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HDFC Securities Institutional Equities
Larsen and Toubro - Margin recovery key for further rerating
Larsen and Toubro Ltd. reported yet another strong quarter, with revenue/Ebitda/adjusted profit after tax at Rs 510.2/56.3/32.2 billion, a beat of (0.2)/4.3/13.3%.
This was led by robust execution owing to a strong order backlog at the beginning of the year. The consolidated net debt/equity stood at 0.77 times as of September 2023 versus 0.58 times as of June-23.
The H1 FY24 net working capital to trailing twelve months sales ratio (excluding off financial services business) stands at 16.7% (-310 basis points YoY).
Whilst prospects pipeline and H1 FY24 performance warranted guidance upgrade, given uncertain geopolitical issues and the upcoming Indian election, L&T has kept guidance open-ended with a positive bias of surpassing the same. Given the record-high order book of Rs 4.5 trillion; bottoming out of infra margins; improvement in subsidiary performance; and higher public capex towards a green economy, we maintain our 'Buy' stance on the stock with an unchanged SOTP based target price of Rs 3,613/share (standalone price/earning multiple of 26 times on Sep-25E earnings per share).
DLF - Well-placed to ride upcycle
DLF Ltd. recorded in-line presales of Rs 22.4 billion (+8.6%/+9.2% YoY/QoQ), with sustenance sales at 84%. For FY24, it reiterated guidance of Rs 120-130 billion in total presales, backed by 11.2 msf of launches with a sales potential of Rs 197 billion.
Of this, five million square feet will be in the luxury segment, with 3.5 msf in DLF Phase V and 1.5 msf in Chennai. Collections stood at Rs 22.8 billion (+98%/+55% YoY/QoQ) as a result of which DLF achieved net cash status at Rs 1.4 billion (versus Rs 570 million net debt in Q1 FY24).
Collection is expected to accelerate in H2 FY24 and DLF has guided for Rs 64-65 billion of collection in FY24. The cash position remains strong at Rs 32 billion, earmarked for growth, dividend payout and debt reduction.
We have recalibrated our residential/land pricing assumption for the NCR market higher by 10-15% for DLF.
With DLF Phase V now touching the Rs 1 lakh/square feet mark, four times the initial launch prices, there are upside risks to our pricing assumption. Also, given the strong presales momentum supported by price hikes; robust launch plans; and an expected increase in office occupancy levels, we maintain 'Buy' on DLF, with an increased target price of Rs 650/share.
Birlasoft - Solid show
Birlasoft Ltd. delivered strong Q2 performance, both on revenue (matching Persistent Systems Ltd.'s sequential growth) and margins. We believe that Birlasoft's return potential is a combination of earnings growth trajectory (accelerating) and multiple rerating, supported by resilience and scalability of service portfolio, strong relative positioning, and recent leadership refresh (Birlasoft – the next large mid-tier).
Q2 performance was marked by manufacturing/banking, financial services and insurance verticals-led growth, large client mining (T10 grew ~two times of company average), strong deal velocity including $100 million plus large deal, and margin improvement despite wage hike impact.
While growth acceleration and deal velocity are supported by changes in incentive structure and latent demand in enterprise resource planning services (S/4 HANA transition), the margin upside is premised on improving business mix (BFSI traction), streamlining delivery organisation (leadership induction from tier-I) and sub-contracting optimisation.
We maintain our 'Buy' recommendation on Birlasoft with an upgraded target price of Rs 650, based on 23 times September-25E earnings per share, supported by 23% EPS compound annual growth rate over FY23- 26E and return on capital employed more than 22%.
Navin Fluorine - Deferment of sales orders impacts performance
We retain a 'Buy' on Navin Fluorine International Ltd., with a target price of Rs 4,616 on the back of-
earnings visibility, given long-term contracts;
tilt in sales mix towards high-margin high-value business;
capacity expansion led growth; and
strong research and development infrastructure.
Ebitda/adjusted profit after tax were 33/31% below our estimates, owing to a 21% fall in revenue, higher-than anticipated depreciation, and higher-than-expected interest cost, offset by lower-than-expected raw material cost.
J Kumar - Continued outperformance
J Kumar Infraprojects Ltd. reported yet another operationally strong quarter, with revenue/Ebitda/adjusted profit after tax at 11/1.6/0.7 billion, beating our estimates by 2.9/3.5/7.0%. In FYTD24, it won projects worth Rs 71.9 billion versus a revised FY24 inflow guidance of Rs 80 billion plus.
The order book as of September 2023 stood at Rs 164.5 billion (~3.9 times FY23 revenue, excluding level one of Rs 16.4 billion).
Gross debt stood at Rs 6.4 billion as of Sep-23 versus Rs 5.1 billion as of June 2023, leading to a gross/net debt/equity of 0.26/0.04 times.
J Kumar maintained its FY24 revenue growth guidance of 15% YoY with an Ebitda margin of 14-15%. Capex incurred in H1 FY24 stands at Rs 620 million.
Excluding the Chennai elevated corridor project, the FY24 capex guidance stands at Rs 1.5 billion. With ~71% utilisation of non-fund-based limits and 45% utilisation of fund-based limits, the company is well-placed to incur capex with a mix of debt and internal accruals.
Further, it guided for FY24-end debt levels of Rs 6.5 billion and net working capital days at 120. Given the limited upside on our target price, we maintain our 'Add' rating on the stock, with an unchanged target price of Rs 446/share (nine times Sep-25E earnings per share).
DCB Bank - Headline growth negated by elevated stress points
DCB Bank Ltd.'s earnings were in line with estimates on the back of healthy loan growth (+19% YoY) and range-bound credit costs, partly offset by a 14 bps QoQ moderation in net interest margins (3.7%). Slippages were elevated at 4.6% (Q1 FY24: 4.2%) resulting in gross non-performing asset levels inching up to 3.4%.
A sharp dip in the current account and savings account ratio to 25% (-93 bps QoQ), was offset by build-up in term deposits, driving a strong deposit growth (+23% YoY).
DCB Bank continues to beef up investments in its franchise-building activities with an intent to double its balance sheet in the next three-four years.
However, given that deposit re-pricing is likely to sustain for a few more quarters, concomitant with concerns around asset quality, we expect limited levers to near-term return on asset reflation.
We tweak our FY24/25 earnings to factor in elevated opex and higher funding costs as a result of higher deposit mobilisation; maintain 'Add' with revised target price of Rs 140 (0.9 times March-25 adjusted book value per share).
Aether Industries - Good show in challenging times
We retain our 'Buy' rating on Aether Industries, with a target price of Rs 1,200, on the back of-
capacity expansion-led growth,
advanced research and development capabilities,
technocratic management,
market leading position in most of its products,
strong product pipeline, and
marquee customer base.
Ebitda/APAT were 14/19% above our estimates, mainly owing to lower-than expected raw material costs and higher-than-expected other income.
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