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Monday, November 12, 2018

Edelweiss calls a ‘Buy’ on Solar Industries
CMP: 1014    Target: 1244

Solar Industries (SOIL) reported in-line Q2FY19 sales and EBITDA. However, muted domestic volume growth was a key concern. Key growth drivers— exports & overseas (up 28% YoY) and defence (Rs. 440mn revenue versus Rs. 88mn in Q2FY18)—grew at a strong pace. Management remains upbeat on domestic volume growth (~12% in H2FY19 versus 5% in H1FY19) led by improvement in overburden removal at coal mines. Though SOIL’s current valuations at 23x FY20E look stretched, we believe strong return ratio (RoCE of 33% by FY20E) and earnings CAGR of 32% will bolster its premium valuation. Maintain ‘BUY’.

Q2FY19: Key highlights
Key positives: 1) net sales jumped 28% YoY led by 34%, 28% and 23% growth in Coal India, exports & overseas and housing/infra business, respectively; 2) defence revenue stood at Rs. 440mn in Q2FY19 and SOIL is confident of clocking Rs. 2bn revenue in FY19 with current order book of Rs. 4.76bn; and 3) management maintained >25% YoY FY19 revenue growth guidance.

Key negatives: 1) Rs. 390mn forex loss impacted profitability; and 2) sluggish volume growth in domestic explosives business due to reduction in overburden removal from the mining segment.

Strong defence order book and robust exports to boost top line
Driven by strong demand from overseas and exports segment along with decent defence order book, management remains confident of achieving 25% revenue growth in FY19. The company’s defence order book stood at Rs. 4.76bn and management is confident of posting Rs. 2bn revenue in FY19.

Outlook and valuations: Overseas strong; maintain ‘BUY’
We estimate SOIL to clock 32% PAT CAGR over FY18‐20 with superior RoE/RoCE and FCF. Significant capex in defence entails huge growth potential and also creates strong entry barriers for others. We maintain ‘BUY’ with TP of Rs. 1,244 (30x FY20E EPS). At CMP, the stock trades at 33.8x FY19E and 22.8x FY20E EPS.

Emkay calls a ‘Buy’ on Titan Co.
CMP: 848    Target: 1000

Titan’s strong 28% growth in jewellery (retail growth of 38%) despite a high base is encouraging, and that along with a strong commentary on festive season growth provides a positive outlook.

  • Despite the recent volatility in jewellery growth, Titan’s superior execution and ability to grow ahead of market provides good growth visibility, in our view. Faster activations and the low competitive intensity should continue to drive share gains, resulting in higher growth.
  • Jewellery margins were affected by one-offs and are expected to improve in 2H. The provision for the IL&FS investment also affected EBITDA growth (19% growth excl one-offs). Management plans to increase spends for growing faster but expects to maintain margins. We estimate flat margins in FY19 and a 40bps expansion in FY20-21.
  • After the recent correction and recovery in jewellery growth, current valuations at 42x FY20E EPS now appear reasonable. Hence, we upgrade Titan to an Accumulate (from Hold), with a revised TP of Rs1,000 (Rs990 earlier), based on 45x Sep-20E EPS.

Jewellery growth encouraging despite a high base; strong festive growth provides positive outlook: After a weak 1Q, jewellery sales have grown 28%, driven by volume growth of 24%, indicating a sharp recovery in the quarter. Retail growth was higher at 38% with LTL growth of 32%. Management indicated growth in the 30-day festive period has been above its target (retail growth of 29%), which should help it achieve its 25% growth guidance in 3Q. Although volatility in jewellery growth remains, Titan’s higher spends and increased activations along with low competitive intensity are driving market share gains and are providing a strong growth outlook, making it one of the fastest growing consumer companies, in our view.

With 20% earnings CAGR, risk-reward now appears favorable: We estimate 19% sales growth, driven by jewellery and a 21% earnings CAGR for FY19-21E. After the recent correction and with jewellery growth recovering after the 1Q miss, the current valuations, at 42x FY20E EPS, appear reasonable. Hence, we upgrade Titan to an Accumulate (from Hold), with a revised TP of Rs1,000 (Rs990 earlier).

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