Voltas Ltd (VOLT IN): Unitary cooling products performance takes the heat off in 1QFY20.

Dated:- 9th August 2019

1QFY20 Results

·       Voltas reported a 24% YoY growth in consolidated revenues to Rs 26,540 mn. The revenue growth was driven by 47% YoY growth in the Unitary Cooling Products (UCP) (main revenue earning air conditioners) segment at Rs 17,488 mn. The Electro-Mechanical Projects (EMP) segment revenues declined by 5% YoY to Rs 8,241 mn and the Engineering Product Services (EPS) segment revenues declined by 4% YoY to Rs 740 mn.

·       The EBITDA margin declined by 35 bps YoY in 1QFY20 to 11% from 11.35% in 1QFY19.

·       Voltas reported EBIT margin expansion of ~60 bps YoY in UCP to 13.1%. The EBIT margins declined by ~220 bps YoY and ~230 bps YoY in EMP (8%) and EPS (32.4%) respectively.

·       Voltas reported a one-time expenditure of ~Rs 430 mn towards a Voluntary Retirement Benefits Scheme. The adjusted Consolidated PAT for 1QFY20 stood at Rs 1,941 mn v/s Rs 1,839 mn in 1QFY19. The profit share in the joint ventures including was Rs 213 mn in this quarter v/s Rs 193 mn in 4QFY19.

Management Commentary

·       Voltas continues to be the market leader in Room Air conditioner business with a market share of 24.1% for 1QFY20 (25.3% for June 2019) at Multi-Brand Outlets. The Air Conditioning industry grew by 36% YoY; Voltas grew higher than the industry YoY growth of ~47%. The inverter ACs accounted for more than 50% of the total revenues.

·       Commercial Refrigeration products and Air Coolers witnessed increased demand in the quarter. The air purifiers too received an encouraging response.

·       Management guided for UCP segment EBIT margins to remain in the range of 11-12% for FY20E.

·       In the EMP segment, the order book stood at Rs 47,560 mn, higher by ~3% YoY. The domestic order intake during 1QFY20 was Rs 4,490 mn v/s Rs 1,500 mn in 1QFY19. On the International front, Voltas continues to be cautious.

Consensus Estimate (Source: market screener website)

·       The closing price of VOLT was Rs 606/- as of 09-Aug-2019. It traded at 33x / 28 x / 24x the consensus EPS for 20E /21E /22E EPS of Rs 18.2 / 21.8 / 25.1 respectively.

· Consensus target price of Rs 630/- implies a PE of 25 x on FY22E EPS of Rs 25.1/-

Radico Khaitan (RDCK) – 1QFY20 – Cost pressure curbs high spirits

Dated :- 9th August 2019

1QFY20 Results

  • Radico Khaitan’s (RDCK) revenues grew by 20.8% YoY to Rs 623 Mn driven by 12% YoY volume growth in Indian Made Foreign Liquor (IMFL).
  • The higher margin Prestige & Above volumes increased by 16% YoY to 2.0 mn cases and the Regular & Other brands volumes reported an increase of 10.2% YoY to 4.3 mn cases.
  • EBITDA improved by 9.3% YoY to Rs 989 Mn. The EBITDA margins declined by ~170 bps to 15.9% impacted by increase in raw material costs.
  • PAT grew by 15.6% YoY to Rs 548 Mn driven by reduction in finance cost.

Management Commentary

  • The margins in 1QFY20 were lower 18% YoY on account of increase in Extra Neutral Alcohol (ENA) prices and ~15% YoY increase in glass bottles. The restriction on operations at the molasses plant by the Central Pollution Control Board during 1QFY20, led to additional costs of Rs 65mn.
  • Rampur Indian Single Malt and Jaisalmer Indian Craft Gin continue to see strong traction in the Indian as well as international markets. RDCK has tripled the manufacturing capacity of Rampur Indian Single Malt which will benefit company in the long run.
  • The management guided for ~9% volume growth in IMFL for FY20E led by ~14% YoY in the Prestige & Above category and ~6% YoY growth in the Regular & Other Brands category.
  • Raw material price pressure will keep the gross margins at ~47% and the EBITDA margins in the range of 16%-16.5% for FY20E.
  • RDCK is expected to be a debt free company within next 18 months.

