Muhurat Picks2018-19

Muhurat Picks2018-19

Muhurat Pick – 2018October 31, 2018

Indian equity markets have corrected in the recent past, in tandem with the fall in other emerging markets that are net crude

importers. Crude has been trading at ~$75-80 per barrel (highest level in the last four years) due to supply issues on the

back of Iran sanctions. Adding to the woes is the sharp rupee depreciation amid escalating trade tensions between the US

and China, which has the potential to lower global GDP growth rates. Moreover, in time to come, the focus would also shift

to general elections, which could lead to volatility as investors prefer stable regime. Despite the recent correction, Indian

equities have outperformed other key emerging markets in CY18 YTD. A closer inspection of the same, however, throws up

an interesting insight wherein majority of the returns have been driven by defensives like IT, FMCG and pharma.

Domestic market outperformance also stems from improving macroeconomic indicators as well as robust urban and rural

demand prospects. On the macro economy front, domestic GDP growth rate in Q1FY19 came in at 8.2%, reinforcing India’s

position as the fastest growing large economy. Moreover, structurally consumption demand continues to move northwards.

Thus, with a structural uptick in place, notwithstanding minor hiccups, we expect corporate earnings to stage an impressive

recovery, growing in excess of 20% CAGR over FY18-20E and support the markets, going forward. Hence, in this Muhurat

2018, we are concentrating our bets on stocks that command consistent RoCE (retail/consumer) along with companies

wherein RoCEs/RoE (pharma and corporate banks) are expected to exhibit turnarounds.

Dear Customers,

Wishing you all a Happy and Prosperous Diwali !

Company Stock Code CMP Target Price Potential UpsideMarket Cap

| | % | crore FY19E FY20E FY19E FY20E FY19E FY20E

Aurobindo Pharma AURPHA 770 915 19 45144 15.6 12.9 2.7 2.3 17.3 17.5

Divis Lab DIVLAB 1,486 1,700 14 39442 27.0 22.7 5.6 4.6 20.7 20.5

SBI STABAN 270 340 26 241000 42.0 16.1 1.1 1.0 2.6 6.5

Axis Bank AXIBAN 560 725 26 144000 26.1 15.2 2.7 2.2 8.6 13.2

Titan TITIND 825 950 15 73242 51.1 40.6 12 10.1 23.5 24.8

Trent TRENT 322 410 27 10700 62.8 44.7 6.3 5.8 10 13

EIH EIHLIM 163 205 26 9,317 40.4 36.5 3.2 3.1 8 8.4

ROE (%)P/BV (x)P/E (x)

Muhurat Pick 2018

Aurobindo Pharma (AURPHA) Buying Range (| 750-780)

• Aurobindo possesses one of the best enduring ecosystems among large

cap Indian pharma peers to withstand the volatility in the US generics

space because of its vertically integrated model and lower product

concentration. This is why, despite having higher exposure to oral solids

in the US, it has been an outlier in the US vis-à-vis peers over the last few

quarters. With the expectation of an improvement in US generics

scenario from H2FY19, we believe the company can maintain the tempo

• Another USP of the company is huge capacity. The company owns 22

manufacturing facilities, including eight key formulation facilities in India

and abroad. These can be optimised by 1) continuous US filings and

launches, 2) incremental launches and filings in the RoW markets and 3)

site transfers and supplies for products covered under various

acquisitions. Higher capacity utilisation is likely to improve the operating

leverage thereby maintaining the margin improvement trend. It also has

a better compliance track record in the recent past

• Over the last few years, the company has successfully managed high

debt scenario and acquisitions by consistently generating free cash

flows. The company has developed a knack of making the acquisitions

profitable by leveraging on its vertically integrated model (Actavis

acquisition in the EU). We expect the company to replicate a similar

success in the recent Sandoz acquisition in the US, gradually. The

company is also one of the better plays on currency tailwinds with ~60%

net forex exposure. We expect sales, EBITDA and PAT to grow at a

CAGR of 28%, 23% and 19%, respectively, in FY19E-21E

(Year End March) FY18 FY19E FY20E FY21E

Revenues (| crore) 16499.8 18699.2 27767.7 30702.0

EBITDA (| crore) 3771.8 3893.6 5118.2 5919.2

Adj. Net Profit (| crore) 2423.2 2481.9 2881.4 3485.9

Adj. EPS (|) 41.6 42.6 49.5 59.9

PE (x) 18.3 17.8 15.3 12.7

P/BV (x) 3.8 3.2 2.7 2.2

ROE (%) 20.7 17.8 17.3 17.5

ROCE (%) 20.0 18.1 15.7 17.7

Divi’s Laboratories (DIVLAB) Buying Range (| 1450-1510)

