Market Strategy
¾ Indian equities ended the month with strong gains driven by strong resurgence in monsoons, hopes of GST constitutional ammendment bill getting passed in the monsoon session and continued FII flows. Sentiment was upbeat as the Union Cabinet approved key changes to the GST Constitutional Amendment Bill.
¾ The corporate quarterly earnings performance was a tad disappointing. However, we expect earnings to improve as the economic recovery gains momentum. Bond yields have been trending down, which has been one of the factors driving rally in NBFCs and PSBs. Buying interest continued to be strong in the mid-cap space.
¾ US equity benchmarks rose sharply due to upbeat domestic retail sales, manufacturing and housing data. Expectations of fresh economy-boosting measures from major global central banks kept most markets across the world in the green. US treasury prices ended lower owing to upbeat US economic cues and rally in global equities amid stimulus hopes
¾ The major events to look forward to in August includes the passage of GST and the remaining quarterly results. Renewed softness in crude prices and good monsoons should dampen inflationary pressures giving more ammunition for the new RBI governor to cut rates.
¾ Although, the investor sentiment remains positive, one should be wary of market valuations which have now breached the 18x FY17 earnings mark. Midcaps have been the flavor of the markets and several of these have hit new valuation highs. Thus, we would advise caution while trying to participate in the on-going rally. One must re-calibrate asset allocation in favour of stocks which have sustainable competitive advantage. We maintain our preference for companies having strong balance sheets and ethical managements. We are positive on select plays on GST (select stocks in Logistics, Auto, Media, Building Materials, Cements etc.) and government spending (Roads and Railways). Key risks to our recommendation would come from geopolitical concerns globally, decline in foreign inflows, sharp currency movements and further spike in oil prices.
Result Update: JSW Steel
¾ JSW Steel's (JSTL) reported strong sets of numbers, led by better than expected realisations, lower input costs and improvement in operating efficiencies. JSTL reported profit of Rs11.09bn in 1QFY17 as against estimated profit of Rs6.69bn. The consolidated net sales for the quarter came at Rs117.08bn, due to the better-than-expected realisation. EBITDA grew 91.6%/69.9% YoY/QoQ to Rs32.69bn, with an EBITDA margin of 27.9%. Blended steel realisation increased by Rs3,593/tonne sequentially, however, it is expected to decline in 2QFY17 due to seasonally weak quarter and recent decline in global steel prices. On the back of better than expected numbers, we have revised our FY17E earnings estimates higher to Rs132.8 (earlier Rs119.3) and FY18E to Rs154.4 (earlier Rs100.3). However, we believe that, JSTL is reasonably valued at 6x FY18E EV/EBITDA, and offer limited upside from the current levels. Hence, we downgrade the stock to SELL (earlier Accumulate), with a revised target price of Rs1,680 (earlier Rs1,370).
¾ Key Risks: Continuation of MIP (expire on August 5, 2016) can give a relief to the steel industry. In the absence of MIP, if other safeguard or anti-dumping duties are imposed, we could see a decline in steel prices in the domestic market, as still a large portion of the imports is happening at the prices lower than MIP.
Result Update: Tata Sponge
1QFY17 performance was below our estimates, with an EBITDA of Rs81mn and an EBTIDA margin of 7.6%. Net sales declined to Rs1.08bn. PAT came in at Rs106mn, down 17.6% QoQ. The weak performance was on account of lower sales volume, which was impacted by logistics issues and the decline in realisation. Going ahead, we believe the raw material costs to likely remain stable at lower levels, while weak scrap prices, weaken the outlook of sponge iron. As a result, we have lowered our realisation assumption, resulting in the downward revision in FY17E/FY18E estimates to Rs43.6/53.7. We revised our target price to Rs615 (earlier Rs625) and downgrade Tata Sponge (TSIL) to REDUCE (BUY), as we believe the stock is reasonably valued at 3.5x FY18E EV/EBITDA and offers limited upside from current levels.
Result Update: Gabriel India
Gabriel 1QFY17 revenues grew by 8% YoY to Rs3.7bn. EBITDA margin expanded from 9% in 1QFY16 to 9.2% in 1QFY17. PBT grew by 16% YoY and PAT growth came in at 11% YoY. On the back of good monsoons and seventh pay commission payout, we expect healthy volume growth for the two wheeler and passenger car segment in FY17. With 82% revenues coming from OEM's, Gabriel will be a key beneficiary of demand revival in the auto sector. Cost reduction measures and operational efficiencies is likely to aid further margin expansion for the company. We retain BUY on the stock with unchanged price target of Rs124.
Result Update: Kansai Nerolac Paints Ltd (KNPL)
Strong performance in the auto OEM segment, stable growth in the decorative segment and lower raw material cost has translated into strong performance for KNPL in Q1FY17 with the company reporting PAT of Rs 1.26 bn against our expectation of at Rs 947 mn .Sales was reported at Rs 10.48 bn (+17% QoQ and +5% YoY). Benign raw material situation continues to have a positive impact on the operating margins with Ebidta margin of 17.8% (+ 290 bps QoQ and 290 bps YoY). With Auto segment continuing to report healthy growth (4% YoY in Q1FY17), we estimate KNPL to continue with its healthy growth trajectory and report earnings CAGR of 15% over FY16 to FY18E. Maintain our positive stance on the paint sector and value KNPL at 42 x FY18E (10% discount to Asian Paints) arriving at a TP of Rs 370 (from Rs.290) with Accumulate rating (from Reduce).
Result Update: Elgi Equipment Ltd (EEL)
¾ EEL reported Q1FY17 result in line with estimates; PAT grew on improved sales in domestic business, higher other income and loss minimization in the international business (scaling down of operations in loss making units in France/ China).
¾ We further tweak international business margins upwards but continue to maintain 'SELL' in view of downside to our DCF based revised target price of Rs 130 (Rs 125 earlier) on company's stock.
Sector Update: Banking/NBFC
We are suspending coverage on the Banking / NBFC sector for the time being. We will be re-initiating coverage on the sector in due course of time. In the meantime, please treat all our existing recommendations as closed.
Auto Industry Volume Update: July 2016
In July 2016, passenger car and two wheeler segment witnessed healthy YoY growth in volumes. In the passenger car segment, Maruti Suzuki, Tata Motors and M&M reported robust YoY volume growth. In 2W space, Hero Motocorp, TVS Motors and Royal Enfield reported strong volume growth. Tractor segment also continued to post recovery. On the other hand, MHCV segment has started to witness volume de-growth. Over the next few months, we expect passenger car, two wheeler and tractor segment to post healthy volume growth. Weak base, good monsoons and seventh pay commission payout will be the growth triggers, in our view.
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