| STOCK UPDATE State Bank of India
Cluster: Apple Green
Recommendation: Hold
Price target: Rs2,460
Current market price: Rs2,091
Q3FY2010 results: First-cut analysis Result highlights -
For Q3FY2010 the State Bank of India (SBI) reported a net profit of Rs2,479 crore, flattish year on year (yoy), and in line with our estimate (Rs2,474 crore). The net interest income (NII) came in at Rs6,316.3 crore, up 9.7% yoy, driven by healthy growth in advances and margin expansion. -
The net interest margin (NIM; calculated) stood at 2.45%, an expansion of 24 basis points sequentially. The improvement in the cost of funds, despite a contraction in the yields on advances was a result of lower cost of funds (significant re-pricing of bulk deposits), improved deployment rate and better deposit mix. -
The non-interest income growth was muted at 4.3% yoy due to weaker treasury income, as expected. The treasury income was down by 35% yoy to Rs437 crore, which partially offset the strong (36% y-o-y) growth in the core fee income. -
The operating expenses went up by 12.5% yoy to Rs5,063.9 crore primarily driven by a 33.7% y-o-y growth in the other operating expenses?a result of the bank?s aggressive branch expansion over the past few quarters. Meanwhile, the staff expenses grew by a muted 2.4% yoy. Consequently, the cost-to-income ratio jumped up to 52.3% in Q3FY2010 vs 47.1% in the previous quarter. -
The provisions and contingencies jumped up sharply to Rs856.6 crore primarily driven by Rs246-crore marked-to-market (MTM) provision against a write-back of Rs342 crore in the year-ago quarter. Meanwhile, the bank made loan loss provisions to the tune of Rs443.7 crore and other provisions of Rs165 crore during the quarter. The resulting provision coverage stood at 40.2%, which after including the technical write-offs stands at 56%?below the 70% level stipulated by the Reserve Bank of India. -
The advances grew by a strong 18.9% yoy to Rs598,918 crore while the deposits grew at a much slower pace of 11.3% yoy, implying an over 260-basis-point sequential expansion in the deployment rate. Furthermore, the current account and savings account ratio improved by 200 basis points qoq to 43% during the quarter. -
The asset quality deteriorated sequentially on absolute as well as relative basis during the quarter. At the gross level, the non-performing assets (NPAs) increased by 9% quarter on quarter (qoq) to Rs18,861.2 crore and at the net level to Rs11,270.8 crore (up 14% qoq). Of the restructured assets, ~6% of the standard assets have slipped into NPA category. The incremental slippages were primarily seen in corporate and small and medium enterprises segment. -
The capital adequacy ratio (CAR) stood at 13.77% as on December 31, 2009 with the tier-I capital adequacy at 9.7%. -
At a consolidated level, the bottom line performance was not encouraging (and was down 8.4% yoy). The associate banks? net profit came in at Rs786 crore, down 24.2% yoy. SBI Life posted a net profit of Rs83 crore (vs a loss of Rs82 crore in Q3FY2009), driven by strong growth in the new business premium. SBI Mutual Fund?s asset under management as on December 2009 stood at Rs37,900 crore, up by 57% yoy. -
At the current market price of Rs2,091, the stock trades at 11.4x FY2011E earnings per share, 5.3x FY2011E pre-provisioning profit, 1.8x FY2011E stand-alone book value. We shall follow up this note with a detailed analysis shortly. We maintain our Hold recommendation on the stock. Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Hold
Price target: Rs1,157
Current market price: Rs1,072
Q3FY2010 results: First-cut analysis Result highlights -
Mahindra & Mahindra?s Q3FY2010 results were below our as well as street?s expectations on account of lower than expected margins. -
The total income grew by 56% year on year (yoy) to Rs4,497.1 crore (in line with our estimate of Rs4,469.3 crore) mainly on account of a 53.8% year-on-year (y-o-y) growth in overall volumes. -
On a segmental basis, the automotive division reported an 86.6% year-on-year (y-o-y) increase in revenues to Rs2,556.8 crore with the volumes growing by stupendous 76.7% yoy and the average realisation improving by 5.6% yoy. The farm equipment division?s revenues also grew by hefty 28.4% yoy to Rs1,928.2 crore on the back of a 39.2% y-o-y growth in volumes but the net realisation declined by 7.8% yoy. -
The profit before interest and tax (PBIT) margin for both the automotive and farm equipment division was disappointing as the same were lower by 424 basis points and 212 basis points on a sequential basis due to higher raw material cost during the quarter. However, on a y-o-y basis, the automotive division reported an 11.2% PBIT margin as against a PBIT loss in Q3FY2009. Displaying a similar trend, the PBIT margin of the farm equipment division improved by 743 basis points yoy to 17%. -
Thus though the overall operating profit margin (OPM) contracted by hefty 371 basis points on a quarter-on-quarter (q-o-q) basis to 14.5% (240 basis points lower than our expectation), the same grew by a strong 523 basis points on a y-o-y basis. The raw material cost as percentage to total income increased by 280 basis points qoq to 67%, however the same declined by 452 basis points yoy. The y-o-y growth in the OPM led the operating profit to grow by 145.2% yoy to Rs653.5 crore (lower than our expectation of Rs756.9 crore). -
