Stock Recommendations

Avanti Feeds Ltd (AFL), is a leading manufacturer of Shrimp Feeds with a capacity of 6,00,000 MT, and Shrimp Processor & Exporter with a capacity of 22,000 MT. AFL has a tie-up with Thai Union Group, Thailand (~25% stake).

AFL is the leader in shrimp feed industry with market share of ~43% in FY18 (FY17-39%) followed by CP Aqua (38%). Full utilization of capacities and major expansions are showing its ability to gain market share. AFL is now exploring more diversification in fish & other feeds and to explore in other countries also. AFL expects share of 46%-47% in FY19 and it has reached 46% in Q1FY19.

AFL has recently completed its capacity expansions in both feed manufacturing (1,75,000MT in Q4FY18) and shrimp processing (15,000MT in Q3FY18). Currently AFL enjoys dominant position in feed segment and is now targeting to become one among the top players in processing segment as well post recent capacity addition. The existing feed capacity was running at full utilisation when commissioning the new capacity in Q4FY18. The revenue contribution from processing segment will accelerate from FY19.

AFL entered into a tie-up with Thai Union Group (world’s largest seafood manufacturers & processors) in 2002. Currently Thai Union has ~25% equity participation in AFL and is also holding 40% equity in AFL’s processing & exporting subsidiary. Collaboration with Thai Union is contributing significantly to both business segments in terms of technical expertise & marketing tie-up.

AFL’s revenue has grown at 33% CAGR during FY14-18 supported by robust capacity additions at a time when multiple tail winds were supporting industry. AFL’s feed volume grew at 33% CAGR in the last 5Yrs while processing volume grew at 25% CAGR. Higher international shrimp prices and stable level of feed prices supported strong growth. However, recently, industry is witnessing a correction in shrimp prices due to slowdown in global shrimp demand on account of extended winter in the US. Shrimp prices has come down by ~15%YoY in Q1FY19. Factoring in recent developments in the industry, we estimate revenue to grow at 10% CAGR over FY18E-20E Vs ~30% growth in FY18.

We expect margins to normalize from high levels of FY18 and PAT to see de-growth in FY19. We expect demand growth to resume as the farm gate prices has recovered which will support farmers. If we exclude the high growth FY18, we expect earnings CAGR of 22% in next 2Yrs. We value AFL on 15x (2Yr Avg-22x, PEG=0.7) on FY20E earnings and arrive at a target price of Rs427 with a BUY rating.

Analyst: Vincent K Andrews

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: Avanti Feeds Ltd: https://goo.gl/BynXoM

Aarti Industries is a leading manufacturer of Specialty Chemicals and Pharmaceuticals with a global footprint. Chemicals manufactured by Aarti are used in the downstream manufacture of pharmaceuticals, agrochemicals, polymers, additives, surfactants, pigments, dyes, etc. The company has 16 manufacturing facilities, mostly located in close proximity to the large ports of western India. 

Q3FY19 revenue grew by 28% YoY, led by broad based growth across segments. Revenue from Specialty chemical business grew by robust 50% YoY, regardless of lower than expected volume growth of 4% YoY, driven by pass through of higher RM cost, and improvement in product mix towards value added products. Gross margin declined by 60bps YoY to 41.1% while EBITDA margin improved by 150bps YoY to 19.5%, on account of lower cost. PAT grew by 47% YoY to Rs133cr. We maintain our EBITDA margin estimates at 18.7% and 19.5% for FY19E & FY20E.

The management is planning to increase NCB capacity from 75000 to 108000 MTPA with an investment of Rs150cr. The expanded capacity will cater to increasing domestic demand and for downstream captive consumption. The Pharma segment grew by 23% YoY, continued to witness strong growth momentum led by volume growth and scale benefits. While Home & personal care business grew by 8% YoY. With backward integration, expansion of product portfolio and shift in volume due to Chinese shut down will continue to benefit ARTO in the medium term. We expect strong off-take from Specialty chemicals and Pharma segment to continue. We marginally increase our revenue estimates by 1.7% & 4.0% and we expect revenue to grow 17% CAGR over FY19E- FY21E. We expect PAT to grow by healthy 25% CAGR over FY19E-21E

We remain optimistic on ARTO’s long term growth story given capacity additions, launch of new products, and robust off-take from Specialty and Pharma segment. The earnings outlook continues to be robust at 25% CAGR over FY19E-21E. We roll forward to FY21E and value ARTO at 21x. However, given sharp run-up in stock prices we downgrade to Hold from Accumulate with target price of Rs1,787.

