leaders of tomorrow k

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

February 17, 2021 ICICI Securities Ltd. | Retail Equity Research 1

Leaders of Tomorrow

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


0

2000

4000

6000

8000

10000

12000

14000

16000

Nifty 50 thorugh the years

Subprime

crisis

Demonetisation

Covid

crash

Slowdown in

China,

devaluation of

Yuan

US China

trade war

Downgrade in

US credit

ratings

Change in

Indian

Government

Source: NSE, Company, ICICI Direct Research

Biggest risk in today’s market is not being there in the market

Nifty 50 through the years

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


Nifty shifting orbits …

Nifty currently trades at a PE of ~32x (based on FY20 EPS) and at a PE of

~38x on Trailing Twelve Months (TTM) basis, thereby helping build the public

opinion that the broader markets are highly euphoric and running ahead of

fundamentals. We however dispel this notion, as we logically derive that

present absolute PE multiples make little sense especially when we had a blip

in corporate earnings in the recent past due to the Covid pandemic and are

staging an impressive earnings CAGR (24%+ over FY21-23E) ahead of us.

Our key focal points:

(i) Nifty constituents have undergone major change in past decade. The

weights of capital efficient sectors such as FMCG, Financials (private

banks), IT and Pharma have increased from 29% in March 2009 to 70% in

December 2020.

(ii) These sectors command higher PE multiples as markets prefer Earnings

visibility and consistency

(iii) Better performing business segments within existing companies is not

captured by current PE. Companies like L&T, SBI etc. have multiple

business lines and hence SoTP (Sum of the parts) based valuations of

these names are not captured by the PE ratio alone.

Trend in Sectoral Weightages in Nifty

Target PE of few individual constituents based on FY23EPS

Sectors/Year Mar-09 Mar-14 Mar-19 Dec-20

Financial Services 11.8 27.5 38.9 38.8

IT 9.1 16.3 13.7 16.3

Oil & Gas 40.7 14.3 15.3 12.5

FMCG 6.4 12.6 11.3 11.5

Automobile 3.3 8.8 6.1 5.4

Pharmaceuticals 2.5 5.2 2.4 3.6

Metals 5.4 4.8 3.7 2.5

Telecom 9.8 1.7 1.5 2.0

Nifty Stocks Target PE (x) Nifty Stocks Target PE (x) Nifty Stocks Target PE (x)

Adani Ports 16.0 SBI Life 45.3 HDFC Bank Ltd 19.3

Asian Paints Ltd 58.2 Titan Co. 58.0 Reliance Industries 17.7

Bajaj Auto Ltd 18.9 Tata Steel 9.2 TCS 29.4

Bajaj Finance Ltd 46.5 Sun Pharma 21.9 Divis Lab 40.0

Bharti Airtel Ltd 32.3 NTPC Ltd 5.4 Axis Bank Ltd 17.5

Dr Reddy's 26.0 Maruti 28.0 Shree Cement 39.8

Nestle India Ltd 63.3 Indusind 37.2 ITC Ltd 17.0

Infosys Ltd 25.4 Britannia 44.5 Grasim Industries 34.7

Overal l Nifty PE 26.2

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

FII inflows at historical high, market sentiments bouyant…


Source: NSE, NSDL, ICICI Direct Research

2020 170262

2019 101122

2018 -33014

2017 51252

2016 20568

2015 17808

2014 97054

2013 113136

2012 128360

2011 -2714

2010 133266

2009 83424

2008 -52987

2007 71487

2006 36540

2005 47181

2004 38965

2003 30459

2002 3630

FII Inflows/Outflows

January 12123

February 1820

March -61973

April -6884

May 14569

June 21832

July 7563

August 47080

September -7783

October 19541

November 60358

December 62016

January (til l

26th Jan 2021)

23630

FII Inflows/Outflows (2020)

400

2400

4400

6400

8400

10400

0

20

40

60

80

100 % of stocks above 200 SMA Nifty 500

1000

3000

5000

7000

9000

11000

13000

15000

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19

Jul-19

Jan-20

Jul-20

Nifty at all-time high clearly indicates

improvement of sentiments

Greater than 90% of the NSE500

stocks are trading above their 200

SMA. This has never happened in

previous bull runs. This highlights

broad based participation and

strong market sentiments.

