| Summary of Contents | | | | STOCK UPDATE Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs522
Current market price: Rs412
Upgraded to Buy
Result highlights -
Bottom line boosted by lower tax provision and stable margin: Wipro?s Q1FY2011 earnings were better than the street?s as well as our expectations on the net profitability front, with the net profit growing by 9.1% sequentially and by 30.5% year on year (yoy) to Rs1,318.6 crore. The strong growth in the net profit was largely driven by a lower effective tax during the quarter (about 15.2%) as the same declined by 490 basis points quarter on quarter (qoq). On the other hand, a better than expected margin performance (a 30-basis-point expansion in the earnings before interest and tax [EBIT] margin of the information technology [IT] services business to about 24.5%) also boosted the profitability. -
Strong volume growth: For Q1FY2011, the consolidated revenues of the IT services business in US Dollar (USD) terms were higher by 3.2% on reported currency term to $1,203.7 million, which was in line with our expectation. On a constant currency basis, the revenues were higher by 4.4% qoq to $1,217.6 million. The revenue growth in the IT services business was largely aided by a sequential blended volume growth of about 4.7%,whereas rate realization declined during the quarter, with the onsite realisation down 4.9% (on account of the start-up cost related to the new ?fixed price? project) and the offshore realisation down 1.4%. In Indian Rupee (INR) terms, the consolidated revenues grew by 3.1% qoq and by 12.6% yoy to Rs7,190.6 crore. For Q2FY2011 Wipro has guided for an impressive sequential growth of about 3.9-6.3% in its revenues in USD terms to $1,250-1,280 million. -
Impressive margin performance despites headwinds: Despite facing headwinds in terms of people related cost (wage hikes) and cross-currency , the EBIT margin of the IT services business expanded during the quarter under review by 30 basis points to 24.5%. The margin expansion during the quarter was aided by better foreign exchange (forex) management, which had a positive impact of 60 basis points on the margins. Going forward, the management has indicated at a 1% margin impact in Q2FY2011 on account of the people related costs (the repackaging cost pertaining to about 20,000 employees in about three to seven years. -
Impressive growth across verticals: During the quarter, Wipro saw a broad-based sequential growth across the industry verticals led by the banking, financial services and insurance (BFSI; 6.4%) and manufacturing (5.5%) verticals. On the other hand, the growth in the healthcare and services, and energy and utilities verticals wdown by 4.9% and 4.6% respectively. In terms of services, package implementation (9.7%) and product engineering (18.5%) services verticals were the key contributors to the growth. However, the business process outsourcing (BPO) vertical declined by 4.6% qoq and was the key depressant. In term of geographies, the US led the growth with a 4.3% sequential growth whereas the growth in Europe remained muted at -0.2% qoq largely on the back of the currency headwinds. On a constant currency basis, Europe too grew by 3.4% qoq. -
Management indicated strong demand environment: Wipro?s management has indicated strong demand environment going forward, with impressive deals funnel across the industry verticals especially in the BFSI, retail, manufacturing, energy and utilities, and healthcare verticals. During the quarter, Wipro won seven large deals with a deal size of more than $30 million. On the other hand, the management has also hinted at a pick-up in discretionary spending, especially in the manufacturing vertical. As far as pricing is concerned, the management has indicated stable pricing environment with some upward bias in certain cases. -
Upward tweak in the estimates: We have now revised our exchange rate assumption (to Rs45.5 for FY2011 and to Rs45 for FY2012) and tweaked upward our volume estimates for FY2011 and FY2012 on account of the broad-based recovery in demand across the verticals and a higher net addition in the last three quarters (over 15,000, out of which around 50% were laterals). Consequently, we have revised our earnings per share (EPS) estimates to Rs23.2 for FY2011 and to Rs26.4 for FY2012 (adjusted for the 2:3 bonus issue). Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs210
Current market price: Rs185
Price target revised to Rs210
Result highlights -
Bottom line in line: Allahabad Bank has reported a net profit of Rs347.1 crore in Q1FY2011, up 14.6% year on year (yoy) and in line with our estimate of Rs337 crore. The healthy performance was driven by a higher than expected growth in the net interest income (NII). The NII for the quarter stood at Rs850.3 crore, up a strong 35.2% yoy. The growth was driven by a robust 24% year-on-year (y-o-y) growth in advances and sequential expansion in net interest margin (NIM). -