Consensus Estimate (Source: www.marketscreener.com)

  • The closing price of RDCK was Rs 322/- on 09-Aug-19. It traded at 22x / 20x / 16x the consensus EPS for 20E /21E /22E EPS of Rs 14.1/ 15.5 /20.1 respectively.
  • Consensus target price of Rs 454/- implies a PE of 23x on FY21E EPS of Rs 20.1.

Risk Tolerance / Loss Tolerance

What’s your risk tolerance? How do you identify it? Both are important questions that I doubt investors spend a ton of time thinking about at first. They’re also abstract questions thanks to all the convoluted definitions of risk. During an interview, Daniel Kahneman was asked his thoughts about identifying risk tolerance. He suggested a better way to frame the question: what’s your loss tolerance? How much loss can you endure before hitting the breakpoint where emotions push you to change your portfolio? By reframing it, Kahneman forces you to think in terms of Rupees, not percentages. That may not seem like a big difference, but emotions trigger in Rupees terms. Lost Rupees can be quickly equated to missed goals and dreams — less money to spend, a canceled vacation, a postponed retirement — that make you nauseous in ways that a percentage won’t.

Kahneman went on to explain its importance in minimizing regret and how to fit it into portfolio construction.

The main question that he found useful to ask when someone is very wealthy is how much loss is the individual willing to tolerate? That is, what fraction of their wealth are they actually willing to lose? It turns out that fraction is usually not very large. That’s a very important parameter. How much do they really want to protect as much as possible, and how much are they willing to consider losing? That varies a lot among individuals. By and large, the very wealthy mostly want to protect their wealth, and they’re willing to play with a small fraction of it. That is the fraction they are prepared to lose, but it’s not a large fraction. So they’re loss averse, not risk as such.

For the individual who is very concerned about losses, he thinks stop-loss order is certainly a good approach. That’s the major question you want to ask the investor. How much are willing to lose? Then you have to take steps so that they won’t lose more than they are willing to lose. That’s in effect a stop-loss policy.

Daniel Kahneman is an Israeli-American psychologist and economist. His notable work is in area of the psychology of judgment and decision-making, as well as behavioral economics. He was awarded the 2002 Nobel Memorial Prize in Economic Sciences.

Mahindra & Mahindra Ltd- 1QFY20- Slowdown hurting the profitability

Dated: 8th August 2019

Quarterly Performance:

Key Highlights:

  1. Net sales were at Rs 128,050 mn, a decline of 4% YoY. The domestic auto sales volume for the quarter was 5% down YoY whereas the exports were down 20% YoY. The export sales were impacted due to the South Asia region which declined 61% YoY. The domestic tractor volumes were down 15% YoY whereas exports have shown a muted growth of 1% YoY.
  2. EBITDA stood at Rs 17,940 mn, a decline of 15% YoY. The operating performance was impacted due to subdued sales and also due to increased advertising & marking expenses.
  3. The operating margins were at 14% vs 15.8% in 1QFY19.
  4. Net profit before the exceptional income was at Rs 9,180 mn for the quarter, a decline of 26% YoY.
  5. The Company reported an exceptional income of Rs 13,600 mn for the quarter which increased the PAT by 80% YoY at Rs 22,600 mn. This was on account of gain on sale of shares by M&M benefit trust and gain on buy-back by an associate/transfer of certain long-term investments.

Management Commentary:

  • Management expects some revival in the tractor industry post-August-19. They have guided for flattish sales for FY20E. They expect a 6-8% sales volume growth for the tractor industry in the coming few months. Good monsoons, an uptick in sowing and low base effect in the 2nd half of the year could provide further upside.
  • Dealer inventory is under control. Company is only at around 2,000-3,000 tractors higher than the desired level of inventory.
  • The management has refrained from providing any industry guidance. Auto industry might see some upsides on account of decent monsoons, favourable commodity prices and pre-buying in the latter part of the year. The rate cut transmission by banks, stimulus in the form of GST rate cut and supportive govt. policies would further help the industry according to M&M management.
  • Post-BS-VI, the small engine vehicle (1.2-litre engines) would 100% be petrol variant. They expect the diesel & petrol mix to be 50:50 post-BS-VI launch.
  •  M&M took a marginal price increase in both auto and FES (Farm Equipment Segment) segments this quarter.

