20 for a brighter 2020!!

FUNDAMENTAL PICKS
Atul

Atul Ltd: Market leader in aromatic compounds used in

personal care and fragrance markets

 In addition to on-going trade war, the significant increase in

labour cost and environment compliance in chemical hubs
such as China, provided the opportunity for Indian producers to
increase market share in Chemicals sector. We believe Atul
with its leadership position in key market segments is well
placed to cash in on the opportunity
 The company is working on capex of over INR 4bn, with a fixed
asset turnover of 2x, which is likely to be completed by mid-
2020. The planned capex covers 30% expansion in the
aromatic compound para cresol’s capacity to 36,000 tonnes,
where in company holds 40% market share. Para cresol is
used in the fragrance and anti-oxidants industry
 The return ratios and cash flows are likely to improve further
driven by economies of scale, improved pricing, demand
recovery in end markets and lower finance costs.
 The stock is trading close to its all-time high and can be
accumulated on declines for decent gains in long-term.
Aurobindo Pharma (ARBP)

Aurobindo Pharma (ARBP): Strong growth in US and Europe

driving Profits

 The new product launches and volume growth in the existing

products ,continues to fuel the top line. The company has
launched 15 products in US markets during Q1FY20, which
includes 4 injectable products
 In Q1FY20, the US business revenue surged by 37% YoY (up
~10% QoQ) to USD 388mn. Other segments like ARV, API
and EU witnessed healthy growth of 9%/6%/8% QoQ,
respectively. Gross margin expanded by ~260bps QoQ
(+40bps YoY) to 57.8% on account of improved product-mix.
ARBP has also commissioned Eugia’s manufacturing facility
and launched 5 oncology and hormonal products in Q1FY20
 The management has guided for 40 new launches in the
coming months which is further expected to accelerate the
overall US revenue. ARBP expects significant growth
opportunities from new injectable launches, scaling-up of
existing business, and traction in OTC business
 The recent fall in stock price has made valuations attractive
and given above positives we expect the ARBP to be the right
pill for LT portfolio addition.
BEML

BEML: Moving in right direction

 BEML is Asia’s second-largest manufacturer of earth moving
equipment and controls over 60% share in Indian markets. The
company operates under three major business verticals - viz.
Mining & Construction (earthmoving, dump trucks, dozers and
excavators), Rail & Metro (RM) and Defence (Tatra trucks and
ARVs).
 BEML is expected to be the biggest beneficiary of burgeoning
opportunity in Metro coaches. The company recently received a
large order from Mumbai Metro worth INR 30bn during Q3FY19,
taking its overall order book to ~INR 91bn
 In Defence & Aerospace sector, the government thrust on import
substitution and the Make-in-India initiative have opened many
opportunities. BEML supplies mortar and casing components to
the Indian Army.
 The company is also working on recovery vehicle on main battle
tank of Indian Army, mine protected vehicle for military and para-
military forces, high-end missile programme and Akash missile
system among others.
 Given the company’s healthy order book, government initiatives on
import substitution, tie-ups with global players in the defence
segment and attractive sector dynamics we expect BEML to
deliver robust financial performance over next 2-3 years
Cochin Shipyard (CSL)

Cochin Shipyard (CSL): Sailing in safe waters

 The company is one of the leading shipbuilding & repair yard in
India, with infrastructure that combines economy, scale, and
flexibility, and has ISO 9001 accreditation. CSL also has an
exclusive area set for offshore construction and future
expansion.
 A zero debt company, sitting on cash reserves worth INR 10bn
or 21% of its market capitalization.
 The company has a healthy order book of INR 80bn, 4x its
annual revenues from shipbuilding
 At current prices the company is valued ~8x of its FY21
estimated earnings. Given high earnings visibility, zero debt
profile, capable management we think the stock can offer good
returns in short to medium term.
DCB Bank

