1

October 22, 20192019

Samvat 2076 – Muhurat for Quality Small and Mid-CapsThe ongoing festive season has brought some cheers, as the demand scenario in the country seems to be improving, while the structural reforms initiated by the government will have a marked long-term impact. Our last year picks were backed by strong earnings visibility as we expected the market to remain range-bound, while we preferred large-cap stocks compared to mid-cap ones. However, we find the scenario has changed significantly over the last one-year, as the stocks have corrected quite significantly, while major reforms have been initiated by the government. Apart from the major cut in corporate tax, major cut in personal income tax rate is also on the cards over the next twelve months, which is likely to provide a big boost to the demand scenario. Good monsoons during the year will also help a good Rabi crop, which will help the rural economy and keep inflation under the RBI’s comfort level.

The interest rate scenario continues to remain benign providing a big boost to the interest rate sensitive sectors. Thus, we find the current market is very well set up to focus on mid-cap, small-cap and interest sensitive large-cap stocks, which could see a significant improvement in earnings and a non-linear jump in demand scenario in the forthcoming quarters. While we believe there are strong re-rating prospects in the small-cap and mid-cap stocks, we believe that there can be no compromise on quality and corporate governance standards.

We present our Samvat 2076 picks based on the following parameters

f High quality mid-cap and small-cap stocks.

f Stocks with solid re-rating potential with steady improvement in demand scenario.

f Private banks with visibility of market share gains.

Our Top Picks This Diwali season we essentially prefer small-cap and mid-cap stocks, as they have the maximum potential for re-rating and deliver solid returns over the next one year. We also present 5 large-cap companies, which fit into the theme well. Our large-cap picks have a higher allocation towards banking sector, as we believe they are well-placed to cash in the current liquidity challenges and gain pricing power to their advantage, going forward. The large banks with solid retail franchise will be the biggest beneficiaries. In small-cap and mid-cap space, we choose stocks based on bottom-up approach with strong earnings visibility, as they have higher potential for re-rating.

Large Cap Ideas f HDFC bank: Consistently gaining market share and well-capitalised to deliver even amid

tough environment. Target price Rs1,430.

f ICICI Bank: Growth prospects improving and gaining market share. Relatively cheap private bank with solid retail franchise. Target Price Rs500.

f HCL Tech: Undervalued for the improving growth prospects. One of the cheapest large-cap IT companies. Target Price Rs1,200.

f UltraTech: Realisations continue to hold strong. Earnings visibility better than most sectors. Target Price Rs5,000.

f Marico Industries: To overcome the near-term headwinds and deliver on growth front with strong brands portfolio. Target Price Rs463.

Wish you all a very happy and prosperous Diwali! Happy Investing!

Head of Research: Naveen Kulkarni

Contact : (022) 4303 4660

Email : naveen.kulkarni@relianceada.com

2

October 22, 20192019

Exhibit 1: GDP growth rate should bounce-back in 2HFY20 and accelerate subsequently.

Source: Bloomberg

Our Mid-cap PicksAmongst mid-cap stocks, we like the following ideas which offer reasonable valuations and strong earnings visibility over the next one year.

f Sonata Software: A vertical and platform-focused IT firm with Microsoft partnership fulcrum. Target Price Rs395.

f Crompton Greaves Consumer: Robust product portfolio, established brand equity with wide distribution network. Target Price Rs297.

f Aarti Industries: Long-term multi-year deals to provide strong earnings visibility. Target Price Rs929.

f Ashok Leyland: Strong M&HCV industry rebound in FY22 on the back of new investment cycle and pent up demand to upscale earnings and valuation multiple. Target Price Rs111.

f V Mart: Pioneered the concept of ‘Organized Value Retail’ providing value fashion in Tier II/III/IV towns of India. Target Price Rs2,516.

f Gujarat Gas: Volume growth will kick in as it invests in CNG & PNG distribution in existing geographical areas and new areas. Target Price Rs214

f Coromandel International: Improved outlook; remains best bet in fertilisers space. Target Price Rs500.

Exhibit 2: Correcting from the recent highs, valuations are now closer to the mean. Also, improving earnings growth scenario provides a lot of comfort on valuation front.

Source: Bloomberg

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3

October 22, 20192019

Exhibit 3: Nifty Earnings Growth

Source: Bloomberg

Exhibit 4: India VIX

Source: Bloomberg

Exhibit 5: Crude Oil ($/bbl)

Source: Bloomberg

NIFTY Earnings growth helped by corporate tax rate cut will lead of 16%/14% YoY growth for FY20/21E respectively. We believe this is very likely to be met.

Volatility has been at elevated levels but could reduce in the forthcoming quarters as earnings growth trajectory picks up.

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Crude prices will remain benign in the forthcoming quarters as demand scenario is soft. Only supply-side issues could stoke up the prices.

4

October 22, 20192019

Slowing GDP growth and decreasing USD-denominated returns have led to a major sell-off by the FIIs.

Interestingly, growth has outperformed this year and likely to continue in the next 12 months.

Exhibit 6: FII & DII Investment

Source: Bloomberg

Exhibit 7: MSCI Value vs. Growth

Source: Bloomberg

3,972 3,262 3,377 5,839 6,603

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Exhibit 8: MSCI Large Cap vs. Mid-cap

Source: Bloomberg

Large-caps have outperformed the mid-caps and small-caps over the last one year, but mid-caps

are likely to start outperforming in the forthcoming quarters.

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October 22, 20192019

Exhibit 9: MSCI Large Cap vs. Small-cap

Source: Bloomberg

Exhibit 10: MSCI Mid vs Small-Caps

Source: Bloomberg

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Exhibit 11: With increased momentum, the quality index has been strong for most part of the year.

