Chola diwali picks 2019

20 for a brighter 2020!! FUNDAMENTAL PICKS Atul Atul Ltd: Market leader in aromatic compounds used in personal care and fragrance markets  In addition to on-going trade war, the significant increase in labour cost and environment compliance in chemical hubs such as China, provided the opportunity for Indian producers to increase market share in Chemicals sector We believe Atul with its leadership position in key market segments is well placed to cash in on the opportunity  The company is working on capex of over INR 4bn, with a fixed asset turnover of 2x, which is likely to be completed by mid2020 The planned capex covers 30% expansion in the aromatic compound para cresol’s capacity to 36,000 tonnes, where in company holds 40% market share Para cresol is used in the fragrance and anti-oxidants industry  The return ratios and cash flows are likely to improve further driven by economies of scale, improved pricing, demand recovery in end markets and lower finance costs  The stock is trading close to its all-time high and can be accumulated on declines for decent gains in long-term Aurobindo Pharma (ARBP) Aurobindo Pharma (ARBP): Strong growth in US and Europe driving Profits  The new product launches and volume growth in the existing products ,continues to fuel the top line The company has launched 15 products in US markets during Q1FY20, which includes injectable products  In Q1FY20, the US business revenue surged by 37% YoY (up ~10% QoQ) to USD 388mn Other segments like ARV, API and EU witnessed healthy growth of 9%/6%/8% QoQ, respectively Gross margin expanded by ~260bps QoQ (+40bps YoY) to 57.8% on account of improved product-mix ARBP has also commissioned Eugia’s manufacturing facility and launched oncology and hormonal products in Q1FY20  The management has guided for 40 new launches in the coming months which is further expected to accelerate the overall US revenue ARBP expects significant growth opportunities from new injectable launches, scaling-up of existing business, and traction in OTC business  The recent fall in stock price has made valuations attractive and given above positives we expect the ARBP to be the right pill for LT portfolio addition BEML BEML: Moving in right direction  BEML is Asia’s second-largest manufacturer of earth moving equipment and controls over 60% share in Indian markets The company operates under three major business verticals - viz Mining & Construction (earthmoving, dump trucks, dozers and excavators), Rail & Metro (RM) and Defence (Tatra trucks and ARVs)  BEML is expected to be the biggest beneficiary of burgeoning opportunity in Metro coaches The company recently received a large order from Mumbai Metro worth INR 30bn during Q3FY19, taking its overall order book to ~INR 91bn  In Defence & Aerospace sector, the government thrust on import substitution and the Make-in-India initiative have opened many opportunities BEML supplies mortar and casing components to the Indian Army  The company is also working on recovery vehicle on main battle tank of Indian Army, mine protected vehicle for military and paramilitary forces, high-end missile programme and Akash missile system among others  Given the company’s healthy order book, government initiatives on import substitution, tie-ups with global players in the defence segment and attractive sector dynamics we expect BEML to deliver robust financial performance over next 2-3 years Cochin Shipyard (CSL) Cochin Shipyard (CSL): Sailing in safe waters  The company is one of the leading shipbuilding & repair yard in India, with infrastructure that combines economy, scale, and flexibility, and has ISO 9001 accreditation CSL also has an exclusive area set for offshore construction and future expansion  A zero debt company, sitting on cash reserves worth INR 10bn or 21% of its market capitalization  The company has a healthy order book of INR 80bn, 4x its annual revenues from shipbuilding  At current prices the company is valued ~8x of its FY21 estimated earnings Given high earnings visibility, zero debt profile, capable management we think the stock can offer good returns in short to medium term DCB Bank DCB Bank Ltd: Long term trajectory intact despite a muted quarter  Over the last years the bank has delivered gradual but steady improvement in return ratios and has scope to improve further, which makes it worth keeping in the watch list  The bank reported a loan book growth of 12% YoY in Q2FY20 on account of de-risking of the corporate loan book (down 10% YoY), the bank intends to