ABC Company Limited...Dhanuka Agritech Limited is one of India’s leading agro-chemical Company. Key drivers: a) low per hectare pesticide consumption vs. developed economies (India

JMFS Research

For Private Clients Please see important disclosure at the end of this report. | Private & Confidential

Nov-20

JMFS Research

SAMVAT 2077 – Diwali Picks

2

Top Recommendations

Mkt Cap (Rs.

Bln) CMP

(Rs/sh) P/E

FY21E P/B

trailing Target Upside %

Jubilant Life Sciences Ltd 111 702.2 12.4 2 875 25%

Hindalco Industries Ltd 420 187.35 12.9 0.7 235 25%

SBI Life Insurance Co Ltd 801 805 48.4 9.2 980 22%

Intellect Design Arena Ltd 32 240.2 15.3 3 300 25%

SBI Cards & Payment Services Ltd. 795 827.1 76.2 14.9 950 12%

Bharti Airtel Ltd 2452 457.3 - 3.2 565 26%

PNC Infratech Ltd 42 163.55 - 1.6 205 25%

Dhanuka Agritech Ltd 35 731.25 19.5 4.9 900 23%

Laurus Labs Ltd 149 282.05 19.7 8.4 345 24%

Federal Bank Ltd 109 54.15 8.6 0.7 70 28%

Aster DM Healthcare Ltd 68 133.9 40.3 2.1 165 22%


3

Jubilant Life Sciences Ltd.

Jubilant Life Sciences has been consistently delivering robust earnings, led by better traction in a) the CMO/Generics category in the Pharma segment and b) the Life Science Chemical category in the Life Science Ingredient (LSI) segment. The Remdesivir launch further supported growth in the Pharma segment in the recent Quarter. The management has maintained its guidance for a double-digit revenue growth in the LSI business in FY21 with the business posting strong sequential improvement in margins for the fourth consecutive quarter. Given a strong order book, increasing contribution from Remdesivir supplies and Jubilant’s commercial supply agreements for Covid vaccine candidates (subject to approvals), growth in the CMO, API & generics businesses could continue to surprise on the upside in the near term. Jubilant continues to trade at a significant discount to its pharma peers even as its pharma margin profile is better than the industry average and the contribution of pharma to overall EBITDA is greater than 70%.

Jubilant has entered into five clinical and commercial supply agreements for Covid vaccine candidates with the annualized revenue potential of these agreements (subject to approvals) expected to be c. INR 5000 mn. Jubilant’s proprietary drug pipeline remains an attractive optionality with two molecules expected to proceed to the trial stage by FY22. The company’s continued focus on debt reduction and the unlocking of value post-business reorganization (expected by Jan’21) should translate into higher valuations going forward.

CMP (Rs.): 702.20 Targets(Rs.): 875 Bloomberg: JUBILANT IN

Source: Company, JMFS Research

FY20 Revenue Mix by Segment

PAT trend (Rs. cr.)

Source: Company, JMFS Research Source: Company, JMFS Research

Revenue from operations (Rs. cr.)

Specialty Pharma

33%

CDMO 17%

Generics 13%

Specialty Intermediates

12%

Nutritional Products

5%

Life Sciences Chemicals

17%

DDDS 3%

2,559 2,885 3,104 4,013

5,349 5,714

3,144 2,882 2,576

3,328

3,545 3,179 123 126 182

176

217 262

FY15 FY16 FY17 FY18 FY19 FY20

Pharma LSI DDDS

431

576 643

574

898

FY16 FY17 FY18 FY19 FY20


4

Hindalco Industries Ltd.

Hindalco FY20 consol. FCF (INR bln)

Trend in Novelis Shipments and EBIDTA/t FY 20 Revenue - Split by Business

Source: Company, JM Financial Source: Company, JM Financial

Source: Company, JM Financial

Hindalco Industries is an industry leader in aluminum and copper. It is one of the largest integrated primary producer of aluminum in Asia while It operates one of the largest single location custom copper smelters in the world. Hindalco arm Novelis Inc is best positioned in high margin product business across all four major industrialized continents in the globe.

