3 smallcaps beat earnings blues, lift margins for 4th quarter in row

NEW DELHI: While June quarter earnings largely proved to be a mixed bag, three BSE500 firms – Heidelberg Cement, Deepak Nitrite and CCL Products with market capitalisation of Rs 3,000-4,000 crore each – managed to deliver growth in profit margins for the fourth straight quarter, thanks to cost optimisation and better product mix.

But with the economy slowing down, can they continue with the good show and reward stock investors?

Here is what analysts say:

Heidelberg Cement: Heidelberg Cement is present in the better-priced Central India region. Its focus on retail sales and premium product contribution has helped it perform well in the recent past, said analysts. “However, Heidelberg has limited options as its current capacity utilisation is 90 per cent and cost benefits are limited, further improvement will be driven only by realisation gains,” said Centrum Broking.

The brokerage has a price target of Rs 215 on the stock. Other brokerages are a bit more positive on it. Prabhudas Lilladher has a target of Rs 220, Anand Rathi Rs 257 and Reliance Securities Rs 260, suggesting up to 37 per cent upside potential.

“We expect visible de-leveraging of balance sheet (net debt at mere Rs 80 crore) and healthy operating efficiencies to result in best return ratios vis-à-vis peers. We expect Heidelberg to sort out capacity constraint issues in due course,” Reliance Securities said. Profit margin for this firm improved to 13.4 per cent in June quarter from 9.5 per cent in the year-ago quarter.

Deepak Nitrite: This chemicals firm has benefitted from a change in product mix in optical brighteners agents (OBAs) segment over the last few quarters, which should be more structural in nature, said Edelweiss Professional Investor Research. The company management believes prices of DASDA, an intermediate used to produce optical brightening, may remain elevated in September and December quarter, and should normalise at higher levels higher.

“We expect this segment to be a key contributor of profitability for Deepak Nitrate going forward,” the brokerage said. “DPL is also planning to manufacture an acetone derivative expected to come on stream by Q4FY20, which will aid the margins and add Rs 100-125 crore to the top-line at full capacity utilisation. Further, commissioning of a power plant (expected by mid-FY21) would also bring in additional cost savings,” the brokerage said. DPL (Deepak Phenolics) is a subsidiary of Deepak Nitrite.

The company doubled its EPS in FY19, and IIFL Securities expects a similar performance in FY20 on capacity utilisation and ramp-up in phenol business. The brokerage has assigned 8 per cent weightage to this stock in its aggressive model portfolio.

“Standalone business may post strong earnings on turnaround in optical brighteners (OBA), firm prices of DASDA () and strong growth in specialty intermediates. The stock is attractively trading at 10.1 times FY21E EPS which makes risk-reward reasonable,” the brokerage said in a note.

Standalone profit margin improved for the company to 19.5 per cent from 5.2 per cent in the year-ago quarter. Consolidated margin improved to 12.5 per cent from 4 per cent YoY.

CCL Products: Six brokerages have ‘buy’ ratings, three ‘outperform’ ratings and one ‘hold’ rating on the maker of instant coffee. Standalone PAT margin of this company jumped to 39.9 per cent in June quarter from 11 per cent in the year-ago quarter. Even as the consolidated profit for the company dropped for the quarter due to higher depreciation and interest cost incurred for the newly commissioned plant, Ebitda margin expanded on better product mix i.e. with higher contribution from high margin freeze-dried coffee business.

Freeze-dried coffee is usually priced at a premium of $1-1.5 per kg against regular-grade coffee. “Commissioning of the freeze dry plant and a favourable change in product mix would drive up FY19-21E EPS CAGR to 13 per cent in our view. Addition of new customers would compensate for the loss of customers in Q4FY19,” Edelweiss Securities said. This brokerage has a price target of Rs 330 on the stock.

The company has maintained its volume growth guidance of 15-20 per cent for FY20 and also maintained Ebitda growth guidance in the range of 15-20 per cent. “We are positive on the CCL's on account of its strong business model, management's rich experience and conservative approach. Post successful execution in Vietnam over FY13-18, we believe that CCL is likely to take another big leap with freeze dried capacity and branded business in India along-with capacity ramp-up in Vietnam. We estimate CCL to post Ebitda and PAT CAGR of 21 per cent and 22 per cent over FY19-21 respectively, coupled with healthy free cash flow and steady return ratio,” Antique Stock Broking said in a note.

EU contributes one-third of CCL's total sales and a preferential duty of 3.1 per cent is levied on instant coffee from India and Vietnam. “Industry players, along with CCL, are making a representation to the government, to appeal to the EU for a reduction in duties, in order to make Indian players more competitive,” IIFL said.