| Summary of Contents | | | | STOCK UPDATE ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs278
Current market price: Rs272
Q4FY2010 results: First-cut analysis Result highlights -
ITC?s net sales grew by 28.7% year on year (yoy) to Rs5,131.6 crore in Q4FY2010, which is ahead of our expectation of Rs4,606.9 crore. In spite of a higher than expected growth in the top line, the adjusted net profit was in line with our expectation mainly on account of a lower than expected operating profit margin (OPM). The margin was lower primarily due to a sharp decline in the margin of the agri business and a lower than anticipated margin of the cigarette business. -
The cigarette business continued to post strong performance with the gross sales growing by 14.4% yoy (the net sales were up by 18.5% yoy) in Q4FY2010. We believe the revenue growth is on account of a high single-digit volume growth in the cigarette sales and price hikes undertaken by the company. The profit before interest and tax (PBIT) margin of the cigarette business stood flat at 27.7% in Q4FY2010 (as against 28.9% in M9FY2010) as against 27.4% in Q4FY2009. -
The key highlight of the quarter was the extraordinary performance of the non-cigarette fast moving consumer goods (FMCG) business. The gross sales of the business grew by 34.1% yoy, ahead of a 23.5% year-on-year (y-o-y) sales growth in Q3FY2010 and an 11.8% y-o-y sales growth in H1FY2010. Also, as anticipated, the PBIT losses of the non-cigarette FMCG business came down to Rs78.7crore in Q4FY2010 from Rs117.3 crore in Q4FY2009. -
With improved occupancies and commencement of new property in Bangaluru, the hotel business? sales grew by 13.6% yoy to Rs274.3 crore. The PBIT margin of the business stood at 28.5% in the quarter as against 29.5% in the corresponding quarter of the last year. -
In spite of an 87.9% y-o-y increase in the sales of the agri business (20% of the overall net sales), the business? profit grew only by 9.9% yoy due to a 419 basis points y-o-y decline in the PBIT margin to 5.9%. -
The paperboards, paper and packaging business registered a moderate performance with an 11.9% y-o-y growth in the gross sales. The PBIT margin also stood flat at 20.2% during the quarter. -
Thus the overall OPM shrunk by 104 basis points yoy to 31.5% in Q4FY2010 (below our expectation of 36.0%). The operating profit grew by 24.6% yoy and the net profit went up by 27.1% yoy. -
The company has given an ordinary dividend of Rs4.5 per share and a special centenary dividend of Rs5.5 per share. The total dividend for FY2010 thus stands at Rs10 per share. Also, the board of the company will consider a proposal for bonus share in its meeting on June 18, 2010. -
We will review our estimates and come out with a detailed note post our interaction with the management of the company. At the current market price, the stock trades at 21.9x its FY2011E earnings per share (EPS) of Rs12.4 and 19.3x its FY2012E EPS of Rs14.1. We maintain our Buy recommendation on the stock. Piramal Healthcare
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs502
Downgraded to Hold Key points -
Deal to inject cash of Rs492 per share: Piramal Healthcare (Piramal)?s sale of domestic pharmaceutical formulation business to Abbott for USD3.72 billion (~8x FY2010 sales) brings in a cash of Rs491.9 per share to the company. We estimate the residual business (CRAMS, PCC, OTC and Path labs) at Rs118.7 per share (as per our FY2012 estimates). Thus the total entity (post tax, net block impact of plant transfer and debt repayment) is valued at Rs610.6 per share. -
To invest in sectors beyond healthcare: Piramal would be giving a special dividend to its shareholders post the deal?s closure. However, the usage of this cash in businesses beyond healthcare alleviates our concerns on the direction of the company?s growth prospects. We note that the residual company may trade at a discount to its trading history given the uncertainty and lower margins of the residual business. -
Book partial profits and downgraded to Hold: The deal could pave way for Piramal into a holding company structure, which generally trades at 20-30% discount to its business value. Hence, although we maintain our estimates till the deal closure (H2CY2010), we downgrade our recommendation on the stock to Hold from Buy and advise investors to book partial profits. We keep our price target under review. Shree Cement
