sharekhan special

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Visit us at www.sharekhan.com Index Q2FY2022 Results Preview Automobiles • Banking • NBFC/AMC/Insurance • Capital Goods and Power • Consumer Discretionary • Consumer Goods • Infrastructure/Cement/Logistics/Building Material • IT • Oil & Gas • Pharmaceuticals • Agri Inputs and Specialty Chemical • Miscellaneous • Sharekhan Special October 12, 2021 For Private Circulation only

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Visit us at www.sharekhan.com

IndexQ2FY2022 Results Preview

Automobiles •

Banking •

NBFC/AMC/Insurance •

Capital Goods and Power •

Consumer Discretionary •

Consumer Goods •

Infrastructure/Cement/Logistics/Building Material •

IT •

Oil & Gas •

Pharmaceuticals •

Agri Inputs and Specialty Chemical •

Miscellaneous •

Sharekhan SpecialOctober 12, 2021

For Private Circulation only

October 12, 2021 2

Q2FY2022 Results PreviewEarnings growth momentum to sustain

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We expect another quarter of strong y-o-y earnings growth (barring few sectors like automobiles) on the normalised base of last year, supported by an improvement in economic activities (core sector growth of 9.9%/11.6% y-o-y in July/August) as COVID-19 cases see a significant decline and a sharp pick up in vaccinations. The only caveat is the cost push pressure (a sharp rise in commodity prices and elevated freight costs) which could impact margins. We believe that earnings growth would be driven by sectors such as 1) Metal & mining, led by volume growth and substantial increase in realisation, 2) strong growth in BFSI, supported by healthy demand from retail and SME segments with a pick-up in economic activities, meaningful decline in slippages on a sequential basis, improved collection efficiency and lower provisions, 3) Capital goods - strong performance backed by healthy order execution, 4) Retail sector’s recovery as footfalls increase on unlock measures, 5) IT to post decent growth on robust demand and large deal wins and 6) export-oriented chemical players would witness strong traction in growth led by a favourable demand environment although margins could contract on high energy/input cost. However, we expect weak earnings for the automobile sector (given production issues on semiconductor chip shortage) and agri-inputs (erratic monsoons and higher input cost). We expect aggregate net profits of Nifty companies to maintain their strong growth momentum, rising 32% y-o-y in Q2FY2022. For the Sharekhan coverage universe, we expect strong y-o-y growth in net profit for IT, BFSI, capital goods, infrastructure, metal players while automobile, auto components and cement are likely to be laggards. We expect net profit to grow 23% y-o-y for the Sharekhan Universe in Q2FY2022.

Outlook

Rapid vaccination improves growth optimism; elevated energy prices a near-term concern: India’s economic activity has improved considerably led by reducing COVID-19 cases, given a rise in pace of vaccination (96 crore vaccine doses till date). We expect the growth momentum to sustain with continuous improvement in high-frequency indicators (GST collections, e-way bills, PMI readings, fuel demand) and increase in exports. Additionally, the third straight year of normal monsoons (shortfall of only 0.7% to the long-period average rainfalls) would result in pick-up in rural demand and the same would get a further boost from upcoming festive season. Government’s pro-growth policies (PLI scheme, etc) and the RBI’s accommodative policy stance makes growth outlook promising over FY2022E-FY2023E. We thus expect corporate earnings growth momentum to remain strong given favourable demand outlook, but rising commodity prices (crude oil, energy prices) could act as near-term challenge for margins.

Valuation

Earnings performance key given high expectation; investor should focus on quality companies: The benchmark indices Nifty/Sensex continued with their upmove and have seen a sharp rally of 28%/26% in CY2021 YTD supported by optimism of sharp pick-up in earnings growth as economic activity shows strong signs of a recovery. Thus, delivery on broad-based earnings growth (expect a 28%/31% CAGR in earnings of Nifty-50/BSE-500 over FY21-23E) led by sustained demand growth remains key for a sustained re-rating of the Nifty 50’s valuation of 24.7x/21x based on FY2022E/FY2023E EPS. Near term volatility may persists given news flow from China (supply chain disruptions, etc), rising commodity price cycle (coal, crude oil & gas prices are elevated) and normalisation of the surplus global liquidity situation. Thus, investors’ focus should be on quality companies with scalable business model along with strong balance sheets to support growth and are available at reasonable valuations considering the earnings compounding potential.

Key risks:

Slower-than-expected earnings in FY22/23 and possible pause/downgrade in consensus earnings estimates with global uncertainties due to a resurgence of the pandemic.

Summary:

� Q2FY22 is expected to be another quarter of healthy growth in corporate earnings. After four consecutive quarters of an over 20% growth in aggregate profits of Nifty 50 companies (100% plus growth in previous two quarters), we estimate Nifty companies to report a revenue/PAT growth of 30%/32% y-o-y Q2.

� Growth in corporate earnings is driven by a strong revival in demand post the second wave of the pandemic, pent-up demand and healthy exports. Normalisation of banks’ earnings and a surge in earnings of global commodity companies (metals, energy) and export-driven sectors like IT services, pharmaceuticals, among others.

� Though high-frequency data suggests an improving trend in the economy, elevated energy and raw material costs could adversely impact margins in the coming quarters. The Street would watch out for comments on margin pressure and companies’ ability to pass on any rise in input costs to customers, without affecting demand.

� The Nifty’s valuations at ~24.7x/21x FY2022E/FY2023E EPS are a bit higher than historical levels but are justified, given our expectation of 38% y-o-y earnings growth for FY22E and re-rating of global equities.

� High-conviction investment ideas:

o Large-caps: ICICI Bank, SBI, Titan, Divi’s Labs, UltraTech, Hero MotoCorp, Infosys

o Mid-caps: Dalmia Bharat, Laurus Labs, Oberoi Realty, Radico Khaitan, Jubilant Foodworks, Max Financial Services, Escorts

o Small-caps: NOCIL, Globus Spirits, PNC Infratech, ISGEC Heavy Engineering, Ramakrishna Forgings, Mastek, KPR Mills

October 12, 2021 3

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Sector wise Q2FY2022 preview snapshotAgri Inputs & Specialty Chemicals Sector view: Positive

� Agri-input companies are expected to clock muted earnings as domestic demand gets hit by erratic monsoons; margins are set to contract on high input cost.

� Specialty chemical players, on the other hand, are likely to post strong earnings growth as revenues surge, riding on favourable demand that would offset low margins. Aarti Industries and SRF would outperform.

� Recent supply chain disruptions in China would benefit Indian specialty chemical players in term of market share gains and higher chemical prices in the near term. However, agri-input companies may be affected by higher raw material costs.

Preferred picks: Coromandel International, PI Industries, SRF, Atul Limited, Sumitomo Chemical India and Aarti Industries

Automobiles Sector view: Positive

� While the economy has opened up in Q2FY2022, the performance of automobile and auto component companies is expected to be moderate due to supply constraints led by chips shortage, affecting passenger vehicles and premium two-wheeler segments.

� Commercial vehicles have witnessed strong recovery in the quarter and exports continue to gain momentum

� We remain positive on automobile demand, despite near-term challenges of semiconductor chip shortage and fear of another wave of COVID-19. We expect strong uptick in automobile volumes across segments post normalisation of the economy, led by pent-up demand from rural, semi-urban, and urban demand along with favourable macro-outlook.

Preferred picks: OEMs: Hero MotoCorp, M&M, and Escorts; Auto Ancillaries: Bosch, Sundram Fasteners, Suprajit Engineering, RK Forgings, Gabriel India, Greaves Cotton, and Apollo Tyres

Banking Sector view: Private Banks - Positive; PSU Banks – Neutral

� For banks, Q2FY22 results would be marked by healthy growth in deposits, but weak credit growth would result in margin pressure. Asset quality trend is likely to improve.

� Private sector banks are likely to outperform, with a relatively better growth in advances and lower provisions, keeping credit cost in under control. Within private banks, ICICI Bank, Kotak Mahindra Bank and HDFC Bank are better placed than peers.

� We are positive on private banks and select PSU banks. Within private banks, our pecking order is ICICI Bank, HDFC Bank, Axis Bank and Kotak Mahindra Bank. Among PSU banks, we retain a preference for SBI, but believe that one can start exploring value in other large PSU banks like Bank of Baroda.

Preferred Picks: Private banks: ICICI Bank, HDFC Bank, IndusInd Bank and Axis Bank; PSU banks: SBI

NBFCs Sector view: Positive

� AUM growth is expected to remain healthy y-o-y in the NBFC space. Robust disbursement growth is likely y-o-y basis.

� Disbursement to remain strong during the quarter largely driven by mortgage lenders. The key driving factors are sharp recovery in business activities, benign rate environment and improved demand.

� Earnings for our universe is likely to be healthy, driven by a 14% y-o-y (7% q-o-q) rise in NII and 16% y-o-y increase in pre-provision operating profit (PPOP).

� We believe that better disbursement growth during the quarter aided by strong economic recovery in Q2FY22, margin decline in the credit cost and lower credit cost.

Preferred Picks: HDFC Ltd, Bajaj Finance, Cholamandalam Investment, Repco Home

Capital Goods and Power Sector view: Positive

� We expect our capital goods coverage universe to report 18.5% y-o-y revenue growth (ex-L&T 20.6%) led by a pickup in execution and better labour availability.

� Capital goods space (ex-L&T) is expected to witness OPM contraction as product-based companies witness margin contraction owing to higher commodity prices. PAT is expected to witness 34.5% y-o-y growth led by L&T and product-based companies (up 17.7% y-o-y).

� For our power universe, we expect good recovery in Q2FY22 led by improved industrial activity, recovery in commercial demand and a low base of last year. However, the same is expected to be partially offset by a rise in fuel cost.

Preferred picks: Among project-based companies, we prefer L&T, Bharat Electronics, Honeywell Automation India, Carborundum Universal, KEC while in the consumer durables space we prefer Polycab, Dixon Technologies, Amber Enterprises and KEI Industries. In power we prefer NTPC, PowerGrid and Tata Power.

Cement/Infra/Building Materials/Logistics Sector view: Positive

� The cement sector is expected to report single-digit volume growth y-o-y led by back ended monsoons while OPM to be affected by increased power & fuel costs. Higher execution and expected uptick in order inflows for the infrastructure space.

� Building material players would benefit from rising residential demand and higher prices for pipes and wood panels. Logistics space to benefit from improved EXIM and domestic trade and margin expansion.

� Government focus on infrastructure investments, rising residential demand, improving EXIM and domestic trade environment are structural growth drivers. Rising input costs pose near-term challenge for OPM.

Preferred picks: UltraTech, Grasim, Dalmia Bharat, The Ramco Cements, KNR Construction, PNC Infratech, Century Plyboards, Greenlam Industries, Greenpanel Industries, Pidilite Industries, TCI Express, TCI Ltd., and Gateway Distriparks.

October 12, 2021 4

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Consumer Discretionary Sector view: Positive

� Opening up of stores, improved footfalls, and pent-up demand would lead to healthy recovery for branded apparels, jewellery, and hospitality sector in Q2FY2022. Revenue has reached 65-100% of pre-COVID levels for most companies. Better operating leverage will improve profitability.

� Garment and home textile companies are expected to post strong double-digit revenue growth, led by sustained high export orders. Margins will be lower on y-o-y and sequential basis due to higher input prices.

� Branded apparel, jewellery, and footwear companies will see revenue crossing pre-COVID level mark as festive demand will aid in reporting strong sales in Q3. Textile companies will continue to benefit from improving India’s market share in export markets.

Preferred picks: ABFRL, Titan, Shoppers Stop, Himatsingka Seide, SP Apparels, Jubilant Foodworks, Indian Hotels Co. and PVR

Consumer Goods Sector view: Positive

� Resilient demand for essentials and a recovery in sales of discretionary products would help consumer goods companies to post volume-led revenue growth in Q2FY2022. Sharekhan’s consumer goods universe’s revenues are likely to grow by 12% y-o-y.

� With key input prices remaining high y-o-y, OPMs will remain under pressure, which will lead to moderate bottomline growth. Sharekhan’s Consumer goods universe’s PAT to grow by 6% y-o-y in Q2FY2022.

� Demand to remain resilient; discretionary categories will see q-o-q improvement. Raw material prices (except for crude oil derivatives and palm oil) have remained sequentially stable and are likely to correct in the coming quarters.

Preferred Picks: Britannia Industries, Godrej Consumer Products (GCPL), Marico, Tata Consumer Products (TCPL), Indigo Paints, Radico Khaitan & Globus Spirits

IT Services Sector view: Positive

� Q2FY22 is likely to be yet another strong quarter, despite a high base, on accelerated digital spends, ramp-up of large deals and broad-based demand.

� EBIT margin would remain weak q-o-q on wage revision, lower utilisation and higher hiring expenses, partially offset by strong revenue growth and increased in pricing.

� IT spending to remain strong in the next 2-4 years, given higher digital adoption, increased in offshoring and spend on core transformation. Leading Indian IT companies to report double-digit revenue growth in FY2022E/ FY2023E.

Preferred Picks: Infosys, HCL Tech, Persistent Systems, Mastek, Birlasoft and Intellect Design

Oil & Gas Sector view: Positive

� In Q2FY22, we expect earnings of CGD companies (IGL/MGL) and gas utilities to rise strongly on y-o-y basis led by a volume recovery. High spot LNG prices would benefit GAIL’s gas marketing business and impact Gujarat Gas’s margin offsetting benefit of volume growth.

� OMCs’ earnings are likely to be a mixed bag as recovery in refining & marketing margins would be offset by lower inventory gains and petrochemical margins. Rise in crude oil prices and lower operating costs bode well for y-o-y earnings growth of ONGC/Oil India.

� We maintain a constructive stance on CGD players given strong volume led earnings growth visibility, high RoEs. OMCs’ core earnings would improve led by a recovery in GRMs & BPCL privatisation key to re-rating of OMCs.

Preferred Picks: Reliance Industries, MGL, IGL, GAIL, GSPL, Oil India, BPCL and HPCL

Pharmaceuticals Sector view: Positive

� Pharmaceutical companies’ growth is expected to moderate in Q2FY2022 after a series of quarters with a double-digit growth.

� The Growth is expected to be slow due to pressures in the US business on account of a lack of new product approvals and higher competitive pressures. The growth in the India business is expected to be strong. Further, a high base in Q2FY21 and increasing cost pressures are expected to slow down the earnings growth to 4.6% yoy for Q2FY22.

� Factors such as improving growth prospects in the US, expected strong growth in the IPM, emerging opportunities in the API space and strong capabilities developed by the Indian companies leading to a shift in preference towards complex generics / biosimilars would drive the growth going ahead.

Preferred picks: Aurobindo, Cadila, Lupin, Dr Reddy’s, Sun Pharma, Biocon, Gland Pharma, Laurus Labs, Solara Active Pharma Science, Abbott India, Caplin Point Laboratories, Metropolis Healthcare

October 12, 2021 5

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Q2FY22: Nifty cos’ revenues to grow 30% y-o-y with high growth in metal, IT and capital goods

Q2FY22: Nifty companies to report 24% y-o-y EBITDA growth as revenue growth to get somewhat offset by margin contraction

Q2FY22: High growth in metal, BFSI and capital goods to drive strong 32% y-o-y earnings growth for Nifty cos

Source: Bloomberg; Sharekhan Research

Source: Bloomberg; Sharekhan Research

Source: Bloomberg; Sharekhan Research

Note: High growth >=15%, Moderate growth >10%<15% and Weak growth <10%

Note: Note: High growth >=15%, Moderate growth >10%<15% and Weak growth <10%

Note: High growth >=15%, Moderate growth >10%<15% and Weak growth <10%

October 12, 2021 6

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Nifty’s 1-year forward P/E band Sensex’ 1 year forward P/E band

Source: Bloomberg; Sharekhan Research Source: Bloomberg; Sharekhan Research

Nifty’s 1 year forward P/B band Sensex’ 1 year forward P/B band

Source: Bloomberg; Sharekhan Research Source: Bloomberg; Sharekhan Research

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Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Q2FY22 sector wise earnings growth for Nifty constituents

38% of Nifty companies to post strong PAT growth on y-o-y basis

Source: Bloomberg; Sharekhan Research; Note; Telecom sector reported net loss in Q2FY21

Source: Bloomberg; Sharekhan Research

Revenues EBITDA PAT

Weak growth 30% 44% 50%

Moderate growth 28% 16% 12%

High Growth 42% 40% 38%

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October 12, 2021 7

AutomobilesModerate growth ahead

Q2FY2022 Results Preview

Sector: Automobiles

Sector View: Positive

Companies CMP (Rs)

Reco/View

PT (Rs)

Alicon Castalloy Limited #

770 Buy 1,056

Amara Raja Batteries

761 Buy 1,146

Apollo Tyres 235 Buy 290

Ashok Leyland 135 Buy 151

Bajaj Auto 3,815 Buy 4,800

Balkrishna Industries

2,579 Hold UR

Bosch 17,670 Buy 18,156

Escorts 1,500 Positive 1,549

Exide Industries $ 185 Buy 229

Gabriel India 154 Buy 173

GNA Axles 1,039 Buy UR

Greaves Cotton 138 Buy 194

Hero Motocorp 2,843 Buy 4,030

Lumax Auto Technologies#

151 Buy 207

M&M @ $ 877 Buy 1,000

Maruti Suzuki 7,426 Buy 7,707

Mayur Uniquoters 471 Buy 670

Ramkrishna Forgings

1,193 Buy 1,204

Schaeffler India 7,131 Buy 8,000

Sundram Fasteners #

952 Buy 1,100

Suprajit Engineering #

349 Buy 401

Tata Motors # 383 Buy 430

TVS Motors $ 560 Buy 688

VST Tillers and Tractors Limited

3,181 Positive 3,246

Source: Company data, Sharekhan estimates@ MM & MVML; # Consolidated; $ core business valuation; UR-Under ReviewCMP as on Oct 08, 2021

Our coverage universe

Price chart

Sharekhan universe of automobile companies is expected to perform moderately in Q2FY2022 with revenue growth of 6.4% y-o-y and 9.6% q-o-q, led by recovery in the volumes of commercial vehicle (CV) and passenger vehicles (PV), partially mitigated by weak growth in two-wheeler (2W) segments. Auto ancillary companies are expected to perform well on a sequential basis, driven by improvement in domestic and export business. Companies dependent on the global PV segment are likely to be impacted by chips shortage. We expect EBITDA margin to improve by 85 bps q-o-q, led by operating leverage benefits and price hikes, partially mitigated by rise in raw-material prices. We retain our positive view on the sector, driven by expected volume recovery across segments. Battery and tyre companies are expected to report improvement on revenue growth and EBITDA margin, driven by aftermarket sales growth, recovery in domestic OEM sales, and operating leverage benefits.

