style="zoom:140%;"> OPEN AN ACCOUNT
KARVY WEALTH MAXIMIZER - OCTOBER 2018
1
Karvy Stock Broking Research is available on Thomson Reuters & Bloomberg (Code: KRVY<GO>)
040 - 3321 6296
vivekr.misra@karvy.com
Vivek Ranjan Misra
KARVY WEALTH MAXIMIZER - OCTOBER 2018
2
Wealth Maximizer
October 04, 2018
Wealth Maximizer
Company Name NSE Symbol Sector
Market Cap
(Rs. Bn.)
CMP*
(Rs.)
Target
Price (Rs.)
Upside
(%)
Adani Ports & Special Economic
Zone Ltd
ADANIPORTS Industrials 683 330 458 39
Hero MotoCorp Ltd HEROMOTOCO Automobiles 582 2914 3732 28
Hindustan Petroleum Corp. Ltd HINDPETRO Oil & Gas 383 251 368 47
Housing Development Finance
Corp. Ltd
HDFC Banking 3045 1798 2201 22
ICICI Bank Ltd ICICIBANK Banking 1954 304 450 48
Larsen & Toubro Ltd LT Infrastructure 1746 1245 1606 29
Mahindra & Mahindra Ltd M&M Automobiles 984 792 1081 37
State Bank of India SBIN Banking 2425 272 347 28
Tata Steel Ltd TATASTEEL Metals & Mining 662 580 748 29
UPL Ltd UPL Chemicals 327 643 850 32
*As on Oct 03, 2018, Please CLICK HERE for previous Wealth Maximizer report
KARVY WEALTH MAXIMIZER - OCTOBER 2018
3
MARKET OUTLOOK
The last quarter has been marked by turmoil in Indian asset markets, with a 2% return. However, the quarter ended with
a 6.9% decline from the high of Nifty in the quarter. We continue to expect that volatility will continue to trend higher.
Since the “taper tantrum” volatility has been low, compared to history and we believe that volatility regime is normalizing.
However, we believe that post the recent decline in markets, there is room for markets to move up, however, high
valuations may limit the upside. We expect that Sensex will end calendar year 2018 at 37,500 and end calendar year
2019 at 45,000.
Economic outlook:
Since the end of last quarter, macro outlook has deteriorated. We believe that the overall economic environment is
supportive of equities.
The macro outlook has deteriorated over the last 3 months, the overall outlook still looks good. IMF expects that
Indian economy will grow at 7.3% in FY18-19, after accounting for higher oil prices and higher rates. The expected
current account deficit of 2.7% for FY18-19 is manageable.
Growth in fixed capital formation has picked up; in the last quarter it grew at 10% YoY. Though upcoming elections
and a rate rise may slowdown the pace somewhat, the economic data signal a turnaround in the capex cycle.
INR depreciation is a headwind for the economy. Our study shows that inflation could be higher by 75 bps, compared
to the baseline assumption. The Reserve Bank of India will need to hike rates, in order to maintain steady real policy
rates.
The recent turmoil in the NBFC sector (triggered by a default by IL&FS) can potentially reduce availability of credit,
reducing demand and thus impacting the economy. However, we believe that RBI has enough policy tools to support
the economy if needed.
Equities:
Earnings growth for Q1FY18-19 was 24% YoY, which was in-line with consensus of 24.2% EPS growth for the
index. We expect that earnings growth for FY2018-19 will be robust, with consensus expectation of 20%, similarly,
for FY19-20, consensus expectation is 19.2%.
We believe that earnings have room to post strong growth over the next two years, support will be provided by the
growing investment demand and will lead to higher earnings growth, especially in cyclical sectors. Capacity utilization
reached 75.2% in Q4FY17-18. It takes time to add capacity; in the meantime higher capacity utilization can help firms
improve margins and ROE. This also opens the door to possible higher earnings growth.
The index has de-rated significantly since the peak of 22x in January 2018. However, the index is still not cheap,
despite the recent correction. Nifty is currently at a 12 month forward PER 17.2x. Since 2005, Nifty’s average has
been 16.2x. At current levels, valuations are not a constraint for markets to move higher.
State elections (Mizoram, Telangana, Rajasthan, Chhattisgarh and Madhya Pradesh) in the run up to the general
elections, which are to be held by May 2019.
Outlook: Overall, we believe that markets will grind higher, though with increased volatility in 2018. If the general
election results in formation of a stable coalition, 2019 could witness a larger upside. Our target for Sensex for December
end 2018 is 37,500 which is 4.2% higher than current levels. For December 2019, we believe Sensex will be 45,000
representing an upside of 25% from current levels.
KARVY WEALTH MAXIMIZER - JULY 2018
4
Summary
NSE Symbol Key Growth Drivers Risks to Our Call Investment Argument
ADANIPORTS
Integrated operating business across the value chain. Delay in capex cycle. Expansion of facilities at various ports to aid in strong revenue and
margins growth.
HEROMOTOCO
Rural demand to pick up
New product launches
Commodity price fluctuation.
Import costs are likely to increase on account
of INR depreciation.
Multiple new launches planned in the near term
Strong brands and robust distribution network places HMCL in a
superior position to report industry leading volume growth.
HINDPETRO
Ever growing demand for energy. Continuous
improvements in the company’s marketing and refining
capabilities reflected in above industry average GRM.
Ongoing rise in crude oil prices would
adversely impact margins. Extended refinery
shutdown periods.
Increasing utilization rates and refining capacity leading to lower average
production costs of oil and gas.
HDFC
Healthy Economic growth.
Govt Initiatives like Affordable Housing, etc.
Slowdown in credit cycle due to liquidity
tightening.
Healthy AUM growth and stable NIM.
HDFC has the best proxy to play on Mortgage business along with
Banking, Insurance and AMC through its subsidiaries.
ICICIBANK
Continuous improvement in operating performance
led by the parameters; Loan growth, core fee income,
NIMs, & lower credit cost. Retail banking has also seen
improvement.
Rising bond yields and high provisioning. Sharp improvement in ROEs in FY20E led by lower credit cost and
improvement in earnings profile. Valuations are quite attractive at 1.0x
FY20E P/B (EX subsidiaries).
LT
Robust order book and strong execution capabilities. Delay in capex cycle recovery and order
execution.
Outstanding order book of Rs. 2717 bn from diversified sectors with a
book to bill ratio of 1.3x provides revenue visibility. Divestment of non-
core assets further improves RoE levels in future.
M&M
Better monsoon and festive season to keep demand
afloat.
Increase in raw material costs.
Competition in the UV segment is intense
with its close competitor.
New product launches lined-up in the UV segment.
Increase in average realizations in tractors have led to margin expansion
and this is expected to remain consistent on the back of 100% capacity
utilization.
SBIN
CASA growth in Retail loans, improvement in Asset
quality.
Rising bond yields and high Provisioning. NPA issues are being resolved.
Can expect improvement in NIM.
TATASTEEL
Buoyancy in domestic demand ably supported by
structural reforms initiated by the government.
Wave of protectionism, regulatory challenges
and fx-fluctuations.
Increased infrastructure spending and low average steel consumption
provide for potential surge in steel demand.
UPL
Positive synergies from Arysta Deal, favourable weather
forecasts, constructive government policies. Possibility
of price increase should be good for the sector. Gaining
traction in biological nutrition portfolio will further drive
growth for UPL.
Weather patterns, pest attacks, drought
condition.
High channel inventory.
The overall sales is expected to be around USD 5 Bn with pre-synergy
significant business opportunities resulting in an overall cost savings of
~USD 200 Mn by FY19E.
