Share Market Tips For July 2019

Mindtree Ltd (NSE: MINDTREE) (Share Price: Rs.696): Avoid

Valuation: Under-Valued stock with TTM P/E of 16x

Reasons to Avoid: MindTree Ltd reported a weak set of Q1 performance. The company reported 0.8% QoQ growth in dollar revenues to $264.2 million. Margins declined from 15.0% in Q4FY19 to 10.0% in Q1FY20 mainly due to one-time special compensation (impacting margins by 260 bps), wage hike (190 bps), visa cost (30 bps) and currency (40 bps) partly offset by 150 bps benefit arising from implementation of IndAS-116. The risk of attrition due to changes in leadership and management, subdued margins in FY20E, currency headwind and rising cost remain key near term concerns. Rising attrition of 90 bps QoQ to 15.1% is also a key concern in the near term for the company.

Financial: Company announced its Q1 result where, Net Revenue stood at Rs 1834 cr in Q1FY20 vs Rs 1639 cr in Q1FY19. Net profit down 41.5% to Rs 92.7 cr Vs Rs 158.2 cr YoY. EBITDA drops 20% at Rs 184 cr in Q1FY20 vs Rs 231 cr in Q1FY19.

SKF India Ltd(NSE: SKFINDIA) (Share Price: Rs.1850): Avoid

Valuation: Fairly-Valued stock with TTM P/E of 27x

Reasons to Avoid: SKF India (SKF) reported weak Q1FY20 results, amid a slowdown in automotive segment. Revenues grew 2.9% YoY at Rs 776.8 crore due to subdued performance from the auto segment. EBITDA margins came in at 15.4%, an 8 bps increase YoY. Auto contributed 47% to the topline (including exports contribution of 9%). The automotive slowdown is expected to impact overall revenue growth for FY20E. Weakness in auto sales is expected to act as a spoil-sport on the performance of bearing companies like SKF. Being the largest bearings supplier (28% market share) with significant auto exposure (45-50% of sales), auto demand remains a key overhang for the stock and near term outlook remains weak seeing the auto monthly sales number.

Financial: Company announced its Q1 result where, Net Revenue stood at Rs 776 cr in Q1FY20 vs Rs 755 cr in Q1FY19. Net profit down 3.7% to Rs 77.9 cr Vs Rs 81 cr YoY. EBITDA up 3% at Rs 120 cr in Q1FY20 vs Rs 116 cr in Q1FY19.

Avenue Supermarts Ltd(NSE: DMART) (Share Price: Rs.1450): Avoid

Valuation: Over-Valued stock with TTM P/E of 87x

Reasons to Avoid: Dmart has posted stellar performance overall in Q1 but management has guided that this could be one-off quarter for better show due to various reason and commentary was weak on EBITDA margin front due to intensifying price competition, higher capex toward new stores and upcoming lease cost expansion. While DMarts cost-led strong competitive position remains unassailable presently, the pricing pressure from peers is estimated to reset the PAT CAGR to 28% over FY19-21. Although its strong compare to its peers but this is much below the 55% seen in FY15- 18, driven by a healthy 210bp margin improvement. Moreover, as the pace of PAT growth slowed to 12% in FY19 on the back of price-led margin pressure, the stock has corrected by 16% over the past year. Despite this, it is still richly valued at EV/EBITDA and P/E of 31x and 56x on FY21E basis. Apart from that recent guidelines by govt in budget to increase minimum public shareholding from 25% to 35% and as per SEBI guidelines, promoter has to reduce holding below 75% by March 2020 which will again put presurre on the stock in mid-term.

Financial: Company announced its Q1 result where, Net sales stood at Rs 5780 cr in Q1FY20 vs Rs 4559 cr in Q1FY19. Net profit up 33.7% to Rs 335 cr Vs Rs 250 cr YoY. EBITDA up 39% at Rs 607 cr in Q1FY20 vs Rs 437 cr in Q1FY19.