� Moderate growth expected in Q2FY2022: We expect our coverage of automobile companies to grow moderately with net revenue expected to grow by 6.4% y-o-y in Q2FY2022, driven by CV and PV segments, partially mitigated by weakness in the 2W segment. Export continues to grow robust in the quarter, driven by aggressive product launches and recovery from COVID-19 pandemic in export destination markets. The domestic farm segment continued to be at healthy levels, driven by positive rural sentiments, however sales were impacted by high base. The three-wheeler segment is improving because of opening of schools, other educational institutions, and corporates.

� Q2FY2022 to be impacted by chips shortage: Auto ancillary companies, which have substantial exposure to PV segments, faced challenges due to chips shortage during the quarter and are expected to perform weaker than expected earlier. Among original equipment manufacturers (OEMs), we expect Maruti Suzuki’s profits to be lower by 43.5% y-o-y due to production cuts and negative operating leverage, led by chips shortage. Moreover, performance of JLR is expected to remain subdued in the quarter.

� Overall profitability to remain subdued: We expect our coverage of automobile companies to post flat earnings growth on a y-o-y basis, largely due to a 230 bps decline in EBITDA margin at 11%, impacted by negative operating leverage and rise in raw-material costs. On a q-o-q basis, EBITDA margin of automobile universe is expected to expand by 85 bps q-o-q, led by higher volumes, price hikes, and operating leverage benefits, partially offset by rise in raw-material prices. Most companies are expecting demand to remain positive in Q3FY2022, driven by the festive season. The major concern remains on supply side due to chips shortage, which is expected to improve gradually in H2FY2022.

Valuation:

Sector view - Positive: We continue to remain positive on the sector despite near-term challenges of COVID-19 related disruptions and chips shortage. The PV segment, both for 2W and four-wheelers (4W), is expected to remain strong amid COVID-19, as a preference for personal transport. Rural demand is expected to drive sales of tractor, farm equipment, and companies having strong rural and semi-urban presence. We expect sequential improvement in M&HCV sales to continue, driven by expected rise in e-commerce, agriculture, infrastructure, and mining activities. We expect the strongest recovery in the CV segment in FY2022E and FY2023E, driven by improved economic activities, low interest rate regime, and better financing availability. The bus and three-wheeler (3W) segments are expected to improve gradually, as corporate office and educational institutions open. We retain our Positive view on the sector.

Key risks

The fear of new variants and the third wave of COVID-19 remain a potential concern. Any significant delay in recovery from COVID-19 infection or vaccination rollout continues to be a key risk going forward. Moreover, the shortage of semi-conductors continues to impact production.

Leaders for Q2FY2022: TVS Motors, M&M, Bosch, Schaeffler India, RK Forgings, VST Tillers, and Tractors

Laggards for Q2FY2022: Tata Motors, Escorts, and Eicher Motors

Preferred Picks:

OEMs: Hero MotoCorp, M&M, and Escorts

Auto Ancillaries: Bosch, Sundram Fasteners, Suprajit Engineering, Ramkrishna Forgings, Gabriel India, Greaves Cotton, and Apollo Tyres.

Summary

� While the economy has opened up in Q2FY2022, the performance of automobile and auto component companies is expected to be moderate due to supply constraints led by chips shortage, affecting passenger vehicle, and premium two-wheeler segments.

� Commercial vehicles have witnessed strong recovery in the quarter and exports continue to gain momentum.

� We remain positive on automobile demand, despite near-term challenges of chips shortage and fear of another wave of COVID-19. We expect strong uptick in automobile volumes across segments post normalisation of the economy, led by pent-up demand from rural, semi-urban, and urban demand along with favourable macro outlook.

� Preferred Picks –

OEMs: Hero MotoCorp, M&M, and Escorts

Auto Ancillaries: Bosch, Sundram Fasteners, Suprajit Engineering, Ramkrishna Forgings, Gabriel India, Greaves Cotton, and Apollo Tyres

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Q2FY2022 results estimates

Company

Sales (Rs cr) EBIDTA margins (%) PAT (Rs cr)

Q2 FY22

Q2 FY21

YoY %

QoQ %

Q2 FY22

Q2 FY21

YoY bps

QoQ bps

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Q2 FY21

YoY %

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Alicon Castalloy Limited #

288.7 204.6 41.1 37.0 12.7 12.8 (8) 458 10.9 5.3 106.4 NA

Amara Raja Batteries 2,216.5 1,935.8 14.5 17.5 13.6 17.6 (400) 33 164.1 201.5 (18.5) 32.4

Apollo Tyres # 4,997.9 4,282.7 16.7 9.0 12.1 16.2 (412) (26) 149.3 354.7 (57.9) 16.8

Ashok Leyland 4,030.8 2,836.6 42.1 36.6 4.1 2.8 NA NA (43.2) (146.7) NA NA

Bajaj Auto 8,558.4 7,155.9 19.6 15.9 15.1 17.7 (260) (6) 1,162.3 1,138.2 2.1 9.5

Balkrishna Industries 2,047.4 1,551.8 31.9 12.0 30.3 32.8 (255) 143 432.2 339.5 27.3 24.8

Bosch 2,816.3 2,479.2 13.6 15.3 13.6 11.6 197 105 322.6 335.4 (3.8) 24.0

Escorts 1,557.7 1,639.7 (5.0) (6.8) 13.5 18.3 (485) (45) 162.3 229.9 (29.4) (12.4)

Exide Industries 2,891.0 2,753.4 5.0 16.3 11.3 14.2 (294) 81 175.3 228.8 (23.4) 39.8

Gabriel India 524.2 459.9 14.0 15.6 7.9 7.9 2 238 25.6 30.6 (16.3) 113.4

GNA Axles 361.9 222.1 62.9 10.0 16.7 18.8 (206) 13 34.3 22.9 49.6 16.3

Greaves Cotton 362.3 329.4 10.0 58.2 8.5 (4.7) NA NA 14.8 (22.5) NA NA

Hero MotoCorp 7,952.9 9,367.3 (15.1) 44.9 11.4 13.7 (233) 201 665.4 953.4 (30.2) 82.1

Lumax Auto Technologies #

317.8 283.8 12.0 22.0 9.5 10.5 (99) 341 14.2 15.7 (9.6) 317.6

M&M @ # 12,471.2 11,590.3 7.6 6.0 13.3 17.8 (445) (57) 915.1 161.8 465.7 (2.0)

Maruti Suzuki 19,475.5 18,744.5 3.9 9.6 5.6 10.3 (472) 97 775.6 NA (43.5) 76.0

Mayur Uniquoters 144.6 125.8 15.0 22.4 20.2 23.0 (275) 526 20.5 20.0 2.7 46.4

Ramkrishna Forgings 499.6 252.5 97.9 21.0 21.1 18.1 305 (198) 30.5 2.1 1,367.8 24.0

Schaeffler India 1,512.9 1,120.7 35.0 22.7 17.6 16.9 68 80 170.1 113.5 49.9 32.8

Sundram Fasteners 1,257.0 889.3 41.3 13.0 17.9 20.1 (218) (11) 133.2 102.4 30.1 10.5

Suprajit Engineering # 496.3 443.1 12.0 37.3 13.8 16.6 (278) 18 40.7 48.1 (15.3) 50.5

Tata Motors # 57,758.9 53,530.0 7.9 (13.0) 6.2 10.6 (438) (171) (410.4) (319.3) NA NA

TVS Motors 5,614.1 4,605.5 21.9 42.7 9.1 9.3 (24) 214 262.8 196.3 33.9 215.4

VST Tillers & Tractors 231.4 220.4 5.0 19.5 13.3 17.1 (382) 18 28.9 29.9 (3.4) 20.5

Soft Coverage

Bharat Forge # 2,380.7 1,376.1 73.0 13.0 22.6 12.1 1,052 123 278.4 2.9 9,500.0 33.8

Eicher Motors 1,982.2 2,123.3 (6.6) 3.9 18.9 22.8 (389) 136 293.5 360.9 (18.7) 9.8

Motherson Sumi # ^ 12,863.2 14,957.2 (14.0) (20.4) 6.7 8.9 (221) (85) 232.0 379.3 (38.8) 10.1

AUTO UNIVERSE 1,55,612 1,45,481 7.0 (0.0) 9.2 12.3 (308) 2 6,061.1 6,156.1 (1.5) 1,112.4

AUTO UNIVERSE - excl Tata Motors

97,853 91,951 6.4 9.6 11.0 13.3 (230) 85 6,471.5 6,475.4 (0.1) 34.6

Source: Company, Sharekhan Research@ MM & MVML; # Consolidated; UR - Under Review

October 12, 2021 9

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Valuations (As on Oct 08, 2021)

CompanyCMP (Rs)

Reco PT (Rs) EPS P/E

FY21 FY22E FY23E FY21 FY22E FY23E

Alicon Castalloy Limited # 770 Buy 1,056 (1.4) 31.2 53.8 NA 24.7 14.3

Amara Raja Batteries 761 Buy 1,146 36.3 43.8 50.5 21.0 17.4 15.1

Apollo Tyres 235 Buy 290 11.6 18.3 24.0 20.3 12.8 9.8

Ashok Leyland 135 Buy 151 (0.7) 2.9 7.0 NA 45.9 19.3

Bajaj Auto 3,815 Buy 4,800 157.5 189.5 218.5 24.2 20.1 17.5

Balkrishna Industries 2,579 Hold UR 59.8 75.4 87.4 43.1 34.2 29.5

Bosch 17,670 Buy 18,156 415.7 482.1 585.7 42.5 36.6 30.2

Escorts 1,500 Positive 1,549 86.4 87.0 96.8 16.8 16.7 15.0

Exide Industries $ 185 Buy 229 8.9 12.7 14.1 16.9 11.9 13.1

Gabriel India 154 Buy 173 3.8 7.0 8.9 40.6 22.0 17.4

GNA Axles 1,039 Buy UR 32.9 48.1 63.2 31.6 21.6 16.4

Greaves Cotton 138 Buy 194 2.5 5.4 8.1 55.5 25.8 17.1

Hero MotoCorp 2,843 Buy 4,030 145.8 191.0 212.1 19.5 14.9 13.4

Lumax Auto Technologies# 151 Buy 207 6.8 9.7 11.9 22.1 15.6 12.7

M&M @ $ 877 Buy 1,000 32.6 44.3 51.0 20.0 14.7 12.8

Maruti Suzuki 7,426 Buy 7,707 140.0 173.6 265.8 53.0 42.8 27.9

Mayur Uniquoters 471 Buy 670 19.6 24.2 29.4 24.0 19.4 16.0

Ramkrishna Forgings 1,193 Buy 1,204 8.8 32.0 52.9 135.6 37.3 22.6

Schaeffler India 7,131 Buy 8,000 93.1 161.3 203.2 76.6 44.2 35.1

Sundram Fasteners # 952 Buy 1,100 17.2 22.1 33.3 55.3 43.1 28.6

Suprajit Engineering # 349 Buy 401 9.6 13.4 16.5 36.4 26.1 21.2

Tata Motors # 383 Buy 430 (3.6) 19.5 33.0 NA 19.6 11.6

TVS Motors $ 560 Buy 688 12.9 20.7 25.2 39.6 24.7 20.2

VST Tillers and Tractors Limited

3,181 Positive 3,246 120.7 133.0 162.3 25.9 23.5 19.3

Source: Company data, Sharekhan estimates@ MM & MVML; # Consolidated; $ core business valuation; UR Under Review

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 10

BankingBetter quarter sequentially; expect improving trend ahead

Q2FY2022 Results Preview

Sector: Banking

Sector View: Positive

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Companies CMP (Rs)

Reco/View

PT (Rs)

Private Banks

ICICI Bank 713 Buy 876

Axis Bank 787 Buy 940

HDFC Bank 1634 Buy 1,810

Federal Bank 86 Buy 95

IndusInd Bank 1,171 Buy 1,340

Kotak Mahindra Bank

1,975 Buy 2,438

RBL Bank 193 Buy 240

City Union Bank 168 Buy 225

AU Small Finance

1210 Buy 1,350

PSU Banks

State Bank of India

469 Buy 534

Bank of Baroda 87 Buy 100

Punjab National Bank

41 Hold 48

Bank of India 58 Buy 100

Source: Sharekhan ResearchCMP as on Oct 11, 2021

Our coverage universe

Price chart

Source: NSE; Sharekhan Research

Margin pressure led by low credit offtake: For banks, Q2FY22 results would be marked by a healthy growth in deposits, but weak credit growth would result in pressure on margins.Credit growth stands at ~6% level, largely driven by vehicle finance and retail loans and also the low base of last year. Private banks under our coverage are estimated to show a growthof 12% y-o-y in advances in Q2, while public sector banks in our universe are expected to clock growth of 3.7% y-o-y in loans, led primarily driven by SBI.

Divergence on asset quality side: Asset quality is expected to stabilise in PSU banks and show an improving trend in private banks. In addition, for PSU banks, the recovery from DHFL could get set off by provisioning for Srei group. However, we expect a better commentary on outlook especially related to asset quality for H2 of the fiscal. Thus, the credit cost is likely to moderate in the coming quarters.

Prefer private banks and select PSU banks such as SBI: The economy may face a temporary blip due to the second wave of COVID-19 and the subsequent localised lockdowns. The RBI has forecast GDP to grow by 9.5% in FY22 that augurs well for long-term demand outlook. During Q2FY22, we expect stronger private banks to show better growth led by a strong capital base, provision buffer, superior asset quality and a retail-focused portfolio. The recent spate of capital raising has been positive for strengthening of bank balance sheets and the gradually reducing liquidity buffer will be a positive support for margins and medium-term return ratios

Leaders for Q2FY2022: HDFC Bank, ICICI Bank, Axis Bank, IndusInd Bank and SBI

Laggards for Q2FY2022: PNB

Preferred Picks: ICICI Bank, HDFC Bank, Axis Bank, SBI

Summary

� For banks, Q2FY22 results would be marked by healthy growth in deposits, but weak credit growth would result in margin pressure. Asset quality trend is likely to improve.

� Private sector banks are likely to outperform, with a relatively better growth in advances and lower provisions, keeping credit cost in under control. Within private banks, ICICI Bank, Kotak Mahindra Bank and HDFC Bank are better placed than peers.

� In case of PSU banks, credit growth has been relatively weak. In addition, the recoveries from DHFL could get set off by provisioning for the Srei group. However, we expect better commentary on outlook especially related to asset quality for H2FY22.

� We are positive on private banks and select PSU banks. Within private banks, our pecking order is ICICI Bank, HDFC Bank, Axis Bank and Kotak Mahindra Bank. Among PSU banks, we retain a preference for SBI, but believe that one can start exploring value in other large PSU banks like Bank of Baroda.