shrink its exposure to corporate segment  Though the growth in advances stayed muted, the diversification in loan book is inspiring The advances as of Q2FY19 included Mortgages, agri (41%), inclusive banking (AIB) (20%), corporate banking (12%) and SME/MSME (12%)  The bank has doubled its branch count from 154 in FY15 to 333 in FY19, due to which the operating expenses remained on the higher side in last few years However as these branches mature, cost-to-income ratio is likely to improve further from current levels and support the bank's earnings profile  The bank is targeting to improve its net interest margin from 3.67% in Q2FY20 to 3.75% over time The leaning in the loan mix towards lesser risk and improving cost to income ratios likely to spur earnings in future Escorts Escorts: Value at decent valuation  Escorts Ltd (ESC) is one of India’s prominent players in the Automotive / Tractor industry, with an overall market share of 11.4% in the domestic tractor industry ESC is also present in construction and material handling equipment, such as cranes, compactors and forklifts with 55% market share in material handling segment  The company has outperformed peers and grew its September sales by ~2.2%YoY while competitors saw de-growth/flat growth The company has got a clean balance sheet and healthy return ratios (RoE > 20%)  With increase in crop prices, above average monsoons (Central India recorded 26% more rainfall and southern states recorded 17% excess rainfall) and better financing support from NBFCs, the sales in H2FY20 is set to make a U-turn  Traditionally, the second half of the year is seasonally stronger for the construction equipment business of the company providing further stimulus  The company is currently trading at ~16x P/E compared to historic average of ~25x we view this as an attractive entry point considering the anticipated turnaround in domestic Agriculture sector Mahanagar Gas Mahanagar Gas Limited: Building an energy network for a greener India  MGL is the sole gas distribution company in Mumbai and has won bids to develop the gas infrastructure in Greater Mumbai, Raigad and adjoining areas  The company’s debt-free and cash rich balance sheet, provides it immense cushion for future CAPEX and expansion  The recent decline in spot LNG prices has aided margin expansion not just for MGL but all downstream companies  The company enjoys massive policy support, which promotes the use of a relatively cleaner fuel like natural gas amid rising environment concerns  A growing number of regions are getting added to consumer gas distribution (CGD) network The gas usage penetration has been limited India though with rising oil prices and policy initiatives, increasing number of people and businesses are moving to Gas  The limited number of operators in the sector with largely untapped markets indicates strong revenue visibility for MGL in near future The company enjoys higher EBITDA margin compared to its peers and is trading at a discount which warrants investor’s attention Lumax Industries Lumax Industries: LED lighting solutions to drive future growth  The company’s revenue increased at a CAGR of 11% between FY14-19 with margins expanding by 350bps to 8.3% during the period The LED lighting solutions business contribute 35% of revenues while the conventional lighting makes up the balance  The shift in trend of automotive lighting from conventional solutions to LEDs and increasing demand for energy-efficient, cleaner vehicles are likely to drive sales for the company  The company managed to expand its margins by 130bps YoY in Q1FY20 to 9.5% through cost cutting measures despite negative operating leverage Any respite in volumes owing to the festive season and pre-BS VI buying could boost the margins further  Given the company’s historic track record and management capabilities we expect the company to make best of any revival in the Auto sector and maintain positive view on the stock given attractive valuations Mahindra and Mahindra Mahindra and Mahindra: Making a U turn to recovery  M&M is the flagship company of the Mahindra group and is a market leader in tractors with over 40% market share The company also has a significant presence in the Utility vehicles space  The domestic tractor industry faced tough time last year on account of subdued monsoons; however the company posted a 0.4% YoY growth in domestic tractor sales for the month of September 2019 Owing to above normal monsoons across the country and increasing crop prices, sales in H2FY19 are expected to recover