Anand rathi diwali pick 2019

Research Team October 17, 2019 A year of gradual disruption and re-engineering of India’s old economic structure  Over the last ten years, investment growth in India remained subdued Numerous factors including destabilising impact of the Global Financial Crisis, 2008, rising global trend towards protectionism, strong capex cycle during 2004-11 and the resultant excess capacity and asset quality problems in the banking sector were some of the key factors behind this slowdown Despite low investment growth, buoyant expansion of consumption by the Indian households (mainly at the cost of savings) sustained  GDP growth around 7% in the last ten years Yet, investment recovery remains crucial for the acceleration and sustainability of long-term growth There are some signals that the capex cycle in India is in the early phase of a take-off  The recent steps taken by the government suggest that rather than taking shortcuts or populist measures, the government is taking administrative and structural measures, which would improve the long-term performance of the economy Such an approach coupled with the improving outlook of the economy and Indian corporate sector make us more positive about the outlook of the Indian equity market  At close to $70 billion, gross FDI inflows to India over the last twelve months is at record high After lacklustre performance since 2014, bank credit to large industries have turned around and accelerating Reflecting the sharp improvement in project execution, the ratio of implemented to proposed industrial investment has reached record high of 70% The recent announcements by the Union Finance Minister to ease administrative control and provide incentives to sectors such as textiles and hospitality and also exports are likely to boost investment  For long term investors, we have found few key themes one should keep in mind always while identifying for the potential investments in market Firstly, what we are witnessing in the Indian economy is more of a gradual disruption happening in many areas and less of a structural slowdown Secondly, the increased role technology is playing in every sphere of business and is also changing dynamics of the businesses along with reducing response time for the incumbents to adjust and react, making them vulnerable  Hence, the simple strategy investors should follow is to invest in simple, scalable business model, high technology intensity like patents etc., businesses with large brands, large distribution network and in sectors which has higher regression coefficient with GDP like consumers, services, technology and similar characteristics and avoid complex and cyclical businesses for the time being DiwaliPicks 2019 Script Name CMP as on 17-Oct-19 Target Price Upside Potential Market Cap PE/PB (₹Bn.) (FY20E) Rationale/Description Nippon Life Insurance Japan has completed acquisition of 75% stake in RNAM from reliance Capital This could be a potential 29 P/E game changer The strategy of the company is to focus on leadership in the retail segment which forms 40% of AUM The Retail business has grown phenomenally, registering a 7fold increase in revenue and a 14-fold increase in profit in six 18 P/E years With the investment cycle likely having peaked, we expect RoI trajectory to improve going forward With focus on seizing market opportunities, IPRU looks to drive growth on the back of several initiatives We believe, IPRU is well positioned for recovery and growth given its P/B focus on strategic initiatives, improving VNB, diversified product mix, multi-channel distribution platform, cost reduction efforts and favorable macro traits The company remains focused on growing its non-defence business such as Homeland Security, Smart City, Space 16 P/E Electronics, Weather Radars, etc Management remains confident in achieving revenue growth of 12% to 15% and EBITDA margin of 20% to 21% in FY20 Reliance Nippon Life Asset Management Ltd 271 321 18% 166 Reliance Industries Limited 1,396 1,610 15% 8,850 ICICI Pru Life Insurance Limited 473 575 22% 678 Bharat electronics Limited 113 135 19% 276 2104 2,422 15% 4,563 HUL has exhibited a decent track record in terms of revenue 69 P/E & margin growth Monsoon has