Consequently, the adjusted net profit shot up by 146.3% yoy to Rs403.1 crore (lower than our expectation of Rs505.9 crore). Adding foreign exchange (forex) gains of Rs16 crore (Rs10.6 crore net of tax) the reported net profit went up by 849% to Rs431.7 crore. -
On a consolidated basis, the gross revenue (including other income) improved by 28.4% yoy to Rs8,156.8 crore, while the reported net profit stood at Rs473.7 crore as against Rs39.1 crore in Q3FY2009. -
The company?s board of directors has also approved the stock-split of each of the ordinary (equity) share of face value of Rs10 into 2 ordinary (equity) shares of face value of Rs5 each fully paid-up. -
We shall review our estimates and come out with a detailed note shortly. At the current market price, the stock is quoting at 14.9x its FY2010E and 13.8x its FY2011E stand-alone earnings. We maintain our Hold recommendation on the stock. Maruti Suzuki
Cluster: Apple Green
Recommendation: Hold
Price target: Rs1,639
Current market price: Rs1,445
Price target revised to Rs1,639 Result highlights -
Maruti Suzuki?s Q3FY2010 results outperformed our as well as the street?s expectations on account of higher than expected margins. -
The total income for the quarter grew by 60.6% year on year (yoy) to Rs7,372.7 crore on the back of a stellar growth of 48.7% in the volume and an 8% growth in the net average realisation. -
The operating profit margin (OPM) for the quarter came in as a positive surprise as it showed a stupendous expansion of 700 basis points yoy and that of 240 basis points quarter on quarter (qoq) to 13.6%. This expansion in the margin was on account of a 390-basis-point year-on-year (y-o-y) and a 120-basis-point quarter-on-quarter (q-o-q) decline in the raw material cost as a percentage of the total income at 75.8% for the quarter, which was mainly due to the one-time benefits of renegotiation of older raw material contracts at a lower price. -
Furthermore, a 250-basis-point y-o-y and a 120-basis-point q-o-q decline in the other expenses as a percentage of the total income to 8.8% for the quarter led the operating profit to grow by a hefty 230% yoy to Rs1,003.7 crore. The stupendous operating performance led to a 221.9% y-o-y growth in the profit after tax (PAT) to Rs687.5 crore. -
Factoring in a higher than earlier expected margin improvement for FY2010 and a fillip to the margins in FY2011 on account of economies of scale and cost efficiencies undertaken by the company, we have revised upwards our earnings estimates for FY2010 and FY2011 by 16.5%and 10.8% to Rs86.2 and Rs 94.3 respectively. -
However, going ahead there are some risks for Maruti Suzuki: a higher than expected uptick in the commodity prices, strong competition likely in the A2 segment (which is the bread and butter of the company), the hardening of interest rates and the possibility of a roll-back of the excise duty cut in the forthcoming budget can result in adverse impact on the sales volumes of the company going forward. On the export front, with scrappage incentives in Europe getting over, the growth rate may slow down significantly. -
Thus, though our earnings estimates for the company stand revised upwards, to factor the above risks to growth going ahead and a moderate earnings compounded annual growth rate (CAGR) of 13.3% for FY2010-12, we have reduced our target price multiple to 16x (from 20x earlier). We have also introduced our FY2012 estimates and expect the company to report earnings of Rs110.5 for the year. -
At the current market price, the stock is trading at 15.3x its FY2011E earnings and 13.1x its FY2012 earnings. We base our price target on the average of the FY2011 and FY2012 earnings estimates. Also, in line with the reduction in our target multiple, our price target stands revised to Rs1,639. We maintain our Hold recommendation on the stock. Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs318
Current market price: Rs247
Price target revised to Rs318 Result highlights -
The Q3FY2010 (consolidated) results of Godrej Consumer Products Ltd (GCPL) are not comparable on a year-on-year (y-o-y) basis due to the consolidation of Godrej Sara Lee (GSL, GCPL acquired a 49% stake in GSL in June 2009) in Q2FY2010. -
While the stand-alone (domestic) sales grew by 16% year on year (yoy), the international business clocked a strong revenue growth of 26% yoy during the quarter (driven by a 49.2% y-o-y growth in Rapidol and a 39.5% y-o-y growth in Kinky). GSL?s revenues stood at Rs120.9 crore in Q3FY2010. Overall, the consolidated net sales of the company grew by 53.1% yoy to Rs517.6 crore for the quarter. -
With the raw material cost staying lower on a y-o-y basis (47.5% as a percentage of sales in Q3FY2010 as compared to 59.1% as a percentage of sales in Q3FY2009) and a 194-basis-point y-o-y decline in the other expenses as a percentage of sales, the operating profit margin (OPM) expanded by 667 basis points yoy to 19.7% during the quarter. Thus, the operating grew by 131.2% yoy to Rs102.2 crore (in line with our expectation of Rs100.4 crore for the quarter). -