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

Positive conditions for a broad based market rally…


Source: NSE, RBI, IMF, WorldBank, ICICI Direct Research

Interest rates at all time low Asset quality concerns peaked out

Corporate debt at lowest levels Historical GDP growth rate of India

44.245.1

45.8 45.6

44.3

42.8

39.5

36.6

33.5

32.0

29.9

25

30

35

40

45

50

No

v-10

No

v-11

No

v-12

No

v-13

No

v-14

No

v-15

No

v-16

No

v-17

No

v-18

No

v-19

No

v-20

(%

)

Industry loans as % to total

2.2 2.3 2.6 2.53.1 3.2

3.84.6

7.68.5

10.810.3

9.0

7.88.5

0

2

4

6

8

10

12

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Mar-

15

Mar-

16

Mar-

17

Mar-

18

Mar-

19

Mar-

20

Se

p-20

Se

p-20

(%)

4

5

6

7

8

9

10

Dec-2010

Apr-20

11

Jul-2011

Nov-201

1

Feb-2012

May-2012

Jul-2012

Oct-2012

Jan-2013

Apr-20

13

Jul-2013

Oct-2013

Jan-2014

May-2014

Aug-201

4

Nov-201

4

Feb-2015

Jun-2015

Sep-2

015

Dec-2015

Apr-20

16

Jul-2016

Oct-2016

Feb-2017

May-2017

Aug-201

7

Dec-2017

Mar-20

18

Jun-2018

Oct-2018

Jan-2019

May-2019

Aug-201

9

Dec-2019

Mar-20

20

Jul-2020

Oct-2020

(%

)

India 10 Year G-Sec Yield %

10.3

6.6 5.5

6.4 7.4 8.0 8.3

7.0 6.1

4.2

(7.7)

11.0

7.0

(10.0)

(5.0)

-

5.0

10.0

15.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022%

Real GDP growth rate (Annual % change)

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

Capacity utilisation trend for core sectors


Source: Company, ICICI Direct Research

Steady demand from core industries should improve capacity utilisation in steel sector Focus on infrastructure to provide headroom for cap utilisation levels in cement sector

60

65

70

75

80

FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Capacity utilisation (%)

Capacity utilisation (%)

66%

68%

70%

72%

74%

76%

78%

80%

82%

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Steel Capacity utilisation

Capacity utilisation

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

In long term, all market cap types & sectors have performed…


Sectoral Indices 1 year 3 year 5 year 10 year

Nifty Realty -4.3% -10.2% 103.4% 6.5%

Nifty Bank -0.5% 11.3% 99.9% 187.7%

Nifty Metal 20.6% -23.0% 91.6% -25.6%

Nifty Financial Services 4.2% 31.2% 131.3% 254.6%

Nifty Energy 7.9% 15.3% 95.7% 88.6%

Nifty Infra 13.5% 3.2% 53.8% 23.7%

Nifty IT 57.4% 95.2% 128.7% 270.8%

Nifty Pharma 49.0% 30.4% 6.9% 167.6%

Broader Indices 1 year 3 year 5 year 10 year

Nifty 50 16.6% 26.3% 86.0% 155.3%

Nifty 100 16.1% 23.2% 85.1% 161.9%

Nifty midcap 100 16.4% -0.2% 69.5% 168.0%

Nifty smallcap 100 14.8% -19.9% 44.1% 101.8%

392%

360%

277%266%

231%210%

189%178% 173%

77%

44%

16%

-34%-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

NSEIT Index

NSEPH

RM

Index

NSEFIN

In

dex

NSEB

AN

K In

dex

NSEM

CA

P In

dex

NSES

MC

P In

dex

NSE100 In

dex

SEN

SEX In

dex

Nifty In

dex

NSEM

ET Index

NSEN

RG

Index

NSEIN

FR

Index

NSER

EA

L Index

Performance between 2009-2015

231%

198%191%

172% 170% 169% 167%162%

153%

136%

122%117% 114%

0%

50%

100%

150%

200%

250%

NSEIT Index

NSEFIN

In

dex

NSEN

RG

Index

SEN

SEX In

dex

NSE100 In

dex

Nifty In

dex

NSEM

CA

P

Index

NSEB

AN

K In

dex

NSER

EA

L Index

NSES

MC

P

Index

NSEIN

FR

Index

NSEM

ET Index

NSEPH

RM

Index

Performance between 2015-2020

Source: Bloomberg, ICICI Direct Research

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

8

Favorable government policies

Source:: Budget Documents, Media reports, ICICIDirect Research

PLI scheme boost for favorable domestic manufacturingCapex plan under National Infrastructure plan