Hindalco continued to deliver strong and resilient performance in FY20 despite 13% decline in aluminum LME price, given - 77%+ of Hindalco’s consolidated EBITDA is LME delinked (Novelis+ Copper) currently. EBITDA (Rs143bn) contribution of respective businesses stood at 67% (vs 55% FY19; adj Jmfe FY20 @72%) for Novelis, 24% for Aluminum and 9% from Copper/others respectively. Novelis registered the sixth consecutive year of margin improvement with adj. EBITDA/ton coming in at USD438/ton and shipments of ~3.3mn tons. Recent acquisition of Aleris is likely to further increase the contribution of Novelis to consolidated EBITDA. Hinadalco had another FCF positive year in FY20 and reported a net debt to EBITDA of sub ~3x as at end FY20. The net debt of the company has increased in 1Q with the closure of Aleris acquisition, approaching net debt EBITDA of 4x – not considering the divestment amount of Lewisport plant. Company is committed to achieve its net debt to EBITDA target of sub 3x over next 24 months. Hindalco recently revised its guidance upwards for the consolidated Novelis entity from USD 425-450 EBITDA/ton to USD 450-475/ton. Hindalco remains our preferred pick in metals.

CMP (Rs.): 187.35 Targets(Rs.): 235 Bloomberg: HNDL IN


5

SBI Life Insurance Co Ltd.

Market share

Trend in Operating ROEV Trend in APE Growth



SBI Life is well positioned to outperform industry growth driven by: i) its focus on increasing share in under-penetrated markets; ii) expanding credit life protection business and iii) leveraging its large bancassurance channel for cross-selling opportunities.

We expect SBI Life APE growth to slow and recover to 16% by FY22E outperforming industry growth as the company taps into its large bancassurance channel to increase penetration and leverage cross-sell opportunities. Product mix shifts in favour of retail products. SBI Life continue to outperform the industry. With a c.11% industry APE market share, SBI Life is the largest insurer (ex-LIC) in the country.

SBI Life continued to maintain its cost leadership with total expense ratios, early buckets see healthy persistency improvement; steady NBV growth led by favourable product mix, improving persistency and favourable operating leverage. We forecast NBV CAGR of 15% over FY19-22E as the insurer, a) invests into distribution, b) focuses on high-margin products like protection/ non-PAR savings, and c) maintains cost leadership. We expect RoEVs to improve to 18% CAGR by FY20-22E, driven by: (1) continuing improvement in NBV margins led by an increase in the proportion of high-margin protection policies and improving persistency, (2) focus on cost efficiency, and (3) strong parent brand equity and scope for cross-selling opportunities. We believe SBI Life is better placed to weather the COVID19 disruption given significant brand equity, an expansive multi-channel, pan India distribution network, cost leadership and access to parent’s huge client base. Stock is trading at x FY 22E EV.

CMP (Rs.): 805 Targets(Rs.): 980 Bloomberg: SBILIFE IN


6

Intellect Design Arena

Revenue across geographies (Q2FY21)

Order backlog ($mln) Quarterly margin trend (%)



Adv. Markets: Americas, Europe, Australia, New Zealand, Singapore, Japan and South Africa

The technology space in financial sector is now transforming into an Application Programming Interface (API) based market place where solutions can be worked on cloud-based networks. Intellect has over 900 APIs across its various product lines catering to customer needs. AI/ML is impacting the financial sector substantially. Risk Analyst has tied up with 8000 Data sources to provide AI/ML based intelligence to P&C insurance companies.

The overall deal pipeline is over $500m, while order backlog from License and Subscription deals is over Rs. 2,000 Crs. 90% of our revenues are from existing customers. Key drivers: a) continuing strong deal win trajectory; b) acceleration of digital transformation in banking & financial space; c) sharp focus on cost and improved revenue mix have aided gains in margin, management expects these drivers to continue aiding performance in the future. Management maintains a positive outlook aided by demand recovery.

In Q2FY21 company reported 14% YoY growth in revenue to Rs. 3730 mln and aims to grow revenue at 20% in FY21. EBITDA margin stood at 24% of revenues and it aspires to grow to 30% over the span of next 4 quarters. The company reported net profit of Rs. 1018 mln for H1FY21 vs. loss in same period las year. Debt has reduced to Rs. 707 mln vs. Rs 2302 in same period last year and expects to be debt free over the next 4-6 quarters. Cash and cash equivalents stand at Rs. 1654 mln.

CMP (Rs.): 240.20 Targets(Rs.): 300 Bloomberg: INDA IN

Adv. Markets (INR mn), 8042,

57%

India (INR mn), 2071, 15%

Rest of the World (INR

mn), 3909, 28%

11 13

4

-2 1

18 20

24

8 10

-1

-6 -4

12 15

19

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

FY19 FY20 FY21

EBIDTA Margin (%) EBIT Margin (%)

154 161 162 156 158 159 152 160

7.4

4.8

0.7

-3.5 1.0

0.6

-4.1

5.3

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

FY19 FY20 FY21

License Based - Order Backlog Growth QoQ (%)


7

SBI Cards & Payment Services Ltd.

