Fw: Investor's Eye: Update - Aditya Birla Nuvo, Genus Power Infra, Provogue, Federal Bank, Tata Global Beverages, Ipca Lab, 3i Infotech, ISMT, BoB, Apollo Tyres

 

 

Investor's Eye [July 30, 2010]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE  Aditya Birla Nuvo Cluster: Apple Green Recommendation: Buy Price target: Rs1,003 Current market price: Rs772 Q1FY2011 results: First-cut analysis Result highlights Aditya Birla Nuvo posted a strong Q1FY2011 earnings on both stand-alone as well as consolidated basis. On stand-alone basis, the company reported a top line growth of 31.5% on year-on-year (y-o-y) basis, led by a strong all-around performance of all the business, especially the garment and insulator businesses that grew at a y-o-y rate of 63% and 47% respectively.  The operating profit grew at stellar 70% on y-o-y basis to Rs189 crore largely led by strong performance of the garment and the fertiliser divisions during the quarter. The garment business showed a positive earnings before interest and tax (EBIT) of Rs9.35 crore in Q1FY2011 as against a loss of Rs23.3 crore in Q1FY2010, while the fertiliser business doubled its profit in the quarter under consideration mainly led by improvement in the utilisation rate. During the quarter the company added 33 exclusive brand outlets, aggregating 8.5 lakh square feet retail space under its direct coverage. Further, for the quarter, it reported a very robust 30% same store sales growth on y-o-y basis.  As a result of strong operational efficiencies coming from all the business segments, the profit after tax (PAT) showed an annual swing of Rs67 crore, from a loss of Rs2.2 crore in Q1FY2010 to a profit of ~Rs65 crore in Q1FY2011. On consolidated basis, the PAT showed a swing of Rs184.2 crore, from a loss of Rs35.3 crore in Q1FY2010 to a profit of Rs149 crore in the quarter under consideration. This was largely on the back of strong profitability of the financial services division. The financial services division reported a Rs54 crore profit for Q1FY2011 as against a loss of Rs100 crore in Q1FY2010 (largely contributed by the insurance business, that achieved a net profit of Rs9 crore for the quarter as against a loss of Rs111 crore in Q1FY2010) In the life insurance business, the total premium income for the quarter grew by 18% on y-o-y basis to Rs1,143 crore, while the company declared its embedded value and new business achieved premium margin (NBAP) for FY2010 that came in at strong Rs3,818 crore (up 25% yoy) and 22.5% respectively. Valuation: Given the diverse businesses Aditya Birla Nuvo is present in, we believe that the company is best valued using the sum-of-the-parts method. An improvement in its growth businesses (viz financial services, business process outsourcing and retail) and the increasing efficiency in the value businesses (fertilisers, insulators, carbon black and textiles) bring strong visibility in the business. Looking at these positives we maintain our Buy recommendation on the stock with a price target of Rs1,003.    Genus Power Infrastructures Cluster: Ugly Duckling Recommendation: Buy Price target: Rs298 Current market price: Rs229 Results above expectations Result highlights Top line up 33.8%: Genus Power Infrastructures Ltd (GPIL)?s Q1FY2011 earnings topped our projections both on revenue and profitability fronts. The net revenue for the quarter was up 33.8% year on year (yoy) to Rs159.8 crore, much above our estimate of Rs145.8 crore. The company?s meter?s business continued to post robust growth with revenue for the quarter at Rs72 crore. The projects business recorded revenue of Rs64 crore. OPM robust at 16.9%: The operating profit margin (OPM) was stable?at 16.9% in the quarter as compared to 17.1% in the year ago quarter, as the rise in other expenses was offset by containment in raw material cost. The other expenses increased 59.4% yoy in the quarter mainly on account of increased provision of Rs5-6 crore (with respect to state electricity boards [SEBs] for any eventuality of liquidated damages).  PAT up 55.6%: The interest cost came down marginally, to Rs9.6 crore in the quarter. Robust margins led the profit after tax (PAT) up 55.6% yoy to Rs12.95 crore, as against our expectation of a 22.1% y-o-y growth.  