Fundamental News & Analysis - 03 OCT 2016

Bajaj Auto September 2016 sales numbers almost flat ; nos broadly in line with estimates

• Bajaj Auto overall sales were almost flat declining by 2% yoy to 376,765 units and were above our estimates of 3.63 lakh units.
• Domestic market sales grew strongly 21% yoy with the onset of the festive season and improvement in rural sales.
• Export market continued to remain under pressure(30% drop) posting yet another month of double digit decline.
• Motorcycle sales were almost flat for the month up 0.5% YoY. Domestic motorcycle sales grew 23% yoy helped by new launches while motorcycle exports declined 29% yoy.
• Three wheeler sales declined 17% yoy. Domestic three wheeler sales grew 10% yoy led by entry into the cargo segment while the three wheeler exports dipped 37% yoy.

L&T construction wins order valued Rs6,024crore; positive for L&T

• Power T&D: EPC order of Rs1,721crore
• Water Effluent treatment : orders worth Rs1,497crore
• Building & Factories: Orders worth Rs1,131crore
• Transportation: Orders worth Rs780crore in Middle East
• Infra: orders worth Rs630crore
• Metallurgical & Materials; Orders worth Rs265crore

TOP NEWS

September 2016 Auto sales trends: The auto sector showed mixed trends in the month of September 2016. While the passenger vehicle segment showed strong double digit growth led by strong festive demand and improvement in rural sales, the MHCV segment showed double digit decline led by the high base of the corresponding month. LCV sales also showed double digit growth led by improvement in the rural demand. Two wheeler players are yet to disclose the sales nos. Outperformers: Maruti Suzuki and Eicher Motors, Underperformers: Ashok Leyland

Sun Pharma announces late-breaking data from two pivotal Phase-3 clinical trials evaluating the safety and efficacy of anti-psoriasis drug tildrakizumab – Long term Positive for Sun; read thru

Jubilant receives USFDA approval for RUBY-FILL; its New Drug Application (NDA) under 505 (b)(2) filing route. The product is expected to be launched in Q3FY2017, for which the current estimated US market size is US$76mn and has a potential to grow up to US$250mn annually in the next five years. – Big positive for Jubilant Lifescience.

Domestic Gas price cut – to impact negatively on upstream companies (ONGC/OIL) while positive impact on city gas distribution companies like IGL, Gujarat Gas & MGL due to lower quantum cut in CNG/PNG price

State Bank of India: SBI’s Chairman Arundhati Bhattacharya gets a one-year extension as chairman – Positive Read thru

Mahindra Holiday Resorts - In a move to boost its product offerings, Mahindra Holidays & Resorts is acquiring 12% stake in Nreach; it owns a brand 'GIFTXOXO', which offers over 4,000 categories of experiences and activities including travel and adventure, gourmet, health and wellness, art and learning experiences – positive read through for Mahindra Holidays

INVESTMENT CALLS

Finolex Cables -New product launches to drive growth; raise PT to Rs500 (Retain Buy, CMP 442)

