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Bajaj Finserv

Strong growth in profitability: Bajaj Finserv (BFS) reported a strong 40.4% YoY growth in Q3FY2017 net profit, driven by a healthy growth in the General Insurance and Lending segments. The company also reported an encouraging 35.7% YoY growth in consolidated total revenue, as loan book from the Lending business and premiums from the insurance businesses showed a good traction.

Lending business puts up decent show despite demonetization: Bajaj Finance (BAF), the lending subsidiary of BFS, posted steady set of numbers for Q3FY2017, considering the challenge posed by the demonetization-led cash crunch situation. Though the AUM growth at 32.6% YoY was slower than the past few quarters, it still was on the higher side in view of an overall slowdown in credit growth and enhanced pre-payments in some segments of BAF. Asset quality improved during Q3FY2017, as Gross Non Performing Assets fell by 11BPS QoQ to 1.47%. The BFS management indicated that though collection efficiencies are still below the per-demonetisation level, they are getting normalized fast and are expected to improve in Q4FY2017.

Insurance verticals report a steady performance: Bajaj Allianz General Insurance (BAGIC) and Bajaj Allianz Life Insurance (BALIC) both reported a good traction in premium income for Q3FY2017. BAGIC, a strong player in the General Insurance space with robust ROE, reported a 27.7% YoY increase in the Gross Written Premium (GWP) at Rs17,21.6 crore while the Net Earned Premium (NEP) climbed by 21.4% YoY to Rs1,258.8 crore. BAGIC’s profit during Q3FY2017 jumped by 189.7% YoY (due to a low base in Q3FY2016) while the combined ratio (a measure of losses + expenses against earned premium) improved to 99.6% from 108.7% in Q3FY2016, which is a positive and better than the top private sector peers. Despite the government’s continued thrust and being a high-growth segment, we believe that the crop insurance business may face challenges in the longer term due to its cyclical nature. BALIC, which had been struggling to gather momentum due to lack of a strong bancasurrance partner, has shown an improved growth in business for the past few quarters. Its GWP for Q3FY2017 grew by 21.2% YoY while the New Business Premium grew by 45.4% YoY. Agency channel’s individual rated new business jumped by ~60% YoY. The management indicated that the agency business has started to show improvement. The management is in talks to forge tie-ups with banks and expects positive development in the next six months.

Valuation and outlook: BFS posted a decent performance during Q3FY2017 across all the three verticals. We believe that the BAGIC and BAF businesses are showing top percentile operating metrics in their respective segments and would continue to maintain the trend growth going forward. The Life Insurance business is steadily improving and its long-term outlook remains positive. We maintain our ‘Buy’ rating on BFS with a revised price target of Rs3,950.

Apollo Tyres
Reco: Hold
PT: Rs200
CMP: Rs184

Higher RM prices to maintain pressure on margins; retain Hold with revised PT of Rs200

Key points
 

RM inflation mars Q3FY2017 performance; operating result in line with estimates: Apollo Tyres (ATL) reported in-line operating performance for Q3FY2017. The topline for the quarter grew by 17% YoY to Rs3,457.9 crore (slightly better than our estimate of Rs3,322 crore), led by a pick-up in demand in both, the domestic as well as European operations. Volume in the standalone operations grew by 7% YoY while the European operations’ volume grew by 10% YoY. The numbers are not comparable due to the acquisition of Reifen (a tyre distribution company in Europe). However, the hardening of Raw Material (RM) prices led to the Operating Profit Margin (OPM) contracting sharply by 280BPS YoY to 14.4% (in line with our estimate of 14.5%). EBITDA at Rs499 crore declined marginally by 2% YoY (in line with our estimate of Rs482 crore). A higher other income at Rs37.3 crore (up 257% YoY), coupled with a lower tax rate (Tax/PBT of 25%) resulted in the PAT growing by 6% YoY to Rs295 crore, which was ahead of our estimate of Rs273 crore.

Demand outlook improving in both domestic and European operations: With the liquidity situation improving post the demonetisation move (announced in early-Nov 2016), ATL’s domestic market OEM sales are expected to improve going ahead. Further, with the Union Budget increasing the allocation for infrastructure development, the tyre replacement segment is likely to gain pace going forward. Also, ATL’s European operation is seeing double-digit volume growth after the company sorted out capacity related issues in H1FY2017. The new plant in Hungary would commence operations in Q1FY2018 and the company has already tied up with various OEMs to commence supplies. We expect ATL’s topline to grow at a 12% CAGR over FY2017-FY2019.