Consensus Estimate (Source: market screener website)

  • The closing price of M&M Ltd is Rs 522/- on 08-Aug-19. It traded at 12.6x / 12.3x the consensus EPS for FY 20E / FY21E EPS of Rs 41.56 / 42.28 respectively.

Indiabulls Housing Finance 1QFY20 result update: Asset quality deteriorates sequentially.

Dated: 7th August 2019

  • Loan assets declined 10% YoY to Rs 1,131 bn. The decline is primarily due to efforts taken for reduction in the Commercial Real Estate (CRE) book.
  • NII at Rs 14,750 mn was 13% lower YoY. Pre-provisioning operating profits at 12,536 mn were 15% lower YoY.
  • Provisions were at Rs 1,476 mn compared to Rs 649 mn and Rs 1,645 mn in 1QFY19 and 4QFY19 respectively.
  • PAT at Rs 8,020 mn was lower by 24% YoY.
  • Asset Quality worsened sequentially from GNPAs and NNPAs of 0.88% and 0.69% respectively in 4QFY19 to 1.47% and 1.10% respectively in 1QFY20.

Management Commentary:

  • IBHFL reduced exposure to CRE loans amounting to Rs 60 bn in 1QFY20. Efforts to reduce CRE exposure is in anticipation of the proposed merger with Lakshmi Vilas Bank (LVB).
  • Management has guided to quarterly disbursements of Rs 100 bn from 2QFY20. Guidance for loan book growth for FY20E is in mid-teens.
  • Management expects spreads to remain stable in 300-325 bps range.
  • IBHFL recovered Rs 7 bn from Palais Royale in 1QFY20 against earlier guidance of Rs 2 bn. Against the recovery, Rs 4.5 bn was used to make additional voluntary provisions. Under ECL norms, companies cannot make floating provisions. Hence IBHFL has proactively classified certain accounts as Stage 3 (including Zee group, CCD group) and provided against them.

Consensus estimates (Source: Marketscreener website):

  • IBHFL closing price (as on 07-08-2019) was Rs 446/- per share. It was trading at a P/B of 1.1x/ 0.9x its book value per share estimates of Rs 417/ 493 for FY20E/ FY21E respectively. Consensus target price over next 12 months is Rs 910/- implying P/B of 1.85x for FY21E BV of Rs 493

Titan Company Ltd (Titan)- 1QFY20- Rising Gold prices impacting the Jewellery biz, Growth Guidance intact for the long- term.

Dated: 7th August 2019

Quarterly Performance:

Key Highlights:

  1. Net sales for the quarter were Rs 52,082 mn, a growth of 16% YoY. The Jewelry/ Watches/ Eyewear business revenues grew 14%/ 20%/ 13% YoY respectively. Other which includes SKINN (skincare) & Taneira (sarees) grew 53% YoY.
  2. EBITDA stood at Rs 5,734 mn, a growth of 18% YoY. EBITDA margins were 11.1% vs 10.8% in 1QFY19.
  3. As an impact of Ind AS- 116, Titan reported an increase in the depreciation and interest of 86% and 211% YoY respectively.
  4. The impact of Ind AS- 116 in the P&L for Titan for the quarter was an increase in interest cost and depreciation by Rs 200 mn and Rs 330 mn respectively and a reduction in rent by Rs 490 mn, resulting in EBITDA going up by Rs 510 mn and PBT lower by Rs 20 mn.
  5. The net profit was Rs 3,662 mn, an increase of 10% YoY. Tax rate stood at 29%.