• Three new product launches in FY2017; next growth driver in place: Finolex Cables (FCL) has maintained its leadership position in Electrical Cables business with more than 10% market share and enjoys a very high brand recall. Now, the company is adding three new products in its portfolio. FCL launched Fans and Switchgears during Q1FY2017 and Q2FY2017, respectively. We recently interacted with the management and learned that Fans are being rolled out through its distribution network while the process of Switchgears distribution is also underway. Further, FCL will launch Electric Water Heaters very soon. We expect that incremental sales from the new launches should start flowing from Q4FY2017 and meaningfully reflect in the financials from FY2018 onwards. The management aims to touch revenue of ~Rs200-300 crore in Fans segment in the next 2-3 years with OPM of ~9-10%. The Switchgears business looks even more promising with OPM of 20%+. The company is looking for revenue of ~Rs500 crore from Switchgears in the next 2-3 years. In the same period, the Water Heater business potential is ~Rs200 crore with double-digit margin. We believe these new launches would be the next growth driver and bring a renewed vigor in the next 2-3 years.
• Core business intact; double-digit growth to sustain: We believe that FCL’s core Electrical Cables business is intact and is likely to deliver double-digit growth in Q2FY2017. In an environment of softer copper prices and stable demand, the company would enjoy healthy margins in the short term. We expect FCL to deliver a flattish topline but earnings are expected to grow by 19% YoY in Q2FY2017. Going forward, we expect healthy growth for FCL on annual basis given the government’s enhanced focus on infrastructure spending, healthy growth visibility of the Automobile sector and better prospects for consumer spending. Further, the rolling out of GST could be an additional trigger for FCL (in line with other organised players in this space) and will enable it to gain business from the unorganised players.
• Revise price target to Rs500; retain Buy: Considering the launch of three new products in FY2017, we have refined our earnings estimates for FCL. While we see meaningful incremental revenue from the new launches flowing in from FY2018, the overall advertisement & promotional spends are expected to rise in view of the new launches. However, the incremental revenue from the new products is expected to come with better margins due to Switchgears (peers are making OPM of 25-35%). We believe that FCL’s strategy to enrich its product portfolio by adding Electrical Consumer products to its existing Electric Cables is structurally a positive move, as the company could gain more pricing power and could see a re-rating. Therefore, we have fine-tuned our earnings estimates for FCL and raise our price target (PT) to Rs500.

Viewpoint: Minda Industries Limited – Well poised to outpace industry growth

• To outgrow passenger industry on new product launches and increased focus on exports: The domestic passenger industry [(comprising Two Wheelers (2W) and Passenger Vehicles (PV)] are currently in an uptrend on the back of improving rural sentiments (due to normal monsoon) and increase in the salaries of government employees (post implementation of Seventh Central Pay Commission). We expect the 2W and PV industries to report a double-digit growth over the next two years. Minda Industries (MIL) has introduced new products recently, which would enable it to outpace the industry growth. Under a joint venture with Kosei, MIL has introduced Alloy Wheels for supply to PV clients (Maruti Suzuki and M&M). Further, the company has commenced supplies of Rubber Hoses for its existing clients. It is also planning to introduce Four Wheeler (4W) Automotive Batteries. The company is entering new platforms for OEM’s and has increased its share of business with Hero MotoCorp, HMSI and Royal Enfield. Also, MIL is aggressively targeting export markets, with the acquisition of Spain’s Clarton Horns giving it access to foreign OEMs such as BMW and Kawasaki. The company is targeting export CAGR of 25% over the next two years. We expect MIL to clock 15% CAGR in topline over FY2016-FY2018 as against industry growth of 12%.
• Rinder acquisition to give footing in 2W lighting segment: MIL has announced the acquisition of Spain’s automotive lighting manufacturer Rinder, which commands a market share of 18% in 2W lighting space in India and has a turnover of about Rs400 crore. The Rinder acquisition is likely to complement MIL’s existing core lighting business and enable it to become a significant player. MIL’s lighting portfolio (ex-Rinder) is skewed towards 4W (contributes 70% to the overall lighting business revenue) while Rinder’s portfolio is tilted towards 2W (contributes 80% to total lighting business revenue). With the acquisition of Rinder, MIL has doubled its market share in the automotive lighting industry (market share now stands at 20%). Further, with the Rinder acquisition, MIL will gain access to designing capabilities (Rinder has an in-house design centre) and cutting-edge LED technology, whose penetration is likely to increase in the domestic market.
• Margin improvement on enhanced capacity utilisation and improvement in subsidiary performance: MIL is aiming to ramp up the supplies of recently introduced products (Alloy Wheels and Rubber Hoses). Increased capacity utilisation would enable it to spread its cost structure over a larger revenue base, resulting in margin improvement. Also, MIL is looking to consolidate units and manufacturing processes for established products, which would also help to expand margins. The company is also targeting improvement in the financial performance of its key subsidiaries, which contribute ~40% to its consolidated topline, driven by enhanced operational efficiencies and reduction in wastage. Subsidiaries have already reported an improved performance (with net margin expanding from 0.6% in FY2015 to 1.8% in FY2016) and we expect the improvement to gain pace going ahead. We expect MIL’s consolidated margins to expand by 70BPS over the next two years.
• Outlook and valuation: MIL has a track record of outpacing the automotive industry growth. The company’s topline has grown at 28% CAGR in the last seven years compared to an 11% growth in the automotive industry. With increased supplies to existing customers and introduction of new products (led by acquisition of group companies), we expect this outperformance to continue going forward. MIL is likely to emerge as the flagship company of the Uno Minda group. Given the improving prospects for the Indian automotive industry and margin improvement, we expect MIL to clock 15% topline and 31% earnings CAGR over the next two years. With an upbeat growth outlook and healthy return ratios, MIL is trading at an attractive valuation of 17.2x FY2017 and 12.6x FY2018 earnings, respectively. We have a positive view on the stock and believe it can generate 20-25% returns in the next 12 months.

