Stock Recommendation- March 2020

Industry: Plastic Products

Supreme Industries Limited is an Indian plastics company. It handles volumes of over 450,000 tonnes of polymers annually. The Company manufacture Industrial and engineering moulded Furniture products, storage and material handling crates, Plastic Chairs, Dining Tables, multilayer sheets, multilayer films, packaging films, expanded polyethylene foam, PVC pipes and fittings, moulded furniture, sataranj mats, disposable EPS containers.

Supreme Industries Ltd reported its Q3FY20 revenue which de-grew by 3% YoY, led by de-growth in Industrial segment, which declined by 21% YoY and Consumer segment de-grew by 4% YoY. Revenue growth from Plastic & packaging segment was flat YoY. The overall volume growth was flat YoY. The overall revenue growth was impacted by lower realization on account of weak commodity prices and subdued performance from Industrial segment. Management has guided a volume growth 10%-12% for FY20E. Given lower than expected revenue growth, we lower our revenue estimates by 3.6% & 3.1% for FY20E & FY21E. We expect revenue to grow by 12.5% CAGR over FY20E-22E.

Supreme Industries Q3FY20 gross margins improved by 430bps YoY to 35.3% on account of softer raw material cost and improved product mix. The company has taken price hikes in CPVC segment to factor in increase in raw material prices. EBITDA grew by 26% YoY and EBITDA margins improved by 360bps YoY to 14.6%. Operating margins across segment witnessed expansion with Packaging segment by 360bps, Packaging 300bps, Industrial 90bps and consumer segment by 270bps YoY as increased sales from value added products. Improvement in Pipe margins was largely due to selling of more value-added items. Going ahead with stable raw materials prices, EBITDA margins is likely to improve. We upgrade our EBITDA margin estimates by 40bps & 30bps for FY20E & FY21E to factor in the likely improvement in margin going forward. We expect PAT to grow by 17.4% CAGR over FY20E-22E.

Supreme has plans to spend Rs500cr for expanding capacities of PVC Pipe plant and PEX Pipe plant and HDPE Fittings at Jadcherla, PVC Fitting plant at Kharagpur and to put up a Pipe complex at a new site in Orissa. Also, to enhance capacity in Protective Packaging Division and consumer segment respectively

Going ahead, we expect revenue growth to driven by revival in packaging & piping segment and operating margin to improve by better product mix. We upgrade to Hold from Reduce as we roll forward to FY22E and value the company at P/E of 28x with a target price of Rs.1,476

 Analyst: Anil R, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please click the link: Supreme Industries – http://bit.ly/2uXeJFu 

Industry: Capital Goods

KEC International Limited is engaged in the construction of utility projects. Its geographical segments include India and Outside India. Its Power Transmission and Distribution business includes providing end-to-end solutions in power transmission and distribution. Its Cables service offerings include extra-high voltage (EHV) cabling solutions provided through Cable Selection and Cabling System. It offers services in all the functional segments of railways infrastructure. Its water services include waste water treatment, including treatment of sewage and industrial effluent, and water resource management, including building of canals, construction of dams and water system, and civil works related to thermal power projects.

Q3FY20 revenue grew by 16.1% YoY to Rs3,073cr which is in-line with our estimates supported by healthy pick-up in international T&D. SAE revenue grew by 121% YoY to Rs432cr & Railway (9% YoY to Rs601cr). Execution of Brazil EPC orders supported SAE tower business to outperform. The company expects the momentum to continue for some more quarters. However, a de-growth was witnessed in civil division by 21% YoY, cable division by 20% YoY and Solar segment by 92% YoY. We expect railway & SAE business continue to outperform due to improved traction in order inflow and approvals for EPC projects. The company has guided a total revenue growth of 15% in FY20 due to a strong order book.

Q3FY20 order book grew by 7% YoY to an all-time high of Rs22,011cr (1.8x TTM revenue) due to 18.3% YoY rise in order inflow to Rs6,054cr. Civil order book scaled up significantly to Rs2,487cr (504% YoY) with the Delhi Metro and Kochi Metro orders. Execution of metro works has commenced and is progressing well. Significant revenue contribution from the metro project is expected from the Q1FY21. T&D tendering pipeline, especially power grid, continues to be under pressure. However, company witnessing a resurgence in the Middle East tendering activity. The order pipeline remains positive as KEC holds strong L1 orders of Rs2,500cr and put together total order book stands at Rs24,511cr.

EBITDA grew by 13.2% YoY to Rs318cr while EBITDA margin witnessed a marginal fall of 27bps YoY to 10.4%. While improvement in gross margin of 209bps to 30.3% was offset by higher employee cost (43% YoY) and other expenses (23% YoY). Net profit grew by 30.7% YoY to Rs145cr aided by lower interest costs and lower effective tax rate of 28.5%.

International T&D opportunity is picking up from SAARC, Middle East region which could mitigate the muted trend in domestic T&D orders. Additionally, continued traction in railway, solar, civil & cable business will drive the top line. We value KEC at a P/E of 13x on FY22E EPS and maintain our BUY rating.