Source: Karvy Research
KARVY WEALTH MAXIMIZER - OCTOBER 2018
5
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 330
Target Price 458
Upside (%) 39
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 682.9 / 9.31
52-wk High/Low (Rs.) 452 / 317
3M Avg.daily value (Rs. Mn)
1079.8
Beta (x) 1.6
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 2071.0
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 62.3
FIIs 21.3
DIIs 11.3
Others 5.1
Stock Performance (%)
1M 3M 6M 12M
Absolute (14) (9) (10) (14)
Relative to Sensex (8) (11) (17) (25)
Source: Bloomberg
Bloomberg Code: ADSEZ IN
Adani Ports & Special Economic Zone Ltd
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 71087 84394 113230 111099 126044
EBITDA 46273 54182 71567 70354 80283
EBITDA Margin (%) 65.1 64.2 63.2 63.3 63.7
Adj. Net Profit 28794 38858 37659 39957 47113
EPS (Rs.) 13.9 18.8 18.2 19.8 23.0
RoE (%) 24.0 25.5 19.2 17.7 17.8
PE (x)* 25.9 18.5 20.5 16.7 14.3
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
Relative Performance*
Source: Bloomberg; *Index 100
India’s Largest Commercial Ports Operator
Integrated operating model across the value chain: APSEZ
enjoys a unique & integrated business model with presence in ports +
logistics + SEZ. It enjoys concession assets in a supportive regulatory
environment with a weighted average concession period of 28 years. It
operates container rail operations in pan India ports with a 20 year licence
along with 3 inland container depots for warehousing. APSEZ boasts of
its land bank of around 8000 hectares of which the company is focusing
on developing industry in a logistics hub. Recently, APSEZ closed lease
agreement with Britannia and Concor for 83 acres.
Expansion to drive growth: Expansion of Dhamra to make it handle
containers and making Kattupalli port a multipurpose cargo port could
be the growth driving factors. Coal handling is expected to increase on
the back of higher electricity demand and lower inventory at different
power plants. Ennore terminal has also started operations from Jan’18,
therefore the increasing volume can be factored in coming quarters,
to make all the sites operational. Company plans to incur a capex of
Rs. 25000-28000 Mn. As a result of the above strategies, company expects
the container and cargo volume to grow by 20% and 12% respectively.
Financial performance: FY18 revenue grew by 34% vs FY17 to reach
Rs. 113 bn while the EBITDA grew by 32%. Consensus estimates a
revenue CAGR of 5.5% along with earnings CAGR of ~14% for FY18-20E.
Diversification aiding overall improvement: APSEZ is consistently
delivering growth with gaining market share (14.8% to 15.2% as on FY18).
Total cargo volumes grew by 7% for FY18 to 180 MMT while all India
cargo grew by 4%. Container volume has also grown across all ports.
Valuation and Risks: Healthy growth of container and cargo volumes
coming in from the expansion plans are the key positives. Stock is currently
trading at 14.3x. The consensus values the company at 19.9x for a target
price of Rs. 458, representing an upside potential of 39%.
80
95
110
125
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug -18
Sep-18
ADANI
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
6
Company Background
Incorporated as Gujarat Adani Port Ltd on May 26, 1998, Adani Ports and Special Economic Zone (APSEZ) is India’s
largest private multi-port operator, post entering concession agreement with GMB to build, operate and maintain the
port for a period of 30 years till 2031 extendable by another 20 years. The port is into providing cargo handling services
for bulk, crude and container cargo. While the company is also bidding for other domestic and international port projects,
it has also invested in value added services like logistics support, providing container rail services and inland container
depots to diversify from its core port business.
ADANIPORTS: Technical View
The stock has lost more than 14% during the month of September 2018 whereas the broader index has lost
around 6.50% during the said time frame. The stock after clocking its fresh highs in the month of January, 2018 has
witnessed profit taking with minor pullbacks. The stock is down more than 28% from its all time highs, whereas the
broader markets have corrected to the tune of 2-2.50% in a span of more than 8 months. The stock is trading below
its 21/50/100/200-DEMA on the daily chart but on the weekly chart it is trading near its 200-DEMA, suggesting
support around 320 levels. The stock is likely to take support around the said levels and stage a bounce. The
stock is also holding above its panic low of 316.55 clocked on 21st September, 2018 and has not revisited in the
last 4-5 trading sessions in spite of weakness in the market. The stock is also witnessing decent volumes from the
last 4-5 trading sessions, suggesting accumulation in the counter around the current levels. Among the indicators
and oscillators, the 14-period RSI is trading around 26 whereas the RSI average comes to be around 33.86 levels,
suggesting stock is oversold and reversal in it can be expected anytime. The immediate support for the stock is
seen to be around Rs. 315 levels, sustaining below which it may find support around Rs. 280-285 levels. On the
higher side, the resistance in the counter is placed around Rs. 350, sustaining above which it may head towards
Rs. 380-405 levels in the medium term.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
7
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 2914
Target Price 3732
Upside (%) 28
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 581.86 / 7.93
52-wk High/Low (Rs.) 3895 / 2850
3M Avg.daily value (Rs. Mn)
1600.0
Beta (x) 0.7
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 199.7
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 34.6
FIIs 39.6
DIIs 14.4
Others 11.4
Stock Performance (%)
1M 3M 6M 12M
Absolute (10) (15) (20) (23)
Relative to Sensex (3) (17) (26) (33)
Source: Bloomberg
Bloomberg Code: HMCL IN
Hero MotoCorp Ltd
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 284427 285005 322305 359075 408181
EBITDA 44550 46348 52802 53762 62275
EBITDA Margin (%) 15.7 16.3 16.4 15.0 15.3
Adj. Net Profit 31602 33771 37972 37110 42305
EPS (Rs.) 158.2 169.1 190.1 185.8 211.8
RoE (%) 41.1 35.7 34.7 29.7 30.2
PE (x)* 19.5 18.3 16.3 15.7 13.8
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
Relative Performance*
Source: Bloomberg; *Index 100
Real Hero....
Multiple new launches planned in the near term: The company
is planning to formally launch multiple models in scooter and premium
bike category in the near term. This includes a premium Bike (Xtreme
200cc) and a Scooter (125cc). These two models are likely to be launched
in domestic as well as the international market. The company expects
to garner higher volumes especially in scooter segment from these new
models in the upcoming year.
Rural demand to pick up: HMCI has reported 14% volume growth in
FY18. The company generates ~40%+ of its two wheeler volumes from
rural areas. We anticipate demand for two wheelers from smaller town and
rural areas to improve in the medium term on account of healthy rise in
income driven by the normal monsoon leading to better crop production.
Farm loan waiver and better agriculture commodity prices including milk
are likely to support the demand further. The Central government has
expressed its intention to double the farm income by 2022. It has already
allocated Rs. 1.87 Tn on rural, agriculture and allied sectors (24% up YoY)
compared to Rs. 1.51 Tn in the last year’s Budget. All these factors are
likely to have a positive influence on the demad for two wheelers in rural
centers in the foreseeable future.
Exports Set to Grow: Currently exports contribute ~3% to HMCL’s
volumes. The company is expected to boost its export volumes by these
two models which are likely to be launched soon as the 2W exports from
India generally take place in large bikes and scooter segment. These two
models are likely to influence HMCL’s export volumes in FY20.
Valuation & Risks: At CMP Rs. 2914, the stock is currently quoting
13.8xFY20E earnings. We believe, given its strong brands and robust
distribution network, HMCL is in a superior position to report industry
leading volume growth. It is a debt-free, cash-rich entity with 33%+
average RoE. At PER of 14.6x FY20E, we see a favorable risk reward
ratio. We maintain our “BUY” rating on the stock with revised price target
Rs. 3732 (17xFY20E earnings).
65
85
105
125
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug -18
Sep-18
HERO MOTO
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
8
Q1FY19 Result Highlights: During Q1FY19, HMCL’s sales grew by 10.4% YoY to Rs. 88.1 bn driven by 13.6%
volume growth and a 2.9% decline in average realizations. EBITDA margins during the quarter contracted by 60bps YoY
to 15.6% on account of gross margin compression of 228 bps. PAT declined by 0.5% YoY to Rs.9.1 bn.