NIM expands qoq: The calculated NIM stood at 2.8% (versus 2.57% in the previous quarter), indicating an expansion of 20 basis points quarter on quarter (qoq). The expansion in NIM was driven by improved yield on assets. Going ahead, the focus on small and medium enterprise (SME) and agriculture segments should help the bank maintain healthy yields. -
Healthy fee income: The non-interest income declined by 19.2% yoy to Rs298.6 crore, as the treasury income dropped by 58% yoy to Rs90 crore. Importantly, the fee-based income was up a healthy 16.2% yoy. -
Provisions spike on low base: The provisions for the quarter came in at Rs151.1 crore, nearly 4x the year-ago number due to a lower base of the last year. The non-performing asset (NPA) provisions declined by 72% yoy to Rs70 crore. The provisioning coverage came in at 77%, though including technical write-offs the same stood healthy at 85.36%. -
Healthy business growth: The bank?s business in the quarter grew at a rate well above the industry?s. The advances grew by a strong 24.4% yoy, while the deposits were up by 21.2% yoy. The growth in advances was broad-based with the micro and SME segment witnessing the highest growth, which in turn, contained the contraction in yields. -
Sequential improvement in asset quality: The asset quality of the bank improved sequentially with the gross non performing asset (GNPA) on absolute basis declining by 7% from the last quarter and the GNPA on relative basis (%GNPA) contracting by 53 basis points to 1.16%. The restructured assets came down to Rs3,073 crore, which amounts to 4% of the total advances outstanding. Of the total restructured pool, Rs169 crore have slipped into the NPA category so far. -
CAR at 13.6%: The capital adequacy ratio (CAR) of the bank came in at 13.6% at the end of Q1FY2011 with tier-I CAR at 8.24%. The bank is awaiting capital infusion to the tune of Rs1,000 crore from the Government of India, which would provide it with enough headroom to pursue its aggressive growth targets. -
Outlook: At the current market price of Rs185, the stock trades at 5.0x its FY2012E earnings per share (EPS), 2.4x FY2012E pre-provisioning profit (PPP) per share and 1x FY2012E absolute book value (ABV) per share. We have tweaked our earnings estimates. We maintain our Buy recommendation on the stock with a revised price target of Rs210. Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs178
Current market price: Rs152
Results above expectations
Result highlights -
Results above expectations: For Q1FY2011 Deepak Fertilisers & Petrochemicals Corporation Ltd (DFPCL) has reported an adjusted net profit of Rs52.2 crore, indicating a growth of 34.2% year on year (yoy) and that of 18.3% sequentially. The net profit is ahead of our as well as the Street?s estimates due to a robust top line growth. The top line growth was achieved on the back of improving capacity utilisation due to improved availability of gas as well as higher fertiliser trading undertaken during the quarter. -
Robust top line expansion: The total operating income for the quarter stood at Rs350.5 crore, up by a robust 44.6% yoy and 8.2% sequentially. -
Chemicals: The revenues from the chemical segment expanded by a strong 32% yoy on the back of higher volumes as well as better realisations. -
Fertilisers: The revenues from the fertiliser segment doubled on a year-on-year (y-o-y) basis and expanded by 75.5% sequentially to Rs128.8 crore. The revenues from traded fertilisers expanded by 32.7% yoy while that from manufactured fertilisers grew 2.3x yoy. -
Real estate: The revenues from the realty business dipped by 13.5% yoy and by 21.8% sequentially. -
OPM expands 250 basis points: DFPCL?s operating profit margin (OPM) grew by around 250 basis points to 26% due to lower employee cost and other expenses. The capacity addition that the company carried out over the past year in nitric acid and the retrofitting of the ammonia plant are also now coming into play fully, enabling higher manufacturing volumes and better OPM across the key businesses. -
Lower other income restricts bottom line: Despite the strong operational performance the bottom line grew at a lower pace of 34.2% due to a lower other income in the quarter as compared to the previous year. -
Maintain Buy with a price target of Rs178: DFPCL has reported a strong set of numbers for Q1FY2011 aided by an increase in its business volumes and higher realisations. The management has indicated that the prices of raw materials are fairly stable and the availability of the raw materials has improved, thereby providing for a stable operating environment going ahead. The company?s new technical ammonium nitrate (TAN) plant is progressing as per schedule and is expected to commence production by September 2010 and provide a strong impetus to its revenues in the near term. At the current market price of Rs152, the stock trades at 6.9x its FY2012E earnings per share (EPS) and 1.1x its FY2012E book value (BV). We maintain our estimates and Buy rating on the stock with a price target of Rs178. Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,825