further Being the market leader, M&M is set to benefit from this recovery  The company is increasing its presence in the farm mechanization space (tillers, harvesters, sprayers etc) that would further help propel growth and compensate for slowdown in utility vehicle segment  The stock has corrected close to 23% over the last one year owing to cyclical downturn and poor monsoons and is available at an attractive valuation Motherson Sumi Motherson Sumi (MSSL): Ready to change gears  MSSL is India’s largest automotive wiring harness company and one of the largest auto ancillary players The company’s revenues increased at a CAGR of 15.3% between FY14-19  SMRP BV, a joint venture between MSSL and Samvardhana International had an order book of EUR 1.82bn as of FY19, giving it a strong revenue visibility in the near term We also expect margins to improve as the new SMP Greenfield plants ramp-up and operating leverage kicks in EBITDA margins of SMP expanded by 70 bps QoQ in Q1FY20  The implementation of BS-VI norms and demand for electric vehicles across the globe are likely to be key drivers for future growth The Battery driven vehicles consume more wiring components which could lead to a 10-20% increase in content per vehicle, a big positive for MSSL  With the capex cycle coming to an end, the company has started repaying debt The company’s net debt has reduced from INR 113bn as on Q3FY19 to INR 83.8bn as on Q1FY20 The stock is down ~47% in last 12 months and is available at relatively cheap valuation RITES RITES Ltd: Strong revenue visibility at an attractive valuation  RITES Ltd generates revenue from two major segments, turnkey projects and consultancy wherein it acts as a consultant and an execution agency The company hence has an asset light business model with zero debt and healthy cash balance of INR 14bn  The company’s revenue increased 37% YoY in FY19, driven by strong order backlog and better execution The order backlog of close to INR 61bn is 3x of annual sales  We expect company to maintain its pace of growth amid growing infrastructure spending In our view, the strong revenue visibility coupled with improved execution and technical capabilities, the company is well placed to benefit from the expected pick-up in the domestic infrastructure spending State Bank of India State bank of India: India banks on it  SBI, the largest Bank in India (In terms of Deposits, Advances, Customers and Banking Outlets) serving 435.1mn Customers, network of 22,010 Branches and 58,415 ATMs The Market share of SBI in terms of Deposits is 22.3%, Advances is 20.0%, no of POS is 15.9%, and Debit Card Spends is 29.8%  SBI’s strong liability franchise and better capital position differentiate it from other PSU banks NIM for Q1FY20 was at 2.8% up +3bps Q/Q (domestic +6bps Q/Q) with cost of deposits falling 3bps Q/Q During Q1FY20, the Net Interest Income of the bank stood at INR 883.49B as on FY19 with a healthy growth of 18.0% YoY The Deposits has shown a growth of 11.6% The Bank’s loan book has grown at the rate of 12% with retail growing at ~18-20% levels  With the structural shift towards high quality assets, the overall earnings volatility has come down and is likely to improve further in coming quarters The bank expects margins to improve in FY20, with NIM guidance of 3.15% Revised ROA guidance of 0.5- 0.6% for FY20 with additional INR 160BN recoveries driven from three stressed accounts Credit cost guidance for FY20 has been maintained at 1.4%  The stock is trading at an attractive valuation and can be looked at from medium to long term perspective United Phosphorus (UPL) United phosphorus limited (UPL): Geographical diversity and ‘Arysta’ to drive growth ahead  The company has been a strong post-patent player in the global CPC industry with higher than industry growth Over FY16-19 UPL recorded a constant currency growth of ~13% while the industry de-grew by 2%  In order to mitigate the risk of obsolete products (as pests develop resistance against CPC over time), UPL continues to invest in innovative and differentiated products/processes The share of innovative products in revenue increased steadily from 2.5% in FY14 to 19% in FY19  The 5-year revenue CAGR of 13% has been supported by outperformance in India and double-digit growth in LatAm, North America and RoW The diversified revenue base (both based on markets and crops) has enabled the company to maintain strong growth momentum despite external headwinds related to adverse climate or crop-specific dynamics  We believe that the company’s