Thus, on the back of the strong operating performance, the adjusted net profit grew by 112.5% yoy to Rs85.1 crore (in line with our expectation of Rs81.8 crore for the quarter). -
In view of the good momentum in organic growth in the domestic and international markets, the likely expansion of the company?s entire domestic product portfolio on acquisition of the remaining stake in GSL and the scope for a much higher scale of business on the likely acquisition (which could act as a trigger for the stock), we believe GCPL is one of the better plays in the Indian fast moving consumer goods (FMCG) industry. However, increasing competitive activity especially in the soap segment and the impact of the high food inflation on the spending from the lower strata of population remain the key risks in the near term. -
We broadly maintain our estimates for FY2010 and FY2011, and introduce our FY2012 estimates for GCPL in this note. At the current market price of Rs247 the stock trades at 22.3x and 18.4x FY2010E and FY2011E earnings respectively (including the 49% stake in GSL). We maintain our Buy recommendation on the stock and revise our price target upwards to Rs318 as we roll forward our price target based on 22x average of our FY2011 and FY2012 earnings per share (EPS) estimates (including the financials of GSL). HCL Technologies
Cluster: Apple Green
Recommendation: Hold
Price target: Rs391
Current market price: Rs361
Price target revised to Rs391 Result highlights -
HCL Technologies (HCL Tech)? Q2FY2010 results were marginally below our expectation mainly due to lower-than-anticipated operating profit margin (OPM), higher direct cost and selling, general and administrative [SG&A] expenses and higher-than-expected effective tax rate. -
The consolidated revenues were flat on a quarter-on-quarter (q-o-q) basis at Rs3,032.5 crore, broadly in line with our estimate of Rs3,040.7 crore. In dollar terms, the revenues grew by 3.4% sequentially to US$651.7 million, driven by volumes (+2.9%) and favourable currency movement (+1.1%; mainly due to cross-currency impact). -
The OPM contracted by 166 basis points quarter on quarter (qoq) to 21.1% (lower than our expectation of 21.8%) on account of increase in the direct cost (due to salary hike, which negatively impacted the OPM by around 121 basis points), higher SG&A expenses and 3.3% appreciation in the Indian Rupee against the US dollar, partially offset by improved efficiency level. -
The net income dropped by 7.3% sequentially to Rs296.8 crore, marginally below our expectation of Rs306.1 crore. This was mainly due to weak operating performance and a 69-basis-point q-o-q increase in the effective tax rate to 18.7%. The fall in the net income was however limited by a decline in the foreign exchange (forex) loss to Rs125.7 crore in Q2FY2010 from Rs150.4 crore in Q1FY2010. -
The management indicated that the company is still waiting to see an up-tick in the demand from the manufacturing and retail verticals and maintained its cautious outlook in terms of demand environment except for the banking, financial services and insurance (BFSI) vertical. Further, the company said that the revenue up-tick in the business process outsourcing (BPO) segment is expected only after the next three to four quarters and the margin is likely to remain under pressure till then (in Q2FY2010 the margin of the BPO segment contracted sharply by 633 basis points to 7.9%). -
We highlight that the volume growth for HCL Tech was lower compared to its peers? [sequential volume growth for Infosys (6.1%), Tata Consultancy Services (TCS; 6.6%) and Wipro (4.7%)]. Further, other front-line IT companies (especially TCS and Wipro) have indicated a broad-based recovery. We mention in this note that we would like to wait over the next few quarters to see if the recovery in IT spending is broad-based or restricted to only the BFSI vertical. Hence, we would track the volume growth for HCL Tech in the coming quarters as it has higher exposure to hi-tech and manufacturing, telecom and retail verticals compared to its peers. Further, the contracting margin in the BPO segment (expected to remain weak over the next few quarters) and industry high utilisation rate at 81.3% (in the software services segment) could hinder its earnings growth going forward. -
We have fine-tuned our earnings estimates to incorporate Q2FY2010 results. Consequently, our revised FY2010 and FY2011 earnings estimates stand at Rs18.1 per share and Rs23.6 per share respectively. We have also introduced our FY2012 estimates and expect an EPS of Rs27.3 for the year. We maintain our Hold recommendation on the stock with a revised price target of Rs391. At the current market price, the stock is trading at 15.3x FY2011 earnings estimate and 13.3x FY2012 earnings estimate. Zydus Wellness
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs342
Current market price: Rs279
Upgraded to Buy Result highlights -
Zydus Wellness? Q3FY2010 results were above our expectations on the back of robust performance of all its brands?Sugar Free, Ever Yuth and Nutralite. -
