Stock Recommendations – May 2021

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Tata Consultancy Services, a division of Tata Sons Limited, is a global IT services organization that provides a comprehensive range of IT services to its clients in diverse industries. The Company, caters to finance and banking, insurance, telecommunication, transportation, retail, manufacturing, pharmaceutical, and utility industries.

In Q4FY21, Topline grew 9.4% YoY to Rs. 43,705cr (+4.2% QoQ, +5.9% YoY on CC basis). BFSI revenue increased to Rs.17,559cr (+7.0% QoQ, +13.3% YoY in CC), supported by large transformational deals and core transformation. Retail and Consumer Packed Food (CPG) was at Rs. 6,778cr (+4.0% QoQ, -0.9% YoY in CC) owing to poor performance in sub sectors. Life Sciences and Healthcare segment continued to remain strong (+3.8% QoQ, +19.3% YoY in CC). Also, Manufacturing business went up 3.9% QoQ/+1.3% YoY on CC. Besides this, Communications and Media, and Technology Services rose 1.8% QoQ, while declined -4.0% YoY on CC terms. EBIT grew 17.0% to Rs. 11,734cr, as EBIT margin expanded 175bps YoY to 26.8% aided by operating efficiency and large deal wins. Resultantly, net profit surged 14.9% YoY to Rs. 9,246cr.

During the quarter, Company’s order book stood at USD 9.2bn, the highest ever number recorded by the company so far. Additionally, TCS also added higher ever employees count 19,388 in Q4FY21, taking total to 488,649 in FY21. While attrition rate (LTM) in IT services was at lowest 7.2% vs. 7.6% in Q3FY21.Management proposed final dividend of Rs.15 in Q4FY21.

TCS product portfolio continued to perform well in Q4FY21, Ignio signed up 15 new customers out of which 7 went live. Company upsell 21 products to its existing clients in Q4FY21. Overall, company added more than 50 customers for Ignio taking total to >200 in FY21.  Additionally, TCS added 7 more reselling partners under channel partner program, won 2 more award under products suit and received 3 patent, with this company has 30 patents so far. Besides, TCS added 5 new wins and 5 go lives under financial domain TCS BaNCS, out of which biggest win was State Street in Q4FY21. Overall company recorded 19 wins for TCS BaNCS in FY21.

Outlook remain promising on the back of strong order book, robust growth across the geography and diverse product portfolio. Additionally, strong growth momentum in core business verticals are likely to continue with strong order booking in BFSI, Retail, and CPG. We reiterate our BUY rating on the stock with a revised target price of Rs. 3,773 based on 31x FY23E adj. EPS.

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

For Disclosures and Disclaimers: Please find the web link for the research note: TCS  Ltd.                                                  

Narayana Hrudayalaya Ltd is a healthcare provider that operates a chain of multi-specialty hospitals, heart centers and primary healthcare clinics across India, Bangladesh and the Cayman Islands.

The company has a strong track record of providing quality healthcare services at an affordable cost. Unlike most private hospitals, NH allocates 60% of its bed capacity to general wards and the remaining capacity towards high-income patients. As a result, NH has been able to provide its services at lower Average revenue per hospital bed compared to its peers while maintaining comparable margins. NH operates its hospitals on an asset-light basis, wherein NH does not invest in the land or the hospital buildings, but invests in the medical equipment and manages the running of the hospitals. The company ties up with like-minded partners to set up these hospitals. Through this model, NH has added over 500 beds in the last five years while expanding ROCE from 7.5% in FY16 to 10.6% in FY20 and maintaining a low Debt/Equity ratio.

Narayana owns and operates Health City Cayman Islands (HCCI), a 110-bed facility located in the Cayman Islands, Caribbean. The Island’s proximity to the west coast of the U.S has attracted patients from cities like Miami with the cost at HCCI around 25%-40% of U.S prices. Doctors at HCCI are recruited from India and sent to the Cayman Islands. Over the last 5 years, NH has focused on increasing its presence at tier-1 cities by setting up premium multispecialty hospitals in New Delhi, Gurugram and Mumbai. In FY19, around 30% of the Gurugram facility’s revenue was from international patients. The Mumbai facility is a pediatric hospital that was established in partnership with SRCC Mumbai.

NH’s revenue grew at a CAGR of 18% over FY16-20 supported by growth in average revenue per operating bed, occupancy rates, and ramp-up of operations in the Cayman Islands. NH’s EBITDA margins stood at an all-time high of 13.5% in FY20 due to improved efficiencies at mature hospitals while reducing losses at the new hospitals. We expect EBITDA margins to expand to 14.5% in FY23E as the share of the revenue from new hospitals and the Cayman Islands increases.

NH is currently trading at a 1 year forward EV/EBITDA of 20x, below its 5-year average of 24x, which is attractive. We value Narayana Hrudayalaya Ltd at 20x FY23e EV/EBITDA with a target price of Rs.517 and recommend a Buy rating, considering NH’s increasing profitability at its new centers and expansion of international operations.