been good in the year This could aid volume growth to some extent in second half 259 IGL’s sales momentum remains strong Government has envisaged to provide Crore connections by 2020 25 P/E We expect the volume growth momentum to continue with development of CGD networks in new GAs Hindustan Unilever Limited Indraprasth Gas Ltd 371 450 21% CMP: ₹1,396 Target: ₹1,610 Reliance Industries Limited (RIL) Rationale:          RIL is India’s largest and most profitable private sector company and continued to be a significant global player in the integrated energy value chain while establishing leadership positions in the retail and digital services business in India The Retail business has grown phenomenally, registering a 7-fold increase in revenue and a 14-fold increase in profit in the last six years Jio has already become the largest operator in India and still signing up more than 10 million new customers each month The two consumer businesses now collectively contribute nearly 32% to the consolidated EBITDA, up from 2% five years ago and the management is targeting their share to be 50% in the next few years RIL’s consolidated EBITDA in the last year was Rs.92,656 crore On the strength of RIL’s existing and new growth engines, the company is confident of growing this by 15% annually over the next years RIL has ended the last year with net debt of Rs.154,478 crore The company have a very clear roadmap to becoming a zero net debt company within the next 18 months that is by 31st March 2021 RIL and Saudi Aramco have agreed to a non-binding letter of intent (LOI), wherein the latter may acquire a 20% stake in the ‘oil-to-chemicals’ division at an enterprise value of USD75b This signifies perfect synergy between the world's largest oil producer and the world's largest integrated refinery and petrochemicals complex RIL have received strong interest from strategic and financial investors in their consumer businesses, Jio and Reliance Retail The company will induct leading global partners in these businesses in the next few quarters, and move towards listing of both these companies within the next five years which will result in significant value unlocking With the investment cycle likely having peaked, we expect RoI trajectory to improve going forward The launch of first revenue engine – mobile broadband – was a huge success RJio is now prepared with the roll out of the other revenue engines – IOT, home broadband services, enterprise broadband service and broadband for small & medium businesses The company will start generating revenue from these businesses from FY20 At CMP the stock is trading at 18.1x FY16E earnings and 14.7x FY17E earnings respectively We recommend a BUY on the stock with a target price of ₹ 1610 per share 52 Week Low / High Avg Daily Volume (3M) No of Shares O/S (Mn.) / Mkt Cap (₹Mn.) Shareholding (Promoters/Institutional/Others) (In ₹ mn) Total Income EBITDA EBITDA Margin PAT PAT Margin EPS (₹) Debt/Equity P/B RoE P/E FY-18 39,16,770 6,41,760 16.4% 3,60,750 9.2% 54.8 0.7 1.8 13.0% 14.5 FY-19 56,71,350 8,39,180 14.8% 3,95,880 7.0% 63.8 0.7 2.1 11.6% 20.4 1017 /1414 98,01,990 6339/88,50,400 47%/36%/17% FY-20E 61,35,730 9,42,618 15.4% 4,66,904 7.6% 76.8 0.7 2.0 12.3% 18.1 FY-21E 67,30,682 11,49,832 17.1% 5,70,412 8.5% 94.4 0.6 1.8 13.4% 14.7 Source: Company, Anand Rathi Research Note: Prices are as on 17-Oct-19 Price Performance (Oct’18=100) 140 120 100 80 Nifty 500 Reliance CMP: 371 Target: 450 Indraprastha Gas Limited (IGL) Rationale:           Incorporated in 1998, Indraprastha Gas Ltd (IGL) took over the City Gas Distribution (CGD) project from GAIL (India) Ltd IGL is a JV between GAIL (India) and Bharat Petroleum Corporation Ltd (BPCL) where each of the two holds 22.5% The company is into retail gas distribution business and provides Compressed Natural Gas (CNG) to vehicles and Piped Natural Gas (PNG) to domestic and commercial consumers in Delhi and NCR IGL’s sales momentum remains strong in Q1-FY20 wherein revenues have increased by 22.4% YoY to Rs.1576.1 crore with underlying volume growth of 13.4% YoY to 6.3 mmscmd CNG volumes came in at 4.7 mmscmd in Q1-FY20 (up 13.7% YoY) whereas PNG volumes have increased by 12.4% YoY to 1.6 mmscmd CNG is economical as