STOCK UPDATE
Mahindra Lifespace Developers
Cluster: Vulture?s Pick
Recommendation: Buy
Price target: Rs437
Current market price: Rs318
Upgraded to Buy
Result highlights
- Q3FY2011 results ahead of expectations: In Q3FY2011 Mahindra Lifespace Developers (MLD) reported a stand-alone net profit of Rs33.4 crore, up 19.7% year on year (YoY), which is above our expectation of Rs26.7 crore on account of much higher than expected revenue growth. The revenues grew by 43.1% YoY to Rs155.8 crore. On a sequential basis, the revenues grew by 75.1%. The strong revenue growth was supported by higher revenue recognition in Splendour Phase II and Aura Phase I in Mumbai and Mahindra Cloris in NCR. The operating profit margin (OPM), though declined by 55 basis points to 27.5%, was ahead of our estimates. The contraction in the OPM is largely on account of an increase in the raw material cost as a percentage of sales to 64.6% in the current quarter from 61% in the corresponding quarter of the previous year.
- Rs233 crore of pre-sales during the quarter: The pre-sales during the quarter (including sales from subsidiary company) stood at Rs233 crore as compared to Rs240 crore in Q3FY2010 and Rs256 crore in Q2FY2011. The pre-sales of the company during the quarter declined on a sequential basis as the company launched only one new project named Iris Court in Q3FY2011 as compared to three projects launched in Q2FY2011 (aggregating 0.55 million square feet [sq ft]). Going ahead the company aims at launching four to five new projects in H1FY2012, thus providing further visibility for its revenues.
- Increase in average price by 9.8%: For M9FY2011, the average price of the project sold stood at Rs5,008 per sq ft which is higher by 9.8% over the average price of M9FY2010. The momentum in the pre-sale volume has come down in Q3FY2011 due to increase in prices but the management does not expect a correction in the prices and expects them to be stable at the current level.
- Addition of clients in MWC Chennai & Jaipur: The company has added five new customers at Mahindra World City (MWC), Chennai in M9FY2011, taking the total number of customers to 55, of which 35 are operational. Mahindra World City Developers also signed up with UK based Duet Hotel to set up a business hotel at MWC, New Chennai. Further, at MWC Jaipur, all the special economic zones (SEZ)s and the Domestic Tariff Area (DTA) were activated with customers either initiating construction or operations. Currently three clients have commenced operations over there with nine initiating construction.
- Entered into MoU with government of Gujarat: Recently, the company has entered into two memorandum of understanding (MoU)s with the government of Gujarat for the development of an integrated business city in the MWC format at the Dholera Special Investment Region (SIR) and for the development of an industrial park near Ahemdabad.
- Upgraded to Buy, price target downgraded to Rs437: Taking into consideration the strong performance of the company during the quarter, we are upgrading our standalone revenue estimates, but on account of higher than expected effective tax rate, the bottom line of the company would remain unchanged for FY2011. We are also factoring in the continuation of a higher tax rate going ahead as the tax benefit enjoyed by a few projects are almost complete. Hence we are downgrading the earnings estimate for FY2012 by around 8%. Further, we are introducing earnings estimates for FY2013, wherein we expect an earnings growth of 15%. We are revising our net asset value (NAV) from Rs527 to Rs437 as we roll forward our valuation by six months and increase our weighted average cost of capital (WACC) assumption from 14% to 16% for Chennai and Jaipur MWCs, factoring the delay in their execution. However, we are upgrading our recommendation from Hold to Buy, as the stock price of the company has corrected sharply in recent times and offers a healthy upside. Further, we like the company as it is debt free and hence the liquidity tightness in the market should not affect its performance. At the current market price, the stock is trading at 0.73x its net asset value (NAV) and 1.2x FY2012E stand-alone price to book value (P/BV).
SHAREKHAN SPECIAL
Q3FY2011 Banking earnings review
Key points
- Strong earnings momentum: The Sharekhan Banking Universe delivered an earnings growth of 24.4% year on year (YoY) in Q3FY2011, which is higher than estimated. The higher than expected growth came in due to a relatively higher advances growth coming on the back of a general pick up in credit, and sequential expansion in margins. However, the growth in net interest income (NII) could not fully percolate to profits due to an increase in the provisions and operating expenses. The asset quality broadly remained at Q2FY2011 levels while it deteriorated in case of certain public sector unit (PSU) banks (Punjab National Bank [PNB], IDBI Bank, Corporation Bank etc). The non interest income growth was muted due to lower treasury gains and a slower pick up in the fee income.