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Q2FY2022 results estimates (Rs crore)

Banks Metric Q2FY21 Q2FY22 y-o-y (%) Remarks

Private Banks

AUSmall Finance Bank

NII 522 688 32% Loan AUMs increased by 24% y-o-y while deposits increased by 45% y-o-y

PPOP 459 376 -18% NIM to remain in the vicinity of 5-5.5%

PAT 209 157 -25% PAT to decline due to a high base

ICICI Bank

NII 9366 11458 22% Loan growth at 20% y-o-y to drive NII growth (11%y-o-y)

PPOP 8261 9398 14% NIM to remain stable at ~3.8%

PAT 4251 5167 21.5% Provisions to decrease due to lower slippages

Axis Bank

NII 7326 8080 10% Loan growth at 10% y-o-y led by retail and SME loans

PPOP 6897 6691, -3% NIM to remain stable at 3.5-3.6%

PAT 1683 2543 51% PAT to increase by 51% y-o-y due to lower provisions

IndusInd Bank

NII 3278 3715 13% Loans increased by 10%y-o-y. NII to increase by 13% y-o-y

PPOP 2831 3376 16% PPoP to increase by 15.7% y-o-y

PAT 647.1 1083.5 67.5% Provisions to decline by 6% y-o-y

HDFC Bank

NII 157800 18300 16% Loans increased 15% y-o-y, while deposits increased by 14% led by higher CASA deposits

PPOP 138,14 166,63 21% Total income to increase 17% y-o-y

PAT 7713 8897 18% Provisioning to increase by 30% q-o-q, PAT to increase by 18% y-o-y

Kotak Mahindra Bank

NII 3913 4112 15% Loan growth expected to grow at 10% y-o-y

PPOP 3297 3487 6% NIMs to remain strong at 4.5-4.7%

PAT 2184 2070 -5% Provisioning to increase by 1% y-o-y. Slippages to be lower in Q2FY22

RBL Bank

NII 1026 955 -% Loan growth of 1% y-o-y, while deposits are likely to rise by 17%

PPOP 699 803 15% Development in MFI and credit card business are key factors to watch out for

PAT 1,40 98 -30% Credit cost may be higher due to higher slippages

Federal Bank

NII 12,96 15,06 16% Loan growth of 10% y-o-y likely, while deposits increased by 10% y-o-y

PPOP 9,32 9,57 3% NIM to remain steady at 3-3.3%

PAT 4,04 498 23% Focus to remain on SME and retail portfolio

City Union Bank

NII 4,37 4,76 9% Loan growth likely to be at 7% y-o-y

PPOP 350 390 10% NII growth is expected to be at ~9% y-o-y

PAT 110 92 -20% Asset quality may deteriorate with GNPLs at 5%

Public Banks

SBIN

NII 28190 29430 4.4% Loan growth expected to increaseby 8% y-o-y

PPOP 16263 18540 14% NII growth will be at about 4%

PAT 4581 7100 55% NIM to remain stable at 3.1%

BOB

NII 7458 7950 6.6% Loan growth to remain flat at 3.5%y-o-y

PPOP 5454 5700 4.5% 50-60% of the international loan book may getrestructured.

PAT 1805 1300 -18% SME and retail portfolio may see higher slippages as a result of COVID-19

PNB

NII 67,48 80,30 19% Loans to remain flat at~2%q-o-q

PPOP 4706 49,89 6% GNPLs to remain high at about 14%

PAT 900 1125 25% NIM to remain stable at about 2.8%

BOI

NII 34,81 31,33 -10% Loans to remain flat at about 1.3% q-o-q

PPOP 28,45 26,88 -6% GNPLs to remain high at about 14%.

PAT 8,44 2,65 -69% NIM to remain stable at about 2.8%

Source: Company, Sharekhan Research

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Valuations (As on Oct 11, 2021)

Companies CMP (Rs) RecoPrice target

(Rs)BVPS (Rs) P/BV (x)

FY22E FY23E FY22E FY23E

Private Banks

ICICI Bank 713 Buy 876 236 263 3 2

Axis Bank 787 Buy 940 322 248 2.3 3

HDFC Bank 1634 Buy 1810 392 455 4.1 3.6

Federal Bank 86 Buy 95 87 97 1 0.9

IndusInd Bank 1171 Buy 1340 587 662 1.8 1.6

Kotak Mahindra Bank 1975 Buy 2438 374 422 4.6 4.1

RBL Bank 193 Buy 240 247 272 0.9 0.8

City Union Bank 168 Buy 225 91 108 1.8 1.5

AU Small Finance 1210 Buy 1350 232 295 5 3.9

PSU Banks

State Bank of India 469 Buy 534 226 281 1.9 1.5

Bank of Baroda 87 Buy 100 162 171 0.5 0.5

Punjab National Bank 41 Hold 48 48 68 0.9 0.6

Bank of India 58 Buy 100 131 155 0.6 0.5

Source: Company, Sharekhan Research

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 13

NBFC/AMC/InsuranceOn an improving trend

Q2FY2022 Results Preview

Sector: NBFC/ AMC/ Insurance

Sector View: Positive

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Companies CMP (Rs)

Reco/View

PT (Rs)

NBFCs

Bajaj Finserve 17,549 Buy UR

Bajaj Finance 7,732 Buy UR

Cholamandalam Invest. 569 Buy 650

HDFC Ltd 2,721 Buy 3,100

L & T Finance Holdings 91 Buy 118

LIC Housing Finance 442 Buy 610

Mahindra and Mahindra Finance

185 Buy 260

Repco Home Finance 316 Buy 400

Spandana Sphoorty Financial

556 Buy UR

AMC

Nippon Life India AMC 447 Buy 502

Insurance

HDFC Standard Life 722 Buy 850

ICICI Prudential Life 660 Buy UR

ICICI Lombard General Insurance

1,529 Buy 1,750

Max Financial Services 999 Buy 1,250

Source: Sharekhan Research, UR - Under reviewCMP as on Oct 08, 2021

Our coverage universe

Price chart

We expect disbursements of non-banking finance companies (NBFCs) under our coverage to pick up significantly q-o-q on a lower base, after a muted show in Q1FY22. Overall, we expect housing finance and vehicle finance companies to clock robust disbursement growth of 90-110%. Further, housing finance companies (HFCs) are better placed as compared to automobile financiers as loans disbursed are more skewed towards salaried customers for HFCs. Collection efficiency (CE) is likely to enhance further from July 2021 levels. CE for auto financiers is expected at 85-100%. With an improvement in the CE, asset quality (Stage-3) is likely to remain stable/ see minor deterioration.

� Housing finance: Property registrations are near record highs, especially in Mumbai led by record low home loan rates and various supportive incentives by real estate developers. This is likely to drive up home loan demand for HFCs, a large part of which will arise from first-time homebuyers. However, with record low interest rates, competition between banks and NBFCs has increased. HDFC and LIC Housing Finance are expected to benefit from the prevalent low interest rates and robust demand primarily emanating from retail borrowers. Additionally, corporate/ wholesale loans are also set to pick up after remaining muted in the previous quarter. With respect to affordable housing disbursement, it has the potential to deliver robust growth. Restructuring may be relatively lower for companies as compared to Q1FY22. For LICHF, we expect incremental stress (stage-3 assets) to be lower at 5.5% in Q2FY22.

� Vehicle finance: For vehicle financiers, CE is expected to improve further with improved mobility, which may see lower slippages during the quarter and help GNPA reduce by 13% q-o-q to 10.6%, for companies in our coverage. We expect restructuring to be higher in Q2FY22 for companies under coverage. Vehicle finance witnessed highest restructuring while housing segment saw lowest restructuring in Q1FY22. However, most vehicle finance companies have up-fronted provisions in the previous quarters. Passenger vehicles volumes were severely affected in September 2021 due to chip shortage. Two-wheeler volumes are likely to pick-up ahead of the festive season characterised by inventory filling. M&HCV volumes may see a recovery going ahead. Used CV segment sales have been comparatively strong on account of un-affordability of new MHCVs, aided by a strong pipeline from Q1FY22. Companies such as M&M Financial Services (MMFS)/ Cholamandalam Investment and Finance Co Ltd (CIFC) are estimated to clock strong disbursement growth.

� Diversified financiers: CE may remain healthy and improved disbursements. Wholesale/corporate real-estate lenders have been focusing on the existing projects and are still selective/cautious in evaluating new projects. For unsecured MSME/personal loans, we expect CE to improve across product categories for Bajaj Finance (BAF).

� Insurance: Life insurers may witness strong APE growth, driven by ULIP and non-par savings. Demand for protection still persists which is making insurers’ to take cautious stance. With respect to general insurance, the combined ratio is likely to remain high, but lower than Q1FY22.

� AMCs: Industry AAUM grew by 37% y-o-y in Sepyember 2021. We expect the proportion of equity AUMs to be higher, thus supporting yields. Other income is likely to remain higher sequentially.

Valuation:

The disruption caused by the second wave of the pandemic and the absence of moratorium, led to delinquencies and higher provisions thereon, across NBFCs in Q1FY22. However, with the unlocking and increased mobility and rapid vaccination drives, the economic environment has improved significantly with activities picking up since July 2021. This was deliberated with the government’s concentrated focus on infrastructure sector and other initiatives for NBFCs and MSMEs, which is likely to improve demand for credit over the medium term. In these tough times NBFCs had accumulated liquidity and provision buffers. But with the normalization and improved collection efficiency, credit off take and asset quality is likely to improve in H2FY22.

Key Risks:

Weak economic environment and rising interest rates

Preferred Picks:

NBFCs: HDFC Ltd, Bajaj Finance, Cholamandalam Investment Finance Co., Repco Home Finance

Insurance: ICICI Prudential Life, Max Financial

AMCs: Nippon Life India AMC

Source: BSE; Sharekhan Research

Summary

� NBFCs – Expect improving trend in Q2: With the continued recovery in the economy since July 2021, we expect the trend in disbursements for NBFCs to improve (surging over 100% q-o-q, albeit on a lower base in Q1, which was severely impacted by the pandemic) as well as collection efficiencies; thereon leading to lower credit costs.

� Insurance – Pick-up in premium collections: Life insurers may witness strong APE growth driven by ULIP and non-par savings, although COVID-19 related claims are likely to remain elevated during the quarter. With respect to general insurance companies, the combined ratio may remain high, but is likely to be lower than Q1FY22.

� AMCs – Strong domestic inflows: Asset management companies are expected to show robust growth in equity assets driven by appreciation and robust domestic inflows with SIPs crossing the Rs. 10,000 crore mark in September.

� Preferred picks:

NBFCs: HDFC Ltd, Bajaj Finance, Cholamandalam Investment Finance, Repco Home Finance

Insurance: ICICI Prudential Life, Max Financial

AMCs: Nippon Life India AMC

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Q2FY2022 results estimates

Companies

NII (Rs cr) PPoP (%) PAT (Rs cr)

Q2 FY22E

Q2 FY21

YoY (%)

QoQ (%)

Q2 FY22E

Q2 FY21

YoY (bps)

QoQ (bps)

Q2 FY22E

Q2 FY21

YoY (%)

QoQ (%)

NBFCs

Bajaj Finance* 4,298 3,405 26.2 16.1 3,800 3,006 26.4 21.9 1,517 9,649 57.2 51.4

Cholamandalam 1,359 1,251 8.6 -0.3 932 900 3.7 -6.1 554 432 28.4 69.6

HDFC Ltd 4,474 3,603 24.2 8.5 4,987 3,968 25.7 8.6 3,578 2,870 26.6 14.5

L & T Finance* 1,404 1,519 -7.6 -6.4 999 1,002 -0.3 -12.7 227 248 -8.4 28.1

LIC Housing Finance 1,265 1,238 2.1 -0.8 1,123 1,112 1.0 9.8 513 791 -35 234

Mahindra Finance 1,247 1,361 -8.3 11.2 894 1,031 -13.3 19.3 351 304 16 -123

Repco Home Finance 151 135 12.2 7.7 133 116 15.3 9.1 76 81 -6.2 136.0

Total 14,197 12,512 13.5 7.3 12,868 11,134 15.6 9.6 6,816 14,374 -52.6 89.5

Companies Revenue from Operations (Rs. cr) PBT (Rs. cr) PAT (Rs cr)

AMC

NAM India* 352 259 36.2 16.5 277 191 44.9 17.3 207 145 42.5 14.1

Companies Net Premium Income (Rs. cr) PBT (Rs. cr) PAT (Rs cr)

Insurance

HDFC Standard Life 11,452 10,045 14.0 51.9 353 326 8.1 14.9 346 326 6.0 14.3

ICICI Prudential Life 9,815 8,572 14.5 48.7 146 330 -56 -167 158 303 -55.8 -167.5

ICICI Lombard General Insurance

3,283 3,097 6.0 -13.8 523 555 -5.7 159.5 389 416 -6.4 156.6

Max Financial Services

5,462 4,533 20.5 56.8 - - - - 125 26 380.8 62.3

Total 30,012 26,247 14.3 40.0 1,021 1,211 -15.7 249.2 1,017 1,071 -5.0 194.7

Source: Company, Sharekhan Research; * Consolidated financials

Valuations (As on Oct 08, 2021)

Companies RecoPrice target

(Rs)CMP (Rs)

EPS (Rs)

FY22E FY23E

NBFCs

Bajaj Finance* Buy UR 7,732 121.3 170.6

Cholamandalam Investment and Finance Company Buy 650 569 30.8 29.5

HDFC Ltd Buy 3,100 2,721 73.2 85.3

L & T Finance Holdings* Buy 118 91 8.2 11.5

LIC Housing Finance Buy 610 442 44.9 68.7

Mahindra and Mahindra Finance Buy 260 185 10.2 15.3

Repco Home Finance Buy 400 316 63.9 69.3

AMC

Nippon Life India AMC* Buy 502 447 11.2 13.3

Insurance

HDFC Standard Life Buy 850 722 7.8 9.2

ICICI Prudential Life Buy UR 660 4.3 6.8

ICICI Lombard General Insurance Buy 1,750 1,529 26.7 39.3

Max Financial Services Buy 1,250 999 13.5 17.6

Source: Company, Sharekhan Research; * Consolidated financials

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 15

Capital Goods and PowerReverting to growth; margins to be under pressure

Q2FY2022 Results Preview

Sector Capital goods and Power

Sector View: Positive

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Coverage Universe

CompaniesCMP (Rs)

Reco. PT (Rs)

LT 1727 Buy 1900

Bharat Electronics

200 Buy 254

Finolex cables 500 Buy 623

KEC International 463 Buy 505

Kalpataru Power 406 Buy 586

Ratnamani Metals

2209 Buy 2500

Thermax 1393 Buy 1720

Triveni Turbines 172 Buy UR

V-Guard 264 Buy 311

JMC Projects 111 Hold 132

KEI Industries 981 Buy UR

Polycab India 2529 Buy UR

Dixon Technologies

5268 Buy 5309

Amber Enterprises

3500 Buy 3716

Cummins India 883 Buy 1252

Blue star Limited 885 Buy 1200

Carborundum Universal

870 Buy UR

Honeywell Automation

45992 Buy 52407

Va Tech Wabag 344 Buy 435

Soft Coverage

ISGEC Heavy Engineering

721 Posi-tive

931

Kirloskar Oil Engines

200 Posi-tive

285

Power

NTPC 141 Buy 170

Power Grid 188 Buy 217

Tata Power 177 Buy UR

CESC 89 Buy 100

UR-Under Review

CMP as on Oct 08, 2021

We expect our capital goods coverage universe to report 18.5% y-o-y revenue growth (ex-L&T 20.6%) led by a pickup in execution and better labour availability for project-based companies (up 15.7% y-o-y driven by L&T) and strong growth in product based companies (up 36.8% y-o-y). However, OPM for capital goods ex-L&T is expected to contract 100bps y-o-y as product-based companies witness margin contraction (-129bps y-o-y) owing to higher commodity prices. Overall, capital goods universe is expected to witness 34.5% y-o-y growth in PAT driven by L&T (up 72.1% y-o-y) and product-based companies (up 17.7% y-o-y). For our power universe, we expect good recovery in Q2FY22 led by improved industrial activity, recovery in commercial demand and a low base of last year. However, the same is expected to be partially offset by rise in fuel cost.

Project based capital goods companies to see improvement in execution with stable OPM y-o-y: Our projectbased companies are expected to see revenue/OPM/PAT to rise by 15.7%/24bps/37.7% y-o-y for Q2FY2022. However, ex-L&T revenue/OPM/PAT to be 13.4%/-71bps/9.7% y-o-y. Improvement in execution led by labour availability domestically along with healthy order execution in exports markets is expected to drive revenues. L&T is expected to see improvement in execution driven by core Infra business along with improvement in OPM leading to strong net earnings growth y-o-y. We expect OPM contraction for KEC, Kalpataru, Triveni Turbines, ISGEC and Kirloskar Oil Engines to lead to dip in net earnings y-o-y.

Product based capital goods companies to see strong revenue growth but lower OPM y-o-y led by commodity inflation: Our product-based companies are expected to witness strong 36.8% y-o-y revenue growth for Q2FY2022 mainly led by multiple price hikes undertaken by the industry while demand environment is expected to have weakened in September. The elevated commodity prices y-o-y should lead to contraction in OPM (down 129bps y-o-y). However, strong revenue growth should support net earnings growth of 17.7% y-o-y. We expect strong net earnings growth for V-guard, KEI industries, Dixon Technologies, Amber enterprises and Bluestar while Finolex cables and Polycab are expected to be impacted by pressure on OPM y-o-y led by increased commodity prices.

Power sector – Decent power demand growth in Q2 to get partially offset by rise in fuel cost: Power demand in India witnessed good recovery in Q2FY22 led by improved industrial activity, recovery in commercial demand and a low base of last year. India’s peak power demand was at all time level of 201GW in July 2021. We thus expect improvement in PLF and a decent growth in power generation/sales for power companies; however partially offset by rise in fuel cost (higher coal price given supply shortage amid rise in power demand). We expect NTPC to post 2.7% y-o-y earnings growth supported by commercialization of new capacities partially offset by lower other income. Power Grid is likely to report 11.4% y-o-y PAT growth as asset capitalization of ~Rs5,500 crore to increase regulated equity. CESC is expected to witness strong earnings recovery as we expect sales volume to increase by 14% y-o-y given low base of Q2FY21. Tata Power would benefit from improvement in integrated performance of CGPL & coal companies led by sharp rise in the international coal price, higher solar EPC execution, benefit of acquisition of Odisha DISCOMS and likely lower interest cost.

