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Macquarie sees at least 3 months for business to be normal post lockdown

Macquarie has made wholesale cuts across their coverage which are in the range from a moderate 5 percent to some cases ~80 percent.

April 07, 2020 / 12:35 PM IST
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The Indian government ordered a nation-wide lockdown on March 25, 2020, for an initial period of 21-days which could get extended to 1-2 months, Macquarie Research highlighted said in a report authored by Aditya Suresh.

In the report, Macquarie has taken a granular look at two scenarios that could emerge in the near future. In the first scenario which is also the base case – Macquarie sees a 1-month lockdown followed by 3 months to business as usual.

In the bear case scenario, there could be 2-months of lockdown followed by more gradual 6 months to normal.

Macquarie has made wholesale cuts across their coverage which are in the range from a moderate 5 percent to some cases ~80 percent. Sectors that look better placed are staples, IT, and pharma.

The report highlights the top 10 Macquarie India research ideas based on certain fundamental parameters such as Book value per share growth is greater than 10 percent, or there is an EPS growth of more than 10 percent, etc. among others.


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HDFC Bank: Target Rs 1,499

Even in the bear case scenario if we assume the loan growth/credit costs post COVID-19 to be 12%/2.3% for FY21E (base 21%/1.3%), the stock still offers an upside of ~30 percent today.

“We consider credit cost of 2.3% to be excessive as ~80% of the unsecured loans is towards salaried employees which in our view would have a better ability to repay in these testing times,” said the report.

Valuations at 2.1x FY22E P/BV for a ~2 percent ROA provides a favourable risk-reward with limited downside risk. Even though agriculture is a pain point, Macquarie does not expect a significant impact on HDFC Bank’s overall asset quality.

Infosys: Target Rs 830

Successful execution of the strategy of the new CEO has yielded success with the company’s organic growth rate being faster than the industry now. Even with a single-digit revenue decline in FY21E (due to global growth shocks), EPS decline would be less than 10 percent (due to margin resilience) against an 18 percent drop in share price in the last 1 month.

The stock has a strong net cash balance sheets (US$3.4bn) and a dividend yield of 4.7 percent. The target price if Rs830 is set at 17x FY22 EPS with ~30 percent upside.

HUL: Target Rs 2563

Macquarie is of the view that home care can benefit in the near term on account of stockpiling which we see normalizing in the next 2-3 months. Out of home consumption like color cosmetics and skincare can take a hit.

“We see long term positive trends in some of the categories like personal wash and packaged/nutrition foods. We believe the GSK merger provides a strong platform to grow the food portfolio. We believe the merger would be EPS accretive (~9%) from the first year, FY21,” said the note.

Superior portfolio constructs, strong distribution and investments in digital infrastructure will help consolidate market share. Macquarie values HUR at 50x FY22E.

ICICI Bank: Target Rs 684

Even if we factor a loan growth/credit costs of 8.5%/2.7% for FY21E in the bear case scenario (post-COVID) the stock offers an upside of ~50 percent today. “We have assumed credit costs to be higher than the GFC level credit cost,” said the note.

Though there will be job losses due to COVID-19, Macquarie believes that the delinquencies in the retail portfolio will be contained and will be fairly lower than the GFC levels as this time around banks has majorly lent to internal customers.

Valuations at ~1.5x FY22E P/BV for 1.5% ROA is very compelling and can offer reasonable upside from the current levels, added the note.

HCL Technologies: Target Rs 727

In the current volatile global macro environment, Macquarie is of the view that HCL has low exposure to BFSI (21% of revenues) and a diversified business mix with software: services mix of 35:65.

UltraTech Cement: Target Rs 3952

Given near term earnings uncertainty, Macquarie focus on asset-based valuation – Ultratech trades at US$128/ton, which is 5 years low and a mere 5-10 percent above replacement cost.

Given the fact that the company has over 20 percent market share, along with diversified geographical presence, strong brand and distribution network, the stock warrants a sustainable premium.

Dr Reddy’s Laboratories: Target Rs 3324

Macquarie is of the view that the market is discounting Dr Reddy’s steadfast focus on creating ex-US growth avenues (refer Fig) and better productivity. It expects ongoing efforts on rationalising costs and improving asset utilisation to boost cash generation.

GAIL India: Target Rs 200

GAIL India is trading at about 50 percent below our fundamental bear case valuation. Macquarie value GAIL’s gas transmission division and listed investments together at US$9bn EV or ~20% above today’s price.

Cipla: Target Rs 535

Key positives are steady growth visibility, recalibrated capital allocation, and attractive valuations, according to Macquarie. The FY21/22E EBITDA margins are higher than Street led by factoring in a higher upside from Cipla’s focus on profitable growth.

Cipla’s key strengths, its strong branded franchises in India and South Africa, are growing at a healthy pace.

Petronet LNG: Target Rs 325

The core thesis on PLNG has not changed despite a volatile macro backdrop, and Macquarie sees a short sharp volume recovery post lockdown. We continue to see PLNG as a steady compounder with – 10+ percent EPS CAGR, driven by: (a) Dahej expansion ramp-up, (b) Kochi ramp-up, (c) tariff compounding, (d) income on growing net cash position.

Disclaimer: The views and investment tips expressed by investment experts on are their own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
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