The Indian credit card industry grew by a healthy 32% CAGR between FY15-19, however, the credit card penetration in India is still at 3%, which is very small number even if we compare it with other emerging countries. According to CRISIL’s study credit card spend in India is expected to grow at 20% CAGR between FY19-24E on the back of rising Government’s support for cash less economy, improvement in payment infrastructure and an increase in organized retail penetration including e-commerce. India has favorable demographics, huge young population, rising per capita income, rapid urbanization etc. to support growth.

SBI Cards & Payment Services (SBIC) is the 2nd largest credit card company in India with a market share of 18.5%/19.9% in terms of Cards-in-force/spends respectively as on June’20. Digital and cash less payments in India are still at a nascent stage, and its prevalence is likely to accelerate with deeper penetration of e-comm and expansion of POS systems in non-metros mainly Tier-2/3 towns. SBIC is benefitted by the strong parentage of SBI. The deep geographical penetration of SBI provides SBIC a huge customer base to be tapped thus enabling low-cost, sustainable and robust growth. The company has been growing above industry average since last many years and has managed to grow market share from 11% in FY14 to 18% in FY20. This growth was also highly profitable as evident in the RoA. SBIC’s ROA has been above 4% since last 5 years.

CMP (Rs.): 827.10 Targets(Rs.): 950 BBG: SBICARD IN


New accounts traction picks up

Online Spend (%)


955 797 851

288

688

2,840

3,408

Q4FY19 Q1FY20 Q4FY20 Q1FY21 Q2FY21 FY19 FY20

New accounts ('000)

3.2 3.6

4.6

6.3

8.3

10.5

FY15 FY16 FY17 FY18 FY19 FY20

Cards in force (in mn)

36.6

43.0 44.9 44.2

54.6

FY17 FY18 FY19 FY20 H1 FY21

Online Spend (%)

Cards in force (in mn)


8

Bharti Airtel

Bharti Airtel is uniquely positioned to tap rising demand for high speed broadband services post the pandemic, through its tie ups with Local Cable Operators (LCOs) and the new FTTH offerings. Further, BHARTI’s Africa business is witnessing momentum on the back of: a) data consumption as it rolls out 4G LTE across key markets like Nigeria; b) its payments business, Airtel Money. Bharti Airtel (BHARTI) is strongly geared to take advantage of the increased demand for enterprise telecom solution, not only among the larger enterprises but also among the Small and Medium Enterprises (SMEs). Bharti is advantageously positioned to benefit from a potential surge in data usage post-Covid-19 due to its market leadership in high-usage high-ARPU customers. We believe that going forward, Bharti would focus on accelerated ramp-up of its enterprise arm, gaining new clients as well as offering broader services to the existing client base.

Bharti has recently partnered with marquee operators such as Verizon and Amazon Web Services, and has rejigged its Enterprise team to tap large untapped MSME opportunity. Pre-IND AS wireless EBITDA margin is expected to improve to ~46.4% in FY25E, aided by operating leverage from higher tariffs and upgradation of subscribers to higher data allowance packs. Valuation: The stock currently trades at 7x FY22E EV/EBITDA vs. 3-year average of 8.3x.

CMP (Rs.): 457.30 Targets(Rs.): 565 Bloomberg: BHARTI IN

100 104

123 129 128 135

154 157 162

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

FY19 FY20 FY21

Trend in India Mobile ARPU (Rs/month)

Trend in India Mobile ARPU (Rs/month) Average Monthly Data Usage (GB/month)

Source: Company, JM Financial Source: Company, JMFS Research

Source: TRAI, JM Financial.

Consolidation to drive doubling of industry revenues over the next 5 years


9

PNC Infra

PNC’s order book has witnessed significant growth, clocking a ~34% CAGR over FY15-20 and currently stands at ~INR 68 billion as of 2QFY21. In 4QFY20 and 1HFY21, the company received LoA for 4 HAM projects and 6 EPC, totalling to INR 90bn (EPC value of HAM projects). Including this, OB stands at INR 158bn (3.2x FY20 revenues) giving a strong visibility for future growth. NHAI is targeting 3200km ordering in 2HFY21, we expect stronger EPC players like PNC to benefit from Govt. focus on road sector capex.