Our Call

Valuation: Prefer companies with inherent abilities to strive during turbulent times:

We expect order booking to gather pace with pick up in government infrastructure investments and private capex. The exports markets is expected to remain buoyant with a pickup in oil prices. For product-based companies we expect growth to be driven by price hikes and market share gains from unorganised players. For power sector, we believe reforms (New Tariff Policy and Power distribution scheme), likely strong power demand growth and focus on renewable energy capacity expansion would drive growth. We continue to prefer companies having a strong diversified order book, execution capabilities and healthy balance sheet (in case of project-based companies). In the consumer durables segment, we prefer companies with a strong cash flow and better working capital management. Hence, among project-based companies, we prefer L&T, Honeywell Automation India, Carborundum Universal, Cummins India, KEC while in consumer durable space we prefer Polycab, Dixon Technologies Amber Enterprises and KEI Industries.

Key risks:

Weak domestic macroeconomic environment leading to feeble project tendering and higher commodity prices affecting OPM.

Leaders: L&T, BEL, Ratnamani, Thermax, V-guard, KEI industries, Amber, Cummins India, Blue Star, Dixon Technologies, Honeywell Automation India, JMC Projects, Tata Power, CESC

Laggards: KEC, Kalpataru, Triveni Turbines, ISGEC, Kirloskar Oil Engines, finolex cables, Polycab

Preferred Picks: L&T, Honeywell Automation India, Carborundum Universal, KEC, Polycab, Dixon Technologies, Amber Enterprises, KEI Industries, NTPC, Powergrid and Tata Power.

Price chart

Source: NSE India, Sharekhan Research

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Summary

� We expect our capital goods coverage universe to report 18.5% y-o-y revenue growth (ex-L&T 20.6%) led by a pick up in execution and better labour availability.

� Capital goods ex-L&T is expected to witness OPM contraction as product-based companies witness margin contraction owing to higher commodity prices. PAT is expected to witness 34.5% y-o-y growth led by L&T and product-based companies (up 17.7% y-o-y).

� For our power universe, we expect good recovery in Q2FY22 led by improved industrial activity, recovery in commercial demand and a low base of last year. However, the same is expected to be partially offset by rise in fuel cost.

� Among project-based companies, we prefer L&T, Bharat Electronics, Honeywell Automation India, Carborundum Universal, KEC while in the consumer durables space we prefer Polycab, Dixon Technologies, Amber Enterprises and KEI Industries. In power we prefer NTPC, Powergrid and Tata Power

October 12, 2021 16

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Q2FY2022 results estimates

Company

Revenue (Rs. cr) OPM (%) Net profit (Rs. cr)

Q2 FY22E

Q2 FY21

y-o-y (%)

Q2 FY22E

Q2 FY21

y-o-y (%)

Q2 FY22E

Q2 FY21

y-o-y (%)

Capital goods

LT 36269 31035 16.9% 11.5% 10.7% 75 1904 1107 72.1%

Bharat Electronics 3502 3195 9.6% 19.3% 19.6% -34 473 399 18.5%

Finolex cables 745 639 16.5% 11.8% 12.9% -108 71 69 2.7%

KEC International 3537 3258 8.6% 7.4% 9.0% -160 119 143 -16.5%

Kalpataru Power 2096 1882 11.4% 10.4% 10.7% -33 129 159 -19.1%

Ratnamani Metals 718 577 24.5% 15.8% 14.2% 161 73 57 29.4%

Thermax 1411 1141 23.7% 8.0% 7.0% 105 78 56 40.4%

Triveni Turbines 202 185 8.9% 19.7% 26.7% -701 31 43 -28.0%

V-Guard 756 617 22.6% 12.7% 12.0% 66 62 50 23.3%

JMC Projects 1100 804 36.9% 9.8% 9.1% 70 33 7 367.0%

KEI Industries 1324 1037 27.7% 11.6% 11.4% 23 98 68 43.9%

Polycab India 2743 2114 29.8% 13.1% 14.8% -172 239 221 8.3%

Dixon Technologies 2690 1639 64.2% 4.0% 5.5% -145 61 52 17.2%

Amber Enterprises 634 408 55.4% 5.3% 5.3% 0 3 2 104.3%

Cummins India 1358 1160 17.0% 14.1% 14.4% -37 193 146 32.6%

Blue star Limited 1171 902 29.9% 5.4% 6.1% -68 27 15 77.4%

Carborundum Universal 775 692 12.1% 18.5% 19.4% -87 95 86 10.4%

Honeywell Automation 905 760 19.1% 21.0% 19.0% 197 147 108 36.2%

Va Tech Wabag 712 608 17.0% 6.1% 7.1% -104 18 17 10.1%

Soft Coverage

ISGEC Heavy Engineering 1429 1345 6.3% 7.7% 10.4% -279 59 78 -23.7%

Kirloskar Oil Engines 895 828 8.1% 10.2% 13.0% -275 37 58 -36.2%

Power

NTPC 26800 24677 8.6% 30.1% 29.1% 97 3600 3505 2.7%

Power Grid 10901 9058 20.3% 88.0% 88.0% 0 3474 3117 11.4%

Tata Power 9605 8290 15.9% 23.0% 24.1% -118 435 280 55.6%

CESC 2384 1989 19.9% 20.6% 17.0% 360 265 228 16.1%

Source: Company, Sharekhan Research

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Valuations (As on Oct 08, 2021)

Company CMP (Rs) RecoPrice

Target (Rs)

EPS (Rs) P/E (x)

FY22E FY23E FY24E FY22E FY23E FY24E

Capital goods

LT 1727 Buy 1900 66.2 84.3 113.4 26.1 20.5 15.2

Bharat Electronics 200 Buy 254 9.0 10.2 11.6 22.3 19.5 17.3

Finolex cables 500 Buy 623 21.8 25.4 29.6 23.0 19.7 16.9

KEC International 463 Buy 505 23.8 26.6 28.8 19.4 17.4 16.1

Kalpataru Power 406 Buy 586 36.2 43.9 51.6 11.2 9.3 7.9

Ratnamani Metals 2209 Buy 2500 68.6 89.3 105.3 32.2 24.7 21.0

Thermax 1393 Buy 1720 24.5 30.5 37.7 56.8 45.6 37.0

Triveni Turbines 172 Buy UR 4.0 4.5 5.0 42.6 37.9 34.1

V-Guard 264 Buy 311 5.4 6.2 7.1 49.4 42.8 37.3

JMC Projects 111 Hold 132 6.9 11.2 14.6 16.1 9.9 7.6

KEI Industries 981 Buy UR 37.3 45.9 52.2 26.3 21.4 18.8

Polycab India 2529 Buy UR 67.5 83.0 97.4 37.4 30.5 26.0

Dixon Technologies 5268 Buy 5309 43.1 59.7 92.2 122.1 88.2 57.1

Amber Enterprises 3500 Buy 3716 36.6 55.7 79.6 95.5 62.9 44.0

Cummins India 883 Buy 1252 23.2 28.6 33.8 38.0 30.9 26.1

Blue star Limited 885 Buy 1200 21.0 28.4 35.7 42.1 31.2 24.8

Carborundum Universal 870 Buy UR 18.8 23.3 26.6 46.2 37.3 32.7

Honeywell Automation 45992 Buy 52407 623.6 794.0 998.7 73.8 57.9 46.1

Va Tech Wabag 344 Buy 435 21.5 29.0 35.1 16.0 11.9 9.8

Soft Coverage

ISGEC Heavy Engineering 721 Positive 931 31.9 41.1 51.6 22.6 17.5 14.0

Kirloskar Oil Engines 200 Positive 285 13.8 15.7 26.8 14.5 12.8 7.5

Power

NTPC 141 Buy 170 16.1 18.2 20.7 8.8 7.8 6.8

Power Grid 188 Buy 217 21.6 23.5 26.2 8.7 8.0 7.2

Tata Power 177 Buy UR 5.3 7.0 7.7 33.6 25.3 23.0

CESC 89 Buy 100 7.1 8.2 8.9 12.5 10.8 10.0

Source: Company, Sharekhan Research, UR-Under Review

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 18

Consumer DiscretionaryRising demand & footfalls to fuel recovery

Q2FY2022 Results Preview

Sector: Consumer Discretionary

Sector View: Positive

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Reco/View

PT (Rs)

Aditya Birla Fashion and Retail

262 Buy 275

Shoppers Stop 276 Positive 328

Trent 1,100 Buy 1,125

Titan Company 2,371 Buy 2,790

Renaissance Global

870 Positive 943

Bata India 1,962 Buy **

Relaxo Footwears 1,351 Buy **

Jubilant FoodWorks

4,062 Buy 4,707

Indian Hotels Company

207 Buy 215

Wonderla Holidays

247 Buy 270

Arvind 108 Buy 122

Himatsingka Seide 283 Positive 346

KPR Mill 451 Buy 472

SP Apparels 343 Positive 398

Welspun India 167 Buy 170

Inox Leisure 413 Buy 470

PVR 1,702 Buy 1,900

Zee Entertainment 304 Buy 400

Source: Sharekhan Research, ** Under reviewCMP as on Oct 11, 2021

Our coverage universe

Price chart

Post the COVID-led roadblock to recovery in Q1FY2022, consumer discretionary companies (including retail and hospitality) are expected to post strong recovery in performance in Q2FY2022, led by opening up of retail stores/restaurants, improved footfalls, pent-up demand, and picking up of festive sales at fag-end of the quarter. Better operating leverage and cost-saving initiatives undertaken in the past few quarters would help companies to post strong improvement in profitability during the quarter. Textile companies are expected to post strong performance y-o-y due to sustained higher demand in key export markets. However, with spike in cotton and yarn prices, margins would be lower on sequential basis.

� Retail, QSR and hospitality – Improved footfalls and pent-up demand to drive recovery in Q2: Opening of stores, improvement in footfalls led by significant drop in COVID-19 cases, and pent-up demand would help retail companies to post strong recovery in performance. We expect branded apparel and retail companies to post recovery of 65-100% in revenue in Q2FY2022. Jewellery company such as Titan is expected to post strong revenue growth of 73% (well ahead of pre-COVID levels), while Relaxo Footwear is expected to report low double-digit revenue growth due to its value-for-money portfolio. Jubilant Foodworks is expected to post delivery-led revenue growth of 35%. Profitability of all companies will improve because of better operating leverage and cost-saving initiatives undertaken in the past.

� Textile – Export-led strong revenue growth; higher input prices to affect margins: Sharekhan’s textile universe comprising home textile and garment manufacturing companies is expected to post revenue growth of 27% y-o-y in Q2FY2022. Growth will largely be driven by higher capacity utilisation, higher demand in export markets, and improving demand in domestic markets. We expect companies such as Arvind, Himatsingka, Welspun India, SP Apparels, and KPR Mill to achieve revenue growth of 30-40% in Q2. However, margins will be lower on a sequential basis due to inflated input prices. On absolute basis, operating profit/PAT performance would be better on a y-o-y basis due to higher sales growth.

� Outlook – Ongoing festive season bodes well: Recovery in the performance of retail and hospitality companies would be much stronger and faster compared to recovery in performance after the first wave in FY2021. We believe this momentum will continue in the ongoing festive season with reduction in COVID-19 cases reducing fear among consumers to explore the outside world. Thus, we expect all branded apparel and retail companies to cross pre-COVID level sales in Q3FY2022. On the other hand, textile companies will continue the good show with India’s market share in for home textile and garments improving in export markets. Raw material inflation is expected to cool off in quarters ahead, while margins are expected to improve due to efficiencies and higher utilisation in the long run.

Valuation and preferred picks:Some of the branded apparel and hotel companies are available at attractive valuation. We like companies with good growth prospects, lean balance sheet, and attractive valuations. Titan will continue to benefit from share gains from regional brands, strong pent-up demand from the wedding segment, and expansion in middle India. Aditya Birla Fashion & Retail (ABFRL) and Shoppers Stop will be good plays on expected strong recovery in the branded apparel and retail space. In the recovery in the hospitality space, we like Indian Hotels Company, while Jubilant Foodworks will be a dominant player in the domestic QSR industry. In the textile space, we like Himatsingka and SP Apparels on account of strong prospects in export markets.

Leaders for Q2FY2022: Titan, Trent, ABFRL, KPR Mill, and SP Apparel

Laggards for Q2FY2022: Wonderla Holidays

Preferred Picks:

Branded apparel and retail: ABFRL, Titan, and Shoppers Stop

Textile: Himatsingka Seide and SP Apparels

Out-of-home discretionary: Jubilant Foodworks, Indian Hotels Co., and PVR

Summary

� Opening up of stores, improved footfalls, and pent-up demand would lead to healthy recovery for branded apparels, jewellery, and hospitality sector in Q2FY2022. Revenue has reached 65-100% of pre-COVID levels for most companies. Better operating leverage will improve profitability.

� Garment and home textile companies are expected to post strong double-digit revenue growth, led by sustained high export orders. Margins will be lower on y-o-y and sequential basis due to higher input prices.

� Branded apparel, jewellery, and footwear companies will see revenue crossing pre-COVID level mark as festive demand will aid in reporting strong sales in Q3. Textile companies will continue to benefit from improving India’s market share in export markets.

� Preferred picks

� Branded apparel and retail: ABFRL, Titan, and Shoppers Stop

� Textile: Himatsingka Seide & SP Apparels

� Out-of-home discretionary: Jubilant Foodworks, Indian Hotels Co., and PVR

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Q2FY2022 results estimates

CompanyNet sales (Rs cr) Operating profit (Rs. crore) Adjusted PAT (Rs cr)

Q2FY22E Q2FY21 YoY (%) Q2FY22E Q2FY21 Y-o-Y Q2FY22E Q2FY21 Y-o-Y %

Branded Apparel, Retail, and Footwear

Aditya Birla Fashion and Retail

1,904 1,019 86.9 188 -2 - -82 -303 -72.9

Shoppers Stop 563 292 92.6 59 -35 - -29 -126 -76.9

Trent 785 452 73.7 127 6 - 15 -48 -

Titan Company 7,866 4,553 72.8 804 313 - 528 173 -

Renaissance Global 511 523 -2.3 44 35 26.2 31 23 35.0

Bata India 589 368 60.0 103 18 - 29 -44 -

Relaxo Footwears 677 576 17.5 146 127 14.9 85 75 13.3

Hospitality & QSR

Jubilant FoodWorks 1,084 806 34.6 275 215 28.0 112 74 50.3

Indian Hotels Company 578 257 125.4 8 -150 - -153 -268 -42.9

Wonderla Holidays 15 0 - -7 -9 -22.7 -12 -16 -24.0

Textile

Arvind 1,841 1,305 41.0 155 121 27.9 28 12 136.4

Himatsingka Seide 793 653 21.4 111 91 22.0 26 4 -

KPR Mills 1,135 942 20.5 238 189 25.5 156 113 38.8

SP Apparels 253 190 33.3 47 34 37.1 27 19 44.6

Welspun India 2,399 1,974 21.6 436 386 12.9 227 188 20.9

Total 20,993 13,909 50.9 2,733 1,340 104.0 989 -126 -

Media & Entertainment

Inox Leisure 59 0 - -57 41 - -71 -68 4.8

PVR 104 40 156.3 -62 -84 -26.1 -153 -184 -17.0

Zee Entertainment 1,989 1,723 15.4 430 314 36.9 280 212 32.2

Grand total 23,144 15,673 47.7 3,043 1,610 89.0 1,045 -166 -Source: Company; Sharekhan estimates

Valuations (As on Oct 11, 2021)

CompaniesCMP (Rs.)

Reco.Price

Target (Rs.)