Current market price: Rs2,475
Price target revised to Rs2,825
Result highlights -
Strong results, in line with expectations: Bajaj Auto Ltd (BAL)?s Q1FY2011 results were in line with our estimates. For the quarter, the total operating income grew by 66.4% year on year (yoy) to Rs3,890.1 crore, primarily driven by a volume growth of 69.5% yoy. The operating profit margin (OPM) for the quarter expanded by a marginal 50 basis points yoy to 20%, mainly on account of a much higher scale of operations and a decline in the other expenses and employee cost as a percentage of the total income. Consequently, the operating profits grew by a hefty 70.6% yoy. Aided by a higher other income on account of the Duty Entitlement Pass Book (DEPB) scheme benefits from the higher scale of exports, the adjusted net profit grew by 85.9% yoy. -
Ramping up capacity to meet buoyant demand: The demand environment remains extremely strong, thereby leading to a full capacity utilisation by the company. However, capacity constraints remains at the supply side and the company foresees production constraints to meet the likely spurt in demand during the festive season. The total production capacity of the company currently stands at 4,260,000 units per annum and the company plans to further increase the capacity to 4,980,000 units per annum by March 31, 2011. -
Outlook remains positive: The recently launched Discover 150cc has been very well received (it clocked in approximately 20,000 units for the first month) and is likely to add incremental volumes to the existing strong brands in the motorcycle portfolio. In the three-wheeler segment, the domestic demand remains strong on the back of the abolition of the permit requirement in Tamil Nadu as well as a robust demand in the export markets of Africa and Sri Lanka. Thus, we expect the company?s total sales volumes to increase by 34.7% and 10.8% in FY2011 and FY2012 respectively. -
Margins to sustain at 20% levels for FY2011: On the raw material front, the management points out that the prices of commodities such as steel and aluminium are likely to soften in Q2FY2011. Thus, with the softening of the raw material prices going forward and the price increases taken in June 2010 in the domestic markets and effective July 1st 2010 in the export markets, the company is likely to sustain its margins at around 20% in FY2011. -
Marginally revise estimates upwards, price target revised to Rs2,825: To factor in the higher other income on account of the DEPB benefits from the higher scale of exports, our earnings estimates stand marginally revised to Rs165.1 and Rs188.3 for FY2011 and FY2012 respectively. At the current market price of Rs2,475, the stock is trading at 15x its FY2011E and 13x its FY2012E earnings. We maintain our Buy recommendation on the stock with a revised target price of Rs2,825 (15x FY2012E earnings). ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs318
Current market price: Rs301
Price target revised to Rs318
Result highlights -
Results in line with expectations: The net sales grew by a strong 17.3% year on year (yoy) to Rs4,847.3 crore on the back of a strong performance by all its businesses. With the operating profit margin (OPM) remaining almost flat, the bottom line grew by 21.8% yoy to Rs1,070.3 crore. -
Strong all-round performance -
As anticipated, the sales volume declined by about 3% yoy on account of the steep price increases implemented by the company to combat the sharp increase in the excise duty. However, the higher sales realisation (due to price hikes) helped the company to maintain its profit before interest and tax (PBIT) margin at around 28% during the quarter. -
The non-cigarette fast moving consumer goods (FMCG) business registered a robust growth of 32.4% yoy while the agri-business, continuing its strong performance, registered an exceptional revenue growth of 43.5% yoy during the quarter. -
The PBIT margin of paperboards, paper and packaging business improved by 524 basis points yoy to 22.7% on account of an improved revenue mix and higher sales realisation. -
Key monitorables in the coming quarters -
Any improvement in the sales volume of the cigarette business/threat from increased competition from the Marlboro brand in the regular cigarette category. -
The sustenance of the strong growth in the non-cigarette FMCG business and the performance of the new launches (especially in skin care category). -
Improvement in the profitability of the hotel business. -
Price target revised to Rs318: With the sustenance of a strong growth across the businesses, we expect ITC to deliver a strong earnings growth amongst the large-cap FMCG stocks. Hence, we continue to like ITC over Hindustan Unilever Ltd (HUL) among Sharekhan?s coverage of large-cap FMCG stocks.