Company Background
HERO MOTOCORP (HMCL), formerly Hero Honda Ltd, is the world’s largest two wheeler manufacturing company
based in New Delhi. It is into manufacturing of motorcycles and scooters and is promoted by the Munjal Family. Some of
its flagship products are Splendor, Passion and HD Deluxe in the motorcycle segment and Duet, Pleasure and Glamour
in the scooter segment. HMCL has extensive sales and service network which spans over 6,000 customers touch
points across the country which comprise a mix of authorized dealerships, service & parts outlets and dealer appointed
outlets. Apart from domestic market the company has been able to spread its presence in 105 countries. The company
commenced its Gujarat Plant in Halol with an initial capacity of 1.2 mn units.
HEROMOTOCO: Technical View
HEROMOTOCO has been falling continuously after making life time high of Rs. 4091.95 levels clocked in the month
of September 2017. The stock has corrected around 28% from its highs which is a normal correction in the larger
bull markets. On a larger picture, the stock is in uptrend forming higher highs and higher lows and the structure
remains intact the secular bull markets are still valid and this correction from the highs is just a secondary correction
in the larger bullish structure of the stock. Technically, the stock is trading below its 20/ 50 /200 days SMA and
weekly charts suggesting short-term weakness in the counter. Among the indicators and the oscillators, the 14
period RSI on the daily and weekly charts is oversold with the daily chart showing a divergence between price
and the said indicator. However, on the price chart, the stock is approaching a key support zone placed around
Rs. 2850 levels where the previous swing low is placed. Hence, downside in the stock seems to be limited; and the
stock is expected to build base around these levels before reversing its secondary down move which has started
from the highs of Rs. 4091.95 levels while on the higher side the key resistance is placed around Rs. 3100 levels
followed by Rs. 3400 levels.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
9
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 251
Target Price 368
Upside (%) 47
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 382.71 / 5.22
52-wk High/Low (Rs.) 484 / 233
3M Avg.daily value (Rs. Mn)
1532.1
Beta (x) 1.0
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 1523.8
Face Value (Rs.) 10.0
Shareholding Pattern (%)
Promoters 0.0
FIIs 21.2
DIIs 15.4
Others 63.4
Stock Performance (%)
1M 3M 6M 12M
Absolute (2) (3) (29) (42)
Relative to Sensex 5 (5) (34) (50)
Source: Bloomberg
Bloomberg Code: HPCL IN
Hindustan Petroleum Corp. Ltd
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 1,776,017 1,871,084 2,186,469 2,713,947 2,785,878
EBITDA 82,786 108,084 107,084 99,618 110,142
EBITDA Margin (%) 4.7 5.8 4.9 3.7 4.0
Adj. Net Profit 46,747 82,358 72,183 66,183 72,059
EPS (Rs.) 10.2 54.1 47.4 43.4 47.3
RoE (%) 30.6 43.7 31.0 24.0 22.4
PE (x)* 17.1 6.5 7.3 5.8 5.3
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
Relative Performance*
Source: Bloomberg; *Index 100
Operating efficiencies: Paving the way forward
In FY18, strong operating performance was observed in the company’s
refining and marketing business. HPCL has improved its refinery & pipeline
infrastructure to keep in line with growing demand vis-à-vis capacity
additions and product flow improvements. Although there was a rise in
share of sour and heavy crude used, efforts made by HPCL over the past
6 years, have resulted in increasing distillate yield of HSD and total yield
distillate by 6.3% and 2.3% respectively. HPCL’s core GRM of 39% YoY
has surpassed the benchmark GRM of 25% YoY despite increasing crude
oil prices in FY18.
Capacity augmentation: A major expansion drive with capex of
Rs. 75,000 Cr over 5 years is underway at HPCL, for which it has
received approval from board to raise Rs. 12,000 Cr through issuance
of NCD/bonds. This is a 3-pronged investment which leads to massive
capacity expansion supplementing BS VI compliant fuels (mandatory
from 1st Apr 2020), bottom upgradation and consolidation at the existing
refining and processing facilities, and a greenfield project. Outlay of
Rs. 21,000 Cr will see expansion of Vizag refinery capacity rise from 8.3
to 15 MMPTA and Rs. 5,000 Cr at Mumbai refinery to raise capacity from
7.5 to 9.5 MMPTA. A 9 MMPTA greenfield refinery project with outlay of
Rs. 43,000 Cr is being set up at Barmer in Rajasthan in a 74:26 joint
venture project with Rajasthan government. HPCL expects to double its
refining capacity over the next 5 to 7 years.
Robust synergy prospect: Talks are underway with parent company
ONGC to acquire its 71% stake in MRPL. Post acquisition, HPCL will
hold 88% stake in MRPL and would usher in economies of scale, reduce
HPCL’s operating costs and expand the company’s product profile.
Valuation and Risks: HPCL is currently trading at P/E 5.3x on FY20E
EPS. The consensus has valued it at P/E of 7.78x FY20E EPS, arriving at
a target price of Rs. 368 with an upside of 47%.
40
65
90
115
140
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug -18
Sep-18
Hindustan Petroleum Cor p. Ltd
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
10
Company Background
Hindustan Petroleum Corporation Ltd, holding Navratna status is a major integrated oil refining and marketing company
in India. With an annual turnover of Rs. 2,45,790 Cr, it is currently ranked 314th on the Fortune Global 500 and 58th
amongst top 250 global energy firms by S&P Global Platts. Accounting for 10% of the country’s total refining requirements,
HPCL has has two major refineries, one on the eastern coast in Visakhapatnam with capacity of 8.3 million metric tonnes
per annum (MMTPA) and the other on the western coast in Mumbai with capacity of 7.5 MMPTA. The company is the
second biggest fuel retailer behind IOC with 15,062 outlets nation wide. Selling around 35.2 million tonnes of petroleum
products per year, HPCL has market share of about 25% amongst PSUs. It is the top lube marketer in India for the fifth
consecutive year, with total lube sales of over 600 TMT in FY18 which can be attributed to owning and operating the
largest lube refinery in the nation. The company operates over a network of 2,514 km for its petroleum products with a
throughput capacity of 23.57 MMTPA. ONGC is the largest shareholder of HPCL, having bought government’s entire
stake of 51.11% for 36,915 Cr in January 2018.
HINDPETRO: Technical View
HINDPETRO is currently trading around 40% down in the year till date. Stock is trading below all of its major moving
averages. The stock witnessed a strong rally from Rs. 141 levels in February 2016 to 492.8 levels in September
2017 and has started to correct from there. Stock has retraced below its 61.8% Fibonacci level and started to move
towards next major support around 78.4% Fibonacci level of the said rally. The current technical setup of the chart
however doesn’t depict a rosy picture as strength of the current downtrend is likely to intensify if the immediate
supports are not held onto. However, having corrected just 1% during the last month, the stock has outperformed
the benchmark index Nifty which lost nearly 6.4%. On weekly chart, the 14 period RSI is trading at 33.62 indicating
that the stock is oversold and it may bounce from these levels in near future. However, Parabolic SAR & Heiken
candlesticks suggest beginning of a fresh leg of rally in daily chart. The stock has good support around Rs. 233
levels below which the next levels of meaningful support lie around Rs. 217 levels. On higher side, Rs. 275 will act
as immediate resistance and above that Rs. 317 would act as next major resistance.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
11
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 1798
Target Price 2201
Upside (%) 22
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 3044.76 / 41.52
52-wk High/Low (Rs.) 2053 / 1638
3M Avg.daily value (Rs. Mn)
5869.5
Beta (x) 1.1
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 1693.8
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 0.0
FIIs 74.0
DIIs 12.6
Others 13.4
Stock Performance (%)
1M 3M 6M 12M
Absolute (8) (4) (2) 2
Relative to Sensex (1) (6) (9) (11)
Source: Bloomberg
Bloomberg Code: HDFC IN
Housing Development Finance Corp. Ltd
Relative Performance*
Source: Bloomberg; *Index 100
Healthy AUM Growth and Stable NIM
HDFC posted a PAT under IND AS of Rs. 21.8 bn, up 56%YoY aided
by dividend income from subsidiaries; PAT growth adjusted for dividend
income was 18%. Loan book growth at 20% (18% AUM growth) led by
higher growth in individual book remains healthy and in line. Asset quality
as per IGAAP was stable QoQ at 1.18. It regained momentum in FY18, led
by housing book growing at 18% and non-housing at 17%, and continuing
into Q1FY19.