Sectors Es timated Exp (| crore)

Mobile phone manufacturing 47240

API & others 6940

Manufacturing of Medical devices 3420

Advanced Cell Chemistry Battery 18100

Electronic/Technology products 5000

Automobiles & Auto Components 57042

Pharmaceutical Drugs 15000

Telecom & Networking products 12195

Textile products 10683

Food products 10900

High Efficiency Solar PV Modules 4500

White Goods (Acs & LED) 6238

Specialty Steel 6322

Total 203580

2.3 4.4

1.7

4.4 4.7 5.0 4.7

3.3

3.8

3.0

3.6 2.5 2.4 3.3 1.3

2.6

1.7

3.1 2.7 2.2 1.7 3.0

4.6

3.3

4.0

2.3 2.2 1.6

4.4

6.0

4.7

6.2

4.2 3.6

1.9

0

5

10

15

20

25

FY20 FY21 FY21IDE FY22 FY23 FY24 FY25

(| Lakh C

rore)

Annual phasing of investment under NIP

Energy & Power Roads Railways Urban & Housing Others

9.0

13.2

15.416.5

21.3

14.4

14.4

21.5

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


What we will not touch: stocks and sectors impacted by

disruption

Declining trend in Li-ion battery costs Renewable capacity & solar tariff in India

69022

77641

87027

89229

91153

50000

55000

60000

65000

70000

75000

80000

85000

90000

95000

2018 2019 2020 Sep-20 Dec-20

Renewable capacity

Source: BNEF.com Statista,CEA, ICICI Direct Research

77.575.1

73.3

69.9

65.6 64.562.3

59.9 60.7 61.1

56.0

50.8

30.0

40.0

50.0

60.0

70.0

80.0

Plant load factor (Coal & Lignite)

917

721

663

588

381

293

219180

156 135

0

200

400

600

800

1,000

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

US

$/kW

h

Li-ion battery costs

Advancements in battery technology & scale

benefits through higher EV adotion has driven

battery costs lower globally

Countrywide PLFs for thermal power plants

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


Source:: SEBI, ICICI Direct Research

What are small-caps?

Large Caps – Top 100 companies by

market cap

(As of Dec 2020: MCap ~>=₹ 29,000

crore)

Mid Caps – 101st

– 250th

companies by market

cap

(As of Dec 2020: MCap between ₹ 29,000

crore and ~₹8,400 crore)

Small Caps – 251st

and beyond

companies by market cap

(As of Dec 2020: MCap ~<=₹ 8,400

crore)

Small-caps are essentially the companies which rank 251 and beyond in the pegging order of listed companies on market capitalization basis.

Economic

growth

Opportunities

for industries

Participation

across the

value chain

Growth opportunities spur new

winners on an ongoing basis …

Small caps

grow into mid

caps

Mid caps

grow into

large caps

Large caps

become

mega-caps

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


Source:: ICICI Direct Research

Small-cap offers superior growth and wealth creation

opportunities

Midcap Opportunity in Tractor Space

Small-Cap Opportunity in Power tiller Space

Industry

growing at

10% CAGR

1.6x present

size in next 5

years

Leader with 43% market

share grows to 50% market

share in next 5 years 1.9x

today’s size

Smaller player with 11%

market share grows to 15%

market share in 5 years

2.2x today’s size

Implied profit

multiplication = >2x

Implied profit multiplication = >2.5x

Industry

growing at

15% CAGR

2x present size

in next 5 years

Leader with 50% market

share grows to 70% market

share in 5 years due to import

restrictions 2.8x today’s size

Implied profit

multiplication = >2.5x

Implied profit

multiplication = >3.5x

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


Source:: NSE, ICICI Direct Research

Small-cap – at the cusp of mean reversion

While large cap index and mid cap index have rescaled previous peak (as of January 2021), small cap index remains well below its life high (~23% from

top) signalling that previous peak is still some distance away …

0

5,000

10,000

15,000

20,000

25,000

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19

Jul-19

Jan-20

Jul-20

Jan-21

Index valu

e

Nifty 50 Nifty MidCap 100 Nifty SmallCap 100

Attained a new peak

Attained a new peak

~23% below top

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


• Historically, small caps have bounced

back strongly from every year of

negative/low returns.

• In recent times, CY20 performance (up

21%) came on the back of two years of

double-digit decline i.e. -29% in CY18 and

-10% in CY19.

