Aditya birla diwali top picks 2019

2019 Diwali Top Picks - 2019 16 October 2019 Diwali Top Picks - 2019  Samvat 2075 has been a tough year for the equity markets by any standards, except when looked through the prism of headline index So while large-cap index (Nifty) was up by ~8%, mid-cap index was down by ~10% and small-cap index was down by ~14%, one of the most divergent years as far as performance differential between indices is concerned Even the large cap index (Nifty) was marked by concentrated performance with top 10 performers accounting for majority of the gains  Global markets were volatile for the Samvat year 2075 as investors battled US-China trade war and US Fed’s not so unambiguous trajectory on rate cuts However, ECB’s promise of more stimulus lead to an European out-performance So while US (DJIA) was up by ~2%, France (CAC) was up by ~8% while Germany (DAX) was up by over 10% As we write, there is still no clarity on a negotiated Brexit deal Global yields, reflecting slowdown dropped sharply with US 10Y dropping over 150bps between the two Samvats EMs, however, fared better than DMs with Brazil (~25%) and Russia (~16%) being the best performing markets  The year also saw the return to power of the NDA government in the general election which bodes well for the political stability and policy continuity Since taking over in the second term, the government has announced a slew of measures, the most prominent being the cut in corporate tax rate from ~35% to ~25% While Samvat 2074 marked the start of the economic slowdown for India (partly as a fallout of the ILFS & NBFC crisis), Samvat 2075 has seen more corporate misgovernances come to light and will actually go down as a year of cleansing for corporate India  While the slowdown started last year, with the NBFC fiasco, and has moved to other parts of the economy (autos, discretionaries and some parts of staples too), long term investment portfolios are built precisely during these challenging times Team ABM presents 10 such investment opportunities which are attractive from a risk reward perspective and the economic outlook (both global and local) for the next year Happy Diwali & Happy Investing!!! Diwali Top Picks - 2019 Bharti Airtel Ltd  About: Bharti Airtel is India’s third largest telecom service provider with a pan India presence Besides, the company is also present in CMP `385.3 Financial Snapshot Sri Lanka and 14 African countries The company provides wireless and fixed line telecom services to individuals and enterprises and  DTH TV services It has a 28.1% market share of wireless subscribers in India (as of July 2019) and provides wireless services to ~10 (In ` bn) FY19 FY20E FY21E Cr subscribers in Africa Net Sales 807.8 844.8 901.5 Key Trigger: The telecom industry in India has undergone a massive churn post the entry of Reliance Jio in September 2016 The EBITDA 258.2 321.7 369.9 Net Profit 4.1 -42.6 -2.0 recharge plan to weed out non-paying subscribers boosting its India wireless ARPU to `129 in Q1FY20 from a low of `100 in Q2FY19 EPS (`) 0.9 -9.8 0.3 It is now focusing on upgrading its subscribers to higher priced plans which is expected to further improve the ARPU The company RoE (%) 0.6 -3.6 -0.1 rock bottom tariffs led to the exit of multiple smaller players from the market and consolidation, with the biggest being the merger of Vodafone India and Idea Cellular It has managed to ride out the storm and emerged stronger The company introduced a minimum has reduced its debt from a peak of `1.13 lakh Cr in Q2FY19 to `93,095 cr in Q1FY20 by utilizing the proceeds from the rights issue of `25,000 Cr in May 2019 The company is expected to further reduce the debt in Q2FY20 from the proceeds of the IPO of Airtel Africa The proposed sale of the non core assets is further expected to help the company reduce its debt  Performance & Valuation: Bharti is expected to benefit from the surge in data volume growth with 40% of Airtel users subscribing to its data plans and 80% of them using 4G The regulatory regime is expected to soften with the proposed moratorium on spectrum payments and the deferment of the zero IUC regime The stock is trading at FY20E/FY21E EV/EBITDA of 10.15 and 8.82 respectively Source: Bloomberg Consensus, ABML Research Diwali Top Picks - 2019 Dalmia Bharat Ltd  About: Dalmia Bharat (“DBEL”) is the fourth largest cement group in India with total cement capacity of 30MTPA Its major areas of CMP `811.0 Financial Snapshot operation are East India, North East India and South India where its 25MTPA capacity is installed It has also acquired assets of Murli Industries (~3MTPA cement capacity) in Chandrapur, Maharashtra and Kalyanpur Cement (1.1MTPA capacity) in Bihar It is also (In ` bn) FY19 FY20E FY21E undertaking a