Stock Recommendations – September 2019





Sector: Pharmaceuticals

Torrent Pharmaceuticals Limited (TRP) engages in the research, development, manufacturing and marketing of generic pharmaceutical formulations in India, the US, Germany, Brazil and internationally. The company offers products in various therapeutic areas. Q1FY20 revenue rose 8.0% YoY to Rs. 2,022cr, supported by strong growth in its key markets. Topline growth was driven by US with 6% YoY growth in USD terms (+12.6% YoY to Rs. 376cr). Accounting for ~45% of sales, India grew 9.2% YoY to Rs. 907cr, (12.6% YoY excluding the effects of change in sales cycle and discontinuation of low margin products). Brazil grew 7% YoY in constant currency (cc) terms (3.0% YoY reported) while Germany registered a mere 6% cc growth (+4.4% YoY reported) as it faced difficulties with serialization and tamper proof packaging.

EBITDA margin expanded 130bps YoY to 26.8% primarily driven by improved profitability through Unichem and net profit surged by 32.5% to Rs. 216cr. EBITDA rose 13.4% YoY to Rs. 541cr, primarily due to operational efficiency led by integration benefit from Unichem.Net profit surged 32.5% YoY to Rs. 216cr, complemented by robust sales, improved margins as well as lower taxes. Sales and marketing expenses as a percentage of domestic sales fell by 261bps, and medical representative productivity rose to Rs. 75 lakh/year from Rs. 40 lakh/year prior. Research and development expenses stood at Rs. 136cr (vs. Rs. 128cr last year), while R&D to sales ratio was 6.7% in 1QFY20. Going forward, management expects to see growth momentum in the Brazilian and Germany market on account of new product launches.

Three abbreviated new drug applications (ANDAs) were filed in Q1FY20, and ~15 ANDAs are expected to be filed during this year. TRP has ~11 tentative approvals and 34 ANDAs pending approvals from the FDA. The company continues to withdraw low margin products to improve profitability further although it is facing pricing pressure in the US. We expect synergy benefit from Unichem to continue in the coming years. They managed to improve its profitability to ~30% from ~18% in FY18-19 after the acquisition of Unichem.

TRP has received OAI (Official Action Initiated) classification from the US FDA in its Dahej facility, while they are awaiting communication on the Indrad facility. The US FDA classifications pose a likely threat considering there have been no FDA approvals in Q1FY20 as a result. However, we expect strong growth in key markets will boost the top line (~10% CAGR over FY19-21E) complemented by ~130bps margin improvements over FY19-21E. We reiterate our HOLD rating on the stock, with a revised target price of Rs.1,773, based on 25x FY21E adj. EPS.

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

General Disclosures and Disclaimers : Torrent Pharmaceuticals Ltd – Click Here


 Sector: Auto – Tractors & Construction

Escorts Ltd (EL) is the third largest Agricultural tractor manufacturer in India. It has a strong presence in the north and west market, with an overall market share of 11.9% as on FY19. Q1FY20 revenue de-grew by 6%YoY below our estimates. This was largely on account of 14%YoY decline in tractor volume growth. Excess shortfall in delayed monsoon, Higher YoY base and lower water level at reservoirs are the key headwinds for the industry. EL’s construction business also registered a negative growth of 21%YoY whereas Railway segment grew by 33%YoY. Despite the hike in price, margin contracted by 230bps due to high operating cost owing to production cut and lower volume across segment. PAT de-grew by 27%YoY. Development over monsoon, especially in the southern or opportunistic markets, and Government’s subsidy towards farm mechanization will be a driving factor for volume growth in the long term.

In the last 3 years industry witnessed a strong CAGR growth of 15% during FY16-19 comparing to its historical average growth rate of 5-6% respectively. During this period state government subsidy for tractors in south and west market was all-time high. The uneven monsoon on these states are badly affecting the growth. During the quarter EL’s strong markets (UP, MP and Northern states) declined by -2%YoY whereas opportunity market by significant -31%YoY. EL’s expanded portfolio & technology upgrades in tractors have resulted in improved numbers both in existing and newer geographies. Exports have grown by 57%YoY for the full year. We are forecasting a moderation in the domestic tractor volume growth in FY20E. We lower our revenue and PAT estimate for FY20 by 9% & 22% and factor volume growth of –7% for FY20.

EL’s market share improved by 80bpsYoY to 11.9% in FY19. During the quarter there is a marginal decline of 20bps. The current market share is pooled from Powertrac and Farmtrac brands at 60%/40% respectively. Recently launched compact tractors and paddy specialist tractors at <40HP category has led to 1% increase in market share from the opportunistic market. Overall share of new products in tractors stands at~20% currently and have better margins.

The management expects the trend of underperformance in south and west region to continue in FY20 as the reservoir level are low in Maharashtra and South.  The Initial volume guidance of 5-8% for tractor seems ambitious considering the fact of high base in FY19 and modest government subsidy in the budget. We expect lower visibility in volume for the near term and profitability to remain under pressure.  We value EL at 10.5x FY21E EPS and downgrade our rating from Accumulate to reduce with a revised target price of Rs 419.

