Stock Recommendations – June 2020

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Jubilant Food Works is a leading quick service restaurant company. It owns franchise for Domino’s in India, Nepal, Sri Lanka and Bangladesh and also for Dunkin’ Donuts in India with over 1373 stores.

Jubilant has a very strong revenue growth of 27% CAGR for the past 9 years. Being the leader in the Indian market for pizza sales, Jubilant has a very strong competitive advantage of online ordering and quick delivery sales as compared to its peers. With adequate liquidity of around Rs 656cr on its balance sheet as of March 2020, the company is in a good position to meet its obligations and take on, its operational challenges. JFL reported muted growth in revenue of 3.8% YoY to Rs. 898cr for Q4FY20, mainly impacted by nation-wide lockdown since March amidst COVID-19 pandemic. Company witnessed strong revenue growth during the first two months with LFL/SSG growth at 8.4%/7.2% in Jan and 14.9%/13.1% in Feb. However, LFL/SSG growth fell sharply in Mar at -28.0%/-28.4%, impacted by supply chain disruption since the commencement of lockdown. During the quarter, Company opened 17 new stores (13 Domino’s Pizza and 2 each in Dunkin’ Donuts and Hong’s Kitchen). On-line Ordering (OLO) contributed 88.9% to delivery sales vs. 75.3% in Q4FY19.

Jubilant is expected to benefit over the long term from the strong discretionary spending habits of the middle class going forward. The growth would be further enhanced by the increased participation of women in the labour force causing families to depend on quick service restaurants. With a large young age population in India, the increasing disposable income among millennials augers very well for Jubilant’s long term growth in India. 930+ stores have been re-opened so far, representing ~87% of total network. Pandemic impacted consumer eating habits and disrupted company’s operations in the short term. Management expects gradual recovery in the medium-term with its strong and trusted brand, proven quality and hygiene credentials, a robust delivery mode and growing Digital capabilities. Going forward, we expect Jubilant’s online delivery sales to be very instrumental in catering to its large base of customers.

In response to the ongoing covid crisis, Jubilant has launched its zero contact delivery business model, effectively helping in growing its revenues. With stringent health measures adopted in restaurants, Jubilant can effectively reduce the number of contact points and deliver safely to the customer which will help revive the sales going forward. Also, currently with prices of inventory coming down due to low demand, Jubilant can save more in terms of inventory spending which we believe will translate into margin recovery.

With Jubilant’s zero contact delivery strategy and presence over 282 cities, company has a strong advantage in the segments it operates compared to its peers. We also expect a gradual recovery post lockdown. Hence we have an Accumulate rating on the stock with a target price of Rs 1903.

Analyst: K Jose Francis, Geojit Financial Services Ltd., INH200000345         

General Disclosures and Disclaimers: Jubilant Food Works – https://bit.ly/2zCt8t5

Cadila Healthcare is India’s leading vertically integrated pharmaceutical company. With its presence across the value chain, it manufactures finished dosage forms, active pharmaceutical ingredients, contract research, animal healthcare products and wellness products. The company has a diversified portfolio in APIs which caters to over 90 countries. At present, the Cadila offers over 38 APIs and intermediates across various therapeutic categories-respiratory, diabetology, gastroenterology, pain management (antimigraine), orthopedics and many more. The company also has 850 products in the finished dosages segment in several forms belonging to 45 therapeutic segments and 12 specialties. Cadila’s Contract Research Operation (CRO) offers a series of pre-clinical and clinical trials for drug development that cover over 45 therapeutic categories. In 2006, Cadila Pharmaceuticals entered into a joint venture with Apollo Hospitals Group to manage Apollo Hospitals, Ahmedabad. 

The company derives 38% of revenue from India and is focused on increasing its presence in the region through its prescription and consumer business. Cadila recently received approval to mass produce India’s first indigenous test kit for antibody detection of covid-19. Has a solid presence in the U.S where its generic portfolio is expected to see incremental growth. Currently researching and developing potential vaccines against covid-19. Upto last quarter, CDH filed 14 additional ANDAs taking total to 386 and also received 8 new approvals, including 2 tentative approvals. Additionally, company is looking for approval of 3 new products under transdermal franchise next year. Recent acquisitions and investments in the wellness and biologics segments are expected to drive sales and expand margins in the long term.

The company has seen its revenues grow at a CAGR of 13% over the last as years mainly due its success in the U.S markets where it has grown at 17% CAGR during the same period. Profits have expanded by 17% CAGR led by increased focus on high margin products. Cadila also has a a strong balance sheet with a debt equity ratio of only 0.7x in FY19, while also giving an average ROE of 25% in the last 5 years. The company had a good cash position of Rs 421 crore in FY19

The increased focus on scaling up domestic business and its solid presence in the U.S generics segment bodes well for the company. Number of approvals of ANDAs by the USFDA is expected to rise in the coming financial year. 

