Reliance Industries, Ujjivan SFB, Aavas Financiers, Indian Hotels, Route Mobile, Q2 Review: HDFC Securities

HDFC Securities Institutional Equities

Reliance Industries - Robust earnings from energy businesses

Our 'Add' rating on RIL with a price target of Rs 2,515/share is premised on-

1. recovery in the oil-to-chemical businesses;

2. Ebitda growth in the digital business, driven by improvement in average revenue per user, subscriber addition, and new revenue streams; and

3. potential for further unlocking in the digital and retail businesses.

RIL’s consolidated Ebitda at Rs 410 billion (+32% YoY; +8% QoQ, our estimate: Rs 385 billion) and adjusted profit after tax at Rs 174 billion (+27% YoY, +9% QoQ) came in above our estimates, supported by better-than-expected performance from its energy businesses.

Ujjivan Small Finance Bank - Customer franchise poised for an upgrade

Ujjivan Small Finance Bank Ltd. once again clocked an all-time high profit after tax, led by robust loan growth (+39% YoY; excluding-MSE) and in-line credit costs (90 basis points annualised). Back-book repricing in the micro finance portfolio was offset by strong deposit traction (+9% QoQ), resulting in 40 bps QoQ moderation in net interest margin to 8.8%. Gross non-performing asset clocked in at 2.4%, witnessing a 27 bps QoQ improvement on the back of strong upgrades/writeoffs despite higher slippages.

Although Ujjivan operates on an elevated investment-deposit ratio at 38% (+500 bps QoQ) for gradual substitution as loans, we expect pressure on medium-term spreads as the portfolio migrates to a higher mix of secured loans.

We adjust our FY24/25 estimates for changes in the balance sheet structure and lower credit costs; Upgrade the stock to a 'Buy' with a revised target price of Rs 75 (2.2 times March-25 adjusted book per share).

Aavas Financiers - Growth momentum key to regaining sector leadership

Aavas Financiers Ltd.’s earnings marginally missed our estimates on the back of lower-than expected loan growth and pressure on yields, reflected in the 30 bps compression in spreads sequentially.

Business momentum continued to be sluggish for a second straight quarter (disbursals up 10% YoY), which was attributed to high competitive intensity and disruptions on account of tech transformation and management change.

Aavas continued its risk-calibrated approach towards underwriting, reflected in sustained pristine asset quality across segments (credit costs at 16 bps annualised).

Opex intensity is likely to remain elevated in the near term as the productivity impact of the ongoing tech investments follows a lead-lag pattern.

While asset quality and profitability were strong, the sluggish growth has been disappointing and could pose a downside risk to our forecasts.

However, the stock has underperformed over the past year, offering a favourable risk reward. We trim our FY24/FY25 earnings estimates by 4% each to factor in lower loan growth and NIMs; maintain 'Add' with revised RI-based target price of Rs 1,830 (implying 3.2 times Sep-24 ABVPS; 21 times Sep-25 EPS).

Indian Hotels - Continues to ride the strong demand wave

Indian Hotels Company Ltd.’s Q2 FY24 numbers were in line with revenue growth of 16% YoY to Rs14.3 billion, led by increased occupancy (66%,+240 bps YoY) and average room rate (+11% YoY), resulting in strong revenue per available room growth (+16% YoY) at domestic enterprise level.

The increase in ARR was driven by a favorable demand-supply gap in key locations, vacation travel, increased corporate travel, and the G-20 presidency. Indian Hotels group’s Ebitda margin increased by 90 bps YoY to 24.8% in Q2 FY24, led by topline growth and the cost control-driven operating leverage.

Management remains optimistic about strong growth momentum in the medium term and hence continues to accelerate the expansion program.

Given the favorable demand-supply mismatch in the industry, cricket World Cup led travel as well as the upcoming wedding and festive season, we expect Indian Hotels to report strong numbers, going ahead.

We maintain our 'Add' recommendation with an FY25 enterprise /Ebitda multiple of 22 times and a target price of Rs 398/share.

Route Mobile - Deal wins improve growth visibility

Route Mobile Ltd. reported revenue growth of 4.9% and the Ebitda margin was stable at 12.6%. The billable transactions increased by 6.1% QoQ while blended realisations were down 1.1% QoQ. Route has signed a partnership with Vodafone Idea Ltd. to provide an application-to-person SMS monetisation solution with a revenue potential of $100 million. Route will make upfront investments in the form of security deposits and the revenue from the Vodafone Idea deal will start from Q4.

The new products revenue comprising WhatsApp, Sendclean and TruSence grew 64% YoY and is ~6% of revenue. The rate hike across International Long Distance and National Long Distance, volume growth, new client additions, launch of new products and contribution from Vodafone Idea and e-commerce deal will aid growth for FY25E.

Their deal with Proximus Group is expected to close in Q4 FY24E. The combined entity will bring synergies of $100 million and the target is to reach $1 billion revenue with a 15% Ebitda margin to become the third largest communication platform as a service player globally.

We believe Route will be able to deliver ~20% organic growth, led by tailwinds in the domestic termination business and expansion of international operations.

We maintain our earnings per share estimate for FY25/26E and maintain our 'Buy' rating with a target price of Rs 1,975, based on 22 times Dec-ember25E EPS. The stock is trading at 20/17 times FY25/26E EPS.

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