2019

Diwali Top Picks - 2019

16 October 2019
 Diwali Top Picks - 2019

 Samvat 2075 has been a tough year for the equity markets by any standards, except when looked through the prism of headline index. So while large-cap index
(Nifty) was up by ~8%, mid-cap index was down by ~10% and small-cap index was down by ~14%, one of the most divergent years as far as performance
differential between indices is concerned. Even the large cap index (Nifty) was marked by concentrated performance with top 10 performers accounting for
majority of the gains.

 Global markets were volatile for the Samvat year 2075 as investors battled US-China trade war and US Fed’s not so unambiguous trajectory on rate cuts.
However, ECB’s promise of more stimulus lead to an European out-performance. So while US (DJIA) was up by ~2%, France (CAC) was up by ~8% while
Germany (DAX) was up by over 10%. As we write, there is still no clarity on a negotiated Brexit deal. Global yields, reflecting slowdown dropped sharply with
US 10Y dropping over 150bps between the two Samvats. EMs, however, fared better than DMs with Brazil (~25%) and Russia (~16%) being the best
performing markets.

 The year also saw the return to power of the NDA government in the general election which bodes well for the political stability and policy continuity. Since
taking over in the second term, the government has announced a slew of measures, the most prominent being the cut in corporate tax rate from ~35% to ~25%.
While Samvat 2074 marked the start of the economic slowdown for India (partly as a fallout of the ILFS & NBFC crisis), Samvat 2075 has seen more corporate
misgovernances come to light and will actually go down as a year of cleansing for corporate India.

 While the slowdown started last year, with the NBFC fiasco, and has moved to other parts of the economy (autos, discretionaries and some parts of
staples too), long term investment portfolios are built precisely during these challenging times. Team ABM presents 10 such investment opportunities
which are attractive from a risk reward perspective and the economic outlook (both global and local) for the next year.

Happy Diwali & Happy Investing!!!

 Diwali Top Picks - 2019

Bharti Airtel Ltd CMP `385.3

 About: Bharti Airtel is India’s third largest telecom service provider with a pan India presence. Besides, the company is also present in Financial Snapshot
Sri Lanka and 14 African countries. The company provides wireless and fixed line telecom services to individuals and enterprises and
DTH TV services. It has a 28.1% market share of wireless subscribers in India (as of July 2019) and provides wireless services to ~10 (In ` bn) FY19 FY20E FY21E

Cr subscribers in Africa. Net Sales 807.8 844.8 901.5

 Key Trigger: The telecom industry in India has undergone a massive churn post the entry of Reliance Jio in September 2016. The EBITDA 258.2 321.7 369.9
rock bottom tariffs led to the exit of multiple smaller players from the market and consolidation, with the biggest being the merger of
Net Profit 4.1 -42.6 -2.0
Vodafone India and Idea Cellular. It has managed to ride out the storm and emerged stronger. The company introduced a minimum
EPS (`) 0.9 -9.8 0.3
recharge plan to weed out non-paying subscribers boosting its India wireless ARPU to `129 in Q1FY20 from a low of `100 in Q2FY19.
It is now focusing on upgrading its subscribers to higher priced plans which is expected to further improve the ARPU. The company RoE (%) 0.6 -3.6 -0.1
has reduced its debt from a peak of `1.13 lakh Cr. in Q2FY19 to `93,095 cr. in Q1FY20 by utilizing the proceeds from the rights issue
Source: Bloomberg Consensus, ABML Research
of `25,000 Cr. in May 2019. The company is expected to further reduce the debt in Q2FY20 from the proceeds of the IPO of Airtel
Africa. The proposed sale of the non core assets is further expected to help the company reduce its debt.

 Performance & Valuation: Bharti is expected to benefit from the surge in data volume growth with 40% of Airtel users subscribing to
its data plans and 80% of them using 4G. The regulatory regime is expected to soften with the proposed moratorium on spectrum
payments and the deferment of the zero IUC regime. The stock is trading at FY20E/FY21E EV/EBITDA of 10.15 and 8.82 respectively.
 Diwali Top Picks - 2019

