Top Ten Stocks To Buy Or Sell After 4QFY19 Earnings Results

Top Ideas:

Large-caps: SBI, ICICI Bank, Maruti, L&T, Infosys, Bharti Airtel, Coal India, Titan, Ultratech, HDFC Life

Mid-caps: Federal Bank, Indian Hotels, Siemens, ABFRL, Crompton Consumer, Ashoka Buildcon, JK Cement, Godrej Agrovet, Oberoi Realty

Ten focus stocks from 4QFY19 earnings season

SBI: Loan growth stood at 13% YoY/7% QoQ, driven by growth of 27.9% YoY in home loans and 15% YoY in the corporate book. Further, it expects loan growth of 12%- 14% in FY20. Slippages moderated to INR79.6b, which, coupled with healthy recoveries and higher write-offs, led to an asset quality improvement. Overall, the bank expects recoveries of INR350b-380b in FY20. It expects the credit cost trend to moderate significantly, going forward.

ICICI Bank: Retail loan mix now stands at 60.2% (+120bp QoQ). Fresh slippages stood at INR35.5b, but healthy recoveries/upgrades of INR15.2b and write-offs of INR73.2b drove a 105bp/52bp QoQ decline in the GNPL/NNPL ratios to 6.7%/2.06%. The quantum of BB and below assets declined to INR175.2b (-7% QoQ). ICICIBC expects credit cost to normalize significantly from FY20. It maintained its consolidated RoE target of 15% by June’20.

L&T: Consol. revenue grew 10.5% YoY to INR449b on a strong base of last year, taking full-year revenue growth to 18% (v/s guidance of 12-15%). EBITDA margin shrank 80bp YoY on account of one-off provisions in the core E&C business. 4QFY19 did not witness any slowdown in execution/order inflow on account of scheduled elections in April-May. LT remains our top pick in the capital goods sector.

Ultratech: The company stabilized operations of Binani’s assets, which operated at 72% utilization in Mar’19. Overall volumes for UTCEM grew 15% YoY to 21.3mt. The company successfully ramped up profitability of Binani’s assets, which achieved EBITDA/t of INR830 (excluding one offs), an improvement of INR740/t. With various cost-efficiency programs, cost/t for UTCEM declined 2% YoY. Thus, EBITDA/t increased 13% YoY to INR1,039. Consequently, EBITDA increased 30% YoY to INR22b, with the margin expanding 2.2pp YoY to 21.1%. Adj. PAT was up 42.5% YoY at INR10.1b.

Maruti: Maruti’s EBITDA remained under pressure due to factors such as inventory de-stocking at the company (-50bp QoQ), Gujarat new line & engine plant fixed cost (-70bp QoQ), Gujarat plant depreciation (-50bp), Fx (-60bp QoQ) and conversion cost inflation (-50bp QoQ). We believe that MSIL will see the full impact of headwinds on both volumes and margins over 1HFY20. We estimate FY20 volume growth of 6%, which will be highly influenced by spread out of monsoon and new product launch. Despite headwinds, EBITDA margin will likely expand by 30bp to 12.9% in FY20, as price increase and lower discounts will partially offset the impact from operating deleverage.

Bharti Airtel: India wireless business made a strong comeback with a beat on all fronts – EBITDA grew 32% QoQ. Minimum recharge strategy drove ARPU by a steep 19% QoQ to INR123, while the subscriber base fell by a meager 1%. Recent rights issue, impending Africa IPO/Bharti Infratel stake sale and the peak-out of capex intensity should act as a key catalyst in alleviating concerns around burgeoning leverage. Bharti is well poised to regain momentum. A turnaround in the India wireless business, coupled with a steady uptick in the Africa business, should propel overall growth.

Coal India: Coal India’s 4Q adj. EBITDA (ex-OBR) grew 4% YoY, driven by higher realizations and volumes, partly offset by a higher wage bill. Excluding the wage bill, cash cost was down ~4% YoY. We expect Coal India’s cash costs per ton to decline as it continues implementing productivity measures and shuts down old mines. This, along with 5-6% growth in volumes, should drive ~8% earnings growth over the next two years. The stock is attractive at current levels at ~4xEV/EBITDA (v/s historical average of 7x) and P/E of 7-8x (v/s average of ~14x).

Indian Oil: Led by its highest-ever marketing margins, IOCL’s EBITDA came in 45% above our estimate. PAT exceeded our estimate by 63%, driven by higher other income and a lower effective tax rate. No threat of spike in oil prices, combined with continuity in reforms, is likely to result in stable marketing margins. The quality of earnings is likely to improve with the commissioning of the PP plant at Paradip and the ramp-up of the Ennore LNG terminal. It is trading at par with the FY15-18 deregulated period, while it should command a premium due to higher free cash flow, in our view.

Federal Bank: Fresh slippages moderated to INR2.6b (1.1% annualized), driven by a 32%/50% YoY/QoQ decline in SME slippages and NIL corporate slippage. The bank expects the slippages trend to moderate, and thus, guided for 55-60bp of credit cost for FY20, and continued RoA improvement over FY20/21. Also, the bank expects a 250bp improvement in the C/I ratio over the next two years.

Asian Paints: Results were disappointing, with 12% sales growth and 2% EBITDA and PAT decline (absolute EBITDA/PAT miss of 16%/ 17%). Ongoing top-line slowdown particularly amid massive capacity expansion (50% capacity added in 6m ending March 2019) and a deteriorating mix indicates a weak earnings outlook. Valuations at 59.5x FY20E and 48.8x FY21E EPS are rich for a company with a weak earnings growth outlook and RoCE likely below 20% for FY20 – as a result, we downgraded our rating on the stock to Sell.