EPS (Rs.) EV/EBITDA (x)

FY21 FY22E FY23E FY21 FY22E FY23E

Branded Apparel, Retail and FootwearAditya Birla Fashion and Retail 262 Buy 275 -6.3 -0.6 2.9 46.9 26.6 18.1

Shoppers Stop 276 Positive 328 -23.1 -6.8 9.9 18.2 10.0 5.9

Trent 1,100 Buy 1,125 -1.3 3.3 9.2 99.7 58.4 40.7

Titan Company 2,371 Buy 2,790 11.0 22.2 31.7 122.8 67.1 48.8

Renaissance Global 870 Positive 943 24.9 52.4 67.9 14.7 8.3 7.0

Bata India 1,962 Buy ** -5.9 17.2 36.0 98.6 36.8 23.6

Relaxo Footwears 1,351 Buy ** 12.3 13.4 17.3 67.5 59.8 48.4

Hospitality & QSR

Jubilant FoodWorks 4,062 Buy 4707 17.7 40.0 57.2 71.3 47.6 36.6

Indian Hotels Company 207 Buy 215 -7.8 -1.5 1.9 - 66.0 32.3

Wonderla Holidays 247 Buy 270 -8.8 -3.4 5.9 - 97.1 14.7

Textile

Arvind 108 Buy 122 0.0 2.9 7.4 9.4 7.4 5.7

Himatsingka Seide 283 Positive 346 -5.4 18.9 31.4 17.3 8.5 6.2

KPR Mill 451 Buy 472 74.9 95.8 116.5 4.2 3.4 2.5

SP Apparels 343 Positive 398 16.8 31.8 44.2 10.2 6.4 4.8

Welspun India 167 Buy 170 5.5 7.0 10.1 14.3 11.6 8.9

Media & Entertainment

Inox Leisure 413 Buy 470 -12.2 20.0 25.0 18.9 5.6 5.0

PVR 1,702 Buy 1,900 -61.5 42.4 58.5 32.5 9.9 8.7

Zee Entertainment 304 Buy 400 13.5 17.2 19.1 11.5 9.0 7.7Source: Company; Sharekhan estimates ** Under review

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 20

Consumer GoodsEyeing a mixed quarter

Q2FY2022 Results Preview

Sector: Consumer Goods

Sector View: Positive

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Reco/View

PT (Rs)

Asian Paints 3,307 Buy 3,550

Bajaj Consumer Care

253 Buy 355

Britannia Industries

3,886 Buy 4,740

Colgate-Palmolive (India)

1,687 Buy 1,950

Dabur India 607 Buy 725

Emami 551 Buy 680

Globus Spirits 1,456 Positive **

Godrej Consumer Products

1,019 Buy 1,249

Hindustan Unilever

2,640 Buy 3,185

Indigo Paints 2,528 Buy 3,305

ITC 232 Buy 280

Jyothy Labs 165 Buy 203

Marico 563 Buy 625

Nestle India 19,029 Buy 22,395

Radico Khaitan 971 Buy 1,250

Tata Consumer Products

819 Buy 960

Zydus Wellness 2,364 Buy 2,505

Source: Sharekhan Research, ** Under reviewCMP as on Oct 08, 2021

Our coverage universe

Price chart

The consumer goods sector is expected to deliver a mixed performance in Q2FY2022 with demand environment remaining resilient while inflated input prices expected to put pressure on margins, thereby affecting bottomline growth. A large part of revenue growth will be volume led growth during the quarter. Among consumer staples companies, Marico will lead the race with revenue growth in the low twenties, while rest of the pack is expected to post high single digit to low double-digit revenue growth. Paint companies are expected to post revenue growth of above 20% led by pent-up demand.

� Volume-led revenue growth: The receding impact of second wave of COVID-19, stable store operating hours, improving footfalls at modern trade, recovery in discretionary/out-of-home categories and stable demand for staples/essential products will help Sharekhan’s consumer goods universe to deliver 12% revenue growth in Q2FY2022 (largely a volume-led growth). Marico will deliver low twenties topline growth (with low double digit volume growth) while HUL, Nestle, Emami, GCPL, Britannia and TCPL will deliver revenue growth in the range of 7-12%. Pent up demand would help paint companies to shine, while high demand and better mix would help liquor companies to post strong revenue growth.

� Raw material inflation to dent margins: Higher input prices such as palm oil (up by 63%), Tio2 (up by 60%), LLP (up by 31%) and HDPE (up by 23%) would affect the margins of most of the companies under our coverage. Staples (barring TCPL) and paints companies are likely to post decline in the OPM in the range of 50-450 bps in Q2FY2022. A ~30% decline in raw tea prices would help TCPL to post slightly better margins on y-o-y basis. Better revenue mix and benign grain-based input prices would help liquor companies such as Globus Spirits and Radico Khaitan to post higher operating margins on a y-o-y basis.

� Outlook: Steady demand environment; input cost pressure likely to ease out: Rural demand is expected to remain strong with better agri production and supported by various government initiatives. Out-of-home/discretionary products will continue to post better demand in the quarters ahead. Overall we expect consumer goods companies to maintain steady volume growth momentum in the coming quarters. Raw material inflation is expected to cool down in a quarter or two easing out substantial pressure on margins in H2FY2022.

Valuation & Picks:

The Nifty Consumption index has seen strong run up of 42% in last twelve months in-line with strong run-up in the broader indices. We retain our selective stance in the FMCG space and give preference to companies with strong earning visibility and decent valuations. In the large cap space, we like GCPL (Strong growth prospects with a change in the top management makes it a good pick) and Britannia Industries (on back of its discounted valuations as compared to some of the large consumer goods companies). Correction in raw tea prices and market share gains in key categories would help TCPL and Marico post earnings growth in the coming quarters. In mid-caps we like Indigo Paints, which is focusing on improving its penetration in the domestic market by expanding dealers/distribution base and Radico Khaitan, which will be one of the key beneficiaries of a higher shift to premium products in the domestic liquor market. On the other hand, Globus Spirits will benefit from government focus on high ethanol blending in fuel resulting in higher margins in the coming years.

Leaders for Q2FY2022: Radico Khaitan, Tata Consumer Products, Globus Spirits and Zydus Wellness

Laggards for Q2FY2022: Britannia Industries, Dabur India and Jyothy Labs

Preferred Picks:

Large-caps: Britannia Industries, Godrej Consumer Products, Marico & Tata Consumer Products

Mid-caps: Indigo Paints, Radico Khaitan & Globus Spirits

Summary

� Resilient demand for essentials and a recovery in sales of discretionary products would help consumer goods companies to post volume-led revenue growth in Q2FY2022. Sharekhan’s Consumer goods universe’s revenues are likely to grow by 12% y-o-y.

� With key input prices remaining high y-o-y, OPMs will remain under pressure, which will lead to moderate bottom line growth. Sharekhan’s Consumer goods universe’s PAT to grow by 6% y-o-y in Q2FY2022.

� Demand to remain resilient; discretionary categories will see q-o-q improvement. Raw material prices (except for crude derivatives and palm oil) have remained sequentially stable and are likely to correct in the coming quarters.

� Preferred Picks:

Large-caps: Britannia Industries, Godrej Consumer Products (GCPL), Marico & Tata Consumer Products (TCPL)

Mid-caps: Indigo Paints, Radico Khaitan & Globus Spirits

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Valuations (As on Oct 08, 2021)

Company CMP

(Rs)Reco

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EPS (Rs) P/E (x)

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Asian Paints 3,307 Buy 3,550 33.4 41.8 49.5 96.0 76.7 64.8

Bajaj Consumer Care 253 Buy 355 15.2 15.6 18.1 16.8 16.3 14.0

Britannia Industries 3,886 Buy 4,740 76.8 78.4 93.5 51.3 50.2 42.1

Colgate-Palmolive (India) 1,687 Buy 1,950 38.1 38.9 42.4 44.1 43.1 39.6

Dabur India 607 Buy 725 9.6 11.2 13.9 64.2 55.1 44.2

Emami 551 Buy 680 10.2 15.1 19.4 53.9 36.6 28.4

Globus Spirits 1,456 Positive ** 48.9 70.7 94.2 28.2 19.5 14.7

Godrej Consumer Products 1,019 Buy 1,249 17.3 19.3 23.4 59.0 52.7 43.5

Hindustan Unilever* 2,640 Buy 3,185 34.6 40.4 48.4 77.5 66.5 55.4

Indigo Paints 2,528 Buy 3,305 14.9 26.8 40.2 167.8 93.3 62.1

ITC 232 Buy 280 10.6 11.7 13.9 21.8 19.8 16.7

Jyothy Labs 165 Buy 203 5.7 6.5 8.1 29.5 25.8 20.6

Marico 563 Buy 625 9.2 10.8 12.6 61.5 52.2 44.8

Nestle India# 19,029 Buy 22,395 216.0 260.6 303.8 88.8 73.6 63.1

Radico Khaitan 971 Buy 1,250 20.8 23.5 29.6 43.6 38.5 30.6

Tata Consumer Products* 819 Buy 960 10.3 11.8 14.6 79.4 69.4 56.1

Zydus Wellness 2,364 Buy 2,505 39.4 51.7 65.7 58.9 44.9 35.3

Source: Company, Sharekhan estimates# Nestle India is a calendar year ending company* Estimates for HUL and Tata Consumer Products are including the merger of acquired businesses ** Under review

Q2FY2022 results estimates

CompanyNet sales (Rs cr) OPM (%) Adjusted PAT (Rs cr)

Q2FY22E Q2FY21 YoY (%) Q2FY22E Q2FY21 Y-o-Y BPS

Q2FY22E Q2FY21 Y-o-Y %

Asian Paints 6,708 5,350 25.4 21.0 23.6 -264 942.0 851.9 10.6

Bajaj Consumer Care 246 225 9.3 23.7 27.8 -413 54 57 -5.4

Britannia Industries 3,664 3,419 7.2 16.7 19.8 -302 430 496 -13.3

Colgate-Palmolive (India) 1,376 1,285 7.1 31.2 31.8 -61 287 274 4.7

Dabur India 2,727 2,516 8.4 21.5 22.6 -117 470 483 -2.7

Emami 827 735 12.6 32.1 35.0 -288 199 194 2.6

Globus Spirits 382 328 16.7 24.3 18.3 597 53 33 60.7

Godrej Consumer Products 3,192 2,915 9.5 22.0 23.5 -147 486 458 6.0

Hindustan Unilever 12,741 11,442 11.4 24.2 25.1 -90 2,167 2,069 4.8

Indigo Paints 192 155 23.9 16.3 18.8 -245 19 19 3.1

ITC 13,214 11,977 10.3 33.4 33.9 -46 3,490 3,232 8.0

Jyothy Labs 552 504 9.5 12.7 17.3 -466 47 60 -21.7

Marico 2,406 1,989 20.9 17.0 19.6 -257 308 294 4.8

Nestle India 3,894 3,542 10.0 24.5 24.9 -47 619 587 5.4

Radico Khaitan 725 630 15.0 18.7 17.0 165 89 72 23.1

Tata Consumer Products 3,090 2,781 11.1 14.7 14.4 33 312 297 5.0

Zydus Wellness 373 342 8.9 7.7 7.9 -26 19 -27 -

Grand Total 56,308 50,136 12.3 24.4 25.6 -121 9,993 9,451 5.7

Source: Company, Sharekhan estimates* Estimates for HUL and Tata Consumer Products are including the merger of acquired businesses# Nestle India is a calendar year ending company and hence, estimates are for Q3CY2021

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 22

Cement/Infrastructure/Building Material/LogisticsBright Q2 for all but cement players

Q2FY2022 Results Preview

Sector: Cement/Infra/Building Material/Logistics

Sector View: Positive

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Companies CMP (Rs)

Reco.PT

(Rs)

Cement

Shree Cement 28058 Hold 32200

Ultratech Cement 7356 Buy 8800

Grasim Industries 1592 Buy 1880

The Ramco Cement 1015 Buy 1310

JK Lakshmi Cement 650 Hold 780

Dalmia Bharat 2092 Buy 2601

Infrastructure

Sadbhav Engineering

48 Hold 68

KNR Constructions 285 Buy 400

Ashoka Buildcon 103 Buy 125

PNC Infratech 364 Buy 420

Building Materials

Century Plyboards 484 Buy 505

Greenlam Industries

1342 Buy 1605

Greenpanel Industries

341 Buy 395

Pidilite Industries 2460 Buy 2525

APL Apollo Tubes 859 Buy 1038

Hitech pipes 592 Positive 689

Supreme Industries 2530 Buy 2553

Kajaria Ceramics 1248 Buy 1402

Astral 2245 Hold 2404

Logistics

Gateway Distrparks 255 Buy 347

Gati 154 Positive 204

Mahindra Logistics 758 Buy UR

TCI Express 1530 Buy 1913

TCI 433 Buy 541

Source: Sharekhan Research, UR - Under reviewCMP as on Oct 07, 2021

Our coverage universe

Price chart

We expect our Cement coverage universe to report single-digit volume growth y-o-y led by back-ended monsoons while OPM to be affected by increased power & fuel costs. Infrastructure space is expected to witness rise in execution while order inflows are slated to rise in H2FY2022. Building materials players are likely to benefit from strong residential demand and rising realizations in piping and wood panel industries. Logistics sector has seen improved EXIM and domestic trade which besides margin expansion that would drive net earnings. Strong net earnings expected from Grasim, Ultratech, KNR Construction, PNC Infratech, Greenpanel, Astral, APL Apollo, Gateway Distriparks, TCI Express and TCI limited.

Cement – Weak September and higher power & fuel costs to lead to dip in PAT y-o-y: Our cement universe (ex-Grasim) is likely to register an 8.5% y-o-y (-2.8% q-o-q) rise in revenue, led by 4.5% y-o-y rise in volumes (-0.3% q-o-q) and 3.8% y-o-y growth in blended realisations (-2.4% q-o-q) for Q2FY2022. Healthy demand in July and August months was eroded by weak September due to back-ended monsoon leading to single digit volume growth y-o-y. As per our channel checks, average pan-India cement prices in Q2FY2022 were down 3.7% q-o-q (up 2.1% y-o-y), with higher dip seen in East, South and Central regions in this order. Further, Q2FY2022 is likely to be affected by increased power and fuel costs and higher freight costs leading to 14.4% y-o-y dip in average EBITDA/tonne for our cement universe at Rs. 1,146 (down 19.4% q-o-q). Pressure on OPM to lead to 12.6% y-o-y dip in net profit (-28.3% q-o-q) for our cement universe.

Infrastructure – Expect pick-up in execution and order inflows: Our infrastructure universe is expected to post revenue growth of 15.3% y-o-y (+4% q-o-q), as companies are much better placed in terms of labour availability leading to execution pick-up. Order book position remains strong, providing revenue visibility over the next 2-3 years, while project awards by both NHAI and MoRTH is expected to improve in H2FY2020. OPM is expected to remain stable q-o-q (-94 bps q-o-q) owing to rise in commodity prices. Strong rise in execution y-o-y, stable OPM and lower leverage on the balance sheet (lower interest costs) to aid in 8.2% y-o-y rise in net profit (up 4.4% q-o-q) for our infra universe.

Building material & Logistics – Building material space to ride on improved residential demand; uptick in trade bodes well for logistics: The building materials sector is expected to see healthy demand emanating from residential segment, which along with lower base of last year should aid in 26.2% y-o-y (up 21.8% q-o-q) rise in revenue. Further, higher revenue is expected to be affected by rising key raw material costs leading to 149 bps y-o-y dip in OPM (up 131 bps q-o-q). Hence, the building material space is expected to post 14.4% y-o-y rise in net profit (+37.1% q-o-q). Piping and wood panel companies are better-placed as compared to ceramic players. The logistics space is expected to see an improving demand environment as can be seen in rising EXIM & domestic volumes (e-way bills & FASTag issuances). Hence, we expect our logistics coverage universe to post 10.9% y-o-y rise in revenue (up 7.9% q-o-q). Higher y-o-y revenue is likely to aid in OPM expansion (up 100 bps y-o-y), leading to 51.5% y-o-y rise in net profit (up 2.2% q-o-q).

Valuations

Structural growth drivers intact: The government’s focus on boosting infrastructure investments especially roads and residential demand momentum sustaining post Q4FY2021 is expected to benefit cement, infrastructure and building material space. However, rising power & fuel costs in cement, gas prices for ceramic and wood panel industries and raw material price increase in piping pose near-term challenges on maintaining OPM. However, considering structural growth drivers we believe much of the input cost pressures can be passed through in ensuing period. Hence, we remain constructive on the sectors. We prefer industry leaders such as UltraTech, Grasim and efficient regional players such as The Ramco Cements and Dalmia Bharat in the cement space. In the infrastructure space, we prefer companies having strong order books, low leverage, and distinct execution capabilities such as KNR Construction and PNC Infratech. In the building material space, we prefer companies that are poised to gain market share from unorganised players and have strong cash flow generation capabilities such as Century Plyboards, Greenlam Industries, Greenpanel Industries, and Pidilite Industries. In the logistics space, we prefer asset-light business models such as Mahindra Logistics, TCI Ltd., and TCI Express along with asset-heavy models such as Gateway Distriparks.

Key Risks

Weak macroeconomic environment and rising interest rates are key risks across three sectors

Leaders for Q2FY2022: Ultratech, Grasim, Shree Cement, KNR Construction, PNC Infratech, Greenpanel, Astral, APL Apollo, Gateway Distriparks, TCI Express and TCI limited

Laggards for Q2FY2022: Dalmia Bharat, India Cements, Sadbhav Engineering, Ashoka Buildcon, Century Plyboards, Kajaria Ceramics, Supreme Industries

Preferred Picks: UltraTech, Grasim, Dalmia Bharat, The Ramco Cements, KNR Construction, PNC Infratech, Century Plyboards, Greenlam Industries, Greenpanel Industries, Pidilite Industries, TCI Express, TCI Ltd., and Gateway Distriparks.

Summary

� The cement sector is expected to report single-digit volume growth y-o-y led by back ended monsoons while OPM to be affected by increased power & fuel costs. Higher execution and expected uptick in order inflows for infra.

� Building material players would benefit from rising residential demand and higher prices for pipes and wood panels. Logistics space to benefit from improved EXIM and domestic trade and margin expansion.

� Government focus on infrastructure investments, rising residential demand, improving EXIM and domestic trade environment are structural growth drivers. Rising input costs pose near term challenge for OPM.