DCB Bank Ltd: Long term trajectory intact despite a muted

quarter

 Over the last 2 years the bank has delivered gradual but steady
improvement in return ratios and has scope to improve further,
which makes it worth keeping in the watch list
 The bank reported a loan book growth of 12% YoY in Q2FY20
on account of de-risking of the corporate loan book (down 10%
YoY), the bank intends to shrink its exposure to corporate
segment
 Though the growth in advances stayed muted, the diversification
in loan book is inspiring. The advances as of Q2FY19 included
Mortgages, agri (41%), inclusive banking (AIB) (20%), corporate
banking (12%) and SME/MSME (12%).
 The bank has doubled its branch count from 154 in FY15 to 333
in FY19, due to which the operating expenses remained on the
higher side in last few years. However as these branches
mature, cost-to-income ratio is likely to improve further from
current levels and support the bank's earnings profile
 The bank is targeting to improve its net interest margin from
3.67% in Q2FY20 to 3.75% over time. The leaning in the loan
mix towards lesser risk and improving cost to income ratios
likely to spur earnings in future
Escorts

Escorts: Value at decent valuation

 Escorts Ltd (ESC) is one of India’s prominent players in the
Automotive / Tractor industry, with an overall market share of
11.4% in the domestic tractor industry. ESC is also present in
construction and material handling equipment, such as cranes,
compactors and forklifts with 55% market share in material
handling segment
 The company has outperformed peers and grew its September
sales by ~2.2%YoY while competitors saw de-growth/flat
growth. The company has got a clean balance sheet and
healthy return ratios (RoE > 20%).
 With increase in crop prices, above average monsoons
(Central India recorded 26% more rainfall and southern states
recorded 17% excess rainfall) and better financing support
from NBFCs, the sales in H2FY20 is set to make a U-turn.
 Traditionally, the second half of the year is seasonally stronger
for the construction equipment business of the company
providing further stimulus.
 The company is currently trading at ~16x P/E compared to
historic average of ~25x. we view this as an attractive entry
point considering the anticipated turnaround in domestic
Agriculture sector
Mahanagar Gas

Mahanagar Gas Limited: Building an energy network for a

greener India
 MGL is the sole gas distribution company in Mumbai and has
won bids to develop the gas infrastructure in Greater Mumbai,
Raigad and adjoining areas.
 The company’s debt-free and cash rich balance sheet,
provides it immense cushion for future CAPEX and expansion.
 The recent decline in spot LNG prices has aided margin
expansion not just for MGL but all downstream companies.
 The company enjoys massive policy support, which promotes
the use of a relatively cleaner fuel like natural gas amid rising
environment concerns
 A growing number of regions are getting added to consumer
gas distribution (CGD) network. The gas usage penetration
has been limited India though with rising oil prices and policy
initiatives, increasing number of people and businesses are
moving to Gas
 The limited number of operators in the sector with largely
untapped markets indicates strong revenue visibility for MGL in
near future. The company enjoys higher EBITDA margin
compared to its peers and is trading at a discount which
warrants investor’s attention
Lumax Industries

Lumax Industries: LED lighting solutions to drive future

growth

 The company’s revenue increased at a CAGR of 11% between

FY14-19 with margins expanding by 350bps to 8.3% during the
period. The LED lighting solutions business contribute 35% of
revenues while the conventional lighting makes up the
balance.
 The shift in trend of automotive lighting from conventional
solutions to LEDs and increasing demand for energy-efficient,
cleaner vehicles are likely to drive sales for the company
 The company managed to expand its margins by 130bps YoY
in Q1FY20 to 9.5% through cost cutting measures despite
negative operating leverage. Any respite in volumes owing to
the festive season and pre-BS VI buying could boost the
margins further
 Given the company’s historic track record and management
capabilities we expect the company to make best of any revival
in the Auto sector and maintain positive view on the stock
given attractive valuations
Mahindra and Mahindra

Mahindra and Mahindra: Making a U turn to recovery

 M&M is the flagship company of the Mahindra group and is a
market leader in tractors with over 40% market share. The
company also has a significant presence in the Utility vehicles
space
 The domestic tractor industry faced tough time last year on
account of subdued monsoons; however the company posted
a 0.4% YoY growth in domestic tractor sales for the month of
September 2019. Owing to above normal monsoons across
the country and increasing crop prices, sales in H2FY19 are
expected to recover further. Being the market leader, M&M is
set to benefit from this recovery.
 The company is increasing its presence in the farm
mechanization space (tillers, harvesters, sprayers etc) that
would further help propel growth and compensate for
slowdown in utility vehicle segment
 The stock has corrected close to 23% over the last one year
owing to cyclical downturn and poor monsoons and is available
at an attractive valuation
Motherson Sumi

