Stock Recommendations – September 2020

SBI Life Insurance Company Limited, is a joint venture between SBI and BNP Paribas formed in 2001, which offers individual and group insurance plans, including traditional and unit linked plans. Its products cover life, health, annuity, pension and variable insurance. The Company had an AUM of 1,753.5 billion as of June 30, 2020.

In Q1FY20, GWP (Gross Written Premium) rose 14.2% YoY to Rs. 7,643cr supported by rapid growth in Renewal Premium (+29.5% YoY) partially offset by New Business Premium (-2.9% YoY) impacted by the lockdown. However, company reported much better NBP collection compared to its peers. As a result, the company was quick to gain market share in Total NBP by 100bps YoY to 6.2% in Q1FY21, post the initial phase of the lockdown. Within NBP, notable decline came in from ULIP (-40.9% YoY) owing to the volatility in the financial markets. APE (Annualized Premium Equivalent) saw a 32.1% YoY drop, as both its Agency (-34.6% YoY) and Banca (-39.8% YoY) were adversely hit.

VoNB dropped 28.6% YoY during the quarter, while the VoNB margin expanded 80bps YoY to 18.7% owing to a slight improvement in the new business mix and profile (+620bps YoY) and partially offset by changes in economic assumptions (-420bps). Cost ratio improved by ~110bps to 10.1% supported by both Opex (~30bps) and Commission ratio (~80bps). PAT rose 5.1% YoY to reach Rs.391cr partly aided by lower expenses. Solvency ratio improved to 2.39x (vs. 1.95x in Q4FY20) as against the regulatory mandated 1.50x.

13th Month Persistency ratio (based on premium) stood at 81.6% (as against 84.5% in Q1FY20) whereas 61^st Month Persistency ratio improved to 63.14% against 56.27% during Q1FY20.  AuM has grown by 19% from 1,469.5 billion as on Q1FY20 to 1753.5 billion with debt-equity mix of 76:24. The Company has diversified distribution network comprising of strong bancassurance channel, agency channel and others comprising of corporate agents, brokers, web aggregators, direct business etc. NBP channel mix for Q1 FY 2021 is bancassurance channel 41%, agency channel 14%, and other channels 45%.

The initial adverse impact of the lockdown on the NBP have started to show signs of recovery. Data shows recovery in New Business Premium collection from June 2020. The strong brand recognition along with wide distribution network should aid growth. We reiterate our BUY rating on the stock with a revised target price of Rs. 1,018 based on 2.8x FY22E EV.

Analyst: Cyril Charly, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: SBI life Insurance company Ltd – https://bit.ly/3aQ6MT3

UPL Ltd. is a global agriculture solutions company engaged in the agrochemicals and industrial chemicals business with manufacturing sites across the world. Through recent expansion, the company has become a leader in global food systems as well. UPL’s revenue marginally fell 0.9% YoY to Rs. 7,833cr, on supply chain disruption in Latin America, North America amidst COVID-19, partially offset by strong growth in India and Rest of the world (RoW) market. LATAM revenue (39% share in FY20) was down 16.0% YoY to Rs. 2,015cr owing to FX volatility in Brazil and delay in purchases by farmers. The company stated that it has subsequently seen a pickup in orders from LATAM and an improvement in market share in the region. UPL is looking to launch a new product in LATAM to cure Asian rust disease, which would further increase UPL’s presence in the region.  Also, North America revenue dragged by 14.1% YoY to Rs. 1,027cr on pre-buying in Q4FY20, led by COVID19. However, India outshines 26.7% YoY to Rs. 1,511cr, backed by robust growth ~36% YoY in Insecticides and Herbicides. Besides, RoW also rose 10.3% YoY to Rs. 1,578cr on growth in South- East Asia and Vietnam. While Europe witnessed to see muted growth 0.9% YoY to Rs. 1,703cr on supply disruption and dry weather conditions affected herbicide sales.

Despite the challenging circumstances, EBITDA stood at Rs. 1,704cr, up by 29.3% YoY, with EBITDA margin improved 510bps YoY to 21.8%, aided by raw material savings, cost synergies, better product and regional mix. Notably, the company recorded an 8% decline in fixed cost owing to lower SG&A and COVID-19 related contingencies. We anticipate a further reduction in cost should support margin sustainability over the medium term. The Company intends to reduce net debt of USD 500mn in FY21, however, UPL is consciously taking any call on debt repayment or holding cash due to uncertain macro-economic environment led by COVID. The Management stated that Arysta merger synergy benefit targets on both revenue and costs are on track. Following this, in 1Q21, the company recorded revenue and cost synergy of Rs. 53cr and Rs. 83cr, respectively. The management stated the ongoing US-China trade war as well as the Covid-19 situation in China could enable UPL to grab new opportunities from its Chinese competitors in the future.    

Given, cost competitiveness, improved margin, further optimization in fixed cost, should support the company’s outlook over the medium term. The benefits from the Arysta merger have started to flow through and would enable UPL to significantly increase in market share in Latin America, a key market.    Additionally, we remain positive on the stock as we believe that the strong demand of CPC products is likely to derive growth further. Hence, we have maintained a BUY rating on the stock with a revised price target of Rs. 601 based on 12x FY22E adj. EPS.

Analyst: Joe V Samuel, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: UPL Ltd. – https://bit.ly/32j4UhQ

PI Industries manufactures plant protection & specialty plant nutrient products and solutions under its agri-inputs business. It is also one of India’s leading custom synthesis (CSM) companies engaged in providing contract research and contract manufacturing services to global innovators.

