Stock Recommendations – October 2019



Sector: Banking/Finance

IDFC First Bank is founded by the merger of erstwhile IDFC Bank and erstwhile Capital First on December 18, 2018. At present, the bank’s total number of branches stands at 279 with a total funded asset to the tune of around ~Rs1,12,500cr.

Robust growth strategy envisioned for the merged entity with a renewed focus on the retail business. The bank plans to grow the retail loan assets to over Rs100,000cr to reach a 70% loan mix, at the same time reducing the infrastructure exposure to NIL in the coming 5 years. The bank plans to reduce the wholesale loan book to Rs40,000cr by March 2020. The bank expects the gross yield of the loan book to increase to 13.5% in the next five years. On CASA front, the bank strives to reach a CASA ratio of 30% within five years, and gradually take it to 40-50% from thereon. The bank also plans to set up 600-700 branches in the next 5 years. Over next 5 to 6 years, the bank expects the RoA & RoE to reach to the tune of 1.4% -1.6% and 13% -15% respectively.

In Q1FY20, the Net Interest Income (NII) of the bank has increased by 22% on an annualized basis. The total operating income of the bank has increased to Rs1,485cr in Q1FY20 compared to 1,386cr in the Q4FY19, marking around 28% annualized growth. Net Interest Margin is almost stable in Q1FY20 at 3.01% compared to 3.03% in Q4FY19. In Q1FY20, the bank’s provisions have increased by 95.4% sequentially to Rs1,281cr on account of exposure to the tune of Rs1,461cr to two financial service firms (including one HFC), which were recently downgraded by the credit rating agencies. In Q4FY19, the bank has provided 15% provision for the same, however, after the credit rerating, the bank has increased the provision coverage of these accounts to 75% of the outstanding principal amounting to Rs1,096cr. The bank also made 15% provisions for exposure of Rs1,006cr to one infrastructure account. For other infrastructure accounts amounting to Rs810cr, the bank has provided a prudent provision coverage of ~70%. Hence, despite having a 33% sequential growth in pre-provision profit, the increased provisions have resulted in a negative net income of Rs617cr.

We strongly believe that the merger and the enhanced focus on retail segment along with a clear growth strategy will act positively for the bank on a longer-term. However, we expect the operating costs as well as the cost of funds to remain elevated on a shorter to medium term. Hence, we value the bank at 1.2x BVPS of FY21E and recommend Hold rating with a target price of Rs45.6.

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

For disclosures and disclaimers, please see below: IDFC First Bank  –


Sector: IT

Hexaware Technologies Ltd. is an information technology and business process outsourcing service provider. It caters to software services in banking & financial, healthcare & insurance, travel & transportation and manufacturing domains. It has 33 global offices with an employee base of around 18,300. Hexaware now has 120 clients in USD 1mn-plus band.

In Q2CY19, Revenue grew significantly by 15.1% YoY to Rs. 1,308cr. By domain, Healthcare and insurance grew 29.2% YoY, followed by manufacturing & consumer (14.2%) and banking & financial services (6.9%). The company has consolidated revenue from Mobiquity business for only half a month this quarter. The company’s revenues would have been boosted by USD 17.6m if Mobiquity revenues for the entire quarter had been included. Operating profit increased to Rs. 191cr in Q2CY19 (vs. Rs.159cr in Q2CY18) as the operating margin improved by 62bps YoY to 14.6%, as higher visa costs and other operating expenses were offset by better pricing and operational efficiencies. The company has also managed to keep its attrition rate flat through its active efforts to manage attrition. We expect the company to maintain its good operating performance and estimate the operating margin to be flat YoY at 14.4% in CY19E. Management has guided for Effective tax rate for CY19E at 18.5% from 20% in prior years. The company incurred capital expenditure worth USD 4.6m in this quarter, in addition to USD 3.7m in Q1CY19. Utilisation increased to 80.7% in the current quarter.

The company has reported new deal wins worth USD 36m. The company has closed its deal with Mobiquity which it acquired for about USD 130m. However, it has consolidated Mobiquity’s financials for only half a month in the current quarter. Consolidated profit including Mobiquity would have been higher by USD 1.7m if included for the entire quarter. The company said that it has several joint pipelines with Mobiquity, with most being in early stages as of now. Hexaware is currently trading at a P/E of 17.6x CY19E. We roll forward to CY20E and value the stock at 16x CY20E adj. EPS, as we expect the company to continue its strong operating performance. Additionally, the consolidation of Mobiquity’s financials will boost its top line growth. Hence, we upgrade our rating to HOLD with a revised target price of Rs. 410.

