Choice diwali picks 2019 2

Diwali Picks 2019 Introduction Dear Investors, For Samvat 2075, was a difficult period for the equity market Benchmark index is reflecting a gain of 12-14% as compared to last Diwali, but is largely supported by a bunch of 10-15 stocks On the contrary, mid-cap and small-cap index are down 8-10% over the same period What can be inferred is that there was no broad base optimism in the market Samvat 2075 was also an event full year ranging from financial sector crisis, general election, consumption slowdown and global events like US-China trade war, Brexit, geo-political tensions etc Despite all these, our three stocks achieved their recommend target price Economic growth in the April-June quarter fell to 5%, lowest in 25 quarters Since then the government has taken some series of measures (like reduction in corporate tax rate, bank recapitalization, support for NBFC, Auto and Real Estate sector) to bring back growth in the economy Corporate tax reduction is structurally positive in the long run, but other measures are likely to improve the overall sentiment Anticipating this most of the global agencies as well as RBI has lowered FY20 economic growth to around 6% from earlier target of around 7% Accordingly, for Samvat 2076 we are cautiously optimistic on the overall economic performance We are recommending fundamentally sound stock with proven track record and attractive valuation for investment over next year Performance Tracker (Samvat 2075) Sector CMP (Rs.) Target Price (Rs.) Target Achieved Pharmaceuticals 981.4 1,220.0 No Banks 1,962.3 2,400.0 Yes Life Insurance 359.7 476.3 Yes IRCON International Ltd Construction & Engineering 343.6 605.0 No Larsen & Toubro Ltd Construction & Engineering 1,198.0 1,613.5 Yes Company Name Ajanta Pharma Ltd HDFC Bank Ltd HDFC Standard Life Insurance Company Ltd Performance Tracker (Samvat 2074) Sector CMP (Rs.) Target Price (Rs.) Target Achieved Apar Industries Ltd Other Electrical Equipments / Products 779.3 857 - 896 Yes Cochin Shipyard Ltd Shipping 568.3 682 - 710 No Life Insurance 670.2 770.0 Yes Plastic Products 1,621.0 2,107.3 Yes Banks 160.1 213.0 No Company Name SBI Life Insurance Company Ltd Nilkamal Ltd Karnataka Bank Ltd Samvat 2076: Diwali Picks 2019 Sector CMP (Rs.) Target Price (Rs.) Potential Upside (%) Advertising & Media 1,196.1 1,423.3 19.0% Other Industrial Products 309.4 357.7 15.6% Godrej Industries Ltd Commodity Chemicals 399.5 552 38.2% Grasim Industries Ltd Diversified 746.5 1,019.8 36.6% Cigarettes, Tobacco Products 246.5 339.4 37.7% Company Name Affle (India) Ltd Carborundum Universal Ltd ITC Ltd Affle (India) Ltd Affle (India) Ltd (Affle) is a global technology company It is a part of Singapore based Affle Holdings Pte Ltd., which is backed by prominent investors like Microsoft Global Finance, D2c Inc., Bennett, Coleman & Co Ltd., Itochu Corporation, Centurion Private Equity Ltd etc Affle is mainly engaged into delivering consumer acquisitions for B2C companies through relevant mobile advertising with a proprietary consumer intelligence platform i.e Consumer Platform This platform aims to enhance return on marketing spend through contextual mobile ads and reducing digital ad frauds Consumer Platform is supported by a flexible & scalable infrastructure and built in-house using cloud computing infrastructure • In domestic market it a leading ad-tech solution provider Affle is one of the very few companies that have products across the entire digital advertising value chain spanning from data management platforms, demand side platforms/ supply side platform, fraud detection and ad-network With the acquisition of various companies in last couple of years, it has further increased its breadth of service offerings, especially to e-commerce and mobile app driven companies • Over FY15-19, it reported a 31.6% CAGR rise in standalone operating