Nirmal bang investment picks for diwali 2019

APL Apollo Tubes Ltd DCB Bank Ltd Indian Metal and Ferro Alloys Ltd Jubilant Life Sciences Ltd Polycab India Ltd Sterlite Technologies Ltd The Anup Engineering Ltd Welspun Corp Ltd CMP: Rs 1392 Target: Rs 2020 APL is the largest producer of ERW Steel Pipes & Sections in India with a capacity of 2.5 mn tons (2.8x nearest competitor) ERW pipes demand is mainly driven by construction/building materials (68% mix) apart from infra, engineering, agri & auto APL is an outlier in its industry, having grown revenues at 23% CAGR over last years, it increased its market share from 12% in FY15 to 18% in FY19 combined with strong profitability (avg ROE of 19% over last years) in a low margin, commodity-convertor business APL’s success is based upon the following characteristics – o o o o o o Lowest cost producer owing to large scale procurement (APL’s volumes are 1.6x and 2.6x the 2nd & 3rd largest competitors viz Surya Roshni and Tata Pipes) 90% of the revenues come from its pan-India distribution network of 790 distributors & 50,000 retailers leading to higher margins & lower receivables APL’s reach is 2.5x its competitors like Surya Roshni, Hi-tech and Rama Steel Multiple plants pan-India in close proximity to the distribution network ensures minimal logistical costs APL has over 1,100 SKUs (unmatched by any of its peers) APL pioneered new technologies (DFT) & innovative products (Chaukhat) which are high value, high margin products Continuously enhanced brand awareness via advertisements (averaged at 5% of profits historically) APL offers better incentives to the distributors who in turn push APL’s products While APL’s products are priced similar to its peers, cost advantages allow it to incentivize distributors better than its peers Over FY19-21E we expect revenue/earnings to grow at a CAGR of 18%/42% with an average RoE of 21% and debt/equity to decline from 0.7x to 0.3x driven by higher free cash flows APL is available at attractive valuations at 15.4x/11.0 FY20/21E We recommend to BUY APL with a target price of Rs 2020, based on 16x FY21E EPS Figures in Rs cr Year Revenues Growth EBITDA Margin PAT PAT Margin EPS PE ROE FY17 5335 36% 371 7.0% 158 3.0% 66.6 20.9 20.7% FY18 7152 34% 389 5.4% 148 2.1% 62.2 22.4 16.5% FY19 8512 19% 496 5.8% 220 2.6% 90.2 15.4 19.9% FY20E 9962 17% 626 6.3% 308 3.1% 126.3 11.0 22.0% CMP: Rs 181 Target: Rs 245 DCB Bank is a Mumbai based, new private sector bank having a loan book of ~Rs 24,000 Cr DCB’s core focus is towards self employed clients with SME, Retail and Agri together forming 87% of the loan book and the balance is Corporate loans Mr Murali Natrajan, the current MD & CEO (since 2009) was instrumental in complete overhaul of the bank post his induction, especially in turning around the bank’s asset quality wherein GNPAs declined from 9% in FY09 to below 2% by FY14 Superior asset quality has been the hallmark of DCB with the bank’s GNPAs/Slippages constantly remaining below 2% since FY14 despite a challenging macro environment and a loan book skewed towards SMEs Advances have grown at a CAGR of 22% over FY16-19 & management is targeting to maintain this growth momentum The bank has maintained NIMs at over 3.6%, well above most peers Strong branch expansion (over 2x to 318 branches) and addition of employees over FY15-18 had kept the cost/income ratio elevated at ~60% historically despite strong core income growth of ~25% However, now with the expansion phase behind and the branch capacity buildup getting utilized, we expect cost/income to decline to ~54% by FY21E We thus expect ROE to expand by 260 bps over FY19-21E to 13.6% At CMP, DCB is trading at 1.7x/1.5x FY20E/FY21E Adj BV and 14.6x/11.0 FY20E/FY21E EPS respectively We recommend BUY on the stock for a target price of Rs 245 (2.0x of FY21E Adj BV) Figures in Rs cr Year NII Growth PPP PAT Growth EPS PE Adj BVPS P/ABV