Analyst – Dilish K Daniel ,   Geojit Financial Services Ltd., INH200000345    

General Disclosures and Disclaimers: Cadila Healthcare- https://bit.ly/2A5f4bx

Hindustan Unilever (HUL) is India’s leading FMCG Company with a heritage of over 80 years in India. With over 35 brands spanning across 20 distinct categories, such as soaps, detergents, shampoos, skin care, toothpastes, deodorants, cosmetics, tea, coffee, packaged foods, ice cream, and water purifiers the company is a part of the everyday life of millions of consumers across India. Its portfolio includes leading household brands such as Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit. HUL is a subsidiary of Unilever, one of the world’s leading suppliers of Food, Home Care, Personal Care and Refreshment products with sales in over 190 countries and an annual sales turnover of €52 billion in 2019. Unilever has over 67% shareholding in HUL. The Company has about 21,000 employees.

For Q4FY20, HUL posted 9.4% declines in Q4FY20 revenue to Rs. 9,011cr, primarily impacted by breakage of supply chain (company plants now running at 70-75% utilization) and subdued demand amidst nationwide lockdown post mid-March. Company witnessed weaker revenue across all three segments with Beauty & Personal Care segment leading the declines (-13.5% YoY) while followed by Food & Refreshments (-6.7%) and Home Care (-4.3%). For FY20, company managed to achieve 1.5% YoY growth in standalone revenue of Rs. 38,785cr.

Q4FY20 EBITDA fell 5.4% YoY to Rs. 2,195cr, mainly dented by lower sales, although EBITDA margin expanded 110bps YoY to 24.4% on lower fuel and input costs. Segment margins for Beauty & Personal Care came in at 24.9%, while Home Care and Food & Refreshment segment margins stood at 19.0% and 17.6%, respectively. PAT before exceptional item declined 7.6% YoY to Rs.1,469cr (excluding post-tax one-off adjustments worth Rs. 50cr). Most of the non-core expenses including recruitment, media, compensation revision, growth capex and restructuring expenses are kept on hold owing to the pandemic, until business conditions normalize.

We expect COVID-19 situation to negatively impact HUL from both demand and supply side in H1FY21 and possibly Q3FY21. Rural demand could be further impacted by lower income with weaker sale of crops amid labor and supply chain issues. Monsoon will play a vital role in demand uptick. Resultantly, we expect revenue growth in FY21 to remain in single digit, but anticipate EBITDA margins to improve on lower fuel/input costs. Hence, we maintain our HOLD rating on the stock with a revised target price of Rs. 2,200 based on 54x FY22E adj. EPS

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

General Disclosures and Disclaimers: Hindustan Unilever – https://bit.ly/2XsduIJ

Britannia Industries is one of India’s leading food companies with a 100 year legacy. The company sells various brands of confectioneries in India and globally. Britannia’s product portfolio includes Biscuits, Bread, Cakes, Rusk, and Dairy products including Cheese, Beverages, Milk and Yoghurt. Britannia is among the most trusted food brands, and manufactures India’s favorite brands like Good Day, Tiger, NutriChoice, Milk Bikis and Marie Gold which are household names in India. Britannia products are available across the country in close to 5 million retail outlets and reach over 50% of Indian homes. The company’s foot print spreads across North America, Europe, Africa and South East Asia through exports.

Britannia Industries has a strong focus on improving its market share. The company has close to 55 lacs outlets in Q3FY20 (including direct outlets totaling 21.7 lacs) and the gap with market leader narrowed down to 8 lacs. Management targets to cross 6mn mark over the next three years to expand its distribution network. With continues strengthening of its distribution network, the company has witnessed unprecedented gain in market share in all rural states, especially the Hindi belt, in the last reported quarter.

Britannia Industries is having strong historical financial performance. Supported by strong distribution network and strong brands, the company’s top-line has consistently grown in the last 5 years to Rs.11,262cr in FY19. Also, the operating cash flow has grown at 12% CAGR during same period. At the same time, the company has consistent focus on cost efficiency measures which is reflected in continuous margin expansion. The company’s EBITDA margin has almost doubled to 15.7% in last 5 years. Britannia Industries has negligible debt in its Balance Sheet with D/E of 0.04x only and has a good cash position of ~Rs850cr as on FY19. The company is having strong return ratios with RoE of 24% and RoCE of 29% as on FY19.

Due to Covid-19 pandemic, packaged food (Biscuit) industry is currently facing supply chain issue and once the situation stabilizes, we believe, Britannia Industries is likely to be a major beneficiary given its strong brands, large distribution network, innovative products and improving market share. We value the stock at 46x FY22E P/E (at 5Yr Avg) and upgraded to Buy due to the recent drop in stock price with a Target of Rs.3,455.

Analyst: Rajeev T, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Britannia Industries- https://bit.ly/3eheGFw

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