focus on managing product resistance, cost optimization and diversified presence across all crops & geographies and massive expansion of footprint with the acquisition of Arysta would propel growth for the company in coming quarters VST Tillers and Tractors VST Tillers and tractors: Leader in compact Tractors & Tillers  Founded in 1967, the company is engaged in the manufacture and sale of power tillers, tractors, rice transplanters, power reapers and auto components The company also exports its products to Africa, Russia, Myanmar and component parts to UK & Europe  With better than average monsoon this year, we expect the demand for tractors to recover The key strength for VST lies in Tillers and the Compact Tractor segment where company continues to be leader  During Q1FY19 VST started seeding of higher horsepower tractors in the range of 39, 45 and 49 The Company launched these tractors in 22 dealerships across four states which have been accepted well as reflected in August sales (up 57%) YOY and the company expect ramping up of production in the second-half of this year  The company holds ample cash reserves which will help pursue organic/inorganic growth opportunities without pressuring its balance sheet The company is debt free and has historically maintained high return ratios and dividend payouts (28% in FY19)  We expect that VST tillers & tractors with 45% market share in tiller segment likely to be a key beneficiary of the improving sector drivers and recommend Buy on the stock at current levels Welspun India Welspun India: Flooring solutions business paving way for future growth  WIL mainly derives revenues from home textiles products such as terry towels and sheets However, the company’s full-fledged entry into flooring solutions business, with commissioning of a new manufacturing facility in Hyderabad is likely to be a potential game changer  The company’s client base includes 17 of the top 30 global retailers WIL derives 38% of top line from innovative products  In Q2FY20, EBITDA increased by 25% YoY on the back of falling costs and operating expenses The EBITDA Margins stabilised at 21% while PAT margin improved to 11% from 9% in last quarter The finance cost declined by 9% YoY and the company intends to eliminate its entire debt by FY2022  We hold positive view on WIL based on the easing litigation pressures, increased focus on domestic market and launch of new products TECHNICAL PICKS Technical Picks Bajaj Finance Stock is in long term uptrend and in short term it consolidated in the range of 3000 - 3400 levels and price breached short term resistance at 3400 levels and it is a continuation pattern to the existing long term uptrend; we expect a strong momentum towards 4800 levels Buy with a stop loss at 3700 Titan In medium term it consolidated in the range of 1000 - 1350 levels and price breach medium term resistance at 1350 levels is a continuation pattern to the existing long term uptrend and trending towards 161.8% Fibonacci levels of short term range at 1550 Buy with a stop loss at 1150 Voltas In long term it consolidated in the range of 480 - 660 levels and price breached long term resistance at 660 levels and trending towards 161.8% Fibonacci levels of short term range at 800 Buy with a stop loss at 640 Biocon In medium term stock was in down trend from 350 levels to 210 levels, which is long term support and bounce back to 240 levels We expect a value buy around long term support and bounce back expected up to 300 levels Buy with a stop loss at 200 ICICI Bank In short term it consolidated in the range of 380 - 440 levels and price breached short term resistance at 440 levels is a continuation pattern to the existing long term uptrend and trending towards 261.8% Fibonacci levels of short term range at 540 Buy with a stop loss at 420 Annexure FUNDAMENTAL PICKS SL NO COMPANY ATUL LTD AUROBINDO PHARMA LTD BEML LTD COCHIN SHIPYARD LTD DCB BANK LTD ESCORTS LTD MAHANAGAR GAS LTD LUMAX INDUSTRIES LTD MAHINDRA & MAHINDRA LTD 10 MOTHERSON SUMI SYSTEMS LTD 11 RITES LTD 12 STATE BANK OF INDIA 13 UPL 14 VST TILLERS TRACTORS LTD 15 WELSPUN INDIA LTD *CSEC TARGET CMP 4252 471 946 374 175 640 972 1210 578 111 279 282 595 1275 53 CONSENSUS TARGET STOP LOSS 4835 3800 682 430 1107 850 510 320 241* 150 765 550 1113 870 1554* 1100 666 500 126 90 335 250 372 240 695 500 1558 1100 64 45 Annexure TECHNICAL PICKS SL NO COMPANY CMP CSEC TARGET STOP LOSS BAJAJ FINANCE LTD 3987 4800 3700 TITAN CO LTD 1335 1550 1150 VOLTAS LTD 699 800 640 BIOCON LTD 242 300 200 ICICI BANK LTD 469 540 