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

For Disclosures and disclaimers: Please find the web link for the research note: Narayana Health Ltd.        

Power Mech Projects Ltd, is a leading infrastructure-construction company based in Hyderabad with an international presence. Key business areas of the company are Erection, Testing and Commissioning (ETC), Civil & Construction, Operations and Maintenance (O&M), and Electrical. The company enjoys a leadership position in power O&M and erection business with a market share of more than 50%. The company has an order backlog of Rs.7,353Cr as of 16th Feb 2021, showing revenue visibility for the next 3 years.

The company is in the process of diversifying its product mix to non-power segments like civil, electrical, railway, etc. The company has reduced its power business from 77% of total revenue at the beginning of FY19 to 59% in 9MFY20. It further plans to bring down the mix of power to 40% and increase the non-power mix to 60%. The major focus in non-power orders will be on civil segments including railways, water, petrochemical, etc. This diversification has helped the company to gain new orders in recent quarters.

During the period FY16-FY20, revenue grew at a CAGR of 12% with PAT growing at 15%. Strong order intake during the period, especially in the Civil segment, contributed to the revenue growth. We expect the order book to grow at a CAGR of 14% during FY20-23E and revenue at 30% during the same period. Increased focus on O&M orders will help the company to have a consistent revenue flow for a longer period along with higher margins. ROE for FY20 stands at 14.8% against 19.7% in FY19, partially offset due to lockdown at the end of March 2020. We expect ROE to be at 16.3% and ROCE to be 15.3% by FY23.

Power Mech enjoys a healthy EBITDA margin of 13%-13.5% and PAT margin in the range of 5.5% to 6.0%. The company being in a highly labor-intensive business was badly affected by the lockdown and restrictions in movement. Management expects the business to be at a 100% efficiency level from Q4FY21 onwards. We project EBITDA margin to be at 10.3% and 11.7% while PAT margin is forecasted at 4.6% and 6.1% for FY22 and FY23, respectively.

With strong order inflow, diversification to the non-power segment, and increased focus in the O&M segment, we expect the company to be in its growth trajectory from Q4FY21 once the company reaches full execution level. Considering these factors, we recommend a Buy rating on Power Mech Projects based on 6x FY23E earnings with a target price of Rs. 727.

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

For Disclosures and Disclaimers: Please find the web link for the research notes: Power Mech Projects Ltd.                                                     

Indraprastha Gas Limited (IGL) processes and distributes compressed natural gas and liquefied petroleum gas. IGL is promoted by Bharat Petroleum Corporation Ltd (BPCL) and Gas Authority of India (GAIL). The company provides piped natural gas (PNG) for households and industries as well as compressed natural gas (CNG) for vehicles in the Delhi-NCR region. IGL operates 562 CNG stations with 14.70 lacs residential consumers and ~6200 industrial/commercial customers. 

The revenues were impacted on the back of COVID-19, as IGL is one of the biggest retailers of CNG to automobiles and PNG to households and industries across regions. However, there has been a strong recovery in volumes due to the gradual easing out of restrictions, with economic activity returning to pre-COVID levels in the last two quarters. As a result, the company has registered an average daily sale of 6.3SCMmn per day in the last quarter vs 5.5SCMmn in Q2FY21. Gas prices reached a record low of $2.1 per MMBtu in FY21, down 40% on a YoY basis, which enabled IGL to procure gas at a favourable cost. This has helped IGL expand its EBITDA margins by 560bps from 21.0% in 9MFY20 to 26.6% in 9MFY21. Gas prices are expected to be benign in the coming year, which would aid further margin expansion.

The industrial units in Delhi were asked by the Air Quality commission to switch over to cleaner fuels and IGL along with the Delhi government and DPCC is working closely for the identification of such units and transition from dirty fuels to cleaner fuels (PNG). “GAS BASED GENSET” is a green initiative by IGL aimed at emission-free gas coupled with fuel efficiency & cost-effectiveness. As GRAP (Graded Response Action Plan) bans usage of Diesel Genset to maintain the air quality in prime cities like Delhi, this measure steps in as an alternate and aids in elevating its revenues besides abiding by the government regulations. In March 2021, IGL signed a long-term gas supply agreement with the Delhi Transportation Corporation (DTC) to continue its supply of CNG public buses till 2030.

The recent lockdown in Delhi may impact volumes in the short term as vehicular movement would be restricted. As the lockdown measures ease, we expect improved capacity utilization and reopening of educational institutions to revive demand for natural gas. The natural gas price environment remains favourable in the coming year and we expect an EBITDA CAGR of 13% over FY20-FY23E. We remain positive on the stock and reiterate our BUY rating with a revised target price of Rs.630 based on a SOTP basis.

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

For Disclosures and Disclaimers: Please find the web link for the research notes: Indraprastha Gas Ltd.                                      

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