05 Aug

Eicher Motors (EICHERMOT IN): 1QFY20 Volume decline increases the margin pressure

Dated: 1st August 2019

1QFY20 Results
• Eicher Motors (EICHER) reported a ~7% YoY decline in revenues in 1QFY20 at Rs 23,819 mn (v/s Rs 25,478 mn in 1QFY19). The volumes declined by 18% YoY to 1,83,589 units. The effective realisation increased by 14% YoY from Rs 1,12,455 per unit in 1QFY19 to Rs 1,28,616 per unit.
• EBITDA declined by 24% YoY to Rs 6,145 mn and EBITDA margin declined by ~600 bps YoY to 25.8%. The margins were impacted by the increase in costs related to the ABS (Anti-Lock Braking System) conversion. 
• The effective tax rate was lower by ~290 bps YoY to 33% for 1QFY20. The consolidated PAT stood at Rs 4,518 mn, lower by 22% YoY. 
• The Volvo Eicher JV performance: The volumes in 1QFY20 were lower by ~18% YoY. The revenues reported a lower decline of 14% YoY to Rs 22,550 mn due to the realisation growth by ~5% YoY. The EBITDA margins declined by ~360 bps YoY to 5.6%. The JV reported lower profits of Rs 383 mn in 1QFY20 v/s Rs 1,182 mn in 1QFY19. EICHER’s share in JV profits stood at Rs 209 mn, a decline by ~68% YoY.

Management Commentary

• EICHER increased the dealer network by 13 dealers to 928 from 915 in 4QFY19. EICHER management is keen on focussing on increasing reach in rural areas by adding more touchpoints. Eicher also intends to expand its international presence by increasing the exclusive international store count from 48 now to 80 over the next 18 – 24 months.
• Management maintained the CAPEX plans of ~Rs 7,000 mn for FY20 for Phase-2 of Vallam Vadagal plant, construction of the Technology Centre, development of new products and to expand RE’s portfolio for global markets. The production will start in 1-1.5 months.
• Management maintained the production guidance for FY20E is 9,50,000 units. EICHER mentioned that the festive season sales will be key monitorable and the industry may also benefit from the pre-buying before the BS-VI implementation in April 2020.

Consensus Estimate (Source: market screener website)

• The closing price of Eicher was Rs 16,570/- as of 01-Aug-2019. It traded at 19x / 18x / 17x the consensus EPS for 20E /21E /22E EPS of Rs 852/ 943 / 991 respectively. 
• Consensus target price of Rs 19,441/- implies a PE of 20x on FY22E EPS of Rs 991/-

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05 Aug

Varun Beverages Ltd. 2QCY19 – Hot summer boosts beverage sales

Dated: 2nd August 2019

Varun Beverages Ltd. (VBL) reported consolidated revenue growth of 36.5% YoY to Rs 28,105 mn in 2QCY19.
• Consolidation of South and West regions from 1St May 2019, extended summers, penetration into existing geographies and good growth from international geographies led to volume growth of 44% YoY. Out of total volume sales of 192 mn cases, 172 mn were sold in India and 24 mn cases in international markets (Sri Lanka, Morocco and Zimbabwe).
• Organic volume growth in India was 18.5% whereas it was 34.2% in international geographies. 
• Realisation per case declined by ~5% due to change in product mix in India post-acquisition of South and West sub-territories, the introduction of packages water in Morocco and lower sales realisation in Zimbabwe to avoid forex fluctuations. 
• Gross Margins declined by 70 bps as sugar prices increased by ~3%. Management expects raw material prices to be stable for CY19.
• Net debt stood at Rs. 37,295 mn as on June 30, 2019, as against Rs. 26,715 mn as on 31st December 2018. Debt: Equity ratio stood at 1.49x as on 30th June 2019 and Debt: EBITDA ratio stood at 2.95x for the trailing twelve months EBITDA. 
Management Commentary
• Company will start selling beverages in Zimbabwe in local currency now instead of USD. Hence, revenues may move up in the coming quarters, but there is a possibility of providing for higher currency depreciation. 
• Production of Tropicana Juices at its Pathankot plant has commenced from 1st Jul’19.
• The company plans to enter the dairy products market under its own brands in the coming quarters. It will be required to pay 1% royalty to Pepsi for selling these dairy brands.
• Capex for CY19 and CY20 is expected to remain less than depreciation cost.
• Company is running at ~60% capacity utilisation levels after the newly acquired regions.
• EBITDAM are expected to be in the range of 21-22% for consolidated business.
• Management expects ROCE levels to improve by 200-250 bps every year.

