Market Strategy 2020 - ICICI...

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Market Strategy2020

Demystifying the economy and equities dissonance

Market Strategy2020

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December 30, 2019 ICICI Securities Ltd. | Retail Equity Research 2

Demystifying the economy and equities dissonance…

Market Outlook

Changing constituents of Nifty support “premium multiple” theory

Nifty constituents have undergone a major change over the last two decades.Traditional asset heavy industries like energy, auto, metals, etc, have seen a declinein their index weights. On the other hand, financial services and consumer goodshave witnessed a continuous increase in their weights. The clear emphasis at theindex level is on quality, which commands a premium valuation pursuant toconsistent growth & high return ratios matrix, justifying our thesis of higher P/Emultiples at index level sustaining, going forward. Even going ahead, we expectthe constituent additions such as insurance, AMC, etc, to drive up the overallmultiples of the index.Nifty fair value pegged at 13,150; BFSI space to lead earnings recovery…

We expect Nifty earnings to stage a smart recovery, growing at a CAGR of 18% overFY19-21E. Outperformance in forward earnings (FY19-21E) is expected to be drivenby the BFSI space amid stable asset quality and recovery of large stressed accounts.We value the Nifty at 13,150 i.e. 19.5x FY21E EPS of | 675. The correspondingtarget for the Sensex is at 43,000.

Company CMP (|) Target Price (|) Upside (%)

Bharti Airtel 461 550 19

IDFC First 45 54 20

KNR Construction 235 300 28

L&T Infotech 1775 2025 14

Mahanager Gas 1055 1230 17

Narayana Hrudayalaya 307 360 17

PVR 1903 2200 16

Stock Picks for 20201. Is the market valuation high and the rally sustainable?

2. Do midcaps/small caps look better than large caps?

3. Should one do bottom fishing in stocks that have corrected 60-70%?

4. Will economic growth revive?

5. Is consumption overpriced?

6. Should one buy auto stocks after steep decline?

7. How would currency stability impact Indian companies?

8. What will happen on trade war? Should metal stocks be ignored?

9. Should one buy PSU stocks amid divestment?

10. Amid increasing domestic liquidity, are FPIs still a dominant force?

11. What are the Top Stock Picks for Strategy 2020

CY19 was “a year of dissonance” with the economy and equity performancereflecting a clear disunion. The GDP clearly witnessed a slowdown in growth whilethe Nifty is at the all time highs. Even within equities, polarisation was clearly visiblewith select large caps ruling the roost with the broader market witnessing a dryspell. Interestingly, the year was also marked by key structural reforms in the formof corporate tax cut and IBC setting the tone for the future.

As we embark towards 2020, the domestic setup is poised interestingly as investorsawait a recovery in key macroeconomic data viz. GDP and infrastructure spendingpost a weak year. Corporate earnings post a lull will be keenly watched for recoveryled by BFSI space. There is also a dilemma as to whether these optical premiummultiples of the index are a new norm or aberration. Amid this set up, the keyquestions for investors are multifold ranging from “are market valuationssustainable” “quality vs. value”, “large caps vs. midcaps”, etc. Hence, drifting fromthe traditional approach, for Market Strategy 2020 we have tried to address thefollowing key questions, which hold key for investment decision making in CY20.

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Is consumption overpriced?

2

Should one buy auto stocks after steep decline?

3

How would currency stability impact Indian companies?

4

What will happen on trade war? Should metal stocks be ignored?

5

Do midcaps/small caps look better than large caps?

6

Will economic growth revive?

7

Should one do bottom fishing in stocks that have corrected 60-70%?

8

Is the market valuation high and the rally sustainable? 1

Market Strategy 2020

Should one buy PSU stocks amid divestment? 9

Amidst increasing domestic liquidity, are FPIs still a dominant force?10

What are the top stock picks for Strategy 2020?11

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Are market valuations high?Changing face of Nifty constituents indicates high multiples to sustain…

• Nifty constituents have undergone a major change over last two decades

• Traditional asset heavy industries like energy, auto, metals, etc, have seen adecline in their index weights. On the flip side, financial services and consumergoods have witnessed a continuous increase in their weights

• The clear emphasis at the index level is on quality, which commands a premiumvaluation pursuant to consistent growth & high return ratios matrix, justifyingour thesis of higher P/E multiples at index level sustaining, going forward. Evengoing ahead, we expect the constituent additions such as insurance, AMC, etc,to drive up the overall multiples of the index

Sectors Jun-05 Jun-17 Nov-19

Financial Services 12.3 35.0 41.3

NBFCs on P/E basis trade at 30x FY21 while most

private banks command P/E mltiple of 20-30x on FY21

basis

Consumer Goods 8.5 11.2 11.5Most consumer companies (in the index) command

FY21 P/E multiple of 50-60x

Construction 1.4 3.8 3.3 L&T commands FY21 P/E multiple of 20x

IT 20.3 11.6 12.4 Commands FY21E P/E multiple of 15-20x

Energy 28.5 13.0 15.4

Metals 5.7 4.0 3.0

Automobile 5.9 11.2 5.7 Facing demand challenges; command 15-20x FY21 P/E

Pharma 5.0 4.6 2.2

Telecom 5.8 2.1 2.2 Incurring losses currently

Cement 2.3 2.0 1.6 Command 25x FY21 P/E

Media/Chemicals/Others 4.3 1.5 1.6

Cyclical faces commodity prices headwinds

NIFTY 50 Sector composition across yearsComments

Total 56% of index commands premium valuation multiples and has stable and consistent earnings growth construct

Source: NSE, ICICI Direct Research

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16.3

13.8 13.3

17.2 17.6

19.5

6.25

8.58.0

6.5

5.15

4.54

5

6

7

8

9

10

12

14

16

18

20

CY

10

CY

11

CY

12

CY

13

CY

14

CY

15

CY

16

CY

17

CY

18

Cur

ren

t

CY2

0E

(%)

(%)

1 yr fwd P/E RBI Repo Rate

Era of Modest Earnings growth (8.6% CAGR) Era of No Earnings growth (1.1% CAGR)

Expectation of 18% Earnings CAGR


The Nifty looks expensive on both trailing as well as one year forward. basis. However, Nifty P/E multiple should never be seen in isolation and shouldalways be seen in conjunction with interest rate cycle domestically along with underlying earnings growth

On trailing basis, Nifty trades at 24.6x P/E vs. 15 year average of18.9x i.e. premium of 30%

Thus, it is being observed that forward P/E multiple at the Nifty is inversely proportional to interest rate trajectory and directly proportional toearnings growth. Thus, currently, with both levers at play, we expect P/E multiples of the Nifty to sustain amid an earnings recovery (courtesy tax ratecut and NPA recovery in banking space) along with a downward sloping interest rate cycle.