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

General Disclosures and Disclaimers : ESCORTS LTD – Click Here



Sector: Banking

HDFC Bank was incorporated in August 1994, with its registered office in Mumbai. The bank provides a number of products and services including wholesale banking, retail banking, auto loans, personal loans and is also involved in treasury and capital markets. In addition, it offers project advisory services and capital market products like GDR and currency bonds.

In Q1FY20, the bank made a 17.1% YoY growth in loans and advances, with domestic retail loans which contribute 54% growing at 16.5% YoY and domestic wholesale loans contributing 46% growing at 19.6% YoY.  Within the domestic retail loans, the highest contribution of 21.9% is from the personal loan segment, which grew by 25% YoY. At the same time, auto segment which contributed 18.5%, witnessed a tepid growth owing to sluggish demand in the auto sector. The total deposit base has grown by 18.5% on a YoY basis, supported by a robust 22.5% YoY growth in term deposits and the CASA deposits growing at 12.5% while the CASA ratio sequentially declined to 39.7%.

The Net Interest Margin (NIM) increased to 4.3% in the Q1FY20 compared to 4.2% in Q1FY19, while marginally declined on a sequential basis. The Net Interest Income (NII) continued to grow at a healthy pace of 22.9% on a YoY basis, and remained almost stable on a sequential basis. Also, the non-interest income witnessed a robust 30.2% YoY growth, supported by treasury gains. The cost to income (C/I) ratio improved by 192bps on a YoY basis and by 70bps sequentially to 39.4%, where the management expects a 300bps decline on next 3-5 years. Both the topline performance and decline in cost to income ratio aided the 28.9% YoY growth in pre-provision profit. At the same time, the increase in provisions has led to 21% YoY increase and 5.4% sequential decline in net profit to Rs5,568cr.

Bank continued to create contingent provisions for the pool of accounts in certain sectors, with net additional provisions of Rs. 165cr this quarter. Floating provision stood at Rs. 1,451cr as on June 2019 In Q1FY20, slippage stood at 2.03%, excluding agriculture core slippage of 1.40%. The bank’s net NPA reached Rs. 3,567cr and net NPA ratio increased 4bps QoQ to 0.43% during the quarter. Provisions rose sharply at 60.4% YoY, majorly driven by stress from the agricultural sector and a step-up in provision for unsecured loans, amongst other reasons.

Company registered strong and consistent growth in advances and deposits, along with a rise in net interest income. We expect the bank to continue to perform strongly in FY20-21E despite challenging macroeconomic factors. We value the stock at 3.6x FY21E BVPS with a target price of Rs. 2,608 and reiterate our BUY recommendation.

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

General Disclosures and Disclaimers : HDFC Bank Ltd.– Click Here



Sector: Capital Goods

Triveni Turbine limited (TTL) is engaged in the manufacturing of steam turbines and parts thereof. It is also involved in servicing, operation and maintenance of steam turbines. It operates through Power Generating Equipment and Solutions segment. Its applications include co-generation, combined heat and power, waste heat recovery and combined cycle power plant, incidental power generation from incineration, captive power plant, independent power producer and non-conventional energy sources. Its subsidiaries include GE Triveni Ltd (GETL), Triveni Turbine Europe Pvt Ltd (TTEPL) and Triveni Turbine DMCC (TTD).

Q1FY20 revenue grew by 24.4% YoY to Rs214cr aided by preponement of domestic turbine deliveries while export revenue declined by 10% YoY due to a high base effect. Revenue from product increased by 33% YoY to Rs172cr whereas contribution from aftermarket was flat at Rs41cr. Performance of GE-Triveni JV was healthy with revenue of Rs 58cr (174% YoY) and a PAT of ~Rs1cr. Triveni has filed a petition against GE before the NCLT for misconduct in the GE-TTL venture. Company claimed that, GE and its group companies have acted in a manner which is against the interest of GE-TTL JV by failing to promote the JV’s business globally. The matter is sub judice and is not affecting their current business.

Q1FY20 order book declined by 7% YoY to Rs724cr due to 10% YoY de-growth in order inflow. Total outstanding order book to sales ratio now stands at 0.8x providing lack of top-line visibility in the coming years. Export order inflow was decreased by 13% YoY at Rs 86cr while the order book increased by 6% at 350cr due to delay in execution. The management said that the enquiry book is strong and expects a strong order inflow from the international market. Domestic order enquiry is likely to pick up due to investments in ethanol and process co-gen sectors mainly Sugar and Pulp & Paper and cement sectors while lack of revival in core sector will have an impact in order bookings.

Gross margin sharply declined by 417bps YoY to 43.3% in Q1FY20 due to higher material cost while EBITDA margin improved by 281bps YoY to 20.5% driven by value engineering and cost reduction measures.  Healthy margins and a marginal decline in tax rate supported a robust growth (61.5% YoY) in earnings at Rs 31cr.  However, given weak order inflow and muted order book have an impact on earnings outlook going forward we, therefore, reduce FY20E/21E EPS estimate by 2% & 8% respectively.

Given weak order inflow and muted outlook on global business due to allegation with GE, we downgrade our rating to ‘Reduce’ from ‘Hold’ and value at a P/E of 21x on FY21E earnings with a target price of Rs 92.

Analyst: Antu Eapen Thomas, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers : Triveni Turbine Ltd – Click Here


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