PNC’s standalone gross debt/equity at 0.1x is among the best in the industry mainly driven by a) strong execution track record and b) prudent bidding strategy. We believe that the company is capable of funding the equity requirement for existing HAM projects (INR 4bn) and new HAM projects won (INR 6-7bn) through internal cash accruals.

Management has upped their FY21 order inflow guidance to INR 100bn (vs INR 70bn earlier) of which PNC has already won orders worth INR 42.5bn in 1HFY21. The balance sheet remains strong with consolidated D/E of 1.3x as on Sep’20, which we estimate to rise to a peak of 2x by FY23 including all new HAM project debt. This leaves room for future growth from more HAM order inflows.


Order book and Order inflow

Resulting in lower debt levels and robust balance sheet


Capex and investments to be funded via internal accruals

CMP (Rs.): 163.55 Targets(Rs.): 205 Bloomberg: PNCL IN


10

Dhanuka Agritech

Revenue & PAT trend (Rs. Cr.)

Products to go off patent between 2020-2023 ($bln) Pesticide consumption (kg/ha)

Source: FICCI Source: AMSEC Research


The Indian agricultural market is expected to reach Rs. 89,380 billion by 2023, exhibiting a five-year CAGR of 12.2%. India is expected to achieve the ambitious goal of doubling farm incomes - from US$ 1,505.27 in 2015-16 to US$ 3,420.21 by 2022. The market for crop protection products is expected to reach US$ 66.7 billion by 2023 (vs US$ 57.5 billion in 2018) registering a CAGR of 3.1%. The agriculture sector in India is expected to gain momentum in the coming years due to increased investments in agricultural infrastructure.

Dhanuka Agritech Limited is one of India’s leading agro-chemical Company. Key drivers: a) low per hectare pesticide consumption vs. developed economies (India per hectare consumption is 0.6kg/ha vs. ~7kg/ha in UK and 13kg/ha in China); b) higher spend on irrigation as government focuses on measures to improve agricultural infrastructure; c) better MPS’s allows farmers to invest in better, more effective farming practices; d) favorable government measures and policies (PM-KISAN, doubling of farmer income, government subsidies).

In Q2FY21 company reported net profit gain of nearly 17% on year to 701 mln rupees, led by a double-digit growth in sales and better operational performance. Revenue from operations for the quarter rose 10% on year to 4.42 bln rupees. Sequentially, the net profit rose more than 35% while revenue was higher by 18%. An added positive was the operating margin expansion to 20.11% in Jul-Sep from 18.25% a year ago.

CMP (Rs.): 731.25 Targets(Rs.): 900 Bloomberg: DAGRI IN

0.4

0.8

1.4

1.6

2020 2021 2022 2023

828.79 883.35

962.63 1,005.84

1,120.07

107.31 121.86 126.17 112.58 141.46

FY16 FY17 FY18 FY19 FY20

Revenue (Rs. Cr) PAT (Rs. Cr)

0.6

2 3

4 5

7 7

12 13

India Turkey Grance Germany Brazil Korea USA Japan China


11

Laurus Labs

Laurus manufactures APIs at its six plants in Visakhapatnam, three of which are approved by the US Food and Drug Administration. It has an R&D laboratory in Hyderabad. Laurus’ forward integration into formulations segment, backed by strong market position in the antiretroviral (ARV) active pharmaceutical ingredients (API) segment has started paying off with receipt of orders from direct participation in institutional tenders to supply ARV drugs.

Laurus Labs Ltd has established itself as a key supplier of differentiated APIs for antiretroviral (ARV) and oncology products and now expanding its presence in some other APIs, CRAMS and formulation business. Companies early foray and investments in manufacturing infrastructure and R&D has helped company become formidable player for HIV drugs & Hep-C drugs in low and middle income countries. Company has shifted focus on new regime ARV formulations and CRAMS which offers better growth prospects and profitability.

API business is likely to see improvement from H2FY21 onwards due to better offtake in onocology API’s and ARV (antiretrovirals) API’s. Laurus provides contract manufacturing of formulation for its European customers, which is witnessing increased traction. We believe companies such as Laurus labs is strategically positioned to leverage on growth through its contract manufacturing business and increased offtake in API’s business. Stock trades at reasonable valuations of 18x its FY22 earnings.