On one year forward basis, Nifty trades at 17.6x P/E vs. 15 yearaverage of 15.0x i.e. premium of 17%

Is this rally sustainable?Downward sloping interest rate cycle, earnings recovery lend support…

24.6

18.9

10.0

15.0

20.0

25.0

30.0

Cu

rren

t

CY

20

18

CY

20

17

CY

20

16

CY

20

15

CY

20

14

CY

20

13

CY

20

12

CY

20

11

CY

20

10

CY

20

09

CY

20

08

CY

20

07

CY

20

06

CY

20

05

Trailing P/E Trailing P/E (average)

17.6

15.0

10.0

12.0

14.0

16.0

18.0

Cu

rren

t

CY

20

18

CY

20

17

CY

20

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CY

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CY

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CY

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13

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CY

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11

CY

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10

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09

CY

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08

CY

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07

CY

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06

CY

20

05

1 yr fwd P/E 1 yr fwd P/E (average)

Source: Bloomberg, ICICI Direct Research

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Country IndexYTD

ReturnsTTM P/E

1 yr forward

P/E

Key

Benchmark

Interest Rate

TTM P/E1 yr forward

P/E

Key

Benchmark

Interest Rate

2 year forward

EPS CAGR

RoE

ProfileP/B EV/EBITDA

US Dow Jones Ind. Avg 19% 19.1 16.4 1.75 15.8 13.6 2.50 9.2% 25.2 4.1 12.1

China Shanghai Comp. Index 13% 14.0 11.7 4.15 11.9 10.4 4.35 14.8% 10.3 1.4 11.6

Japan Nikkei 225 10% 18.7 17.1 -0.10 15.0 14.8 -0.10 5.8% 9.7 1.8 9.7

Germany Dax 24% 24.3 14.0 0.00 12.4 10.9 0.00 7.3% 8.8 1.6 9.0

UK FTSE 8% 17.5 12.7 0.75 15.6 11.1 0.75 17.6% 10.8 1.7 8.9

India Nifty 50 10% 24.6 17.6 5.15 22.5 16.8 6.50 18% 13.7 2.9 12.5

CY19 end CY18 end TTM

P/E multiple expansion…global phenomenon ...amid low interest rate scenario

19.1

15.8

16.4

13.6

1.75

2.5

0 5 10 15 20 25

T

T-1

US Key Policy Rate (%) US 1 yr fwd P/E (x) US TTM P/E (x)

14

11.9

11.7

10.4

4.15

4.35

0 2 4 6 8 10 12 14 16

CY19 end

CY18 end

China Key Policy Rate (%) China 1 yr fwd P/E (x) China TTM P/E (x)

Global markets across both developing as well as developed nations have witnessed an expansion in the valuation matrix over the past year (T, T-1) timeframe. In some markets like the US, China and India, it was supported by a decline in key benchmark rates by central bank while in some markets likeJapan, Germany and the UK it was amid a steady state near zero benchmark interest rates.

In the US, amid 75 bps interest rate reduction by the central bank, oneyear forward P/E multiple expanded from 13.6x to 16.4x

In China, amid a 20 bps interest rate reduction by the central bank, TTMP/E multiple expanded from 11.9x to 14.0x

Against this backdrop, P/E multiples are likely to sustain domestically given 135 bps interest rate reduction by the RBI


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Nifty fair value at 13,150….…. BFSI space to lead earnings recovery

119 108 114 111162

23263 67 68 75

80

90

66 82 93 101

104

126

11 1415 18

21

25

41 3743 44

28

35

1429

4354

43

55

7790

8583

98

112

390426

461485

536

675

0

100

200

300

400

500

600

700

FY16 FY17 FY18 FY19 FY20E FY21E

EPS

(|)

BFSI IT Oil and Gas Capital Goods Auto Metals and Mining Others*

FY16 earnings depressedlargely owing tocommodity debasement

FY17-19 muted earnings owing to assetquality stress in BFSI space

Robust earnings growth on theback of tax rate cuts and heavylifting by BFSI• We expect Nifty earnings to stage a smart recovery, growing at a CAGR of 18% over FY19-21E

• Outperformance in forward earnings (FY19-21E) is expected to be driven by the BFSI space amid stable assetquality and recovery of large stressed accounts

• We value the Nifty at 13,150 i.e. 19.5x FY21E EPS of | 675. Corresponding target for Sensex at 43,000

Source: ICICI Direct Research

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-200

-100

0

100

200

300

400

-80 -30 20 70 120 170

Avg

. P

rice

Re

turn

s 3

Yrs

in %

Past 3 years earnings CAGR (%)

Stock wise performance of Nifty in past three years

Outperformers ( 14 stocks)

Underperformers (15 stocks)

Improving fundamentals (2 stocks)

Average performers (19 stocks)

Do midcaps, small caps look better than large caps?


While midcaps outperformed large caps significantly in FY15-18, it witnessed a reversal in trend amid liquidity issues along with IL&Fs crisis and other corporatedefaults over the past 18 months. In turn, this skewed the investor’s focus towards quality companies with high governance standards and stable growth. Hence, onlyquality companies in both these indices have outperformed the market as seen in the below table. Going forward also, we believe the quality stock selectionapproach will continue to find favour rather than an index specific approach.

The Nifty rallied 49% in the past three years mainly backed by the strongperformance of 16 stocks that rallied over 142% during the same period.The rally in these stocks was mainly led by a strong operationalperformance backed by high governance standards during the sameperiod. We list here the top five performers of the Nifty along with theirearnings growth.

The performance of individual midcap, small cap stocks was skewed by~33 stocks outperforming the index and ~56 stocks underperforming.However, we observed that almost all large outperformances weremainly driven by strong fundamentals and robust growth in earnings.

-150

-100

-50

0

50

100

150

200

250

300

350

-100 -50 0 50 100 150 200 250

Avg

. P

rice

Re

turn

s 3

Yrs

in %

Past 3 years earnings CAGR (%)

Stock wise performance of adjusted Nifty Midcap, Small Cap Index

Outperformers ( 33 stocks)Improving fundamentals (25 stocks)

Underperformers (56 stocks)

Average performers (23 stocks)

Source: ICICI Direct Research

Company 3Yrs price growth 3Yrs Earning CAGR

Bata India 305% 25%

Venky's (India) 300% 66%

P&G Health 291% 148%

Jubilant Foodworks 281% 45%

Deepak Nitrite 267% 29%

VIP Ind. 259% 27%

Company 3Yrs price growth 3Yrs Earning CAGR

Bajaj Finance 375% 45%

Titan 262% 27%

Bajaj Finserve 228% 23%

Reliance Industries 196% 9%

HUL 142% 14%

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Top Picks for Strategy 202011

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Source: Capitaline, ICICI Direct Research

Falling stocks and their traits

In order to gauge the attributes of the sharply fallen stocks, we ran a query on ~2500 frequently traded stocks. For CY19YTD, 302 stocks were downmore than 60% at the current levels. The key observations suggest that such stocks could have declined owing to deterioration in financials likedecline in revenues and profitability or continued losses and high leverage along with a sub-optimal return ratio profile. On the other hand, manysuch companies (~30% of the sample size) have high level of promoter pledging, which could have negatively impacted stock prices. Interestingly,most companies do not suffer from only one of the weakness traits but rather witnessed a combination of two or more of the below-mentionedfundamental weakness signals.