Order book at Rs788 crore: The order book at the end of Q1FY2011 stands at Rs788 crore as against Rs820 crore at the end of Q4FY2010. The company got orders worth Rs129 crore during the quarter. The orders for meters division formed 34% of the current order book and those for projects division formed 65%. The company has already participated in tenders worth Rs1,530 crore. Outlook and valuation: GPIL, one of the mid-cap companies under our coverage, is the market leader in meters space. Given its strong order pipeline, huge opportunity in chosen niche and proven execution capabilities, we believe that the company can sustain about 20-25% growth in revenue over the next few years, over which period its OPM is also likely to remain stable. At the current market price, the stock trades at 4.6x FY2012E earnings per share (EPS) while it discounts its historical (FY2010) book value by 1.2x. In our view, the stock does not adequately capture the potential compounded annual growth rate (CAGR) of 24.3% in profit over FY2010-12E. We remain positive and maintain our Buy recommendation on the stock. We are maintain our estimates and price target of Rs298 (6xFY2012E EPS) on the stock.   Provogue India Cluster: Ugly Duckling Recommendation: Buy Price target: Rs95 Current market price: Rs58 Strong performance in Q1  Result highlights For Q1FY2011 Provogue India Ltd (PIL) has reported a strong sales growth of 41.1% on a year-on-year (y-o-y) basis to Rs103 crore (which is higher than our estimate of Rs90 crore). The growth was led by the revival in the domestic demand and the strong performance of the export business. The same-store sales growth for the quarter was 8% while exports contributed 53% to the revenue as against the normal contribution of 33-34%. Despite contraction in the gross margin due to the high contribution from the export segment, a strong operational improvement during the quarter aided PIL?s operating profit to grow at 40% on a y-o-y basis. The operating profit margin (OPM) stood flat on a y-o-y basis at 14.6% (14.7% in Q1FY2010). A lower other income restricted the earnings before interest, tax, depreciation and amortisation (EBITDA) growth to 15.8% on a y-o-y basis to Rs18.6 crore. In line with the same, the profit after tax (PAT) grew by 15.9% on a y-o-y basis to Rs7.8 crore (against our estimate of Rs7.2 crore).  PIL is poised to report a healthy earnings compounded annual growth rate (CAGR) of 22.8% over FY2010-12 in its core business of fashion brand retailing. The growth will be achieved on the back of strong store expansion, buoyant demand and enhanced product range. We like the stock and consider it a good bet to play the Indian retail and retail infrastructure play. Hence, we maintain our Buy rating on the stock. We value the retail business of PIL at Rs56 per share even at a discounted multiple of 15x compared to PIL?s historical valuation and to the valuation of its peers. Thus, the current market price is completely ignoring the value in Prozone Enterprises Pvt Ltd (PEPL). We assign a value of Rs39 per share to the real estate venture to arrive at a sum-of-the-parts (SOTP) valuation of Rs95 per share for PIL. Our price target for PIL remains Rs95.   Federal Bank Cluster: Ugly Duckling Recommendation: Buy Price target: Rs387 Current market price: Rs347 Price target revised to Rs387 Result highlights Federal Bank?s bottom line in Q1FY2011 was down 3.3% year on year (yoy) at Rs131.9 crore, slightly below our projection of Rs142 crore. The bottom line was hit by a weaker non-interest income and spike in provisions (with the base effect coming into play in both the cases), which outweighed a robust growth in top line. Importantly, the bottom line on sequential basis was up 12.8%. The reported net interest income (NII) was up a robust 42.5% yoy to Rs413.3 crore, in line with our expectation of Rs401 crore. The NII growth was driven by a year-on-year (y-o-y) expansion in the net interest margin (NIM) to 4.15%, though the advances growth was below the industry level, at 16.6% yoy. The Q1FY2011 NIM (reported) stood at 4.15%, largely in line with the NIM of 4.19% seen in the previous quarter. The 5-basis-point improvement in the cost of deposits was offset by a 9-basis-point deterioration in the yield on assets. The treasury gains, in line with the industry trend, were weak during the quarter, down 