The net sales grew by a strong 41.7% year on year (yoy) to Rs75.1 crore (ahead of our expectation of Rs70 crore). While Sugar Free maintained its strong leadership position with an 81% market share in the sharply growing category, Nutralite registered a strong revenue growth on the back of overall good demand that was further aided by shortage of butter in the market. Ever Yuth continued the growth traction witnessed in H1FY2010. -
With benign raw material cost (raw material cost as percentage to sales stood at 32.3% in Q3FY2010 as compared to 37.1% in Q3FY2009) and a 208-basis-point year-on-year (y-o-y) decline in the other expenses as percentage to sales, the operating margin jumped by 741 basis points yoy to 20.5%. -
Consequently, the operating profit went up by 93.7% yoy to Rs20.7 crore and the adjusted net profit grew by a stellar 105.5% yoy to Rs14.3 crore (which is ahead of our expectation of Rs10.9 crore for the quarter). -
To factor in the higher-than-earlier anticipated sales growth rates, the higher-than-earlier expected margins on account of higher scale of operations and the tax benefits to accrue from the new facility, we have revised our earnings estimates upwards. Consequently, our earnings per share (EPS) estimates for FY2010, FY2011 and FY2012 stand increased from Rs9, Rs11.7 and Rs14.4 to Rs10.4, Rs15.5 and Rs22.5 respectively. -
At the current market price of Rs279, the stock trades at 26.8x, 18x and 12.4x its FY2010E, FY2011E and FY2012E earnings respectively. In line with the upgrade in our earnings estimates, we are upgrading our price target to Rs342 at 18x average of FY2011E and FY2012E EPS. We are also upgrading our recommendation on the stock from Hold to Buy. Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs149
Current market price: Rs108
Price target revised to Rs149 Result highlights -
Ratnamani Metals & Tubes Ltd (RMTL) disappointed as it reported steep decline in its volume in Q3FY2010 and the reason for the same was non-execution of the contracts by some of its clients. The company expects better Q4FY2010, as majority of these non-executed orders are likely to be completed by March 2010 with some spillover to FY2011. -
The company?s net sales dropped by 15.8% year on year (yoy; 10.1% quarter on quarter [qoq]) to Rs160.5 crore on the back of a 7.8% year-on-year (y-o-y) fall in total volumes, a 32.5% y-o-y fall in stainless steel realisation, which was partially offset by a 26.6% y-o-y rise in carbon steel realisation. On a sequential basis, the stainless steel realisation declined by 3.5%, however the carbon steel realisation improved by 4.7%. The total volumes declined by 3.1% on a sequential basis. -
The operating profit margin (OPM) improved sharply by 1,015 basis points yoy to 22%. Consequently, the operating profit grew by a strong 56% yoy to Rs35.4 crore on the back of a 30.2% y-o-y drop in the raw material cost. However, on a sequential basis, the OPM contracted by 115 basis points and as a result the operating profit was down by 14.5% qoq. -
Supported by strong operational performance coupled with steep drop in interest expenses (Rs0.6 crore in Q3FY2010 versus Rs5 crore in Q3FY2009), the net income increased strongly by 161.4% yoy to Rs17.4 crore. However, the net income declined by 18.8% sequentially. -
The order book position stood at Rs350 crore in the quarter, of which the carbon steel pipe orders form Rs200 crore and the stainless steel pipe orders the remaining Rs150 crore. We highlight here that the order book has declined from Rs455 crore in the previous quarter (Q2FY2010) and is a concern for the company. -
The company expects its order book to improve going forward with new orders for the stainless steel business likely to come from refinery projects (MRPL and Paradip) and some orders for the carbon steel segment coming from GAIL. We also expect the company to benefit from huge investment coming up in power, refinery and setting-up of gas pipeline infrastructure in the country. -
We maintain our FY2010 estimates but fine-tune the FY2011 estimates to factor in the lower raw material cost and interest expenses. Consequently, our revised earnings per share (EPS) estimate for FY2011 stands at Rs20.4. We are also introducing FY2012 estimates in this note and expect FY2012 EPS at Rs23.4. -
We have revised our price target to Rs149 (3.5x its FY2012E EV/EBITDA) and maintain our Buy recommendation on the stock. At the current market price, the stock is attractively valued at a price/earnings (PE) of 4.6x and an enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 2.4x based on FY2012E earnings. Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs765
Current market price: Rs650
Price target revised to Rs765 Result highlights -
Beats estimates: Cadila Healthcare (Cadila) has reported better-than-expected results for Q3FY2010, marked by a 75.8% year-on-year (y-o-y) growth in the adjusted profit after tax (PAT) to Rs139.8 crore, 43.8% above our estimate. This growth stemmed from higher-than-expected revenues (especially from exports to the US and France). -