Distribution of above-mentioned traits in companies that witnessed sharp correction


247

90

60

149

180

73

0

50

100

150

200

250

300

RoE<8% Promoter pledging morethan 40%

Companies with negativenetworth

Companies which haveincurred loss in H1FY20

Companies which havereported decline in sales

in H1FY20

Companies with DebtEquity more than 1.5

No

. o

f co

mp

anie

s

Number of Companies

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Does the tide turn? Not in most cases!!!

• The moot question that needs to be answered is whether these stocks are worth bargain hunting post the decline in stock prices. Can these stocksrecover their lost glory and touch their earlier peak levels?

• The strategy to invest in severely beaten-down stocks is based more on hope of them turning out to be multi-baggers than on a soundunderstanding of operational performance revival. The reality is not at all encouraging. Empirical evidence on stock price recovery post asignificant decline leads us to the believe that bargain hunting in such beaten down stocks would not be a credible strategy as the recovery ofsuch stocks to earlier levels is rare. During the last eight years, correction of 60% or more has hardly resulted in those stocks regaining theirprevious life-time highs

YearNo of stocks declined by >

than 60%

Recovered to hit all-time

high post decline

2012 54 2

2013 243 23

2014 81 1

2015 72 3

2016 81 0

2017 61 0

2018 371 0

2019 302 0

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Source:: RBI, MOSPI, ICICI Direct Research

Indian nominal GDP growth has slowed down to 7% YoY in H1FY20 on the back of slower growth in investments (GFCF-up 4% YoY) while consumption continues to growat steady pace (Private Consumption-up 7% YoY in H1FY20). The slowdown is largely due to:- i) moderation in capital outlay of all states (up only 7% YoY in FY20)following slower-than-expected GST collection and ii) change in guidelines of land acquisition towards road projects. On the positive side, the improvement in landacquisition progress in road sector indicate that tendering activity set to pick up in H2 FY20. Also, RBI survey of 1539 listed manufacturing companies shows there aresigns of investment cycle picking up. The manufacturing firms have increased investments in fixed assets to 45.6% of the funds available in H1FY20 v/s 18.9% last year.Hence, we expect full fledged revival in the economy (including investment) in FY21E.


37.5 39.6 43.4 49.0 55.7 28.4

6.7%5.5%

9.6%

13.0% 13.7%

4.0%

2%

4%

6%

8%

10%

12%

14%

16%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2014-15 2015-16 2016-17 2017-18 2018-19 H1FY20*

(|

lakh

cro

re)

GFCF trend

Gross Fixed Capital Formation GFCF growth

72.5 81.3 91.2 100.8 112.9

13.014.4

15.818.9

21.337.5

39.643.4

49.055.7

124.7 137.7153.6

171.0190.1

206.9

11.0 10.511.5 11.3

11.2

8.8

2

4

6

8

10

12

0

50

100

150

200

FY15 FY16 FY17 FY18 FY19 FY20P

(|la

kh c

rore

)

Nominal GDP breakup

Private Consumption Govt. Consumption GFCF

• The slowdown in nominal GDP growth rate is mainly attributable to aslowdown in gross fixed capital formation (GFCF). After seeing the consistentimprovement in GFCF growth rates over the last three years, growth in GFCFslowed down to 4% YoY in H1FY20

• The tendering activity (a lead indicator for the investment cycle) also remainedsubdued at | 2.9 lakh crore during YTDF Y20 mainly on account of: : i)moderation in capital outlay of all states (up only 7% YoY in FY20) and ii)change in guidelines for land acquisition towards road projects.

11.010.5

11.511.3 11.2

8.8

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7

8

9

10

11

12

FY15 FY16 FY17 FY18 FY19 FY20P

Nominal GDP Growth

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• Overall tendering grew 2x to | 9.6 lakh crore duringFY15-19 primarily led by state and central governmentspending. In YTD FY20 (till November), thegovernment tendering slowed down to | 2.5 lakhcrore mainly due to :- i) change in guidelines for landacquisition towards road projects and ii) moderationin capital outlay of all states (up only 7% YoY in FY20)

• With a marked improvement in land acquisition, weanticipate a moderate recovery in H2FY20E. Theimprovement in investment cycle could get visible inFY21E with the government efforts to improve GSTcollection and consequent better capital outlay atboth central and state level

• Beside this, the government’s recent announcementto curtail corporate tax rate for new investment alongwith benign inflation and lower interest rate scenariocould pave the way for a recovery in privateinvestment in FY21E


Source: RBI, Projects Today, MoRTH, ICICI Direct Research, * YTD FY20 is for April-November, 2019 period

(| lakh

crore)(%)

(| lakh

crore)(%)

(| lakh

crore)(%)

(| lakh

crore)(%)

(| lakh

crore)(%)

Central

Govt.

2.6 42% 2.7 33% 3.2 36% 2.9 30% 1.0 40%

State

Govt.

3.6 58% 5.5 67% 5.8 64% 6.7 70% 1.5 59%

Indian

Pvt.

0.0 0% 0.0 0% 0.0 0% 0.0 0% 0.0 1%

Total 6.2 100% 8.3 100% 9.0 100% 9.6 100% 2.5 100%

FY16 FY17 FY18 FY19 YTD FY20

Capital Outlay

(| '000 crore)

2015-

16

2016-

17

2017-

18

2018-

19 (RE)

2019-

20 (BE)YoY (%)

Uttar Pradesh 64.4 69.8 39.1 88.5 77.6 -12%

Maharashtra 22.8 25.6 26.8 41.6 40.7 -2%

Karnataka 20.7 28.2 30.7 35.9 40.1 12%

Telangana 13.6 33.4 23.9 26.9 17.3 -36%

Bihar 24.0 27.2 28.9 33.9 36.6 8%

Gujarat 24.2 22.4 26.3 31.4 32.8 4%

Others 163.7 185.8 217.9 285.4 336.2 18%

All-States 333.4 392.2 393.6 543.6 581.4 7%

YoY(%) 23% 18% 0% 38% 7%

4.5 6.2 8.3 9.0 9.6 2.9

-11.7

37.632.4

9.4 6.8

-20

-10

0

10

20

30

40

50

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY15 FY16 FY17 FY18 FY19 YTDFY20*

(%)

(|la

kh c

rore

)

Tendering trend

Total tendering YoY Tendering Growth (RHS)

0%

20%

40%

60%

80%

100%

FY15 FY16 FY17 FY18 FY19

Verticle-wise tendering

Roadways Railways Manufacturing Power/Energy Irrigation Others

GFCF may see visible signs only in FY21E…

6733

9285

7491

9494

29374

0 5000 10000 15000 20000 25000 30000

FY15

FY16

FY17

FY18

FY19

Land Acquired in Hectares

Land acquisition jumps more than 3x YoY

Tendering activity by Ownership

State-wise capital outlay

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The consumption stocks are trading at 1.5x premium to their 10 year average multiples. The major reasons for this multiple expansion are their capital efficientbusiness model (RoE of ~35%) along with strong earnings growth (10 year earnings CAGR of ~14%). We believe the premium valuation of consumer stocks is likely tostay in coming years for various supporting reasons such as their long term growth visibility and low cost of capital globally. In addition, heightened investor focus onquality and cash generating business along with fewer opportunities elsewhere makes consumption stocks a relatively safe investment destination for long terminvestors.