Management Commentary:

  1. Management has cut its 22% growth guidance for the jewellery business. They expect the demand for the jewellery to be impacted in 2QFY20 as well due to the rising gold prices. They expect some revival in the demand for the jewellery by September this year.
  2. Management expects a recovery in demand with stabilisation of the gold prices.
  3. Management highlighted wedding jewellery sales have been lower than their expectations due to a smaller number of wedding days in 1st half of wedding season.
  4. The performance from the South region was good whereas West and East India continue to remain most impacted post spike in the gold price
  5. They expect a 20% plus growth in the jewellery business in the 2HFY20E.
  6. They have maintained the SSS (same-store sales) growth guidance of 14-15% YoY.
  7. The watch business has shown a 20% YoY growth in this quarter on the back of the institutional order from TCS of Rs 560 m. Adjusted for this, watch business revenue grew 11% YoY.
  8. There was a one-off expense of Rs 400 mn for the Business Associate Meet which impacted the EBIT margins according to the management. This is a non- recurring expense.
  9. Management expects an improvement in the margins with revenue growth coming in accompanied by the increased demand in the market.

Consensus Estimate (Source: market screener website)

  • The closing price of Titan is Rs 1,036/- on 07-Aug-19. It traded at 52x / 42x/ 35x the consensus EPS for FY 20E / FY 21E/ FY22E EPS of Rs 19.9 / 24.5/ 29.3 respectively.
  • Consensus target price of Rs 1,204/- implies a PE of 49x on FY21E EPS of Rs 24.5.

Laurus Labs 1QFY20 results: Temporary troubles, growth story intact

Dated: 6th August 2019

1QFY20 result update:

  • Consolidated Revenue grew 2% YoY (-% QoQ) to Rs 5,506 mn. API, Synthesis, Ingredients and FD segments contributed to 67%,11%,3% and 19% of revenues  respectively.
  • EBITDA declined 3% YoY (+27% QoQ) to Rs 832 mn. Reported EBITDA margins contracted by 80 bps YoY to 15.1% from 15.9% in 1QFY19.
  • Net Profit fell 9% YoY to Rs 151 mn

Management Commentary:

  • Due to delay in shipment, revenues of Rs 750-100 mn are pushed to 2QFY20.
  • Laurus has incurred capex of Rs 450 mn in 1QFY20 and has guided for Rs 1,500-2000 mn capex in FY20.
  • Laurus is very positive about finished dosage business and expects revenues to reach to Rs 4,200 mn for FY20.
  • Company expects ~10% growth in API business for FY20. Company expects ARV revenues to be in the range if Rs 1,300-1,400 mn in FY20
  • Laurus has completed backward integration and supply issues from China have been mitigated. This has led to an improvement in the gross margin.

Consensus Estimate (Source: marketscreener website)

  • The closing price of Laurus is Rs 317/- as on 6th August 2019. It traded at 18x / 12x the consensus EPS for FY 20E / FY 21E of Rs 17.2 / 26.7 respectively.
  • Consensus target price of Rs 435/- implies a PE of 16x on FY21E EPS of Rs 26.7.

ITC Ltd 1QFY20 result update: Cigarette revenues and margins continue to improve

  • The total revenues grew 6% YoY to Rs 113,614 mn for the quarter. The revenues from cigarettes business were reported at Rs 54,334 mn, YoY growth of 6% in 1QFY20. The FMCG/ Hotels/ Agri/ Paperboards business grew 8%/ 15%/ 15%/ 13% respectively in 1QFY20.
  • The total EBIT was reported at Rs 48,270 mn, YoY growth of 12%. The Cigarette business, which contributed 86% of the total EBIT of the company, reported EBIT margins at 70.8%, YoY growth of 140 bps. Hotels and Agri business margins were under pressure with a decline of 130 bps/ 60 bps at 2.6% and 5.6% respectively.
  • The net profit for the quarter was Rs 31,739 mn, YoY growth of 13% as compared to Rs 28,187 mn in 1QFY19. The calculated tax rate was at 34% for the quarter.