(Year End March) FY17 FY18 FY19E FY20E

Revenues (| crore) 4064.3 3912.8 5044.0 6075.3

EBITDA (| crore) 1446.0 1268.4 1916.2 2308.6

Adj. Net Profit (| crore) 1060.4 883.7 1459.7 1732.3

Adj. EPS (|) 39.9 33.3 55.0 65.3

PE (x) 36.1 43.3 26.2 22.1

P/BV (x) 7.1 6.5 5.4 4.5

ROE (%) 19.8 14.9 20.7 20.4

ROCE (%) 25.3 20.0 27.0 26.6

• The company has two segments - generics (~56% of FY18 revenues) and

custom synthesis (CRAMS; 44% of FY18 revenues). The custom synthesis

(CS) business is a margin accretive one but at times lumpy as it depends

on offtake from customers. Strong R&D capabilities and India cost

arbitrage along with IP adherence are some legacy strengths, which are

likely to drive incremental assignments from MNCs. The recent lifting of

import alert has led to improved sentiments in the near future. We expect

CS to grow at a CAGR of ~25% to | 2643 crore in FY18-20E

• In APIs, the company remains committed to only a few research driven

niche opportunities. Two generics, Naproxen (pain management) and

Dextromethorphan (cough suppressant) account for ~25% of overall

revenues. Divi’s enjoys ~70% global market share in these two products.

It is also increasing its presence in another niche area of carotenoids after

acquiring requisite capabilities. With focus on brownfield expansion, the

management is committed to addressing the capacity constraints. We

expect sales from generics (includes Carotenoids) segment to grow at a

CAGR of ~26% to | 3007 crore in FY18-20E

• Besides currency tailwinds, the strong Q2 performance was attributable to

higher capacity utilisation in the wake of Chinese supply constraints. To

overcome the capacity constraints and prepare for growing opportunities

arising due to China factor, the company has earmarked an aggressive

capex of ~| 1500 crore (including maintenance capex), over and above

~| 1000 crore spent in the last three years. Margins are also likely to get

support from currency tailwinds and operating leverage. We ascribe a

target price of | 1700 based on 26x FY20E EPS of | 65.3

Muhurat Pick 2018

Axis Bank (AXIBAN) Buying Range (|535-570)

• Axis Bank is the third largest private bank in terms of loans. There was a

recent change in top management with Amitabh Choudhary being

appointed the new MD and CEO with effect from January 1, 2019

• Advances as on Q1FY19 was at | 441074 crore. Due to its network &

strong corporate relationships, loan book grew at 30% CAGR earlier,

higher than 19% CAGR in industry. It has largely been a corporate lender

though the trend has been changing over the years. One of the biggest

strengths of the bank is its strong liability franchise. CASA deposits

account for ~47% of deposits as on June 2018. CASA ratio has been at

~45% for almost a decade. This has been due to constant investment in

branches & ATMs, strong brand recognition & quality services. This has

enabled it to maintain healthy NIM of >3% since FY08

• GNPA ratio has been in range of 1-1.3% till Q3FY16. However, it rose to

6.9% by FY18, led by incremental slippages from corporate. Currently,

the bank has vulnerable exposure of | 12236 crore; | 2847 crore in

restructured bucket and | 10396 crore to BB and below rated borrower

• Dismal asset quality in the past has been a show spoiler for the bank.

With bulk of the pain recognised, anticipated recovery of large stressed

cases referred to NCLT, expect GNPA ratio to improve at 5.2% by FY20E

• Retail has put up a good show. Now, the corporate segment is expected

to witness healthy traction & quality ahead. PAT trajectory in FY18-20E

would be higher on improving operating earnings & lower base in FY18

State Bank of India (STABAN) Buying Range (| 245-275)

• SBI being the largest bank in India by asset size (| 34 lakh crore) has

played a lead role in the banking industry. Post merger of banking

associates and subsidiaries and passing through a difficult NPA cycle, it is

coming out strong with top management guiding for rise in RoA

• Credit grew strongly in the past at 17.4% CAGR in FY09-14 while deposit

has grown at 13.4% CAGR. It has been moderating since FY15. Going

ahead, with retail & focused corporate exposure, credit growth is seen

staying moderate at 11% CAGR in FY18-20E to | 23.8 lakh crore. Watchlist

is at | 24633 crore with GNPA, NNPA ratio at 10.69%, 5.3%, respectively

• SBI has managed CASA ratio of >45% & retail deposit >80% of deposit,

which is stable in nature led by its strong reach & liability franchise. SBI

has seen NIM moderation from 3% earlier due to interest income write-

back in NPA. Hence, we expect calculated global NIM at ~2.6-2.7% in

FY19-20E. Cost to Income ratio may stay at ~46%

• SBI’s management has guided a strong recovery path led by moderation

in slippages, resolution of stressed assets and strong growth in advances.