Source: Bloomberg

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6

October 22, 20192019

Ashok Leyland (BUY, CMP: Rs76; Target Price: Rs111)

Background & BusinessAshok Leyland (AL) is the second largest CV manufacturer in India, the fourth largest bus

manufacturer in the world and the twelfth largest truck manufacturer globally. It has strong

presence in domestic market along with a footprint across 50 countries. The Company generates

~90% of the business from domestic market.

Investment Rationale f M&HCV Segment – Strong Rebound Likely in FY22: We expect the M&HCV segment to

witness strong rebound in 2HFY21E and FY22E, post ongoing down cycle. Healthy agri output

due to favourable monsoon, reversal of investment cycle, sizable incremental capex on

account of government’s tax relief for new investment are expected to bring back cheers for

the economy in FY21E. Pent-up demand of previous 1.5-2 years would be the single biggest

catalyst for strong revival.

f Stable Market Shares & Least Competitive Threat: Market share in the M&HCV segment

continues to remain more or less stable over the years. Therefore, it doesn’t have higher risk

of any particular new launch by the competitor taking away big chunk of shares unlike PVs.

Moreover, pricing discipline is broadly maintained unlike aggressive pricing by 2W players.

Thus, the competitive pressure for the M&HCV industry is the least, in our view.

f Reducing Dependence on Cyclical Biz: Over last few years, AL has increased its focus on

non-cyclical business i.e. exports, spare parts, after sales service and defence segment etc.

We believe that its non-cyclical business has huge potential, going ahead.

Outlook & ValuationWe see AL as a multi-bagger opportunity and at current valuation the risk reward appears to

be highly favourable, despite near-term issues, which are likely to remain for at least another

1-2 quarters. In light of expected bottoming out of the industry in foreseeable future and attractive valuation of 12x FY22E, we recommend BUY on the stock with a Target Price of Rs111, valuing it at 17x FY22E EPS.

Key Risks f Prolonged economic slowdown and higher-than-expected competitive intensity.

f Any major change in government regulation.

f Adverse commodity price movement due to change in global factors.

Key Financials (Rs mn) FY19 FY20E FY21E FY22ENet Sales 290,550 206,447 236,309 307,811

EBITDA 31,357 15,050 20,830 33,247

EBITDA margin (%) 10.8 7.3 8.8 10.8

Adj. Net Profit 19,722 6,365 10,509 19,159

EPS (Rs.) 6.7 2.2 3.6 6.5

YoY growth (%) 20.3 (67.7) 65.1 82.3

RoE (%) 24.0 7.4 12.0 20.1

RoCE (%) 21.9 7.1 11.2 18.8

PER (x) 11.5 35.7 21.6 11.9

P/BV 2.7 2.8 2.6 2.4

EV/ EBITDA 6.9 14.6 10.8 6.5

Source: Company, RSec Research

7

October 22, 20192019

HDFC Bank (BUY, CMP: Rs1,240; Target Price: Rs1,430)

Background & BusinessHDFC Bank enjoys a leading presence in the BFSI space offering banking services to both retail and wholesale customers. Incorporated in August 1994, Housing Development Finance Corporation (HDFC) was amongst the first private sector entity to receive the RBI’s ‘in principle’ approval to commence banking operations. The HFC currently holds 21% stake in the Bank. The Bank has two key subsidiaries in the lending and broking segments i.e. HDB Financial Services and HDFC Securities.

Investment Rationale f Strong Business Growth to Continue: The Bank’s loan book grew by 19% YoY and 8% QoQ to

Rs8,976bn in 2QFY20 owing to strong sequential growth in Corporate Banking and non-vehicle retail portfolio. Its deposits grew by 23% YoY and 7% QoQ to Rs10,216bn in 2QFY20. We expect its loan book to clock 15-20% CAGR over the next few years led by the growth in all major segments. The Bank is gaining market share from PSU as well as private banks in working capital financing segment. Moreover, increased penetration in semi-urban/rural areas along with the bank’s digital push has aided pipeline in the business banking segment.

f Superior & Stable Margin Continue to Aid Bottom-line: The Bank has been able to maintain healthy margin despite pressure on cost of funds over the last few quarters. Despite a healthy growth in CASA depsoits, the Bank’s CASA ratio has been on a decline over the last 2 years driven by shift to term deposits (TDs) by existing customers, as the TD rates remain elevated. While this has impacted the Bank’s cost of funds, margin was maintained at ~4.2-4.2% aided by change in lending mix in 2FY20.

f Healthy Asset Quality across Cycles; High PCR: The Bank has displayed impeccable performance on asset quality front across cycles, with average slippages of 2.1% for the last 13 quarters. Provisioning Coverage Ratio (PCR) continues to remain stable at ~70% over the last 5 years. Despite gradual rise in retail NPAs over the last one year, we expect the same to remain contained, going forward.

f Improving Opex Ratio to Aid RoAs: The Bank has been at the forefront on use of technology to improve business productivity. Driven by increased digitisation and unassisted digital origination, it aims to bring down cost/income by 300bps over the next 3-4 years, which should aid its RoAs by 7-8bps over the period, in our view.

Outlook & Valuation We believe the Bank is well-positioned to deliver healthy growth even in the current weak environment. Its strong capital position, improving operating efficiency and impeccable asset quality performance across cycles should continue to aid return ratios with RoA/RoE pegged at 2%/18% for FY21E. Impact of management transition will be the key development to watch out for, though the Bank continues to have a strong second line of management. At CMP, the stock trades at multiple of 3.5x FY21E. We have a BUY recommendation on the stock with a Target Price of Rs1,430.