� We stay Positive on the sector. Preferred picks - UltraTech, Grasim, Dalmia Bharat, The Ramco Cements, KNR Construction, PNC Infratech, Century Plyboards, Greenlam Industries, Greenpanel Industries, Pidilite Industries, TCI Express, TCI Ltd., and Gateway Distriparks.

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BSE Sensex S&P BSE Basic Materials

October 12, 2021 23

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Q2FY2022 results estimates

CompanyRevenue (Rs. cr) OPM (%) Net profit (Rs. cr)

Q2 FY22E

Q2 FY21

YoY %

QoQ %

Q2 FY22E

Q2 FY21

YoY(bps)

QoQ(bps)

Q2 FY22E

Q2 FY21

YoY %

QoQ %

Cement

Grasim 4505 2949 52.8 19.7 19.9 11.5 836 20 776 360 115.5 61.2

UltraTech 11107 10019 10.9 -3.2 23.5 25.5 -200 -416 1292 1215 6.3 -23.2

Shree Cement 3244 3022 7.3 -6.0 24.6 32.7 -806 -475 432 547 -21.1 -34.7

The Ramco Cements 1281 1257 1.9 4.2 25.2 35.2 -994 -440 150 236 -36.5 -11.3

JK Lakshmi Cement 1116 1045 6.8 -9.4 14.8 17.9 -303 -270 75 81 -6.5 -36.5

Dalmia Bharat 2535 2410 5.2 -2.1 18.8 29.1 -1032 -823 105 231 -55 -52.9

Soft Coverage

India Cements 1157 1070 8.2 13.2 12.5 21.9 -940 -330 30 71 -57.9 -19.6

Mangalam Cement 339 321 5.6 -4.7 12.6 17.2 -457 -1052 17 21 -20.5 -57.5

Total 25283 22092 14.4 0.7 21.6 24.9 -332 -410 2877 2763 4.1 -15.7

Total (ex-Grasim) 20,778 19,143 8.5 -2.8 21.9 27.0 -501 -479 2101 2403 -12.6 -28.3

Infrastructure

Sadbhav Engineering 428 412 3.8 62.7 11.7 12.1 -40 249 5 5 1.7 -

KNR Constructions 729 601 21.2 -1.5 18.9 20.6 -175 -48 78 61 26.9 6.2

Ashoka Buildcon 952 877 8.4 -5.9 12.4 14.9 -255 52 92 105 -12.3 -9.3

PNC Infratech 1,287 1,053 22.2 2.9 13.8 13.5 34 -19 96 69 38.9 3.2

Total 3,395 2,944 15.3 4.0 14.2 15.2 -94 6 271 240 12.7 8.0

Building Materials

Century Plyboards 585 520 12.5 30.3 17.3 16.5 85 386 63 50 25.3 86.3

Greenlam Industries 311 289 7.7 -7.3 14.4 14.0 36 299 21 19 15.1 22.3

Greenpanel Industries 285 225 26.9 -7.5 20.0 20.6 -57 -224 26 18 38.8 -14.2

APL Apollo Tubes 2,821 2,202 28.1 11.3 7.6 7.7 -10 -247 120 92 29.8 -18.8

Pidilite Industries 2,425 1,880 29.0 25.2 23.0 27.3 -425 507 377 356 5.7 73.1

Hi-tech Pipes 348 299 16.5 -9.1 5.5 4.5 99 -11 7 4 86.4 -18.9

Supreme Industries 1,840 1,375 33.8 37.1 17.8 18.6 -84 123 217 175 24.0 26.7

Kajaria Ceramics 805 713 13.0 43.3 14.4 20.2 -572 13 68 89 -23.8 57.6

Astral Poly Technik 992 747 32.8 41.7 19.0 19.2 -24 50 121 87 39.0 63.1

Total 10,413 8,250 26.2 21.8 15.6 17.1 -149 131 1,019 891 14.4 37.1

Logistics

Gateway Distriparks 329 263 25.4 -0.1 26.8 24.9 199 -21 33 4 - -25.3

Gati Limited 370 343 8.0 27.4 3.0 6.0 -302 299 -2 0 - -

Mahindra Logistics 915 833 9.9 4.8 5.2 4.5 74 7 13 15 -13.5 38.5

TCI Express 253 213 18.8 13.5 15.8 15.3 51 141 29 23 25.1 23.7

TCI Ltd. 736 697 5.6 5.7 10.9 8.9 199 5 48 37 30.1 1.6

Total 2,603 2,347 10.9 7.9 10.3 9.3 100 25 121 80 51.5 2.2

Source: Company, Sharekhan Research

October 12, 2021 24

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Valuations (As on Oct 07, 2021)

Company RecoPrice target

(Rs.)CMP (Rs)

EV/EBITDA (x) P/E (x)

FY22E FY23E FY24E FY22E FY23E FY24E

Cement

Shree Cement Hold 32200 28058 22.5 18.2 15.3 43.9 35.2 30.1

UltraTech Cement* Buy 8800 7356 15.6 13.8 11.3 30.4 26.7 22.1

Grasim Industries* Buy 1880 1592 37.2 28.8 25.1 90.5 66.9 58.3

The Ramco Cement Buy 1310 1015 15.7 14.0 12.6 25.3 22.2 20.2

JK Lakshmi Cement Hold 780 650 8.1 7.1 6.3 16.4 15.0 14.2

Dalmia Bharat Buy 2601 2092 14.5 13.0 10.9 43.5 40.0 31.1

Soft Coverage

India Cements Not Rated 196 11.4 9.9 9.1 35.1 25.1 22.2

Mangalam Cement Not Rated 449 6.9 5.5 4.2 15.0 11.6 9.3

Infrastructure

Sadbhav Engineering*

Hold 68 48 7.4 6.0 5.0 30.7 13.8 8.0

KNR Constructions* Buy 400 285 12.0 10.4 8.9 20.6 17.3 14.4

Ashoka Buildcon Buy 125 103 3.3 1.9 1.0 11.9 8.6 6.5

PNC Infratech* Buy 420 364 11.6 9.7 8.8 21.5 17.4 15.3

Building Materials

Century Plyboards Buy 505 484 26.9 22.3 18.0 42.2 34.6 28.0

Greenlam Industries Buy 1605 1342 16.4 14.4 12.8 29.4 24.5 20.5

Greenpanel Industries

Buy 395 341 15.1 12.3 10.8 28.7 20.4 17.3

APL Apollo Tubes Buy 1,038 859 31.7 22.1 17.2 59.6 38.3 29.6

Pidilite Industries Buy 2525 2460 60.9 49.4 41.9 93.1 74.5 62.9

Hi-tech Pipes Positive 689 592 8.4 6.6 5.5 12.2 8.8 7.0

Supreme Industries Buy 2553 2530 27.0 22.5 19.3 37.5 30.9 26.0

Kajaria Ceramics Buy 1402 1248 35.4 27.5 21.7 60.7 44.0 32.5

Astral Poly Technik Hold 2404 2245 59.3 49.0 39.3 93.0 75.5 58.8

Logistics

Gateway Distriparks Buy 347 255 10.3 8.3 6.3 22.1 15.6 11.1

Gati Limited Positive 204 154 19.4 14.1 10.6 64.9 28.1 17.3

Mahindra Logistics Buy UR 758 25.9 19.7 15.5 91.1 58.4 43.9

TCI Express Buy 1913 1530 30.1 24.3 19.9 41.9 34.0 28.0

TCI Ltd Buy 541 433 10.3 9.1 7.9 16.5 15.0 13.1

Source: Company, Sharekhan Research, * Standalone financials, UR – Under Review

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 25

IT Digital wave to lift growth yet again

Q2FY2022 Results Preview

Sector: IT

Sector View: Positive

Our coverage universe

CompaniesCMP (Rs)

Reco.PT

(Rs)

Birlasoft Limited

412 Buy 500

Expleo Solutions

1,035 Positive 1,453

HCL Tech 1,305 Buy 1,400

Infosys 1,693 Buy 1,950

Intellect Design 690 Buy 900

L&T Infotech 5,773 Buy UR

L&T Tech 4,667 Buy UR

Mastek Limited 3,024 Buy 3,840

Persistent Systems

3,752 Buy 4,160

Tata Elxsi 5,839 Buy UR

TCS 3,834 Buy 4,250

Tech Mahindra 1,413 Buy 1,665

Wipro 647 Hold 740

UR: Under ReviewCMP as on Oct 05, 2021

Indian IT companies are expected to deliver yet another strong quarter in terms of sequential revenue growth during Q2FY2022, led by ramp-up of deals and accelerated digital spends by enterprises. EBIT margin is expected to remain weak on a sequential basis owing to backfilling of attrition with lateral employees. We expect deal TCVs to remain healthy with a large number of small-size deals, while net employee addition is expected to remain strong. We expect Infosys and LTTS to raise their revenue growth guidance for FY2022, while HCL Tech would retain its double-digit revenue growth guidance. We believe Infosys and HCL Tech are expected to retain their EBIT margin guidance.

Expect another strong quarter: We expect Tier-I IT services companies to report constant currency (CC) revenue growth between 4.8% and 7.2% q-o-q, while midcap IT companies (under our coverage) would continue to outperform large-cap IT companies with CC revenue growth between 5.4% and 8.2% q-o-q. Infosys is expected to report leading CC revenue growth of 5.4% q-o-q among the top five IT companies, while revenue growth of TCS and HCL Tech is expected to recover strongly in Q2. Among mid-tier IT services companies in our coverage universe, Persistent Systems Limited (PSL) is expected to lead with CC revenue growth of 8.2% q-o-q, followed by Tata Elxsi, Mastek, and L&T Infotech (LTI). We assume cross-currency headwind to have an impact of 20-90 bps q-o-q because of appreciation of USD against other major global currencies.

Margins likely to be mixed bag: We expect EBIT margin to remain under pressure on a sequential basis owing to wage revision, backfilling of attrition with higher-cost lateral staff, transition of large deals, decline in utilisation, and return of some discretionary expenses. Margin levers such as strong revenue growth, higher offshoring, and better pricing would partially negate the above margin headwinds in Q2. As most of IT companies have rolled out salary hikes twice and paid one-time bonus to manage supply-side challenges since December 2020, margins are expected to decline on y-o-y for most companies.

Accelerated digital spends to drive growth: We expect IT spending to remain strong in the next 2-4 years because of (1) accelerated spending on digital and Cloud transformation initiatives, (2) increase in offshoring post the pandemic, and (3) legacy transformation. We believe many Indian IT companies are well poised to deliver double-digit revenue growth over the next couple of years because of strong demand across the verticals, accelerated digital spending, and rising focus on higher outsourcing by global clients. Further, Accenture’s strong growth, outlook, and aggressive hiring reaffirm robust demand environment for IT services in the medium term. Though margin is expected to remain under pressure in the near term owing to rising hiring expenses, higher subcontractor expenses, increased discretionary expenses, and investments in building capability, we believe these headwinds would be partially strong revenue growth, rising offshore mix, better pricing for digital projects, and pyramid optimisation. We maintain our Positive stance on the sector because of strong business momentum and accelerated IT spending to achieve compressed digital transformation.

Valuations

Strong business momentum to continue: The CNX IT Index (up 24%) has outperformed benchmark indices (Nifty up 13%) by around 11% in the past three months. Stock prices of many IT companies are trading at their lifetime high multiples (premium to their five-year average), given double-digit revenue growth visibility over FY2021-FY2023E, resilient operating models, and higher cash flow conversion. We believe any positive surprises around results/growth outlook/management commentary could lead to further re-rating of stocks. We prefer companies with full service model, presence in faster growth areas, higher return ratios, strong free cash flow (FCF) generation, and attractiveness in terms of relative valuations.

Leaders: Infosys, TCS, HCL Tech, PSL, Tata Elxsi, Mastek, and L&T Infotech.

Preferred picks:

Large-cap: Pecking order: Infosys, HCL Tech, TCS, and Tech Mahindra

Mid-cap: Pecking order: PSL, Mastek, Birlasoft, Intellect Design, L&T Tech, Tata Elxsi, L&T Infotech, and Expleo Solutions

Price chart

Summary

� Q2FY22 is likely to be yet another strong quarter, despite a high base, on accelerated digital spends, ramp-up of large deals and broad-based demand.

� EBIT margin would remain weak q-o-q on wage revision, lower utilisation and higher hiring expenses, partially offset by strong revenue growth and increased in pricing.

� IT spending to remain strong in the next 2-4 years, given higher digital adoption, increased in offshoring and spend on core transformation. Leading Indian IT companies to report double-digit revenue growth in FY2022E/ FY2023E.

� We stay Positive on the IT sector, given strong demand. Preferred picks in pecking order are Infosys, HCL Tech, TCS, and TechM among large caps; Persistent Systems, Mastek, Birlasoft, Intellect Design, L&T Tech, Tata Elxsi, and L&T Infotech among midcaps.

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Q2FY2022 results estimates

CompanyRevenue (Rs. cr) OPM (%) Net profit (Rs. cr)

Q2FY22E Q2FY21 y-o-y (%)

q-o-q (%)

Q2FY22E Q2FY21 y-o-q (bps)

q-o-q (bps)

Q2FY22E Q2FY21 y-o-y (%)

q-o-q (%)

TCS 47,706 40,135 18.9 5.1 28.1 28.7 -61 18 9,556 8,433 13.3 6.1

Infosys 29,351 24,570 19.5 5.2 25.4 28.8 -343 -125 5,213 4,845 7.6 0.3

HCL Tech 21,052 18,594 13.2 4.9 24.7 26.6 -195 22 3,355 3,142 6.8 4.4

Wipro 19,444 15,148 28.4 5.9 22.1 22.9 -78 -134 2,780 2,466 12.8 -14.0

Tech M 10,665 9,372 13.8 4.6 18.5 18.2 29 6 1,408 1,065 32.3 4.1

L&T Infotech 3,673 2,998 22.5 6.1 19.1 22.9 -376 39 545 457 19.2 9.6

L&T Tech 1,593 1,314 21.2 4.9 16.9 19.9 267 -53 227 166 37.4 5.2

Persistent 1,334 1,008 32.4 8.5 16.0 16.4 -41 -35 160 102 56.4 5.5

Birlasoft 1,002 857 16.8 5.9 15.1 13.9 115 -90 107 69 54.2 -6.2

Tata Elxsi 603 430 40.2 8.0 26.5 27.4 -94 -36 120 79 52.2 5.9

Mastek 553 410 35.0 7.1 21.2 21.1 10 -62 71 51 40.1 3.0

Intellect Design 430 372 15.8 5.4 25.0 24.0 101 45 79 59 32.6 6.5

Soft Coverage

Expleo Solutions 97 74 32.3 10.7 17.5 24.0 -653 89 14 13 9.9 7.9

Source: Company, Sharekhan Research

Valuations (As on Oct 05, 2021)

Company RecoPrice

target (Rs.)

CMP (Rs)

EPS (Rs.) P/E (x)

FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E

TCS Buy 4,250 3,834 89.3 107.1 121.5 135.2 42.9 35.8 31.6 28.4

Infosys Buy 1,950 1,693 45.6 52.7 62.1 69.9 37.1 32.1 27.3 24.2

HCL Tech Buy 1,400 1,305 47.9 50.8 58.2 65.2 27.2 25.7 22.4 20.0

Wipro Hold 740 647 19.1 22.1 24.9 27.6 33.9 29.3 25.9 23.4

Tech Mahindra Buy 1,665 1,413 51.2 65.0 72.4 82.1 27.6 21.7 19.5 17.2

L&T Infotech Buy UR 5,773 110.3 129.0 154.0 179.3 52.4 44.7 37.5 32.2

L&T Tech Buy UR 4,667 62.9 89.7 112.4 130.6 74.2 52.0 41.5 35.7

Persistent Buy 4,160 3,752 59.0 84.9 115.1 129.9 63.6 44.2 32.6 28.9

Birlasoft Buy 500 412 11.3 16.0 18.8 21.7 36.4 25.6 21.9 18.9

Tata Elxsi Buy UR 5,839 59.1 81.2 98.7 116.9 98.8 71.9 59.1 49.9

Mastek Buy 3,840 3,024 81.9 96.9 112.3 137.0 36.9 31.2 26.9 22.1

Intellect Design Buy 900 690 19.6 22.2 28.3 36.6 35.3 31.0 24.4 18.8

Expleo Solutions Positive 1,453 1,035 49.2 51.6 63.5 77.7 21.0 20.1 16.3 13.3

Source: Company, Sharekhan Research

Key things to watch out for: (1) Commentary on shifting of spends towards digital and Cloud technologies and strong growth visibility as industry is at a very early stage of a technology upcycle; (2) revenue growth and margin guidance from Infosys, HCL Tech, LTTS, and Wipro. We expect Infosys and LTTS to increase FY2022E revenue growth guidance to 16-18% each, while HCL Tech is likely to retain its double-digit revenue growth guidance. Wipro is likely to guide revenue growth guidance of 2-4% for Q3FY2022E. On the margin front, Infosys and HCL Tech would maintain their EBIT margin guidance of 22-24% and 19-21%, respectively; (3) commentary on decision-making time on large deals. We expect faster conversion of smaller deals in Q2. Though deal TCVs could remain modest on a q-o-q basis, we believe there would be a large number of smaller deals in Q2; (4) demand outlook across verticals especially BFSI, retail, communication, manufacturing, and retail; (5) commentary on availability of mega deals and addition of new logos in the ensuing quarters; expect TechM, PSL, and HCL Tech to report higher-than-normal deal TCVs; (6) outlook on the margin trajectory to be keenly watched for; (7) commentary on steps to manage supply-side challenges; (8) commentary on outsourcing intensity, progress on vendor consolidation opportunities, and cost-saving measures; and (9) higher hiring activity and increasing investments in the hyperscalers and SaaS ecosystem.

