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HDFC Securities Institutional Equities
Bharat Forge - Margin recovery seems to be on track
Bharat Forge Ltd.'s consolidated Ebitda at Rs 6.2 billion was in line with our estimate. However, profit after tax missed estimates due to higher-than-expected interest and depreciation. Key to highlight in Q2 was that Bharat Forge's export business grew 21% YoY despite the ongoing global challenges.
We continue to highlight that Bharat Forge has multiple growth levers going ahead, which include:
defence orders that are likely to see this segment's revenue ramp-up to Rs 17 billion by FY25E, from Rs 3.5 billion in FY23,
strong growth expected in passenger vehicle exports,
huge ramp-up potential at JS-Auto Cast given there is a huge demand for castings, both in India and abroad, and
strong order backlog in aerospace, which would boost this segment's revenue to Rs 5 billion over the next four years, from Rs 1.7 billion.
Further, its long-term stable revenue growth guidance is a testimony to the fact that management has been able to transform Bharat Forge from a cyclical entity to a stable revenue stream, given its well-diversified mix. Reiterate 'Buy' with a revised target price of Rs 1,185 (from Rs 1069 earlier) as we roll forward to Sep-25 estimates.
Nykaa - In-line performance; thesis remains on track
Fsn E-Commerce Ventures Ltd.'s Q2 top line grew 22.4% YoY to Rs 15.07 billion (our estimate: Rs 15.12 billion). Beauty and personal care growth continues to moderate (19% YoY in Q2 and H1; versus 42% compound annual growth rate over FY19- 23). BPC annual unique transacting customer grew 17.6% YoY in Q2 (versus 30% CAGR clocked over FY19-23).
Interestingly, despite the rising contribution of existing customers to BPC gross merchandise value (79% in Q2 FY24 versus 75% in Q2 FY23), BPC customer acquisition costs marginally increased as % of net sales value to 9.8% (versus 9.5% in base).
Could this mean the cost of retaining existing traffic is getting more expensive? Certainly warrants closer monitoring.
Fashion NSV grew at a healthy 32.4% YoY with an improving contribution margin as Nykaa plugged pre-delivery leakages and reduced Fashion's customer acquisition costs.
CM/Ebitdam at 19.9/5.4% was broadly in line (our estimate: 19.7/5.2%). We maintain our FY25/26 Ebitda estimates and 'Reduce' rating with a discounted cash flow-based target price of Rs 130/share (implying 72 times Sep-25 EV/Ebitda).
Emami - Volume growth remains weak; beat on margin
Emami Ltd.'s Q2 FY24 revenue growth of 6% was in line with our estimates while Ebitda growth of 20% was well ahead of our estimate (our estimate: 13%), aided by higher-than-expected expansion in gross margin and better cost control. Domestic/international revenues grew by 4/12% YoY, with domestic volume growth of 2% (3% four-year CAGR).
Domestic growth was led by Navratna and Dermicool, which grew 12%, followed by pain management/healthcare, which grew by 1/4%. BoroPlus/Kesh King/male grooming revenues fell 4/5/7% on weak consumer demand.
The alternate channel continued to report stellar performance with modern trade/e-commerce growing by 17/50% and now contributing 11/13% of domestic revenues. Gross margin expanded by 345 bps YoY to 70%, led by a softening raw material basket and pricing intervention with Ebitdam expansion of 300 bps to 27%.
Emami remains hopeful of demand recovery, especially in rural markets, while expanding FY24 Ebitdam by c.200-250 bps, led by-
softening inflation;
improving agri yield and rural wages;
increase in government spending; and
festive season.
We slightly increase EPS due to gross margin expansion while remaining cautious about the core business growth, given the limited scope to add new consumers in niche categories. We value the stock at 25 times price/earning on Sep-25E EPS to derive a target price of Rs 500. Maintain 'Reduce'.
Sundaram Finance - Strong all-round performance
Sundaram Finance delivered a strong set of outcomes, driven by higher-than-expected loan growth, higher other income, and sustained strong margins. The company's strategy of product diversification continues to play out, with intermediate commercial vehicle/light commercial vehicle/small commercial vehicle and commercial lending segment driving growth, despite sluggishness in the core medium and heavy commercial vehicle segment. Consequently, net interest margins remained stable despite rising cost of funds.
We tweak our FY24/FY25 earnings to factor in better-than-expected assets under management growth and higher other income and maintain 'Buy' with a revised SoTP-based target price of Rs 3,500 (standalone entity at 3.6 times Sep-25 adjusted book value per share, 25% discount to Cholamandalam Finance).
Loan growth stronger than historic trends, sustained profitability and better performance of subsidiaries are likely to drive further rerating.
Gujarat State Petronet - Higher tariffs drove the beat
Our 'Add' rating on Gujarat State Petronet Ltd. with a target price of Rs 305 is premised on-
recovery in transmission volumes after a 25% decline in volume seen in FY23 due to high spot liquefied natural gas prices, owing to geopolitical issues and low inventories and
limited upside triggers in the near term.
Hence, we believe that, at present, the stock is fairly valued with an return on equity of 16.7/15.4/15.1% in FY24/25/26E and a combined free cash flow of Rs 32 billion over FY24-26E.
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