Net sales up 32% yoy: The net sales increased by 32% year on year (yoy) in the quarter due to: a) a 67% y-o-y increase in the US and 31.6% growth in the European generics business arising from higher volumes in the existing products and launch of new (blockbuster drug in European Union) products; b) a 17.1% y-o-y increase in the domestic formulations business; and c) a contribution of Rs18.6 crore (vs nil in Q3FY2009) from the newly formed Hospira joint venture (JV), which partially offset a 14.3% y-o-y drop in the revenues from the Nycomed JV. -
Exports lead to revenue growth: The performance during the quarter was driven by the legacy export formulation business that improved by 45.2% yoy. Inspite of the rupee appreciating in the quarter, the export business (especially the US, European and the Latin American) surprised us positively by increasing by 45.6% yoy and 30.5% quarter on quarter (qoq). The share of exports in the total composition of sales increased from 45.8% in Q2FY2010 to 50.8% in the quarter clearly reflecting the company?s ambitious targets for international dosage business in the developed markets. -
OPM expands by 240 basis points: the operating profit margin (OPM) expanded by 240 basis points to 22.5%, largely driven by a 200-basis-point y-o-y dip in the raw material cost. We anticipate a scale-up in the OPM going ahead with benefits accruing from the high-margin international markets. -
Adjusted PAT jumps 75.8% yoy: The adjusted PAT increased by 75.8% yoy mainly on account of a strong operating performance during the quarter. The 14.1% adjusted PAT margin during Q3FY2010 has been maintained consistently over the last three quarters, which is indicative of a strong in-built growth. We estimate the adjusted PAT to post compounded annual growth rate (CAGR) of 20% over FY2010-12E. -
Revise estimates upwards: In view of better than expected results, we are upgrading our earnings by 11.1% in FY2010E and by 17.9% in FY2011E. We estimate the revenues to post a CAGR of 15% over FY2009-11E. Our revised earnings per share (EPS) thus stands at Rs35.5 and Rs42.4 for FY2010E and FY2011E respectively. We forecast an EPS of Rs51.3 for FY2012E. -
Maintain Buy: This leads us to increase our price target to Rs765 from Rs684 earlier (18x FY2011 earnings). The strong traction in the domestic and export businesses, and the increasing visibility of business from Hospira JV reinforce our view on the company?s continued growth prospects. Further, the monetisation of its strong research and development (R&D) pipeline would act as a trigger going forward. At the current market price of Rs650, the stock is available at valuations of 18.3x FY2010E and 15.3x FY2011E estimated earnings. We maintain our Buy recommendation on the stock. India Cements
Cluster: Ugly Duckling
Recommendation: Reduce
Price target: Rs102
Current market price: Rs113
Downgraded to Reduce Result highlights -
India Cements posted poor performance in yet another quarter. The Q3FY2010 reported net profit declined by 43.8% year on year (yoy) to Rs34.8 crore, well below our as well as street?s estimates despite a healthy volume growth of 38.1%. The performance was dented by much higher than expected pressure on realisation in the quarter. Though the average realisation has firmed up in the recent few weeks, it is unlikely to sustain given the unfavourable demand-supply situation in the southern region. -
The Q3 net sales that also includes revenues from Indian Premier League (IPL), wind power and shipping business went up by 14.5% yoy to Rs864.1 crore. -
The cement dispatches improved by 38.1% yoy to 2.76 million metric tonne (MMT; including clinker sales). However, the blended realisation fell by 16.9% yoy and 12.1% quarter on quarter (qoq) mainly due to drop in demand especially from Andhra Pradesh. -
On the margin front, the operating profit margin (OPM) shrunk by over 1,000 basis points yoy to 13.5%. The OPM contraction was mainly due to 16.9% year-on-year (y-o-y) drop in the average blended realisation, firming up of the raw material cost by 41.6% per tonne and increase in freight cost by 16.6% per tonne (due to increase in lead distance). Consequently, the operating profit slid by 35.3% yoy to Rs116.5 crore. -
The company made a foreign exchange translation gain of Rs11.6 crore as against a loss of Rs13.2 crore in the corresponding quarter of the previous year. Thus, the adjusted profit after tax (PAT) went down by 61.3% yoy and 80.3% qoq to Rs27.1 crore. -
On capacity addition front, the company commissioned cement-grinding units at Malkapur and Parli and the same have started stabilising. -
Given the severe pressure on realisation in the southern region during the quarter (especially in Andhra Pradesh where the company has 20% exposure) we are downgrading our earnings estimates to factor in a higher than expected pressure on realisation. The revised earnings per share (EPS) works out to Rs12.3 and Rs7.4 for FY2010E and FY2011E respectively. We are also introducing our earnings estimates for FY2012 with EPS of Rs9.4. At the current market price the stock trades at price/earnings (PE) of 15.4x, an enterprise value (EV)/earning before interest, tax, depreciation and amortisation (EBITDA) of 6.2x its FY2011 earning estimates. Given the muted growth outlook we are downgrading the stock to Reduce rating with a price target of Rs102 (6x EV/EBIDTA FY2011E). Reliance Industries
