STOCK UPDATE Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs756
Current market price: Rs654 Upgraded to Buy Result highlights Mahindra and Mahindra (M&M)?s Q3FY2011 total income grew by 36.1% year on year (YoY), the growth was marginally higher than our expectations. The top line growth was driven by a strong performance from the automotive and farm equipment segments. The automotive business? realisations grew 0.5% quarter on quarter (QoQ) due to an improved product mix. Tractor realisations, however, dropped by 1.7% sequentially. Its raw material-sales ratio in Q3FY2011 increased by 200 basis points QoQ as cost inflation was felt across the board. Similarly, the 27% year-on-year (Y-o-Y) jump in the other expenses was sharper than expected. The staff cost, however, moderated with just a 5.3% Y-o-Y growth. Consequently, the operating profit margin (OPM) improved by 20 basis points YoY but was lower by 140 basis points QoQ in a seasonally weak quarter. The Q3FY2011 adjusted profit after tax (PAT) came in line with our expectations due to a higher other income. The reported PAT was much higher as it included Rs117 crore of exceptional gains (Rs82.2 crore adjusted for tax) owing to the stake sale in Owens Corning India. The Q3FY2011 consolidated total income grew by 20.9% YoY while the consolidated PAT grew by 57.4% YoY. The consolidated numbers include 48.2% of Tech Mahindra?s stake in Q3FY2011 as against 100% in Q3FY2010. We expect the FY2012 automotive volumes (including pick-ups) to grow by 17% and the tractor volumes to rise by 12%. We are marginally increasing our stand-alone FY2012 earnings per share (EPS) estimate by 2%, assuming a better performance from the tractor business. Our sum-of-the-parts (SOTP) valuation target for M&M is revised to Rs756 per share (we are reducing the core business? multiple to 12x FY2012E earnings citing higher ownership risks and Rs128 per share as the value of the subsidiaries). Though the ownership concerns remain a risk, the company has been able to maintain margins in an inflationary scenario. Given the recent sharp correction in the stock price, we upgrade the stock to Buy.
BASF India
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs586
Current market price: Rs513 Price target revised to Rs586 Result highlights Bottom line significantly below expectations: BASF India?s stand-alone Q3FY2011 net profit came in at Rs23.7 crore, up 110% year on year (YoY) but significantly below our estimate of Rs43.7 crore mainly due to the lower than expected operating profit margin (OPM). The Q3FY2011 results however are not strictly comparable with those of Q3FY2010, as the quarter under review includes the financials of the merged Ciba India. Top line jumps on consolidation with Ciba India: The total income for the quarter was up by 140.4% YoY to Rs702 crore, driven by a 2.1x year-on-year (Y-o- Y) rise in the revenue from the performance products business. The robust growth in the performance products business was largely due to the merger with Ciba India. The company reported a new business segment (functional solutions) with revenues of Rs123 crore. The agricultural solutions and plastics businesses also logged in a good show with the revenue up by 55% and 230% YoY respectively. OPM deteriorates: The operating profit declined by 18.5% YoY to Rs19.2 crore in the quarter, due to an around 534-basis-point contraction in the OPM to 2.7% (versus our expectation of 11% for the quarter). The OPM contraction was a result of the amalgamation with Ciba India, which enjoys lower margins than BASF India, and also on account of a decline in the margins of the agricultural solutions and plastics businesses. Net income up by 110% YoY: Despite a decline in the operating profit, the company reported a 110% YoY increase in its net income, purely on account of the benefit in taxes accrued by carrying forward of losses from BASF Coatings India Pvt Ltd (BCIN) and BASF Polyurethanes India Limited (BPIL). However, the growth in the net income was limited due to higher depreciation and interest expenses during the quarter. Bombay High Court approved scheme of amalgamation of BCIN, BCCIPL and BPIL: During the quarter, the Bombay High Court has approved the amalgamation of BCIN, BASF Construction Chemicals (India) Pvt Ltd (BCCIPL) and BPIL with BASF India vide its order dated January 14, 2011. Accordingly, BCIN, BCCIPL and BPIL have been merged with the company with effect from April 01, 2010. Additionally the amalgamation would result in an increase in the share capital to Rs43.29 crore from Rs40.7 crore, thus implying an equity dilution of around 6%. However, we have not factored in the same in our assumptions due to lack of availability of financial details for BCIN and BCCIPL. Maintain Hold with revised price target of Rs586: BASF India reported a strong top-line growth, which was above our expectations. But the company?s performance at the operating level was disappointing mainly due to negative margins in its agriculture solutions and plastics businesses. We have revised our earnings estimates for FY2011 and FY2012 to factor in the steep decline in the OPM in Q3FY2011 and our revised earnings per share (EPS) now stand at Rs35.5 for FY2011 and Rs45.1 for FY2012. At the current market price, the stock trades at 11.4x its FY2012E EPS and 1.9x FY2012E book value (BV). We maintain our Hold recommendation on the stock with a price target of Rs586 (now valued at 13x its FY2012E EPS).