compared to other liquid fossil fuels such as petrol/diesel This would continue to push the conversion of vehicles to CNG mode Government has envisaged to provide Crore connections by 2020 and has set aggressive targets for providing PNG connections In line of the same, the Company has also set high targets for PNG domestic connections The government of India is in the process of developing smart cities These cities will have a strong infrastructure of clean and efficient fuel which would add to the growth prospects of the Company There is a concern for increased population in the country In order to curb the same, judiciary, central and state governments are giving boost to eco-friendly fuel i.e CNG and PNG We expect the volume growth momentum to continue for the company as the company plans to invest Rs.11.7bn on capex in FY20 mainly on CNG stations, PNG pipelines and development of city gas distribution networks in new geographic areas Going forward, we believe given the company’s good pricing power, IGL will continue to pass on any upward revision in domestic gas prices, thus, maintaining margins At CMP the stock is trading at 24.9x FY20E EPS and 21.9x FY21E EPS We recommend BUY on the stock with a target price of ₹450 per share 52 Week L/H 232 / 380 Avg Daily Volume (3M) 18,68,330 No of Shares O/S (Mn.) / Mkt Cap (₹Mn.) 700 / 2,59,000 Shareholding (Promoters/Institutions/Others) (In ₹ mn) Total Income EBITDA EBITDA Margin PAT PAT Margin EPS (₹) Debt/Equity P/B RoE P/E FY-18 45,921 11,161 24.3% 7,217 15.7% 10.3 0.0 5.4 21.7% 27.1 45% / 45% / 10% FY-19 57,648 12,593 21.8% 8,421 14.6% 12.0 0.0 5.0 21.2% 25.4 FY-20E 68,453 15,006 21.9% 10,266 15.0% 14.9 0.0 5.2 21.3% 24.9 FY-21E 78,978 17,090 21.6% 11,743 14.9% 17.0 0.0 4.4 20.1% 21.9 Source: Company, Anand Rathi Research Note: Prices are as on 17-Oct-19 Price Performance (Oct’18=100) 160 140 120 100 80 Nifty 500 IGL CMP: 113 Target: 135 Bharat Electronics Ltd (BEL) Rationale:  Bharat Electronics Limited (BEL) is a key supplier of products and turnkey systems to the Indian Defence Forces It produces a wide range of state-ofthe-art equipment in fields such as Defence Communication, Radars, Naval Systems, C4I Systems, Weapon Systems, Telecom & Broadcast Systems, Electronic Warfare and Tank Electronics BEL also offers civilian products including Electronic Voting Machines, Tablet PC, solar-powered traffic signal systems and Access Control Systems  Commencing operations in 1954, with a single unit in Jalahalli, Bangalore, BEL has expanded its presence across the country by setting up eight other Units: Ghaziabad, Pune, Machilipatnam, Panchkula, Kotdwara, Navi Mumbai, Chennai and Hyderabad Each unit has a specific product mix and customer focus BEL has also overseas presence with offices in New York and Singapore  Management remains confident in achieving revenue growth of 12% to 15% and EBITDA margin of20% to 21% in FY20  Recently, the company bagged the much awaited large ticket order to deliver surface-to-air Akash Missile System to seven squadrons of the Indian Air Force over the next three years For FY20, BEL has already booked order inflows of ₹90 billion and expects about ₹150 billion for full year  The company remains focused on growing its non-defence business such as Homeland Security, Smart City, Space Electronics, Weather Radars, etc The company plans to maintain the non-defence business share at about 20-25% level of turnover in coming years  Further, BEL remains committed to boost its in-house R&D with focused engagement with DRDO, National Labs, Academia, Foreign Design Houses, etc BEL is continuously investing 8-10% of its turnover in R&D year-on-year basis  Additionally, inventory days fell substantially from 180 days in FY18 to 136 days in FY19, reflecting improved inventory control  We remain optimistic on BEL given its strong order book position, expertise in executing complex projects, healthy client base, cost reduction efforts and diversification initiatives  At CMP the stock is trading at 15.5x FY20E EPS and 2.4x FY21E EPS We recommend BUY on the stock with a target price of ₹135 per share 52 Week L/H 72 /118 Avg Daily Volume (3M) 1,17,69,700 No of Shares O/S (Mn.) / Mkt Cap (₹Mn.) 2437 /2,74,726 Shareholding (Promoters/Institutions/Others) 59%/31%/10% (In ₹ mn) FY-18 FY-19 FY-20E FY-21E 1,00,687 1,18,547 1,35,132 1,50,729 EBITDA 20,400 29,062 26,875 29,025 EBITDA Margin PAT PAT Margin EPS (₹) Debt/Equity P/B RoE P/E 20.3% 14,317 14.2% 5.8 0.0 4.3 18.2% 24.3 24.5% 18,864 15.9% 7.7 0.0 2.5 21.9% 12.0 19.9% 17,783 13.2% 7.3 0.0 2.7 16.9% 15.5 19.3% 18,842 12.5% 7.8 0.0 2.4 15.4% 14.5 Total Income Source: Company, Anand Rathi Research, Consensus Estimates Note: Prices are as on17-Oct-19 Price Performance (Oct’18=100) 150 125 100 75 50 Nifty 500 BEL CMP: 271 Target:321 Reliance Nippon Life Asset Management(RNAM) Rationale:  Reliance Nippon Life Asset Management (RNAM) isthe fifth largest AMC in India, The total AUM of the company in mutual funds is ~ lakh Cr which is about 8.4% of the entire market as of FY19 Besides the mutual fund business, the company has a sizeable AUM under Portfolio Management services and alternate Investment funds The company also manages funds for provident fund bodies and government managed pension Funds schemes  Nippon Life Insurance Japan has completed acquisition of 75% stake in RNAM from reliance Capital This could be a potential game changer as Nippon Life Insurance is the largest Insurance company in Japan and the total assets managed by Nippon Life Insurance globally are twice the size of the entire mutual fund industry of India  The company has a very strong distribution network which includes ~75000 distributors and 74 banks This strong network has given the company access to ~47 lakh unique customers The strategy of the company is to focus on leadership in the retail segment which forms 40% of AUM This helps the company to reduce its dependency on HNI investments which are cyclical in nature  At the industry level, the mutual fund penetration ratio (AUM as % of GDP) is ~11% which is significantly lower than the world average of 62% This ratio is also greater than 45% for all other emerging economies like south Africa, Brazil etc In addition to this, India has ~30% household saving rate which is higher than other economies The Indian mutual fund industry is also highly skewed in nature( Top players have a combined AUM of ~ 70%).These macro factors indicate a strong outlook for the industry and strong cash inflow for the industry leaders  The returns from other asset classes are unfavourable and hence Mutual fund industry is witnessing strong inflows Increasing fund flow within the industry along with strong distribution network with strong market share will help the company to grow The company has grown at a CAGR of 15% over the past years and we believe that it will continue to so over the next couple of years We also believe that the change in promoter will help in attracting inflows from retail as well as corporates  At CMP the stock is trading at 29.0x FY20E EPS and 25.5x FY21E EPS We recommend BUY on the stock with a target price of ₹321 per share 52 Week L/H 120 / 288 Avg Daily Volume 90 Day (‘000) 1,12,517 No of Shares O/S (Mn.) / Mkt Cap (₹Mn.) 612/ 16,55,86 Shareholding (Promoters/Institutions/Others) (In ₹ mn) Total Income EBITDA EBITDA Margin PAT PAT Margin EPS (₹) Debt/Equity P/B RoE P/E FY-18 17,486 6,663 38.1% 4,557 26.1% 7.6 0.0 6.4 21.7% 32.4 75.0%/14.6% /10.4% FY-19 14,786 5,390 36.4% 4,861 32.9% 7.9 0.0 5.0 19.7% 26.4 FY-20E 15,846 6,910 43.6% 5,693 35.9% 9.4 0.0 6.3 19.3% 29.0 FY-21E 17,579 7,781 44.2% 6,535 37.2% 10.7 0.0 6.0 18.6% 25.5 Source: Company, Anand Rathi Research Note: Prices are as on 17-Oct-19 Price Performance (Oct’18=100) 185 160 135 110 85 60 Nifty 500 RNAM CMP:2,104 Target:2,422 Hindustan Unilever Limited Rationale:       Hindustan Unilever Limited(HUL) is India’s largest fast-moving consumer goods (FMCG) company with a heritage of over 80 years It has grown meaningfully over the years to become a trusted brand and currently nine out of ten Indian households use its products on daily basis The company has a very strong brand recognition with solid market presence Over the past several years, HUL has exhibited a decent track record in terms of revenue and margin growth In Q2Fy20, HUL showedrevenue growth of 6.7% YoY while EBITDA and PAT grew 21.0% and 21.5% YoY, respectively, Despite near term weak rural growth