COLGATE PALMOLIVE LTD

Company Name - Colgate Palmolive Ltd CMP 1,578 TGT 1,745

Key Rationale

* Focus on volume led profitable growth: Gross Margin at 67% are expected to sustain as GMs are a function of volume, product mix, innovation, promotional intensity and channel mix. Management indicated it will not compromise on volume growth and still maintain competitive positioning in the market by a judicious balance between pricing and volumes. CLGT’s focus remains on maintaining value proposition for the consumer and thus would not take unnecessary price increases.

* Strategic approach towards innovation: Unrelenting focus on consumer needs (existing/ unknown with functional/emotional benefits) has led the innovation drive for CLGT. The company upped the ante in innovation to drive premiumization and growth with focus on key pillars - 1) Building platforms – Naturals under Vedshakti toothpaste by launching contemporary packaging, extension of Vedshakti equity into product gaps like Mouth Spray and Oil Pulling (one of its kind launch in India), 2) launching products with technological edge Colgate Visible White Instant, Gentle toothbrushes Anti-bacterial brush etc, Colgate Diabetics a functional product launch (targeting diabetics), first such launch globally thus showcasing CLGT’s relentless focus on consumer’s needs.

* Strong share gains in MT and e-commerce channels: CLGT cashed in on the Natural’s tailwind momentum and increased reach of its Naturals portfolio by 2x outlets. Naturals portfolio’s household penetration increased by 70bps YTD. Focus has been increasing on its E-com presence across various platforms as it grew by 11x over FY16 till date with a 12% rise in its market share YTD. In Modern Trade CLGT reported +170bps YoY share gains owing to increased shelf space and visibility amid the pandemic. CLGT’s share in MT/e-commerce is now higher than all India market share. Resurgence of General Trade channel has been a positive and CLGT has held onto its its 50%+ market share amid ebbing of competitive pressures from Patanjali which has struggled in the market place in recent times in our view.

Infosys Ltd 

Company - Infosys Ltd  CMP 1246 Target 1404

Key Rationale

* Industry defining US $ 3.2 bn partnership: Infosys wins $3.2 bn contract from Daimler. Daimler will transform its IT operating model and infrastructure landscape across workplace services, service desk, data centre, networks and SAP Basis together with Infosys. As a part of this partnership, automotive IT infrastructure experts based out of Germany, wider Europe, the US and the Apac region will transition from Daimler to Infosys. Infosys has seen many people takeover deals in the recent past and has integrated more than 16,000 employees through other partnership in recent years.

* Resilient business, Healthy outlook: Infy management revised its guidance upwards to 2%-3% (0%-2% previous) revenue growth in CC terms for FY21 and operating margin will be in the range of 23%-24% (21%-23% previous). The management commentary is positive in the verticals like BFSI, Hi tech Media, Life Sciences and Communications. While Retail vertical will recover slowly across geographies in near term. However digital business continues to show robust performance with $1,568 mn (44% to the top line) showed a strong growth of 27% YoY and 3.5% QoQ in cc terms. Deal wins for the quarter remained strong at $3.17bn from $1.47bn previous quarter.

* Growth drivers led by digital, large deals: Infosys is witnessing business traction led by accelerated enterprise investments in digital. Management believes that the pandemic has accelerated the already strong trend for digital transformation. Infosys’ large deal momentum has been robust and pipeline continues to be strong led by digital transformation and vendor consolidation

Bharti Airtel Ltd

Company - Bharti Airtel Ltd CMP 516 Target 676

Key Rationale

* Demand for enterprise services to remain robust: Airtel has launched various products for enterprise as it is trying to leverage growth from ‘Work from Home’. Its key launches include Airtel Blue Jeans, Airtel Secure, Airtel Cloud and Airtel IQ for B2B customers. Focus on becoming a solution provider continues with its offering in Cloud, security, data centres and CPaaS solutions. Adopting partnership model to improve Cloud service offerings, it entered into a partnership with AWS Professional Services.

* Positioning as a digital company continues: Airtel started providing details of its digital initiatives from Q1, which continued in Q2. Management’s strategic bets in digital continues to gain traction: (i) there are over 1.1 mn retailers transacting and making payments every day on Mitra App; (ii) 160 mn (vs. 155 mn in Q1) monthly active users across Airtel Thanks, Wynk, Xstream and payments platforms; (iii) Wynk has MAUs (59.3 mn in Q2’21) with an addition of ~9 mn during Q2; Thanks platform has 81.6 mn MAUs in Q2 with an addition of ~8 mn and Airtel Xstream is at 33.7 Mn MAUs, addition of ~8 mn users in Q2. ; (iv) Online recharges continue to contribute ~50% to overall revenue. Airtel has also forayed into Cloud communications market with the launch of Airtel IQ, an omni-channel Cloud-based communications platform.