• There remains significant headroom for

continued recovery in the small cap

space

• Interestingly small cap’s are yet to

generate meaningful alpha over their

larger counterparts namely Nifty 50 and

Nifty Midcap

As against an average long period beta of ~0.7x of

Nifty Small Cap 100 vs. Nifty 50, the present small

cap index beta stands at ~0.5x i.e. near to average-2

std dev; near to its bottom range. The same is

indicative of potential outperformance of Small caps

vis-à-vis bellwether index

(Small Cap beta = small cap index value/Nifty index

value)


Historical data suggest reasonable headroom for small-cap

outperformance

0.20

0.40

0.60

0.80

1.00

CY

05

CY

06

CY

07

CY

08

CY

09

CY

10

CY

11

CY

12

CY

13

CY

14

CY

15

CY

16

CY

17

CY

18

CY

19

CY

20

Be

ta (

x)

Small Cap beta Average small cap beta +2 SD -2 SD

Year end index

value

YoY Returns

(% )

Year end

index value

YoY Returns

(% )

Year end

index value

YoY Returns

(% )

Over NiftyOver Nifty

Midcap

2020 13,982 15 20,842 22 7,088 21 7 (0)

2019 12,168 12 17,103 (4) 5,835 (10) (22) (5)

2018 10,863 3 17,876 (15) 6,449 (29) (32) (14)

2017 10,531 29 21,134 47 9,093 57 29 10

2016 8,186 3 14,351 7 5,781 2 (1) (5)

2015 7,946 (4) 13,397 6 5,653 7 11 1

2014 8,283 31 12,584 56 5,273 55 24 (1)

2013 6,304 7 8,071 (5) 3,403 (8) (15) (3)

2012 5,905 28 8,505 39 3,710 37 9 (2)

2011 4,624 (25) 6,112 (31) 2,712 (34) (9) (3)

2010 6,135 18 8,857 19 4,101 18 (0) (2)

2009 5,201 76 7,433 99 3,486 107 31 8

2008 2,959 (52) 3,736 (59) 1,684 (71) (19) (12)

2007 6,139 55 9,200 77 5,801 87 33 10

CY

Small Cap Alpha (% )Nifty Small Cap 100Nifty Midcap 100Nifty 50

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK



Small-caps provide strong earnings visibility at reasonable

valuations

Low interest rate scenario is a key tailwind to overall equities

(TINA factor). Within equities, small caps offer superior earnings

potential, with FY21E-23E CAGR seen at ~27%. This compares

to ~24% CAGR seen at large caps and ~19% CAGR seen at mid

caps

Consequent to relative price underperformance recently and

higher expected earnings up ahead, valuations for small caps vis-

a-vis narrower indices are at attractive levels (~14x P/E on FY23E

EPS). This provides margin of safety on small caps.

9.1

30.2

18.4

24.2

19.1

16.2

21.5

18.8

7.1

26.7

28.0

27.3

0

5

10

15

20

25

30

35

FY

21E

FY

22E

FY

23E

2 year C

AG

R

(FY

21

-23E)

YoY

Earnings grow

th (%

)

Nifty Nifty MidCap 100 Nifty SmallCap 100

32.429.7

22.8

19.2

26.6

22.4

19.2

15.8

23.521.9

17.3

13.5

0

5

10

15

20

25

30

35

FY

20

FY

21E

FY

22E

FY

23E

P/E (x

)

Nifty Nifty MidCap 100 Nifty SmallCap 100

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


Our past history of well researched stocks turning multi-baggers

0

2,000

4,000

6,000

8,000

10,000

12,000

0

300

600

900

1200

1500

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Phillips Carbon Black (LHS) Nifty Small Cap 100 (RHS)

Details Initiation Peak

Date 11-Jul-16 12-Jan-18

Price 175 1455

Mcap 600 crore 5,000 crore

RoCE 6% 17%

A leader in supplying carbon black, an

essential compound for manufactruing tyres

Phillips Carbon Black turned ~8x vs. small cap index

return of ~50% during last small cap run (2016-2018)

Affle India turned ~3x vs. small cap index return of 75%

during current small cap run (mid may 2020 onwards)

Details Initiation Peak

Date 18-May-20 16-Dec-20

Price 1275 4007

Mcap 3,250 crore 10,200 crore

RoCE 32% 32%

Affle is a technology platform that enables

advertisers to do targeted advertising

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

1000

2000

3000

4000

5000

May-20

May-20

Jun-20

Jun-20

Jun-20

Jul-20

Jul-20

Aug-20

Aug-20

Sep-2

0

Sep-2

0

Oct-20

Oct-20

Nov-20

Nov-20

Nov-20

Dec-20

Affle India (LHS) Nifty Small Cap 100 (RHS)

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

Constructed applying bottom up style of investing methodology.