Divestment of non-core assets and stake sale in subsidiaries is on the list.

For FY20E, credit growth is pegged by SBI at 12% CAGR (our estimate

11% CAGR) and RoA at 0.9-1% (our estimate- 0.4-0.5%). Even if the bank

is able to achieve reasonable growth maintaining credit cost at ~2-2.5%

(incorporating Ind-As provisions), earning trajectory should remain

healthy. Adequate provision in lieu of cases referred to NCLT provides

comfort. Overall, long term structural value remains intact

Key Financials FY17 FY18 FY19E FY20E

NII (| crore) 75,199.0 74,853.6 86,112.6 101379.0

PBT (| crore) -1,258.5 -15,528.4 8,318.7 23002.1

Adj. Net Profit (| crore) -1,803.5 -6,548.4 5,906.3 15411.4

Adj. EPS (|) -2.2 -7.3 6.6 17.3

PE (x) -125.0 -37.9 42.0 16.1

P/BV (x) 1.1 1.1 1.1 1.0

ROA (%) -0.1 -0.2 0.2 0.4

ROE (%) -0.9 -3.0 2.6 6.5

Key Financials FY17 FY18 FY19E FY20E

Net Profit (| crore) 3679 276 5807 9978

P/E (x) 37.8 NA 26.1 15.2

ABV (|) 196.8 182.5 211.6 265.3

P/ABV (x) 2.9 3.2 2.7 2.2

GNPA (%) 5.0 6.9 5.9 4.8

RoNA (%) 0.6 0.0 0.8 1.2

RoE (%) 6.8 0.5 8.6 13.2

Muhurat Pick 2018

Titan Company (TITIND) Buying Range (| 775-830 )

• Titan Company is a major player in the organised jewellery market with a

share of ~ 5%. Tanishq’s penetration is still at a nascent stage in the

Indian jewellery market. This provides an immense opportunity for Titan

to enhance its market share. Recent regulatory changes such as gold

hallmarking & GST have been highly favourable for organised players like

Titan, leading to market share gains from unorganised players

• The wedding segment accounts for ~ 60% of the jewellery market in

India (| 150,000 crore of total | 2,50,000 crore), of which Tanishq’s

market share is ~ 3%. Titan is targeting increasing its wedding jewellery

share in total revenues from 35% in FY18 to 50% by FY23. Its sustained

efforts towards enhancing its share in the wedding jewellery space is

proving to be fruitful as it is growing at a much faster pace compared to

the non-bridal jewellery. Since average ticket size for wedding jewellery

is higher than the adornment jewellery, Titan’s aggressive foray in the

wedding space is expected to enhance asset turnover and return ratios,

going forward

• Despite headwinds like fewer wedding dates in H1FY19, surge in gold

prices & tightening of regulatory policy, Titan continued to gain market

share. The management remains upbeat on growth outlook with the aim

to grow jewellery segment revenue at a CAGR of 20% till FY23E. High

asset turnover with positive operating leverage are expected to translate

into 33% RoCE by FY20E from 29% in FY18. We believe Titan’s growth

story will remain multi-pronged and drawn over a longer time frame

Key Financials FY17 FY18 FY19E FY20E

Net sales (| crore) 13,260.8 16,119.8 19,413.4 23,128.3

EBITDA (| crore) 1,155.5 1,644.7 2,096.6 2,613.5

PAT (| crore) 711.5 1,130.1 1,442.5 1,816.0

EPS (|) 8.0 12.7 16.2 20.5

P/E (x) 103.6 65.2 51.1 40.6

EV/Sales (x) 5.5 4.5 3.8 3.1

RoCE (%) 24.7 29.3 31.4 33.1

RoNW (%) 16.8 22.2 23.5 24.8

Trent Ltd (TRENT) Buying Range (| 310-325)