71.4% yoy. Notably, ?commissions, exchange & brokerage? grew a strong 10.2% quarter on quarter (qoq) though muted at 4.5% on a y-o-y basis. Consequently, the total non-interest income contracted by 25.5% yoy. The operating expenses were up 18% yoy to Rs187.9 crore due to higher staff expenses as well as growth in overhead expenses as a result of branch and ATM expansion. This led to a 100-basis-point quarter-on-quarter (q-o-q) deterioration in the cost to income ratio to 35.9%. Federal Bank reported a 16.6% y-o-y growth in advances, which was below industry levels. From segmental perspective, the growth was primarily driven by a strong growth in advances to the corporate segment. The deposits meanwhile grew at a slower pace, up only 10.2% yoy to Rs34,984 crore as a result of the bank?s conscious efforts to reduce its high-cost deposits. Notably, the current and saving account (CASA) deposits grew at a strong 22.4% yoy, leading to a 280-basis-point sequential improvement in CASA ratio to 29%. The asset quality of the bank deteriorated in the quarter on sequential basis. The gross non-performing asset (%GNPA) was up a steep 76 basis points to 3.73% and the GNPA on absolute basis (%GNPA) was up 27% to Rs1,043.8 crore. Despite higher provisions, the provision coverage ratio (PCR) contracted by 350 basis points sequentially to 80.8%, though remaining at comfortable levels. Including technical write-offs the PCR stood even higher at 89%?well above the Reserve Bank of India (RBI)?s mandate of 70%. The restructured assets now stand at Rs1,140 crore or 4.2% of outstanding advances. Of this, around Rs65 crore worth of assets slipped into NPA category during Q1FY2011, taking the cumulative tally to Rs170 crore (15% of the restructured assets). The bank?s capital adequacy ratio (CAR) as on June 30, 2010 stood at 17.89% (as per Basel II norms) as compared to 19.11% in the year-ago quarter. Clearly, the Q1FY2011 results seem weaker on y-o-y basis due to unfavourable base effect (high treasury gains and lower provisions in year ago quarter). However, on a sequential basis a 12.8% growth is quite healthy. Going ahead, we expect the performance of the bank to improve on the back of a steady balance sheet growth and easing in asset quality pressures. Moreover, the appointment of an experienced banker from a reputed private sector bank should lead to improved fundamental in the long term. At the current market price of Rs347, the stock trades at 7.6x FY2012E earnings per share (EPS), 3.3x FY2012E pre-provisioning profit (PPP), 1x FY2012E stand-alone BV and 1.1x F2012E consolidated book value (BV). We maintain our Buy recommendation on the stock with a revised price target of Rs387.   Tata Global Beverages (Tata Tea) Cluster: Apple Green Recommendation: Hold Price target: Rs122 Current market price: Rs116 Downgraded to Hold Result highlights Tata Global Beverages Ltd (TGBL, formerly Tata Tea)?s Q1FY2011 results are not comparable on year-on-year (y-o-y) basis due to consolidation of Grand (Russian acquisition) in Q3FY2010. Q1FY2011 (consolidated) results?Sales volume under pressure; profitability affected by high cost inventory of raw material The net sales grew by just 6.5% year on year (yoy) to Rs1,380 crore with sales volume in various markets remaining flat during the quarter. The Russian acquisition?Grand?contributed around Rs97 crore during the quarter. Thus on a like-to-like basis, the consolidated net sales remained almost flat. The high cost of inventory (raw tea) coupled with rising coffee prices led the raw material cost as percentage to sales surge by 401 basis points yoy during the quarter. The higher raw material cost led to a sharp 359-basis-point decline in the operating profit margin (OPM) in the quarter to 9.9%.  Thus the operating profit declined by 21.8% yoy to Rs136.8 crore and the adjusted net profit (before minority and share of profit from associates) fell 23.8% yoy to Rs68.1crore, much below our estimate of Rs112.5 crore. Key monitorables going ahead The movement in the prices of key input (tea and coffee) in the domestic as well international markets Performance of various brands under TGBL portfolio Disclosure of any strategies/details towards joint venture with PepsiCo  Revision in estimates We have revised downwards our earnings estimate for FY2011 by 8.5% to factor in a lower than expected top line growth and a higher (than earlier expected) raw material cost. We have however maintained our earnings estimates for FY2012.  