and economy slowing down, HUL had a impressive volume growth of 5% YoY on a large base In Q2FY19, Home care segment grew 9.4% YoYled by premiumisation & increase in penetration leading to 151bps EBIT margin expansion The beauty & personal care segment grew by 5.3% on YoY basis, growth was led by the premium segment.Foods & refreshments’ revenue rose 8.4% YoY with EBIT margin falling 139bps YoY on account of higher raw material cost Monsoon has been good during the year This will aid the volume growth to some extent In order to address liquidity challenge at wholesale as well as well as retail level, and to support volume growth, the company will take some price cuts in the current quarter In addition to this, the festive season( Diwali) is likely to give some relief to the slowing demand If there is a revival in demand, HUL will be the key beneficiary While current macro economic conditions is likely to keep subdued demand in near term, we remain optimistic that the company will outgrow the industry HUL being the largest FMCG company with one of the largest footprints in terms of products and distribution network and its strategy to target volume growth, should drive healthy growth in medium to long term In addition to this, the company is also focusing on the rising potential in the natural space The launch of Ayush Master brand in different segments is likely to boost the companies top line At CMP the stock is trading at 69.0x FY20E EPS and 60.0x FY21E EPS We recommend BUY on the stock with a target price of ₹2422 per share 52 Week Low / High 1522 / 2108 Avg Daily Volume 90 Day (‘000) 1,62,937 No of Shares O/S (Mn.) / Mkt Cap (₹Mn.) 2165 / 45,54,764 Shareholding (Promoters/Institutional/Others) (In ₹ mn) Total Income EBITDA EBITDA Margin PAT PAT Margin EPS (₹) Debt/Equity P/B RoE P/E FY-18 3,55,500 75,010 21.1% 52,140 14.7% 24.1 0.0 62.6 66.4% 87.3 FY-19 3,93,110 88,800 22.6% 60,540 15.4% 28.0 0.0 57.9 71.6% 75.2 67.2% / 19.1%/ 13.7% FY-20E 4,15,770 94,326 22.7% 65,959 15.9% 30.5 0.0 52.6 77.0% 69.0 FY-21E 4,68,058 1,08,529 23.2% 75,926 16.2% 35.1 0.0 47.0 76.2% 60.0 Source: Company, Anand Rathi Research Note: Prices are as on 17-Oct-19 Price Performance (Oct’18=100) 135 120 105 90 75 60 Nifty 500 HUL ICICI PRUDENTIAL LIFE INSURANCE COMPANY(IPRU) CMP: 473 Target: 575 Rationale:  ICICI Prudential Life Insurance Company Limited (IPRU IN) is one of the leading players in the domestic life insurance sector with a strong presence across India offering a range of long term savings and protection products to meet different life stage requirements of customers As of June 30, 2019, the company had an AUM of ₹1,640.24 billion and a Total Sum Assured of about ₹11.85 trillion  As the company remains focused on growing the margin accretive protection and annuity business, PAT declined 30% y/y in FY19 stemming from new business stain However, management aims to double FY19 Value of New Business (VNB) in to years and expects protection business to be a key contributor in margin expansion  In Q1FY20, total premium registered a decent growth of 14.7% y/y to ₹ 63.29 billion The share of protection business in Annualised Premium Equivalent (APE) increased from 8.2% in Q1FY19 to 14.6% in Q1FY20 Further, VNB increased by 27% y/y to ₹3.09 billion in the quarter while PAT improved marginally to ₹2.85 billion  For Q1FY20, based on Retail Weighted Received Premium (RWRP), IPRU had a private market share of 17.2% and overall market share of 10.0%  With focus on seizing market opportunities, IPRU looks to drive growth on the back of several initiatives This includes expanding distribution network through acquisition of new partners as well investing in creation of new sourcing channels, increase penetration in under-served customer segmentsand leveraging technology for process reengineering and drive productivity  In terms of macro scenario, the domestic life industry has plenty upside as India remains significantly under-insured, both in terms of penetration and density Further improving life expectancy, young Indian population, increasing disposable income and rising awareness of risk protection will continue to be the demand drivers in the sector  We believe, IPRU is well positioned for recovery