• Trent, a leading retailer with a presence across various consumer

categories, is gearing up for rapid growth driven by aggressive store

addition. Accelerated store addition in the Westside format, rightsizing of

Star Bazaar stores coupled with consistent growth in Zara are further

expected to accelerate Trent’s financial performance

• Westside has proven to have one of the most profitable business models

as it primarily focuses on selling private label brands (96% of revenues)

Higher share of private label brands has led to industry best gross

margins (~60%) for Westside. It has a pan-India presence with 131 stores

across 70 cities and online reach across India with exclusive listing

through Tata CLiQ. The management has chalked out aggressive store

expansion plans for FY19E and is planning to open ~30 additional

Westside stores. Healthy store addition, coupled with steady same store

sales growth (~8%) is expected to drive revenues, going forward

• We believe the recently acquired value fashion business, Zudio, would

add to incremental revenue growth. Trent sees value fashion as one of the

growth drivers and intends to scale up the brand significantly in coming

years. We expect consolidated revenues to grow at 25% CAGR in FY18-

20E with EBITDA margin expansion of 120 bps to 10.5% by FY20E. We

value the stock on SOTP basis assigning 3.2x, 3.0x, 1.5x FY20E EV/sales

to the standalone business, Inditex (Zara), Star Bazar, respectively.

Key Financials FY17 FY18 FY19E FY20E

Revenue (| crore) 1,833.9 2,157.5 2,790.6 3,386.2

EBITDA (| crore) 125.7 201.2 281.2 355.7

Net Profit (| crore) 84.9 87.0 170.3 239.5

EPS (|) 2.6 2.6 5.1 7.2

EV/Sales (x) 6.1 5.2 4.0 3.3

Debt/Equity (x) 0.3 0.2 0.2 0.2

ROE (%) 3.8 5.5 10.0 13.0

ROCE (%) 7.4 10.0 12.7 15.4

Muhurat Pick 2018

East India Hotels (EIHLIM) Buying Range (| 145-165)

• East India Hotels (EIH) is one of the premium hotel operators having a

presence across leisure & business destination and a total room capacity

of 4,834 rooms (of which EIH owns around 45% of rooms). The company

is expected to be a key beneficiary of a revival in the economic

environment

• In the past few years, the industry has been witnessing some green

shoots mainly led by a decline in room supply and increase in demand.

The proposed supply of rooms has significantly reduced from 1,14,446 in

FY08 to 47,067 in FY18. This is further validated by the fact that demand

growth (7.8% YoY) has outpaced supply growth (4.6% YoY) in FY18.

Overall occupancy has also improved 2.8% YoY to 68% while the

average room rate (ARR) improved 2% YoY in FY18. With slowing down

of capacity additions coupled with a rise in spending by domestic

travellers, we expect the sector to see a better growth trajectory and

healthy pricing in the next three to four years

• Apart from an improving environment, the reopening of the Delhi

property (opened in Q3FY18) and launch of six new hotels is expected to

drive topline (CAGR of 15.7% in FY18-20E) and bottomline growth

(19.3% CAGR in FY18-20E)

• The stock is trading at attractive valuation of 19.8x FY20E EV/EBITDA

against industry average of 28.0x. Hence, we have a BUY rating on the

stock with a target price of | 205 (i.e. valuing at two year forward

EV/EBITDA of 25.0x, EV/room of | 3.8 crore)

| Crore FY17 FY18 FY19E FY20E

Net Sales 1,528.7 1,598.8 1,982.5 2,141.1

EBITDA 261.1 298.9 426.2 471.0

Net Profit 103.1 179.2 230.3 255.2

EPS (Rs) 1.8 3.1 4.0 4.5

EV/EBITDA (x) 36.5 31.8 22.2 19.8

P/BV (x) 3.3 3.4 3.2 3.1

RoNW (%) 4.6 6.6 8.0 8.4

RoCE (%) 6.5 8.7 11.2 11.6

Muhurat Pick 2018

Performance of 2017 Muhurat Picks

Company Reco Price Target Price Return (%) Status

HDFC 1745 2056 -3.7 Call Closed at | 1680

Sagar Cements 820 1025 25.0 Target Achieved

Ineos Styrolution 1025 1250 -34.9 Call Closed at | 667

NRB Bearing 128 160 25.0 Target Achieved

Mayur Uniquoters 394 450 14.2 Target Achieved

Prabhat Dairy 136 165 21.3 Target Achieved

MM Forgings 786 1020 29.8 Target Achieved

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC

Andheri (East)

Mumbai – 400 093

research@icicidirect.com

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