Outlook and valuation TGBL?s focus of diversifying from commodity tea business to value-added beverages business provides several growth levers and will improve the profitability of the company in the long run. Expanding its foot prints into new markets and enhancing the product portfolio by entering into new categories or introducing new products augurs well for the company from the medium- to longer-term perspective. However in the near term 1) firm raw material prices in the international markets; 2) sales volume pressure in the key markets; and 3) Intense competition in various markets are the key headwinds for the company. We value the stock at 15x its FY2012E earnings per share (EPS) of Rs8.1 and our revised price target stands at Rs122. In view of the limited upside from the current levels and near-term concerns (as mentioned above), we downgrade our recommendation on the stock to Hold from Buy. At the current market price the stock trades at 17.3x FY2011E EPS of Rs6.7 and 14.3x FY2012E EPS of Rs8.1.   Ipca Laboratories Cluster: Ugly Duckling Recommendation: Buy Price target: Rs330 Current market price: Rs280 Higher expenses mar Q1 net profit  Result highlights Base profit misses expectations: For Q1FY2011 Ipca Laboratories (Ipca) reported an adjusted net profit of Rs41.8 crore. The Q1FY2010 net profit declined by 4.2% year on year (yoy) and was below our expectation of Rs48.6 crore largely due to higher employee and marketing expenses during the quarter. The total income of the company grew by 16.4% to Rs418 crore, which was in line with our estimate of Rs417.4 crore, essentially due to a 20% year-on-year (y-o-y) growth in the formulation exports. The operating profit margin (OPM) contracted by 300 basis points to 17%, which was lower than its normal margin of 19-20%. The margin was subdued on account of aggressive hiring of field force (up 130 basis points) and higher marketing expenses (up 140 basis points). But sales growth remains in line: The 16.1% y-o-y growth in the domestic formulation business and the sharp pick-up in the export of the formulations (up 29% yoy; branded--up 15%, generic--up 34%) elevated the sales to Rs418 crore. However ,the lower anti-malarial sales (down 20.5%; owing to delayed monsoon) remained a drag on the overall performance. The rupee?s appreciation against the major other currencies also hampered the revenue growth by 7%. The sales in the Commonwealth of Independent States (CIS; up 18% yoy) and the UK (up 33%) normalised during the quarter. The business of active pharmaceutical ingredients (APIs) remained subdued with only a 5% growth yoy due to a decline in the anti-malarial API and a loss in revenue from its product, Metopolol API, due to the closure of the plant of one of its clients. Guided for 18.5-19% top line growth: The growth in the domestic market and the increasing contribution of tender from artemether + lumefantrine give the management confidence to achieve an overall growth of 18.5-19% (tweaked from the 18-20% growth guidance given earlier) and to improve the earnings before interest, tax, depreciation and amortisation (EBITDA) margin from hereon. Ipca plans to incur Rs150 crore of capital expenditure (capex) in FY2011; of this Rs90 crore will be utilised towards the Sikkim facility. Tweak estimates, maintain Buy: The Q1FY2011 results are below our estimates owing to the aggressive hiring and promotional activities undertaken by the management for its domestic business. We treat this quarter as an aberration and believe the growth will normalise in the subsequent quarters. We also remain confident of a strong recovery in the anti-malarial sales (we expect only partial recovery in API sales). Thus, we tweak our estimates to factor in the partial loss from the anti-malarial API sales. Our revised earnings per share (EPS) estimates stand at Rs18.1 for FY2011 (vs Rs19.6) and at Rs22.6 for FY2012 (vs Rs23.5). At the current market price of Rs264, Ipca is attractively valued at 13.5x FY2011E earnings and 11.2x FY2012E earnings. With a healthy balance sheet and improving return ratios, the stock is expected to get re-rated closer to its peers. Based on the strong earnings visibility from the export segment and the scale-up in the domestic business, we maintain our Buy recommendation on the stock with a price target of Rs330.   