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Brokerage recommendations

Monday, March 05, 2018

Emkay call a 'Buy' on Sterlite Technologies
CMP: 357        Target: 500

Large order win in SI business
The new contract is worth Rs35bn (Rs26bn execution and Rs9bn AMC). The company expects to complete execution in 2.5 years with annual revenue run rate of Rs10bn. SOTL should generate 12% EBITDA margin on this contract. The peak working capital cycle should be Rs3bn during execution phase. We expect slight increase in short term loans as company is also expanding optic fiber capacity.

50% EPS CAGR, 37% ROE, 34% ROCE by FY20E
We forecast YoY EPS growth of 81% for FY18, 40% for FY19 and 35% for FY20. About 80% of incremental profits will come from optic fiber sales (ongoing capacity expansion to 50m KM) and 20% from system integration contracts. We expect SOTL’s ROE to increase to 37% in FY20 from 22% in FY17. SOTL’s ROCE will rise to 34% in FY20 from 20%.

High conviction BUY
SOTL trades at 24x FY20E EPS vs 15x a year back when investors were still unconvinced about the sustainability of growth in optic fiber. SOTL’s stock has risen 230% YTD, on the back of its earnings growth. Still, we believe there is steam left. We value the stock at 33x FY20 PER (PEG of 0.9x).

Centrum Wealth Research call a 'Buy' on Capital First
CMP: 669             Target: 919

Capital First Ltd (CFL) reported good set of numbers for Q3FY18 with 31.8% AUM growth at Rs24,755 crore along with 4bps QoQ decline in gross NPAs to 1.59%, as on 31 Dec’17. The net interest income (NII) and net profit grew 57.9% YoY and 41.7%, respectively. The AUM growth was driven largely by 35.0% growth in retail loans which comprise ~93% to the total.

Recommendation: We have been maintaining an Outperformer rating on CFL on the back of its diversified asset mix and low NPAs coupled with healthy loan growth. Going ahead, considering the strong track record, focus on growing high yielding retail business and improving asset quality, we believe the stock will gain better valuation. At CMP, the stock of CFL trades at 2.2x/1.8x its FY19E/FY20E adjusted book value. Since the last 2 quarters, CFL has maintained healthy business growth along with decline in NPAs (from 1.72% at the end of Q1 to 1.59% now). This has resulted in consistent improvement in profitability with RoE at 14.8% (vs. 13.1% in Q2 and 11.5% in Q1). Also, post-merger with IDFC Bank, the growth of the merged entity is expected to remain healthy under the leadership of Mr Vaidyanathan. We continue to remain positive on the stock and maintain Outperformer rating with a target price of Rs919, valuing it at 2.5x its FY20E ABV.

Business growth remains healthy: Overall AUM growth remained healthy at 31.8% to Rs24,755 crore, with retail loans growing 35.0% to Rs22,977 crore as on 31 Dec’17. CFL’s wholesale loans have remained steady contributing ~7% to the total book. Going ahead, CFL plans to reduce their wholesale loans to ~5% by the end of FY18. Post-merger with IDFC Bank we expect the core business of CFL to continue growing at a healthy pace of 31% CAGR over FY17-20E, reaching Rs33,741 crore.

Asset quality to remain stable: Post moving to the 90dpd reporting in Q1FY18 the asset quality has improved over the last 2 quarters to 1.59% gross NPA, down 4bps QoQ and net NPA at 0.97%, down 3bps, as on 31 Dec’17. Gross and net NPAs are expected remain low and decline to 1.18% and 0.65%, by FY20E, on 90 dpd basis.

Update on merger: CFL has agreed to merge with IDFC Bank in an all share deal (139 shares of IDFC Bank for 10 shares of CFL), post which the current MD of CFL Mr. Vaidyanathan will be heading the merged entity as MD & CEO. The merger/transition procedure is likely to take about 6-9 months. The merger will provide CFL with low cost funds in form of deposits (currently CFL has over 50% bank borrowings) along with providing IDFC Bank with a strong retail franchise.

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