Healthy AUM growth and flattish spread: AUM has continued
traction with growth of 18% for another quarter. Growth is similar across
individual as well as non-individual segment. Individual loans, including
loans sold over last year has grown by 25%. Spreads are stable on a
sequential as well as YoY basis at 2.3%. NIMs have improved by 10 bps
on a YoY basis to 3.5%.
Benefit from Affordable housing: With government’s thrust on
affordable housing by subsidizing through CLSS scheme, HDFC has also
increased the focus on EWS and LIG segment. In Q1FY19, 37% of home
loans approved in volume terms and 19% in value terms have been to
customers from the EWS and LIG segment.
Valuation and Risks: HDFC has consistently met the expectations of
the market in terms of consistent growth along with stable margins and
stable asset quality. It is the best proxy to play on Mortgage business
along with Banking, Insurance and AMC through its subsidiaries. Value
unlocking in subsidiaries such as HDFC AMC should support the valuation.
We value the stock at 5x FY20 BVPS with a “BUY” rating for a target price
of Rs. 2201.
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Interest Income 93854 105983 124341 152620 177088
Net Profit 70931 74426 121636 100277 113621
EPS (Rs.) 45.0 47.0 75.9 57.9 66.0
BVPS (Rs.) 216.0 249.6 366.4 403.6 440.7
P/E (x)* 24.6 32.0 24.1 31.0 27.2
P/BV (x)* 5.1 6.0 5.0 4.5 4.1
RoE (%) 21.8 20.2 24.1 15.0 15.5
RoA (%) 2.6 2.4 3.3 2.3 2.2
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
85
95
105
115
125
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-
18
Aug -
18
Sep-18
HDFC
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
12
Company Background
HDFC is India’s largest provider of housing finance, primarily focusing on retail housing. HDFC’s distribution network
spans over 400 outlets. In addition, HDFC covers additional locations through its outreach programmes, which has
helped the corporation disburse housing loans in more than 2,500 towns and cities in India. It has also supplemented
the distribution channel through the appointment of direct selling agents (DSA). Besides the core business of mortgages,
HDFC has evolved into a financial conglomerate, diversifying into other businesses through its subsidiaries viz., HDFC
Standard Life Insurance,HDFC Asset Management Company, HDFC Bank, and HDFC General Insurance Company.
HDFC: Technical View
The stock is currently trading around its lowest level in as many as 37 weeks, clearly indicating the firm grip of bears
in the counter. The overall chart structure indicates that the stock is taking a breather around current levels and is
likely to witness a bounce back towards Rs. 1900 -1950 levels if the immediate supports around Rs. 1690-1670
are not broken on a closing basis. The current technical setup of the chart however doesn’t depict a rosy picture
as the DMI- is pointing skywards with the ADX(20.37) too inching higher, indicating that the strength of the current
downtrend is likely to intensify if the immediate supports are not held onto. However, having corrected more than
9% during the last month, we expect a bounce towards Rs. 1900-1950 in the days to come, if the broader market
supports and inches higher again. Stop loss for a positional trade must be placed below Rs. 1650.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
13
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 304
Target Price 450
Upside (%) 48
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 1954.30 / 26.65
52-wk High/Low (Rs.) 366 / 255
3M Avg.daily value (Rs. Mn)
6961.8
Beta (x) 1.5
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 6435.0
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 0.0
FIIs 48.1
DIIs 41.6
Others 10.3
Stock Performance (%)
1M 3M 6M 12M
Absolute (9) 11 12 9
Relative to Sensex (2) 9 4 (5)
Source: Bloomberg
Bloomberg Code: ICICIBC IN
ICICI Bank Ltd
Relative Performance*
Source: Bloomberg; *Index 100
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Interest Income 212240 217373 230258 269753 319875
Net Profit 97263 98011 67774 25344 148042
EPS (Rs.) 15.0 15.0 11.0 4.0 23.0
BVPS (Rs.) 140.0 156.0 164.0 167.0 186.0
P/E (x)* 19.0 18.9 27.5 75.9 13.2
P/BV (x)* 1.5 1.4 1.3 1.8 1.6
RoE (%) 11.4 10.3 6.6 2.4 13.1
RoA (%) 1.4 1.3 0.8 0.9 1.5
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
Recovery on Course
Impaired loans likely to have peaked: In consonance with
management, we also believe ICICBC has already recognized a large
portion of stress reflected in (1) gradual reduction in impaired loans
(including watch-list and other stress pool) which peaked in FY16 and
watch-list now at 90 bps of loans (2) reducing BB and below rated pool
(4% vs. 17% in FY16) and (3) SEC filings which indicates (a) commercial
loans overdue for more than 30 days have fallen from 10.2% in FY15 to
1.4% in FY18 (2) net slippages in commercial banking declining in FY18
and for the first time in last five years the difference of provisioning between
Indian accounting and US- GAAP accounting turned positive; reflecting a
lot of recognition done in FY18, with provisioning yet to catch up.
NIM Stability: NIMs looked optically stable at 3.19% (down merely 5bps
sequentially) with domestic NIMs at 3.54%.However, NIMs were aided by
10bps as a large recovery in a steel account flowed through this quarter.
International NIMs continued to dwindle at merely 30bps. The management
believes pressure on NIMs is set to continue as CoF rises and pressure on
pricing continues. However, any one off chunky recoveries could spring a
positive surprise.
Growth uptick sustained: While the overall loans grew only 11%/1%
YoY/QoQ, domestic loans grew 15% YoY (87.5% of loans vs. 84.6%
YoY). The uptick in domestic loans was led by rapid growth in retail loans
(20%/3% YoY/QoQ) and a 17% YoY jump (albeit down 6% sequentially)
in SME loans. Corporate growth remained tepid as domestic corporate
advances dipped 1% sequentially. Overseas loans continued to decline
and stood at 12.5% of total advances (vs. 15.4% YoY and 12.6% QoQ).
Valuation and Risks: We maintain strong “BUY” on the stock with
target price of Rs. 450 valuing subsidiaries at Rs. 100 per share and core
banking book at 2.0x FY20 P/B. We have revised down our estimates
largely on account of lower treasury gains and higher than estimated
impact of resolutions on growth.
80
96
112
128
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-
18
May-18
Jun-18
Jul-
18
Aug -18
Sep-18
ICICI
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
14
ICICIBANK: Technical View
ICICIBANK cracked more than 10% during the month of September 2018 amid broad based selling. The stock has
also slipped below all its major short and medium term moving averages like the 21 day EMA at 319.38, 50 day
EMA at 315.23 and also below its 100 day EMA at 307.86 levels. However, it is still holding above its 200 day EMA
levels at 302.01 indicating the long term bullishness is still intact for the stock. The stock has witnessed a rally from
165.17 to 365.7 and witnessed a correction and retraced by nearly 50% of the said rally and bounced back from
there indicating another leg of rally. The overall chart structure of the stock indicates that it is in a clear short term
downtrend and has shown first signs of taking a breather around current levels. As far as the technical setup of the
stock is concerned, the ADX is clearly indicating that the stock is losing the strength of its current downtrend and a
similar picture is being painted by the RSI which is trading around 37.10 on daily charts The stock has good support
around 285 levels below which the next levels of meaningful support lie around 264 levels. On higher side, 347-366
levels will act as immediate resistance above that 390 would act as next major resistance.