Banco Products (NSE: BANCOINDIA) (Share Price: Rs.100): Avoid

Valuation: Under-Valued stock with TTM P/E of 10x

Reasons to Avoid: In Q4FY19 revenue grew by strong 27.6%, mainly due to higher contribution from the European subsidiary (Constitutes 60% of revenue) growing at 55% YoY respectively. However domestic CV demand for the quarter registered a volume de-growth of 1.2%YoY due to lower government spending in road infrastructure, implementation of overloading ban and liquidity crunch. BPIL 40% revenue comes from standalone business which has grown by 32%YoY for the quarter. PAT de-grew by 12.3%YoY, supported by lower tax. We expect the domestic demand scenario to remain subdued for trucks and cars in FY20. EBITDA margin for FY19 was at 11.2%. During the quarter BPIL consolidated margin witnessed significant decline by 740bps at 10.8%. This was largely do increase in operating cost. We expect EBITDA margin to remain under pressure owing to higher operating expenses and lower contribution from the gasket business.

Financial: Company announced its Q4 result where, Net sales stood at Rs 370 cr in Q4FY19 vs Rs 305 cr in Q4FY18. Net profit down 82% to Rs 4.8 cr Vs Rs 26.9 cr YoY. EBITDA down 27.5% at Rs 42.9 cr in Q4FY19 vs Rs 58 cr in Q4FY18.

GNA Axles Ltd (NSE: GNA) (Share Price: Rs.260): Potential Buy

Valuation: Under-Valued stock with TTM PE of 8x.

Reasons to consider: Company has posted stellar Q1 performance despite the slowdown in auto sector which is driven by growth from export markets. Since the auto sector is facing slowdown in india due to this management has given its business outlook weak for short term, but subsiquently told it will be positive for long term. They are exploring new avenues for growth and diversification across geographies in future to mitigate the slowdown from one region. It has shown a very strong growth in revenues and healthy operating profit margin which is led by cost control measures taken by management and a fall in raw material prices.

Drivers: GNAs strategy to expand its footprint by targeting other geographies such as Australia and South America is expected to help de-risk the business from significant dependence on North America and Europe. In near term the new emission norms are expected to lead to pre-buying as BS VI compliant vehicles would be more expensive than the current vehicles which will be seen as positive in auto to push the growth and increase in sales of vehicle. To further fuel growth and diversify from CV and off-highway segments, GNA has started entering SUV and LCV axle shaft segments. The company has chalked out plans to set up a manufacturing facility with initial capacity of 600,000 units. It's focusing on acquiring customers from North America, Europe and India in that order. The commercial production of this facility is already commenced from March 2019.

Financial: In Q1FY20 Net Sales was Rs 258 crore Vs Rs. 213 crore in Q1FY19 up 21%. Net Profit at Rs. 18 crore in Q1FY20 up 30% from Rs. 14 crore in Q1FY19,whereas EBITDA stands at Rs. 41 crore in Q1FY20 vs Rs. 32 crore in Q1FY19 up 31%.

Yes Bank Ltd (NSE: YESBANK) (Share Price: Rs.86): Avoid

Valuation: Under-Valued stock with TTM P/BV of 0.77x

Reasons to Avoid: Yes Bank recognized Rs 6,230 cr of slippages with large part coming from the watchlist and partly from BB & below book (non watchlist) impacting overall asset quality sharply. The bank also saw its BB & below book loans assets increase on net basis to 9.4% from 8.3% in Q4FY19 which puts asset quality under high risk as these are extremely lumpy exposures along with that NII growth was weak at 2.8% on back of slower loan growth of 10% and interest reversals of Rs 223 cr. Weakness in NII led to NIMs dropping by 30bps QoQ to 2.8%. Bank slowed down its loan growth to 10% YoY and deposits growth to 6% YoY. Liabilities especially saw higher de-growth as CA franchise slowed on consolidation in corporate business, while SA balances saw shift towards TDs, bringing down CASA ratio to 30% from 33.1% in Q4FY20. On a lower growth momentum and a weaker RoA we remain sceptical on the stock.

Financial: Its annouces Q1 result where, Net interest income stood at Rs 2,278 cr in Q1FY20 vs Rs 2219 cr in Q1FY19. Net advances grew by 10% YoY to Rs 2,36,300 cr. Net profit down 92.5% to Rs 95.5 cr Vs Rs 1265.7 cr YoY. NIM drops 50 bps at 2.8% YoY.