Risks f Any major slowdown in economy.

f Higher-than-expected slippages from agri portfolio.

f Any adverse impact of management transition.

Key Financials (Rs mn) FY18 FY19 FY20E FY21E

Loan & Advances 6,583,331 8,194,012 9,832,815 11,799,378

Net Interest Income 400,949 482,433 560,703 653,523

PPP ex Except. Items 326,248 397,497 464,486 543,114

Reported Profits 174,867 210,781 257,824 315,419

Earnings Per Share 67.4 38.7 47.3 57.9

P/E (x) 29.2 31.5 25.8 21.1

Adj. BV 409.6 267.9 303.6 349.7

P/ABV (x) 4.8 4.6 4.0 3.5

Gross NPAs Ratio (%) 1.3 1.4 1.5 1.5

Adj. RoA 1.8 1.8 1.9 2.0

Adj. RoE 17.9 16.5 16.2 17.3Source: Company, RSec Research

8

October 22, 20192019

ICICI Bank (BUY, CMP: Rs452; Target Price: Rs500)

Background & BusinessICICI Bank is the second largest private bank in India with a balance sheet size of Rs9,637bn as of Jun‘19. The Bank has 4,882 branches and 15,101 ATMs. Further, the Bank through its subsidiaries has established a strong presence in AMC, life insurance, general insurance and capital market business. All these subsidiaries are among the top 3 players in their respective segments.

Investment Rationale f Up-tick in Domestic Business Growth to Sustain: The bank’s overall loans grew by 15% YoY

in 1QFY20 led by 18% YoY growth in domestic loans. The strong growth in domestic loan book was led by 22% YoY/3% QoQ growth in retail loans and 23% YoY growth in SME loans. Even domestic corporate loan – excluding the gross NPAs and write-offs grew in double-digit. The Bank’s best-in-class liability franchise along with superior customer outreach across business segments should continue to drive healthy growth.

f Asset Quality Outlook Positive with Declining Residual Corporate Stress: The Bank’s outstanding standard ‘BB and below’ portfolio continued to decline to Rs153bn or 2.6% of net advances in Jun‘19 from 4.8% in Jun’18, with significant part of slippages coming from the outlined ‘BB and below’ book over the last few quarters. Slippages ratio declined to 2% in 1QFY20 from 2.5% in FY19 and 6.2% in FY18. With sustained decline in concentration risk and increasing share of higher rated corporate loans, we expect slippages to remain contained with sharp decline in credit cost to 1.1% in FY20E from 3.7% in FY19.

f Industry Best CoF & Rising Share of Higher Yielding Loans to Aid NIM: ICICI Bank’s CASA ratio (as a percentage of interest-bearing liabilities) at 40% has increased over the years and is amongst the highest in the industry. Moreover, the Banks CASA market share at above 6% has gradually increased over the years, resulting in more competitive CoF relative to peers (at 4.7% for FY19), lowering the need to take asset side risks. This, along with low penetration in unsecured retail segment, and lower interest reversal incrementally should aid the bank’s NIM.

Outlook & Valuation Led by dwindling headwinds on asset quality front and improving balance sheet, ICICI Bank is expected to deliver sustained improvement across operating metrics with RoE improving to 15% by FY21E (4% in FY19). Further, its strong liability franchise with the industry-best CoF adds to our comfort. RoE expansion over the next two fiscals will mainly be driven by margin improvement and decline in credit cost. At CMP, the stock trades at 2.5x of FY21E. We have a BUY recommendation on the stock with a Target Price of Rs500.

Risks f Lower-than-expected loan growth.

f Higher-than-expected slippages from corporate portfolio.

f Challenges in corporate recovery.

Key Financials (Rs mn) FY18 FY19 FY20E FY21E

Loan & Advances 5,123,953 5,866,466 6,717,103 7,825,425

Net Interest Income 230,259 270,148 309,986 359,066

PPP ex Except. Items 247,416 234,379 272,076 323,408

Reported Profits 67,774 33,634 137,557 186,332

Earnings Per Share 10.5 79.7 19.5 14.4

P/E (x) 29.9 137.2 157.1 185.6

Adj. BV 120 3 2.6 2.2

P/ABV (x) 2.6 2.4 2.6 2.5

Gross NPAs Ratio (%) 8.8 6.7 5.6 4.2

Adj. RoA 1.3 0.5 1.4 1.6

Adj. RoE 10.8 4.0 12.0 14.5 Source: Company, RSec Research

9

October 22, 20192019

Crompton Greaves Cons. Elect. (BUY, CMP: Rs266; Target Price: Rs297)

Background & BusinessCrompton Greaves Consumer Electricals (CROMPTON) is the largest player in fans (with 24% market share) and residential pumps (with 27% market share) segment in India. It holds number 2 position in lighting segment with 8% market share. In 2015, the consumer durables business was demerged to form a separate entity.

Investment Rationale f High Potential for New Categories: CROMPTON derives 94% of its revenue from 3 product

categories i.e. fans (46%, lighting (28%) and pumps (20%) and has a relatively small presence in other appliances (4% water heaters). It has a potential to increase the addressable market by ~Rs145bn to ~Rs600 bn. While there is an overlap in the distribution of some of these categories, the Company has to invest to strengthen its distribution in appliances and kitchen utensil channel, depending on its execution of ‘right to win’ strategy. If CROMPTON is able to gain even 2% market share in potential addressable market, it can boost its revenue significantly in the near future.

f Market Leader in Fans & Residential Pumps: CROMPTON is market leader in fans segment, largest category of electrical appliances (Rs80bn) with 24% market share and almost 700bps higher than its next competitor. The Company is a market leader in ‘residential pumps’ and among the top 2 players in lighting segment (market size of Rs200bn.

f One of the best Operating Margins, despite Significant Outsourcing-mix: Despite a significant outsourcing-mix (40% of products are outsourced), CROMPTON earns one of the highest operating margins across the industry. This is on the back of efficient sourcing, lean cost structure and strong distribution/brand strength. Among competitors, Havells margins are one of the highest largely on account of pricing strength and in house manufacturing (excluding Lloyd products, ~90% of Havells products are manufactured in house).