ROA ROE FY18 797 29% 418 245 23% 8.0 22.7 87.2 2.1 0.9% 9.8% FY19 995 25% 525 326 33% 10.5 17.2 96.5 1.9 1.0% 11.0% FY20E 1,150 16% 647 385 18% 12.4 14.6 106.2 1.7 1.0% 11.7% FY21E 1,259 10% 716 507 32% 16.4 11.0 122.7 1.5 1.1% 13.6% CMP: Rs.184 Target: Rs.238 Fully integrated producer of Ferro Chrome with 190 MVA installed furnace capacity, 262.5 MW captive power generation and captive chrome ore mines Ferro Chrome is primarily utilized in the production of Stainless Steel Chrome Ore and Power are the key input costs for the production of Ferro Chrome Currently Net sales realization (NSR) is around Rs.65000-66000 as compared to the cost of production of around Rs 6000061000 per T making it unviable for non-integrated players We expect Ferro Chrome prices to rebound from the current levels to around Rs.71000-72000 per T Current replacement cost of the plant including mine is around Rs.3000Cr and stock is available at Enterprise value of Rs.1188Cr IMFA has invested Rs.375 Cr in Utkal coal block which has been de-allocated by the Supreme Court We expect IMFA to receive the above money whenever this coal block is auctioned by the Government in FY20 This block is reserved for PSUs and IMFA will receive the money accordingly IMFA is a play on the operating leverage; any increase in NSR, directly increases the EBIDTA/Tonne We have valued IMFA at 5x EV/EBIDTA based on FY20E Figures in Rs cr Year Revenues Growth EBITDA Margin PAT Margin EPS PE EV/EBITDA FY17 FY18 1672 38 513 31 249 15 92 1765 422 24 186 11 143 FY19 1633 -7 262 16 82 30 FY20E 1669 2% 259 15 79 30 CMP: Rs 506 Target: Rs 654 Jubilant Life Sciences Limited is an integrated global pharmaceutical and life sciences Company engaged in Pharmaceuticals (~ 60%), Life Science Ingredients (~37%) and other businesses including Drug Discovery Solutions and India Branded Pharmaceuticals The stock has corrected 45% in last one year due to regulatory actions on its Roorkee formulations and Nanjangud API facilities and due to uncertainty of Pharma Business listing (which has been clear now) Company’s focus on specialty pharma which includes Radiopharma and Allergy therapy products are the key growth factors for the future These segments have limited competition and provides moat to the already established player like Jubilant Life Though the ramp up in Rubyfill has been below management’s expectations, we believe it is likely to improve form hereon Further Triad acquisition is likely to add to the growth and profitability as we believe the pain and loss during integration has also been bottomed out For Radio Pharma, the company has more products under pipeline which is likely to be launched in next 2-4 yrs LSI witnessed strong FY18 on the back of higher nutritional products, favorable crude and currency, however FY19 saw growth moderation We believe FY20 would see gradual recovery At CMP, JLL is trading at 9.2x/7.7x FY20E/FY21E consensus earnings which are attractive We believe that correction already factors the headwinds and believe the downside is limited form here Figures in Rs Cr Year Revenues Growth EBITDA Margin Adj PAT PAT Margin EPS PE ROE FY18 7518 28.3% 1518 20.2% 634 8.4% 40.7 12.4 27.0% FY19 9111 21.2% 1739 19.1% 857 9.4% 55.0 9.2 20.2% FY20E 9343 2.5% 1871 20.0% 876 9.4% 55.3 9.2 16.8% FY21E 10151 8.7% 2089 20.6% 1031 10.2% 65.4 7.7 16.9% CMP: Rs 726 Target: Rs 814 Polycab India Ltd is a country’s leading consumer electrical brand engaged in (i) wires and cables, (ii) FMEG comprising electric fans, LED lighting and luminaire, switches and switchgears, solar products and conduits and accessories, and (iii) EPC It is the largest player in the wires and cables industry with 12% market share In an industry where anything between 40-70% is outsourced, Polycab has adopted a strategic policy to manufacture on its own in order to maintain the quality of the goods and to control the entire supply