revenue over FY15-19 to Rs 1,177.9mn in FY19 EBITDA increased by 91.3% CAGR over FY15-19 to Rs 247.5mn EBITDA margin expanded from 4.7% in FY15 to 21% in FY19 PAT increased by 64.9% CAGR to Rs 166.8mn in FY19 PAT margin expanded from 5.7% in FY15 to 14.2% in FY19 The company had a positive standalone operating cash flow over FY15-19, which increased by 152.5% CAGR to Rs 175.3mn in FY19 Average standalone RoIC and RoE over FY15-19 was 26.1% and 26.5%, respectively • Going forward, Affle is expected to benefit from operating leverage i.e higher productivity We believe it has a set infrastructure and only it needs to ramp-up its platform with more services and accuracy in the deliveries, which in turn will attract move advertisers and companies In the past two fiscal, it has benefited from higher employee productivity and going forward too is expected to benefit from the same • We are forecasting a 26.2% rise in revenue in FY20E to Rs 1,486.4mn EBITDA and PAT margin are expected at 24% and 15.8%, respectively, in FY20E as against respective margins of 21% and 14.2% in FY19 Similarly, FY21E top-line is forecasted to be at Rs 2,010.5mn (a growth of 35.3% over FY20E), while EBITDA and PAT margin are anticipated to be at 24.5% and 16.2%, respectively At CMP of Rs 1,196.1, Affle’s share is trading at a EV/Sales multiple of 20.3x and 15x to its FY20E and FY21E top-line, respectively Considering the above observations, we assign a “BUY” rating on the stock with a target price of Rs 1,423.3 per share, translating into a potential return of 19% Rating matrix CMP (Rs.) 1,196.1 Face Value (Rs.) 10.0 MCAP (Rs mn) 30,494.9 Enterprise Value (Rs mn) 29,495.5 Rating BUY Target Price (Rs.) 1,423.3 Upside Potential (%) 19.0% 52 week H/L Rs 1,295.2 / 751.1 Sector Advertising & Media Category Small Cap Shareholding pattern Particulars 07-Aug-19 Sep-19 68.38% 68.38% Promoter FII 7.86% 8.78% DII 15.32% 17.61% Public 8.44% 5.23% Standalone financial performance snapshot (Rs bn) Net Sales EBITDA PAT EPS (Rs.) RoE (%) RoCE (%) P/E (x) P/B (x) EV/Sales (x) EV/EBITDA (x) P/S (x) FY18 0.84 0.17 0.09 3.5 29.3% 44.0% Source: Choice Broking FY19 1.18 0.24 0.17 6.5 36.0% 39.9% FY20E 1.49 0.36 0.23 9.2 14.7% 18.7% 130.0 19.1 20.3 84.6 20.5 FY21E 2.01 0.49 0.33 12.8 16.9% 21.5% 93.6 15.9 15.0 61.1 15.2 Carborundum Universal Ltd Carborundum Universal Ltd (CUMI) a material science company - incorporated in 1954 as a joint venture entity between the Murugappa Group, The Carborundum Co., USA and the Universal Grinding Wheel Co Ltd., U.K In addition to the manufacturing of super refractories, electro minerals, industrial ceramics and ceramic fibers, the company pioneered the manufacturing of coated & bonded abrasives in India Today, CUMI manufactures range of over 20,000 varieties of abrasives, ceramics, refractory products and electro-minerals across several locations in and outside the country As on FY19, the Abrasives, Ceramics and Electrominerals segments contributed 44%, 21% and 38%, respectively, to the consolidated top-line • With state-of-the art facilities and strategic alliances with global partners, CUMI has achieved a reputation for quality and innovation CUMI is one of the five manufacturers in the world with fully integrated operations that include mining, fusioning, wind and hydro power stations, manufacturing, marketing and distribution • CUMI’s constant innovation and product upgradation, through in-house R&D and strategic alliances with global leaders in grinding technology, have not only ensured it market leadership in India and abroad, but also international recognition as a manufacturer of quality abrasives and a provider of total grinding solutions CUMI’s products are being exported to more than 50 countries spread across North America, Europe, Australia, South Africa and Asia • Abrasive segment reported a 1.1% Y-o-Y decline in segmental