Outlook & Valuation With continued strong demand for new launches, market leadership and robust distribution network, we expect CROMPTON’s earnings to clock 14% CAGR through FY19-21E, while RoCE is likely to improve to 42.7% in FY21E from 40.7% in FY19. At CMP, the stock trades at 38x of FY20 and 31x of FY20 earnings. Valuing at 35x P/E to its FY20E EPS, we maintain our BUY recommendation on the stock with a Target Price of Rs297.

Risks f Substantial rise in cheaper imports from China.

f Slower-than-expected recovery in consumer demand.

Key Financials (Rs mn) FY18  FY19  FY20E  FY21E

Net Revenue          40,797          44,789          50,302          57,487

EBITDA            5,310            5,843            6,607            7,761

EBITDA Margin (%)              13.0              13.0              13.1              13.5

Net profit            3,238            4,014            4,392            5,379

EPS Rs)                5.2                6.4                7.0                8.6

Growth (%)              13.3              24.0                9.4              22.4

ROE (%)              41.0              36.6              31.8              31.1

ROCE (%)              39.0              44.1              46.0              44.4

P/E (x)              51.5              41.5              38.0              31.0

P/B (x)              21.1              15.2              12.1                9.6

EV/EBITDA (x)              32.3              28.9              25.2              21.3Source: Company, RSec Research

10

October 22, 20192019

UltraTech Cement (BUY, CMP: Rs4,251; Target Price: Rs5,000)

Background & BusinessUltraTech Cement (UTCEM), the Aditya Birla group company, is the largest manufacturer of grey cement, RMC and white cement in India. It is also one of the leading cement producers globally. The company has a consolidated capacity of 113mnT of grey cement. UTCEM has 23 integrated plants, 1 clinker plant, 27 grinding units and 7 bulk terminals, post Century merger. Its operations span across India, UAE, Bahrain, Bangladesh and Sri Lanka.

Investment Rationale f Leadership Status Bodes Well: UTCEM – with ~22% market share on pan-India level and having

dominant presence across the regions – is on sound footing to exploit secular consumption opportunity for cement due to absence of any meaningful alternatives. Further, an overview of its capacity expansion during the last five years shows that the Company has added new capacity of 39mnT over FY14-FY19 mainly driven by acquisition of cement assets (23.5mnT). With the completion of acquiring Century Cement assets, UTCEM has crossed the 100mnT mark in domestic cement industry, which is unmatched.

f Sizeable Expansion Potential – Advantage: In a scenario of looming higher limestone cost due to exorbitant higher price in new auctioning of mines, companies having rich limestone resources are considered to be winners in future. Notably, with the successful acquisition of Binani’s assets, UTCEM has now got added advantage in terms of new limestone resources in a probable clinker deficit Northern region. The Management already highlighted that its UNCL capacity can potentially be doubled if needed and in addition to this Pali (Rajasthan) capacity, which is already on the anvil. Hence, UTCEM is on a sweet spot as of now to grab all upcoming opportunities pertaining to cement consumption in the country for the decades to come.

f Improvement on Return Ratio on the Cards: UTCEM’s net debt to EBITDA and D/E ratio deteriorated to 2.5x and 0.57x in FY19 from 1.2x and 0.25x in FY15, respectively mainly led by back-to-back acquisition of Jaypee and Binani. Further, its gross debt further increased by Rs30bn post acquisition of Century. UTCEM does not intend to go for further expansion aggressively, rather mulls utilising a large chunk of cash to pare down its debt instead. Therefore, we foresee its RoCE to improve from 11.1% in FY19 to 14.3% in FY21E.

Outlook & Valuation Consistent approach to trim cost along with focus on improvement in RoCE by balance-sheet deleveraging augurs well for UTCEM. Going forward, we expect demand to recover post festivals followed by increase in the government spending. After recent correction, stock is currently available at 13.5x and 11.8x EBITDA FY20E and FY21E, respectively which appear to be attractive, in our view. We maintain our BUY recommendation on the stock with a Target Price of Rs5,000.

Risks f Government’s failure to revive infrastructure projects.

f A substantial increase in operating cost.

f Subdued realisation.

Key Financials (Rs mn) FY18 FY19 FY20E FY21E

Net Sales 293,579 357,035 448,005 492,693

EBITDA 58,833 65,203 100,481 108,035

EBITDA margin (%) 20.0 18.3 22.4 21.9

Adj. Net Profit 23,822 24,557 45,762 49,971

EPS(Rs.) 81.3 89.4 158.5 173.1

YoY growth (%) (14.5) 10.0 77.3 9.2

RoE (%) 8.9 9.1 13.8 12.3

RoCE (%) 12.2 11.1 15.4 14.5

PER (x) 52.3 47.5 26.8 24.5

P/BV 4.5 4.2 3.2 2.9

EV/ EBITDA 22.1 20.3 13.7 12.2

EV/tonne (US$) 221 216 185 177Source: Company, RSec Research

11

October 22, 20192019

Marico (BUY, CMP: Rs395, Target Price: Rs463)

Background & BusinessMarico (MRCO) is one of the India’s leading consumer products companies in the beauty & wellness sector. It has product portfolio spanning across haircare, skincare, edible oils, healthy foods, male grooming and fabric care. Its key brands are: Parachute, Shanti Amla, Saffola, Hair & Care, Nihar Naturals and Set Wet.