3i Infotech Cluster: Emerging Star Recommendation: Buy Price target: Rs105 Current market price: Rs63 Performance below expectation Result highlights 3i Infotech?s Q1FY2011 net income of Rs61.9 crore was below our expectation of Rs75.4 crore. The main reason for the deviation of the net income from our estimate was higher interest expenses (Rs37.5 crore) coupled with increased depreciation cost (Rs25.6 crore). We were expecting a lower interest cost of Rs25.6 crore and lower depreciation charge of Rs21.1 crore.  For Q1FY2011, the consolidated revenues grew by 1.4% quarter on quarter (qoq) and by 6.6% yoy to Rs637 crore. The sequential revenue growth was muted during the quarter on account of decline in the volume of the transaction services business sequentially; revenues for the same were down by -1.2% qoq to Rs242.1 crore. The information technology (IT) solutions business (IT services and products) clocked revenues of Rs394.9 crore, up by 3% qoq.  The operating profit margin (OPM) declined marginally by 20 basis points qoq to 19.5%, on account of the wage hikes effected during the quarter (about 10% blended). Nevertheless, better cost control on account of the IT solutions and services business? integration restricted the margin decline. For FY2011 the management has indicated the margins shall be maintained at the current level. Starting from Q1FY2011, 3i Infotech has changed its reporting structure in segment reporting from three segments earlier (software products, IT services, transaction services) to two segments, namely IT solutions and transaction services. The IT solutions business? revenues grew by 3% qoq and by 8.3% yoy to Rs394.9 crore, thereby accounting for 62% of the total revenues. The transaction services business? revenues declined by 1.2% qoq but increased by 3.8% yoy to Rs242.1 crore, thereby accounting for 38% of the total revenues.  3i Infotech?s performance for the quarter gone by was below our expectations on both the top line and the bottom line front. Nevertheless, its margin performance was quite better than our expectations. Going forward, the management has hinted at an improving demand environment with healthy traction seen in the emerging geographies, like the UK, the Middle-East and the Asian markets. However, the US market is yet to pick up as per expectations. Nevertheless, the management is confident of achieving its FY2011 revenue guidance of 11-14% growth. We remain positive on the stock with a long-term perspective; however, in the medium term, stability in the quarterly financial performance will be a key trigger for the re-rating of the stock. We maintain our Buy recommendation and price target of Rs105 on the stock. At the current market price of Rs63, the stock is trading at attractive valuations of 5.5x FY2011 earnings estimate and 5x FY2012 earnings estimate.   ISMT Cluster: Ugly Duckling Recommendation: Buy Price target: Rs69 Current market price: Rs49 Higher power cost and depreciations affect Q1 results Result highlights ISMT?s Q1FY2011 results were disappointing with its net income declining by 25.1% year on year (yoy) to Rs18.4 crore due to an increase in the energy cost, a higher depreciation cost and a foreign exchange (forex) loss of Rs3.4 crore (vs a forex gain of Rs1.2 crore in Q1FY2010). Adjusting for the forex loss, the profit after tax (PAT) declined at a lower rate of 6.5% to Rs21.8 crore. ISMT?s total income from operations increased by 34.8% yoy to Rs346.3 crore in Q1FY2011. In terms of the segments, the tube segment reported a 20.7% year-on-year (y-o-y) growth in its net sales to Rs218.7 crore and the steel segment?s net sales were up strongly by 68.5% yoy to Rs127.6 crore. The tube segment?s sales volume grew by 17.4% yoy to 31,000 tonne in the quarter on the back of a strong growth in the volumes from both the domestic and export markets. The strong domestic sales in the quarter were led by a robust demand from boiler and bearing sectors while the demand from the export market came from oil country tubular goods (OCTG) and construction equipment sectors. The net realisation in the tube segment went up by 2.9% yoy (and by 