Analyst: Rajin Rajan P, Geojit Financial Services Ltd., INH200000345

For disclosures and disclaimers, please see below: Hexaware Technologies Ltd. –



Sector: Aquaculture

Avanti Feeds Ltd (AFL) is a leading manufacturer of Shrimp Feeds and Shrimp Processor & Exporter. The company has a strong technical and marketing tie-up with the Thai Union Group Public Company Ltd (equity participation of ~25%), Thailand. Avanti exports its products mainly to USA and to other countries like Europe, Japan, Australia and Middle East.

For Q1FY20, revenue grew by 5% YoY mainly on account of strong growth in processing revenue (48%YoY) while feed revenue growth was muted. The total capacity utilisation of the processing segment improved to ~60% (51% for the new capacity of 15000MT and 78% for the old capacity of 7000MT). In Feed segment, the industry witnessed a de-growth of 10-12% in Q1FY20, however the company maintained volumes through market share gains. AFL’s market share has increased to 47% in FY19 from 43% in FY18. The market share improvement will benefit the company with strong top-line growth when the industry regains its momentum. Currently, Feed segment contributes ~83% of total revenue. The stocking in the first crop of this year was delayed due to climatic conditions but has picked up in April to June months supported by favourable prices and climate conditions. The farm-gate prices started witnessing improvement from April (>30% for large size) which will encourage farmers and hence the feed volumes. Though the industry feed volume is expected to be flat for this year considering the recent drop in shrimp culture, the company however expects 5%-10% growth through market share gains supported by consistent product quality and service. We maintain our revenue estimates and expects 14% CAGR over FY19-21E.

EBITDA margin maintained at 12.5% (12.7% YoY) in Q1FY20. We expect stable realisation for feed segment while factoring better shrimp export prices considering ~3%-7% increase witnessed in recent months for various sizes. Additionally, the company’s focus on value-added products (29% of total exports in Q1FY20 Vs 14% YoY) and improvement in capacity utilisation will support margins. However, the recent surge witnessed in raw material prices (Soya & Wheat which is used in feed manufacturing) may exert pressure on feed margins unless the company passes it to the customers and it would depend on the progress in shrimp culture activity and prices. We lower our EBITDA margin assumptions to 12.2% for FY20 (earlier 12.6%), but expect EBITDA growth of 19% CAGR over FY19-21E.

The recent improvement witnessed in farm-gate and export prices provides better outlook for both Feed & Processing segments. We continue to value AFL at 15x considering healthy growth & RoE and no debt, maintain Buy rating with Target of Rs427.

Analyst: Vincent K A, Geojit Financial Services Ltd., INH200000345

For disclosures and disclaimers, please see below: Avanti Feeds 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.  BFL’s Q1FY20 revenue de-grew by 4%YoY due to slowdown in Industrial export segment (down 37%YoY) and weakness in domestic CV (down by 31%YoY). Both Export & domestic declined by 11%YoY & 7%YoY respectively. The overall volume remains negative at -9% due to lower demand. Additionally, a fragile demand environment for domestic autos and lower visibility towards per-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 240bps due to higher input cost and lower product mix. PAT de-grew by –28%YoY.

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. Although, 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 believe 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.

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 Aluminum in the 1st phase itself, the facility will provide a fillip to growth as it gradually ramps up. BFL’s Aluminum forging facility in Tennessee, USA at a cost of $55mn is fully focused on new generation vehicle.  Recently Bharat forge America wholly owned subsidiary of BFL is setting up a green-field Aluminum forging and machining facility in North Carolina. The 1st phase of the project involves approx. US$56 million capital investment. This investment is backed up by orders already secured from prestigious OEM’s and has been achieved by leveraging our R&D capabilities.

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, which constitutes 29% of sales.  However, BFL’s strategy to shift into new technological products owing to change in regulation and ramp-up in electric vehicle globally will bring value migration per vehicle in the long run. We value BFL at 18x (1yr fwd basis) FY21E EPS and downgrade our rating from buy to Reduce with a revised target price of Rs376.

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

For disclosures and disclaimers, please see below: Bharat Forge Ltd –



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