Investment Rationale f Market Leader in Coconut Oil Segment: In India, MRCO’s volume market share of coconut oil

rose by 45bps YoY to 59.4% in FY19. Parachute’s portfolio recorded 8% YoY volume growth in FY19. It finds opportunity to gain market share in rural markets due to relatively lower market share compared to urban and increased distribution reach. MRCO plans to invest behind brand building and tactical inputs to remain competitive. It expects 5-7% CAGR volume growth over the medium-term.

f Market Share Gains in Value-Added-Hair-Oil (VAHO): VAHO brands volume grew by 7% YoY in FY19 with Nihar Naturals, Shanti Badam Amla (leader among all sub brands in VAHO) registering market share gains. In the medium-term, MRCO is confident of reviving the double-digit volume growth backed by focus on premiumisation.

f New Strategy to revive the growth in Saffola: Saffola refined edible oil volume grew by 8% YoY in FY19 led by growth from modern and e-commerce. Brand dominates with ~75% volume market share (Mar’19, MAT) in India’s super premium refined edible oils segment. However, MRCO remains cautiously optimistic on Saffola franchise in the near-term, as growth in category moderated mainly due to higher competition and sluggishness in traditional channels. MRCO is charting new strategy to bring back the growth momentum including changing price points.

Outlook & Valuation For FY20 and beyond, MRCO aspires to deliver 8-10% volume growth coupled with healthy market share gains on the back of increased investment in core portfolio, new launches increased distribution reach and judicious pricing. At CMP, the stock trades at PE multiple of 45x/39x based on consensus estimates of FY20E/21E. We have positive view on MRCO on attractive valuation and improving business prospects.

Risks f Increased copra (crude dependent) oil prices.

f Slowdown in consumption.

Key Financials (Rs mn) FY19 FY20E FY21E FY22E

Net Sales 72,136 80,344 90,383 99,526

EBITDA 13,294 15,542 17,867 19,953

EBITDA margin (%) 18 19 20 20

Adj. Net Profit 11,350 11,339 13,071 14,517

EPS(Rs.) 8.8 8.8 10.1 11.2

YoY growth (%) 16.4 -0.3 15.0 11.2

RoE (%) 39.9 35.6 36.6 36.7

RoCE (%) 32.8 23.9 25.4 26.0

PER (x) 44.9 45.1 39.2 35.2

P/BV 18.6 15.4 13.7 12.1

EV/ EBITDA 33.7 32.4 28.2 25.3Source: Bloomberg

12

October 22, 20192019

V-Mart (BUY, CMP: Rs2,010, Target Price: Rs2,516)

Background & BusinessV-Mart (VMART) has pioneered the concept of ‘Organised Value Retail’ providing value fashion in Tier

II/III/IV towns of India.

Investment Rationale f Aggressive Store Addition Strategy: The Company operates in 1.9mn sq ft retail space with

its 227 stores (59% stores presence in Tier-III towns). After doubling its network of stores in the

last 5years, V-Mart now plans to add at least 40 stores annually. We expect its revenue to clock

>20% CAGR, going ahead led by 5-6% Same-Store-Sales growth and aggressive new store

additions strategy.

f Masters in Value Retailing: Over the years, V-Mart has mastered the chain of ‘Value Retail’ via

its own-operated departmental stores that cater to the entire family that seeks to provide the

latest fashion in Apparel (93% of revenue in FY19) and Kirana segments. V-Mart’s cluster-based

approach of ‘creeping expansion’ is aimed at generating visibility, supply chain efficiencies,

rapid scalability leading to buying/procurement flexibility and cost savings. The Company

reported apparel average selling price of Rs320 and average transaction size of Rs805 in FY19.

f Strong Financials: Despite aggressive store additions, V-Mart has been generating healthy FCF

since last 5years. The Company is currently net debt free, generating average ROCE/ROE of 18%

in last 4years. With increased private label share (currently 65%), its gross margin is expected

to improve leading to higher operating leverage, going ahead.

Outlook & Valuation With over 600 districts in India, majority of which are in the Tier-II/III cities, highly scalable and

efficient business model of V-Mart has charted a well calibrated plan to grow and expand at the

current pace for several years to come. At CMP, the stock trades at PE multiples of 36x and EV/EBITDA multiple of 15x based on consensus estimates of FY21E.

Risks f Elongated working capital cycle due to lower inventory turnover.

f Higher competition and discounts in the industry.

Key Financials (Rs mn) FY19 FY20E FY21E FY22E

Net Sales 14,337 17,617 21,356 26,204

EBITDA 1,329 1,881 2,368 2,930

EBITDA margin (%) 9.3 10.7 11.1 11.2

Adj. Net Profit 596 773 1,001 1,261

EPS(Rs.) 33.99 42.94 55.43 70.84

YoY growth (%) -20.8 26.33 29.08 27.81

RoE (%) 18.60 21.11 20.60 19.82

RoCE (%) 18.60 21.11 20.60 19.82

PER (x) 66.5 46.8 36.27 28.2

P/BV 8.9 7.61 6.25 5.35

EV/ EBITDA 27.1 19.04 15.12 12.23Source: Bloomberg

13

October 22, 20192019

HCL Technologies (BUY, CMP: Rs1,065, Target Price: 1,200)

Background & BusinessHCL Technologies (HCLT) is India’s fourth-largest IT services firm with US$8.6bn in FY19 revenue. It offers a gamut of IT services including ADM, IMS, engineering and R&D services and BPO to major verticals including Financial Services, Manufacturing, Telecom, Retail and Healthcare. HCLT earns major chunk of revenue from North America (64.4%), followed by Europe (28.2%). Its revenue, EBIT and PAT clocked 12.9%, 8.3% and 9.7% CAGRs, respectively over FY14-FY19.