and growth given its focus on strategic initiatives, improving VNB, diversified product mix, multi-channel distribution platform, cost reduction efforts and favorable macro traits  At CMP the stock is trading at 8.7x its FY20E Book Valueand 8.0 x its FY21E Book Value We recommend BUY on the stock with a target price of ₹575 per share 52 Week L/H 475 /278 Avg Daily Volume (3M) 26,48,000 No of Shares O/S (Mn.) / Mkt Cap (₹Mn.) 1436 /6,73,839 Shareholding (Promoters/Institutions/Others) (In ₹ mn) 75%/18%/7% FY-18 FY-19 FY-20E FY-21E 3,89,644 4,20,539 4,73,410 4,50,362 PAT 16,192 11,389 13,158 14,788 EPS 11.3 7.9 9.4 10.4 P/E 34.5 44.2 50.4 45.5 P/B 8.1 7.1 8.7 8.0 ROE 24.0% 16.0% 16.0% 16.0% Net Revenue Source: Company, Anand Rathi Research, Consensus Estimates Note: Prices are as on17-Oct-19 Price Performance (Oct’18=100) 160 135 110 85 60 Nifty500 ICICIPRU Diwali Picks 2018 Performance (29th Oct 2018) Company Reco Target CMP/Exit Asian Paints Limited HDFC Bank Limited Indraprasth Gas Limited Return on closed Calls 1,195 1,924 251 1471 2420 319 1471 2420 319 LTTS Sundram Fasteners Limited JSW Steel Limited Total Return 1,669 521 340 2042 760 406 1548 464 283 Hi/Lo for Status Return Period 1825 / 1118 Closed 23% 1283 / 943 Closed 26% 380 / 232 Closed 27% 25% 1820 / 1405 596 / 399 385 / 202 Open -7% Open -11% Open -17% 7% Booked on Date 05-Feb-19 29-Mar-19 07-Feb-19 Nifty500 Return 5% 12% 6% Alpha Return 18% 14% 21% Annualized Return 66% 32% 74% - 7% 7% 7% -15% -18% -24% -15% -18% -24% 19% Status of open calls: In our last Diwali picks we have closed three calls in profit and three stocks have remained open The open stock picks witnessed few uncertain business events due to unprecedented slowdown in automobile sector and liquidity crisis in NBFC space leading to funding squeeze to most of the related businesses This resulted in delay in growth of our subject companies We continue to monitor our recommended companies and review our recommendations accordingly In this case, we continue to remain positive on long term growth prospects of these three open stock calls L&T Technology Services Limited:  L&T Technology Services Limited (LTTS) has reported a growth of 17% in its revenues at ₹13,475 million in Q1-FY20 as against ₹11,522 million in Q1-FY19 In US dollar terms the revenue growth was 14.8% YoY and 1.4% QoQ at $193.9 million The growth for the company in the quarter was driven by Transportation, Process and Medical Devices while Telecom and Hi-Tech segment de grew for the quarter The company’s long terms prospects remains intact an we continue to remain positive on the stock Sundram Fasteners Limited:  The company had faced slow down in operation on account of unprecedented slowdown in automobile sector However, to further its growth in non-automotive segments, the company has incorporated a new wholly-owned subsidiary named "Sunfast TVS Limited" on April 8, 2019 The new company will focus on the Aerospace and Defence segments The Company will also focus on parts for armoured vehicles and trucks  The long-term prospects of SFL remains intact, as it is well placed to demonstrate superior performance in H2-FY20 driven by expanding its capacity and making concentrated efforts to improve the product mix with focus on high-value products and increased contribution of exports We maintain our view on the stock on back of positive outlook from management Thus, we continue to remain positive on the stock JSW Steel Limited:  The slowdown was mainly driven by subdued domestic market demand and a weaker sentiment as reflected in slow automotive and consumer durables momentum leading to lower volumes and inventory build up  Management has guided for steel production of 16.95 million tons while sales volume guidance of 16 million tons, a growth of 1.5% each for the financial year FY20 Spreads are still favorable for the producers and are expected to normalize in medium term We continue to track the progress and review the same in future 10 Disclaimer: Analyst Certification  The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report Ratings Methodology  Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>₹300 Billion ) and Mid/Small Caps (₹300Bn.) 15% 5%-10% Below 5% Mid/Small Caps (