Analyst: Anil R

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: Aarti Industries Ltd: https://goo.gl/8fqtgs

Federal Bank Limited is a major Indian commercial bank in the private sector headquartered in Kerala having 1251 branches and 1669 ATMs spread across different States in India with a loan book size of ~ Rs107,000 cr and a deposit base of ~ Rs123,500 cr.

In Q3FY19, total interest income witnessed 18% YoY growth and contributed towards a 13% YoY increase in Net Interest Income (NII), which stands at Rs1077 cr. PAT increased by 28% YoY to reach Rs334 cr, mainly on account of significant improvement in other income supported by 89% YoY growth in profit from sale of securities and 91% YoY increase in profit from forex transactions. The operating profit grew by 26% YoY supported by healthy growth in advances at 25% YoY. Net Interest Margins (NIM) remained almost stable with only a marginal increase of 2 bps from the last quarter and stands at 3.17%. We factor 16% CAGR growth in NII over FY18-21E supported by strong growth in loans and advances.

The Bank witnessed strong 25% YoY growth in loan book in Q3FY19, supported by robust growth across segments. Both corporate and core retail segments grew by 31% YoY. Federal Bank has improved its YoY market share in advances by 11 bps to 1.12% and deposits by 12 bps to 1.03% with the help of aggressive marketing strongly supported by digital and retail banking. Total deposits grew by 24% YoY in which low-cost CASA grew by 23% and the CASA ratio increased by 22 bps YoY to 33.35%. Corporate and Retail loans will continue to see strong traction and we factor 21% CAGR growth in loan book over FY18-21E.

Compared to the last quarter, GNPA ratio marginally slipped by 3 bps to 3.14% and NNPA ratio has improved by 6 bps to 1.72%. The fresh slippage has reduced by Rs56 cr from Rs477 cr in the last quarter to Rs426 cr in this quarter, whereas the recoveries have improved to Rs240 Cr in Q3FY19 compared to Rs155 cr in Q2FY19, which helped the GNPA to remain at this level. Slippage from SME segment is at Rs192 cr against Rs.169 cr in Q2FY19. Also, the exposure to IL&FS is only Rs245 cr, which is of completed projects and is serviced through an escrow account.

On account of the reduction in slippages and stability in asset quality, we value the bank at 1.4x Adj. BV of FY21E with a target price of Rs99.

Analyst: Abijith T Cherian

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: Federal Bank Ltd: https://goo.gl/nqKCJU

Suven Life Sciences is a pharmaceutical research expert that is in the business of Contract Research and Manufacturing Services (CRAMS) and uses it’s innovation capability to undertake New Chemical Entity (NCE) based CRAMS projects. Suven is headquartered in Hyderabad, Telangana with its R&D facilities in Hyderabad and Medak and has 3 manufacturing locations at Medak, Nalgonda and Visakhapatnam. The company has a 950+ member team which includes 400 member strong R&D team comprising of 30+ PhDs.

Suven had invested US$ 5.35 million in 2017- 18 for developing its NCE pipeline in phase 2A and has achieved considerable progress in that direction. The company has so far undertaken more than 1247 product patents, 37 product inventions, 46 process patents and 11 process inventions. Of the 13 molecule pipeline, they have four molecules that are under various stages of clinical trials. If successful, these molecules can turn to be the main growth drivers of the company. They also have strong research facilities which drives their growth and are currently working on approximately 8-10 formulation products, the ANDAs of which will be filed in a phased manner from 2020 onwards. Expanding old age population and rising prevalence of lifestyle related nervous disorders are increasing global demand for CNS therapeutics while rising prevalence of mental illnesses and increasing awareness regarding psychiatric disorders are other factors driving the market growth.

Revenue witnessed a steady CAGR growth of 12% in FY16-18 owing to healthy order receipts. In FY16, they also saw a jump in revenue from technical services which rose by ~200%. We expect a moderate Q4FY19 and sales to see higher growth from FY20 onwards. We also forecast specialty segment to grow at 16% & 19% resp. for FY20 and FY21. Suven has been able to bring its EBITDA margins to ~32% levels in the last two years while net profit margin is also seen improving which is around ~22%.

We expect the revenue to grow at 13% CAGR over FY19-21E and PAT to grow at a CAGR of 17% during the same period while the EBITDA margin to stabilize around 33%. We anticipate the industry growth to be stable for the next couple of years even in the scenario of certain drugs becoming generic. Once the new molecules passes the clinical tests, it can turn-out to be a potential revenue source for the company. Suven is also moving ahead with the plan to demerger its CRAMS business to allow a focused strategy which will maximize their ability to mobilize funds. Hence we value Suven at 18x on FY21E EPS and arrive at a target price of Rs260 and recommend ‘Buy’ rating.

Analyst: Dilish K Daniel

Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: Suven Life Sciences Ltd: https://goo.gl/Eb1St7