Investment Rationale f Higher Organic Growth on Healthy Deal Wins: HCLT has seen strong improvement in organic

revenue growth aided by deal wins from major clients like Nokia. In 1QFY20, the IT major clocked a robust 14% YoY organic CC revenue growth. Aided by healthy deal wins, the IT major clocked robust growth across verticals including MFG, COMM, Retail and HC; thus, HCLT is seeing traction across verticals accounting for ~80% of revenue.

f Digital, Platform & Product Biz – Key Driver: HCLT’s digital business (Mode 2 and 3) is seeing strong growth (29.7% of revenue in 1QFY20, 28.1% YoY growth). Sequentially, mode 2 revenue grew by 3.6% in CC terms, while Mode 3 grew by healthy 6.5% in CC terms. Since FY16 – the first year when HCLT started disclosing this data – Mode 2 and Mode 3 revenue has risen from 15.9% of revenue to 29.7% in 1QFY20, with Mode 2 revenue rising from 12.3% in FY16 to 18.8% in 1QFY20, while Mode 3 revenue has risen from 3.6% in FY16 to 10.9% in 1QFY20. Mode 2 revenue has clocked robust 8.4% revenue CQGR in USD terms over 1QFY19-1QFY20. With client organisations investing in digital transformation irrespective of volatile macro environment, we expect this business to continue to drive revenue growth for the IT major, going forward.

f IBM Product Biz – Strong Cross-selling Opportunity: The IBM product business will be consolidated from 2QFY20E, and we believe the company has good potential for cross-selling its IT services to IBM product clients, which could boost revenue growth further.

Outlook & Valuation At CMP, the stock trades at a reasonable PE of 12.8x FY21E EPS. While we expect the stock to continue to trade at a reasonable discount to TCS and Infosys in light of risks in the product model, we believe current valuation is undemanding in light of healthy organic growth and deal wins. We have a BUY recommendation on the stock with a Target Price of Rs1,200.

Risks f Challenges of running a hybrid IT Services & Product company

f Margin challenges in the core IT and Business services segment

f Deterioration in margin quality

f Cost escalation could impact project delivery and profitability

f Currency risk

Key Financials (Rs mn) FY18 FY19 FY20E FY21E

Net Sales 505,700 604,270 698,882 783,327

EBITDA 114,400 139,660 156,196 177,914

EBITDA margin (%) 22.6 23.1 22.3 22.7

Adj. Net Profit 87,800 101,220 102,206 117,629

EPS(Rs.) 63.8 73.6 74.3 85.5

YoY growth (%) 3.8 15.3 1.0 15.1

RoE (%) 25.0 25.8 23.0 23.6

RoCE (%) 22.1 22.5 18.9 19.1

PER (x) 16.7 14.5 14.3 12.5

P/BV 4.0 3.5 3.1 2.8

EV/ EBITDA 12.0 10.0 8.5 7.6 Source: Company, RSec Research

14

October 22, 20192019

Sonata Software (BUY, CMP: Rs320, Target Price: 395)

Background & BusinessSonata Software (SSOF) is a mid-sized IT services company having presence in the US, the UK, Europe, APAC, & Middle East. It operates through two business units i.e. International IT Services (IITS) and Domestic Products & Services (DPS). Within IITS (37.6% of gross revenue in FY19), Sonata caters to Travel, Retail & Distribution and OPD verticals, providing consulting, ADM, ERP, Microsoft Dynamics AX, testing, IMS, Cloud, Mobility and Platform Services. In DPS segment (62.4% of FY19 revenue), Sonata sells software products through its subsidiary, Sonata Information Technology.

Investment Rationale f ‘Platformation’ Strategy to Drive Growth MS Alliance the key: Sonata is aiming to become a strategic

partner for its clients and is focusing on ‘Platformation’ strategy to achieve this objective. It is looking to use platforms and IP as business transformation drivers and become a long-term partner rather than just an IT vendor, which will drive customer stickiness, in our view. SSOF is focusing on driving revenue scale-up with major clients to US$5mn (’60x5 strategy’), with the company targeting 60 clients with average engagement size of US$5mn over the next 4-5 years, which will drive US$300mn in annual revenue (15-20% CAGR). Currently, 7-8 clients contribute revenue in excess of US$5mn. The Microsoft Alliance is a critical part of the pie, with the AX ERP platform contributing 26% to revenue in 1QFY20, the highest ahead of ADM. AX revenue has clocked a strong 9.5% USD revenue CQGR over the past 8 quarters (44% annualised growth). Aided by Platformation strategy and the MS Alliance, we expect Sonata to clock 13% USD revenue CAGR in its IITS business over FY19-FY21E.

f High Dividend Yield Provides Cushion to Stock Price: Sonata’s dividend/share has risen steadily over last 4 years (dividend pay-out ratio at 50-60% of PAT); we expect high dividend pay-outs to sustain. Based on our FY20E dividend/share estimate (Rs12), dividend yield is 3.9%, providing good downside protection. Sustained dividend pay-out record boosts confidence on cash generating ability to fund dividends, capex and strategic acquisitions.

f No Equity Dilution, High Interest Coverage Reflect Healthy Cash Flow: SSOF has not raised any equity since April 2001. Its gross debt-equity ratio has ranged between 0-0.4x over the past 4 years. Interest coverage ratio has ranged between 19-95x, reflecting comfortable debt servicing capability. This drives further confidence in its ability to generate healthy cash flows and maintain a prudent capital structure.