Why ‘Consumption’ is commanding premium valuation

• Long term growth visibility: Consumer stocks have delivered double digit volume growth of 11% in the last 10 years. We believe this volume growth wouldsustain, going forward, due to following reasons: 1) lower penetration, 2) government thrust to boost rural income (contributes ~30% of total demand) and 3)last mile connectivity with strong distribution network

• Lower interest rate: Given the lower interest rate scenario globally, most foreign funds chasing consumption stocks due to their stable earnings, low capitalrequirement and high dividend payouts

• Low risk of disruption: Unlike various tech led disruptions across sectors, this industry is less prone to any disruptions. Consumer companies have maintainedtheir market leadership position by taking corrective actions promptly to stay ahead of competition

0

20

40

60

80

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Average P/E Earnings growth

Premium valuation driven by stable earnings

24

1512

35

1820

11

0

5

10

15

20

25

30

35

40

IT Capitalgoods

Cement Consumer Metal Auto Pharma

(Ro

E)

12

13

14

15

16

17

18

19

20

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

(Eb

itd

a m

arg

in)

EBITDA margin expansion by ~500 bps over last 10 years

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What we believe…

• However, we do not expect the aforementioned disruptions to distort the consumption story. If we take a look at the history of the last 10 years, economic crisis(such as subprime mortgage crisis) has triggered parking of money into safe haven consumer stocks, thus pushing multiples to a life-time high

• Despite the economic slowdown, the quality of balance sheet of consumer companies has remained strong due to asset light model, higher free cashflow yieldand high dividend (payout ratio at ~40% in the last 10 years)

• We believe consumption stocks may continue to command premium valuations compared to other industries and may remain at higher multiples

What could trigger multiple contraction in consumption stocks?

Disruption through start-ups: Over the last 10 years, new sector start-ups have emerged in various categories, growing higher on a low base compared toconsumption majors. As they have lower requirement of incremental capital, there could be a shift of funds chasing these high growth companies, which may resultin multiple contraction of leading consumer stocks.

Rising interest rates globally: We believe a rise in interest rates globally would restrict the multiple expansion of consumption stocks. This scenario would makeinvestment in bonds more attractive compared to equity due to its low risk profile.

Change in business model: A robust distribution network and higher ad spend to sales has been the major pillars of growth for consumption companies. Hereby,leading consumer companies have utilised last mile connectivity through their distribution network and traditional modes of advertisement to their advantage.However, newer distribution channels such as modern trade/e-commerce have emerged, which have been utilised by some late entrants in the industry. This hasenabled them to reach the final consumer in a short span of time. These new companies have resorted to cost effective digital advertisement compared toerstwhile traditional methods. These start-ups have leveraged these measures to their advantage. Hence, companies that are flexible in adopting these newmethods can witness higher growth and impact the existing consumer majors, which could lead to multiple contraction in future.

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Prevailing medium term challenges….

FY20E a washout year, with FY21E offering modest recovery …

Should one buy auto stocks after steep decline?...…No, time correction seen persisting; green shoots missing!

Source: SIAM, NSE, Bloomberg, ICICI Direct Research * Auto Index level as on 23rd

December, 2019

CYAuto Index

Level

Auto Index EPS

(normalised)EPS (YoY, %)

Nifty Auto 1 year

forward P/E

Sectoral Volume

Growth %

2020* 8180 440 23.8 18.6 0%

2019* 8180 356 -11.4 23.0 -14%

2018 10454 401 -17.4 26.1 13%

2017 10597 485 13.2 21.8 8%

2016 8682 429 13.1 20.2 9%

2015 8262 379 -15.2 21.8 2%

2014 6779 447 12.3 15.2 9%

2013 4902 398 11.5 12.3 1%

2012 4103 357 12.2 11.5 6%

Valuation multiples at Nifty Auto index converging towards longterm one-year forward P/E mean (18x)

1) Idle capacity (GST led efficiencies and revised axle load norms)

2) Tighter finance availability and lower LTV

1) Increase in cost of ownership (safety features, state taxes)

2) Evolving consumer preferences

1) Rise in ownership costs (insurance, safety features, fuel)

2) Muted farm income growth over last two to three years

CV

PV

2-W

FY20E has been a challenging year for the domestic automobile space with double digit volume decline across segments. With impending price hikes(>10% in 2-W & CV) due to BS-VI transition as well as slowing economic activity, volume growth is expected to be muted even in FY21E. This will limit theearnings growth of sectoral companies with time based correction in stock price persisting. Hence, we do not recommend blanket BUY on auto space.

• Auto-ancillary players in segments like battery and tyres are better placed than OEMs due to steady state replacement demand (~60-70% of sales)

• Wining combination can also be a PV exposed auto ancillary player as the category is pre-dominantly petrol fuelled (~70%) and is largely insulated fromsteep price hike due to BS-VI transition. PV space is also structurally well placed given limited penetration as well as rising per capita income

…. de-rating of valuation multiple, mean revision underway

Volume growth YoY FY17 FY18 FY19 FY20E FY21E FY16-19 CAGR FY19-21E CAGR

2-W 5.2% 15.5% 6.3% -10.2% 3.7% 8.9% -3.5%

PV 10.6% 6.1% 0.4% -13.1% 9.6% 5.6% -2.4%

CV 4.3% 16.0% 16.1% -18.6% 1.9% 12.0% -8.9%

Total 5.1% 14.5% 6.5% -10.5% 4.3% 8.6% -3.4%

Post healthy industry growth (8.6% CAGR) over FY16-19, FY19-21E isexpected to witness a de-growth of 3.4% CAGR. Industry volumes areexpected to decline by 10.5% in FY20E and offer a modest recovery of 4% inFY21E, thereby keeping earnings as well as valuation multiples under check

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Scrappage policy announcement awaited…. ….. potential to expedite recovery, address vehicular emission

Industry eagerly awaits well defined affirmative scrappage policy which has the potential to achieve twin benefits of:-

• Volume support to domestic automobile industry• Addressing vehicular pollution

Our estimates suggest that nearly 2 crore vehicles(age>15 years) are eligible for scrappage, ofwhich conservatively ~30% i.e. 60 lakh couldtranslate into fresh demand for the domestic autoindustry

In value terms, this represents anopportunity of ~| 1.2 lakh crore. Itwill be a big boost for the CV industrywith volumes coming in forreplacement equivalent to 36% ofannual sales (FY19).

Effective scrappage policy has the potential to support growth of the domestic automobile sector over next three years (FY20-22). This is the desiredpolicy support by the government for the expedite recovery of domestic automobile sector.