Motherson Sumi (MSSL): Ready to change gears

 MSSL is India’s largest automotive wiring harness company

and one of the largest auto ancillary players. The company’s
revenues increased at a CAGR of 15.3% between FY14-19
 SMRP BV, a joint venture between MSSL and Samvardhana
International had an order book of EUR 1.82bn as of FY19,
giving it a strong revenue visibility in the near term. We also
expect margins to improve as the new SMP Greenfield plants
ramp-up and operating leverage kicks in. EBITDA margins of
SMP expanded by 70 bps QoQ in Q1FY20
 The implementation of BS-VI norms and demand for electric
vehicles across the globe are likely to be key drivers for future
growth. The Battery driven vehicles consume more wiring
components which could lead to a 10-20% increase in content
per vehicle, a big positive for MSSL
 With the capex cycle coming to an end, the company has
started repaying debt. The company’s net debt has reduced
from INR 113bn as on Q3FY19 to INR 83.8bn as on Q1FY20.
The stock is down ~47% in last 12 months and is available at
relatively cheap valuation.
RITES

RITES Ltd: Strong revenue visibility at an attractive valuation

 RITES Ltd generates revenue from two major segments,

turnkey projects and consultancy wherein it acts as a
consultant and an execution agency. The company hence has
an asset light business model with zero debt and healthy cash
balance of INR 14bn
 The company’s revenue increased 37% YoY in FY19, driven
by strong order backlog and better execution. The order
backlog of close to INR 61bn is 3x of annual sales.
 We expect company to maintain its pace of growth amid
growing infrastructure spending. In our view, the strong
revenue visibility coupled with improved execution and
technical capabilities, the company is well placed to benefit
from the expected pick-up in the domestic infrastructure
spending.
State Bank of India

State bank of India: India banks on it

 SBI, the largest Bank in India (In terms of Deposits, Advances,
Customers and Banking Outlets) serving 435.1mn Customers,
network of 22,010 Branches and 58,415 ATMs. The Market share
of SBI in terms of Deposits is 22.3%, Advances is 20.0%, no. of
POS is 15.9%, and Debit Card Spends is 29.8%.

 SBI’s strong liability franchise and better capital position

differentiate it from other PSU banks. NIM for Q1FY20 was at 2.8%
up +3bps Q/Q (domestic +6bps Q/Q) with cost of deposits falling
3bps Q/Q. During Q1FY20, the Net Interest Income of the bank
stood at INR 883.49B as on FY19 with a healthy growth of 18.0%
YoY. The Deposits has shown a growth of 11.6%. The Bank’s loan
book has grown at the rate of 12% with retail growing at ~18-20%
levels

 With the structural shift towards high quality assets, the overall
earnings volatility has come down and is likely to improve further in
coming quarters. The bank expects margins to improve in FY20,
with NIM guidance of 3.15%. Revised ROA guidance of 0.5- 0.6%
for FY20 with additional INR 160BN recoveries driven from three
stressed accounts. Credit cost guidance for FY20 has been
maintained at 1.4%

 The stock is trading at an attractive valuation and can be looked at

from medium to long term perspective
United Phosphorus (UPL)

United phosphorus limited (UPL): Geographical diversity

and ‘Arysta’ to drive growth ahead
 The company has been a strong post-patent player in the
global CPC industry with higher than industry growth. Over
FY16-19 UPL recorded a constant currency growth of ~13%
while the industry de-grew by 2%.
 In order to mitigate the risk of obsolete products (as pests
develop resistance against CPC over time), UPL continues
to invest in innovative and differentiated products/processes.
The share of innovative products in revenue increased
steadily from 2.5% in FY14 to 19% in FY19.
 The 5-year revenue CAGR of 13% has been supported by
outperformance in India and double-digit growth in LatAm,
North America and RoW. The diversified revenue base (both
based on markets and crops) has enabled the company to
maintain strong growth momentum despite external
headwinds related to adverse climate or crop-specific
dynamics
 We believe that the company’s focus on managing product
resistance, cost optimization and diversified presence
across all crops & geographies and massive expansion of
footprint with the acquisition of Arysta would propel growth
for the company in coming quarters
VST Tillers and Tractors