Analyst: Antu Eapen Thomas, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please click the link: KEC International Ltd – http://bit.ly/3bPrlPD

Industry: NBFC

Can Fin Homes Ltd is the housing finance arm of Canara bank. The company has dominance in south India with focus on Tier 1 and Tier 2 cities. It provides housing loans, composite loans, non-housing loans, mortgage loans, site loans, loans for commercial properties, as well as fixed and cumulative deposits.

In Q3FY20, Loan Portfolio surpassed the Rs.20,000Cr mark with a stable growth in clientele base. Company’s loan portfolio registered a strong growth of 15% YoY in the current quarter with housing segment loans (including non-salaried class) driving the growth. 90% of Loan portfolio comprises of housing segment loans with the rest 10% having exposures to top up loans, site loans, LAP etc. Company maintains stable exposure of 71% to the salaried and professional segment which is expected to drive interest income going forward. In this quarter, Canfin has increased it’s borrowings from banks to 57% YoY from 48% which will aid in bringing down their borrowing costs going forward.

 For the current quarter, Net Interest Margin (NIM) stood at 3.42% registering a growth of 11 bps YoY from 3.31%. This was largely aided by growth in yield YoY to the tune of 14 bps and a slight decline in cost by 1 bps. Further, company’s Cost to Income (C/I) Ratio has slightly decreased from 15.58% to 15.55% QoQ due to the decline in cost. Pre-provision profit and Net income grew by 24.17% and 40.6% YoY respectively. Noticeable growth in PAT was driven by the increase in interest spread from 2.17% to 2.32% YoY.

 Gross NPA ratio has marginally increased from 0.79% to 0.8% and Net NPA ratio has increased from 0.58% to 0.59% QoQ, overall the asset quality remains relatively stable with slippages accounting for marginal amounts. Capital adequacy ratio at 22.07% remains well above the required regulatory levels indicating good financial health of the company. Asset quality being one of the top priorities, management has taken stringent measures to maintain disbursement growth at moderate levels and average ticket size of loans are maintained as earlier to avoid bad assets.  

 Company with its growing clientele base, increasing branches and stable asset quality has huge upside potential for growth in the tier 3 cities. Expansion to these areas and diversification of loan portfolio from the southern region is expected to reduce the concentration risk going forward. Also the impact of lower costs will be felt over the coming quarters which indicates strong earnings outlook. Hence we value the stock at 2.4x FY22E BVPS with a target price of Rs.557 and retain Accumulate rating on the stock.     

Analyst: Jose Francis, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please click the link: Can Fin Homes- http://bit.ly/2P8eXjX

Industry: Specialty Chemicals

Aarti Industries owns businesses across India engaged in large scale production of various chemicals like benzene intermediaries, pharmaceuticals, surfactants etc. Aarti is one of the leading suppliers to global manufacturers of Dyes, Pigments, Agrochemicals, Pharmaceuticals & rubber chemicals. Aarti is amongst the largest producers of Benzene-based basic and intermediate chemicals in India. It has corporate office in Mumbai along with representatives in the United States & Europe.

In Q3FY20 results company’s revenue declined by 4.5% YoY, as revenue from Specialty chemicals declined by 1% YoY. Pharma business grew by modest 3% YoY was lower than expected. The decline in specialty business revenues was largely on account of fall in raw material prices and non-availability of raw materials which impacted the volumes. In Pharma segment, certain high value products were impacted. The capacity augmentation is on track with an investment of Rs1,200cr, NCB capacity to increase from 75000 to 108000 MTPA. The expanded capacity will cater to increasing domestic demand and for downstream captive consumption. ARTO will continue to benefit from backward integration, expansion of product portfolio and shift in volume due to Chinese shut down in the medium term. The management expects the growth in the US agrochemical industry to pick up from FY21. However, given lower than expected realization, we lower our revenue estimates by 2% for FY21E. We factor revenue to grow by 16% CAGR over FY19- FY21E.

Gross margin improved by 340bps YoY to 45.4% led by lower cost and better product mix. Improvement in EBITDA margin was limited to 100bps YoY to 20.9%, on account of higher cost. Pharma segment margin continue to witness better traction largely on account of higher contribution from regulated markets and improvement in product mix with higher value addition. PAT grew by 5% YoY to Rs140cr. Considering lower than expected realisation in Q3, we lower our EPS estimates by 1.5% & 2.4% for FY20E & 21E. Despite this, PAT is expected to grow by 22% CAGR over FY20-22E.

In the near-term revenue growth is likely to be impacted by lower volume off-take and fall in realization on account of fall in raw material prices. However, we remain constructive on ARTO’s long term growth given strong capacity building focusing on global markets, backward integration and increase in downstream products. With start of execution of multiyear contracts, revival in volumes from Specialty chemicals & Pharma segments and improved outlook on account issues in China, will benefit the company in the long run. We value ARTO at 24x as we roll forward to FY22 and maintain “Accumulate” with target price of Rs1,133.

 Analyst: Anil R, Geojit Financial Services Ltd., INH200000345

General Disclosures and Disclaimers: Please click the link: Aarti Industries- http://bit.ly/2HDBdOE