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 27

Oil & GasHigh oil & gas prices bode well for upstream PSUs & GAIL

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We expect CGDs (excluding Gujarat Gas) to report strong earnings growth y-o-y, led by sharp volume growth and strong margin and gas utilities (especially GAIL) would benefit from substantial improvement in profitability of gas marketing business and volume growth across segment. OMCs earnings performance is expected to be mixed as sharp recovery in refining & marketing margins would get largely offset by lower inventory gain, subdued refinery utilisation for HPCL and sequential moderation in petchem margin for IOCL. Upstream PSUs (ONGC and Oil India) are likely to report high earnings growth led by increase in oil price and lower operating cost. We expect Reliance Industries’ (RIL) earnings to grow by 9% q-o-q led by modest growth in its standalone O2C business and Jio and a solid recovery in EBITDA of retail business.

� City gas distribution (CGDs) and gas utilities – Robust earnings growth led by volume recovery & strong margin: We expect gas sales volumes to grow strongly and reach pre-pandemic levels for IGL/MGL with likely normalisation of CNG volumes (given an improvement in vehicular traffic after easing of COVID-led restrictions) and for Gujarat Gas (GGAS) led by higher gas demand from industrial customers. IGL/MGL are expected to report steady margins reflecting benefit of operating leverage, CNG/domestic PNG price hikes, while Gujarat Gas would witness margin pressure in industrial/commercial (I/C) PNG segment due to steep rise in spot LNG prices (up 5x y-o-y). Overall, we expect IGL/MGL to report robust 69%/17% y-o-y PAT growth, while Gujarat Gas’s PAT is expected to decline by 6% y-o-y as margin contraction would more than offset volume growth. Among gas utilities, GAIL is expected to report robust 60% y-o-y PAT growth led by sharp rise in profitability of gas marketing segment on back of higher spot LNG price, higher realisation in LPG-LHC business and volume growth across segments. Petronet LNG would benefit from sequential increase in Dahej terminal volumes (utilisation expected at 99% versus 87% in Q1FY22) while higher domestic gas production would result in 6% q-o-q volume growth to 39 mmscmd for GSPL.

� OMCs – Mixed performance as higher refining & marketing margin to get offset by lower inventory gain: We expect OMCs (IOCL, BPCL and HPCL) core earnings to witness significant improvement as GRMs are on recovery mode (Singapore complex GRM up 76% q-o-q to $3.7/bbl) and diesel/petrol marketing margin expected to improve sharply to Rs. 5.6/Rs. 3 per litre versus only Rs. 4.1/Rs. 1 per litre in Q1FY22. However, on reported basis the performance would be mixed due to lower inventory gains q-o-q, weakness in HPDE margin on higher naphtha price for IOCL and subdued refinery utilisation for HPCL. We expect IOCL/BPCL/HPCL PAT to witness -4%/30%/7% q-o-q earnings growth in Q2FY22. For RIL, we expect PAT to increase by 9% q-o-q to Rs. 13,324 crore led by 1) modest growth in the O2C business as higher GRM to get offset by lower petchem margin, 2) decent performance by Jio supported by 4%/1% q-o-q increase in subscribers/ARPU to 460 million and Rs. 140/month respectively and 3) strong q-o-q retail EBITDA growth led by demand recovery.

� Upstream PSUs – Higher oil price to drive earnings growth: ONGC/Oil India is expected to benefit from $5/bbl q-o-q jump in oil realisation, lower operating cost and marginal rupee depreciation, while gas realisations are expected to remain stable sequentially. Additionally, ONGC would benefit from higher realisations on sales of value-added products (VAP) while Oil India would witness decent growth in oil/gas sales volume. We thus expect ONGC/Oil India’s standalone PAT to increase by 58%/85% y-o-y to Rs. 5,956 crore/Rs. 689 crore in Q2FY22.

Valuations

We maintain a constructive stance on CGD players given strong volume led earnings growth visibility, high RoEs and pricing power in CNG. However, elevated spot LNG prices of more than $20/mmBtu would impact margin of GGAS in near term although GGAS has been taking proactive pricing actions to protect its margins. Core earnings of OMCs are expected to improve with a cyclical recovery in refining margins and structurally better marketing margins over FY2022-FY2023. The earnings trajectory of upstream PSUs expected to improve in the coming quarters supported by a sharp rally in crude oil prices to ~$80/bbl and recent 62% hike in domestic gas price. MGL and IGL are our preferred picks among CGD space. We prefer RIL among downstream players as potential materialisation of a likely minority stake sale in the oil-to-chemical (O2C) business and a cyclical GRM recovery could be key near-term catalysts and further value unlocking in the digital and retail businesses would add to shareholders’ returns in the coming years. We prefer HPCL and BPCL among OMCs given cyclical earnings recovery and potential re-rating on successful privatisation (expected by March 2022) of BPCL. We prefer GAIL and GSPL among gas utilities, as it is a play on rising domestic gas demand and is available at attractive valuations.

Key Risks

1) Lower-than-expected gas sales volume amid COVID-19 led demand slowdown. 2) A delay in the development of new GAs and a continues rise in domestic and imported gas prices. Favourable policies for electric vehicles (although adoption of EVs has been slow in India) could affect the growth outlook for CGD companies. 3) Lower refining margin and further delay in BPCL privatisation.

Leaders for Q2FY2022: RIL, GAIL, ONGC, Oil India, IGL and MGL

Laggards for Q2FY2022: Gujarat Gas

Preferred Picks: RIL, MGL, IGL, GAIL, GSPL, Oil India, BPCL and HPCL

Price chart

Q2FY2022 Results Preview

Sector: Oil & Gas

Sector View: Positive

Our coverage universeCompanies CMP

(Rs)Reco. PT

(Rs)

RIL 2,560 Buy 2,700

Oil India 248 Buy UR

Petronet LNG 230 Buy 285

Mahanagar Gas 1,077 Buy 1,450

IOCL 130 Buy 150

BPCL 447 Buy 520

HPCL 312 Buy 340

GAIL (India) 166 Buy 196

GSPL 314 Buy 410

Gujarat Gas 621 Buy 890

Indraprastha Gas Ltd

517 Buy 650

Source: Sharekhan ResearchCMP as on Oct 06, 2021

Source: BSE; Sharekhan Research

Summary

� In Q2FY22, we expect earnings of CGD companies (IGL/MGL) and gas utilities to rise strongly on y-o-y basis led by a volume recovery. High spot LNG prices would benefit GAIL’s gas marketing business and impact Gujarat Gas’s margin offsetting benefit of volume growth.

� OMCs’ earnings are likely to be a mixed bag as recovery in refining & marketing margins would be offset by lower inventory gains and petchem margins. Rise in crude oil prices and lower operating costs bode well for y-o-y earnings growth of ONGC/Oil India.

� We maintain a constructive stance on CGD players given strong volume led earnings growth visibility, high RoEs. OMCs’ core earnings would improve led by a recovery in GRMs & BPCL privatisation key to re-rating of OMCs.

� Preferred picks - Reliance Industries, MGL, IGL, GAIL, GSPL, Oil India, BPCL and HPCL.

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Q2FY2022 results estimates (Standalone financials)

Companies

Sales (Rs cr) OPM (%) PAT (Rs cr)

Q2 FY22E

Q2 FY21

YoY (%)

QoQ (%)

Q2 FY22E

Q2 FY21

YoY (bps)

QoQ (bps)

Q2 FY22E

Q2 FY21

YoY (%)

QoQ (%)

RIL# 1,54,751 1,11,236 39.1 10.6 16.5 17.0 -50 -16 13,324 9,567 39.3 8.6

Oil India 3,346 2,169 54.3 11.3 38.9 34.0 488 -213 689 373 84.7 35.7

Petronet LNG 10,167 6,236 63.0 18.2 11.3 21.9 -1060 -100 722 862 -16.2 6.9

Mahanagar Gas Ltd 796 507 57.1 29.4 44.6 43.6 98 -478 244 144 69.0 19.5

IOCL 1,41,299 85,611 65.0 19.1 7.9 11.0 -307 -144 5,701 6,227 -8.4 -4.0

BPCL 87,354 50,146 74.2 23.2 4.5 8.9 -449 -13 2014 2,581 -22.0 29.8

HPCL 81,495 51,511 58.2 12.9 4.1 6.5 -243 1.2 1925 2,477 -22.3 7.2

GAIL 21,372 13,643 56.7 22.9 13.7 9.8 388 -18 1,979 1,240 59.7 29.4

ONGC 25,763 16,917 52.3 11.9 52.2 49.9 230 -62 5,956 3,771 58.0 37.4

GSPL 558 577 -3.2 5.9 71.0 66.0 501 -3 257 271 -5.3 10.1

Gujarat Gas 3,721 2,513 48.1 23.6 18.4 29.2 -1083 -564 448 475 -5.7 -5.9

Indraprastha Gas Ltd 1,768 1,305 35.5 40.6 30.0 31.2 -121 -30 361 308 17.2 47.8

Source: Company, Sharekhan estimates; # Consolidated financials

Valuations (As on Oct 06, 2021)

CompaniesCMP (Rs)

EPS (Rs)CAGR over

FY21-23E (%)

P/E (x)Reco

Price Target

(Rs)FY21 FY22E FY23E FY21 FY22E FY23E

RIL 2,560 73.5 86.2 110.0 22.4 34.8 29.7 23.3 Buy 2,700

Oil India# 248 12.7 24.1 28.4 49.6 19.6 10.3 8.7 Buy UR

Petronet LNG# 230 19.6 21.5 23.7 10.1 11.8 10.7 9.7 Buy 285

Mahanagar Gas Ltd# 1,077 62.7 81.8 93.1 21.8 17.2 13.2 11.6 Buy 1,450

IOCL# 130 18.5 25.0 21.7 8.3 7.0 5.2 6.0 Buy 150

BPCL# 447 67.2 32.1 34.4 -28.4 6.6 13.9 13.0 Buy 520

HPCL# 312 75.2 53.8 62.2 -9.0 4.1 5.8 5.0 Buy 340

GAIL (India)# 166 11.0 17.8 19.8 34.1 15.1 9.3 8.4 Buy 196

GSPL# 314 16.5 19.6 22.1 15.9 19.1 16.0 7.5 Buy 410

Gujarat Gas 621 18.6 22.9 28.6 24.0 33.4 27.1 21.7 Buy 890

Indraprastha Gas Ltd# 517 14.4 19.9 22.7 25.6 36.0 25.9 22.8 Buy 650

Source: Sharekhan estimates; # Standalone financials; RIL’s FY2022E—FY2023E EPS has been adjusted for enhanced equity base to factor rights issue

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 29

PharmaceuticalsHigh base to slow down Q2 growth; prospects stay bright

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Pharmaceutical company’s growth in Sharekhan’s universe is expected to moderate in Q2FY2022 after series of quarters with a consistent double digit growth. The growth is expected to be slowed down by the pressures in the US business while the strong growth in the Indian Pharmaceutical market (IPM) due to the revival in acute therapies would aid the overall growth. Further, high operating margins’ base in Q2FY21 and a likely increase in the operating expenses could pressurize margins of pharma companies in Q2FY22, leading to likely slower earnings growth of 4.6% y-o-y. Amongst the companies in the universe, we expect Laurus Labs, Gland Pharma, Abbott India and Divis to outperform for the quarter.

� Topline growth likely to slow down: The revenue growth of the pharmaceutical companies under Sharekhan’s universe is expected to moderate to 6.5% y-o-y for Q2FY22 after a strong double digit growth reported in previous quarter. The growth of the formulations companies with a sizeable presence in the US markets is expected to be impacted due to heightened competitive pressures and lack of new product approvals. Players such as Aurobindo is expected to report a decline 5.7% y-o-y in sales due to price erosion and higher inventory built up across channels, while Lupin’s sales growth is also expected to slow down to 1.7% y-o-y. Simultaneously API players such as Laurus Labs and Solara Active Pharma are likely to report a strong double digit growth backed by commissioning / ramp up of new capacities. Gland is also expected to stage a double digit sales growth, while India focused MNC’s such as Abbott India, due to revival in acute therapy is expected to post a strong double-digit growth.

� High base, increasing cost pressures to moderate earnings growth: The corresponding quarter of previous years was the quarter with a high margins base as the companies benefitted substantially from the strong demand for covid related drugs, in both the domestic as well exports markets leading to a better realizations. Also the marketing costs were lower which aided the margins. Secondly, cost pressures in the form of higher freight cost, likely increase in marketing and promotions spends and absence of COVID- led products would exert margin pressures, which in turn would slow down the earnings growth. The universe’s earnings growth is expected to be around 4.6% y-o-y as compared to double digit growth reported in previous quarter.

� Growth prospects stay bright: Indian pharmaceutical companies are better placed to harness opportunities and post healthy growth going ahead as they are competitive globally and hold a sizeable market share in most markets. Moreover, other factors such as - 1) improving growth prospects in the US with increasing preference for specialty / complex generics (including biosimilars) and injectables 2) revival in the IPM which is expected to stage a close to double digit growth in FY22, and 3) emerging opportunities in the API space would be key growth drivers. The area of vaccines could also offer sizeable growth opportunities for Indian companies. Collectively, this points towards a strong growth potential going ahead for pharmaceutical companies.

Valuations

Sector view - Positive: The pharma index over the past 18 months has consistently outperformed the benchmark indices reporting a sturdy 78% returns as compared to a 48% returns by the benchmark. Strong outperformance is expected to continue going ahead as well and we see this translating to a multi-year bull run for pharmaceutical companies. Indian pharmaceutical companies are among most competitive ones globally and, over the years, have developed strong capabilities, which have laid the footing for strong growth ahead. The confluence of other factors including improving growth prospects in exports as well as domestic markets and focus on specialty/complex products in addition to emerging opportunities in the API space would be key growth drivers. Improving growth prospects in the domestic market could benefit India-focused MNCs. Collectively, this points towards a strong growth potential, which would unfold. Based on this, we have a Positive view on the sector.

Key Risks

1) Adverse regulatory changes / delay in approvals could impact the sector’s performance. 2) Currency volatility could impact earnings.

Leaders for Q2FY2022: Laurus Labs, Gland Pharma, Abbott India and Divis Labs

Laggards for Q2FY2022: Strides Pharma Sciences, Aurobindo

Preferred Picks:

Large Caps: Aurobindo, Cadila, Lupin, Dr Reddy’s, Sun Pharma, Biocon

Mid Caps: Gland Pharma, Laurus Labs, Solara Active Pharma Science, Abbott India, Caplin Point Laboratories, Metropolis Healthcare

Price chart

Q2FY2022 Results Preview

Sector: Pharmaceuticals

Sector View: Positive

Our coverage universeCompanies CMP

(Rs)Reco. PT (Rs)

Aurobindo 719 Buy 915

Cadila 550 Buy 720

Cipla 916 Buy 1,150

Divis 5,100 Buy 5,620

Ipca Labs 2,369 Buy 2,850

Lupin 956 Buy 1,400

Sun Pharma 823 Buy 900

Torrent Pharma 3,074 Buy 3,400

Biocon 360 Buy 470

Granules 330 Buy 475

Laurus Labs 651 Buy 800

Sanofi India 7,822 Buy 9,600

Abbott India 21,723 Buy 22,780

Strides Pharma sciences

586 Hold 770

Solara Active Pharma

1,480 Buy 2,100

Dr Reddys Laboratories

4,892 Buy 5,900

Gland Pharma 3,883 Buy 4,400

Caplin Point Laboratories

906 Positive 1,054

Metropolis Healthcare

2,781 Positive 3,390

Source: Sharekhan ResearchCMP as on Oct 07, 2021

Source: BSE; Sharekhan Research

Summary

� Pharma company’s growth is expected to moderate in Q2FY2022 after a series of quarters with a double digit growth.

� The Growth is expected to be slow due to pressures in the US business on account of lack of new product approvals, higher competitive pressures. The growth in the India business is expected to be strong. Further High base in Q2FY21 and increasing cost pressures are expected to slow down the earnings growth to 4.6% yoy for Q2FY22

� Factors such as improving growth prospects in the US, expected strong growth in the IPM, emerging opportunities in the API space and strong capabilities developed by the Indian companies leading to a shift in preference towards complex generics / biosimilars would drive the growth going ahead.