KEI Industries Ltd(NSE: KEI) (Share Price: Rs.465): Potential Buy

Valuation: Fairly-Valued stock with TTM PE of 20x.

Reasons to consider: The KEI Industries (KEI) results were more than analyst estimates, driven by strong sales in the retail segment and growth in EPC and institutional orders. KEI is focusing on expanding its dealer network, as this sales channel offers higher brand stickiness as well as better margins and lower working capital requirement. The institutional sale growth was a positive and management expect this division to grow in double digits. The EHV (Extra High Voltage) sales was another growth engine and is expected to rise further, considering the government push for underground electrification and metro transport. KEIs domestic institutional division reported a revenue growth of 14% to Rs 6,250 mn in Q4FY18. The EHV sales were up by more than 81% and EPC up by more than 32%. Exports grew 36%. The institutional segment rose 18%. Retail sales were Rs 4,060 mn, a growth of 29%. We believe this occurred due to expansion of dealer network and brand perception. Pending order as on date is Rs 47,070 Mn plus L1 is Rs 1,130 Mn for EHV.

Drivers:KEI has completed the 2nd phase of the HT power cable expansion at Pathredi. Debottlenecking of Pathredi plant will also take place, which will increase production capacity in next 3-4 years. In Silvassa, KEI plans to expand capacity of house wires in two phases, with a capex of Rs 900-1,000mn. This expansion is expected to be completed by the end of FY20. KEI is reaping the fruits of its thrust on the retail segment, with a strong growth and higher margin profile. KEI currently has more than 1,450 dealers and is expected to grow this by at least 10% every year. The sales from this segment is expected to grow by about 25%. Given more than 50% of the sales through channel financing, KEIs working capital remains in control. The channel financing is expected to grow to 70-80% in the next 2- 3 years. The electrician meets are being continued at a fast pace, as they are a key influencer in the buying decision of consumers. As mangement expected to grow in FY20 by 17-18 % as a whole. EPC will grow at 10%,EHV Cable has capacity to go upto 3,500-4,000 mn in FY20. Demand drivers will be government initiatives for O&G sector, metro projects, and power sector.

Financial: Total revenue Rs 1258 cr in Q4FY19 vs Rs 1030 cr in Q4FY18 up 22%. Net Profit at Rs. 60 cr in Q4FY19 vs Rs 49.5 cr in Q4FY18 up 21%. Ebitda remain stands at Rs 141 cr in Q4FY19 vs Rs 100.5 cr in Q4FY18 up 40.6%.

Sterlite Technologies Ltd(NSE: STRTECH) (Share Price: Rs.165 ): Potential Buy

Valuation: Under-Valued stock with TTM PE of 12x.

Reasons to consider:Sterlite Tech reported good set of numbers in Q4 FY19 driven by increase in revenue contribution from service and solutions business. Revenue recorded remarkable growth of 111% YoY to Rs 1791 cr driven by early execution of the navy order. EBITDA stood at Rs 326 cr, an increase of 40% YoY while margin reported at 18% which is down 800bps YoY. Decrease in margin was primarily driven by the increase in execution of service orders and softening of fibre prices. Order book remains robust at Rs 10,516 cr and gives us a good revenue visibility. Net Profit came at Rs 165 cr up 49% YoY. In Geographical mix, Europe become extremely strong market for the company and contributed 24% in FY19 to the topline.

Drivers: Company has strengthened its position in Europe through acquisition of Metallurgica Bresciana in Italy, which has added new products and customer portfolio. The management has guided that the companys planned expansion with new industry 4.0 plant at Aurangabad is expected to be ready with (50 million fkm) fibre capacity by June 2019. Second planned capex is on track to double its fibre cable capacity of 33 million fkm by June 2020. On Service business demand was driven by national broadband initiatives of "Bharat -Net" along with the State initiatives of "Smart Cities and also spending on network modernization by defence and power & utilities. Customer mix has also evolved (with strengthening of new customer segment like Enterprise and citizen network which roughly contributes 37% in FY19 topline). The management expects service business contribution to increase to 50% in next 2-3 years. It has also guided EBITDA margin of 25-26% in the product business and 11-12% in the network solution business. Company to tap USD75bn data solution opportunity by 2023 with its 4 pronged Strategy which is 1) Innovate (new value added product and offering), 2) Scale (new customer and geographies), 3) Expand into new portfolio and application and 4) Integrated (moving towards integrated solutions based offering). We believe company is on a right trajectory to deliver subsequent growth amidst increase in fibre capacity and increasing execution of service orders, growing international presence and winning large number of deals. Going ahead, we believe the company is well positioned to address network creation opportunity, as telcos, cloud companies and new digital infrastructure players create hyper-scale networks, and data network solutions for Mobility, Last-mile access, Long-haul connectivity, Network modernization and Data centers, across large customer segments globally. We also expect that once roll out of 5G on a commercial basis is commenced, it would further spur the volume of optic fibre and fibre cable thereon, which requires strong network connectivity to carry the backhaul.