brownfield capacity expansion of ~8MTPA in Eastern region which will take the total capacity to ~38MTPA DBEL has Net Sales 94.8 105.2 120.1 EBITDA 19.4 23.8 27.0 Net Profit 3.1 4.8 6.3 grown from 1.2MTPA cement capacity in 2006 to 30MTPA in 2019 through organic and inorganic expansion  Key Trigger: Government’s infra push which includes large projects like Bharatmala, Sagarmala, Railways & Metro projects etc as well as a push for affordable housing should lead to higher single digit cement demand growth Its acquisition of Murli Industries assets  in Chandrapur gives it exposure to central region too thereby able to service various regions from there DBEL has a history of EPS (`) 16.0 24.6 30.2 acquiring stressed assets and successfully turning them around Over 50% of its total capacity has grown through acquisitions RoE (%) 3.0 4.5 5.4 Performance & Valuation: DBEL’s revenue & operating profit has grown at a CAGR of 26% & 33% respectively over past 5Y while its volume has grown at a double digit rate DBEL is one of the most profitable cement companies- operating margins of 20%+ and EBITDA/T of >`1200 Despite aggressive acquisitions its net debt/EBITDA ratio is 1.6x which is well within comfort level It is trading at 6.5x FY21E EV/EBITDA which is at ~30% discount to its past years valuation We remain positive on the stock from a long term perspective Source: Bloomberg Consensus, ABML Research Diwali Top Picks - 2019 Dr Lal PathLabs Ltd  About The Company : Dr Lal PathLabs Ltd (DLPL), is one of India’s largest diagnostic players with over 2,500 patient service CMP `1374.0 Financial Snapshot centers, pre-dominant presence in North India and a rapidly expanding pan India footprint DLPL has a B2C oriented business model  ensuring higher customer/patient stickiness as compared to its B2B driven peers The company has a strong presence in North India (In ` bn) FY19 FY20E FY21E (72% of revenues), with over 20% market share in the Delhi-NCR region Net Sales 12.0 13.9 16.1 Key Investment Argument: The Indian diagnostic industry is worth 60,000 Cr in annual revenues and is a highly fragmented market EBITDA 2.9 3.6 4.3 Net Profit 2.0 2.4 2.9 with over lakh labs currently in operation With over 50% of the diagnostic market being unorganized, DLPL is well placed to benefit from the market share shift towards the organized players Moreover, the diagnostic industry is expected to grow in double digits over the next three years with organized players growing faster DLPL aims to increase its presence in T-II & T-III towns of Haryana, Punjab EPS (`) 23.9 29.2 35.3 and UP which surround its primary market in the Delhi-NCR region Further, the Kolkata Reference Laboratory will drive next phase of RoE (%) 23.0 23.2 23.4 growth by expanding its footprint in Eastern India  Performance & Valuation: DLPL’s revenue and profit has grown at a CAGR of 16% and 21% respectively over the past years With strong brand equity, solid business model and an on going industry shift from unorganised to organised players, we expect Dr Lal PathLabs to grow at a faster click as compared to the overall industry The company trades at a reasonable valuation (given its higher growth profile) of 38x on its FY21E earnings which we believe should sustain because of low capex requirements in the future & sustained Free Cash Flow generation We expect Stock to deliver 20%+ over the next twelve months Source: Bloomberg Consensus, ABML Research Diwali Top Picks - 2019 HDFC Bank Ltd  About: HDFC Bank is the retail focused bank, having a well-diversified credit and deposit base Within credit, both retail & corporate CMP `1221.1 Financial Snapshot constitute 50% each, while for industry retail credit is just ~20% of credit Similarly, on deposits front, it has CASA ratio of ~40% and  retail deposits (CASA + Retail FD) of ~85% which is amongst the best in industry and provides bank an edge in terms of CoF & (In ` bn) FY19 FY20E FY21E granularity of customer base NII 482.4 578.9 694.7 Key Trigger: Considering the under-penetrated credit market and dearth of capital for both PSU banks and NBFCs, we expect HDFC PPP 397.5 473.0 577.1 Net Profit 210.8 258.4 314.5 Bank to continue to grab market share and deliver ~20% growth in credit and profitability It is adequately capitalized with ~16% tier capital as far as growth capital is concerned Stable asset quality is expected to be maintained considering the diversified credit book In addition; stringent credit monitoring mechanism, strong management pedigree and well-seasoned book indicates for the stable EPS (`) 39.3 48.6 58.7 asset quality going ahead Digitisation & usage of technology will further push C/I ratio lower Already, C/I ratio is below 40% which is RoA (%) 1.9 2.0 2.0 commendable considering the high proportion of