Outlook & Valuation We like SSOF’s differentiated business, quality balance sheet, high RoE and lack of equity dilution for last 18 years. We expect the MS Alliance to be a key growth driver, and SSOF has conducted MS showcases in Dubai, London, the US and India, and won deals as well. Acquisitive opportunities are also being closely evaluated with potential US$5-25mn size, mainly in the MS ecosystem. At CMP, the stock trades at 10.9x FY21E EPS. We have a BUY recommendation on SSOF with a Target Price of Rs395.

Risks f Client-specific issues in any of the top-10 clients could impact revenue growth.

f Growth pangs in IMS business, given disruptive impact of cloud revenue replacing on-premise revenue.

f Event-specific risks could impact IT budgets, cut discretionary spend and delay new deals.

f Cost escalation could impact project delivery and margin.

f Currency risk.

Key Financials (Rs mn) FY18 FY19 FY20E FY21E

Net Sales 15,658 16,821 19,405 23,708

EBITDA 2,310 3,356 3,792 4,285

EBITDA margin (%) 9.4 11.3 11.5 11.7

Adj. Net Profit 1,925 2,493 2,733 3,033

EPS (Rs) 18.3 23.7 26.0 28.8

YoY growth (%) 23.2 29.5 9.6 11.0

RoE (%) 31.0 35.1 33.0 31.8

RoCE (%) 24.8 31.5 29.5 28.9

PER (x) 17.2 13.3 12.1 10.9

P/BV (x) 5.1 4.3 3.7 3.2

EV/ EBITDA (x) 12.8 9.3 7.6 6.4 Source: Company, RSec Research

15

October 22, 20192019

Aarti Industires (BUY, CMP: Rs821, Target Price: Rs929)

Background & BusinessAarti Industries (ARTO) is one of the leading benzene-based specialty chemical companies globally

with the global market share of various products ranging from 25-40%. Operating under two

segments viz. specialty chemicals and pharmaceuticals, ARTO has a diverse customer base with no

single customer accounting for more than 5% of consolidated revenue.

Investment Rationale f Long-term Multi-year Deals Boost Earnings Visibility: ARTO has signed three multi-year long-

term deals with collective revenue potential of >US$2bn, which provides a strong growth visibility.

Assuming 100% off-take, the deals would collectively contribute an earnings ofRs1.8bn (37% of

FY19 PAT) in first full year of operation (FY22) while at 80% off-take, the earnings contribution is

pegged at Rs1.35bn (28% of FY19 PAT).

f Toluene to Chart Next Leg of Growth in Base Biz: Barring the long-term multi-year deals,

ARTO’s existing business is also poised to flourish via the company’s venture into toluene value

chain. ARTO has commissioned 30,000MT capacity of nitro-toluene in FY18, which attained

48% utilisation in FY19. The management has guided for a sales potential of Rs3.5-4bn upon

attaining peak utilisation over the next 3-4 years. We expect ARTO’s volume to clock 16% CAGR

over FY19-21 compared to the estimated overall volume CAGR of 5% for ARTO over the same

period.

f Focus on Value-added Products Augurs Well: ARTO operates on a cost-plus model; therefore

with a view to expanding its earnings, it focuses on the profit share on each product, which

moves in tandem with the complexity of the product. Thus, the more downstream the product

is, the higher EBITDA it generates. Hence, ARTO has been consistently ramping up capacity of

its high-value products (4x in PDA over FY15-18 and 2x in hydrogenation space over FY12-18)

and utilisation ramp-up in such products could be immensely beneficial, in our view. We peg

PDA and hydrogenation utilisation at 65% and 60% (on increased capacity) in FY21 compared

to 44% and 65% in FY19, respectively.

Outlook & Valuation We believe ARTO is well-positioned to support the next leg of growth. We are enthused with

the company’s leadership position, long-term growth prospects, multi-year long-term deals,

aggressive capex and focus on value-added products. We have a BUY recommendation on the stock with a Target Price of Rs929.

Risks f Any unfavorable movement in RM prices and resultant spike in working capital.

f Delay in commissioning of facilities and lower-than-expected off-take.

Key Financials (Rs mn) FY18 FY19 FY20E FY21E

Net Sales 38,061 47,055 52,800 64,860

EBITDA 6,991 9,651 10,509 13,343

Net Profit 3,330 4,917 5,473 7,352

EPS (Rs) 19.1 28.2 31.4 42.2

PER (x) 43.0 29.1 26.1 19.5

EV/EBITDA (x) 23.5 16.3 15.5 12.2

RoE (%) 22.6 23.4 19.2 21.7 Source: Company, RSec Research

16

October 22, 20192019

Coromandel International (BUY, CMP: Rs419, Target Price: 500)

Background & BusinessCoromandel International (CRIN) is the flagship company of the Murugappa Group and is a subsidiary of EID Parry (India). CRIN has grown multi-fold since its inception in 1961 to attain an overall fertiliser market share of 8% with a manufacturing capacity of ~4.5mnT. It markets a wide range of phosphatic fertilisers, crop protection products and specialty nutrients. The key fertiliser products include: Gromor 14-35-14, Gromor 28-28-0, Gromor 20-20-0-13 and Gromor 10-26-26.