revenue in Q1 FY20, which was mainly due to a slowdown in industrial production Profitability too suffered due to the subdued demand Anticipating a bleak industrial expansion in the near term, CUMI would end the fiscal with almost a flat or a modest decline in the Abrasive segment business On the contrary, other two segments reported double digit growth in Q1 FY20 With little exposure to the auto sector, the Ceramics segment is expected to report a double digit growth, while the Electrominerals segment with its vast applications across the sectors is likely to show an improvement in the business At CMP of Rs 309.4, CUMI’s share is trading at a P/E multiple of 21.9x and 18.5x to its FY20E and FY21E EPS, respectively We believe that the sluggishness in the business is already factored in the share price, which corrected by around 20% from its 52W price and 45% from its all time high price of Rs 421.6 Current fiscal performance is expected to low in terms of profitability and return ratios, but is expected to improve with the revival in the economic growth Thus we assign a “BUY” rating on the stock with a target price of Rs 357.7 per share, translating into a potential return of 15.6% Rating matrix CMP (Rs.) 309.4 Face Value (Rs.) 1.0 MCAP (Rs mn) 58,515.5 Enterprise Value (Rs mn) 57,497.8 Rating BUY Target Price (Rs.) 357.7 Upside Potential (%) 15.6% 52 week H/L Rs 415.3 / 266.4 Other Industrial Products Sector Category Mid Cap Shareholding pattern Particulars Promoter Sep-18 Dec-18 Mar-19 Jun-19 42.40% 42.39% 42.37% 42.11% FII 4.62% 4.63% 5.13% 5.50% DII 24.05% 24.22% 23.77% 23.81% Public 28.93% 28.76% 28.73% 28.58% Consolidated financial performance snapshot (Rs bn) Net Sales EBITDA PAT EPS (Rs.) RoE (%) RoCE (%) P/E (x) P/B (x) EV/Sales (x) EV/EBITDA (x) P/S (x) FY18 23.7 4.0 2.2 11.4 13.3% 17.5% FY19 26.9 4.4 2.5 13.1 13.9% 18.1% Source: Bloomberg Estimates FY20E 29.5 4.7 2.7 14.2 13.4% 17.4% 21.9 2.9 2.0 12.1 2.0 FY21E 32.9 5.5 3.2 16.8 14.1% 18.8% 18.5 2.6 1.7 10.4 1.8 Godrej Industries Ltd Godrej Industries Ltd (GIL) is one of the Godrej Group's holding companies It has significant interests in consumer goods, real estate, agriculture and gourmet retail through the subsidiary and associate companies, across 18 countries GIL’s chemicals division, ranks among India’s leading manufacturers of oleo chemicals & surfactants and the products are exported to over 80 countries in North and South America, Asia, Europe, Australia and Africa Godrej Consumer Product Ltd (GCPL; 23.8% holding by GIL) is an emerging market leader in home and personal care products, delighting consumers with innovative, superior quality products at affordable prices Godrej Properties Ltd (GPL; 53.6% holding by GIL) brings innovation and excellence to the real estate industry in India, delivering superior value through extraordinary and imaginative spaces created out of deep customer focus and insight Godrej Agrovet Ltd (GAL; 58% stake held by GIL) is a diversified, research & development backed agri-business company, dedicated to addressing India’s key agricultural crises • The chemical division is one of the leading manufacturers of basic oleo-chemicals, surfactants and derivatives of oleochemicals in India It derives a significant portion of its revenue from exports (33% of its turnover) Over the past few years the company has been adding value-added products which have helped it in expanding its product portfolio and de-disking the business It currently produces 100 products which have application in 24 industries • Oleo chemicals are industrially produced chemicals derived from animal fats or vegetable oils Since oleo chemicals are less toxic as compared to conventional petrochemical products, various end use industries such as those engaged in manufacturing of personal care products, detergents, soaps and agrochemicals, are substituting their