Its key parameters include:

• Capital efficient businesses (subjective) with well defined path of higher return ratios in future. Expansion of sustainable ROCE.

• Dominant market share position

• Robust growth prospects

• Low on debt & leverage

• Sound Financials; healthy B/S, positive cash generating businesses

• Run exhaustive check in terms of management pedigree and other corporate governance parameters

• Time horizon – We believe stocks show reasonable performance over 3-5 years

• Valuation - We do not follow necessarily a contrarian approach, so we do not aim to buy cheapest stock and sell expensive

stocks. Stocks are cheap and expensive for a reason

• Robust balance sheet, here the income growth should be faster than the balance sheet growth

• Other Criteria

a) Multi-bagger approach

b) Universe of 15-20 companies

c) No sector will be more than 25% of the portfolio

d) Individual stocks should not be more than 10% and less than 3% of portfolio while investing


Our small-cap investment philosophy

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


“Leaders of Tomorrow” portfolio

For our small cap portfolio offering, we have chosen businesses that are

capital efficient, are strong cash generators (all companies CFO positive

in FY20), possess strong B/S (average debt:equity as of FY20 at ~0.3x)

“Leaders of Tomorrow” portfolio

Diversified industry exposure

Name of the company CMP No of shares Value Weightage %

Auto 5.2%

Minda Corporation 93 275 25,575 5.2%

Consumer Durable 16.8%

Bajaj Electrical 1,022 30 30,660 6.2%

Amber Enterprises 2,963 10 29,630 6.0%

Huhtamaki India 302 75 22,650 4.6%

Capital Goods 9.6%

Elgi Equipment 170 120 20,400 4.1%

Timken India 1,345 20 26,900 5.5%

Cement 4.9%

Sagar Cement 688 35 24,080 4.9%

Infrastructure 10.0%

Brigade Enterprises 286 80 22,880 4.6%

PNC Infra 264 100 26,400 5.4%

IT 10.7%

Teamlease Services 3,419 8 27,352 5.6%

Birlasoft 253 100 25,300 5.1%

Financial Services 13.6%

CSB Bank 219 100 21,900 4.4%

CAMS 1,873 11 20,603 4.2%

IEX 271 90 24,390 5.0%

Logistics 10.9%

Mahindra Logistics 495 50 24,750 5.0%

TCI Express 962 30 28,860 5.9%

Pharma 8.8%

Advance Enzymes 369 60 22,140 4.5%

Indoco Remedies 302 70 21,140 4.3%

Chemicals 9.5%

Rallis India 267 90 24,030 4.9%

Sudarshan Chemicals 509 45 22,905 4.7%

Total 492,545 100.0%

5.2%

16.8%

9.6%

4.9%

10.0%10.7%

13.6%

10.9%

8.8%

9.5%

Portfolio Sectoral Mix

Auto Consumer Durable Capital Goods

Cement Infrastructure IT

Financial Services Logistics Pharma

Chemicals

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


52

,44

5

49

,50

5

60

,45

6

69

,77

8

0

15,000

30,000

45,000

60,000

75,000FY

20

FY21

E

FY22

E

FY23

E

₹ c

rore

Net sales are expected to grow at 18.7% CAGR over FY21E-23E

11

.9%

13

.3%

14

.3%

14

.5%

8.0%

10.0%

12.0%

14.0%

16.0%

FY20

FY21

E

FY22

E

FY23

E

%

For the small cap portfolio, margins are expected to expand from ~12% in FY20 to ~14.5% by FY23E

14

.5%

17

.1%

18

.3%

17

.2%

20

.0%

21

.5%

10.0%

15.0%

20.0%

25.0%

FY21

E

FY22

E

FY23

E

%

RoE RoCE

The portfolio comprises of companies which are seen undergoing rapid return ratio improvement

Strong operational performance expected from small cap portfolio in coming years …