SegmentCut-off

year

Total vehicle

eligible for

Scrappage

(lakh units)

Actual volumes opting

for scrappage in 2019

@ 30% of eligible

volume (lakh units)

FY19

Industry

volumes

(lakh units)

Current ASP

per unit (|)

Opportunity

size in value

(| c rore)

2-W 2004 148.1 44.4 220.0 45,000 19,998

4-W 2004 27.0 8.1 34.0 450,000 36,398

CV 2004 12.0 3.6 10.0 1,400,000 50,497

3-W 2004 13.8 4.1 7.0 200,000 8,287

Total 201 60 115,181

220

34 10 7

44.4

8.1 3.6 4.1

20 24

36

59

-

20

40

60

80

0

50

100

150

200

250

2-W 4-W CV Others (3-W)

FY19 Sales Volume (lakh units)

Actual Volumes opting for scrappage (lakh units)

Scrappage volume as a % of annual sales (RHS)

Source: MoRTH, ICICI Direct Research

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Over past five years inflation has been significantly under control…

…this has narrowed difference between US CPI and India CPI leading to lower volatility in exchange rates

• We expect exchange rates to be less volatile, going ahead, onthe back of a stable inflation outlook in India and stable globalcrude oil prices on the back of a relatively balanced demand-supply scenario

• At ~US$450 billion, India's foreign exchange reserves arecomfortable by global standards and sufficient to mitigate anyundue volatility in the forex market

• A stable currency scenario also bodes well for potential FDIinflows into India and will complement the government’s ‘Makein India’ drive, especially in the backdrop of the newlyincorporated 15% tax bracket for new companies for setting upmanufacturing operations after October 1, 2019

• As we expect a stable currency scenario, we prefer exporterswith a high margin profile who have performed consistently infavourable as well as volatile currency scenario. Hence, webelieve large cap IT and pharma companies should do well in thecurrent scenario. Our top picks are TCS, Infosys, Divi’sLaboratories and Syngene International, among others

• Among importers, we expect better prospects for oil marketingcompanies (OMCs) and aviation players, which tend to benefit ina stable currency scenario on account of lower volatility inprofits and stable working capital requirement. We prefer BPCLamong OMCs and aviation companies

8.0

4.3

0.0

2.0

4.0

6.0

8.0

10.0

2004-2014 2014-2019

in %

Inflation (average)

5.6

2.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2004-2014 2014-2019

in %

Difference between US CPI and India CPI

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$3

$4

$11

$16

$17

$18

$28

Electrical Equipment

Miscellaneous…

Machinery

Chemicals

Others

Computer Electronics

Transportation…

Exports (in Billions)

$21

$26

$27

$39

$44

$50

$93

$187

Chemicals

Furniture

Fabricated Metal

Machinery

Miscellaneous Manf.

Electrical Equipment

Others

Computer Electronics

Imports (in Billions)

What will happen on trade war?…trade disputes have remained sticky issue


US trade deficit with China US imports from China in 2018 US exports to China in 2018

• The US trade deficit with China has been going for decades. It has not only sustained but also ballooned in last decade. The US – China trade tussleovershadows every other trade tussle because of its mammoth size. US trade deficit has increased considerably from US$ 268 billion in CY 2008 to US$ 420billion in CY 2018. So as to curb the flow of imports, US since March 2018 levied duties on Chinese goods in order to stem the flow of imports. China alsoretaliated with reciprocal measures. This tit for tat measures have at regular intervals adversely impacted market sentiments thereby having a negative rub-offon major bourses across the globe. Till now US had duties levied on ~US$ 370 billion of Chinese goods (25% duty on US$250 billion Chinese imports and thebalance US$ 120 billion of Chinese imports will be subject to a 7.5% duty once the phase 1 deal agreement takes effect). China already has tariffs ranging from5% to 25% on about $110 billion worth of U.S. products.

• As both US and China combined account for ~40% of world’s GDP, the trade tussle between world’s two largest economies have had a far reachingimplications on global growth rates. After registering a decent growth of 3.2% in CY 2017, the world GDP growth has declined to 3.0% in CY 2018. The tradefriction between the worlds two largest economy is expected to result in a muted GDP growth of 2.6% in CY 2019E.

• Historically, trade disputes between economies have been sticky in nature and sustained over a longer period of time. This phenomenon has also recentlygained traction. With a motive to supports their own economic interests , countries across the globe have initiated protectionists measures, thereby increasingtrade related differences. Since this gap is unlikely to be filled in near term, it will keep on impacting the markets at regular intervals. With two biggesteconomies locking horns on trade, the world GDP growth has taken a knock thereby impacting demand for industrial metals.


0

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45% 51% 48% 53%

55% 49% 52% 47%

0%

20%

40%

60%

80%

100%

Aluminium Steel Copper Zinc

(in

%)

Rest of the World China

6.8 6.76.5 6.4 6.4

6.26.0

5.0

5.5

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7.0

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-18

Jun

-18

Sep-

18

De

c-18

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-19

Jun

-19

Se

p-1

9

(in

%)

Gross Domestic Product (GDP)

Should metal stocks be ignored?....Phase 1 deal a pause; continued trade tussle to impact metal stocks


• China is the world’s largest consumer of metals. The trade tussle between US and China have had an adverse impact of Chinese GDP growth, therebyimpacting demand for several commodities. While over and again the news flow from the trade discussions have led to a short term bounce, but the same haswaned out quickly. Recently as part of the phase 1 deal, the US has agreed to halve its 15% tariff on about US$120 billion in Chinese goods. It will also suspendindefinitely planned duties to the tune of ~US$ 160 billion that were set to take effect on 15th December, 2019. While both world super powers have stitcheda preliminary Phase -1 deal, going forward, focus is likely shift to addressing more systematic issues which relates forced-technology transfers, subsidiesprovided to state owned companies (by China), etc. As this issues are sensitive in nature the resolution of the same is unlikely in near term. Hence, inintermediary trade related news flow will continue impact commodities market.

• Domestically prominent large Indian companies have advantage of being one of lowest cost producers of steel, aluminum etc. globally. While a lean coststructure works in their favor, the selling prices are dependent on global commodity prices which have been volatile with a downward bias. The trend ofglobal commodity prices hinges on demand – supply dynamics in China. Over the years, incase of majority of metals such as steel , aluminum , etc. China havehad excess capacity. Surplus capacity coupled with government supports has led to elevated output levels in China . Higher output from China has unfavorablyimpacted demand –supply balance thereby leading to muted commodity prices in general. Going forward, with focus on infrastructure spending, whiledomestic players have a pedal of decent volume growth, with respect to pricing ,the domestic players are likely to be dependent on Chinese developments .

• In the midst of current situation of trade tussle, uncertainty with respect to pricing environment , in an event of any positive news flow metal counters can belooked more on perspective of momentum rather than structural buys. On the back of heavy dependence on China and ensuing cyclicality attached to itsearnings profile , in current scenario of trade tussle it is demanding to carve out a constructively sustainable story for metals

China’s demand share in global commodities Growth rate of China’s GDP (quarterly)- at 27 year low


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Should one buy PSU stocks amid divestment?

Source: BSE, Company, PPAC, ICICI Direct Research

Investment in PSU stocks should be made selectively and not via a basketapproach as the broader PSU index has underperformed the BSE Sensex over aperiod of time. We believe PSU companies with dominance and a strategic moatin sectors like banking, logistics, gas, defence, etc. can create value over themedium to long term. We prefer SBI, Bank of Baroda, Container Corporation(Concor), Indraprastha Gas, Petronet LNG, Bharat Electronics, etc.