10.2% quarter on quarter [qoq]) to Rs70,500 per tonne in the quarter under review. The operating profit margin (OPM) declined sharply by 611 basis points yoy to 15.6% mainly due to an increase in the energy cost, a higher proportion of steel sales in the total sales (37% in the quarter vs just 29% in the same quarter of the last year) and a lower realisation in the export market (due to the appreciation in the rupee against the US Dollar). Consequently, the operating profit declined by 3.2% yoy to Rs54 crore despite strong growth in the net sales. Led by a lower operating profit, higher depreciation (a 26.6% y-o-y rise) and a forex loss of Rs3.4 crore (vs a gain of Rs1.2 crore in Q1FY2010), the net income declined by 25.1% yoy to Rs18.4 crore. However, a strong increase in the other income (a 230.3% y-o-y increase) and lower interest expenses (a 3.4% y-o-y fall) limited the decline in the net income. Adjusting for the forex loss, the PAT declined at a lower rate of 6.5% to Rs21.8 crore. In our interaction with the company?s management, the latter has indicated that the revised capacity expansion schedule is on track. The company?s power plant is scheduled to be commissioned in Q4FY2011 and its steel plant would begin operations from Q2FY2011 onwards. The company has already started commercial production from its tube expansion project at Baramati. We have lowered our FY2011 and FY2012 earnings estimates to factor in a higher power cost, which has been partially offset by a lower income tax rate of 20% (as per the management?s guidance). Consequently, our revised earnings per share (EPS) estimates for FY2011 and FY2012 now stand at Rs7.9 and Rs11.2 respectively.  The demand for seamless tubes is strong and we expect it to improve further in the coming quarters. Further, the cost pressure would also ease out with the commissioning of the company?s captive power plant. Hence, we maintain our positive view on the company?s earnings growth (a compounded annual growth rate [CAGR] of 50% over FY2010-12E). We maintain our Buy recommendation on the stock with a price target of Rs69. At the current market price, the stock is trading at an attractive valuation of 4.4x its FY2012 earnings estimate.   Bank of Baroda Cluster: Apple Green Recommendation: Buy Price target: Rs935 Current market price: Rs753 Price target revised to Rs935 Result highlights For Q1FY2011 Bank of Baroda (BoB) reported a bottom line of Rs859.16 crore vs our estimate of Rs794 crore. The bottom line grew by 25.4% year on year (yoy) supported by a strong growth in the net interest income (NII). The asset quality deteriorated on a sequential basis due to slippages from the small and medium enterprise (SME) and agri portfolios.  The NII for the quarter was up a robust 54.2% yoy to Rs1,858 crore, driven by a strong 30.7% year-on-year (y-o-y) growth in the advances. Meanwhile, the reported net interest margin (NIM) deteriorated by seven basis points sequentially led by a contraction in the yields.  The non-interest income came down by 12.2% yoy to Rs617.2 crore due to a y-o-y decline in the bank?s treasury income.  The operating expenses were up by 5.5% yoy led by a 22.1% y-o-y increase in the other operating expenses. Meanwhile, the staff expenses contracted by 2.9% yoy. The cost-to-income ratio improved by 878 basis points yoy to 38.3% during the same period.  The business growth remained very strong with deposits and advances growing by 28.2% and 30.7% yoy respectively. The advances growth was led by the SME and retail segments. The current account and savings account (CASA) ratio of the bank stood at a healthy 38.1%, which was largely in line with that of the year-ago quarter.  The provisions for the quarter stood at Rs251.3 crore vs a write-back of Rs39 crore in the year-ago quarter.  