* Strong customer additions: Bharti Airtel – active subscribers up 3.0 mn in October 2020 vs 3.8 mn added in September 2020. Active SMS was up 23 bps MoM at 33.3%, overtaking RJio’s share of 33.2%. On reported basis also, it gained 3.7 mn subscribers in October 2020 (market share at 28.7%) vs. 3.8 mn gain in September 2020

RELAXO FOOTWEAR LTD

Company - Relaxo Footwears Ltd CMP 800 Target 925

Key Rationale

* Mass and value proposition the core: ~70% of Relaxo’s revenues are from mass and value footwear category with large presence in Tier II, III & IV cities. Owing to lockdown demand for casual and open footwear remained higher thus largely cushioning the impact on revenues in H1FY21. But with South and West regions being hardest hit in terms of COVID cases and strict lockdowns in these geographies, demand for its closed footwear got impacted (relatively higher contribution to regional sales). However, with easing of lockdown restriction, demand for open footwear would aid a recovery in volumes for the company led by 1) better traction in demand for closed footwear especially from South and West and 2) strong winter season in North and East regions, leading to improvement in margins going ahead.

* Healthy return ratios and balance sheet: Relaxo has maintained healthy operating cash flows, asset turns (~3x) and EBITDA Margins over the years making it a capital efficient business. In H1FY21, earnings of the company were negatively impacted on account of COVID-19 led slowdown that led to revenue and profitability decline. However, we believe, strong balance sheet and efficient working capital would help Relaxo sail through the current situation comfortably. We expect the company to be a key beneficiary of market share gains in current times as the unorganized players mainly dominant in mass and value category find it challenging to conduct business amid rising RM prices and in turn their inability to pass on RM price rise and liquidity constraints.

* Further Capex to drive growth: Despite slowdown company is moving forward with its capex plan of adding additional capacity of one lakh pairs per day at its Bhiwadi plant with estimated capex of Rs. 90 cr owing to the strong demand seen for Flite PU and Sparx brands.

Amber Enterprises India Ltd 

Company - Amber Enterprises India Ltd CMP 2378 Target 2800

Key Rationale

* Most backward integrated player in India and strategic plant locations: AEL caters to 49% of client requirement for outdoor units, 78% for Indoor units and 60% for Window AC’s (WAC’s). Its plants are strategically located in proximity to customer’s facilities ensuring prompt response to clients and saving on logistics costs, a significant advantage for Amber over its competitors and also an entry barrier.

* Strong traction in RAC demand: Post easing of lockdown conditions, there has been a recovery in demand for RAC’s. Further, the government measures to ban ACs with refrigerants have led to increased traction for Amber and the company is in talks with 3-4 prospective clients to cater to this need for gas filling solutions by its clients. Amber being a one stop solutions provider is prepared to cater to growing requirements from its existing and new customers for gas filling and supply of components in our view. Moreover, in the immediate term the strong traction is seen as brands prepare for the upcoming season.

* Increased localisation to aid business: Amber being a one stop solutions provider is likely to benefit as more companies set up domestic manufacturing/ sourcing locally, as it is equipped to meet the components supplies as well as fully built units.

* Commercial AC segment foray: Amber has developed Commercial AC models and the production of the same is expected to start by Q4FY21/ Q1FY22. The foray is in tandem with it’s strategy to expand its product range in HVAC segment and further diversify its operations.

* Planned capex to augur well with PLI on the cards: In October, Amber announced its plans to set up greenfield plants in Pune & South India, for AC’s and components. The government is likely to expand the PLI scheme for AC and components on the lines of the mobile PLI scheme and an announcement to that effect is expected in a couple of months as indicated by the management. With the existing structure and planned capex, Amber is well positioned to quickly scale up its operations and capture the opportunity under any PLI scheme announced by the government, as currently a large proportion of AC components and ACs are being imported.

UJJIVAN SMALL FINANCE BANK LTD

Company - Ujjivan Small Finance Bank Ltd CMP 40 Target 47

Key Rationale

* Diversified portfolio: UJSFB’s efforts to de-risk the portfolio and move away from MFI towards the SME and Affordable housing space and other newly introduced products such as vehicle and gold finance offers the bank ample headroom to grow. We expect the book to grow at 23% CAGR over FY20-23E driven by a strong growth of 44% CAGR in non-microfinance segments, albeit on a smaller base.

* Multiple levers to stabilize NIMs: The strong traction in deposits and recent encouraging trends in both CASA and retail deposits will help in lowering CoF. The less competitive Tier 2 and 3 cities, where the bank aims to build a sustainable deposit base would help in bringing CoF down. Thus the drop in CoF would partially offset the yield compression, aiding NIMs. With macros normalizing and credit growth picking up, excess liquidity held by the bank would be done away with, thus easing pressures on NIMs.

* Improving asset quality post COVID-19: UJSFB’s razor sharp focus on maintaining asset quality has been visible even as a NBFC. We believe, the bank will be able to successfully sail through the asset quality stress in the near term with the help of multiple and flexible repayment options offered by the bank to improve the collection efficiency. Though, a spike in the GNPAs in the near term on the back of COVID-19 related headwinds would be visible, GNPAs would normalize over the medium term.

* ROA expansion visible: With a large part of opex incurred to transition to a bank now behind, a downtrend in the opex/assets will be visible. Though ROA will remain subdued in FY21E on the back of higher COVID-19 related provision, visible improvement is expected FY22E onwards as opex and credit costs moderate.