Common traits to look for in value accretive PSU companies:

• Presence in growing businesses

• Dominant sector position

• Expertise in their area of operation

• Favourable government policies

• Barriers to entry

• Turnaround in business cycle

• Potential disinvestment candidate

• Strong balance sheet

• Sustainable earnings growth and return ratios

We believe PSU companies with the above traits present a good investmentopportunity over the medium to long term. Historically, PSU companies with aturnaround in business cycles and with stable business growth have createdvalue for investors. In addition to the above traits, high dividend payout andrecent corporate tax cut are added benefits providing a cushion to investments.

A successful strategic disinvestment/privatisation of a large PSU company maylead to a re-rating of dominant PSU companies with strategic moats and shouldbe watched carefully.

Within the non-financial PSU space, companies like Concor and city gas distributioncompanies have outperformed the broader indices. We continue to like the samedue to their dominant position in the growing sectors.

67%

33%

Concor dominant position in container train operator segment

Concor Others

15.020.1 23.5 25.3

11.4

14.516.2 17.1

0.0

5.0

10.0

15.0

20.0

0.0

7.0

14.0

21.0

28.0

35.0

FY16 FY17 FY18 FY19

% s

har

e

mm

scm

d

CGD segment increasing market share within gas sector

CGD Sector Gas consumption (LHS) CGD Share as % to total Gas consumption (RHS)

Company/Index 10 Year absolute return (%) 10 Year CAGR return (%)Concor 122.7 8.3

Indraprastha Gas 1150.4 28.7

Petronet LNG 642.0 22.2

S&P PSU Index -24.7 -2.8

S&P BSE Sensex 138.3 9.1

Nifty 136.9 9.0

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Peaking of NPA cycle makes dominant PSBs structural play

Source: Company, RBI, ICICI Direct Research

Measures taken by the government and change in strategy of PSU banks are keyreasons to be positive.

• Key beneficiaries of decline in 10 year G-sec yields as interest rates areanticipated to structurally remain lower

• As part of Indradhanush mission to revamp PSU banks, GoI has formed BankBoard Bureau (BBB) tasked to improve governance of Public Sector Banks,recommend selection of chiefs of PSU banks and financial institutionsbringing in structural change in selection of management

• IBC is a major reform which has reduced recovery timeless and has improvedoverall recovery rate to ~50% vs. earlier ~20-25% range

• Focus on retail segment by PSU banks is likely to propel advance growth andearnings trajectory. Top 5 PSU banks by advances (SBI, BoI, Canara, Unionand PNB) are focusing on retail segment wherein the proportion hasincreased from 17% in FY16 to 24% in FY19 & 26% in H1FY20 (partiallycontributed by buyout from NBFCs)

In the financial PSU space, dominant PSU banks offer good investmentopportunity given peaking out of NPA cycle. We believe companies like SBI,BoI and BoB are best placed to play the anticipated improvement in NPAcycle as witnessed in FY02-08. In FY02-08, dominant PSU banks witnessed 5-8x run up in stock price on the back of improving trend in NPA cycle.

Increased focus of PSU banks towards retail segment to support earnings growth while maintaining prudent asset quality

1719

2224

26

0

5

10

15

20

25

30

FY16 FY17 FY18 FY19 H1FY20

(%)

Asset quality woes faced by PSU banks peaked out in FY19

11.1

9.4

7.8

5.5

3.62.7 2.2

0

50

100

150

200

250

300

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2002 2003 2004 2005 2006 2007 2008

Sto

ck P

rice

GN

PA

(%

)

GNPA (%) Bank of India Bank of Baroda St Bk of India

Improvement in NPAs leads to sharp run up in PSB stock prices

539955

684733

896601

789016 778310

0

200000

400000

600000

800000

1000000

FY16 FY17 FY18 FY19 H1FY20

| c

rore

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The total market capitalisation of the Indian equity market is around | 154 lakh crore or US$2.2 trillion. Foreign portfolio investors (FPIs) hold ~ | 30 lakhcrore or 20% of the total market capitalisation while insurance companies hold ~| 10 lakh crore and mutual funds hold ~ | 12 lakh crore.

Domestic mutual funds have become significant market participants in the last few years. Their investment in the Indian market has increased significantlyfrom ~ | 2 lakh crore in December 2012 to ~| 12 lakh crore in December 2019. Domestic insurance and mutual funds together hold ~14% of the Indianmarket capitalisation.

Foreign investors or FPIs, however, still remain a dominant force in the Indian equity market.

Total investment value of major institutional investors

Source:: NSDL, ICICI Direct Research

Amid increasing domestic liquidity, are FPIs still a dominant force?

Mutual Funds CAGR 28%

FPIs CAGR 15%

Insurance CAGR 8%

Domestic mutual funds have grown far higher among major institutional categories in last seven years

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

FPI 1160343 1337763 1955075 1975329 2039773 2824386 2727549 3040695

Insurance 597995 561376 185016 711064 762337 991101 953215 996431

Mutual Funds 216913 197544 303825 428417 507037 901331 1004291 1188629

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Overall, more than 90-95% of total FPI inflows can be attributed to actively managed funds while flows through passive ETFs are less than 5-10%. However, ETF flowsinto EMs have seen consistent growth with the number of ETFs focused on EMs witnessing a growth of 25% from 200 to 250 in the last one year, highest ever. Globallyalso, the trend of passive flows gaining traction is clearly visible with the asset under management in global ETFs now stands at ~US$ 5.5 tn.

Indian markets accordingly are also likely to receive higher share of passive flows through both India dedicated or EM dedicated ETFs, going forward.

Sectors like financials, energy, IT, consumer staples and consumer discretionary have higher weightages in most of these ETFs benchmark and are likely to receive bulkof these passive FPI flows, going forward.

Sectors Nov Oct Sep Aug Jul Jun May Apr

Automobiles & Auto Components -103 -283 1279 77 -1700 1414 -1078 1348

Banks 6629 2809 2045 -8908 -6468 -1189 475 2315

NBFC 716 -2 -1059 -4182 -229 1792 4006 3247

Capital Goods 686 1103 873 -574 -1151 1831 1371 -344

Consumer Durables 267 743 223 -297 -99 66 -171 404

Food, Beverages & Tobacco -438 -530 -1709 -2184 -1095 -657 -466 329

Healthcare Services 202 350 645 276 38 326 9 -26

Household & Personal Products 273 410 659 713 -597 -104 -216 641

Insurance 363 7427 4012 4224 979 3110 1893 2758

Media 110 918 96 602 132 114 523 -147

Metals & Mining 156 -241 18 -721 -169 -138 -299 -830

Oil & Gas 3327 2993 -677 -3840 -1161 77 613 4249

Pharmaceuticals & Biotechnology -1006 -497 -917 -566 -387 -1858 -2372 -270

Realty 242 -17 -284 -35 25 264 15 -957

Software & Services -800 -3416 -2732 -2744 -5935 -2077 -3226 -104

Telecom Services 116 -1079 -608 509 177 59 -391 -172

Transportation -266 -1082 -344 -516 -66 74 162 42

Utilities -594 484 -284 425 124 988 255 1600

Grand Total 14436 12368 7548 -17592 -12418 2595 7919 21193

FPI sectoral positioning

• The banking sector has been witnessing arevival in inflows. The same, along with~30% weight in ETFs, is likely to attractmajor flows in the sector

