ACC, Tech Mahindra, Axis Bank to Hero MotoCorp: Which shares to buy?

Brokerage Edelweiss said that ACC is likely to be the biggest beneficiary of a) the step-up in supplies by Coal India Ltd (CIL) to non-power sectors.

Edelweiss said Hero MotoCorp’s Q1FY20 EBITDA of Rs 11.5 billion (down 16% YoY) came in line with its estimate. Image source: Reuters

The equity markets are volatile for quite some time and it is not easy to make the right bet in the market. Therefore, investors have to make an informed choice. The wealth of information on market trends and fundamentals may be helpful to gain from trading and minimise loss. Here is the report of Edelweiss on four shares:

ACC (BUY):
The brokerage said that ACC is likely to be the biggest beneficiary of a) the step-up in supplies by Coal India Ltd (CIL) to non-power sectors; and b) a further dip in prices of pet coke and imported coal. According to ACC’s CY18 annual report, the fuel cost was hit by non-availability of linkage coal. CIL’s recent efforts to debottleneck linkages may offer respite. Media reports suggest CIL has cleared 44 percent of the non-power sector supply backlog since April 2019 and the balance is likely to be cleared in one–two months.
"We argue the purported savings may be amplified by the falloff in pet coke (~20%) and imported coal (~15%) over the past four months—not factored in our estimates. Even after building in the current seasonal weakness in cement prices, we see upside risk to CY19E EBITDA even as we retain CY20E. Maintain ‘BUY’ with a target price of Rs 1,846 (at 12x CY20E EV/EBITDA)."

Tech Mahindra (BUY):
The brokerage said it believed that revival in communications vertical should reflect over FY20. Undemanding valuation and strong deal momentum in communications reaffirm its confidence in the stock. "We believe the stock has seen healthy correction and it trades at an attractive 11.8x FY20E EPS. We maintain ‘BUY/SP’ with a target price of Rs 935.

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Axis Bank (HOLD):
The brokerage said given management’s road map to achieve 18 percent return-on-equity (RoE) target, Axis Bank was expected to deliver strong Q1FY20 numbers. However, earnings were qualitatively soft with some disappointment in asset quality and softer core revenue momentum. Key highlights: a) high slippages (even outside of watchlist); b) overall stress pool at Rs 175 billion (2% of exposure) due to identification of further eight-stressed accounts and downgrades to watchlist; and c) despite higher specific provisions (>2.3% credit cost), net stress pool and provisioning coverage remained steady rendering near-term credit cost outlook cautious.

The only silver lining was operating leverage benefit (cost/income down <40%) and strong growth in retail trade (39% YoY). Despite structural changes, we see a few impediments to meeting RoE target: a) Net interest income (NIM) improvement; b) asset quality volatility; and c) impending capital raise.

"Therefore, we believe current valuations (2.3x FY21E P/ABV) capture upside risks and steady execution is warranted for sustainable re-rating of the stock. Hence, maintain ‘HOLD’ with a Rs 761 target price."

Hero MotoCorp (HOLD):
Edelweiss said Hero MotoCorp’s (HMCL) Q1FY20 EBITDA of Rs 11.5 billion (down 16% YoY) came in line with its estimate. Demand across rural and urban markets continued to remain subdued with recovery contingent on a strong monsoon and improvement in availability of financing. With the Destini 125cc (18% market share), the company has tasted success in the fast-growing 125cc scooter segment, but we believe it needs to replicate the performance in the premium motorcycle segment as well, it said.

"Ability to pass on BSVI costs and prudent inventory management remain key H2FY20 monitorables. Maintain ‘HOLD’ with a revised target price of Rs 2,498 (Rs 2,532 earlier) as we roll over to December 2020E.

Gujarat Gas (BUY):
Edelweiss said Gujarat Gas’ (GGL) Q1FY20 earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs 4.7 billion (up 87.7% YoY) beat its as well as consensus estimates by over 40 percent, driven by better profitability. Key highlights of management call: 1) National Green Tribunal (NGT) has issued warning letters to accelerate gas conversion in Halol and Tarapur; 2) further upside from Morbi (current 5.5mmscmd) likely depending on ceramic units gaining traction in new markets (US and Europe); 3) volume at 9.2 mmscmd (up 42.3% YoY) came broadly in line with estimate; 4) gross margin at Rs 7.9/scm beat estimate (Rs 6.7/scm) as benefits of lower spot LNG prices were not fully passed on in Morbi; and 5) EBITDA margin surged 31.9 percent YoY to Rs 5.6/scm (estimate INR4.0/scm) with lower unit operational expenditure than expected due to operating leverage.

"With GGL cutting industrial prices by 10 percent in Q2FY20, we believe Q1 may have been a peak for near-term gross margin. However, we believe, opex savings will be sustainable and thus revise up FY20/21E EPS 2.6%/4.0% leading to 7.3% revision in TP to Rs 222 (INR207 earlier). Reiterate ’BUY’ with GGL as our top pick among CGDs."

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