Generics API, Generics FDF and Synthesis

EBITDA & EBITDA Margin (%)


Revenue (YoY Gr 60%)

467

359

424

522 571

160

292 267

352

452

85 78

148 100 116

Q2 Q3 Q4 Q1 Q2

FY20 FY21

Generics API Generics FDF Synthesis

712 729 839

974

1,139

Q2 Q3 Q4 Q1 Q2

FY20 FY21

Revenue (YoY Gr 60%)

139 150 193

285

378

20 21 23

29 33

Q2 Q3 Q4 Q1 Q2

FY20 FY21

EBITDA (YoY Gr 172%) Margin (%)

CMP (Rs.): 282.05 Targets(Rs.): 345 Bloomberg: LAURUS IN


12

Federal Bank Ltd.

Margin trends (Q2FY21)

Trend in Asset Quality and Provisions Trend in accretion to Deposits and Loans



Management guided for RoA expansion by 25-30 bps to 1.25-1.30% over next 2-3 years supported by a) increase in C-D ratio, b) expansion in NIMs, c) improvement in fee income, d) moderation in opex and e) moderation in credit costs. Management indicated that the focus on retail banking will continue. Management also indicated that the increased use of data analytics has aided in better and enhanced credit underwriting and risk monitoring which in turn should lead to better credit quality.

Federal Bank reported robust core operating profits aided by a) strong traction in core fee income (INR 2.9bn, +68% QoQ), b) sturdy NIMs (3.13%, +6bps QoQ) and c) moderate opex growth (+7% YoY). However, overall provisions were elevated at INR 5.9bn (as FB created addtnl. covid provisions of INR 4.0bn) which resulted in subdued PAT of INR 3.1bn (-26% YoY). Management indicated that post the end of moratorium, FB has seen healthy collection efficiency of c.95% in Sep-20. Slippages were negligible at INR 100mn aided by aided by asset classification standstill (actual slippages at 2.4bn without benefit).

We believe Federal Bank continue to strengthen its Gold Loan Book offsetting muted trend in Wholesale Portfolio. Strong Retail Deposit mix with strengthening fee income and Bank Asset quality set to improve as less exposure to stressed loans coupled with Provisions inching up also aided by collection efficiency improving. We believe downside maybe limited at CMP as While FB has corrected 41% YTD and trades at seemingly attractive valuations of 0.7x FY22E adj. BVPS.

CMP (Rs.): 54.15 Targets (Rs.): 70 Bloomberg: FB IN


13

Aster DM Healthcare

Aster DM is an attractive play on the mandatory insurance coverage in GCC and the increasing insurance penetration in India. With presence in 7 GCC countries and an established brand in south India, Aster has a well-diversified business profile with a strong base in high realization geographies. Aster’s presence across business segments - hospitals, clinics and pharmacies - and geographies offers multiple synergies with Indian nationals accounting for c.61% of the doctor strength in its GCC network and patients from GCC being transferred to India for complex tertiary care.

Aster continues to leverage multiple cost levers, including centralized procurement of medicines & consumables, rental renegotiations, manpower optimization and offshoring of back end operations to a shared service centre in India (expected by 4Q), to drive cost efficiencies.

The near-term impact of deferment of elective surgeries is expected to be partly offset by higher Covid volumes in GCC. Given the focus on cash conservation, Aster has put major greenfield (Chennai, Aster KLE, Muscat) and expansion (Riyadh) plans on hold with the management focusing on sweating its current assets and no major bed additions expected over the next 2 years.


Operational Beds

EBITDA - FY21 Q1


Revenue - FY21 Q1

Hospitals 54%

Clinics 20%

Pharmacies 26%

466 540 615 761 913 908 971

1,306 1,436

2,038 1,979 2,179

2,530 2,486 1,772

1,976

2,653 2,740

3,092 3,438 3,457

FY15 FY16 FY17 FY18 FY19 FY20 Q1FY21

GCC India

Hospitals 66%

Clinics 8%

Pharmacies 26%

CMP (Rs.): 133.90 Targets(Rs.): 165 BBG: ASTERDM IN


14

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Order 2005 (as amended, the "Financial Promotion Order"), (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial

Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial

Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together

being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or

investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

JM Financial Services Ltd. - Research Analyst

Corporate Identity Number: U67120MH1998PLC115415

Research Analyst - INH000001196 | NSE - Capital Market INB231054835 | Futures & Options INF231054835 | Currency Derivatives INE231054835 | BSE - Cash Market INB011054831 | Equity

Derivatives INF011054831 | MSEI - Equity INB261054838 | Equity Derivative INF261054838 | Currency Derivatives INE261054835 | NSDL - IN-DP-NSDL-241-2004 | CDSL- IN-DP-CDSL-236-

2004 | PMS - INP000000621 | AMFI - ARN0002


16

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