| STOCK UPDATE Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs510
Current market price: Rs432 Taro execution holds the key Result highlights - Taro?s Q3FY2011 results below expectation: Sun Pharmaceutical Industries (Sun) reported Q3FY2011 net profit at Rs350.2 crore (up by 3.3% year on year [YoY]). The results were below expectations on account of higher than expected staff costs and depreciation charges from Taro?s integration. Net sales were largely in-line with our expectation, witnessing a growth of 56.8% YoY (Taro accounted for 28.3% of total sales). Despite an improvement in gross margins (on account of inventory reduction in rest of world [RoW] markets), a sharp spike in staff costs from Taro, a high base in Q3FY2010 and chargeback on Protonix led to a lower than expected operating performance. However excluding Taro the operating margins stand at 31.2%.
- Taro-execution remains the key: Sun plans to increase the research and development (R&D) expenditure for Taro to strengthen its product pipeline. The audited numbers of CY2009 and CY2010 would provide more clarity on Taro?s actual growth. We expect Taro to grow by 8-10% annually for the next two years.
- Caraco recovery?a gradual process: Caraco has indicated that there would not be any manufacturing till the end of FY2011 due to the prolonged remediation process at its manufacturing facility. Caraco sales are expected to be lower in Q4 given the lack of one-offs and possible chargeback on generic Protonix. Sun would now set up its own sales force in the USA for marketing and distribution of its products there. We view the new sales force team in US as a proactive step from Sun?s management in order to protect its revenues.
- Revenue guidance revised upwards to 42% from 35%: Sun?s management has revised upwards its revenue guidance to 42% from 35% earlier for FY2011 due to consolidation of Taro?s business. We view the guidance conservative as Sun has already grown by 51% in M9FY2011; implying a 31% growth in Q4. It has also cut down its abbreviated new drug application (ANDA) filings guidance to 20-22 from 30 earlier. Further the overall R&D spend would also stand reduced due to increased focus towards compliance of US facilities. We expect a muted top line growth in the US market in FY2012 due to the ongoing Caraco issues, however contribution from Taro should offer some respite.
- Raise estimates and maintain Buy rating: Incorporating the revised guidance from the management, our earning per share (EPS) estimate for FY2011 stands at Rs16.9 per share and that of FY2012 stands at Rs21.8. We introduce our FY2013 numbers in the note and forecast an EPS of Rs26. Sun?s Q3FY2011 performance reflects the base business performance with no major one-offs. Though the margins would remain under pressure due to the remediation process in Caraco and Taro, we believe that opportunities from other product launches and with Sun?s excellent track record on acquisitions, the same will rebound in FY2013. We have valued Sun at 23x its FY2012E earnings and expect this premium to sustain on account of its robust domestic portfolio and strong growth visibility from the US (ex-Caraco). We maintain our Buy recommendation on the stock with a price target of Rs510.
Andhra Bank
Cluster: Cannonball
Recommendation: Hold
Price target: Rs168
Current market price: Rs137 Price target revised to Rs168, maintain Hold Result highlights - Andhra Bank?s results were ahead of our estimates as its net profit grew by 20% year on year (YoY) to Rs331 crore against our expectation of Rs310 crore. A strong growth in the bank?s net interest income (NII; up 44% YoY and 7% sequentially) contributed to the growth in the profit. The business growth remained strong as the advances grew by about 28% YoY while the margin continued to move up to 3.91% (up ten basis points quarter on quarter [QoQ]). The gross non-performing assets (NPAs) inched up to 1.33% from 1.26% in Q2FY2011. The provision coverage increased to 80.4% from 79% in the preceding quarter.
- Continued momentum in operating performance: The growth in the advances was strong as the same grew by 28% YoY and by 4.5% QoQ driven by a strong growth in the small and medium enterprises (SME; up 29% YoY), retail (up 26% YoY) and agri (up 22% YoY) segments. This along with the increase in the margin led to a robust growth in the NII (up 44% YoY). The deposit growth also gained traction as the deposits grew by 23.4% YoY with savings deposits growing by 22% YoY.