VST Tillers and tractors: Leader in compact Tractors & Tillers

 Founded in 1967, the company is engaged in the manufacture and

sale of power tillers, tractors, rice transplanters, power reapers and
auto components. The company also exports its products to Africa,
Russia, Myanmar and component parts to UK & Europe.
 With better than average monsoon this year, we expect the
demand for tractors to recover. The key strength for VST lies in
Tillers and the Compact Tractor segment where company
continues to be leader
 During Q1FY19 VST started seeding of higher horsepower tractors
in the range of 39, 45 and 49. The Company launched these
tractors in 22 dealerships across four states which have been
accepted well as reflected in August sales (up 57%) YOY and the
company expect ramping up of production in the second-half of
this year
 The company holds ample cash reserves which will help pursue
organic/inorganic growth opportunities without pressuring its
balance sheet. The company is debt free and has historically
maintained high return ratios and dividend payouts (28% in FY19).
 We expect that VST tillers & tractors with 45% market share in
tiller segment likely to be a key beneficiary of the improving sector
drivers and recommend Buy on the stock at current levels.
Welspun India

Welspun India: Flooring solutions business paving

way for future growth

 WIL mainly derives revenues from home textiles products

such as terry towels and sheets. However, the company’s
full-fledged entry into flooring solutions business, with
commissioning of a new manufacturing facility in
Hyderabad is likely to be a potential game changer
 The company’s client base includes 17 of the top 30
global retailers. WIL derives 38% of top line from
innovative products
 In Q2FY20, EBITDA increased by 25% YoY on the back
of falling costs and operating expenses. The EBITDA
Margins stabilised at 21% while PAT margin improved to
11% from 9% in last quarter. The finance cost declined by
9% YoY and the company intends to eliminate its entire
debt by FY2022
 We hold positive view on WIL based on the easing
litigation pressures, increased focus on domestic market
and launch of new products
TECHNICAL PICKS
Technical Picks

Bajaj Finance
Stock is in long term uptrend and in short term it consolidated in the range of 3000 - 3400 levels
and price breached short term resistance at 3400 levels and it is a continuation pattern to the
existing long term uptrend; we expect a strong momentum towards 4800 levels. Buy with a stop
loss at 3700.

Titan
In medium term it consolidated in the range of 1000 - 1350 levels and price breach medium term
resistance at 1350 levels is a continuation pattern to the existing long term uptrend and trending
towards 161.8% Fibonacci levels of short term range at 1550. Buy with a stop loss at 1150.

Voltas
In long term it consolidated in the range of 480 - 660 levels and price breached long term
resistance at 660 levels and trending towards 161.8% Fibonacci levels of short term range at 800.
Buy with a stop loss at 640.

Biocon
In medium term stock was in down trend from 350 levels to 210 levels, which is long term support
and bounce back to 240 levels. We expect a value buy around long term support and bounce back
expected up to 300 levels. Buy with a stop loss at 200.

ICICI Bank
In short term it consolidated in the range of 380 - 440 levels and price breached short term
resistance at 440 levels is a continuation pattern to the existing long term uptrend and trending
towards 261.8% Fibonacci levels of short term range at 540. Buy with a stop loss at 420.
Annexure 1

FUNDAMENTAL PICKS
SL. NO COMPANY CMP CONSENSUS TARGET STOP LOSS
1 ATUL LTD 4835 3800
4252
2 AUROBINDO PHARMA LTD 682 430
471
3 BEML LTD 1107 850
946
4 COCHIN SHIPYARD LTD 510 320
374
5 DCB BANK LTD 241* 150
175
6 ESCORTS LTD 765 550
640
7 MAHANAGAR GAS LTD 1113 870
972
8 LUMAX INDUSTRIES LTD 1554* 1100
1210
9 MAHINDRA & MAHINDRA LTD 666 500
578
10 MOTHERSON SUMI SYSTEMS LTD 126 90
111
11 RITES LTD 335 250
279
12 STATE BANK OF INDIA 372 240
282
13 UPL 695 500
595
14 VST TILLERS TRACTORS LTD 1558 1100
1275
15 WELSPUN INDIA LTD 64 45
53
*CSEC TARGET
Annexure 2

TECHNICAL PICKS
SL. NO COMPANY CMP CSEC TARGET STOP LOSS

1 BAJAJ FINANCE LTD 3987 4800 3700

2 TITAN CO LTD 1335 1550 1150

3 VOLTAS LTD 699 800 640

4 BIOCON LTD 242 300 200

5 ICICI BANK LTD 469 540 420

HAPPY DIWALI!
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