Key highlights from the press release:

  • Cigarettes: A punitive and discriminatory taxation and regulatory regime, together with a sharp increase in illegal trade in recent years, continues to pose significant operating challenges to the legal cigarette industry in the country. Performance during the quarter was also impacted by weakness in the overall demand environment. Excessive taxation has made legal, duty-paid cigarettes in India amongst the costliest in the world in terms of per capita affordability.
  • FMCG: Amidst the market slowdown across urban and rural markets, the FMCG business reported a YoY growth of 8% led by Atta, Potato Chips, Premium Cream Biscuits and Noodles in the Branded Packaged Foods Business, Liquids (Handwash & Bodywash) in the Personal Care Products Businesses and Notebooks in the Education & Stationery Products Business. The segment EBITDA reported YoY growth of 41% despite stepped-up investments in brand building, gestation and start-up costs of new categories.
  • Hotels: Revenues grew 15% on the back of new properties, amidst relatively soft demand conditions. In spite of reporting 18% YoY growth in EBITDA, the segmental EBIT declined 21% as the additional depreciation pertaining to new properties weighed on segment results. The Business made steady progress during the quarter in the construction of an ITC Hotel in Ahmedabad and WelcomHotels in Amritsar, Guntur & Bhubaneswar.
  • Agri Business: The company has recently forayed into Frozen snacks segment under ‘ITC Master Chef’ brand and it continues to be scaled up. However, lack of trading opportunities in Oilseeds and Pulses, subdued demand for leaf tobacco in international markets, relatively steeper depreciation in currencies of competing origins in recent years and adverse business mix weighed on Segment Results.
  • Paperboards business: The company strengthened the business on the back of strong volume growth in value-added paperboard segment and product mix enrichment. The growth in the Packaging & Printing Business was impacted due to sluggish demand conditions in the FMCG industry and exports. Capacity utilisation of the recently commissioned facilities, viz., Value Added Paperboard machine, Bleached Chemical Thermo Mechanical Pulp mill and Decor machine, was further ramped up during the quarter.

Consensus Estimate (Source: marketscreener website)

  • The closing price of ITC Ltd is Rs 260/- as on 6th August 2019. It traded at 23x / 21x the consensus EPS for FY 20E / FY 21E of Rs 11.2 / 12.5 respectively.
  • Consensus target price of Rs 332/- implies a PE of 27x on FY21E EPS of Rs 12.5/-.

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SBI 1QFY20 result update: Profitability sequentially better, pace of improvement disappoints.

Dated: 5th August 2019

  • Advances grew by 14% YoY to Rs 21,347 bn. Indian retail book growth was 17% while corporate book growth was 12%. Foreign advances book grew by 16%.
  • NII was Rs 229 bn, 5% higher YoY. Overall NIMs at the Bank level marginally improved to 2.81% from 2.78% in 4QFY19.
  • Total operating expense was 7% higher YoY. The increase was due to higher employee provisions on account of decline in bond yields.
  • Provisions were 52% lower YoY and 44% lower QoQ. The total provisions number was lower due to provision write backs of Rs 24 bn. NPA provisions were Rs 116 bn in 1QFY20 vs. Rs 130 bn in 1QFY19 and 173 bn in 4QFY19.
  • Reported PAT was at Rs 23 bn vs Rs 48 bn loss reported in 1QFY19 and Rs 8 bn profit in 4QFY19.
  • Asset Quality was stable on a sequential basis with GNPA and NNPA at 7.53% and 3.07% respectively.

Management commentary:

  • Slippages were high in 1QFY20 at Rs 162 bn compared to Rs 99 bn and Rs 75 bn in 1QFY19 and 4QFY19 respectively. Reasons for this jump include Rs 20 bn exceptional agri slippages in one state on account of farm loan waiver, higher SME slippages due to absence of RBI dispensation which was available in 1QFY19, Rs 20 bn due to some technical issues in an account that is being serviced regularly.
  • Out of Rs 116 bn NPA provisions made in 1QFY20, Rs 23 bn was provided against 2 accounts that are standard but need proactive provisions as per a recent RBI circular.
  • Management has guided to credit costs of 140 bps for FY20E. This includes any additional provisions that may be required for the 2 specific currently standard accounts (DHFL and one renewable energy account). This credit cost guidance is higher than the previous guidance of 100 bps.
  • Management is expecting loan growth of 12% and NIMs for the overall business of 3.15% in FY20E.
  • In the current scenario, management expects to achieve core RoA of 0.5-0.6% in FY20. Gains from recoveries or subsidiary stake sale will be over and above this return guidance. This is lower than previous comparable guidance of 0.70-0.75%

Consensus estimates (Source: Marketscreener website):

  • The stock price was Rs 300/- as of 5-Aug-19 and traded at 1.17x/ 1.04x the consensus Book Value for FY20E/21E BV of Rs 256/286 respectively.
  • Consensus target price is Rs 376/- implying P/B of 1.31x for FY21E BV of Rs 286

Axis Bank Ltd (AXS)- 1QFY20 Result update- Operating performance drives the earning momentum.