- But provisions remain high: The provisions during the quarter increased by 43% QoQ to Rs172 crore, mainly contributed by the NPA provisions. The slippages were at Rs204 crore against recoveries of Rs101 crore which contributed to the increase in the NPAs (from 1.26% in Q2FY2011 to 1.33% in Q3FY2011). The bank provided Rs152 crore for NPAs (compared with Rs96 crore in Q2FY2011). This led to an increase in the provision coverage to 80.4% from 79% in Q2FY2011.
- Margin up 10 basis points QoQ: The bank?s margin for Q3FY2011 came in at 3.91%, a ten-basis-point increase over the Q2FY2011 margin. This was on account of a nine-basis-point sequential improvement in the yield on advances and a 25-basis-point increase in the investment yields. The cost of deposits went up to 5.84% from 5.67% in Q2FY2011 as the current account and savings account (CASA) ratio declined by 180 basis points QoQ to 28.5%.
- Non-interest income growth: In line with the industry trend the non-interest income growth was subdued--the non-interest income declined by 11.4% YoY and showed a modest growth of 4% QoQ. This was due to a higher fee income base of the previous year and lower treasury profit (Rs7 crore compared to Rs18 crore in Q3FY2011 and Rs47.5 crore in Q3FY2010).
- Valuations: While the bank continues to deliver a strong operating performance, the increase in the slippages has not stabilised leading to higher NPA provisions. Further, the contraction in the CASA ratio and the relatively higher proportion of bulk deposits will negatively affect the margin. We have revised our estimates and price target downward to factor the asset quality risk, margin contraction and political risks. We value the bank at 1.3x FY2012 book, leading to a price target of Rs168. Despite a higher upside on our price target we maintain our Hold recommendation due to the concerns about the bank?s asset quality and the compression in its margin.
Indian Hotels Company
Cluster: Apple Green
Recommendation: Hold
Price target: Rs106
Current market price: Rs91 Downgraded to Hold Result highlights - Net sales grew by 10.8% year on year (YoY) to Rs485.3 crore. However excluding the other non-operational income, the net sales grew by ~15% YoY mainly on account of an improvement in business fundamentals.
- On backward calculations, we expect average occupancy rate to be in the range of 72-73% in Q3FY2011 (as against 70% in Q3FY2010) and the average room rentals (ARRs) must have gone up by around 8% during the quarter.
- The operating margins slumped by 480 basis points YoY to 29.7% in Q3FY2011. This was mainly on account of higher employee cost and other expenses (also includes brand building and promotional spends).
- The employee cost has gone up by ~29% YoY, mainly on account of an increase in the retirement benefit liabilities (non-recurring in nature), change in salary growth rate assumption and additional work force for new hotels.
- On the other hand, other expenses as a percentage to sales went up by 170 basis points YoY to 27.8% in Q3FY2010 on account of pre-operating expenses and brand and promotional expenses towards the launch of Taj Falaknuma Palace and the re-launch of the heritage wing of the Taj Mahal Palace, Mumbai. As per our calculations these pre-operating and advertisement expenses would have been around Rs20 crore for the quarters. If these expenses had not been there, the operating margins would have remained almost flat YoY for the quarter.
- The operating profit declined by 4.6% YoY to Rs144.3 crore. This along with lower than expected other income and higher incidence of tax resulted in a 20.8% YoY decline in the adjusted profit after tax (PAT) to Rs52.0 crore.
- We like the fact that the business fundamentals of the company (occupancies and ARRs) have improved considerably in M9FY2011. However non-recurring expenses (such as pre-operating and branding expenses over the launch / re-launch of hotel properties) have dented the profitability in the first 9 months of FY2011. The non-occurrence of the same would improve the profitability of the company in the coming quarters.
- On the other hand, the international properties have witnessed improvement in the occupancies in M9FY2011. With further improvement in the occupancies and the overall business environment, the ARRs of these properties are likely to pick up going forward.
- Improved business fundamentals of Indian Hotels (standalone business) and a likely improvement in the profitability of the international properties would result in a better earning performance by the company in the coming years. With a limited upside from the current levels, we downgrade our recommendation from Buy to Hold with a revised price target of Rs106 (based on EV/room of Rs0.93 crore). At the current market price the stock trades at 28.4x its FY2012E consolidated EPS of Rs3.2 and its EV/room of Rs0.9 crore.