Financial: Total revenue Rs 1791 cr in Q4FY19 vs Rs 847 cr in Q4FY18 up 111%. Net Profit at Rs. 165 cr in Q4FY19 vs Rs 112 cr in Q4FY18 up 49%. Ebitda remain stands at Rs 326 cr in Q4FY19 vs Rs 232 cr in Q4FY18 up 40%.

State Bank of India (NSE: SBIN) (Share Price: Rs.368): Potential Buy

Valuation:Under-Valued stock with TTM P/BV of 1.55x.

Reasons to consider: SBIN is India's largest public sector bank. In its recent quarterly result bank has reported 13% growth in advances YoY and deposit growth was seen slightly suggish at around 7.6% YoY, while CASA was improved 6 bps YoY. NII was up 15% Rs 22,954 cr YoY and NIM was stood at 2.78% expanding to 28 bps YoY. On asset quality side bank has performed well its GNPA at 7.53% improving by 338 bps YoY while NNPA was at 3.01% improving by 94 bps YoY. PAT at Rs 838 Cr is down 78% QoQ, translating into ROA of 0.09% on account of high provisions the bank had to make in order to finish the year with cleaner books. We expect the ROA to rise in coming years to 0.55% and 0.75% by FY20/21 on the back of several recoveries in line from three major accounts: Essar Steel, Bhushan Steel and Alok Industries amounting around Rs 16,000 Cr along with a recoveries of around Rs 17,000 Cr (after 50% write-off of corporate NNPA of INR 34,000 Cr) from other NPA accounts.

Drivers: SBIN Chairman in the concall addressed with the clear guidance of the Management towards improving the asset quality of the bank. It said corporate NNPA stood at Rs 34,000 Cr at the end of March 2019,of which the banks confidently declared of recovering +50% in FY20. The management acknowledged 3 major accounts alone of Essar Steel, Bhushan Steel and Alok Industries, from where the bank expects to recover almost Rs 16,000 Cr alone during FY20 (after taking hair-cuts of around 50%). Regarding the other major accounts, the management said: IL&FS have been provisioned 900 Cr during Q3 FY19, Jet Airways provisioned fully during March 2019 while DHFL still is a standard asset but kept under watch list. On the recovery front, the Bank acknowledged the recovery of Rs 37,000 Cr during FY19 and Rs 11,000 Cr in Q4FY19, and expects similar if not more recovery during FY20 as well. Going forward, the Management also provided a FY20 PPOP (Pre-Provision operating profit) guidance of Rs 70,000 Cr from core business, 15,000 Cr of recoveries and Rs 5,000 Cr of stake sale in subsidiaries (85,0000-90,000) Cr. SBIN is currently trading at a P/Adj.BV multiple of 1.1x/1.05x on FY20E/FY21E book value and we expect the valuation of the bank to improve on back of its improving ROE outlook and asset quality metrics.

Financial: Its annouces Q4 result where, Net interest income stood at Rs 22,954 Cr in Q4FY19. Net advances grew by 13% YoY to Rs 22,935(bn). CASA grown by 6bps to 45.7% YoY. Net profit at Rs 838 cr YoY. NIM remain at 2.78% YoY.

RITES Ltd (NSE: RITES) (Share Price: Rs.306): Potential Buy

Valuation: Fairly-Valued stock with TTM PE of 14x.