Punj Lloyd
Cluster: Apple Green
Recommendation: Reduce
Price target: Under review
Current market price: Rs69 Downgraded to Reduce Result highlights Disappointment continues: Punj Llyod Ltd (PLL) has disappointed yet again by posting a consolidated net loss of Rs62.1 crore as against our and the Street?s expectations of profit. The performance of the company was disappointing primarily on account of a sharp decline in the net revenue and poor operating profit margin (OPM). The revenue declined by 27.8% year on year (YoY) to Rs2,093.6 crore on account of the slow execution of its Libyan projects, which form as high as 35% of the total order book of the company, and several other projects that are in the initial stage. In addition, contraction in the margin due to lower revenue booking and absorption of fixed cost dented the earnings of the company. Libyan orders continue to dampen: The execution of the Libyan orders has been delayed significantly due to a delay in getting master plans and the advances on the projects which has hit the earnings in the last few quarters, as the Libyan orders form around 35% of the company?s order book. Work on three of these five projects began in Q2FY2011 but because of the slower execution, it could not reach the threshold limit to book the revenue. PLL has booked about $20 million so far on the orders worth $750 million. However, now the master plans are getting released in a phased manner and the company has received 15% advances on all the five projects. Thus, the management expects execution to scale up in FY2012 gradually. Margins on these projects are as high as 14%. OPM contracts sharply: The OPM of the company contracted by 364 basis points on a year-on-year (Y-o-Y) and 448 basis points on a quarter-on-quarter (Q-o-Q) basis to just 3.4%, which is much below our estimate and also below the guidance given by the management post-Q2FY2011 results. The key reason behind the margin contraction was the absorption of the fixed cost in case of the slow-moving Libyan orders and power projects that have not reached the revenue booking threshold limit. Further, in case of the new orders bagged in the last three to four months, the company had started mobilising resources but the revenue booking could not take place. Consequently, the operating profit dropped by 65.3% YoY to Rs70.6 crore. However, the management is confident of achieving the targetted OPM of 9% in the coming couple of quarters as the revenue booking from the Libyan projects and the new orders gain momentum. Further, the margins on the ex-Libyan orders are in the range of 8-9%. Downgrading estimates: We are downgrading our profit after tax (PAT) estimate for FY2011 to a loss of Rs58 crore as in M9FY2011 itself the company has booked a loss of Rs69 crore. Further, we are downgrading our FY2012 estimates as the execution of the company?s Libyan orders will pick up only gradually in FY2012 and the execution risk remains high. We also introduce our FY2013 earnings estimate in this note. However, Q3 saw strong order inflow: The only positive thing about the quarter was that the order inflow that was muted in H1FY2011 picked up very well in the third quarter as the company bagged nearly Rs4,370 crore worth of orders in this period, taking the total inflow during the nine months of FY2011 to Rs9,300 crore. With the strengthening of the order inflow during the third quarter the order book of the company now stands at Rs27,780 crore (which is 2.6x its FY2010 revenue). However, the key challenge remains the execution of the order book. Downgraded to Reduce: At the current market price, the stock is trading at 12.4x FY2012E earning per share (EPS). PLL is present in some of the high-growth sectors (infrastructure, petrochemicals etc), which are expected to receive heavy investment in the coming years. However, the order execution for the company has been a major challenge in the recent past and the company has been disappointing again and again for the last few quarters on the earnings front. PLL needs to ramp up its execution significantly in order to return to the growth path. Though the management has guided for a pick-up in execution in FY2012, the pick-up will take place in a gradual manner and hence the pain might continue for a few quarters more. Further, due to sedate execution, the number of working capital days has deteriorated to 186 days as compared to 122 days in FY2010. Thus, we change our recommendation from Hold to Reduce as PLL would still take a few more quarters to improve the execution of orders and we believe the current price already captures that. However, the uncertainty prevails over pending litigations and more cost overruns/liquidation damages which the company might face on other projects due to delayed execution. Hence we put our price target under review.
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