� Preferred Picks: Large Caps: Aurobindo, Cadila, Lupin, Dr Reddy’s, Sun Pharma, Biocon; Mid Caps: Gland Pharma, Laurus Labs, Solara Active Pharma Science, Abbott India, Caplin Point Laboratories, Metropolis Healthcare

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CompaniesSales (Rs cr) OPM (%) PAT (Rs cr)

Q2 FY22E

Q2 FY21

YoY (%)

QoQ (%)

Q2 FY22E

Q2 FY21

YoY (bps)

QoQ (bps)

Q2 FY22E

Q2 FY21

YoY (%)

QoQ (%)

Large Caps

Aurobindo 6111.0 6483.0 -5.7 7.2 21.4 22.1 -73.0 16.1 795.3 805.0 -1.2 3.3

Cadila 3918.0 3820.0 2.6 -2.7 23.1 22.6 49.6 -8.2 526.0 605.0 -13.1 -6.9

Cipla 5245.0 5038.8 4.1 -4.7 22.4 23.4 -95.6 -203.6 707.9 665.0 6.4 -15.6

Divis 1990.0 1749.3 13.8 1.5 41.9 43.3 -134.8 -154.8 576.5 519.6 11.0 3.5

Lupin 3900.0 3835.0 1.7 -8.7 16.3 15.2 114.5 -542.4 302.2 211.0 43.2 -40.2

Sun Pharma 9551.0 8553.1 11.7 -1.7 26.1 27.0 -90.2 -210.4 1670.0 1550.0 7.7 -16.3

Torrent Pharma 2177.1 2017.0 7.9 2.0 31.7 31.5 25.7 1.5 362.0 310.0 16.8 9.7

Dr Reddy's Lab 5107.3 4910.9 4.0 3.3 22.4 25.1 -273.1 382.9 685.0 693.8 -1.3 80.1

Biocon 1910.7 1745.0 9.5 8.5 24.3 22.4 189.3 221.0 156.0 174.0 -10.3 85.7

Mid Caps

IPCA 1500.0 1361.1 10.2 -4.2 24.5 26.5 -199.7 -213.3 264.5 267.1 -1.0 -13.8

Granules 899.0 858.1 4.8 5.8 23.0 29.9 -688.0 -70.2 118.4 163.6 -27.7 -1.5

Laurus Labs 1385.3 1138.8 21.6 8.4 31.5 32.8 -133.1 57.5 269.5 242.3 11.2 11.5

Sanofi india* 755.3 686.6 10.0 -4.3 28.0 28.0 0.9 -331.2 155.0 133.1 16.5 -9.7

Abbott India 1303.1 1054.9 23.5 7.0 22.7 22.8 -11.8 92.3 218.1 180.7 20.7 11.4

Strides Pharma Science

729.2 793.6 -8.1 5.9 3.0 19.8 - - -78.0 44.2 - -

Metropolis Healthcare

315.0 288.4 9.2 -3.6 31.2 31.5 -31.2 -13.2 61.7 60.5 2.0 4.6

Solara Active Pharma 463.2 397.6 16.5 14.2 23.3 24.5 -125.3 76.0 63.9 56.7 12.7 26.0

Gland Pharma 1098.9 831.5 32.2 -4.8 39.4 35.8 360.0 159.2 340.5 218.9 55.6 -2.9

Caplin Point Laboratories

335.0 268.1 24.9 11.6 31.7 32.6 -89.6 84.6 80.0 56.9 40.6 12.8

Grand Total 48694.0 45725.6 6.5 0.0 24.5 25.2 -72.1 -51.6 7274.4 6957.4 4.6 -2.6* Results for Q3CY2021Source: Company, Sharekhan Research

Valuations (As on Oct 07, 2021)

Companies CMP (Rs) Reco /

ViewPT (Rs)

EPS (Rs) P/E (x)

FY21 FY22E FY23E FY21 FY22E FY23E

Large Caps

Aurobindo 719.0 Buy 915 42.2 61.4 70.3 17.0 11.7 10.2

Cadila 550.0 Buy 720 22.4 22.3 27.4 24.6 24.7 20.0

Cipla 916.0 Buy 1150 29.8 38.4 47.7 30.8 23.9 19.2

Divis 5100.0 Buy 5620 74.8 96.4 126.7 68.2 52.9 40.3

Lupin 956.0 Buy 1400 26.8 36.7 50.0 35.7 26.0 19.1

Sun Pharma 823.0 Buy 900 28.3 29.4 34.2 29.0 28.0 24.1

Torrent Pharma 3074.0 Buy 3400 73.6 82.6 105.5 41.8 37.2 29.1

Biocon 360.0 Buy 470 4.8 9.5 15.4 75.4 37.9 23.4

Dr Reddys Laboratories 4892.0 Buy 5900 117.6 161.0 213.0 41.6 30.4 23.0

Mid Caps

Ipca Labs 2369.0 Buy 2850 90.5 92.8 104.8 26.2 25.5 22.6

Granules 330.0 Buy 475 22.2 23.9 31.6 14.8 13.8 10.4

Laurus Labs 651.0 Buy 800 18.5 23.9 31.1 35.2 27.2 20.9

Sanofi India 7822.0 Buy 9600 225.8 267.4 294.8 34.6 29.3 26.5

Abbott India 21723.0 Buy 22780 325.1 393.0 454.0 66.8 55.3 47.8

Strides Pharma sciences 586.0 Hold 770 21.5 6.7 37.7 27.3 87.5 15.5

Solara Active Pharma 1480.0 Buy 2100 62.4 74.5 98.8 23.7 19.9 15.0

Gland Pharma 3883.0 Buy 4400 61.1 80.3 123.6 63.6 48.4 31.4

Caplin point Laboratories 906.0 Positive 1054 33.2 40.4 51.3 27.3 22.4 17.7

Metropolis Healthcare 2781.0 Positive 3390 35.8 44.4 52.6 77.7 62.6 52.9Source: Company, Sharekhan Research

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 31

Agri Inputs and Specialty ChemicalWeak Q2 for agri-input; robust revenue growth for specialty chem

Q2FY2022 Results Preview

Sector: Agri Inputs and Specialty Chemicals

Sector View: Positive

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Reco/View

PT (Rs)

Agri Inputs

Coromandel International

858 Buy 1,070

Insecticides (India) 715 Buy 900

PI Industries 3,280 Buy 3,900

UPL 738 Buy 930

Sumitomo Chemical India

411 Buy 500

Speciality Chemicals

Aarti Industries 1,109 Buy 1,155

Atul Limited 10,556 Buy UR

SRF 11,942 Buy UR

Sudarshan Chemical

675 Buy 815

Vinati Organics 2,114 Buy 2,350

NOCIL 306 Positive 348

Source: Sharekhan ResearchCMP as on Oct 08, 2021

Our coverage universe

Price chart

We expect agri-input companies under our coverage to clock weak earnings growth as volume are affected by erratic monsoons and margin to contract on a sharp rise in input costs. However, companies such as UPL would benefit from strong growth in exports markets which would offset weak domestic growth. On the other hand, specialty chemical companies are expected to post strong earnings growth as a demand recovery would result in high revenue growth offsetting pressure on margin from high input and logistic cost. Aarti Industries, SRF and Vinati Organics would outperform the sector.

� Agri inputs - Erratic monsoons, high raw material costs would impact earnings growth: We expect demand for agri-input in domestic markets to remain muted due to erratic monsoons in July-August and the high base of last year and thus we expect muted topline growth for domestic agrochemical companies (low single-digit revenue growth on y-o-y basis). We see continued strong growth traction in exports markets led by high global crop prices and good agronomics (price hikes in Latin America by UPL). We thus expect agrochemical companies with a high exposure to export markets (such as UPL and PI Industries) to report relatively better revenue growth in Q2FY2022. Fertiliser companies such as Coromandel International would see good revenue growth led by higher realisation given subsidy support but fertiliser consumption is expected to remain weak. However, margins are expected to witness pressure given increase in raw material price and higher freight rates. Overall, we expect our agri-input coverage universe to deliver 11% y-o-y revenue growth but earnings to increase by only 2.3% y-o-y on margin contraction due to higher input costs.

� Specialty chemicals – Improved demand & better pricing to cushion earnings from margin contraction: Strong demand environment for chemicals led by a recovery in global economies and better pricing (on raw material cost push) would result in robust revenue growth for specialty chemical players. Overall, we expect strong 33% y-o-y revenue growth for specialty chemical companies under our coverage. We expect Aarti Industries to report 28% y-o-y revenue growth led by revival in discretionary demand while SRF is likely to clock a 40% y-o-y revenue growth supported by robust growth in specialty chemicals, higher ref-gas demand, low base of technical textiles and decent growth in packaging films. We expect Vinati Organics to report an 80% y-o-y revenue growth (on low base of Q2FY21) given strong recovery in ATBS demand, incremental revenue contribution from ramp-up of Butyl phenol and better realisations. However, we expect EBITDA margin to contract by 246 bps y-o-y for our coverage universe owing to sharp increase in key raw material prices and higher logistic cost (elevated freight rates) given non-availability of containers for exports. Aarti Industries’ margins are likely to rise by 101 bps y-o-y as demand recovers from high margin discretionary segment. We expect specialty chemical companies under our coverage universe to report 28% y-o-y earnings growth led by strong demand recovery.

� Chinese power crisis – An opportunity for Indian specialty chemical players: Recent supply disruptions emerging from power outages in China along with limited new capacity addition provide a tactical opportunity for Indian specialty chemical players to increase market share and benefit from increase in product prices in the short term. Moreover, global best practices for manufacturing standard, R&D capabilities, and accelerated capex plan of Indian specialty chemical companies along with the government’s pro-growth policies will act as further catalyst for growth and drive sustainable high earnings growth for the sector. However, agri-input companies may see impact of higher raw material cost from supply disruptions in China.

Valuation:

The Indian specialty chemicals sector is well poised to capitalise on global tailwinds and expand its global market share to 7-8% in next few years from 4% currently supported by structural drivers including the China Plus One strategy, import substitution and opportunities emerging from recent supply chain disruption in China. The above factor provides longevity to revenue and earnings growth and is expected to support premium valuations for quality specialty chemical companies (like SRF, Aarti Industries, Vinati Organics and Atul Limited). Hence, we stay positive on Indian the specialty chemical sector.

Key Risks:

Higher raw material cost for agri and speciality chemical companies might impact margins if they are not able to pass it on to customers. Lower demand offtake for products of for specialty chemicals players owing to a slowdown in economic activity may also affect earnings.

Leaders for Q2FY2022: UPL, SRF, Aarti Industries and Vinati Organics

Laggards for Q2FY2022: Coromandel International and Insecticides (India).

Preferred Picks: Coromandel International, PI Industries, Sumitomo Chemical India, SRF, Atul Limited and Aarti Industries.

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Source: BSE; Sharekhan Research

Summary

� Agri-input companies are expected to clock muted earnings as domestic demand gets hit by erratic monsoons; margins are set to contract on high input cost.

� Specialty chemical players, on the other hand, are likely to post strong earnings growth as revenues surge, riding on favourable demand that would offset low margins. Aarti Industries and SRF would outperform.

� Recent supply chain disruptions in China would benefit Indian specialty chemical players in term of market share gains and higher chemical prices in the near term. However, agri-input companies may be affected by higher raw material costs.

� Preferred Picks: Coromandel International, PI Industries, SRF, Atul Limited, Sumitomo Chemical India and Aarti Industries.

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Q2FY2022 results estimates

Companies

Sales (Rs cr) OPM (%) PAT (Rs cr)

Q2 FY22E

Q2 FY21

YoY (%)QoQ

(%)Q2

FY22EQ2

FY21YoY

(bps)QoQ (bps)

Q2 FY22E

Q2 FY21

YoY (%)QoQ

(%)

Agri Inputs

Coromandel International

5,382 4,611 16.7 46.9 15.1 18.3 -317 193 578 589 -1.9 71.1

Insecticides (India) 438 456 -4.0 -6.5 12.1 12.7 -57 76 34 42 -17.6 -2.0

PI Industries 1,361 1,158 17.5 14.0 22.5 24.2 -169 165 229 218 5.4 22.5

UPL 9,654 8,939 8.0 13.4 20.6 20.2 37 -128 718 674 6.5 3.5

Sumitomo Chemical India

990 902 9.7 26.5 22.1 24.3 -212 299 159 158 0.7 50.2

Agri Inputs Total 17,824 16,066 10.9 21.9 19.0 20.0 -100 -17 1,718 1,680 2.3 26.4

Speciality Chemicals

Aarti Industries 1,506 1,173 28.4 14.4 22.7 21.7 101 -113 192 144 33.5 8.6

Atul 1,140 1,002 13.7 5.5 22.8 26.1 -326 94 181 175 3.3 12.8

NOCIL 397 222 79.2 15.3 19.2 14.3 495 -207 50 17 199.4 6.2

SRF 2,943 2,101 40.1 9.0 23.5 27.3 -376 -112 418 325 28.9 7.8

Sudarshan Chemicals

480 429 12.0 1.4 14.2 15.8 -156 84 32 30 4.0 14.3

Vinati Organics* 395 219 80.0 2.2 31.1 38.3 -723 483 93 62 49.3 14.4

Speciality Chemicals Total

6,862 5,146 33.4 8.9 21.6 24.1 -246 -26 965 753 28.3 9.6

Source: Company; Sharekhan Research, * Standalone

Valuations (As on Oct 08, 2021)

CompaniesCMP (Rs)

EPS (Rs) CAGR over

FY21-23E (%)

P/E (x)

RecoPrice

Target (Rs)FY21 FY22E FY23E FY21 FY22E FY23E

Agri Inputs

Coromandel International 858 45.3 53.6 60.4 15.5 18.9 16.0 14.2 Buy 1,070

Insecticides (India) 715 52.5 69.5 88.8 30.0 13.6 10.3 8.1 Buy 900

PI Industries 3,280 48.0 57.3 74.5 24.6 68.3 57.2 44.0 Buy 3,900

UPL 738 40.6 54.4 63.0 24.5 18.2 13.6 11.7 Buy 930

Sumitomo Chemical India 411 6.9 8.3 10.0 20.0 59.4 49.6 41.2 Buy 500

Speciality Chemicals

Aarti Industries 1,109 14.4 20.3 27.6 38.3 76.8 54.7 40.2 Buy 1,155

Atul Limited 10,556 221.5 267.1 300.9 16.6 47.7 39.5 35.1 Buy UR

SRF 11,942 198.8 238.7 295.3 21.9 60.1 50.0 40.4 Buy UR

Sudarshan Chemicals 675 20.4 22.9 30.3 21.8 33.1 29.4 22.3 Buy 815

Vinati Organics* 2,114 26.2 37.5 48.6 36.2 80.7 56.3 43.5 Buy 2,350

NOCIL 306 5.3 12.0 15.3 69.7 57.6 25.5 20.0 Positive 348

Source: Company; Sharekhan Research, * Standalone

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

October 12, 2021 33

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Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Miscellaneous

Q2FY2022 results estimates

Company Net sales (Rs Cr) OPM (%) Adjusted PAT (Rs Cr)

Q2 FY22E

Q2 FY21

YoY (%)

QoQ (%)

Q2 FY22E

Q2 FY21

YoY BPS

QoQ BPS

Q2 FY22E

Q2 FY21

YoY (%)

QoQ (%)

Affle (India) 230 135 70.5 50.9 19.0 25.5 (649) (399) 35 27 28.6 (3.2)

Bharti Airtel 27,850 25,060 11.1 3.7 47.5 44.2 333 (84) 757 (714) - 184.3

Coal India 23,242 21,153 9.9 (8.1) 17.7 18.8 (104) (141) 2,785 2,948 (5.5) (12.1)

Info Edge 354 256 38.3 10.8 31.5 20.1 1,137 30 104 51 102.9 2.8

JSW Steel 31,555 19,264 63.8 9.2 33.1 21.7 1,139 (243) 5,743 1,365 320.7 (2.7)

MOIL Ltd 328 307 6.7 11.7 31.3 2.2 2,919 279 76 7 938.3 23.2

NMDC 5,912 2,230 165.1 (9.2) 48.4 17.4 3,099 (1,573) 2,165 752 187.7 (32.1)

SAIL 25,793 16,925 52.4 24.9 28.3 11.2 1,703 (355) 4,319 262 1,546.1 10.8

Polyplex Corp 1,552 1,227 26.5 7.8 21.5 26.4 (487) (74) 129 168 (23.5) (5.3)

Quess Corp 3,211 2,615 22.8 7.5 4.9 5.3 (44) (0) 58 44 31.7 29.3

Triveni Engineering 1,091 1,168 (6.6) (1.8) 6.5 6.7 (12) (696) 38 37 3.8 (58.9)

Balrampur Chini Mills 1,174 1,290 (9.0) - 9.0 9.9 (90) (280) 55 78 (29.9) (28.9)

Healthcare Global Enterprise

350 248 41.1 8.2 16.3 12.1 416 41 (3) (27) (90.1) (80.0)

Castrol India 970 883 9.8 9.0 23.2 32.6 (948) 95 158 205 (22.5) 13.2

Phillip Carbon Black 1,069 664 61.0 6.4 16.1 15.9 24 (20) 109 58 89.9 4.9

Mahindra Lifespace Developers

157 31 410.0 5.9 - - - - (11) (14) - -

Oberoi Realty 476 316 50.7 67.5 46.1 59.0 (1,286) 221 154 138 11.9 91.1

Source: Company, Sharekhan estimates

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