Robust financial health - a hallmark of our portfolio

2,6

20

3,1

16

4,3

77

5,3

45

0

1,500

3,000

4,500

6,000

FY20

FY21

E

FY22

E

FY23

E

₹ c

rore

PAT is seen growing at 31% CAGR over FY21E-23E

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK


Companies – What we like about them

Company View

Minda Corporation

Minda Corporation (MCL) is a leading auto ancillary player with a history of capital efficient operations, net debt free B/S (September 2020) and presence across

new model launches like Mahindra Thar & Bajaj Chetak. We like MCL primarily on account of; its well-diversified presence across segments with 2-W, CV, PV

and aftermarket constituting ~53%, 23%, 10%, 14% of its sales (FY20), respectively. In the recent past, MCL also took a hard call by letting go its loss making

and capital inefficient European business (Minda KTSN) with its base business i.e. mechatronics and wiring harness largely immune to EV risk. We are also

enthused by MCL’s intent to clock ~12% margins & ~20%+ RoIC, going forward

Bajaj Electrical

We like Bajaj Electricals for its strong recovery in H1FY21 performance of electrical consumer durable business. We believe Bajaj Electricals will be among few

fast moving electrical goods (FMEG) players who are going to report 100% sales recovery in FY21 due to strong rural penetration despite sales loss for almost 40

days in FY21 amid pandemic. Also, the management effort to keep limited exposure in the project business, improved balance sheet condition (D/E at 0.5x) and

strong distribution networks bodes well for stock, going forward

Amber Enterprises

Amber Enterprises is the key supplier to all the top 10 AC brands and commands ~24% volume market share of ACs sold in India during FY20. We see a long

term play in Amber given a significant business opportunity arising through import restrictions on RAC and its components (business opportunity of ~| 10,000

crore) and India’s AC export opportunities (market share may cross | 27,000 crore in the next 10 years from mere | 450 crore in FY19). With revenue, PAT

CAGR of 19%, 26%, respectively, in FY20-23E, we believe the stock is available at attractive valuation (27x earnings of FY21 EPS)

Huhtamaki

HIL is the leading player in the flexible packaging industry, providing packaging & labelling solutions to its clients through its ~18 plants and two R&D centres

across India. The major client includes Nestlé, HUL, P&G, Mondelez, Coca Cola, etc. A leadership position in the domestic flexible packaging industry, strong

client base and focus on launching innovating products will be key drivers of revenue & PAT growth in CY20E-22E. Healthy balance sheet (D/E: 0.4x, RoE:

~25%, RoCE: ~24%), strong future cashflows and backing of a strong promoter strengthen our belief on Huhtamaki India to command higher valuation

Elgi Equipments

Overall, Elgi’s strategy to expand in new geographies in Europe, continued growth momentum in the US, Australia and expected rebound in South East Asia &

Gulf markets are expected to contribute significantly to incremental growth in coming years. A rebound was visible in Q2FY21 performance with air compressor

international sales (including exports from India) contributing ~57% to total air compressor sales registering growth of ~39% to | 253 crore YoY. Margins are

expected to improve due to ramp-up in international business, operating cost reduction initiatives to lead incremental revenue, future growth and positive

operating leverage. Going ahead, further traction in the international market, new products like oil free compressors (AB series) would aid growth while green

shoots of revival visible in India business would further aid topline

Timken India

Timken India is the leading tapered roller bearings manufacturer in India with a strong presence & leadership position in freight segment bearings. Upcoming

thrust on Infrastructure, railways (conversion of conventional coaches to LHB coaches), DFC and upcoming metro projects augur well for the company. Also, a

revival in CV and overall auto segment is also expected to provide further fillip. We like the stock due to its MNC brand, high return ratios & a debt free balance

sheet combined with a robust outlook

Sagar Cement

Sagar Cement is a mid-sized cement player (5.75 MT) with cement plants located in Andhra region. The company has a presence in Andhra Pradesh (34%),