Dated: 31st July 2019

Key financial performance:
1) Loan book grew of 13% YoY in this quarter led by domestic loan book growth of 19% YoY. The international loan book declined 34% YoY. Retail loan book continued to be the key growth driver- growing at 22% YoY. 
2) Deposit grew 21% YoY in this quarter. The CASA ratio stood at 60%. The deposit growth was led by 37% YoY growth from the term deposits while CASA grew 3% YoY.
3) Net Interest Income (NII) grew 13% YoY at Rs 58,437 mn with Net Interest margin (NIM) of 3.5%. NII for 1QFY19, there was a one-time positive impact of Rs 2,490 mn due to the recovery of a large IBC case. Adjusting this one-off, NII has seen a growth of 19% YoY.
4) Non-interest income for 1QFY20 grew 32% YoY to Rs 38,690 mn driven by fee income that grew 26% YoY to Rs 26,630 mn. Trading profit stood at Rs 8,320 mn driven by G-Sec gains. Miscellaneous income for 1Q stood at Rs 3,730 mn, primarily dividend from subsidiaries and recovery in written-off accounts.
5) PPOP grew 35% YoY, with contribution from all revenue and cost line items. 
6) Provisions for the quarter stood at Rs 38,146 mn, a 14% increase from a year-ago period.
7) Net profit for the year grew 95% YoY at Rs 13,701 mn on the back of an improved performance at the operating level & efficient management of the costs.
8) NPA ratios for the Bank remained stable during the quarter. GNPA ratio stood at 5.25% and the NNPA ratio stood at 2.04% which was slightly lower than the previous quarter. (GNPA at 5.26%, NNPA at 2.06% in 4QFY19)
Management Commentary:
1) Loan Book:
a) The Bank’s strategy on retail assets continues to be centred around existing customers of the Bank. 83% of retail assets originations in 1Q was from existing customers. 98% of the Bank’s credit card and 93% of personal loan originations in the quarter were from existing customers of the bank.
b) The Bank’s Auto Loans business: Auto loans portfolio has grown by 36% YoY. The growth is evenly spread across the country. Auto loan disbursements have grown by 19% YOY in 1QFY20. 
c) SME lending growth was tepid at 8% YoY. Term loans and working capital loans grew by 3% and 9% YoY, respectively.
d) In the Corporate Bank, domestic loan growth stood at 16%, and the international book de-grew 39% YoY.
2) The management expects the domestic loan book of the Bank to grow 5-7% faster than industry.
3) For FY20, AXS expects NIM to remain broadly flat YoY, with an upward bias. They expect NIMs to settle in the range of 3.5-3.8% over the medium term.
4) Cost to the asset to stabilise at the current level of 2.08% in the near term before trending down to 2% level in the medium term.
5) AXS increased provisioning on certain non-banking assets held on their books. This was an additional provision of Rs 5,350 mn during this quarter. This quarter, they made specific provisions for all Non-Fund Based exposures that they have to borrowers that are either already NPA or are in the BB & Below pool. As they transitioned to this new regime, the bank made an additional provision of Rs 4,590 mn during the quarter.
6) The Bank’s Provision Coverage on Non-Performing Assets stands at 78%, compared to 69% in 1QFY19 and 77% in 4QFY19.
Consensus Estimate (Source: market screener website)
• The stock price was Rs 669/- on 31st July 2019 and traded at 2.2x/1.9x/1.6x consensus Book value of Rs 306/346/ 415 for FY20E/21E/22E respectively. 
• Consensus target price is Rs 847.5/- implying PB of 2.4x for FY21E BVPS of Rs 415/-

Note:
NII- Net interest income
NIM- Net interest margins
PPOP- pre-provision profits
NPA- Non-performing assets