Phillips Carbon Black
Cluster: Cannonball
Recommendation: Buy
Price target: Rs212
Current market price: Rs134 Price target revised to Rs212 Result highlights - Strong results at PBT level; higher tax outgo impacted PAT: Phillips Carbon Black Ltd (PCBL)?s Q3FY2011 results were strong at the top-line, operating and profit before tax (PBT) levels. The PBT increased at a healthy rate of 25.4% year on year (YoY) to Rs45 crore in Q3FY2011; however a higher tax outgo resulted in the bottom-line witnessing a decline of 10.7% YoY to Rs30 crore.
- Strong volume growth and realisation boost net sales: The total income from operations grew at a healthy rate of 24.5% YoY to Rs432.1 crore in the quarter. In terms of business segments, the net sales from the carbon black segment grew by 24.9% YoY to Rs416.1 crore on the back of a strong 20.4% year-on-year (Y-o-Y) increase in the sales volume to 80,874 million tonne (MT) and a 3.8% Y-o-Y rise in the realisation to Rs51,452 per tonne. The net sales from the power segment stood at Rs22.3 crore (vs Rs17.9 crore in Q3FY2010).
- OPM almost flat on YoY basis: The operating profit margin (OPM) remained almost flat at 14.7% as compared to 14.9% in Q3FY2010. Consequently, the operating profit increased by 22.5% to Rs63.5 crore supported by a strong growth in the top-line.
- Net income declined by 10.7% YoY: The net income declined by 10.7% YoY to Rs30 crore mainly on account of a higher effective income tax rate (33.2% in Q3FY2011 vs 6.2% in Q3FY2010) and an increase in the depreciation and interest expenses. Tax expenses for Q3FY2010 are net of MAT Credit Entitlement of Rs9.14 crore.
- Carbon black capacity expansion to get delayed by two more quarter: The company?s carbon black capacity expansion plans for 50,000MT at Mundra is expected to get delayed by two more quarters and the company now expects the plant to get commissioned at the end of Q1FY2012. The 10MW captive power plant at Cochin is also expected to get commissioned by Q4FY2011.
- Management guidance maintained: The company has maintained its carbon black sales volume guidance of over 30,00,000MT in FY2011. It expects an OPM of 14-15% for the year on the back of improved earnings from the power segment and a strong sales volume growth. However, with the increase in the CBFS (a key raw material for carbon black and derivative of crude oil) price we see pressure on the carbon black margins. To keep margins at 14-15%, we believe that the company would have to pass on the increase in the raw material prices through price hike in the carbon black segment.
- Lowered estimates: We have lowered our FY2011 and FY2012 revenue and earnings estimates to factor: (1) the delay in starting the 50,000MT carbon black plant; and (2) the higher income tax rate at 25%. Consequently, our revised earnings per share (EPS) estimate stands at Rs40.2 for FY2011 and Rs43.7 for FY2012.
- Maintain Buy: We maintain our Buy recommendation on the stock with a revised price target of Rs211. At the current market price, the stock trades at an attractive valuation of 3.1x FY2012 earnings estimate and 3x FY2012 enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA).
Shree Cement
Cluster: Cannonball
Recommendation: Hold
Price target: Rs1,825
Current market price: Rs1,631 Price target revised to Rs1,825 Result highlights - Continued poor performance, earnings below expectation: Shree Cement, in its Q3FY2011 results, posted an 80.2% decline in the adjusted net profit to Rs33.4 crore. The adjusted net profit of the company is below our estimates on account of a lower than expected other income and higher than expected interest charges. The performance of the company at the operating level was in line with our estimates but disappointing at the profit before tax (PBT) level and stood at just Rs1.8 crore. However, with the tax write back, the adjusted net profit increased to Rs33.4 crore as against our estimates of Rs37.7 crore.
- Contraction in cement realisation affects overall revenue: The total revenue of the company has decreased by 10% year on year (YoY) to Rs779.6 crore. On a segmental basis the revenue from the cement division has declined by 9.4% YoY to Rs746.1 crore mainly on account of a fall in the blended realisation by 11.3% YoY and 5.3% quarter on quarter (QoQ) to Rs2,851 per tonne. The volume (including clinker sales) increased by 2.1% YoY and by a strong 14.8% on a sequential basis to 2.62 million tonne. Further the revenue from its power business has declined by 21.8% to Rs33.5 crore in line with our estimates. During the quarter the company has sold 7.37 crore units of surplus power at an average rate of Rs4.5 per unit.