OTHER NEWS

Domestic Gas price cut – to impact negatively on upstream companies (ONGC/OIL) while positive impact on city gas distribution companies like IGL, Gujarat Gas & MGL due to lower quantum cut in CNG/PNG price

The Government has cut domestic natural prices by 18% to US$ 2.8/mmbtu (NCV based), which is applicable from Oct 2016 to end of March 2017. This would impact negatively for gas producing upstream companies like ONGC/OIL/RIL. With this cut, gas production will turn loss making for these companies. We expect impact on earnings of OIL would be around 4% while we see potential earnings impact on ONGC around 5% with this development. However, impact on RIL’s earnings would be around 1% or lower given the substantially lower earnings contribution from this segment currently.

On the other hand, we see this as a positive development for city gas distribution (CGD) players like Indraprasta Gas, Mahanagar Gas and Gujarat Gas. We believe these players may retain some benefit and pass on partial price cut to consumer but given the current situation when petrol and diesel prices are inching up and likely to remain firm in line with global crude oil prices. IGL has announced a price cut of Rs 1.4/kg for CNG and Rs 1 for PNG, which is a cut of around 4% compared to gas price cut of 18%. GAIL would also be benefitted as natural gas is input for its petchem facility while the finished prices are usually follow crude oil price trend.

State Bank of India: SBI’s Chairman Arundhati Bhattacharya gets a one-year extension as chairman – Positive Read thru

State Bank of India's Chairman Arundhati Bhattacharya has got a one-year extension as chairman of the Bank. The move will allow her more time to lead a clean-up of bad assets and oversee the merger of affiliates. SBI had performed relatively better than peers under her leadership and we believe the continuation will be positive for the bank.

Liqour companies - Bihar Government notifies new liquor prohibition law for state; committed to continue with total prohibition in the state of Bihar – negative for Globus Spirits, United Spirits and other liquor companies

Sun Pharma announces late-breaking data from two pivotal Phase-3 clinical trials evaluating the safety and efficacy of anti-psoriasis drug tildrakizumab – Long term Positive for Sun; read thru.

Tildrakizumab is a monoclonal antibody designed to control psoriasis. Additional findings from the Phase-3 clinical trials will be presented at upcoming scientific meetings and the preparations for regulatory submissions in both the US and Europe are proceeding, stated the company in a release. Funded by Sun Pharma, Merck is responsible for the completion of phase-3 trials in patients with mild-to-moderate plaque psoriasis, and submission of a Biologics License Application to the US Food and Drug Administration (FDA). It is also responsible for manufacturing finished goods to support Sun Pharma’s initial product launch, according to the company. The psoriasis market is set to more than double to $13.3 billion by 2024 from $6.6 billion in 2014, according to UK-based research and consulting firm Global Data.

RBL acquires 9.99% stake in Utkarsh Micro Finance as a part of its strategic move to cater to under-banked and unbanked segments, while RBL also plans to extend its product portfolio to Utkarsh customers – Positive read thru

RIL – As per media reports, the Oil Ministry has asked Directorate General of Hydrocarbons (DGH) to quantify the compensation Reliance Industries has to pay for drawing out natural gas belonging to ONGC – Sentimentally negative for RIL.