requirement for petrochemicals with oleo chemicals Fatty Alcohols, in which the company is a leading producer, find its use in home and personal care industry Fatty acids find its use in textiles, rubber, polymers, foods and feeds, and personal care products Surfactants are used in industries ranging from home and personal care to polymers, oil fields and construction chemicals Glycerin is used in a variety of applications including food and personal care products among others Rising consumer spending on green products and increasing awareness regarding the harmful effects of chemicals used in cosmetic products has resulted in an upsurge in preference for oleo chemicals At CMP of Rs 399.5, GIL’s share is trading at a TTM P/S multiple of 6.3x as compared to peer average of 2.5x Taking into account the business potential of other subsidiaries, we feel that the holding company discount is steep (of around 65%) at current market price which is unwarranted Thus based on SOTP valuation, we arrive at a target price of Rs 552, thereby assigning a “BUY” rating to the stock Rating matrix CMP (Rs.) Face Value (Rs.) MCAP (Rs mn) Enterprise Value (Rs mn) Rating Target Price (Rs.) Upside Potential (%) 52 week H/L 399.5 1.0 134,401.4 183,307.8 BUY 552.0 38.2% Rs 561 / 377 Commodity Chemicals Sector Category Mid Cap Shareholding pattern Particulars Dec-18 Mar-19 Jun-19 Sep-19 Promoter 74.72% 61.33% 61.33% 61.38% FII 11.93% 12.12% 11.87% 11.90% DII 4.79% 4.70% 4.59% 4.38% Public 8.56% 21.85% 22.21% 22.34% Standalone financial performance snapshot (Rs bn) Net Sales EBITDA PAT EPS (Rs.) RoE (%) RoCE (%) P/E (x) P/B (x) EV/Sales (x) EV/EBITDA (x) P/S (x) FY18 19.6 2.4 2.4 7.2 13.3% 7.6% FY19 21.4 4.1 (0.9) (2.7) -5.6% 15.5% Source: Bloomberg Estimates FY20E 22.5 3.5 1.4 4.2 8.2% 8.1% 96.2 7.9 7.0 45.5 6.0 FY21E 24.8 4.3 1.4 4.3 8.1% 12.2% 93.0 7.6 6.5 37.9 5.4 Grasim Industries Ltd Grasim Industries Ltd (Grasim) a part of Aditya Birla Group (a USD 48.3bn corporation), is one of the largest viscose staple fiber (VSF) manufacturers globally with a capacity of 0.549mn tonnes (as of 30th Jun 2019) Globally, on standalone basis, it has a global market share of around 9.5% and around 16% market share on group level The company has the monopolistic market position in Indian VSF market It is also the leading player in caustic soda (a raw material for VSF) and epoxy in India with a market share of around 30% in FY18 Apart from these, through its subsidiaries Ultratech Cement Ltd., Grasim has presence in the domestic cement sector and is the largest player with a capacity of around 103mn tonnes Aditya Birla Capital Ltd., a subsidiary of Grasim; is one of the most diversified financial services (NBFC, AMC, Life & General Insurance, Wealth Management, Housing Finance, Private Equity, ARC etc.) players in India • According to the management, global VSF demand growth is anticipated in the range of 6-7% in the next 2-3 years However, Grasim is expected to continue to report higher VSF demand This is mainly due to favorable fiber economics and higher demand traction of LIVA brand • We are expecting volatility in the international VSF prices, mainly due to the capacity addition and various regulatory actions in China However, Grasim has over the last couple of years has kept its domestic realization resilient, which was primarily due to its monopolistic position and higher proportion of value added products (VAP) in the sales-mix The company has significantly changed its geographical sales-mix to address the volatility in the VSF realization It has increased its business in the domestic market, where the realizations are at premium to the global prices Grasim has reduced its export sales from 36% in Q3 FY17 to around 15% in Q1 FY20 • Going forward, the management has indicated that pulp prices would soften, which would aid in VSF margin expansion in near term