Cluster: Cannonball
Recommendation: Hold
Price target: Rs2,100
Current market price: Rs1,990
Price target revised to Rs2,100 Result highlights -
Disappointing performance even after adjusting one-time charges: In spite of posting a strong revenue growth of 17.2% year on year (yoy) to Rs944 crore, Shree Cement has posted disappointing earnings in Q4FY2010. The company posted an adjusted net loss of Rs16.5 crore (after adjusting for one-time items of Rs54.8 crore largely related to reversal of tax concessions) mainly on account of a much higher than expected depreciation, interest charges and employee cost. -
Healthy volumes drive revenues; in line with estimates: The cement division delivered volumes (cement and clinker) of 2.74 million tonne (a 13.7% y-o-y increase) and generated revenues of Rs889.9 crore (up 16.8% yoy). The revenue growth of the cement business was supported by higher volumes and improved blended realisation (up by 2.7% yoy to Rs3,250 per tonne). In addition to the revenues from its core division, the company sold 7.78 crore power units in the quarter that fetched it Rs54 crore. -
Margin contracts as input cost and employee cost increase: On the margin front, the operating profit margin (OPM) stood at 34.5% in the quarter as against 41.2% in a year-ago quarter. The contraction in the OPM is on account of a) an increase in the power and fuel cost (up by 13.7% yoy on a per tonne basis), b) a higher freight cost (up by 14.1% yoy on a per tonne basis) and c) an increase in the employee cost (by 75% yoy to Rs49.9 crore). -
Early commissioning of capacity leads to surge in depreciation: The depreciation charges increased over four-fold to Rs278.6 crore due to commissioning of 3 million tonne (1.2MTPA in Rajasthan and 1.8MTPA in Uttrakhand) and 96MW captive power generation capacities (46MW in Beawar and 60MW in Ras). The above capacity was initially scheduled to come on-stream in H1FY2011 (as per the management guidance) and hence was not factored in the estimates. -
Further, there was a sharp increase in the interest cost (over three-fold to Rs50.4 crore) in the quarter. The higher than expected interest and employee cost is on account of the subsidy entitlement certificates (for wages of Rs9.16 crore and interest of Rs34.0 crore) for the year, which has not been issued to the company by the government of Rajasthan (under Rajasthan Investment Promotion Scheme 2003). However, going ahead, we will not see such provisions in the employee cost and the interest charges. -
For the full year FY2010, the company posted revenue and adjusted bottom line growth of 34% and 20.4% respectively. The board of the company has declared a final dividend of Rs8 per share. -
Maintain Hold with a revised price target of Rs2,100: We have fine-tuned our earnings estimates for FY2011 and FY2012 primarily to incorporate higher than expected revenues from the sale of power units and lower than expected depreciation charges. The revised earnings per share (EPS) works out to Rs201.9 and Rs198.9 for FY2011 and FY2012 respectively. At the current market price, the stock trades at price/earnings (P/E) of 10x, an enterprise value (EV)/EBIDTA of 4.6x on FY2012 and EV/tonne of US$115 on expanded capacities of 13 million tonne. We value the stock on EV/tonne of US$120 on the expanded capacity and arrive at a price target of Rs2,100. However, due to a limited upside from the current level, we maintain our Hold recommendation on the stock.
SECTOR UPDATE Telecommunications
April net addition at 11.18 million subscribers
GSM operators added 11.18 million subscribers in April 2010, which is 19.96% lower than that in the last month (March 2010). The April numbers do not include that of Reliance Communications (RCom) and Tata Teleservices, which are yet to disclose their numbers for the month. The sharp decline in the new subscriber addition in April is in part ascribable to the high base of the last month. In March 2010, GSM players added a record 13.95 million subscribers. The total subscriber base (excluding those of RCom and Tata Teleservices) stood at 416.7million in April 2010, a rise of 2.76% over that in March 2010.
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