Investment Rationale f Strong Presence in Niche Geographies: Overall fertiliser demand is highly concentrated with

Top-10 states contributing 79% to total volume. In case of NPK (a category of fertilisers), the Top-10 states contribute 93% to total volume. CRIN has strong presence in the largest fertiliser consuming states. 90% of CRIN’s volume comes from Top-10 consuming states, within which 94% of all NPK volume is contributed by Top-10 states. CRIN’s market share too in the key states in unparalleled with >50% NPK share in AP and Telangana, >40% in Odisha, >25% in West Bengal and >20% in Karnataka.

f Backward Integration to Aid Margin: Phosphoric acid (PA) is the key raw material of the Company, which accounts for 38-40% of its total RM cost. As the prices of PA increased by an average 26% YoY in FY19, CRIN’s margin contracted by 40bps in FY19 (120bps contraction in 9MFY19). However, CRIN is now set to expand its captive production of PA by 100kMT to 350kMT (expected commissioning in 2HFY20E). The incremental capacity would save US$100/MT compared to import of PA. Therefore, at optimum utilisation, incremental capacity would aid margin expansion.

f Steady Crop Protection Biz: CRIN is among the Top-5 players in Indian agrochemical industry. It is the third largest producer of Mancozeb globally (which contributes 40-50% to its overall sales). It is also the second largest manufacturer of Malathion (insecticide) and a major manufacturer of Phenthoate (insecticide) in Asia. The business has operations in 81 countries through >900 registrations. CRIN has been focusing on new product to tap the US$3bn opportunity being created for generics industry over CY17-20, as multiple molecules are going off-patent.

Outlook & Valuation We believe CRIN is likely to benefit in the upcoming Rabi season with improved reservoir levels. Moreover, with stabilisation of DBT and PA prices tapering off, the working capital situation is likely to improve, going forward. At CMP, the stock trades at 16.1x/13.4x FY20E/21E consensus EPS.

Risks f Any adverse change in government’s subsidy policies could impact the business.

f Surge in prices of phosphoric acid.

f Adverse climatic conditions.

Key Financials (Rs mn) FY18 FY19 FY20E FY21E

Net Sales 110,829 132,246 129,518 141,271

EBITDA 12,564 14,431 14,028 16,151

Net Profit 6,913 7,362 7,438 8,936

EPS (Rs) 23.6 25.2 25.9 31.2

PER (x) 17.7 16.6 16.1 13.4

EV/EBITDA (x) 11.5 10.4 10.7 9.3

RoE (%) 23.9 23.5 22.0 22.4 Source: Bloomberg

17

October 22, 20192019

Gujarat Gas Limited (BUY, CMP: Rs182, Target Price: Rs 214)

Background & BusinessGujarat Gas (GUJGA), is India’s largest CGD player with presence in 25 CGD licenses spread across

41 districts and 6 states and 1 Union Territory, which accounts for ~11% of total CGD licenses and

~10% total authorised areas issued by PNGRB in India. GUJGA is the largest CGD company in

terms of market share catering to >13.5 lakh residential consumers, >12,300 commercial customers,

dispensing CNG through 344 stations for vehicular consumers and providing clean energy solutions

to >3,500 industrial units through its wide spread operations with ~23,200 km of natural gas

pipeline network.

Investment Rationale f Volume to Clock Robust ~14% CAGR over FY19-FY22E:Volume growth will kick in as

GUJGAinvests in CNG & PNG distribution in existing geographical areas (GAs) and new areas. If

the recent decision of the National Green Tribunal (NGT) to ban coal gasifiers is any indication of

environmental awareness in Gujarat, industrial volume will expandfurther. We expect GUJGA’s

volumeto clock a robust 14% CAGR over FY19-22E led by industrial, commercial and CNG.

f Spot LNG Prices to Boost EBITDA Margin: Global LNG supply was 326MMT in CY18, which

reached to 240MMT in CY19 (till Aug’19), registering ~30MMT YoY increase. We expect global

output to reach 364MMT in 2019 (+38 MMT or +12% YoY)driven by sustained output from existing

facilities including Nigeria, the UAE, Trinidad and Egypt. Yamal LNG production stabilised at

~10% above nameplate capacity. We believe LNG oversupply globally to keep spot LNG prices

soft (average likely below US$7/mmbtu for the next 2 years).

Outlook & Valuation We expect GUJGA’s sales volume to clock 14% CAGR over FY19-FY22E led by industrial, commercial

and CNG. We believe Gujarat State Pollution Control Board (GSPCB) is likely to take stringent

measures on polluting industrial units in Gujarat. We also expect spot LNG prices to remain soft for

next 2 years, which will boost GUJGA’s EBITDA margin. At CMP, the stock trades at 14x of FY21E EPS, which is discount to its peers (IGL & MAHGL). We recommend BUY with a Target Price of Rs214.

Risk f Lower Fuel oil prices

Key Financials (Rs mn) FY18 FY19 FY20E FY21E

Total Income 61,743 77,544 100,284 109,737

Gross Margin 14,963 16,715 21,775 24,562

EBITDA 8,951 9,846 14,444 16,730

EBIT 6,232 6,966 11,346 13,381

PAT 2,914 4,349 7,119 8,603

P/E (x) 39.0 23.8 16.9 14.0

EV/EBITDA (x) 15.3 12.2 10.1 8.7 Source: Company, RSec Research

18

October 22, 20192019

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RSL’s activities were neither suspended nor have defaulted with any stock exchange with whom RSL is registered. Further, there does

not exist any material adverse order/judgments/strictures assessed by any regulatory, government or public authority or agency or

any law enforcing agency in last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or

pending against RSL as on the date of this Report.

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RSL CIN: U65990MH2005PLC154052. SEBI registration no. ( Stock Brokers: NSE - INB / INF / INE 231234833; BSE - INB / INF / INE

011234839, Depository Participants: CDSL IN-DP-257-2016 IN-DP-NSDL-363-2013, Research Analyst: INH000002384); AMFI ARN

No.29889.