While we maintain our earnings estimates for FY2011 and FY2012, considering the strong earnings growth momentum we value the stock at 22x its FY2012E earnings (in line with the current valuation of the FMCG sector). Thus, our revised price target stands at Rs318. We maintain our Buy recommendation on the stock. At the current market price the stock trades at 23.8x its FY2011E earnings per share (EPS) of Rs12.6 and 20.8x its FY2012E EPS of Rs14.5. IDBI Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs151
Current market price: Rs122
Price target revised to Rs151
Result highlights -
Bottom line above expectation: IDBI Bank has reported a strong set of numbers for Q1FY2010. The bottom line grew by a strong 46% year on year (yoy), driven by a robust growth in the net interest income (NII) and a healthy core fee income. The outperformance at the bottom line level can be traced to a lower than expected operating expenses (opex) in the quarter. -
Strong top line growth: The reported NII came in at Rs851.2 crore, a 169% increase over that of the corresponding quarter of the last year. The healthy NII growth primarily stemmed from a strong 38% year-on-year (y-o-y) growth in advances and a 7-basis-point sequential expansion in the reported net interest margin (NIM). -
Robust fee income: The non-interest income dipped by 38.3% yoy to Rs466.2 crore driven by a significantly lower treasury gains during the quarter (Rs10 crore vs Rs465 crore a year ago). Importantly, the core fee income growth was impressive at 53% yoy. -
Opex lower than expected: The operating expenses growth remained high at 54% yoy led by a 96% y-o-y increase in staff expenses as the bank continued with its aggressive hiring. On sequential basis, however, the operating expenses were down by 20.7%. -
PCR inches up: The provisions for the quarter dipped by 10.4% yoy to Rs501.8 crore, which in turn, supported the bottom line growth. A major part of the provisions was due to a rise in the non-performing assets (NPAs), whereas provisions on investment and standard assets were also higher. The provision coverage ratio (PCR) for the quarter stood at 39.2% (vs 34% in Q4FY2010), however including technical write-offs the same came in at 73.6%. -
Negative surprise: The asset quality deteriorated sequentially, as the gross non-performing asset (GNPA) increased by 24% quarter on quarter (qoq) to Rs2,640.2 crore. In relative terms too, the GNPA (%GNPA) as well as the net nonperforming assets (%NNPA) increased sequentially by ~40 basis points and 17 basis points respectively. The surge in NPA was due to two large restructured accounts slipping into the NPA category. -
High slippages in restructured pool: The bank restructured assets to the tune of around Rs65 crore during the quarter taking the total restructured assets outstanding to ~Rs9,365 crore, about 4.8% of the total advances outstanding. Of these a total of ~Rs460 crore have slipped into the NPA category. -
Strong business growth: The business growth of the bank in the quarter remained strong at 37% yoy, led by a 36% y-o-y and a 38% y-o-y growth in the deposits and advances respectively. The current account and savings account (CASA) ratio deteriorated by 160 basis points sequentially. However the CASA ratio calculated on daily average balance basis witnessed some improvement sequentially. -
Capital infusion soon: The capital adequacy ratio (CAR) of the bank as on June 30, 2010 stood at 11.86% with tier I CAR at 6.69%. While the CAR is marginally below the regulator?s comfort level of 12%, it would be restored to ~13% after the capital infusion to the tune of Rs3,119 crore by the government (likely next month). -
Outlook: The Q1FY2011 results provide further evidence of the improvement in the bank?s core business and the operating parameters. Going ahead, the capital infusion would only aid the efforts to improve the core business. We maintain our earnings estimates while revising our price target to Rs151 (due to the dilution arising from the capital infusion). At the current market price of Rs122, the stock is trading at 8x its FY2012E earnings per share (EPS) and 0.9x its FY2012E book value (BV). We maintain our Buy recommendation on the stock with a revised price target of Rs151. Alphageo India
Cluster: Emerging Star
Recommendation: Book Profit
Current market price: Rs199
Book profit
Result highlights -
Alphageo India Ltd (Alphageo) has reported another quarter of weak performance. The company?s inability to bag fresh orders in the face of intensified competition is getting reflected in its performance. Given the seasonal weakness in Q2, the stock would continue to languish in the near term. Consequently, we advise investors to book profit in the stock. The key risk to our recommendation is better than expected inflow of fresh orders going ahead. -
In Q1FY2011 the company?s net loss increased to Rs0.9 crore from Rs0.7 crore in Q4FY2010. This was largely due to a decline of 26% in its revenues to Rs10.4 crore in Q1FY2011. -
The operating profit margin improved by 188 basis points yoy to 25.4% (versus 42.5% in Q4FY2010). The operating profit declined by 19% yoy mainly on account of a sharp decline in the net sales. -
The order booking in the last season was lower than expected and one of its large orders (worth Rs45 crore) has been delayed due to client-specific issues. This is resulting in subdued revenue growth for the company. Our channel checks suggest that the competition has intensified in the seismic survey segment with many overseas companies bidding aggressively. Thus, we believe that it would be advisable to book profit.