Kotak Mahindra acquires BSS Microfinance for Rs 139.2 Cr

Kotak Mahindra Bank: Canadian pension fund raises stake in Kotak Mahindra Bank from 4.89% to 5.77% - Positive read thru

Telecom: India gets $8 billion worth of telecoms spectrum bids on auction's first day

India started its biggest ever telecoms airwaves auction on Saturday, receiving 535.3 billion rupees ($8.04 billion) worth of bids on the first day of the sale. The total value of the airwaves put on the block is estimated to be worth $84 billion based on the auction reserve price set by the government. The 1800 MHz band of airwaves that can also do 4G and are available at less than a quarter of the price of the 700 MHz band saw higher bidding.

ZEEL clarifies no acquisition of UAE’s Hum 106.2 FM by the company

Zee Entertainment revives talks to acquire Reliance Broadcast network

As per media sources, ZEEL has revived talks with Reliance Broadcast Network (RBNL) to acquire the latter’s radio and television business. The two companies have been in talks since the beginning of this year, but they had failed somewhere in mid-August. Initially, ZEE was in talks to acquire 49% in RBNL’s radio channel brand 92.7 BIG FM and 100% of its television channels BIG Magic and BIG Ganga.

IRB Infrastructure – Receives Letter of Award for 6-Laning Project on Kishangarh - Udaipur - Ahmedabad Highway from NHAI (had already announced preferred bidder on 20th September 2016)

The company has now received Letter of Award from NHAI for six laning of 125km Kishangarh Udaipur Ahmedabad section of NH-79 on BOT (Toll) mode. The estimated project cost is Rs2400 crore for which it offered a premium of Rs228.6 crores. The concession period of the project is 20 years including construction period of 910 days. The company had already announced that it has emerged as a preferred bidder for the same project on 20th September 2016.

Road Sector: The government approved Rs1660 crore worth for 454km of highway projects in 8 states including UP, Maharashtra and Assam. Of the 8 projects, 5 will be undertaken on Engineering, Procurement and Construction (EPC) mode. The development is positive read thru for the road sector especially EPC players like Ashoka Buildcon, Sadbhav Engineering, Gayatri Projects, KNR Construction among others.

Inox Leisure commenced commercial operations of multiplex cinema theatre at Howrah and Jaipur

Inox Leisure announced that it has commenced the commercial operations of a multiplex cinema theatre, taken on license basis, and located at Howrah and Jaipur with effect from September 30, 2016. These multiplexes have 7 screens and 1,766 seats.

UFO Moviez’s theatre arm plans to set up 20 screens in non-metro by next year

UFO Moviez has said it will be investing Rs.15 crore to set up at least 20 screens in non-metro regions by next year. It has already shortlisted five franchisees including in Maharashtra, Punjab and Gujarat. The first screen is expected to be up and running by November in Moga, Punjab. UFO Moviez has launched Nova Cinemas under its subsidiary Valuable Digital Screens Pvt Ltd. The company targets close to 2,000 screens by 2020.

Cognizant reveals corruption probe in US, replaces president

Cognizant said it was cooperating with US authorities in an investigation related to the Foreign Corrupt Practices Act, and carrying out its own probe to determine whether some payments made in India breached the law. Cognizant appointed Rajeev Mehta as the new president of the company after the current president Gordon Coburn resigned.

Tata Motors is planning to take a price hike in the Passenger vehicles segment on the back of increase in the input cost.

M&M has taken a price hike in the PV (passenger vehicles) segment and CV (Commercial vehicles) segment of 1% effective this month

Emco has entered into Agreement for selling its Business Unit i.e. Wind Mills situated at Sinner and Sangli in Maharashtra on a slump sale basis subject to fulfillment of conditions precedent as per Agreement.

Ashok Leyland plans to introduce 8-10 new products in the LCv space over the next 2-3 years; to invest up to Rs 400 crores. Positive.

Ashok Leyland post separation from Nissan has announced to launch 8-10 new products over the next 2-3 years in the LCV space. The new models could include upgrades of existing models and complete new models as well. The first of the new models is expected to be launched in the next 6 months time frame. Ashok Leyland has planned to invest around Rs 400 crores for the new LCV's.

