Big Story. 5 value stocks for you

Exide Industries (194.2): Positively charged

Parvatha Vardhini C

New vehicle sales volumes, which grew at 14 per cent in 2017-18, slowed to 5 per cent in 2018-19 and further plunged by 15 per cent in the first five months of this fiscal. This slowdown, along with market volatility, has seen many auto and auto component stocks take a knock in the past year. Despite the stimulus measures announced by the government to boost auto sales, the sector may not come out of the downturn in a hurry. Corporate tax cuts will also take time to show up as accretions to earnings.

The ongoing discounts, good monsoon and the upcoming festival season may boost demand to an extent. But the transition to BS-VI fuel emission norms on April 1, 2020, high transaction costs arising from compulsory multi-year third-party insurance, increase in road taxes in some states, etc still remain dampeners. Commercial vehicle sales too may gain strength only after economic activity gathers momentum.

In this backdrop, tyre and battery manufacturers which have sizeable after-market sales can ride the slowdown better. This is because tyres and batteries need to be replaced every three to four years in existing vehicles. Exide Industries is one such company.

The stock has dropped about 30 per cent in the last year. It now trades at about 19 times its trailing 12-month earnings, lower than Amara Raja Batteries (24 times) as well as Exide’s own three-year historical average of 25 times.

Over the last few years, the company has taken measures to strengthen its market share in the automotive replacement segment. These include higher support to dealers, improvement in after-sales service, faster turnaround in warranty claims, and launch of new products.

Compliance requirements under the GST will bring down the price advantage that unorganised battery-makers currently enjoy. This is expected to increase demand for organised players such as Exide, especially in the commercial vehicles and tractors segment.

Exide is well-placed to catch up when new vehicle sales pick up. It counts almost all leading auto manufacturers among its clients.

The company has also taken steps to tackle the shift to electric vehicles. It has entered into a joint venture with Switzerland-based Leclanché to build lithium-ion batteries. A lithium-ion cell production plant is expected to be in operation by mid-2020. Exide has already introduced batteries for e-rickshaws.

In the quarter-ended June 2019, net sales remained somewhat flat at ₹2,779 crore over the June 2018 quarter. Net profits inched up by 7 per cent to ₹225 crore.

Operating margins came in at 14.6 per cent, a tad higher than 14.1 per cent last year. Prices of lead — the key raw material — hover at around $2,000 a tonne currently. It is not expected to spike sharply, given the slowdown in Chinese demand. The company is debt-free.

GAIL (134.2): Strong pipeline

Anand Kalyanaraman

Since end-May, the stock of gas transmission major GAIL (India) has fallen more than 25 per cent. While the post-Budget market weakness played a part, the stock was also dragged down by some company-specific factors.

One, the tariff hike announced by downstream regulator PNGRB for GAIL’s key HVJ pipeline was below expectations. Next, low global gas prices raised concerns about the prospects of the gas trading business, given that the company has entered into long-term contracts to procure US LNG cargoes. Also, the decline in global crude oil prices affected the profitability of the petrochemicals and LPG segments.

This, along with a planned shutdown in the petrochemical business and subdued gas transmission volumes, resulted in a muted June quarter performance by the company. Besides, the overhang of a possible separation of the company’s gas transmission business from its gas marketing business continued to weigh down the stock.

The dip in the share price though presents a good value-buying opportunity. For one, the stock’s valuation is quite attractive. At ₹134, it trades at about 10 times its trailing 12-month earnings, compared with its three-year average of about 17 times. The current dividend yield on the stock is about 5 per cent. Also, the business concerns seem overdone.

The company has said that it is adequately hedged on its US LNG contracts. This should help the gas trading segment to perform well, as it did in the June quarter. Gas transmission volumes had declined in the June quarter due to planned shutdowns in some user industries.

Volume growth is expected to pick up over the coming year with more imported gas expected to come in through LNG terminals and completion of new pipelines. Also, the domestic gas output, if it improves, will aid GAIL’s transmission business. Higher volumes should mitigate the impact of the lower-than-expected tariff hike.