• Capital goods, oil & gas and consumerdurables have witnessed a trend reversalwhile FPIs have turned buyers in thesesectors

• NBFCs and telecom have just seen positiveinflows after a continuous sell-off in theprevious months

• Consistent inflows were seen in theinsurance and media space

• Continuous selling was seen in technology,pharma and transportation sectors

FPI sectoral flows since April 2019

Source:: NSDL, ICICI Direct Research

FPIs sectoral positioning: Who’s gaining and who’s not

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Stock Picks

Source: Company, ICICI Direct Research

Target Price: | 550 (19% upside)

• Bharti Airtel (Airtel) is India’s second largest telecom operator with a revenuemarket share of 30% (vs. Jio revenue market share of ~32% and Vodafone Idea~28%) as on Q2FY20. The company has 28 crore wireless customers in India and~9.9 crore subscribers across operations in 14 African countries

• The recent tariff hike has been a shot in the arm for the industry, which wasoperating at sub optimal ARPUs post the new player’s entry three years back. Wehighlight that Airtel has raised tariffs by ~15-47% across packs from December,2019. The hike in tariff is likely to translate into FY21E revenue and EBITDA upgradeof ~9 and 17%, respectively. We expect the price hike to result in increasing themonthly ARPU to | 155 vs. current levels of | 127

• The company has also announced plans to raise ~US$3 billion through a mix of debtand equity. We believe that the same is to meet the AGR dues demand within thestipulated time in case there is no relief from the Supreme Court/government. Thefund raising intention assures that Bharti will survive given the availability of fundscoupled with price hike

• Airtel has reported a relatively stronger retention of its revenue market share withstable KPI across and also enjoys comfortable leverage vis-à-vis peers. With aresilient performance amid challenging times, we value the stock with a DCF basedtarget price of | 550/share

Bharti Airtel (BHAAIR) Target Price: | 54 (20% upside)IDFC First Bank (IDFBAN)

(| Crore) FY18 FY19E FY20E FY21E

Net Sales 2,334 3,086 3,719 4,213

EBITDA 402 586 1,190 1,387

PAT 123 183 129 224

EPS (|) 26.4 39.2 25.3 43.8

PE (x) 72.1 48.6 75.4 43.5

P/BV (x) 8.3 7.2 7.2 6.2

RoNW (%) 11.5 14.8 9.6 14.4

RoCE (%) 14.7 13.8 9.5 11.3

(| Crore) FY17 FY18 FY19E FY20E

Net Sales 83,688 80,780 87,455 100,955

EBITDA 30,065 25,630 36,901 46,322

PAT 1,099 410 -32,927 3,448

EPS (|) 2.7 1.0 NA NA

PE (x) 166.8 447.7 NA 68.2

P/BV (x) 2.6 2.6 4.2 4.0

RoNW (%) 5.6 2.1 4.0 7.1

RoCE (%) 2.7 -3.5 -3.6 5.8

• IDFC started as an infrastructure financing NBFC in 1997 and set up a universal bank in2015. Later, on January 13, 2018, IDFC Bank and Capital First announced a merger toform IDFC First Bank, to strengthen retail business and operate as large retail bank.

• The merged bank is the eighth largest private bank on the basis of advances. As ofSeptember 30, 2019, funded assets are at | 107656 crore with retail contributing 45%of the book and share of corporate at 55%. The bank has a pan-India presence with 351branches and ~70 lakh customers. NW is at | 16866 crore

• The management aims to build a retail franchise with focus on SME, consumerfinancing. The vision plans are: loan book is targeted to grow at ~11% CAGR to | 180000crore in FY25E. Contribution of retail segment is to rise to ~70% while erstwhile infraexposure is to run down. The bank aims to open 500-600 branches in the next five to sixyears with a target CASA ratio of 30%. With merger synergies benefiting growth andmargins, RoA & RoE is targeted to inch up to 1.4-1.6% & 13-15%, respectively, by FY25E

• The bank’s exposure to stressed account is at ~| 3000 crore as of September 2019.However, it maintains a healthy coverage on those account. GNPA, NNPA ratios were at2.62%, 1.17%, respectively. Going ahead, exposure to telecom may impact asset quality

• Under the new leadership, the bank aims to grow its retail base maintaining its assetquality. Restructuring of balance sheet is seen improving margins & return ratios.Therefore, the stock trading at ~1.25x FY22E ABV offers an attractive opportunity

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Stock Picks



• KNR Constructions (KNR) is a leading road focused EPC player with a strong executiontrack record and a reputation for completing projects on time/ahead of the schedule. Itsrevenues grew at 19.1% CAGR to | 2,137.3 crore in FY14-19

• As of Q2FY20, KNR’s order book (OB) was at a strong | 6,681.8 crore [including therecently won HAM project and Karnataka State Highways Improvement Project (KSHIP)HAM project], implying order book-to-bill ratio of 3.1x on TTM basis. On new ordersfront, it secured order inflows (OI) worth | 1,800 crore. KNR is targeting incremental OIworth | 1,000-1,500 crore in H2FY20E. On the execution front, execution in three out offive HAM projects is in full swing. Overall, with execution expected to remain strong, weexpect revenues to grow at 19.1% CAGR to | 3,031.1 crore in FY19-21E

• KNR has enjoyed better EBITDA margins than its peers due to: i) large fleet of ownequipment and quarrying mine, ii) lower subcontracting expenses (9% in FY19) and iii)receipt of early completion bonuses/escalation claims. Going ahead, we expect EBITDAmargin of 18.3%, 18.0% (higher band of guidance of 17-18%) in FY20E, FY21E,respectively, on the back of higher execution of high margin irrigation projects, lowerlevel of subcontracting expenses & receipts of some portion favorable claims

• At the CMP, KNR is trading at attractive valuations of 6.1x FY21E EV/EBITDA. Thecompany has a strong execution track record, enjoys best in class WC cycle with veryhealthy balance sheet and strong return ratio (RoCE: 19.0% & RoE: 18.6% as of FY19).Going ahead, with a healthy order book and strong execution, we expect its revenues togrow at 19.1% CAGR to | 3,031.1 crore in FY19-21E. Hence, we have BUYrecommendation on the stock with a target price of | 300/share (7x FY21E EV/EBITDA)

KNR Constructions (KNRCON)

(| Crore) FY18 FY19 FY20E FY21E

Net Sales 1,931.7 2,137.3 2,506.6 3,031.1

EBITDA 386.1 427.0 458.7 545.6

Net Profit 272.1 263.3 238.8 266.7

EPS (|) 19.4 18.7 17.0 19.0

PE (x) 12.0 12.4 13.7 12.3

P/BV (x) 2.8 2.3 2.0 1.7

RoNW (%) 23.5 18.6 14.5 14.0

RoCE (%) 20.5 19.0 16.2 17.8


• L&T Infotech (LTI) is among top 20 global IT services company and sixth largest Indian ITcompany. The key drivers of the company’s growth have been winning large deals, newlogos, client mining and its continuous efforts to drive the same. In H1FY20, thecompany had faced certain challenges in its top client and headwinds in hi-tech mediaclient. However, these client specific issues are largely behind and growth should pickup in H2FY20E and FY21E. Further, the company has also highlighted that its overallpipeline has shown growth of 42% with a robust pipeline of large deals (32 large deals)which gives healthy revenue visibility in the medium term. This coupled with healthygrowth in digital revenues is expected to drive the company’s overall topline with CAGRgrowth of 12.1% over FY19-22E