CNG price in Delhi cut by Rs 1.40 to Rs35.45 and piped gas by Re 1 to Rs 23 per scm in line with reduction in prices of domestic produced natural gas

GNFC to set up a fertilizer plant at Dahej in partnership with Belgium's Ecophos.

GNFC is partnering with Belgian firm Ecophos SA to set up a di-calcium phosphate plant at Dahej in Gujarat at an estimated cost of Rs 526 crore. Project will have an equity investment of Rs 24 crore from GNFC and Rs 134 crore by Ecophos in the ratio of 15:85 respectively. The new plant shall use entire hydrochloric acid produced as a by-product from the GNFC's Toulene di-isocyanate (TDI) plant at Dahej resulting in improved profitability of the TDI business.

Quick Service Restaurants - Industry reports states that the market for chain restaurants including cafes and quick service restaurants (QSR) is expected to grow at 20 per cent a year to reach Rs 51,000 crore ($8bn) by 2021 – positive read through for Westlife Developers and Jubilant Foodworks

Maruti Suzuki September 2016 sales at record highs; volumes grew strongly by 31% YoY; sales nos beat estimates; Positive

• Maruti Suzuki India Limited reported highest ever total monthly sales for the month of September 2016 at 149,143 units.
• The domestic sales were up 20% YoY while the export sales too were up 54% YoY on a lower base in September 2015.
• The Mini segment sales volumes were up 25% YoY spurred by festive demand and positive rub off effect of the implementation of the 7th pay commission recommendations.
• The compact car segment too registered a growth of 13% YoY driven by a sustained demand for the Baleno.
• The utility vehicles segment continued its strong growth trajectory, growing by 191% YoY on the back of a strong demand for Vitara Brezza

Tata Motors September 2016 overall sales numbers grew by 7.6% YoY; nos broadly inline with estimates.

Tata motors September 2016 domestic sales numbers were up 7.6% YoY to 48648 units. The domestic sales were up 5.3% YoY while export sales grew strongly by 29% YoY. The passenger vehicles sales were up 24.5% YoY on the back of a sustained demand for the newly launched Tiago. The commercial vehicles sales declined by 2.5% YoY. MHCV sales declined 20% to 12,743 units on the back of a high base of corresponding month last year.The LCV segment reported sales grew 19% YoY to 15,617 units driven by strong rural demand. M&M Auto sales for September 2016 up 8% YoY driven by LCV segment; Nos in line with estimates

• M&M’s auto segment sales for September 2016 at 46,130 units were up 8% YoY on the back of a 7% growth in the domestic business while the exports were up by 13.6% YoY on the back of improved demand.
• The LCV segment volumes were up 13% YoY pointing at a sustained demand for LCV’s
• The Utility vehicle segment grew by a modest 2.5% YoY indicating continued market share loss on lack of petrol variants.
• Three wheeler segment sales improved marginally (reported 4% growth) on back of improvement in the rural demand
• Exports grew 14% led by tapping of new geographies

Ashok Leyland sales volumes for September 2016 down 18% YoY due to high base; Nos below estimates.

• Ashok Leyland reported a drop of 18% YoY for September 2016 sales nos on the back of a 26% drop in the MHCV volumes.
• MHCV segment reported a 26% YoY de-growth for the month on the back of a higher base in September 2015 and marginal market share loss.
• LCV segment volumes on the contrary were up 17% YoY due to improvement in the industry demand.

Eicher Motors – Commercial Vehicle sales up 14% YoY; Nos above estimates.

• Eicher Motors commercial vehicle sales at 4843 units up 14% driven by a strong demand for Buses and market share gains in the truck segment on back of new launches.
• Eicher Bus segment sales were up 65% YoY to 1049 units on the back of improved demand scenario.
• The LMD (Light & Medium Duty) segment sales too were up 8% to 2,747 units on the back of sustained demand for the recently launched products.

Eicher Motors – 2 wheeler division (Royal Enfield) sales up 30% YoY to 57842 units driven by sustained demand for leisure biking. Nos in-line with estimates.

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