retail credit  Performance & Valuation: HDFC Bank is well-positioned to grow credit and PAT at ~20% CAGR for next couple of years It earns strong NIM of ~4.3% mainly owing to high yielding retail credit book CoF to remain relatively on lower side considering the strong business model and provide further edge to the bank as competition struggles RoA of ~2% is amongst the best in industry Rich valuations to be maintained considering the steady growth, superior NIM and ROA generating capabilities of the bank Expect stock to deliver ~20% return in year time-frame Source: Bloomberg Consensus, ABML Research Diwali Top Picks - 2019 HDFC Life Ltd  About: HDFC Life, as a JV between HDFC Ltd and Standard Life Aberdeen is amongst the largest life insurer of India with major CMP `611.0 Financial Snapshot focus on protection business It is backed by strong parentage, superior brand, trust and well-diversified distribution network When  compared to peers, HDFC Life has a well diversified book with ULIP constituting 55% of total APE, Par - 18%, Non-Par – 15%, (In ` bn) FY19 FY20E FY21E Term – 7% and Annuity – 5% Majority of competition has ~75%+ ULIP share Gross Premium 291.9 350.3 420.3 Key Trigger: Under-penetrated Life Insurance market and Financialisation of economy would lead to increasing share of life Net Profit 12.8 15.1 17.6 183.4 220.0 264.0 insurance in the customer’s wallet share HDFC Life is well-placed to grab this opportunity with strong distribution network including Embedded Value Bancassurance, Brokers, Agency and others Although there is no longer exclusive tie-up with HDFC Bank, we believe, it will continue  to remain major partner with its large retail presence In addition, there has been increasing awareness of protection vs ULIP amongst EPS (`) 6.3 7.4 8.7 customers in which HDFC Life holds dominant market position RoE (%) 22.6 18.6 20.4 Performance & Valuation: The company is well-positioned to grow its APE, VNB and profitability on steady state basis Market-leading digital capabilities and ability for innovative, customer oriented products like HDFC Sanchay, shall enable the company to maintain its leading position in life insurance market Owing to high protection mix, the company earns superior VNB margin of 25%+ which enables it to earn healthy RoE of ~25% and dividend payout of ~25%, thereby keeping valuations rich Seasoned leadership guided by an independent and competent board keeps the company’s governance at highest standard while maintaining business performance Expect stock to deliver ~20% return in year time-frame Source: Bloomberg Consensus, ABML Research Diwali Top Picks - 2019 ICICI Lombard General Insurance Company Ltd  About: ICICI Lombard GIC is the largest private sector general insurance company in India with market share of over 8% on gross CMP `1207.3 Financial Snapshot premium income basis It operates in multiple range of products namely motor, health, personal accident, crop, fire, marine etc It was  founded as a JV between ICICI Bank and Fairfax Financials, a Canadian company Its gross written premium stood at `147.9bn in (In ` bn) FY19 FY20E FY21E FY19 with total industry size of ~`1.75tn Gross Premium 144.9 152.1 178.0 Key Trigger: ICICI Lombard is the leader in general insurance industry and has maintained the leadership position since FY2004 Net Profit 10.5 12.3 15.2 Combined Ratio % 98.5 99.0 99.0 stands to be one of the biggest beneficiary It has demonstrated over the years industry leading practices and policies in terms of EPS (`) 23.1 27.2 33.5 recognition and disclosure of risk It has also adopted prudent approach in reserve development which is also reflected in the fact that RoE (%) 21.3 22.1 23.2 Recent developments in regulations like compulsory third party motor for 2W and cars for 5Y and 3Y respectively, allowing re-pricing of health insurance annually (3Y earlier) have also improved the prospects of the industry and ICICI Lombard being industry leader it inflates the claim reserves (liability) at the rate of 12-14% which is higher than the reported CPI  Performance & Valuation: Company’s Loss ratio and Combined ratio for FY19 stood at 75.3% and 98.5% respectively Its realized return stood at 9.4% with investment leverage of ~4x leading to ROAE of 21.3% in FY19 It aims to maintain its ROE over 20% going ahead with maintain pricing discipline, prudent risk management, increase in investment float and favorable regulations It is valued at PE of 50x on FY19 basis We believe it is reasonably valued given strong franchisee, multi-year growth visibility and strong track record of the company We expect it to deliver multi-year compounded growth and remain preferred stock in general insurance sector Source: Bloomberg Consensus, ABML Research Diwali Top Picks - 2019 