Company Background
ICICI Bank Limited provides banking and financial services in India and internationally. It operates through Retail Banking,
Wholesale Banking, Treasury, Other Banking, Life Insurance, General Insurance and other segments. It provides home,
car, two wheeler, personal, gold and commercial business loans as well as loans against securities and loans for new
entities. In addition, the bank offers life, health, travel, car, two wheeler, home, and student medical insurance products;
pockets wallet; fixed income products; investment products such as mutual funds, gold monetization schemes and
initial public offerings as well as other online investment services. It also provides farmer finance, tractor loans, and
micro-banking services as well as other services to agro-traders and processors and agro corporate. Further, it provides
portfolio management, trade, foreign exchange, locker, private and NRI banking and cash management services; family
wealth and demat accounts; commercial banking, investment banking, capital markets and custodial, project and
technology finance and institutional banking services as well as internet, mobile and phone banking services.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
15
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 1245
Target Price 1606
Upside (%) 29
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 1745.77 / 23.80
52-wk High/Low (Rs.) 1470 / 1123
3M Avg.daily value (Rs. Mn)
3455.1
Beta (x) 1.1
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 1401.7
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 0.0
FIIs 18.7
DIIs 38.9
Others 42.5
Stock Performance (%)
1M 3M 6M 12M
Absolute (9) (0) (6) 10
Relative to Sensex (2) (2) (13) (5)
Source: Bloomberg
Bloomberg Code: LT IN
Larsen & Toubro Ltd
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 1000328 1076365 1179081 1349560 1521255
EBITDA 104571 110732 195911 158177 182617
EBITDA Margin (%) 10.5 10.3 16.6 11.7 12.0
Adj. Net Profit 41933 60287 87892 84476 97650
EPS (Rs.) 29.9 43.0 62.6 61.8 71.6
RoE (%) 9.9 12.8 13.9 14.3 14.9
PE (x)* 29.0 31.5 28.0 20.2 17.4
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
Relative Performance*
Source: Bloomberg; *Index 100
Eight Decades of Leading the Change
Order book build-up & strong traction in infrastructure
segment: L&T’s outstanding order book at the end of June 2018 stood
at Rs. 2717 Bn (37% growth Vs Q1FY18) from diversified sectors while
the order inflow for Q1FY19 stood at Rs. 361 Bn (3% growth Vs Q1FY18).
Infrastructure segment constitutes for 77.5% of the order book and 53.7%
of its new order inflow during Q1FY19. Current outstanding order book
is dominated by domestic orders with 76.7% contribution followed by
Middle East with 15.1%.
Financial performance: Robust order book build up reflects its proven
leadership in the infrastructure & engineering segments and gives revenue
visibility. Consensus estimates revenue CAGR of 14% & earnings CAGR
of 18% during FY18-20E along with a EBITDA margin of ~12% by FY20.
Buyback: L&T announced a share buyback of up to 6 crore equity
shares i.e. 4.29% of total paid up equity share capital at a maximum price
of Rs.1500/share for aggregate amount of Rs. 9000 Cr which is at ~13%
premium to market price. According to L&T’s five-year strategic plan to
exit non-core businesses and improve RoE to 18% by FY21, the share
buyback proposal is in line with their long term objective.
Hyderabad Metro: In addition to 30 Km stretch of the Hyderabad Metro
being commissioned in Nov’17 another 16 Km became operational from
25th, Sep 2018 and this completes the entire corridor 1 of the project.
Valuation and Risks: L&T’s diversified exposure to various sectors/
geographies coupled with its excellent execution capabilities across
sectors and its balance sheet strength compared to other peers in the
sector has resulted in strong order book build up. The consensus values
the company at 22.4x for a target price of Rs. 1606, representing an
upside potential of 29%. Delay in capex cycle recovery & order execution
may pose threat to the call.
95
104
113
122
131
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-
18
Jul-18
Aug -18
Sep-
18
L&T
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
16
Company Background
L&T is a $18 bn technology, engineering, construction, projects, manufacturing and financial services conglomerate with
global operations. L&T is one of Asia’s largest vertically integrated E&C Companies and is India’s largest Engineering &
Construction Company. L&T has an excellent track record of executing the most complex projects in diverse sectors like
infrastructure, oil & gas, defence, power and others making it the most preferred partner resulting in repeat orders from the
clients. L&T has strong presence in Infrastructure, Power, Metallurgical-material handling, Heavy Engineering, Electrical &
Automation, Hydrocarbon, Development projects, IT, Financial services and others. It undertakes developmental projects
like Buildings & Factories, Transportation infrastructure, Heavy civil infrastructure, Power, Water & Renewable energy,
Ship building, Defence, Machinery & Industrial products. L&T, through its subsidiaries, associates and JVs it operates in
Financial services, Infotech, Infrastructure, Hydrocarbon, Manufacturing, Fabrication and other Services, etc.
LT: Technical View
The stock has lost around 7% during the month of September 2018 whereas the broader index has lost around
6.50% during the said time frame. The stock after clocking its fresh highs of 1470 on 1st February, 2018 has
witnessed profit taking with minor pullbacks. The stock has slipped towards 1206 levels on 28th June, 2018 and
witnessed a smart bounce from the lower levels towards Rs. 1390 levels in a span of almost 2 months, recovering
more than 15% from its lows. The stock is down more than 13% from its all time highs, whereas the broader
markets have corrected to the tune of 2% in the said time frame. The stock is trading below its 21/50/100/200-
DEMA on the daily chart but on the weekly chart it is trading above its 100/ 200-DEMA suggesting strength on
a bigger time frame. Among the indicators and oscillators, the 14-period RSI is trading around 35 and is close
to the oversold levels of around 30. The stock bounced back in the last trading session from Rs. 1250 levels
finally closing around Rs. 1272 levels for the day. The immediate support for the stock is seen to be around
Rs. 1248-1250 levels, sustaining below which it may find support around Rs. 1175-1205 levels. On the higher
side, the resistance in the counter is placed around Rs. 1340, sustaining above which it may head towards
Rs. 1370-1390 in the medium term perspective.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
17
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 792
Target Price 1081
Upside (%) 37
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 984.11 / 13.42
52-wk High/Low (Rs.) 993 / 626
3M Avg.daily value (Rs. Mn)
2291.3
Beta (x) 0.8
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 1243.2
Face Value (Rs.) 5.0
Shareholding Pattern (%)
Promoters 26.5
FIIs 34.0
DIIs 21.2
Others 18.3
Stock Performance (%)
1M 3M 6M 12M
Absolute (16) (11) 3 25
Relative to Sensex (10) (13) (5) 9
Source: Bloomberg
Bloomberg Code: MM IN
Mahindra & Mahindra Ltd
Relative Performance*
Source: Bloomberg; *Index 100
Banking on New UV launches
The company plans to launch new UV models in the next 4-5 months. At
the same time, it anticipates tractor industry to grow by 12-14% in FY19.
Therefore, we believe M&M’s earnings and stock performance is likely to
be directly influenced by success of its new launches in UV segment and
tractor industry growth in upcoming months. Given its current low base in
UV segment (~18K volumes per month), any of the new model becoming
a success could easily add significant growth to its UV portfolio.
Robust Growth in Tractor Division (38% of sales): During the
quarter, M&M sold 139,844 tractors, a 19.6% increase YoY. Tractor
division reported 24.2% sales growth to Rs. 50.1 bn aided by 5.2%
increase in average realizations. Segmental margins expanded by
247 bps to 20.9% during the quarter on account of high capacity utilization.
Currently its tractor division is operating at full capacity. Management
expects domestic tractor market to grow at ~10-12% in FY19.
Automotive Volumes are up 18% YoY (62% of sales): During the
quarter, the company reported sales of 99,897 vehicles in its automotive
division, an increase of 18% YoY. Automotive division reported 22.6%
sales growth to Rs. 80.3 bn. The company plans to launch 3 new models
in the next 4-5 months. These include a new MPV (U321), S201 (Tivoli
platform) and Rexton.
EBITDA Margins expanded by 261 bps YoY to 15.8%: During
Q1FY19, M&M’s EBITDA margins expanded by 261bps YoY to 15.8%
on account of increasing scale effect in tractor and Auto division. This
performance is commendable on the back of significant rise in raw material
prices and increased competitive intensity.