Also higher chemicals sales volume is likely to partially offset the possible drop in the blended chemicals realization Overall easing cost pressures coupled with various cost reduction initiatives, would help the company in maintaining the margins at current levels We are anticipating a 6.2% CAGR rise in the top-line over FY19-21 to Rs 231.9bn in FY21E Consolidated EBITDA and PAT would increase by 7.4% and 3.5% CAGR, respectively Based on SOTP valuation methodology, we value the company with a Rs 1,019.8 Thus we recommend a “BUY” rating on the stock Rating matrix CMP (Rs.) 746.5 Face Value (Rs.) 2.0 MCAP (Rs mn) 490,905.1 Enterprise Value (Rs mn) 1,132,920.1 Rating BUY Target Price (Rs.) 1,019.8 Upside Potential (%) 36.6% 52 week H/L Rs 958.6 / 635.6 Sector Diversified Category Large Cap Shareholding pattern Particulars Sep-18 Dec-18 Mar-19 Jun-19 Promoter 40.09% 40.16% 40.15% 40.15% FII 23.51% 21.16% 20.00% 18.26% DII 16.69% 17.78% 18.68% 21.08% Public 19.71% 20.90% 21.17% 20.51% Standalone financial performance snapshot (Rs bn) Net Sales EBITDA PAT EPS (Rs.) RoE (%) RoCE (%) P/E (x) P/B (x) EV/Sales (x) EV/EBITDA (x) P/S (x) FY18 157.9 30.8 20.4 33.2 4.6% 5.1% Source: Choice Broking FY19 205.5 40.7 28.8 46.9 6.9% 7.4% FY20E 211.9 42.5 27.9 45.4 6.3% 7.5% 16.5 1.0 2.4 12.1 2.3 FY21E 231.9 47.0 30.9 50.2 6.6% 7.8% 14.9 1.0 2.2 10.9 2.1 ITC Ltd ITC Ltd (ITC) is one of India's foremost private sector companies with a market capitalization of USD 50bn and gross sales value of USD 10.8bn The company has a diversified presence in FMCG, hotels, packaging, paperboards & specialty papers and agribusiness ITC's aspiration to be an exemplar in sustainability practices is manifest in its status as the only company in the world, of its size and diversity, to be carbon, water and solid waste recycling positive In addition, its businesses and value chains create sustainable livelihoods for more than 6mn people, a majority of whom represent the poorest in rural India As on FY19, Cigarettes, FMCG, Agribusiness and Paperboards, Paper & Packaging segments contributed 41%, 25%, 19% and 12% to the total gross revenue, respectively • During Q1 FY20, the company reported 5.8% Y-o-Y rise in standalone operating revenue This was backed by 6% and 8% Y-o-Y growth in the business from the Cigarettes and FMCG segment, and double digit growth in other segments EBITDA margin expanded by over 1ppts Y-o-Y to 39.7%, mainly led by margin expansion in Cigarettes and FMCG segment PAT margin expanded by 170bps Y-o-Y to 27.6% in Q1 FY20 • Since Aug 2017, there is no change in taxes on the cigarette, as a result of which ITC was able to report a positive cigarette volume growth since five consecutive quarters With no indirect tax hike in the last GST council meet, the company would seek to maintain the positive volume growth in FY20 Also with the reduction in the corporate income tax rate, it would increase its cigarette trade activities to maintain its competitiveness in the market Unexpected rise in the tax would act as a negative trigger for the company • Aided by strong operating margin, the company generated an average operating cash flow of around Rs 100bn every year in the last five fiscal This is utilized by it to expand other non-cigarette business Last fiscal the company strengthened its milk procurement network and also ventured into fresh vegetable segment ITC generated over 3/4th of the FMCG business from packed food and the margin expansion in Q1 FY20 was mainly backed by favorable product-mix, business scale and better cost management Thus further expansion of the FMCG basket would assist it in further de-risking the business operations At CMP of Rs 246.5, ITC’s share is trading at a TTM P/E multiple of 23.8x, which is lower to the 10 years average P/E multiple of 30x The current multiple is also at a significant discount to it peer average