420 HAPPY DIWALI! Cholamandalam Securities Limited Member: BSE,NSE,MSE Regd Office: Dare House,2 (Old) # 234) N.S.C Bose Road, Chennai – 600 001 Website: www.cholawealthdirect.com Email id – customercarewm@chola.murugappa.com CIN U65993TN1994PLC028674 Chola Securities is a leading southern India based Stock broker Our focus area of coverage within the Indian market is Mid and Small caps with a focus on companies from southern India Our Institutional Equities services are carried out in partnership with RCCR, a boutique Investment research and Corporate Advisory firm founded by a team with extensive experience in the Asset management industry RESEARCH Kedar S Kadam DGM & Head of Research +91-44 - 4004 7361 kedarsk@chola.murugappa.com Mugilan K Technical Analyst +91-44 - 4004 7353 mugilank@chola.murugappa.com Sai Lavanya K Fundamental Analyst +91-44 - 4004 7266 sailk@chola.murugappa.com Arjun Prasad Pasumarthi Fundamental Analyst +91-44 - 4004 7363 arjunpp@chola.murugappa.com Sahil Jain Associate +91-44 - 4004 7360 sahilj@chola.murugappa.com Ammar Haider Associate +91-44 - 4004 7360 amarh@chola.murugappa.com INSTITUTIONAL SALES Venkat Chidambaram Kishore K Ganti Bhavesh Katariya Sudhanshu Kumar Head of FII Business & Corporate Finance* Mumbai Mumbai Institutional Equities* +91-44 - 24473310 +91-22-26597239 +91-9860297739 +91 - 9953175955 venkatc@chola.murugappa.com kishorekg@chola.murugappa.com bhaveshgk@chola.murugappa.com sudhanshuk@chola1.murugappa.com Balaji H Compliance Officer 044 - 30007226 balajih@chola.murugappa.com *Employees of Business Partner - RCCR DISCLAIMER: This report is for private circulation and for the personal information of the authorized recipient only, and we are not soliciting any action based upon it This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal It does not provide individually tailor-made investment advice and has been prepared without regard to any specific investment objectives, financial situation, or any particular needs of any of the persons who receive it The research analyst who is primarily responsible for this report certifies that: (1) all of the views expressed in this report accurately reflect his or her personal opinions about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of Cholamandalam Securities Limited makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete The views expressed are those of the analyst and the Company may or may not subscribe to all the views expressed therein Cholamandalam Securities Limited reserves the right to make modifications and alterations to this statements as may be required from time to time without any prior approval Cholamandalam Securities Limited, its affiliates, directors and employees may from time to time, effect or have effect an own account transaction in or deal as agent in or for the securities mentioned in this report The recipient should take this into account before interpreting the report All investors may not find the securities discussed in this report to be suitable Cholamandalam Securities Limited recommends that investors independently evaluate particular investments and strategies Investors should seek the advice of a financial advisor with regard to the appropriateness of investing in any securities / investment strategies recommended in this report The appropriateness of a particular investment or strategy will depend on an investor’s individual preference Past performance is not necessary a guide to future performance Estimates of future prospects are based on assumptions that may not be realized Re-publication or redistribution in any form, in whole or in part, is prohibited No part of this material may be duplicated in any form and/or redistributed without Cholamandalam Securities Limited prior written consent The news items appearing in this are collected from various media sources and we make no representations that it is complete or accurate ... 9953175955 venkatc @chola. murugappa.com kishorekg @chola. murugappa.com bhaveshgk @chola. murugappa.com sudhanshuk @chola1 .murugappa.com Balaji H Compliance Officer 044 - 30007226 balajih @chola. murugappa.com... 4004 7361 kedarsk @chola. murugappa.com Mugilan K Technical Analyst +91-44 - 4004 7353 mugilank @chola. murugappa.com Sai Lavanya K Fundamental Analyst +91-44 - 4004 7266 sailk @chola. murugappa.com... Analyst +91-44 - 4004 7363 arjunpp @chola. murugappa.com Sahil Jain Associate +91-44 - 4004 7360 sahilj @chola. murugappa.com Ammar Haider Associate +91-44 - 4004 7360 amarh @chola. murugappa.com INSTITUTIONAL