Larsen & Toubro Ltd  About: Larsen & Toubro (“L&T”), India’s largest E&C company, has interests in Projects, Infrastructure Development, Manufacturing, CMP `1424.2 Financial Snapshot IT & Financial Services It is the market leader in India’s capital goods & construction space The company has various subsidiaries  namely LTI, LTTS, LTFH and others which are doing fairly well & have registered healthy growth supplementing its base business (In ` bn) Key Trigger: L&T is a good proxy to a broad based industry capex The capacity utilization as per RBI stands at ~74% and the same Net Sales is at the cusp of re-ordering which is likely to benefit L&T The Govt under Modi 2.0 has stated intent to invest `100 Tn in infrastructure FY19 FY20E FY21E 1391.4 1585.8 1799.5 EBITDA 237.1 189.7 220.6 Net Profit 89.1 102.9 122.5 visibility for the next years Further the order inflow momentum has sustained through a healthy mix of both PSU & Private sector EPS (`) 63.5 72.8 86.9 Performance & Valuation: On standalone basis, over the past three years, L&T’s revenue/PAT has registered CAGR of 11%/13% RoE (%) 15.2 15.2 16.0 over next years and is therefore positive for the capital goods space which is likely to receive strong order inflow going forward L&T has robust order book of ~`294,000 Cr.; which is approximately 3.3x annual sales and provides hedge against cyclicality & good  respectively It has healthy balance sheet, with D/E of 70% on account of improved working capital management Its working capital cycle has  improved from 59 days in FY18 to 49 days in FY19 on closing basis This has led to healthy free cash flow generation EPS (`) 8.7 8.8 10.2 Performance & Valuation: Marico’s Revenue/EBITDA/PAT has grown at a CAGR of 9%/11%/18% respectively Marico has newly RoE (%) 40.3 35.6 36.6 launched products in snacks segment where it has witnessed initial success We believe new launches led by innovation should lead to next leg of growth Also benign input cost should support the margins It is trading at 38x FY21E PE We like the company due to its clean balance sheet and strong cash flow Source: Bloomberg Consensus, ABML Research Diwali Top Picks - 2019 The Phoenix Mills Ltd  About: Phoenix is a proxy to the Indian Retail sector, which is seeing strong demand driven by multiple factors It operates in four CMP `695.5 Financial Snapshot verticals namely Retail, Hospitality, Commercial and Residential It has over 17.5 mn sft of real estate assets spread across  Retail – 5.85 mn sft, Commercial – 1.67 mn sft, Residential – 4.13 mn sft and remaining Hospitality – 5.85 mn sft (In ` bn) FY19 FY20E FY21E Key Trigger: High growth in organized retail industry in India on account of multiple factors like favorable demographics, increase in Net Sales 18.9 21.1 22.6 disposable income and shift in consumption pattern has led to high demand for commercial retail space Over 50 global brands aspire EBITDA 9.9 10.9 11.6 Net Profit 4.2 4.1 4.4 to invest and participate in India’s retail story However, many of them have not been able to find a suitable retail space for setting up their stores PML has emerged as India’s one of the most premium mall owner and manager This helps it to command multi-fold  premium from the high end brands and shortage of quality space only adds to its position PML intends to double its retail portfolio in EPS (`) 27.5 25.8 27.9 next 4Y There are several mall projects coming up at Pune, Ahmedabad, Indore & Lucknow , amongst other cities RoE (%) 13.3 11.1 11.0 Performance & Valuation: Phoenix’s Revenue & PAT has grown at a CAGR of 7% & 27% respectively over the past years Phoenix has long term rental contracts at good yield - In the falling interest rate scenario the capital value of its rental Assets gets augmented It is trading at 13x FY21E EV/EBITDA We expect its core EBITDA to grow at a CAGR of ~10% over FY19-21E Remains one of the best proxy to consumption Source: Bloomberg Consensus, ABML Research Diwali Top Picks - 2019 Titan Company Ltd  About: Titan, a TATA group company, is the largest jewellery retailer in India which operates under “Tanishq” brand It also has a CMP `1274.6 Financial Snapshot presence in watches and eyewear segment About 90% of its business comes from the jewellery segment, with 80% of the jewellery  business consisting of gold jewellery and remaining diamond jewellery Over the years, Titan has established itself as one of the most (In ` bn) FY19 FY20E FY21E trustworthy consumer brand in jewellery, watches and eyewear Net Sales 195.9 228.0 270.1 Key Trigger: Jewellery business is one of the most fragmented and unorganized sector in India (Only 20% is organised).Titan stands EBITDA 21.7 26.2 32.3 Net Profit 14.0 17.7 21.9 unorganized sector is clearly visible since demonetisation/GST in the