Valuation & Risks: We expect M&M’s overall volumes, sales and PAT to
grow at a CAGR of 9.6%, 12.1% and 14.9% over FY18-20E respectively.
We maintain “BUY” with a new SOTP based price target of Rs. 1081 (PER
of 16x FY20 core EPS + Rs. 355 Subsidiary Valuations).
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 388879 413779 475774 540901 597725
EBIDTA 52463 54042 70434 83078 91805
EBIDTA Margin (%) 13.5 13.1 14.8 15.4 15.4
Adj. Net Profit 33378 33754 41896 50397 55286
EPS (Rs.) 28.2 28.4 35.2 42.4 46.5
RoE (%) 15.5 13.4 14.5 15.5 15.1
PE (x) 22.9 20.0 19.6 18.7 17.0
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
90
113
136
159
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-
18
Aug -18
Sep-18
M&M
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
18
Q1FY19 Result Overview: During Q1FY19, M&M net sales grew by 22.8% YoY to Rs. 133.6 Bn driven by 19.6%
volume growth and 3% increase in average realizations. EBITDA margins expanded by 261bps YoY to 15.8% on
account of increasing scale effect in tractor and Auto division. Net profit before extraordinary items grew by 64% YoY to
Rs. 12.3 bn.
Company Background
M&M is the world’s largest tractor manufacturer and the third largest passenger vehicle manufacturer in India. M&M,
through its subsidiaries and group companies has a presence in financial services, auto components, hospitality,
infrastructure, retail, logistics, steel trading and processing, information technology businesses, agri, aerospace,
consulting services, defence, energy and industrial equipment.
M&M: Technical View
Technically, the stock is in uptrend forming higher highs and higher lows and after witnessing a life time high of
Rs. 993 levels has entered into correction mode with overall market correcting. The stock is in a secular uptrend
with some secondary correction which is counter to the main trend. The stock is currently witnessing secondary
correction after making a life time high of Rs. 993 levels and is currently approaching its support area. As far as
the technical parameters for the stocks are concerned, the 14 periods RSI (46.15) on weekly charts is trading
below its RSI Avg (66.50) indicating short term weakness is approaching support area. The very fact that the RSI is
nearing support around the 40 mark in corrections is clearly suggesting that there is enough room for the stock to
outperform in the time to come. On the other hand, on the monthly charts, the ADX (which indicates the strength
of any trend) is also clearly indicating that the strength of the current uptrend and this secondary correction gives a
good entry point for the long term investors. As far as the long term moving averages are concerned, the 200 day
Simple Moving Average is placed around 838 levels and the stock is comfortably trading above it. On the higher
side, resistance is placed around Rs. 940 levels followed by Rs. 990 levels. Hence, we recommend investors with
a longer time horizon to go long in the counter around current levels, average on declines towards the lower end of
the above-mentioned support zone (i.e.840).
KARVY WEALTH MAXIMIZER - OCTOBER 2018
19
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 272
Target Price 347
Upside (%) 28
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 2424.81 / 33.06
52-wk High/Low (Rs.) 352 / 232
3M Avg.daily value (Rs. Mn)
7489.2
Beta (x) 1.4
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 8924.6
Face Value (Rs.) 1.0
Shareholding Pattern (%)
Promoters 58.9
FIIs 11.2
DIIs 22.3
Others 7.6
Stock Performance (%)
1M 3M 6M 12M
Absolute (11) 6 8 8
Relative to Sensex (5) 3 0 (6)
Source: Bloomberg
Bloomberg Code: SBIN IN
State Bank of India
Relative Performance*
Source: Bloomberg; *Index 100
The Bank of Choice for a Transforming India
Retail business driving growth: For the quarter, SBI gross advances
witnessed a growth of 5.49% YoY to Rs. 19, 90,172 Cr, with domestic
advances growth of 7.21% YoY to Rs. 17, 23,443 crore as on June 18.
While corporate loan growth (including large, mid-corporate and SME) was
slow at 5.14% YoY, its agri book was flat YoY. The retail segment’s growth
was respectable at 14.1% YoY, driven by home loans (up 13% YoY) and
auto segment (up 12.4% YoY). Deposits increased by 5.58% YoY, where
CASA ratio improved by 69 bps YoY to 45.1% with domestic savings bank
deposits increasing by 8.9% to Rs. 10, 30,040 crore as on June 18.
Bad loan Recoveries: The bankruptcy process will lead to some
recoveries. We are likely to see one or two fairly big recoveries from these
bad loans. The bank is confident about its power sector NPLs, which
are going through the Samadhan scheme. Some of these loans could
get resolved during this quarter – that would not change provisioning
requirements, but would help in reducing the stock of bad loans at an
aggressive pace.
Better topline helped by one-off interest: NII grew strongly by 24%
YoY mainly on interest recovery of Rs. 19.0 bn on one large NCLT resolution
which helped NIM improvement of 30bps QoQ to 2.8%. NII growth still
looked good with 12% YoY growth on back of some more interest
recognition on other recoveries and good control on cost of funds which
was up 6bps QoQ. Bank conservatively expects NIM of 2.8-2.9% for FY19.
Valuation and Risks: SBI with its focus on loan book growth, CASA
share in deposits, sustained NIMs of 2.7%, reducing NPAs and fresh
slippages augur well in the long term. Merged SBI presents a case for a
diversified balance sheet that mirrors the domestic economy available at
bargain valuations from a long term investment perspective. We value the
stock at 1.3x FY20 BVPS with a “BUY” rating for a target price of Rs. 347.
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Interest Income 775929 813367 823828 928742 1045000
Net Profit 122246 2412 (45563) 92244 276531
EPS (Rs.) 15.9 0.3 (5.3) 11.1 28.5
BVPS (Rs.) 232.6 272.4 258.0 241.5 262.7
P/E (x)* 12.2 946.4 0.0 24.5 9.5
P/BV (x)* 0.8 1.0 0.9 1.1 1.0
RoE (%) 7.2 0.1 (2.4) 0.4 0.6
RoA (%) 0.5 0.4 (0.2) 0.3 0.7
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
80
90
100
110
120
130
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug -18
Sep-18
SBI
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
20
Company Background
State Bank of India is India’s largest bank offering personal banking, agricultural banking, corporate banking and NRI
banking with a consolidated balance sheet close to Rs. 36.2 lakh crore (Rs. 36.2 Tn). SBI employs over 264,041
employees and operates through a network of 22414 branches and has one of the largest ATM networks in the world
with 59541 ATMs including Cash Deposit Machines and Recyclers serving over 424 Mn customers. SBI, along with its
merged subsidiaries provides various services like deposits, retail loans for Home, Automobile, Education, other Personal
and Corporate loans. SBI has various non-banking subsidiaries: SBI Life Insurance Company, SBI Capital Markets, SBI
Funds Management and SBI Cards & Payments.
SBIN: Technical View
SBIN cracked more than 14% during the month of September 2018 amid broad based selling. The stock has also
slipped below all its major moving averages like the 200 day SMA at Rs. 277.09, 100 day SMA at Rs. 275.72 and
also below its 20 day SMA at Rs. 288.93 levels. The overall chart structure of the stock indicates that it is in a clear
short term downtrend and has shown first signs of taking a breather around current levels. The stock has good
support around Rs. 255-250 levels below which the next levels of meaningful support lie around Rs. 240-230 levels.