Dalmia Bharat Ltd. CMP `811.0

 About: Dalmia Bharat (“DBEL”) is the fourth largest cement group in India with total cement capacity of 30MTPA. Its major areas of Financial Snapshot
operation are East India, North East India and South India where its 25MTPA capacity is installed. It has also acquired assets of Murli
Industries (~3MTPA cement capacity) in Chandrapur, Maharashtra and Kalyanpur Cement (1.1MTPA capacity) in Bihar. It is also (In ` bn) FY19 FY20E FY21E

undertaking a brownfield capacity expansion of ~8MTPA in Eastern region which will take the total capacity to ~38MTPA. DBEL has Net Sales 94.8 105.2 120.1
grown from 1.2MTPA cement capacity in 2006 to 30MTPA in 2019 through organic and inorganic expansion.
EBITDA 19.4 23.8 27.0
 Key Trigger: Government’s infra push which includes large projects like Bharatmala, Sagarmala, Railways & Metro projects etc. as
Net Profit 3.1 4.8 6.3
well as a push for affordable housing should lead to higher single digit cement demand growth. Its acquisition of Murli Industries assets
EPS (`) 16.0 24.6 30.2
in Chandrapur gives it exposure to central region too thereby able to service various regions from there. DBEL has a history of
acquiring stressed assets and successfully turning them around. Over 50% of its total capacity has grown through acquisitions. RoE (%) 3.0 4.5 5.4

 Performance & Valuation: DBEL’s revenue & operating profit has grown at a CAGR of 26% & 33% respectively over past 5Y while its Source: Bloomberg Consensus, ABML Research

volume has grown at a double digit rate. DBEL is one of the most profitable cement companies- operating margins of 20%+ and
EBITDA/T of >`1200. Despite aggressive acquisitions its net debt/EBITDA ratio is 1.6x which is well within comfort level. It is trading
at 6.5x FY21E EV/EBITDA which is at ~30% discount to its past 4 years valuation. We remain positive on the stock from a long term
perspective.
 Diwali Top Picks - 2019

Dr. Lal PathLabs Ltd CMP `1374.0

 About The Company : Dr. Lal PathLabs Ltd (DLPL), is one of India’s largest diagnostic players with over 2,500 patient service Financial Snapshot
centers, pre-dominant presence in North India and a rapidly expanding pan India footprint. DLPL has a B2C oriented business model
ensuring higher customer/patient stickiness as compared to its B2B driven peers. The company has a strong presence in North India (In ` bn) FY19 FY20E FY21E

(72% of revenues), with over 20% market share in the Delhi-NCR region. Net Sales 12.0 13.9 16.1

 Key Investment Argument: The Indian diagnostic industry is worth 60,000 Cr. in annual revenues and is a highly fragmented market EBITDA 2.9 3.6 4.3
with over 1 lakh labs currently in operation. With over 50% of the diagnostic market being unorganized, DLPL is well placed to benefit
Net Profit 2.0 2.4 2.9
from the market share shift towards the organized players. Moreover, the diagnostic industry is expected to grow in double digits over
EPS (`) 23.9 29.2 35.3
the next three years with organized players growing faster. DLPL aims to increase its presence in T-II & T-III towns of Haryana, Punjab
and UP which surround its primary market in the Delhi-NCR region. Further, the Kolkata Reference Laboratory will drive next phase of RoE (%) 23.0 23.2 23.4
growth by expanding its footprint in Eastern India.
Source: Bloomberg Consensus, ABML Research

 Performance & Valuation: DLPL’s revenue and profit has grown at a CAGR of 16% and 21% respectively over the past 5 years. With
strong brand equity, solid business model and an on going industry shift from unorganised to organised players, we expect Dr. Lal
PathLabs to grow at a faster click as compared to the overall industry. The company trades at a reasonable valuation (given its higher
growth profile) of 38x on its FY21E earnings which we believe should sustain because of low capex requirements in the future &
sustained Free Cash Flow generation. We expect Stock to deliver 20%+ over the next twelve months.
 Diwali Top Picks - 2019

HDFC Bank Ltd. CMP `1221.1

 About: HDFC Bank is the retail focused bank, having a well-diversified credit and deposit base. Within credit, both retail & corporate Financial Snapshot
constitute 50% each, while for industry retail credit is just ~20% of credit. Similarly, on deposits front, it has CASA ratio of ~40% and
retail deposits (CASA + Retail FD) of ~85% which is amongst the best in industry and provides bank an edge in terms of CoF & (In ` bn) FY19 FY20E FY21E

granularity of customer base. NII 482.4 578.9 694.7

 Key Trigger: Considering the under-penetrated credit market and dearth of capital for both PSU banks and NBFCs, we expect HDFC PPP 397.5 473.0 577.1
Bank to continue to grab market share and deliver ~20% growth in credit and profitability. It is adequately capitalized with ~16% tier 1
Net Profit 210.8 258.4 314.5
capital as far as growth capital is concerned. Stable asset quality is expected to be maintained considering the diversified credit book.
EPS (`) 39.3 48.6 58.7
In addition; stringent credit monitoring mechanism, strong management pedigree and well-seasoned book indicates for the stable
asset quality going ahead. Digitisation & usage of technology will further push C/I ratio lower. Already, C/I ratio is below 40% which is RoA (%) 1.9 2.0 2.0
commendable considering the high proportion of retail credit.
Source: Bloomberg Consensus, ABML Research