Petchem volumes should also pick up with the plant resuming operations. It is not clear if and when the separation of the company’s gas transmission and gas marketing businesses will take place. In any case, shareholders of GAIL (India) will have stake in the restructured businesses. The Centre’s push to increase the share of natural gas in India’s energy mix should help GAIL — the country’s largest gas utility.

The company’s consolidated profit in FY 2019 grew 36 per cent to ₹6,546 crore. The recent cut in corporate tax rates will help GAIL by reducing its effective tax rate.

Brigade Enterprises (202.5): Safe shelter

Bavadharini KS

The stock of Brigade Enterprises , a Bengaluru-based realty company, has gained over 50 per cent in the last one year. But it offers value at this juncture as it trades at 16 times its trailing 12-month earnings, lower than the average of 18 times it had traded at in the past three years.

While the tight liquidity situation, coupled with the slowdown in consumption, has played spoilsport with recovery in the real-estate sector, Brigade has reported strong sales in the residential segment. It registered 83 per cent Y-o-Y new sales (value) growth in FY19. This is thanks to the Bengaluru market drawing more working population, leading to incremental residential demand.

Over 70 per cent of the company’s projects are in Bengaluru and across diverse segments such as residential, office, retail (mall) and hotels. For the June quarter 2019, the new sales (value) rose to ₹593 crore from ₹295 crore last year during the same period. This is mainly attributed to the strong demand in mid-income and affordable housing segment, given that nearly 80 per cent of the company’s on-going and completed projects are in the less than ₹1-crore ticket size. The strong launch pipeline and operational rental portfolio in Bengaluru are expected to help the company’s earnings.

The company has recently launched 0.64 million sq ft of residential projects in the June quarter, of which 0.52 million sq ft are affordable housing projects. With robust volumes in this space and quicker project completion, the company’s earnings are expected to improve. The impact of recent corporate tax rate cut could be low on Brigade as the effective tax works out to about 23 per cent for FY19. However, other incentives by the Centre for players in the affordable housing segment are positives for the company.

The competitive pricing of its units and favourable location of the residential projects bode well for the company’s realisation. The average price realisation rose 2 per cent Y-o-Y to ₹5,244 per sq ft in the June quarter when players such as Sobha registered a decline of nearly 8 per cent Y-o-Y to ₹7,312 per sq ft for the same period.

Further, given the strong demand for office space, particularly in Bengaluru where the rental income grew 14 per cent, the company is steadily increasing its commercial projects.

For the June quarter, it launched three commercial projects totalling one million sq ft. During the same period, the company was able to lease 0.77 million sq ft, which is expected to yield rental income of ₹66 crore per annum.

Brigade has planned new project launches; 2.6 million sq ft of commercial projects and 6.4 million sq ft of residential projects in the coming quarters.

Cholamandalam Investment and Finance Company (310.6): Sound fundamentals

Radhika Merwin

The NBFC turmoil over the past year has hit most stocks within the space. Sluggishness in disbursements, overall slowdown in the economy and pressure on profitability owing to rise in cost of funds, can continue to keep stocks under pressure in the near term. But for long-term investors, it presents a good opportunity to buy quality stocks. Cholamandalam Investment and Finance Company has a well-established track record in the vehicle financing business (constituting 75 per cent of the overall assets under management).

Being part of the Murugappa Group, the company derives good operational/financial support from group companies. The company’s disbursements have grown by a robust 23 per cent CAGR between FY16 and FY19; in FY19 too, despite the challenging environment, the company’s disbursements grew by a strong 21 per cent, with both vehicle financing and loan against property (LAP) doing well.

Even in the latest June quarter, the company’s disbursements continued to grow by 22 per cent, despite the slowdown in the auto industry. Disbursements in the vehicle finance business grew by about 22 per cent, thanks to a well-diversified loan book across the spectrum in the automotive sector. In the current scenario of slowdown in the heavy vehicle and car segment, the company’s diversification into two-wheelers and focus on the used vehicle business, have aided growth. While near-term disruptions are likely and disbursement growth may moderate owing to the weak demand in the underlying segment, the company’s sound financials and portfolio mix should mitigate the pain. The management has guided for a 15 per cent growth in disbursement in FY20.