chain It has 24 manufacturing facilities across India To integrate backward the company is setting up a copper wire rod plant at Ryker, Gujarat which is likely to commission by Q2FY20 This would help in raw material management as well aids margins The company has diversified into the FMEG business in 2014 to move from pure B2B player to B2C Company Though it was a late entrant to FMEG market, the company has grown rapidly (43.7% CAGR over FY16-19) In FY19 it posted EBIT margins of 1.2% which are likely to improve in coming years We believe as the contribution of FMEG would increase in the overall pie, the company level margins are likely to improve as well The company pays full tax hence would be beneficiary of the recent tax rate cut Working capital has improved mainly due to increase in payable days; the management expects receivables and inventory days to improve going forward Q1 is typically a soft quarter and normatively, there is pick up as the year progresses Figures in Rs Cr Year Revenues Growth EBITDA Margin Adj PAT PAT Margin EPS PE ROE FY18 6770.3 23.1% 728.9 10.8% 358.6 5.3% 25.4 28.6 15.2% FY19 7956.0 17.5% 923.2 11.6% 500.3 6.3% 35.4 20.5 17.5% FY20E 8914.5 12.0% 1002.4 11.2% 593.1 6.7% 40.9 17.7 17.4% FY21E 10025.6 12.5% 1147.5 11.4% 685.1 6.8% 47.9 15.2 17.1% CMP: Rs 147 Target: Rs 215 Sterlite is a unique data play as 100% of its profits come from data related products/ services Sterlite enjoys a 7% market share in the global optical fibre market and is reaping the benefits of rising fiberisation of telecom networks globally, as data demand grows Over the medium to long term, other growth catalyst such as 5G, IOT and domestic government led initiatives like Digital India, Bharat Net (Phase III) are likely to provide strong visibility Onset of 5G in China and other developed countries is expected to drive global optic fibre demand which should reverse the falling trend in fibre prices Services mix is slated to increase to 50% by FY21E (from 37% in FY19) which shall drive the margins towards 18-20% (from 22% in FY19) Services margins stand at ~11% while that of products stand at ~28% We believe this change in business mix is already factored in the stock price Recently, the promoters have completely removed pledging of shares (~97% of their holdings), which were done to support M&A activity by promoter group in other businesses This is a positive sign and should aid sentiment Given the robust growth potential (topline, earnings CAGR of 23%, 19%, respectively, over FY19-21E), we recommend to buy the stock We value the company at 12x FY21E P/E to arrive at a target price of Rs 215 Figures in Rs cr Year Revenues Growth EBITDA Margin PAT PAT Margin EPS PE ROE FY17 3179 30% 711 22.3% 334 10.5% 8.3 17.6 22.5% FY18 5092 60% 1082 21.2% 563 11.1% 14.0 10.5 33.9% FY19 6655 31% 1339 20.1% 620 9.3% 15.2 9.7 31.1% FY20E 7654 15% 1524 19.9% 730 9.5% 17.9 8.2 29.6% CMP: Rs 470 Target: Rs 690 Anup Engineering is promoted by Mr Sanjay Lalbhai and his family (Promoter of Arvind Ltd) Anup was earlier a subsidiary of Arvind Ltd and recently got demerged Anup is engaged in design and fabrication of process equipment (heat exchangers & pressure vessels) which finds application in oil & gas refineries, petrochemicals and fertilizers The domestic process plant equipment industry is growing at 12% CAGR driven by huge investments in oil & gas refining, petrochemical and fertilizer sectors Anup’s order book has witnessed a healthy improvement of 94% YoY to Rs 300 Cr in FY19 Book-to-bill ratio has thus increased from 0.6x in FY18 to 1.2x in FY19 Anup shall spend Rs 163 Cr over the next three years (>2x the amount spent in last years) on expansion which shall be funded mainly from internal accruals Post this capex, Anup shall be able to generate normalized revenue of ~Rs 650 (at 2x gross block turnover) which is 2.7x higher than FY19 revenue of Rs 243 Cr Moderate