quarterly results of organized jewellery players like Tanishq EPS (`) 15.8 20.1 24.8 Moreover with increasing urbanization and jewellery becoming a consumption item rather than investment, there is a preference for RoE (%) 25.2 26.4 27.8 to be one of the biggest beneficiary of the shift in demand from unorganized to organized sector due to its reputed name in the industry Growing urbanization and rise in disposable income is driving demand for discretionary spending The shift in demand from branded jewellery  Performance & Valuation: Titan has emerged as trust worthy name in jewellery sector, which is highly sensitive to quality In an industry of fragmented nature, its market share is still low single digit which shows high potential to grow despite industry headwinds Its revenue/EBITDA/PAT has grown at a CAGR of 21%/29%/28% respectively over FY16-19 It is trading at 42x FY21E PE Expect its earnings to grow at a CAGR of 22%-25% over FY19-22E It remains our preferred pick in retail FMCG space Source: Bloomberg Consensus, ABML Research Disclaimer Disclaimer: This document is not for public distribution and is meant solely for the personal information of the authorised recipient No part of the information must be altered, transmitted, copied, distributed or reproduced in any form to any other person Persons into whose possession this document may come are required to observe these restrictions This document is for general information purposes only and does not constitute an investment advice or an offer to sell or solicitation of an offer to buy / sell any security and is not intended for distribution in countries where distribution of such material is subject to any licensing, registration or other legal requirements The information, opinion, views contained in this document are as per prevailing conditions and are of the date appearing on this material only and are subject to change No reliance may be placed for any purpose 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therefore should not form the basis of and should not be relied upon in connection with making any investment The investment may not be suited to all the categories of investors The recipients should therefore obtain their own professional, legal, tax and financial advice and assessment of their risk profile and financial condition before considering any decision Aditya Birla Money Limited, its associate and group companies, its directors, associates, employees from time to time may have various interests/ positions in any of the securities of the Company(ies) mentioned therein or be engaged in any other transactions involving such securities or otherwise in other securities of the companies / organization mentioned in the document or may have other interest with respect to any recommendation and / related information and opinions The company follows Employee Trading Policy which regulates the trading activities of the research analysts The compensation of the research analysts is governed as per the Board approved “Research Analyst” Policy Aditya Birla Money Limited is acting as a Research Analyst and is registered under SEBI (Research Analyst) Regulations, 2014 SEBI Registration No INH000002145 14 Research Team Vivek Mahajan Head of Research 022-6819 0549 vivek.mahajan@adityabirlacapital.com Fundamental Team Vidrum Mehta Auto 022-6819 0537 Vidrum.Mehta@adityabirlacapital.com Jaymin Trivedi Banking & Finance 022-6819 0511 jaymin.trivedi@adityabirlacapital.com Naveen Baid IT 022-6819 0516 naveen.baid@adityabirlacapital.com Suresh Gardas Pharma & Chemicals 022-6819 0513 suresh.gardas@adityabirlacapital.com Mahavir Jain Mid - Cap 022 6819 0518 mahavir.jain@adityabirlacapital.com Mohan Jaiswal Technical Analyst 022-6819 0515 mohan.jaiswal@adityabirlacapital.com Salim Hajiani Equity Advisor 022-6819 0512 salim.hajiani@adityabirlacapital.com Pradeep Parkar Equity Advisor 022-6819 0514 pradeep.parkar@adityabirlacapital.com Hemal Shah Equity Advisor 022-6819 0552 Hemal.Shah3@adityabirlacapital.com Advik Shetty Research Associate 022-268190541 advik.shetty@adityabirlacapital.com ABML research is also accessible in Bloomberg at ABMR Thank You ... vivek.mahajan@adityabirlacapital.com Fundamental Team Vidrum Mehta Auto 022-6819 0537 Vidrum.Mehta@adityabirlacapital.com Jaymin Trivedi Banking & Finance 022-6819 0511 jaymin.trivedi@adityabirlacapital.com... 0516 naveen.baid@adityabirlacapital.com Suresh Gardas Pharma & Chemicals 022-6819 0513 suresh.gardas@adityabirlacapital.com Mahavir Jain Mid - Cap 022 6819 0518 mahavir.jain@adityabirlacapital.com... mohan.jaiswal@adityabirlacapital.com Salim Hajiani Equity Advisor 022-6819 0512 salim.hajiani@adityabirlacapital.com Pradeep Parkar Equity Advisor 022-6819 0514 pradeep.parkar@adityabirlacapital.com