Reasons to consider: RITES Limited is a wholly owned Government Company, a Miniratna enterprise. It is a leading player in the transport consultancy and engineering sector in India with diversified services and geographical reach. In Q4 company has posted robust number PAT rises 70% to Rs 132 cr YoY and revenue rises 30% to Rs 714 cr YoY. It also has good dividend yield. It provides services to traditional railways, rail projects of power companies, metro rail projects, ports, and highways. Rites is also involved in leasing railway locomotives to domestic nonrailway customers and exports locos. In the past three years Rites has also been nominated by the Indian Railways to undertake turnkey execution of railway projects in new line laying, doubling and gauge conversion.

Drivers: Rites has developed specialized expertise over the years in providing consultancy services across major market segments in the transport infrastructure sector including railways, urban transport, roads and highways, ports, inland waterways, airports and ropeways. Rites has maintained a strong balance sheet over the years with virtually no debt as on March 2018. The company has also enjoyed healthy operating cashflows. Operating cashflows between FY15- FY18 has grown at a CAGR of 15% where Rites continues to be a debt free and asset light company and where its growth in revenue and profitability has been consistent over the last few years. Rites has also reported average RoE of 17-18% during the past 3 years, thus showing strong commitment on delivering shareholders return. Hence going ahead we expect that Rites has the capability to sustain the robust financials performance given its strong order book and asset light model. The management has also clearly stated that consultancy business will continue to grow and will help it sustain EBIDTA margins of 37-38% going ahead also, RITES should benefit from growing railways capex, new metro projects, development of airports in tier 2 and 3 cities, and infrastructure investments in countries where Indias EXIM Bank has provided funding. we believe that Rites is supported by a competent management team and promoters, and is well positioned to ride the next wave in the Infrastructure sector and believe that Rites is well positioned for long term sustainable growth.

Financial: Total revenue Rs 714 cr in Q4FY19 vs Rs 549 cr in Q4FY18 up 30%. PAT at Rs. 132 cr in Q4FY19 vs Rs 83 cr in Q4FY18 up 59%. Ebitda stands at Rs 215 cr in Q4FY19 up 56.5% vs Rs. 137 cr in Q4FY18.

Welspun Corp Ltd (NSE: WELCORP) (Share Price: Rs.145 ): Potential Buy

Valuation: Fairly-Valued stock with negative earnings .

Reasons to consider: Welspun Corp (WCL) is a leading global manufacturer of large diameter pipes with an installed capacity of 2.4 Mn tonnes. With the execution and addition of the latest order of 180KT, the company order book at the start of FY20 now stands at 1.66 MT (in terms of revenue Rs141 bn), to be executed over next 15-18 months. WCL has entered into an agreement to sell PCMD division and 43MW power plant, at a consideration of Rs9.4 bn, this will make balance sheet further cleaner, post the completion of the transaction which will complete by the end of Dec19. With the cleaner balance sheet and completion of capex cycle, Free Cash Flow is expected to improve backed by strong operational performance. The only key risk to the company is steel price volatility which can impact performance and Low crude price which can defer investments in oil and gas industry.

Drivers: Given its strong manufacturing and execution capabilities, strong order backlog coupled with robust bids in the pipeline (2.3 MT), we believe, WCL is better placed compared to its peers, to take advantage of renewed pipe demand globally and in the domestic market. Going ahead, since a large part of revenues is expected to come from the US which should support margins. Backed by improvement in operating performance and decline in interest outgo (focus is on reducing debt). Management indicated that huge business potential exists in Saudi region, as most of the desalination plants are far from demand area. Management sees strong demand in both, Oil & Gas and Water sectors, driven by Saudi Aramco and SWCC respectively. The current order book in Saudi currently stands at 800KT, which is the 3x installed capacity, which provides huge revenue visibility. Management also indicated that local players will get 10% price preference in addition to the protection.

Financial: Total revenue Rs 2,756 cr in Q4FY19 vs Rs 1,658 cr in Q4FY18 up 66%. Net loss at Rs. 148 cr in Q4FY19 vs Rs 7.6 cr in Q4FY18. Ebitda stands at Rs 41 cr in Q4FY19 down 73.5% vs Rs. 158 cr in Q4FY18.