Market expectation of possible increase in cigarette tax is acting as a trigger for subdued valuation Considering its ability of increasing cigarette price, the company would maintain its profitability in the near term Thus we assign a “BUY” rating to the stock with potential price of Rs 339.4 per share Rating matrix CMP (Rs.) 246.5 Face Value (Rs.) 1.0 MCAP (Rs mn) 3,028,619.8 Enterprise Value (Rs mn) 2,853,724.6 Rating BUY Target Price (Rs.) 339.4 Upside Potential (%) 37.7% 52 week H/L Sector Category Rs 310 / 234.1 Diversified Large Cap Shareholding pattern Particulars Sep-18 Dec-18 Mar-19 Promoter 0.00% 0.00% 0.00% Jun-19 0.00% FII 17.05% 17.04% 16.75% 15.64% DII 38.08% 38.20% 38.40% 42.47% Public 44.87% 44.76% 44.85% 41.89% Consolidated financial performance snapshot (Rs bn) Net Sales EBITDA PAT EPS (Rs.) RoE (%) RoCE (%) P/E (x) P/B (x) EV/Sales (x) EV/EBITDA (x) P/S (x) FY18 434.5 165.0 112.7 9.2 21.3% 27.8% FY19 483.5 184.3 125.9 10.2 21.2% 27.6% Source: Bloomberg Estimates FY20E 525.6 201.8 151.4 12.3 23.1% 28.0% 20.0 4.6 5.4 14.1 5.8 FY21E 575.8 224.8 164.7 13.4 22.8% 28.5% 18.4 4.2 4.9 12.6 5.3 DISCLAIMER This report does not constitute a prospectus, offering circular or offering memorandum and is not an offer or invitation to buy or sell any securities, nor shall part, or all, of this presentation form the basis of, or be relied on in connection with, any contract or investment decision in relation to any securities This report is for distribution only under such circumstances as may be permitted by applicable law Nothing in this report constitutes a representation that any investment strategy, recommendation or any other content contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation All investments involve risks and investors should exercise prudence in making their investment decisions Choice Equity Broking is under no obligation to update or keep current the information contained herein Different assumptions, by Choice Equity Broking or any other source may yield substantially different results Choice Equity Broking makes no representation or warranty, express or implied, as to, and does not accept any responsibility or liability with respect to, the fairness, accuracy, completeness or correctness of any information or opinions contained herein Neither Choice Equity Broking nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report In no event shall Choice Equity Broking be liable for any direct, special indirect or consequential damages, or any other damages of any kind, including but not limited to loss of use, loss of profits, or loss of data, whether in an action in contract, tort (including but not limited to negligence), or otherwise, arising out of or in any way connected with the use of this report or the materials contained in, or accessed through, this report Choice Equity Broking and its affiliates and/or their officers, directors and employees may have similar or an opposite positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment) Choice Equity Broking specifically prohibits the redistribution of this material in whole or in part without the written permission of Choice Equity Broking and Choice Equity Broking accepts no liability whatsoever for the actions of third parties in this regard  ... (or investment) Choice Equity Broking specifically prohibits the redistribution of this material in whole or in part without the written permission of Choice Equity Broking and Choice Equity Broking... making their investment decisions Choice Equity Broking is under no obligation to update or keep current the information contained herein Different assumptions, by Choice Equity Broking or any other... No Company Name SBI Life Insurance Company Ltd Nilkamal Ltd Karnataka Bank Ltd Samvat 2076: Diwali Picks 2019 Sector CMP (Rs.) Target Price (Rs.) Potential Upside (%) Advertising & Media 1,196.1