 Performance & Valuation: HDFC Bank is well-positioned to grow credit and PAT at ~20% CAGR for next couple of years. It earns
strong NIM of ~4.3% mainly owing to high yielding retail credit book. CoF to remain relatively on lower side considering the strong
business model and provide further edge to the bank as competition struggles. RoA of ~2% is amongst the best in industry. Rich
valuations to be maintained considering the steady growth, superior NIM and ROA generating capabilities of the bank. Expect stock to
deliver ~20% return in 1 year time-frame.
 Diwali Top Picks - 2019

HDFC Life Ltd. CMP `611.0

 About: HDFC Life, as a JV between HDFC Ltd and Standard Life Aberdeen is amongst the largest life insurer of India with major Financial Snapshot
focus on protection business. It is backed by strong parentage, superior brand, trust and well-diversified distribution network. When
compared to peers, HDFC Life has a well diversified book with ULIP constituting 55% of total APE, Par - 18%, Non-Par – 15%, (In ` bn) FY19 FY20E FY21E

Term – 7% and Annuity – 5%. Majority of competition has ~75%+ ULIP share. Gross Premium 291.9 350.3 420.3

 Key Trigger: Under-penetrated Life Insurance market and Financialisation of economy would lead to increasing share of life Net Profit 12.8 15.1 17.6
insurance in the customer’s wallet share. HDFC Life is well-placed to grab this opportunity with strong distribution network including
Embedded Value 183.4 220.0 264.0
Bancassurance, Brokers, Agency and others. Although there is no longer exclusive tie-up with HDFC Bank, we believe, it will continue
EPS (`) 6.3 7.4 8.7
to remain major partner with its large retail presence. In addition, there has been increasing awareness of protection vs ULIP amongst
customers in which HDFC Life holds dominant market position. RoE (%) 22.6 18.6 20.4

 Performance & Valuation: The company is well-positioned to grow its APE, VNB and profitability on steady state basis. Source: Bloomberg Consensus, ABML Research

Market-leading digital capabilities and ability for innovative, customer oriented products like HDFC Sanchay, shall enable the company
to maintain its leading position in life insurance market. Owing to high protection mix, the company earns superior VNB margin of
25%+ which enables it to earn healthy RoE of ~25% and dividend payout of ~25%, thereby keeping valuations rich. Seasoned
leadership guided by an independent and competent board keeps the company’s governance at highest standard while maintaining
business performance. Expect stock to deliver ~20% return in 1 year time-frame.
 Diwali Top Picks - 2019

ICICI Lombard General Insurance Company Ltd. CMP `1207.3

 About: ICICI Lombard GIC is the largest private sector general insurance company in India with market share of over 8% on gross Financial Snapshot
premium income basis. It operates in multiple range of products namely motor, health, personal accident, crop, fire, marine etc. It was
founded as a JV between ICICI Bank and Fairfax Financials, a Canadian company. Its gross written premium stood at `147.9bn in (In ` bn) FY19 FY20E FY21E

FY19 with total industry size of ~`1.75tn.. Gross Premium 144.9 152.1 178.0

 Key Trigger: ICICI Lombard is the leader in general insurance industry and has maintained the leadership position since FY2004. Net Profit 10.5 12.3 15.2
Recent developments in regulations like compulsory third party motor for 2W and cars for 5Y and 3Y respectively, allowing re-pricing
Combined Ratio % 98.5 99.0 99.0
of health insurance annually (3Y earlier) have also improved the prospects of the industry and ICICI Lombard being industry leader
EPS (`) 23.1 27.2 33.5
stands to be one of the biggest beneficiary. It has demonstrated over the years industry leading practices and policies in terms of
recognition and disclosure of risk. It has also adopted prudent approach in reserve development which is also reflected in the fact that RoE (%) 21.3 22.1 23.2
it inflates the claim reserves (liability) at the rate of 12-14% which is higher than the reported CPI.
Source: Bloomberg Consensus, ABML Research