• Digital contribution is now at 40% of revenue (vs. 26% in Q2FY17) and has grown at 7%CQGR since Q2FY17 ahead of the company’s growth rate of 3.1% during the sameperiod. Of the new deal wins, 37% is in the new age space. This, coupled withimprovement in growth in banking, financial services segment (high margin) wouldlikely lead to EBIT margin expansion from 16.9% in FY20E to 17.4% in FY22E

• The company’s outlook for sustaining profit margins in the midst of rising costpressures, niche capabilities in the industries sub segments and large deal pipelineprompt us to be positive on the stock. Currently, it is trading at ~15x on FY22E EPS whileEPS growth over FY20E-22E is expected to be 14.0%. Hence, we value the stock at |

2025/share

Larsen &Toubro Infotech (LTINFO)


Net Sales 9,446 10,574 12,110 13,491

EBITDA 1,883 2,034 2,340 2,630

PAT 1,516 1,549 1,798 2,008

EPS (|) 87.3 89.2 103.6 115.7

PE (x) 19.8 19.4 16.7 15.0

P/BV (x) 6.1 5.1 4.3 3.6

RoNW (%) 31.0 26.4 25.8 24.4

RoCE (%) 40.4 34.5 33.6 31.9

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Stock Picks



• Incorporated by renowned cardiac surgeon Dr Devi Prasad Shetty in 2000,Narayana Hrudayalaya operates as a chain of multispecialty hospitals. The companyhas a legacy model based on affordability over the years. However, to scale up inother regions, the model is likely to be modified from ‘’affordable’’ to a mix ofaffordable + quality at premium

• Under “Asset Right Model”, the company engages with partners who invest in landand building while it takes care of medical equipment and hospital management ona revenue share basis. However, the management has maintained a flexibleapproach in this regard. Thus, it also owns some hospitals where the opportunity isright. This is due to this focus on balance sheet and likely improvement in averagerealisation per operating bed (ARPOB) by optimising case mix

• Persistent improvement in occupancy rate across all segments continues to propelboth revenues growth and margins. The new hospitals are also witnessing areduction in losses. The management has reiterated significant moderation incapex. Significant improvement and sustainability of these vital prints hold key asthe focus now shifts to improvement in operating leverage and that was clearlyvisible in recent performances. We continue to believe in the long term prospectsof the company on the back of asset-right model and affordability philosophy. Wearrive at an SOTP target price of | 360

Narayana Hrudayalaya (NARHRU)

(| crore) FY19 FY20E FY21E FY22E

Net Sales 2862.8 3226.2 3488.7 3808.0

EBITDA 287.9 444.8 503.3 585.0

Net Profit 59.3 146.3 199.8 272.3

EPS (|) 2.9 7.2 9.8 13.3

P/E (x) 105.2 42.7 31.2 22.9

EV/EBITDA (x) 24.2 15.7 13.6 11.2

RoCE (%) 7.7 12.0 13.9 16.5

RoE (x) 5.5 12.2 14.5 16.7


• Mahanagar Gas (MGL) is one of India’s largest players in the city gas distribution (CGD)business. It is currently the sole authorised distributor of compressed natural gas (CNG)and piped natural gas (PNG) in Mumbai, its adjoining areas and Raigad district,Maharashtra. Additionally, MGL’s planned capex in Pen, Uran and Karjat areas providevisibility for volume growth in the medium to long term. In the CNG segment, MGLplans to add 25 CNG stations per year for the next three years to the existing network of244 CNG stations. Going forward, we estimate sales volumes at 3.1 mmscmd and 3.2mmscmd in FY20E and FY21E, respectively

• MGL has strong pricing power in the CNG segment while a decline in spot LNG pricesover the last six months has improved the profitability in the industrial/commercial PNGsegment as well. Hence, we expect MGL to report healthy gross margins of | 14.6/scmand | 14.4/scm for FY20E and FY21E, respectively

• The government’s priority allocation of domestic natural gas to CGD sector, robustpipeline infrastructure and strong pricing power will enable MGL to report long termsteady growth. Given the healthy margins and discount in valuation compared to itspeers, we value MGL at 16x P/E multiple

Mahanagar Gas (MAHGAS)


Net Sales 2,452.9 3,056.8 3,362.8 3,578.1

EBITDA 780.6 885.5 1,089.6 1106.3

Net Profit 477.9 546.5 816.3 759.1

EPS (|) 48.4 55.3 82.6 76.8

PE (x) 21.8 19.1 12.8 13.7

P/BV (x) 5.0 4.3 3.5 3.0

RoNW (%) 22.8 22.8 27.6 22.0

RoCE (%) 31.9 31.7 31.6 27.1

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Stock Picks



• PVR is the largest multiplex in India with 800 screens spread over 69 cities as onQ2FY20. Over the last four years (FY16-19), the company has demonstrated healthyrevenues and EBITDA CAGR of 11% and 15%, respectively

• The company’s growth has been driven by strong content as well additionalmonetisation through F&B and ad revenues, which are margin accretive. ForFY20YTD, the movie slate has performed exceptionally well and hits such asAvengers: Endgame, War, Kabir Singh, Houseful 4, Mission Mangal, Bharat, etc hasdriven the collection. The content slate, going forward in H1CY20, is alsoencouraging with movies such as Street Dancer 3D, Tanhaji: The Unsung Warrior,Chhapaak, Baaghi 3, Shubh Mangal Zyada Saavdhaan, Sooryavanshi, ’83, CoolieNo.1, Laxmmi Bomb, etc., which should drive healthy box office collections ahead

• We have built in healthy footfall growth of 11.8% CAGR in FY19-21E to 124 millionscreens (also aided by SPH acquisition) and flattish ATP (effect of GST cut), whichwill lead to 15.6% FY19-21E CAGR in the net box office revenues to | 2185 crore.The F&B tracking strong footfall and improving SPH is likely to clock 16.3% CAGR inFY19-21E. We bake in a conservative 14% CAGR in ad revenues over FY19-21E, on adecent base. EBITDA (ex- Ind AS) CAGR is expected at ~17.7% over FY19-21E

• PVR remains a key beneficiary of a flourishing multiplex business, which is one ofthe proxies on rising urban discretionary consumption spends. We value PVR at14.5x FY21E EV/EBITDA (ex-Ind-AS 116) and arrive at a target price of | 2200/share

PVR (PVRLIM)


Net Sales 2,334 3,086 3,719 4,213

EBITDA 402 586 1,190 1,387

PAT 123 183 129 224

EPS (|) 26.4 39.2 25.3 43.8

PE (x) 72.1 48.6 75.4 43.5

P/BV (x) 8.3 7.2 7.2 6.2

RoNW (%) 11.5 14.8 9.6 14.4

RoCE (%) 14.7 13.8 9.5 11.3

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Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC

Andheri (East)

Mumbai – 400 093

[email protected]

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