As far as the technical setup of the stock is concerned, the ADX is clearly indicating that the stock is losing the
strength of its current downtrend and a similar picture is being painted by the RSI which is trading around 34.81 on
daily charts. Investors with a medium term horizon can start accumulating the stock in bits and parts and hold with
a stop loss placed below Rs. 230 on a closing basis for potential upside technical targets of Rs. 290-305 in the next
3-4 months.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
21
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 580
Target Price 748
Upside (%) 29
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 662.40 / 9.03
52-wk High/Low (Rs.) 748 / 493
3M Avg.daily value (Rs. Mn)
5465.3
Beta (x) 1.1
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 1126.5
Face Value (Rs.) 10.0
Shareholding Pattern (%)
Promoters 33.1
FIIs 15.8
DIIs 29.4
Others 21.7
Stock Performance (%)
1M 3M 6M 12M
Absolute (4) 2 (0) (7)
Relative to Sensex 4 0 (8) (19)
Source: Bloomberg
Bloomberg Code: TATA IN
Tata Steel Ltd
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 1056832 1166826 1317415 1525194 1498729
EBITDA 79659 170344 219509 276288 278466
EBITDA Margin (%) 7.5 14.6 16.7 18.1 18.6
Adj. Net Profit (3828) (42408) 134343 93826 96917
EPS (Rs.) (5.4) (42.9) 128.1 78.5 80.5
RoE (%) (1.5) (10.8) 26.9 14.1 12.8
PE (x)* - - 4.5 7.4 7.2
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
Relative Performance*
Source: Bloomberg; *Index 100
Demand Growth in Domestic Market to Drive Tata
Steel’s Revenue
Tata Steel’s focus on domestic market may continue to pay off as demand
for steel is strengthening in India on the back of increased infrastructure
spending. The ramping up of Kalinganagr project capacity to 8 MnTPA in next
4 years and acquisitions of Bhushan Steel and Usha Martin will contribute
to greater sales in upcoming years. These acquisitions have potential of
enhancing company’s product portfolios and market competitiveness.
Further, a 50:50 JV with Thyssenkrupp AG (to be completed by FY19)
would help create a leading pan-European steel enterprise. With this, the
company will meet competition from Chinese steel in Europe and South-
East Asia. The company may continue upgrading its product mix favouring
higher-value-items such as automotive and specialty steel products: and
improve upon operational efficiency to sustain margins. However, balance
sheet of Tata Steel has got stretched with these acquisitions which could
negatively impact profitability in near-term.
Structural Reforms: The government of India has implemented
several structural reforms including the Goods and Services Tax (GST),
the Insolvency and Bankruptcy Code and has come out with National
Steel Policy to make Indian steel industry self-sufficient and internationally
competitive. These initiatives along with Make-in-India initiative and higher
urbanization will continue to drive the demand for steel in near future.
Valuation and Risks: The company is likely to continue with its
superior performances on the back of increased infrastructure spending
at domestic level and buoyancy in global steel demand led by recovery in
global economies and steel capacity closure in China. The acquisitions
of Bhushan Steel with 5 MnTPA and Usha Martin with 1 MnTPA capacity
could be value accretive given the synergies that Tata Steel will enjoy.
We have positive outlook on the company. We have valued the stock
on PE 9.3x of FY20E EPS and have arrived at target price of Rs. 748
implying 29% upside. However, risk to valuation is wave of protectionism,
regulatory challenges and Fx-fluctuations.
65
83
101
119
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May
-18
Jun-18
Jul-18
Aug -18
Sep
-18
TATA
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
22
Company Background
Established in the year 1907 at Jamshedpur, Jharkhand, Tata Steel limited is part of 150 years old Tata group. The
company is the 10th largest steel manufacturer in the world with operations in 26 countries and commercial presence
in 50 countries. The company has steel production capacity of 27.5 MnTPA (as on 31st March 2018). Tata Steel India
has manufacturing units at Jamshedpur with a production capacity of 10 MnTPA and at Kalinganagar Odisha with a
production capacity of 3 MnTPA. Kalinganagar plant has received capacity expansion approval of 8 MnTPA. It operates
with completely integrated value chain that extends from mining to finished steel goods. The company is primarily involved
in the business of mining, steel-making and downstream value added products and solutions. It produces a wide range
of products and services for infrastructure development and construction. It also develops products for several industrial
and engineering applications with significant presence in different type of industries. The recent acquisitions of Bhushan
Steel and Usha Martin have the potential to enhance Tata Steel’s product portfolio and market competitiveness in the
near future.
The company has many awards to its credit. However, winning of ‘Most Ethical Company’, CII Environmental Best
Practices and Golden Peacock HR Excellence awards deserve special mention.
TATASTEEL: Technical View
TATASTEEL has been making repeated cycles of higher highs and higher lows on the weekly & daily charts. The
counter has zoomed over 65% in the small time frame of approximately two years trading months clocking an all
time highs of Rs. 752 levels. After clocking the peak, the counter has witnessed round of profit taking which dragged
the stock to the lower levels of Rs. 500-550. The counter thereafter started its second round of up move and is
currently trading with bullish bias and is consolidating above the major moving averages. This consolidation may
be considered as the best buying opportunity for medium term investors. On the daily charts, the stock has given a
decisive breakout above Rs. 550 levels with notable trading volumes and is currently trading well above the same.
Analyzing the recent volume price action, the volumes have been encouraging in the recent consolidation post the
breakout indicating strong hands have started accumulating the stock at current levels. At current juncture, the stock
is expected to re-gain its bullish momentum and move towards the next resistance levels of Rs. 620-650 followed
by Rs. 700 levels. On the flip side, immediate support is pegged around Rs. 550 followed by Rs. 480-500 levels.
We recommend medium term investors to buy the stocks at current levels and accumulate more on any declines.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
23
India Research - Stock Broking
Recommendation (Rs.)
CMP (as on Oct 03, 2018) 643
Target Price 850
Upside (%) 32
Stock Information
Mkt Cap (Rs.Bn/US$ Bn) 327.28 / 4.46
52-wk High/Low (Rs.) 850 / 537
3M Avg.daily value (Rs. Mn)
2123.6
Beta (x) 1.2
Sensex/Nifty 35976 / 10858
O/S Shares(mn) 509.3
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 27.7
FIIs 44.0
DIIs 11.2
Others 17.1
Stock Performance (%)
1M 3M 6M 12M
Absolute (11) 2 (16) (19)
Relative to Sensex (4) (0) (22) (30)
Source: Bloomberg
Bloomberg Code: UPLL IN
UPL Ltd
Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 138340 160750 171410 193465 257586
EBITDA 23950 29850 35050 39863 54383
EBITDA Margin (%) 17.3 18.6 20.4 20.6 21.1
Adj. Net Profit 9400 17270 20220 23222 27312
EPS (Rs.) 19.5 34.7 40.7 46.1 54.0
RoE (%) 16.0 26.2 24.5 22.8 22.0
PE (x)* 25.8 21.3 18.4 13.9 11.9
Source: Bloomberg, Karvy Research, *Represents multiples for FY16 - FY18 are based on historic market price
Relative Performance*
Source: Bloomberg; *Index 100
UPL Arysta Life Sciences Acquisition- Positive
Synergies to Drive Future Profitability
The acquisition will enhance UPL’s position as a global leader in the
agricultural solutions. Through this, it intends to find market opportunities
in emerging markets like Asia, Latin America and Europe. The transaction
will close tentatively by Dec‘18/Jan’19 and effect would be visible in
FY20E. The consolidation in the industry is driven towards giving crop
solutions to farmers. UPL has been investing in the same from the last few
years to improve their ability to fight climate change. The USD 4.2 Bn is the
value of the deal with zero debt. Globally, Arysta is 4th in seed treatment
while being 7th/8th in seed treatment solutions. Arysta also has an alliance
with Japanese manufacturers who have access to several patented and
new molecules which would bring in new value to UPL. About 30% of
the sourcing of RM for Arysta comes from China. The interest liability is
about USD 120 Mn on an annual basis. Current capacities will be used for
Arysta’s portfolio as Arysta is devoid of the same.
Valuation and Risks: Latin American market growth during Q1FY19
largely led by normalization of channel inventory. Several new registrations
in Mexico, Peru, Ecuador and Colombia could support higher growth
momentum in the region along with strong order book for Brazil. Arysta
has good presence in Eastern Europe along with Africa and Middle East,
which can provide opportunities to UPL to diversify its revenue stream in
future resulting in stable financial performance in the long run. Further,
bio-solutions form 8% of Arysta’s overall revenue, with an estimated market
size of USD 6 Bn and estimated growth of 14% CAGR. Also expect 5%
CAGR for Herbicides and Insecticides for next 5 years. Thus, increasing
dependency on other segments like Bio-stimulants and seed treatment
can lead UPL to outpace industry growth in medium to long run. At CMP
Rs. 643, we recommend “BUY” for a target of Rs. 850 valuing at 15.7x
FY20E EPS as per consensus estimates representing an upside potential
of 32%.