Cluster: Evergreen
Recommendation: Hold
Price target: Rs1,148
Current market price: Rs1,042
Price target revised to Rs1,148 Key points -
Reliance Industries Ltd (RIL)?s Q3FY2010 results were in line with our expectations. The company?s net income grew by 15.8% year on year (yoy) to Rs4,008 crore, in line with our estimate of Rs4,011 crore for the quarter. The company reported a gross refining margin (GRM) of USD5.9 per barrel in Q3FY2010 versus USD6 per barrel in Q2FY2010; the same was above our and the street?s expectations of USD5.5 per barrel. -
We have revised our earnings per share (EPS) estimate for both FY2010 and FY2011 to incorporate: (1) the lower GRM assumption of USD6.5 per barrel in FY2010 though maintaining our FY2011 GRM assumption at USD9.5 per barrel (benefit of captive gas use, higher complexity level and likely improvement in light-heavy crude oil price differential); and (2) a revision in our dollar/rupee exchange rate assumption to Rs47 for FY2010 and to Rs46.5 for FY2011. Consequently, our revised EPS estimates now stand at Rs52.1 for FY2010 and Rs73.5 for FY2011. We have also introduced our FY2012 earnings estimate in this note and expect EPS of Rs86.8 for the year. -
The benchmark Singapore Complex? GRM has improved to USD4 per barrel in January 2010 from USD1.9 per barrel in Q3FY2010 mainly on account of higher gasoline and gas oil crack spreads. With the global economy coming out of recession and the crude oil demand expected to increase, we expect the Organization for Petroleum Exporting Countries (OPEC) to increase the production of heavy crude oil. Hence, we expect the light-heavy crude oil price differential to normalise at USD2-3 per barrel. Further, RIL?s GRM would also get the benefit of captive use of gas produced from the Krishna-Godavari (KG) D-6 block. However, we highlight here that with the increase in the supplies from the new refineries (new capacity added to the tune of 1.5-2.0 million barrel), RIL?s GRM would not see its peak level of USD15.7 per barrel (that it had touched in Q1FY2009) in the near to medium term. -
As anticipated, on a sequential basis the margin in the petrochemical segment declined to 13.9% (versus 16.5% in Q2FY2010) on account of a higher price of naphtha, a key raw material for the petrochemical (petrochem) segment. We expect RIL?s petrochem margin to stabilise in the range of 14-15% in view of the strong domestic demand environment (a 24% y-o-y rise in polymer and a 17% y-o-y increase in polyester in M9FY2010). Further, with crude oil moving in the narrow range of USD75-80 per barrel, the negative impact of the higher prices of naphtha (a key raw material for the petrochem segment) would also be limited in the coming quarters. -
RIL ramped up its gas production at the KG D-6 block (D1 and D3 fields) to 60 million standard cubic meter per day (mmscmd) in Q3FY2010. The company has said that the design capacity of the KG D-6 gas production facilities has achieved a flow rate of 80mmscmd. With the gas allocation in place (the government has allocated additional 50mmscmd of gas) and the production volumes being tested by RIL, the KG D-6 production ramp is largely dependent upon the Hazira-Vijaypur-Jagdishpur (HVJ) pipeline capacity expansion by Gas Authority of India Ltd (GAIL). We have factored in a gas price of USD4.2 per mmbtu and a seven-year income tax holiday in our valuations and estimates. -
With the ramp-up of gas production, incremental refinery volumes from the new refinery and sustained petrochem margins, RIL?s earnings are expected to grow at a compounded annual growth rate (CAGR) of 29% over FY2010-12. We highlight here that lower than expected GRM and petrochem margin remain the key risks to our earnings estimates. Further, RIL still faces uncertainties on two counts: (1) tax benefits on the natural gas business under section 80-IB (clarity still awaited), and (2) gas pricing including the court case with Reliance Natural Resources Ltd (RNRL). -
We have revised our price target to Rs1,148 in view of the following: (1) we have rolled over our valuation multiple to the average of the FY2011 and FY2012 earnings before interest, tax, depreciation and amortisation (EBITDA) estimates for the refining and petrochem businesses; (2) we have assumed a higher valuation multiple of 7x its EBITDA for the refining business, and (3) we now use 303.6 crore shares (excluding the treasury shares of 12.5 crore after deducting the recent sale of 5.9 crore treasury shares by the company) to arrive at our target price. We maintain our Hold recommendation on the stock. At the current market price, the stock trades at a price/earnings ratio of 12x FY2012 earnings and an enterprise value (EV)/EBIDTA of 6.8x FY2012. ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs303
Current market price: Rs255
Upgraded to Buy Result highlights -