Consensus Estimate (Source: market screener website)
The closing price of VBL was Rs 623/- as of 02-August-19. It traded at 43x/ 34x the consensus EPS for CY 20E / CY 21E EPS of Rs 14.6/18.6 respectively· Consensus target price of Rs 713/- implies a PE of 38x on CY21E EPS of Rs 18.6

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05 Aug

Granules 1QFY20 results: Finished dosage sales to drive margins higher

Dated: 2nd August 2019

1QFY20 result update:

  • Consolidated revenue grew 31% YoY (-3% QoQ) to Rs 5,953 mn. API, PFI and FD segments contributed to 36%,16% and 48% of revenues respectively.
  • EBITDA grew 63% YoY (+22% QoQ) to Rs 1,186 mn. Reported EBITDA margins expanded by 390 bps YoY to 19.9% from 16.0% in 1QFY19.
  • Net Profit without JV grew 55% to Rs 578 mn and net profit with the share of JV grew 61% YoY to Rs 832 mn.

Management Commentary:

  • Management has reiterated 20% CAGR growth in revenues and 25% CAGR growth in profits for the next 3 years.
  • Management has said that raw material costs risks have been mitigated so going forward raw material costs will be stable.
  • Good growth in FD sales and increased utilization of few idle capacities has led to an improvement in gross margins
  • Management has guided for ~19% EBITDA margins for FY20E.
  • Granules have guided for 8-12 filings and 3-5 approvals in FY20E.
  • Capex guidance for FY20E remains constant Rs 1500 mn.
  • Management has mentioned that they will be reducing promoter pledging which is 43% as of now to 33% in a few days and will be fully removed by FY21E.

Consensus Estimate (Source: market screener website)

  • The closing price of Granules is Rs 92/- as on 2nd August 2019. It traded at 8x / 7x the consensus EPS for FY 20E / FY 21E of Rs 11.6 / 13.6 respectively.
  • Consensus target price of Rs 142/- implies a PE of 10x on FY21E EPS of Rs 13.8.
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05 Aug

The Value of Cash

With indices touching new highs every day, many investors start thinking that they should be 100% invested in equity markets. No one wants to hold cash as there is high opportunity cost. Instead of holding cash in the portfolio, investors want to own a stock, any stock. This is perhaps the best time to remind ourselves of the value of cash. Let us remind ourselves of how successful investors look at it.

“I think it’s [cash] actually an aggressive strategic asset because it’s one of the few things that rises in value as the market plunges. Its value is inversely proportional to how challenging the environment is” Ken Shubin Stein

“Holding cash is uncomfortable, but not as uncomfortable as doing something stupid” Warren Buffett

“I have found it wise, in fact, to periodically turn into cash most of my holdings and virtually retire from the market. No general keeps his troops fighting all the time, nor does he go into battle without some of his forces held back in reserve” Bernard Baruch

“Naysayers argue that holding a large amount of cas

stimate (Source: marketscreener website)

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05 Aug

Kotak Mahindra Bank (KMB standalone) 1QFY20

Kotak Mahindra Bank (KMB standalone) 1QFY20: Moderation in Advances growth, stable asset quality

  • KMB reported advances at Rs 2,080 bn, 18% higher YoY.
  • NII at Rs 31,730 mn was 23% higher YoY.
  • NIM for 1QFY20 was 4.49% compared to 4.28% in 1QFY19.
  • Provisions were Rs 3,168 mn, 33% lower YoY.
  • PAT at Rs 13,602 mn was 33% higher YoY
  • GNPA and NNPA were relatively flat at 2.19% and 0.73% respectively for 1QFY20 compared to 2.14% and 0.75% respectively in 4QFY19.

Management commentary:

  • Advances growth in corporate and business banking segments has been low. Consumer and commercial advances have reported strong growth of 20%+ in FY20.
  • Management expects to continue around 20% growth in advances.
  • NIM expansion is likely due to pricing power and lower cost of funds.
  • Interest rate on Savings accounts below Rs 1 lac is reduced to 4% from 5% earlier. Benefit of the rate reduction will reflect in 2QFY20.
  • Provision for retirement benefit has been significantly higher YoY due to lower interest rates.

Consensus Estimate (Source: marketscreener website)
• The stock price was Rs 1,494/- on 23rd July 2019 and traded at 5.8x/3.7x  the consensus Book value for FY20E/21E of Rs 258/404  respectively. 
• Consensus target price is Rs 1,499/- implying PB of 3.7x for FY21E BVPS of Rs. 404/-

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