- Margin contraction led by fall in cement realisation and surge in pet coke price: The operating profit margin (OPM) stood at 20.2% as against 38.8% in the corresponding quarter of the previous year. The sharp contraction in the OPM is on account of a) drop in the cement realisation by 11.3%, b) increase in power & fuel cost by 26.6% YoY on per tonne basis due to a surge in pet coke price and c) poor profitability in its power division. Moreover the employee cost during the quarter has also increased significantly by 28.4% to Rs47.9 crore. Further, the other income during the quarter declined sharply by 88.4% YoY and 92.9% QoQ to just Rs1.9 crore, which is much below our estimates.
- Increase in interest cost and depreciation further dent the earnings: The interest charges rose by 62.9% YoY to Rs20.4 crore and the depreciation charges increased by 38.7% to Rs131.4 crore on account of capacity addition carried out by the company in its cement as well as power division. In M9FY2011 the company has commissioned 50MW of power capacity and the overall power capacity of the company stands at 260MW. As a result of the severe contraction in the OPM coupled with a surge in interest and depreciation charges, the PBT stood at just Rs1.8 crore. However, there was a tax write back to the tune of Rs25.7 crore. As a result the adjusted net profit of the company increased to Rs33.4 crore.
- Downgrading earnings estimates for FY2011 and FY2012: We have revised our earnings estimates downwards for FY2011 and FY2012 mainly to incorporate lower than expected cement realisation, surge in the pet coke prices and poor performance of the power division. The revised earnings per share (EPS) works out to Rs59.6 and Rs82.7 for FY2011 and FY2012 respectively. Further, in this note we are also introducing our FY2013 earnings estimates with the EPS standing at Rs96.5.
- Maintain Hold with revised price target of Rs1,825: We expect the profitability of the company to improve in the coming quarter due to an increase in the cement prices by Rs10-12 per bag in its key market in the month of January. Further, cement offtake has also picked up, which will support volume growth in the coming quarter. However, the key concerns remain in terms of a) oversupply which will continue to put pressure on the realisation (even after the recent price hike we believe that the average realisation for FY2011 would decline by 9% compared to the average realisation of FY2010), b) cost pressure in terms of higher pet coke price and c) a drop in the merchant realisation. Hence we maintain our Hold recommendation on the stock with a revised price target of Rs1,825 (valued at enterprise value [EV]/earnings before interest, tax, depreciation and amortization [EBDITA] of ~7x its FY2012E earning). At the current market price the stock trades at a price earning (PE) of 19.7x and an EV/EBIDTA of 6.2x on FY2012 earnings estimates.
VIEWPOINT Kalpataru Power Transmission Getting traction as expected
Kalpataru Power Transmission Ltd (KPTL) reported net sales of Rs793 crore, 8% higher than our estimates. This amounts to a growth of 10% year on year (YoY) and 26% quarter on quarter (QoQ). The company maintained its earnings before interest, tax, depreciation and amortization (EBITDA) margin around 11.7%, 25 basis points higher YoY and 10 basis points higher QoQ. However, this is 88 basis points lower than our estimates, due to higher than expected raw material and other expenses. The EBITDA grew by 13% YoY and 27% QoQ to Rs92.6 crore. Carrying over the benefits of revenue growth and sustained margin, the profit after tax (PAT) grew by 15% YoY and 23% QoQ to Rs50.8 crore. This translates into an earning per share (EPS) of Rs3.3 for Q3FY2011, which is 5% lower than our estimates.
SECTOR UPDATE Automobiles Modest revival with some positive surprises
The automobile sales for January 2011 reported a strong revival after the slump in December 2010. The positive surprises came from Mahindra and Mahindra (M&M; tractors), Tata Motors (passenger vehicles) and Maruti Suzuki (SX4 and Dzire segment). Negative surprises came primarily from Tata Motors (medium and heavy commercial vehicles [M&HCVs]), Maruti Suzuki (exports) and TVS Motor Company (mopeds).
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