ITC?s Q3FY2010 results were ahead of our as well as the street?s expectations on the back of a healthy performance by all its businesses. The net sales (including the other operating income) grew by 18.7% year on year (yoy) to Rs4,580.2 crore. -
The highlights of the Q3FY2010 results were the 8% year-on-year (y-o-y) growth in the cigarette sales volume, a 23.5% y-o-y growth in the non-cigarette fast moving consumer goods (FMCG) revenues, and a 29.5% y-o-y growth in the revenues and a 725-basis-point improvement in the profit before interest and tax (PBIT) margin of the paper, paperboard and packaging business. -
Though the hotel business was expected to post a better performance in Q3FY2010 on the back of improved occupancies and average room rates (ARRs), and the commencement of the new hotel property in Bangalore, the flattish y-o-y revenue at Rs264 crore is ahead of our expectation. -
The decline in the losses of the non-cigarette FMCG business coupled with the higher margins in the agribusiness, and the paperboards, paper and packaging business resulted in a 157-basis-point y-o-y improvement in the operating profit margin (OPM). The operating profit grew by 23.9% yoy to Rs1,707.6 crore. -
The other income stood at Rs159.1 crore as against Rs97.6 crore in Q3FY2009. Thus, the healthy operating performance across the businesses along with the higher other income resulted in a 26.7% y-o-y growth in the reported net profit to Rs1,144.2 crore. -
Though our top line estimates remain almost the same, to account for the higher margin trajectory across segments we have revised our bottom line estimates upwards by 2.8% and 3.0% for FY2010 and FY2011 respectively. We have also introduced our FY2012 numbers through this note. -
We believe the sustenance of a strong volume growth in the cigarette business, the higher growth trajectory of the non-cigarette FMCG business, the improved prospects of the hotel business and the sustenance of higher exports in the agribusiness would help ITC?s revenue to grow at 15% compounded annual growth rate (CAGR) over FY2009-12. The lower losses in the non-cigarette FMCG business, improved profitability in the hotel business and the sustenance of higher margins in the agribusiness, and the paper, paperboard and packaging business, the bottom line is expected to grow at a CAGR of 20.0% over FY2009-12. -
At the current market price of Rs254.9 the stock trades at 23.7x its FY2010E earnings per share (EPS) of Rs10.8 and 20.2x its FY2011E EPS of Rs12.6. We revise our price target upwards as we roll forward our target price to Rs303 based on 22x average of our FY2011 and FY2012 EPS estimates. In view of the significant correction in the stock price (since we downgraded the stock to Hold due to minimal upside) and the potential upside of ~19% from the current levels, we upgrade our recommendation from Hold to Buy. -
In the near term though there exists a strong possibility of an increase in the excise levy on cigarettes in the forthcoming Union Budget especially given the current fiscal situation and the fact that the government had desisted from tinkering with the same in the last budget. This may weigh on the stock?s performance in the run-up to the budget. However, with good visibility of ITC?s earnings growth as compared to that of Hindustan Unilever Ltd (HUL), we maintain ITC as our top pick in the large-cap FMCG space. Allahabad Bank
Cluster: Cannonball
Recommendation: Hold
Price target: Rs144
Current market price: Rs136
Healthy core performance Result highlights -
For Q3FY2010 Allahabad Bank has reported a net profit of Rs345.4 crore, down 6.5% on a year-on-year (y-o-y) basis though above our estimate of Rs320 crore. The outperformance was a result of a higher than expected improvement in the net interest margin (NIM) coupled with a strong advances growth. -
The net interest income (NII) for the quarter stood at Rs675.6 crore, up by 11.8% year on year (yoy) and 12% quarter on quarter (qoq). The growth was driven by a 13-basis-point quarter-on-quarter (q-o-q) expansion in the reported NIM coupled with a robust 8% advances growth on a sequential basis. -
The reported NIM expanded by 13 basis points qoq to 2.97% during the quarter, mainly driven by a 40-basis-point improvement in the cost of funds. Meanwhile, the yields on funds contracted by 26 basis points qoq driven by lower yields in both advances and investments. -
The non-interest income declined by 17% yoy to Rs339.5 crore, as the treasury income dropped by 54% yoy to Rs133.3 crore during the quarter. Importantly, the fee-based income grew by a robust 32% yoy as the bank leveraged its core banking solution (CBS) branch network to achieve a higher growth in the fee-based income. -
The bank maintained a tight leash over its operating expenses during the quarter as a result of which the increase in the operating expenses was contained at 5.3% yoy. During the quarter the bank made an ad-hoc provision to the tune of Rs47 crore towards pension liability and that of Rs10 crore towards wage arrears. -
The provisions for the quarter came in at Rs246.3 crore, up 139% yoy on a lower base. The non-performing asset (NPA) provisions went up by 57% yoy to Rs110 crore while the investment depreciation provision stood at Rs63 crore vs a write-back of Rs68 crore in the year-ago quarter. The resulting provisioning coverage of 80.4% was well above the 70% level mandated by the central bank. -