competition, criticality of products and customization have aided pricing power reflecting in the best in class margins that Anup enjoys Anup’s revenue base of Rs 243 Cr seems small in the context upon considering the industry size (Rs 27,000 Cr), strong parentage, decades of experience and demerger from Arvind We thus believe Anup is geared to witness accelerated growth in coming years and is available at attractive valuations at 9.6x/7.3x FY20/21E We recommend to ‘BUY’ Anup with a target price of Rs 690, based on 14x FY20E EPS (Upside of 47%) Figures in Rs cr Year Revenues Growth EBITDA Margin PAT PAT Margin EPS PE ROE FY17 244 46% 54 21.9% 45 18.6% 44.5 10.6 18.8% FY18 243 0% 64 26.2% 40 16.4% 39.1 12.0 14.1% FY19 296 22% 77 26.1% 50 16.9% 49.2 9.6 15.6% FY20E 376 27% 98 26.2% 65 17.4% 64.2 7.3 17.4% CMP: Rs.132 Target: Rs.192 Welspun Corp (WCL) is a part of Welspun Group and provide comprehensive pipe solutions WCL manufactures line pipe solutions ranging from 1.5” to 140” including LSAW, HSAW, HFIW and ERW pipes WCL production capacity in India is 1600 KTPA, US 575 KTPA and Saudi 300 KTPA and they have coating facility in the all the three plants With imposition of stiff trade barriers by US Government, steel pipe has to be locally sourced now WCL is booked till December 2019 for its US facility and is targeting higher margin order going ahead With higher Oil prices, US companies have started extracting more Shale Oil and Gas for which demand for incremental pipe have started emerging Above $40 per barrel of Oil, make Shale capex viable option WCL has 50% JV in Saudi Arabia Since last years JV has been posting losses Currently Saudi has order book for next years Since last qtrs, Saudi operation is reducing its loss and in Q1FY20, Saudi operation reported profits We expect Saudi business to improve in FY20E WCL plans to become net debts free by FY20E and with no major capex lined up in the near term and the divestment proceeds which it will receive from Plate and Coil mills and power plant WCL is trading at 3.8 x EV/EBIDTA based on FY20E EBIDTA We value WCL at 5.5x EV/EBIDTA FY20E with a target price of Rs.192 Figures in Rs cr Year Revenues Growth EBITDA Margin PAT PAT Margin EPS PE EV/EBIDTA FY17 FY18 5898 -18 512 8.7% 26 0.4% 1.0 132 8.8 6347 579 9.1% 181 2.9 % 6.0 22 5.6 FY19 8953 41 863 9.6% 100 0.7% 4.0 33 4.2 FY20E 9398 924 9.8% 382 4.0% 14.4 3.8 Research Reports that are published by Nirmal Bang Securities Private Limited (hereinafter referred to as “NBSPL”) are for private circulation only NBSPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no INH000001766 NBSPL is also a registered Stock Broker with National Stock Exchange of India Limited , BSE Limited ,Metropolitan Stock Exchange of India Limited , Multi Commodity Exchange of India Limited , National Commodity and Derivative Exchange Limited and Indian Commodity Exchange Limited in cash and Equity and Commodities derivatives segments NBSPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets NBSPL or its associates have not been debarred / suspended by SEBI or any other 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B-2, 301/302, Marathon Innova, Opp Peninsula Corporate Park Off Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No : 91 22 6723 8000/8001 Fax : 022 6723 8010 ... exclusively with NBSPL Our reports are also available on our website www.nirmalbang.com Nirmal Bang Research (Division of Nirmal Bang Securities Pvt Ltd.) B-2, 301/302, Marathon Innova, Opp Peninsula... December 2019 for its US facility and is targeting higher margin order going ahead With higher Oil prices, US companies have started extracting more Shale Oil and Gas for which demand for incremental... recommendations to its clients, and would be happy to provide information in response to specific client queries Before making an investment decision on the basis of this research, the reader