 Performance & Valuation: Company’s Loss ratio and Combined ratio for FY19 stood at 75.3% and 98.5% respectively. Its realized
return stood at 9.4% with investment leverage of ~4x leading to ROAE of 21.3% in FY19. It aims to maintain its ROE over 20% going
ahead with maintain pricing discipline, prudent risk management, increase in investment float and favorable regulations. It is valued at
PE of 50x on FY19 basis. We believe it is reasonably valued given strong franchisee, multi-year growth visibility and strong track
record of the company. We expect it to deliver multi-year compounded growth and remain preferred stock in general insurance sector.
 Diwali Top Picks - 2019

Larsen & Toubro Ltd. CMP `1424.2

 About: Larsen & Toubro (“L&T”), India’s largest E&C company, has interests in Projects, Infrastructure Development, Manufacturing, Financial Snapshot
IT & Financial Services. It is the market leader in India’s capital goods & construction space. The company has various subsidiaries
namely LTI, LTTS, LTFH and others which are doing fairly well & have registered healthy growth supplementing its base business. (In ` bn) FY19 FY20E FY21E

Net Sales 1391.4 1585.8 1799.5

 Key Trigger: L&T is a good proxy to a broad based industry capex. The capacity utilization as per RBI stands at ~74% and the same
is at the cusp of re-ordering which is likely to benefit L&T. The Govt. under Modi 2.0 has stated intent to invest `100 Tn in infrastructure EBITDA 237.1 189.7 220.6
over next 5 years and is therefore positive for the capital goods space which is likely to receive strong order inflow going forward. L&T
Net Profit 89.1 102.9 122.5
has robust order book of ~`294,000 Cr.; which is approximately 3.3x annual sales and provides hedge against cyclicality & good
EPS (`) 63.5 72.8 86.9
visibility for the next 3 years. Further the order inflow momentum has sustained through a healthy mix of both PSU & Private sector.
RoE (%) 15.2 15.2 16.0
 Performance & Valuation: On standalone basis, over the past three years, L&T’s revenue/PAT has registered CAGR of 11%/13%
respectively. It has healthy balance sheet, with D/E of <0.2x & decent return ratio ~12%. For FY20E, the management has maintained Source: Bloomberg Consensus, ABML Research

its guidance of 10-12% growth in its order inflow, 12-15% growth in its revenue and stable operating margin. L&T has strong execution
track record, technical expertise, competitive moat along with prudent management to capture the rising growth opportunity in the
infrastructure segment in India. On consolidated basis, L&T is trading at alluring valuation of ~17x its FY21E EPS and thus, we remain
positive on the stock from a long term perspective.
 Diwali Top Picks - 2019

Marico Limited. CMP `380.5

 About: Marico is among the leading FMCG player in India with leadership in Coconut Oil (Parachute brand) and Edible Oil (Saffola Financial Snapshot
brand). It also operates in beauty and wellness segment with product offerings across categories of hair care, skin care, edible oils,
healthy snacks, male grooming etc. Its international business contributes 22% to total sales. (In ` bn) FY19 FY20E FY21E

Net Sales 72.7 80.3 90.4

 Key Trigger: Marico is diversifying its product portfolio and expanding into food products like Healthy snacks, coconut based foods,
hair and skin care portfolio etc. It has received encouraging response from its new launches in food products. It is also geographically EBITDA 12.8 15.5 17.9
diversified therefore reducing any geography specific risk with Bangladesh being its largest market. Marico’s Free Cash flow has
Net Profit 11.2 11.3 13.1
improved significantly from ~50% to >70% on account of improved working capital management. Its working capital cycle has
EPS (`) 8.7 8.8 10.2
improved from 59 days in FY18 to 49 days in FY19 on closing basis. This has led to healthy free cash flow generation.
RoE (%) 40.3 35.6 36.6
 Performance & Valuation: Marico’s Revenue/EBITDA/PAT has grown at a CAGR of 9%/11%/18% respectively. Marico has newly
launched products in snacks segment where it has witnessed initial success. We believe new launches led by innovation should lead Source: Bloomberg Consensus, ABML Research

to next leg of growth. Also benign input cost should support the margins. It is trading at 38x FY21E PE. We like the company due to its
clean balance sheet and strong cash flow.
 Diwali Top Picks - 2019

The Phoenix Mills Ltd. CMP `695.5

 About: Phoenix is a proxy to the Indian Retail sector, which is seeing strong demand driven by multiple factors. It operates in four Financial Snapshot
verticals namely Retail, Hospitality, Commercial and Residential. It has over 17.5 mn sft of real estate assets spread across
Retail – 5.85 mn sft, Commercial – 1.67 mn sft, Residential – 4.13 mn sft and remaining Hospitality – 5.85 mn sft. (In ` bn) FY19 FY20E FY21E