Telangana (25%), Tamil Nadu (12%) and Karnataka (11%), with the company’s brand Sagar Cements being a renowned one in southern India. The company also

has a presence in Maharashtra (9%) and Odisha (8%), thereby being well-diversified in terms of sales flow. The company’s cost of production (CoP) is one of the

lowest in the south market. In the past three years, the company has also initiated further cost efficiency measures like setting up of coal based CPP of 18 MW

at its plant in Mattampally, Nalgonda and expansion of grinding unit in Bayyavaram to 1.5 MT. The company is aiming to reach 10 MT capacity by FY25E. While

the full benefit of new capacities would start flowing in from FY23E, we expect expansion led revenue CAGR of 20.5% in FY20-22E. Further, strong management

profile, cost efficiency and healthy BS should augur well, going ahead

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

February 17, 2021ICICI Securities Ltd. | Retail Equity Research

20


Company View

Brigade Enterprise

The residential segment has displayed a strong recovery and continued momentum is likely to aid overall cash generation. The company is in various stages of

discussions to lease 1.4 msf area over the next six months, which will boost its rental revenues. Reopening of economy is likely to boost retail and hospitality

segment, albeit gradually. Brigade has comfortable debt-equity and sufficient liquidity from operational commercial assets (and likely operational assets)

PNC Infratech

PNC remains our preferred pick in the EPC space given its robust order book, healthy return ratios and lean balance sheet (debt free on standalone).

Notwithstanding its asset monetisation plan fructification, sufficient internal accruals from current order book is enough for equity infusion. The Increased

allocation to MoRTH in Union Budget (up 17% YoY at | 1.08 lakh crore) will help in expanding road network as well as higher order inflows opportunity for road

EPC players like PNC

Teamlease Services

TeamLease Services (TLS) is one of India’s leading providers of human resource services in the organised segment. TLS’ services span the entire human

resources supply chain covering employment, employability and education. Employment services include temporary staffing solutions, IT staffing and regulatory

consultancy for labour law compliance while employability offerings include learning and training solutions. The company is expected to be a key beneficiary of

formalisation of the economy. This, coupled with increase in outsourcing, consolidation of market and market share gains are other long term revenue drivers for

the company. In addition, we expect specialised staffing revenues to improve led by a revival in IT services and reducing competitive intensity. Further,

improving cashflows and margins are other key positives. Hence, we have a positive view on the stock

Birlasoft

Birlasoft, an IT service company, caters to diverse sectors and geographies. In terms of geographies, Birlasoft generates, 82% from America, 8.7% from Europe

and 9.7% from Rest of the World (RoW). In terms of verticals, the company generates 40.7% from manufacturing, 17.1% from BFSI, 17.0% from energy &

utilities and 25% from life-sciences. Birlasoft has also aligned sales structure across verticals to improve cross selling opportunities, multi service deals and

client mining. The company is also hiring leaders from Tier 1 companies, which will help strengthen its leadership, improve client mining and drive operational

efficiency. This, coupled with focus on annuity type revenues, healthy deal pipeline, consistent improvement in order book, focus on niche verticals and

expansion in Europe & APAC bode well for long term revenue growth of the company. Further, improving margin trend and healthy cash balance prompt us to be

positive on the stock

CSB Bank

Promoted by Fairfax India Holding Corporation, CSB Bank is one of the oldest private sector banks with strong base in Kerala, Tamil Nadu and Karnataka. The

bank is engaged in diversified lending including Corporate, MSME and retail with predominant focus on gold loans at Rs 5644 crore; i.e ~43% of advances. This

enables the bank to improve yields as well as granularity of book. Given current uncertain environment, the bank has witnessed an uptick in proforma GNPA at

3.42%. However, provision coverage of ~91% coupled with provision buffer of | 145 crore i.e ~1.1% of advances. Focus on high yielding assets, improvement

in granularity of liabilities and adequate provision buffer to keep earnings trajectory and return ratio healthy. Therefore, we remain positive on growth prospects

and fundamentals of business.

CAMS

CAMS is India’s largest registrar and transfer agent (RTA) of mutual funds with a market share of ~70% based on average assets under management. Apart

from this, CAMS also provides services to alternative investment funds (AIFs), insurance companies, banks and NBFC. Leadership in mutual funds business

and focus on entering other avenues enables delivering sustained business growth at ~13-14% CAGR and sustain RoE ahead of 30%. Prefer business model

without any credit risk and sustainable growth potential

IEX

Indian Energy Exchange is India's premier electricity exchange with a market share of ~ 95% in the short term exchange market. With the launch of new

products such as RTM, GTAM, the company has been able to capitalise on the enormous opportunity that lies in the power market. Currently, share of short

term electricity market is at only ~11%. We expect short term market to have a much larger share of the pie in the future. IEX, being the leading power

exchange will be the prime beneficiary for this shift from long term to short term market

