cost and absence of high margin redevelopment revenue. Despite drop in operational margin, PAT grew by 8% YoY in Q4FY19 supported by rise in other income (19% YoY) and lower tax expenses.

Company’s order book remain strong while most of the projects are not yet awarded due to delay in clearances and litigation issues. Any signs of pick up in execution of redevelopment projects will augur well for the revenue estimate. We revise our rating to Reduce and value NBCC’s core business at a P/E of 17x on FY21E EPS and book value of land parcel at Rs5/share.

Analyst: Antu Eapen Thomas

Geojit Financial Services Ltd., INH200000345

 For Disclosures and Disclaimers, and web link to the research notes: NBCC Ltd – Click Here



Sector: Cement

Dalmia Bharat Ltd (DBL) is the fourth largest cement company in India with a capacity of ~26.1MT, focusing in South with 13.2MT and East and North-East with 12.9MT. DBL has completed amalgamation with OCL India.

DBL reported revenue growth of 8%YoY in Q4FY19 supported by 7.5%YoY growth in volumes while industry volume grew by 12%YoY. Blended realisation was flat on YoY basis but grew by ~5% on QoQ basis. DBL has booked tax incentive for ~Rs84cr for the quarter (~Rs210cr for FY19) and expects Rs150-170cr next year. The newly acquired asset, Kalyanpur Cement (1.1MT in Bihar) has started commercial production in April, 2019 and expects 60-65% utilisation in FY20 which will aid volume growth. FY19 witnessed a strong demand improvement in industry with ~12% volume growth. Though we expect slowdown in volume growth in Q1FY20 quarter on account of election, government’s strong focus on infra and housing will continue to support demand. We expect revenue to grow by 12%CAGR over FY19-21E.

EBITDA margin improved by 70bps YoY and 520bps QoQ aided by savings in freight (-8.4%YoY) and other expenses (13.9%YoY) which is largely off-set by surge in RM cost (+12%YoY). Pet coke (fuel) price per ton was at $91 during Q4FY19 Vs $93/$101 QoQ/YoY. Also, price of slag was at Rs1,296 per ton vs Rs1,356/Rs1,033 QoQ/YoY. The full benefit of the softening of Fuel and RM prices is expected in coming quarters. The savings in freight expenses was on account of decline in diesel prices while lead distance continue to remain <300km. DBL is also focusing on cost saving measures like setting up of Waste Heat Recovery (WHR) in various locations. Cement prices also has started witnessing some improvement especially in South in the quarter on account of demand improvement. DBL’s capacity utilisation has improved to 72% in FY19 from 68% in FY18. We expect EBITDA margin to improve to 21.9%/23.3% in FY20/FY21 from 20.5% in FY19. Adverse price movements and any surge in fuel and RM prices is the key risk.

DBL has completed the amalgamation with OCL India and the resultant entity ‘Odisha Cements Ltd’ has been renamed as ‘Dalmia Bharat Ltd’. The restructuring will lead to additional synergy and tax benefits. For the acquisition of Murli Industries (3MT, Maharashtra), final hearing at NCLT got completed in February and order is awaited. The recently announced new grinding capacity expansion of ~7.8MT in East with a capex of Rs3,700cr is on track and is expected to complete by FY21. Rs1,700-2,000cr is expected to spend in FY20. DBL has repaid debt of Rs1,368 in FY19 and has scheduled Rs1,100cr for FY20E. We value DBL at EV/EBITDA of 9.5x and upgrade to Accumulate from Hold rating.

Analyst: Vincent K A

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers, and web link to the research notes: Dalmia Bharat – Click Here




Sector: Packaging

Mold-Tek Packaging Ltd (MTEP), is an innovator and pioneer in rigid plastic packaging in India and is market leader in this segment and one of the leading manufacturers and suppliers of high quality airtight and pilfer proof containers/pails in India for paints, lubricants, food and FMCG. Further, it is the first company to introduce IML technology in India.