SHAEKHAN SPECIAL Monthly economy review Economy: IIP growth moderates in May -
In May 2010 the Index of Industrial Production (IIP) registered a growth of 11.5% year on year (yoy), the lowest growth recorded since November 2009. The slowdown in growth was led by a lower growth in the manufacturing segment and the wearing off of the low base effect of the previous year. The moderation in IIP growth could indicate the lack of a generalised demand overheating the economy even as high inflationary trends prevail. -
Inflation for the month of June 2010 accelerated to 10.55%. The persistently high inflation has caused the Reserve Bank of India (RBI) to undertake a mid-term review hike in the key policy rates during July 2010. -
The trade deficit for May 2010 came in at USD11.29 billion, widening by 8.4% on a month-on-month (m-o-m) basis. Exports continued to expand for the seventh consecutive month and increased by 35.1% yoy. During the month, the commerce department sought additional resources from the finance ministry to continue providing export sops to select sectors -
The global economy is bouncing back from its deepest downturn in decades, though industrial production in the Organisation of Economic Co-operation and Development (OECD) nations remains below its pre-recession peak. Purchasing manager indices have generally remained in expansion territory, suggesting that the global recovery remains intact. (Read more under Global round-up). Banking: RBI hikes key policy rates by 25 basis points -
During the month, the RBI hiked the repo and the reverse repo rate by 25 basis points each to 5.5% and 4% respectively in an interim meeting. The interim rate hikes were undertaken to temper inflation, which has become more generalised recently, and were largely expected by the market. There is a possibility that the central bank may take further rate action in its scheduled policy review meet on July 27, 2010. However, this is expected be taken keeping in mind the economic recovery, the global uncertainties in addition to anchoring the inflationary expectations. -
The credit offtake (non-food) registered a growth of 22.3% yoy (July 2, 2010). The strong credit growth was a result of the loans given to telecommunications (telecom) companies for third generation (3G) and broadband wireless access (BWA) auctions. -
The credit-deposit (CD) ratio expanded to 72.3% (as on July 2, 2010) as compared to 71.3% as on June 4, 2010. Meanwhile the incremental CD ratio too increased to 101.4% as compared to 93.9% seen during the previous month. -
The liquidity situation remained tight and banks withdrew an average of Rs530 billion worth of money from the RBI through the repo window during the month-till-date (MTD) period (July 2-22, 2010). The declining liquidity scenario is the result of payments by telecom companies to the government for the 3G broadband service and BWA spectrum auctions. During the month, the RBI extended its temporary liquidity boosting measures introduced earlier by around a fortnight up to July 16, 2010 and then further extended its second liquidity adjustment facility (LAF) up to July 30 while discontinuing the statutory liquidity ratio (SLR) concession. -
The yields on the government securities (G-Secs; ten-year) stood at 7.68% as on July 21, 2010, up by ten basis points from the previous month?s level. The yields on the G-Secs of short-term maturities (one year, two years) increased at a higher rate than the yields on the G-Secs of short-term maturities on an m-o-m basis due to the tight liquidity situation in the short term. Equity markets: Average daily volumes contract -
During the MTD period (July 1-21, 2010), the average daily volumes contracted in both the futures and options (F&O) and the cash segment. -
During the MTD period in July 2010 (July 01-21), the foreign institutional investors (FIIs) were net buyers while the domestic mutual funds were net sellers. -
The total industry average assets under management (AUM; equity+debt) contracted by 15.8% month on month (mom) during June 2010.The net resources mobilised in equity schemes during June 2010 stood at negative Rs1,923 crore as redemption resources outpaced resources raised through the new and existing schemes. Insurance: Life insurance growth robust despite regulatory concerns -
The life insurance industry posted a robust 52.3% year-on-year (y-o-y) growth in the annual premium equivalent (APE) in May 2010 in spite of the regulatory concerns relating to unit linked insurance plans (ULIPs). Though the spat between the Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI) has been settled with the government ordnance promulgating that IRDA will oversee ULIPs, the insurance regulator has come out with additional regulatory changes applicable to all new ULIPS approved by the IRDA. The revised guidelines are likely to have a negative impact on the margins and growth of the insurance companies in the near term. However, these reforms are positive from a long-term perspective as the end-consumer stands to benefit from them. Hence, these reforms should ultimately help improve the penetration of life insurance products in India. -
In May 2010, the gross premium underwritten for the general insurance industry grew by 20.3% yoy. The private sector players posted a strong growth of 21.8% yoy while the public sector players registered a growth of 19.3% yoy during the month.
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