60
78
96
114
132
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug -18
Sep-18
UPL
Sensex
KARVY WEALTH MAXIMIZER - OCTOBER 2018
24
Company Background
United Phosphorous (UPL) is the largest producer of agrochemicals in India, being both producer and exporter of
off-patent crop protection products and other industrial chemicals. The company was incorporated in the year 1969
and is spread across 123 countries. UPL is amongst the top five post–patent agrochemical manufacturers in the world.
It offers a wide range of products and has developed more than 100 insecticides, fumigants, rodenticides, fungicides,
herbicides, specialty chemicals, industry chemicals and chloroalkaline products. All the units of UPL are certified under
the ISO 9001 for quality assurance, 14001 for Environment Pollution Control norms and OHSAS 18001 for healthy and
safety.UPL also manufactures Caustic Chlorine, White Phosphorus, Industrial Chemicals and Specialty Chemicals. It
also has a captive power plant which has a generating capacity of 48.5 MW i.e. BEIL (Bharuch Enviro Infrastructure).
BEIL is engaged in collection and disposing of solid/hazardous wastes from member industries in the regions. CEL
(Chemo Electronic Laboratory) is a part of UPL’s diversification strategy. It is one of the largest manufacturers of toxic gas
detection devices and the only manufacturer of chemical detector tubes in India. ETL (Enviro Technology) has a common
effluent treatment plant located in Gujarat. Recently, it acquired a seed treatment/solutions company called Arysta Life
Sciences in a USD 4.2 Bn deal.
UPL: Technical View
UPL has been in a secular up move on the weekly charts making higher highs and higher lows. The counter has
been trading with bullish bias from past few trading months and has generated excellent returns for the long term
investors. Technically, the stock is looking strong, trading well above its short to medium term moving averages
generating handsome returns of over 25% in the past two months. Even the volumes in the recent run up were
on the higher side indicating strong confidence of the market participants even at the lower levels. We expect it to
continue its northward journey in the coming months as well. As per the current technical set up, the stock is trading
around the mean of the Bollinger band (20,2) indicating possible upside potential in the stock. Among indicators,
the 14-day RSI line is trading in the comfortable zone pointing northwards reflecting the positive sentiment in the
counter. The immediate support for the stock is pegged around Rs. 620 levels followed by Rs. 550 levels for the
medium to long term perspective. The stock may test Rs. 750 levels in the medium term perspective followed by
Rs. 790-810 levels. From the medium to long term perspective, the stock looks ideal for investment at current levels
where any dip towards Rs. 620-630 levels may be utilized as the best buying opportunity.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
25
Wealth Maximizer - Largecap (WM) is an investment product of Karvy Stock Broking Ltd formulated
by our Equity Fundamental & Technical Research, based on Techno-Funda Analysis. It enlists 10 stocks from
the Karvy Large-cap stock universe.
The objective of ‘Wealth Maximizer’ is to deliver superior returns over an extended time frame. The investment
philosophy works on simple but superior fundamental research.
The 10 large cap companies detailed in this product in our opinion, reflect superior businesses with consistent
future cash flows, operating efficiency and growth potential.
We also track short-term price distortions that create long-term value, driven by sound economic fundamentals
of the company. This reflects stocks that have margin of safety will converge to their intrinsic value over a
period of time and will reflect superior returns.
This is also a part of managing the overall risk, the objective is to attain higher risk adjusted returns and deliver
consistent out-performance.
The stocks’ performance will be assessed on an ongoing basis and the composition of the stocks in the
product will be altered based on target achievement, changes in the fundamentals of the stocks, industry
position, market performance and broad macro-economic factors.
The product is being given to the clients in the form of non-binding investment recommendations so that
they can decide to capitalize on the robust fundamentals and future plans of the company which are being
discussed in the report.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
26
Disclaimer
Analyst certification: The following analyst(s), Vivek Ranjan Misra who is (are) primarily responsible for this report and whose name(s)
is/are mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security
(ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s)
or views contained in this research report.
Disclaimer: Karvy Stock Broking Limited [KSBL] is registered as a research analyst with SEBI (Registration No INH200003265). KSBL is
also a SEBI registered Stock Broker, Depository Participant, Portfolio Manager and also distributes financial products. The subsidiaries and
group companies including associates of KSBL provide services as Registrars and Share Transfer Agents, Commodity Broker, Currency
and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, financial consultancy and
advisory services, realty services, data management, data analytics, market research, solar power, film distribution and production, profiling
and related services. Therefore associates of KSBL are likely to have business relations with most of the companies whose securities are
traded on the exchange platform. The information and views presented in this report are prepared by Karvy Stock Broking Limited and
are subject to change without any notice. This report is based on information obtained from public sources , the respective corporate
under coverage and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness
guaranteed. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be
altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form,
without prior written consent of KSBL. While we would endeavor to update the information herein on a reasonable basis, KSBL is under no
obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent KSBL
from doing so. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other
reason. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document
or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers
simultaneously, not all customers may receive this report at the same time. KSBL will not treat recipients as customers by virtue of their
receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment
or strategy is suitable or appropriate to your specific circumstances. This material is for personal information and we are not responsible for
any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors
must make their own investment decisions based on their specific investment objectives and financial position and using such independent
advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that
neither KSBL nor any associate companies of KSBL accepts any liability arising from the use of information and views mentioned in this
report. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets.
Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to
change without notice. Actual results may differ materially from those set forth in projections.
Associates of KSBL might have managed or co-managed public offering of securities for the subject company or might have been mandated
by the subject company for any other assignment in the past twelve months.
Associates of KSBL might have received compensation from the subject company mentioned in the report during the period preceding
twelve months from the date of this report for investment banking or merchant banking or brokerage services from the subject company
in the past twelve months or for services rendered as Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker,
merchant banker and underwriter, Investment Advisory services, insurance repository services, consultancy and advisory services, realty
services, data processing, profiling and related services or in any other capacity.
KSBL encourages independence in research report preparation and strives to minimize conflict in preparation of research report.
Compensation of KSBL’s Research Analyst(s) is not based on any specific merchant banking, investment banking or brokerage service
transactions.
KSBL generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or
derivatives of any companies that the analysts cover.
KSBL or its associates collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the
report as of the last day of the month preceding the publication of the research report.
KSBL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in
connection with preparation of the research report and have no financial interest in the subject company mentioned in this report.
Accordingly, neither KSBL nor Research Analysts have any material conflict of interest at the time of publication of this report.
It is confirmed that KSBL and Research Analysts, primarily responsible for this report and whose name(s) is/ are mentioned therein of this
report have not received any compensation from the subject company mentioned in the report in the preceding twelve months.
It is confirmed that Vivek Ranjan Misra, Research Analyst did not serve as an officer, director or employee of the companies mentioned
in the report.
KSBL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.
Neither the Research Analysts nor KSBL have been engaged in market making activity for the companies mentioned in the report.
We submit that no material disciplinary action has been taken on KSBL by any Regulatory Authority impacting Equity Research Analyst
activities.
KARVY WEALTH MAXIMIZER - OCTOBER 2018
27
Investor Grievance Cell Email: igksblsb@karvy. com,
SEBI Reg. No.: INH200003265
PMS Regd No. INP000001512
www.karvyonline.com
1800 419 8283
research@karvy.com
Reg. Oce
Karvy Centre, 8-2-609/k Avenue 4,
Street No.1, Banjara Hills,
Hyderabad-500 034.
Tel : +91-40-23312454
Fax : +91-40-23311968
Corporate Oce
Karvy Millennium, Plot No.31,
Financial District, Gachibowli,
Hyderabad-500 032.
f
in
You
Tube