PI Industries recorded a standalone revenue of Rs. 968cr in Q1FY21, which was up 28.4% YoY, mainly driven by strong growth in both domestic (42.1% of total sales) and export revenue (57.9% of total revenue). On a consolidated basis, revenue from exports rose 22.6% YoY to Rs. 614cr, backed by strong demand for molecules, proactive inventory management coupled with strong capacity. Domestic revenue surged 76.3% YoY to Rs. 446cr, aided by Isagro acquisition, new product launches and strong positioning owing to early sowing.

Notably, all manufacturing facilities commenced operation with capacity utilization building back pre-COVID levels during the quarter, which would provide strong revenue visibility over the medium-term. Gross profit grew 21.7% YoY to Rs. 411cr, while gross margin dropped 240bps, impacted by the change in export, domestic mix and Isagro. However, EBITDA came in at Rs. 218cr, up 43.8% YoY while EBITDA margin expanded 240bps to 22.5%, aided by controlled fixed overhead cost. Resultantly, net profit surged 30.9% YoY to Rs. 132cr, supported by strong growth in other operating income. The management aims to achieve a 20% YoY revenue growth in FY21 (in case of gradual normalization of COVID-19 situation). Separately, the PI has filed 7 new patent applications during the quarter. Also, a robust order book of USD 1.5bn is expected to continue fueling strong export revenue growth over the medium-term, while a good monsoon is likely to support domestic revenue growth prospects further. Moreover, the company expects to launch 2 new products in Q2/Q3FY21, whereas pick-up in volumes is likely for some of the products commercialized in the last 1-2 years. Despite liquidity challenges in the market on account of COVID-19, PI’s strategic growth initiatives should be supported by a healthy free cash-flow generation (Rs. 298cr, ~7% of revenue). Besides, the company has raised Rs. 2,000cr through a Qualified Institutional Placement (QIP) in July 2020, which would help the company to focus on organic and inorganic growth initiatives going forward. The ongoing trade disputes with China could open up new opportunities for PI in the long term.

The strong pipeline, new launches, Isagro acquisition and strong demand for branded products should maintain the growth momentum over the medium term. Also, we remain positive on the stock on the robust export order book and controlled cost measures. The fund raised from the QIP could see PI making investments in pharma, overseas manufacturing units as well as developing a new pipeline of products. Therefore, we reiterate our ACCUMULATE rating on the stock with a revised target price of Rs. 2,210 based on 42x FY22E adj. EPS.

Analyst: Joe V Samuel, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: PI Industries Ltd . – https://bit.ly/2EcI4AB

Federal Bank Ltd is an Indian commercial bank in the private sector headquartered in Kerala having 1,263 branches and 1,936 ATM/ Recyclers and a loan book size of ~Rs1,23,437cr.

In Q1FY21, the Net Interest Income (NII) for the quarter grew by 12% YoY to Rs 1,296cr compared to Rs1,154cr in Q1FY20, along with a stable 9% growth in advances. Advances growth of the bank is higher than the industry growth of 6.5% in these challenging times. The pre-provision operating profit witnessed a robust 19% YoY growth, supported by 28% increase in fee and other income. Growth in other income was supported by treasury gains on sale of securities at Rs304cr. In the current quarter, retail loan book of the bank has grown at 16% YoY while corporate loan gook grew 3% YoY. Bank’s market share in loans and advances improved 5bps to 1.18% largely driven by better marketing efforts as well as digital initiatives. Both corporate and retail book is expected to witness traction and we factor in a 11% CAGR growth over FY20-22E.

The banks total deposit increased 17% YoY, with a 5% increase in NRE deposits and 4% increase in retail deposits. Deposit market share improved 5bps to 1.10%. Share of retail deposits stands at 91% of the total deposits in Q1FY21 compared to 92% in Q1FY20. Current Account Savings Account (CASA) deposits grew 7% YoY. CASA ratio improved by 152bps from 30.2% in Q1FY20 to 32.02% in Q1FY21. At the same time cost to income ratio has improved by 246 bps from 50.22% in Q1FY20 to 47.76% in Q1FY21. Capital adequacy of the bank stands at 14.17% in which Tier1 CRAR stands at 13%.

In Q1FY21, the gross /net NPA of the bank stood at 2.96%/1.22% compared to that of 2.99%/1.49% in Q1FY20 and 2.84%/1.33% as on Q4FY20. There has been a fresh slippage of Rs184cr and bank has provided 100% provisioning for the same. Covid specific provisions was at Rs186cr. Moratorium trend stands flat at 35% compared to last quarter. However, net moratorium slipped to 24% and as per the management close to 11% of customers paid all 4 installments but, they are still tagged under moratorium.

Federal bank is currently trading at Adj. P/B of 0.8/0.7 for FY21E and FY22E respectively which is 30% discount to last 3-year average. Though we remain cautious over retail asset quality post moratorium, expect return ratios to be better going forward. We roll forward our valuation to FY22E and maintain buy rating on the stock based on 0.8x Adj.BV of FY22E with a revised upward target price of Rs.63.

Analyst: Rajin Rajan.P, Geojit Financial Services Ltd., INH200000345

For Disclosures and Disclaimers: Federal bank Ltd. – https://bit.ly/3hnFBS9