Historically, MTEP was supplying plastic pails for paints and lubricants players, which were more or less commoditized and lacked much product differentiation. MTEP adopted In-mold labelling technology in 2011 which was largely accepted globally to add photographic, glossy labels to packaging and thus enhance brand value. MTEP has fully integrated facilities ranging from label making, mold adaptations to in-house robots for use in its production line. The backward integration of design, molds and use of robots in production process has led to cost reduction.

During FY10-13 MTEP’s EBITDA margin was in the range of ~10%-12%. However, post FY13 EBITDA margin witnessed significant expansion by 760bps to 18.9% led by 390bps improvement in gross margins to 39% in FY19 driven by a structural upgrade in its business model and scale benefits. Increasing share of IML in product mix, higher contribution from food and FMCG (F&F) segment coupled with cost savings led by backward integration drove margin expansion.

During FY10-FY13, MTEP’s P/E valuations hovered in the range 3x-5x. However, during last 5 years, valuation has significantly re-rated and its P/E band has expanded from 5x to above 20x and touched a high of 30x. Consistent re-rating in MTEP valuation has been largely propelled by strong earnings momentum of 35 % CAGR over FY13-FY19.

Currently management’s focus is on increasing revenue contribution from FMCG customers where margins are higher. Additionally, FSSAI (Food Safety and Standards Authority of India) is expected to come-up with new set of stringent norms related to packaging to control contamination in food products. We believe that this will be one of the key growth triggers for higher-end packaging going forward and the MTEP will be the major beneficiary. In F&F segment, it has marquee clients like Procter and Gamble, ITC, HUL, Amul, Cadbury, London Dairy, Mondelez, Heinz and Vadilal etc.

Currently MTEP it is trading at 1 year forward P/E of 17x, 16% discount to its last 1-year average of 21x (on account of sharp correction in mid and small cap stocks) which seems attractive given strong earnings outlook going forward.

Analyst: Anil R

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers, and web link to the research notes: Mold-Tek Packaging – Click Here



Sector: Specialty Chemicals

AARTI Industries Ltd (ARTO) is a global leader in Benzene based derivative products. The company has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints and pigments. It has process driven manufacturing capacity, which provides flexibility in manufacturing products as per the market dynamics. Hence, ARTO is strategic supplier for various domestic and global MNCs. Aarti is best placed to benefit from the structural upcycle underway in the Indian chemicals industry as global chemical giants are de-risking their raw material sourcing destination from China, due to higher regulatory restriction and to diversify country risk.

ARTO’s Q4FY19 Revenue grew by 18% YoY, led by broad based growth across segments. Revenue from Specialty chemical business grew by robust 17% YoY, regardless of lower than expected volume growth of 3% YoY, driven by better realization, and improvement in product mix towards value added products. The Pharma segment grew by 22% YoY, continued to witness strong growth momentum led by volume growth and scale benefits. While home and personal care business grew by 16% YoY. ARTO will continue to benefit from backward integration, expansion of product portfolio and shift in volume due to Chinese shut down in the medium term. Going forward, we expect strong off-take from specialty chemicals and pharma segment to continue. Gross margin improved by 180bps YoY to 42.8% while EBITDA margin improved by 200bps YoY to 19.6%, on account of lower cost. PAT grew by 47% YoY to Rs124cr.

To invest Rs1,200cr for capacity augmentation in FY20E given strong demand outlook in domestic and export markets. CAPEX plan includes increase of NCB capacity from 75000 to 108000 MTPA with an investment of Rs150cr. The expanded capacity will cater to increasing domestic demand and for downstream captive consumption. Capacity expansion will be in 2 phases and it will be fully operational in FY21E.

Management has guided 15%-20% revenue growth. We factor revenue to grow by 17% CAGR over FY19- FY21E.

Going ahead with strong volume offtake and value-added products in the sales mix we expect EBITDA to grow by 17% CAGR over FY19-20E. Consequently, PAT is expected to grow by 22% CAGR over FY19-21E.

We remain optimistic on ARTO’s long term growth story given capacity additions, launch of new products, and robust off-take from specialty and pharma segment. The earnings outlook continues to be robust at 26% CAGR over FY19E-21E.

Analyst: Anil R

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers, and web link to the research notes: Aarti Industries– Click Here


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