Overall, the company’s asset quality has been stable, with GNPAs at 2.6 per cent of loans. However, higher stress in the LAP segment warrants a watch. There has been a rise in delinquencies, post-demonetisation, in the LAP segment that constitutes 21 per cent of loans.

But constant efforts to resolve accounts through SARFAESI have helped bring down GNPAs in the segment. A lower loan-to-value of 50-52 per cent and chunk of the book (80 per cent) being self-occupied residential property have helped the company mitigate the risk.

On the liquidity front, the company has been comfortable. Its asset liability was well-matched as of June 2019. Its net interest margins (NIMs) have fallen by 60 bps Y-o-Y in the June quarter, owing to rise in the cost of funds and higher liquid assets (about ₹5,300 crore as of June 2019 to mitigate the tight liquidity conditions).

While focussing on high-yielding businesses can aid margins, near-term pressure can continue. Nonetheless, the company’s strong profitability — return of equity at 20 per cent — is a key positive. The recent cut in corporate tax rate would also help propel earnings. The company’s effective tax rate was 39 per cent in FY19 (current tax/PBT). However, it would need to raise capital to fund its growth over the next two years.

After coming under pressure in the beginning of the year, the stock has rallied over the past two months.

At the current price, it trades at about 2.6 times its expected FY20 book value, lower than its three-year historical average of about 3.2 times.

Ultratech Cement (4,395.2): Concrete structure

Keerthi Sanagasetti

Cement manufacturers have seen healthy realisations (revenue per tonne) on account of rising demand, post the Centre’s increased thrust on infrastructure and affordable housing. The pan-India cement prices peaked to almost ₹370 a bag (50 kg) in May-June 2019. From there, the prices have dipped marginally to about ₹340 a bag in August, which is still 7-8 per cent higher on a Y-o-Y basis.

With a domestic capacity of 98.8 million tonnes per annum (mtpa) — 21 per cent of the country’s combined capacity — Ultratech Cement seems a good value pick , given the recent correction in stock price.

The stock trades at 36 times the price earnings, which is at a discount to its three-year average of 46 times.

Majority of the costs incurred by cement makers are from fuel (energy), logistics and raw material consumption. Sanguine trends in these costs have boosted the company’s profitability. Its EBITDA per tonne stood at ₹1,590 in the latest June quarter, highest over a decade. These cost-savings are likely to sustain.

For instance, lower fuel consumption and fall in prices of pet coke and imported coal have resulted in savings in fuel costs. In FY19, there was an 18 per cent reduction in aggregate power consumption.

That aside, the international average pet coke and coal prices have also been falling steadily since December 2018. Analysts estimate that prices of pet coke and imported coal have dropped by 28 and 40 per cent respectively in August 2019 as well. The company has, through its acquisitions, optimised the average lead distance. This, coupled with lower diesel prices and revised axle load norms, have led to substantial savings in freight costs.

Ultratech Cement has been aggressively adding newer capacities since 2004, mainly through acquisitions. Five acquisitions in the last 15 years have added 52 mtpa capacity — a growth of 8 per cent CAGR to its global capacity (at 102.8 mtpa in FY19).

Notable ones being the acquisition of Jaiprakash Associates and Binani Cement’s assets in June 2017 and November 2018 respectively, adding 26.45 mtpa (in total) to Ultratech’s capacity. In July 2019, the company also received a NCLT nod to acquire the cement business of Century Textiles, which will further add 14.6 mtpa to its current capacity, taking Ultratech’s consolidated capacity to over 117 mtpa by 2QFY20.

The company’s inorganic moves have helped it garner better realisations and benefit from cost-savings through resource optimisation. Its ability to buy distressed assets at reasonable valuations has also helped it maintain its debt levels. In FY19, the net debt was 0.73 times its equity.

The effective tax rate for the company (standalone), comes to 21 per cent in FY19, which is lower than the new rate of 25.17 per cent announced recently, implying that the company may continue with its existing regime.

According to the annual report, there has been an increase in MAT credit entitlement for FY19 (about ₹197 crore), indicating that the company has paid tax under MAT provisions in FY19. The reduction in MAT rates to 17.47 per cent now, could lead to savings on tax outgo.

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