Net Sales 18.9 21.1 22.6

 Key Trigger: High growth in organized retail industry in India on account of multiple factors like favorable demographics, increase in
disposable income and shift in consumption pattern has led to high demand for commercial retail space. Over 50 global brands aspire EBITDA 9.9 10.9 11.6
to invest and participate in India’s retail story. However, many of them have not been able to find a suitable retail space for setting up
Net Profit 4.2 4.1 4.4
their stores. PML has emerged as India’s one of the most premium mall owner and manager. This helps it to command multi-fold
EPS (`) 27.5 25.8 27.9
premium from the high end brands and shortage of quality space only adds to its position. PML intends to double its retail portfolio in
next 4Y. There are several mall projects coming up at Pune, Ahmedabad, Indore & Lucknow , amongst other cities. RoE (%) 13.3 11.1 11.0

 Performance & Valuation: Phoenix’s Revenue & PAT has grown at a CAGR of 7% & 27% respectively over the past 5 years. Source: Bloomberg Consensus, ABML Research

Phoenix has long term rental contracts at good yield - In the falling interest rate scenario the capital value of its rental Assets gets
augmented. It is trading at 13x FY21E EV/EBITDA. We expect its core EBITDA to grow at a CAGR of ~10% over FY19-21E. Remains
one of the best proxy to consumption.
 Diwali Top Picks - 2019

Titan Company Ltd. CMP `1274.6

 About: Titan, a TATA group company, is the largest jewellery retailer in India which operates under “Tanishq” brand. It also has a Financial Snapshot
presence in watches and eyewear segment. About 90% of its business comes from the jewellery segment, with 80% of the jewellery
business consisting of gold jewellery and remaining diamond jewellery. Over the years, Titan has established itself as one of the most (In ` bn) FY19 FY20E FY21E

trustworthy consumer brand in jewellery, watches and eyewear. Net Sales 195.9 228.0 270.1

 Key Trigger: Jewellery business is one of the most fragmented and unorganized sector in India (Only 20% is organised).Titan stands EBITDA 21.7 26.2 32.3
to be one of the biggest beneficiary of the shift in demand from unorganized to organized sector due to its reputed name in the
Net Profit 14.0 17.7 21.9
industry. Growing urbanization and rise in disposable income is driving demand for discretionary spending. The shift in demand from
EPS (`) 15.8 20.1 24.8
unorganized sector is clearly visible since demonetisation/GST in the quarterly results of organized jewellery players like Tanishq.
Moreover with increasing urbanization and jewellery becoming a consumption item rather than investment, there is a preference for RoE (%) 25.2 26.4 27.8
branded jewellery.
Source: Bloomberg Consensus, ABML Research

 Performance & Valuation: Titan has emerged as trust worthy name in jewellery sector, which is highly sensitive to quality. In an
industry of fragmented nature, its market share is still low single digit which shows high potential to grow despite industry headwinds.
Its revenue/EBITDA/PAT has grown at a CAGR of 21%/29%/28% respectively over FY16-19. It is trading at 42x FY21E PE. Expect its
earnings to grow at a CAGR of 22%-25% over FY19-22E. It remains our preferred pick in retail FMCG space.
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14
Research Team
Vivek Mahajan
Head of Research
022-6819 0549
vivek.mahajan@adityabirlacapital.com

Fundamental Team
Vidrum Mehta Auto 022-6819 0537 Vidrum.Mehta@adityabirlacapital.com
Jaymin Trivedi Banking & Finance 022-6819 0511 jaymin.trivedi@adityabirlacapital.com
Naveen Baid IT 022-6819 0516 naveen.baid@adityabirlacapital.com
Suresh Gardas Pharma & Chemicals 022-6819 0513 suresh.gardas@adityabirlacapital.com
Mahavir Jain Mid - Cap 022 6819 0518 mahavir.jain@adityabirlacapital.com
Mohan Jaiswal Technical Analyst 022-6819 0515 mohan.jaiswal@adityabirlacapital.com
Salim Hajiani Equity Advisor 022-6819 0512 salim.hajiani@adityabirlacapital.com
Pradeep Parkar Equity Advisor 022-6819 0514 pradeep.parkar@adityabirlacapital.com
Hemal Shah Equity Advisor 022-6819 0552 Hemal.Shah3@adityabirlacapital.com
Advik Shetty Research Associate 022-268190541 advik.shetty@adityabirlacapital.com

ABML research is also accessible in Bloomberg at ABMR

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