The asset quality of the bank deteriorated in the quarter on absolute basis as the gross non-performing asset (GNPA) increased by 10.7% quarter on quarter (qoq) to Rs2,657.4 crore. However, the GNPA on a relative basis (%GNPA) remained largely stable at 1.41%. The deterioration in the asset quality was largely due to slippages from the bank?s SME and agri portfolios. The provisioning coverage as at the end of Q1FY2011 stood at 73%. The total restructured assets stand at Rs5,283.4 crore (about 2.8% of the advances) of which Rs476 crore (about 9% of the total restructured assets) have slipped into non-performing assets (NPA) so far. The bank, as on June 30, 2010, remains adequately capitalised with its capital adequacy ratio (CAR) at 13.25% (as per Basel II norms) and tier-I CAR at 8.16%. The bank raised tier-II capital of Rs1,000 crore during the quarter. Bank of Baroda has reported a sturdy performance for the quarter on the back of a strong business growth and a largely stable NIM. We continue to maintain our optimistic view for the bank on the back of its conservative approach, steady margins, and healthy loan book growth. We are tweaking our estimates to factor in the banks Q1FY2011 performance. At the current market price of Rs753, the stock trades at 6.6x its FY2012E earnings per share (EPS), 4x FY2012E pre-provisioning profit (PPP) and 1.5x its FY2012E adjusted book value (ABV). We maintain our Buy recommendation on the stock with a revised price target of Rs935.   Apollo Tyres Cluster: Apple Green Recommendation: Buy Price target: Rs82 Current market price: Rs64 Q1 results above expectations Result highlights Stand-alone performance, top line in line, margins surprise positively: Apollo Tyres? total income in Q1FY2011 declined by 5% year on year (yoy) to Rs1,121.3 crore. The decline was primarily on account of a lockout at its Perambra plant in Kerala. The surprising factor for the quarter was a lower than expected decline in the operating profit margin (OPM), which came in at 10.4% as against the expectation of 8.5%, primarily on account of a lower than expected decline in the raw material cost. Consequently, the operating profit stood at Rs117 crore, indicating a decline of 39.8% yoy. A lower than expected tax rate of 29.4% in Q1FY2011 as against 34% in Q1FY2010 offset the 28% year-on-year (y-o-y) increase in the interest cost during the quarter. Consequently, the reported net profit declined by 57.1% yoy to Rs40.6 crore. Consolidated performance, strictly not comparable: The consolidated revenue, though not comparable on y-o-y basis due to the acquisition of VBBV on May 15, 2009, grew by 11.3% yoy to Rs1,820.7 crore. The consolidated OPM for the quarter declined by 169 basis points yoy to 10.9%. Consequently, the operating profit was down by 3.6% yoy to Rs198.5 crore. Furthermore, aided by a much lower tax rate, the reported net profit grew marginally by 0.6% yoy to Rs74.2 crore. Price hikes taken to partially offset higher raw material cost: Natural rubber prices continue to surge with an average rubber cost of Rs165 per kg in Q1FY2011 as against Rs140 per kg in Q4FY2010. Thus, to partially offset the steep surge in natural rubber prices and to protect its margins, the company has taken price increases in the original equipment manufacturing (OEM) as well as replacement markets. Though the company expects a further 10% increase in rubber prices in Q2FY2011, it expects the same to soften in H2FY2011 only with the commencement of rubber production season.  Outlook: We believe the key things to watch out for Apollo Tyres is the restart of production at its Kerala facility and price of raw material particularly natural rubber. We believe, while the company will rake in top line growth from new Chennai facility (which is expected to ramp up production from 100MT per day to 200MT per day by the end of FY2011) and price hikes, the bottom line performance is likely to be subdued for the year on y-o-y basis.  Maintain Buy: We have revised our earnings estimates downward mainly to factor in the loss of production due to ongoing lockout at Perambra plant and partly due to higher estimates of rubber prices. Consequently our consolidated estimates stand revised to Rs8.2 and Rs10.1 for FY2011 and FY2012 respectively. We maintain our Buy recommendation on the stock with a price target of Rs82. At the current market price, the stock is trading at 7.8x and 6.3x its FY2011E and FY2012E consolidated earnings respectively.   Click here to read report: Investor's Eye Attention:  As per SEBI guidelines, clients who want to transact in the Futures & Options segment are required to submit proof of Financial Details. Kindly contact the nearest Sharekhan branch for more information or check the pop-up banner on our website, www.sharekhan.com.

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