* Outlook: We believe that the fast-paced diversification from a micro financier to a small finance bank and the recent ramp up in the liability franchise after a slow start augur well for the bank. We arrive at a target price of Rs. 47, valuing UJSFB at 1.9x FY23E P/ABV basis on the back of visibility of ROE expansion over the long term, efficient risk management framework, visibility of long runway for growth and a competent management team.

* Key Risks: Compliance with RBI guidelines on minimum promoter shareholding remains a major overhang. Higher exposure to the informal sector could trigger higher NPAs in case of any disruptive event.

STAR CEMENT LTD

Company - Star Cement Ltd CMP 102 Target 115

Key Rationale

* Capacity expansion to drive volume and revenue growth for the company: SCL is in the process of expanding its present grinding capacity from 4.3 mntpa to 6.3 mntpa. The unit will get operational in Q4FY21. The 2 million tonne per annum (mntpa) grinding capacity is coming at Siliguri, West Bengal in the East India which will help the company to spread it wings in the growing market of East India which currently forms 25% of its total revenue. With the expansion in the capacity, we expect the company to report healthy volume growth at a CAGR of 15% over FY20A to FY23E.

* Strong market presence in its key market of North East & growing in East India: SCL is the largest cement producer in North- East India with estimated market share of 23% in FY20. The North-East region contributes 75% of total revenue with strong brand visibility which enables the company to enjoy premium pricing in the region. Since Eastern India has the lowest per capita consumption of cement in India, the sustainable increase in demand on the back of housing and infra activities augurs well for the company. We expect the company to improve its EBITDA margins from 20.6% in FY20A to 23.9% in FY23E.

* Healthy financials to support future growth: The company exhibits a healthy financial position with very low debt, high interest coverage ratio and strong return ratios. The capex for the ongoing capacity expansion has been met out of the internal accruals of the company. Further the company has sufficient liquidity to meet any incremental capex going forward. We believe that capital structure of the company will remain healthy from medium to long term perspective

Solara Active Pharma Ltd

Company - Solara Active Pharma Ltd CMP 1186 Target 1350

Key Rationale

* India’ APIs Industry, dual source qualification and import substitution a structural tailwind: The Indian API market is estimated to be ~INR 798 bn, growing at 8.8% annually. Out of this market, INR 525 bn is domestic consumption and API exports are INR 273 bn. Further, India’ API imports INR 249 bn from China has increased up to 68% of overall API import in last 8 years.

* We believe dual source qualification by global Pharma players and import substitution from China could generate a structural demand from Indian APIs manufacturers after a Covid-19 outbreak. Solara, being a pure-API player with 80+ molecules in the product basket is well placed to grab this opportunity. Further, GoI has launched the production-linked INR 100 bn incentive scheme for 53 products that could strengthen the domestic APIs manufacturing and less import from China.

* Strong Product Portfolio: Solara has strong product portfolio (80+ commercial APIs and 25+ APIs under development) that comprises high volume APIs like Ibuprofen, Gabapentin, and Ranitidine, low volume (niche) products like Oseltamivir, Sevelamer, Venalfaxine and Nizatidine. Solara has the highest gross margins ~57% in the industry that reflects the company has pricing power and value added products in the portfolio. The company’s top 10 products accounted for 77% of revenue and new products accounted for 7% of overall revenue. We believe, Solara’ API portfolio could deliver revenue CAGR of 19.0% over the period FY20-FY23E.

* Solara offers contract development and manufacturing services that accounts for 10% of total revenue pie.

NOCIL LTD

Company - NOCIL Ltd CMP 144 Target 176

Key Rationale

* Well positioned in China+1 strategy of Tyre majors: With rising preference and growing enquiries by tyre manufacturers to look for nonChinese dependable suppliers, NOCIL is sweetly positioned as it could unlock significant growth opportunities for the company over the medium to long term. A testimony to this is an upgrade in NOCIL’s status of being a global manufacturer from a regional one. Further NOCIL has the most diversified product basket offering 22 products under one roof thus edging over peers as a one-stop-shop for tyre majors.

* Anti-Dumping Duty (ADD) levy to aid margin: DGTR approved levy of ADD on imports on one of the anti-oxidants manufactured by NOCIL. Anti-oxidants contribute to ~45% of Revenue. Owing to the levy, we expect NOCILs EBITDA Margin to improve by at least 100-150bps thus leading to a healthy earnings growth.

* Outlook: We note there has been a significant improvement in the overall business from H2FY21 (aided by unlock driven improving demand in replacement tyres and OEMs), volumes and pricing are seeing an improving trend which is expected to improve significantly in FY22 on the back of new capacity commercialization, rising new product contribution and low base. Further, a positive outcome on ADD levy and a structural opportunity to play as a dependable non-Chinese player augurs well for NOCILs long term prospects. In valuation terms, stock is trading at ~10x FY23E EPS which is attractive in our view as we expect NOCIL to report 22%/23% CAGR in Revenue/PAT CAGR over FY20- 23E

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