RM prices increase steeply; margins likely to decline as industry is unable to pass on full increase in RM cost: RM prices have surged in the last 3-4 months. International natural rubber prices have increased by 50% in the last three months on the back of an improved demand scenario and supply disruptions in Thailand. Tracking the international prices, the domestic natural rubber prices have increased by 31% in the last three months. Further, crude oil prices have increased by 8% in the last quarter. ATL indicated that it expects ~10% increase in RM basket in Q4FY2017. Although, ATL has undertaken a 1.5% price hike, it is unlikely to pass on the full increase in RM cost, which will lead to a decline in margin. We believe that the OPM of 17% enjoyed by ATL for the domestic market in H1FY2017 was its peak. We expect the OPM to drop to ~12% levels in FY2018, which is close to the average OPM band enjoyed by the company. Also, the company stated that large tyre players in Europe have announced a 5-6% price hike, but it would be implemented from March 2017, thereby impacting the OPM in the near term. Overall, we expect ATL’s consolidated OPM to drop from 15% in 9MFY2017 to 13% in FY2018.

Outlook and valuation: Although the topline growth looks strong for ATL, the recent sharp increase in the RM prices is likely to dent the company’s margins going forward. Increased competitive intensity in the domestic tyre industry, coupled with the continued threat from Chinese tyre imports would keep the pricing environment constrained, as the Indian tyre industry will be unable to fully pass on the increase in RM prices. We have reduced our earnings estimates by 4% and 3% for FY2018 and FY2019, respectively. We retain our ‘Hold’ rating on the stock with a revised price target of Rs200 (Rs210 earlier), as we have scaled down our target multiple to 9x (which is close to the long-term historical average P/E multiple) from 10x earlier. We also rollover our target multiple to FY2019 earnings estimates.

Wonderla Holidays
Reco: Buy
PT: Rs425
CMP: Rs368

Footfalls remain strong; higher operating cost affects profit; PT revised to Rs425

Key points
 

Strong footfalls despite cash crunch; non-ticket revenue growth also sturdy: For Q3FY2017, Wonderla Holidays’ (WHL) revenue grew by 39.0% YoY to Rs70.1 crore - much ahead of our as well as street expectations. Despite the tight liquidity scenario in the wake of demonetisation, the footfalls jumped by 32% YoY. This was largely driven by incremental footfalls in the newly launched Hyderabad park, while footfalls in the Bangalore and Kochi parks posted low single-digit growth. Celebration of Dussehra and Christmas festivals led to better-than-expected footfalls in the Bangalore park. The Hyderabad park continued to witness good traction, with 0.45 million footfalls in the first nine months of its operation.

OPM hit by higher operating and promotional cost for Hyderabad park, higher service tax provisioning: Despite strong footfalls, WHL’s Operating Profit Margin (OPM) shrank to 19% in Q3FY2017 from 36.0% in Q3FY2016. The commissioning of the Hyderabad park in April 2016 led to a sharp increase in the overall operating cost (employee cost, advertising & promotional spends and direct operating expenses almost doubled YoY). Also, the company made a provision of Rs10.4 crore towards the service tax and other levies, which affected the profitability substantially. The Hyderabad park posted marginal profit at the operating level in Q3FY2017. The company’s operating profit in Q3FY2017 declined to Rs13.3 crore from Rs18.2 crore in Q3FY2016 while the reported Profit After Tax (PAT) dropped to Rs4.2 crore from Rs12.3 crore in Q3FY2016.

Footfalls in mature parks to improve gradually; OPM expected to expand from FY2018 onwards due to enhanced scale of Hyderabad operations: The WHL management is confident of good growth in the footfalls of matured Bangalore and Kochi parks in the coming quarters (we have factored in mid-single digit growth in footfalls), as 45-50% footfalls are from the repeated visitors. The Hyderabad park is expected to end FY2017 with footfalls of 6-6.5 million and is expected to clock strong double-digit growth in FY2018. The WHL management has hinted that the provisioning amount towards the service tax and other levies will normalise to Rs4-5 crore in the coming quarters. Further, the Kochi and Bangalore parks are achieving OPM in the historical range of 40-42%. Therefore, the enhanced scale of operations in the Hyderabad park would improve the overall margins in FY2018 and FY2019. Further, the company is planning to hike prices by 5-8% to support the overall profitability.

One-offs continues to spoil the show; But expect better FY2018; Retain Buy with revised price target of Rs425: We have reduced our earnings estimates for FY2017 and FY2018 to factor in the lower OPM due to higher operating cost related to the Hyderabad park, and higher one-time provisioning for service tax and other levies. The company posted strong growth in footfalls and we expect this trend to continue going forward, as WHL endeavors to provide better entertainment services to its patrons at a reasonable price. WHL has recently added two new rides in the Kochi park and is planning to add new rides in its existing parks to drive growth in the footfalls in the coming years. The company’s better cash generation ability and a strong balance sheet make WHL one of the better plays in the consumer discretionary services space. We maintain our ‘Buy’ recommendation on the stock with a revised price target of Rs425 (rolling it over to FY2019 earnings). The stock is currently trading at 11.7x its FY2019E EV/EBITDA.

Key concern: Any significant drop in the footfalls in the Bangalore and Kochi parks would act as a key risk to our earnings estimates.

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