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

February 17, 2021ICICI Securities Ltd. | Retail Equity Research

21


Company View

Mahindra Logistics

Post pandemic, companies are reviewing their supply chains and increasingly looking at Omni-channel presence & B2C models. Specialised 3PL companies in

such environments can provide reduced logistics costs, better turnaround time to each client on greater efficiency, lower capex, better utilisation level vs. each

company’s internal logistics operations. MLL continues to expand operations with its existing clients and also acquire new clients, helped by increased

customer focus on tech backed solutions to their supply chain operations. With a changing client profile (addition of non-auto clients), MLL has been able to

leverage the situation by enhancing high margin warehousing, value-added services component in its revenue mix. MLL has strengthened its already strong

liquidity position on balance sheet and continues to improve its cash conversion cycle

TCI Express

Express logistics continues to remain beneficiary of the normalisation of the business cycle. We expect the company to report a revival in revenue growth

driven by new branch additions & expansion of clients in SME segment. TCI Express is expected to tide over the current volatility by continued automation,

enhancing technological capabilities and reducing field footprints. The management’s singular focus on carrying profitable shipments in the B2B segment along

the surface route, has consistently led to stable operational performance, even amid lower volumes scenario (as seen in H1). Low leverage, a robust growth

trajectory and high core return ratios (FY22E RoCE at 28%, healthy FCF yield), position TCIEL as one of the preferred picks in the logistics space

Advanced Enzymes

Advanced Enzyme is poised to capture the growing opportunities in the enzymes and probiotics space backed by proven capabilities and stable financials that

have been fairly consistent, thanks to a mix of organic and inorganic growth strategy employed by the management. Strong margins and healthy return ratios

reflect the pricing power and balance sheet strength of the company. Going ahead, the management intends to augment its R&D capability for better facilitation

and strengthening of in-house R&D capability, which bodes well in the long run in its quest to improve scalability and a possible foray into more complex

enzymes

Indoco Remedies

After going through rough patches in FY18-19, where Indoco faced headwinds on the domestic front (structural issues) and exports front (regulatory setbacks),

the situation is returning to normalcy. While FY21 growth in the domestic market is likely to be impacted amid Covid-19, exports are likely to deliver robust

growth on the back of strong pipeline and visible launch schedule as reflected in the upbeat management guidance. Also, normalisation of exports dispatches is

likely to improve operating leverage as well. With better visibility, we expect the company to maintain consistency and generate strong FCF

Rallis India

The company plans to incur a capex of | 800 crore over the next five to six years. The majority of this capex would go towards building capacity for export

business. This incremental capex can have asset turn of 2-2.5x, providing decent visibility for the topline growth. Further, backward integration capex would aid

gross margins, to a certain level, and thereby translates into better operating visibility. In turn, this can support bottomline performance and return ratios for the

coming future. This should help the company to demand better valuations. Thus, we remain positive on the stock

Sudarshan Chemicals

The company’s operations and demand from end users are reverting back to normal as the economy opens up. The company’s H2 is also likely to benefit amid

some pent-up demand. Amid strong demand, the company is trying to expedite its growth capex plans of | 585 crore (which have been bit delayed amid Covid),

which gives a visibility and management commitment towards future growth. Sudarshan’s consistent track record, with favourable macro factors and robust

domestic demand are key catalysts for it. Margins are also likely to improve due to backward integration and change in product mix towards margin accretive

products

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC

Andheri (East)

Mumbai – 400 093

[email protected]

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

2323

Disclaimer

ANALYST CERTIFICATION

I/We, Pankaj Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our

views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)

or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in

the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial

products. ICICI Securities is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with

Insurance Regulatory Development Authority of India Limited (IRDAI) as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research

Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank

which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance,

venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com.

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might

have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities

generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the

analysts cover

Recommendation in reports based on technical and derivative analysis centre on studying charts of a stock's price movement, outstanding positions, trading volume etc as

opposed to focusing on a company's fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view

the Fundamental and Technical Research Reports.

Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.

ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Retail Research. The

views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, and target price of the Institutional Research.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is

strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person

or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis,

ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities

from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable

regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

MO

MEN

TU

M P

ICK

2424

Disclaimer

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or

completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of

offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this

report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal,

accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions

expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions

and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate

the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts

no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors

are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set

forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject

company for any other assignment in the past twelve months.

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the

date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or

other advisory service in a merger or specific transaction.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates

or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research

report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report.

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report

as of the last day of the month preceding the publication of the research report.

Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies

including the subject company/companies mentioned in this report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other

jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any

registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of

investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.