- Robust operating performance: For the quarter ending Q3FY2011, the banks under our coverage posted an advances growth of 25.6% YoY as against a ~24.% growth posted by the industry. This contributed to the strong growth in the NII which grew by 38% YoY and 9.2% quarter on quarter (QoQ). However, due to the higher base of the previous year and a steep rise in rates, the advances growth for the industry could be approximately 20% for FY2011.
- Margins peaked, cost pressure has started building up: The margins continued with the upward trend in Q3FY2011 as banks actively passed on the incremental costs through PLR/ base rate hikes. In our view the margins of most of the banks have peaked as the impact of the rate hikes on the deposits will be mostly reflected from Q4FY2011 leading to a pressure on margins. Further as the banks have increased rates quite steeply, it would be difficult to pass on further rate hikes in the coming quarters as it could lead to a slowdown in business growth.
- Pension and gratuity provisions lift the opex for PSU banks: During the quarter, most PSU banks made adhoc provisions for the second pension liabilities while private banks witnessed increased employee costs, leading to an increase in operating expenses. We expect the operating expenditure (opex) to remain at elevated levels due to the pension provisions, wage inflation and investments in infrastructure.
- Asset quality remains stable: The private sector banks saw stable to improving asset quality while PSU banks witnessed reoccurrence of slippages, albeit at a lower pace. The slippages were mainly contributed by certain segments like the corporate, small and medium enterprises (SME), agri etc. Going forward, we expect the asset quality to remain stable as slippages from the vulnerable segments like restructured assets, agri , micro finance institutions (MFI) etc have already peaked. However other sectors like real estate and telecom could give a negative surprise in case of an adverse regulatory and macro scenario.
- Valuations and outlook: The quarter gone by (Q3FY2011) was marked by a strong business growth and robust margins which led to a strong performance at the operating level. Profits also showed a decent growth despite an increase in provisions and subdued non- interest income growth. The asset quality though disappointing for a few banks remained comfortable on an overall basis. In view of the Q3FY2011 results, we have fine tuned our estimates but revised our target prices downward to factor the macro concerns like monetary tightening, liquidity deficit, regulatory risks etc. We expect margins to taper from Q4FY2011 onwards due to a steep rise in the retail and bulk deposit rates while operating expenses are expected to remain high (especially for private banks). On the asset quality front we derive confidence from slowing of slippages and an improving economy which may lead to better recoveries. We remain positive on the sector from a long term point of view, however challenges remain in the near term. Among the stocks in the sector, we prefer PNB, Axis Bank and Yes Bank.
Q3FY2011 Capital Goods & Engineering earnings review
Key points
- The Q3FY2011 results of the companies in our capital goods & engineering universe (except Genus Power Infrastructure, which has not declared its results yet) exhibited better execution of order book. These companies reported a revenue growth of 31.4% year on year (YoY), which was better than our expectation of 25.4%. The growth momentum in the top line in Q3FY2011 was a respite from the subdued growth posted in H1FY2011 (a 20% growth YoY).
- The operating profit margin (OPM) of these companies was lower in Q3FY2011 as compared to that in Q3FY2010 as the effect of the rise in the input cost and the high base have started reflecting in their margin now.
- The order inflow was muted in the quarter on a year-on-year (Y-o-Y) basis and companies like Bharat Heavy Electricals Ltd (BHEL) and Larsen and Toubro (L&T) would require a very high growth in their order inflow in Q4FY2011 to meet their order booking guidance. We have downgraded our earnings estimates for a few companies like L&T and Thermax to reflect the muted order booking in M9FY2011.
- One more negative surprise was the persistent delay in order awarding especially from the state utilities; this was reflected in quite a few management commentaries. Competition pressure may also heat up further in view of the slow moving capital expenditure (capex) cycle. We feel that more concerns would arise if the order awarding activities do not pick up significantly in the next six months. However, we also opine that these concerns are a little overdone as most of the companies are trading at or below their five-year average valuation multiple. Moreover, there are early indications that there may be a possibility of the withdrawal of import incentive in the forthcoming Union Budget to protect the domestic power equipment market amidst the massive lobbying by the domestic players like L&T and BHEL. If implemented, this would act as a positive trigger for the sector. Also, given the huge quantum of the investment expected in the infrastructure, future of the capital goods sector continues to hold promise. Hence, we believe that the recent fall in the capital goods stocks has provided a good entry point to the investors. Our top picks from the sector are L&T, BHEL, Thermax and V-Guard Industries (V-Guard), and we currently have a Buy recommendation on all four.
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