The business of the bank grew at a rate well higher than the industry growth rate during the quarter. The advances grew by a strong 24% yoy while the deposits grew by 25.4% yoy. Meanwhile, on a sequential basis, the advances and deposits grew by 8% each. The growth in advances was led by the small and medium enterprises (SME) and agriculture segments. -
The asset quality of the bank deteriorated in absolute terms during the same quarter. In absolute terms, the gross NPAs (GNPA) increased by 7.2% qoq to Rs1,160.5 crore. Meanwhile, the asset quality in relative terms, at both gross and net levels, stood almost steady on a q-o-q basis. The bank restructured accounts amounting to Rs557.3 crore during the quarter, leading the total restructured loans to increase to Rs3,627.3 crore, which amounts to 5.6% of total advances outstanding. -
The capital adequacy ratio (CAR) of the bank came in at 15% as at the end of Q3FY2010 and the same was largely in line with the CAR in the previous quarter. During the quarter the bank raised Rs650 crore (tier I: Rs150 crore; tier II: Rs500 crore) to augment its capital adequacy. -
Allahabad Bank has reported a healthy set of numbers for the third consecutive quarter. The bank is witnessing strong traction in its core fee income as it leverages its CBS branch network while maintaining healthy business growth momentum. While the GNPA growth was a little higher at 7% qoq, the bank maintains provision coverage among the highest in the industry. At the current market price of Rs136, the stock trades at 4.6x its FY2011E earnings per share (EPS), 2.2x FY2011E pre-provisioning profit (PPP) per share and 1.1x FY2011E adjusted book value (ABV) per share. We maintain our Hold recommendation on the stock with a price target of Rs144. Grasim Industries
Cluster: Apple Green
Recommendation: Hold
Price target: Rs2,877
Current market price: Rs2,618
Price target revised to Rs2,877 Result highlights -
On a stand-alone basis, in Q3FY2010 Grasim Industries (Grasim) posted an 80.8% year-on-year (y-o-y) growth in its adjusted net profit to Rs595.9 crore, which is below our estimate on account of a lower than expected profit before interest and tax (PBIT) margin in the cement division and a higher than expected effective tax rate. -
The revenues of the company grew by 14.6% year on year (yoy) to Rs3,087.9 crore in Q3FY2010. The revenue growth was driven mainly by the strong performance of the viscose staple fibre (VSF) division whose revenue grew by 70.7% to Rs962.4 crore, the highest ever. The revenue from the cement division grew by 17.3%, which is in line with our estimate. However, due to the absence of revenue from the sponge iron division and the poor performance of the chemical division the overall revenue growth limited to 14.6% on a y-o-y basis. -
The operating profit margin (OPM) of the company improved significantly by 13.2 percentage points yoy to 33.1%. The expansion in the OPM was mainly on account of the improvement in the PBIT margin of the VSF and cement divisions during the quarter under review. Moreover, the power & fuel cost as a percentage of sales declined to 17.2% from 20.1% in Q3FY2009. Thus, the operating profit of the company increased by 91.1% yoy to Rs1,021.9 crore. However, the OPM declined by 187 basis points on a sequential basis. -
The company?s interest outgo increased by 14.8% to Rs50.4 crore and depreciation charge rose by 18.9% to Rs142.4 crore during the quarter yoy. The depreciation charge increased because of the capacity addition carried out by the company earlier. -
The effective tax rate for Q3FY2010 increased to 32.4% from 20.8% a year ago. The reported net profit of the company improved by 80.8% yoy to Rs595.9 crore. -
During the quarter, the company commissioned a new cement plant at Kotputli having a capacity of 1.5 million tonne. With the commissioning of the aforesaid plant the total cement capacity on a stand-alone basis stood at 22.55 million metric tonne (MMT). Further, the cement restructuring initiative is progressing as per schedule and according to that the demerger of the cement business into Samruddhi Cement should be completed by mid March 2010. -
We have revised our earnings estimates upwards for FY2010 and FY2011 mainly to factor in the higher than expected volume growth and realisation in the cement and VSF divisions. The revised stand-alone earnings per share (EPS) estimates for FY2010 and FY2011 work out to Rs264.7 and Rs.230.3 respectively. Consequently, we are revising our price target upwards to Rs2,877. We are also introducing our earnings estimate for FY2012 at Rs270.2 per share. At the current market price the stock trades at a price/earnings (PE) of 11.4x FY2011 earnings estimates and an enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 6.1x on FY2011 estimates. We maintain our Hold recommendation as our revised target price offers limited upside from the current level.
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