Summary of Content
STOCK UPDATE Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,100
Current market price: Rs1,675 Upgraded to Buy -
Audit balance sheet shows spike in cash reserves: The audited results of Bharat Electronics Ltd (BEL) for FY2011 show a significant jump in cash & cash equivalents to Rs6,519 crore compared with Rs3,578.4 crore as on March 2010. The spike in cash reserves was driven by a jump in the current liabilities during the year which is intriguing for us. This has led to free cash of Rs815 per share on the books, which is close to 50% of the prevailing valuation.
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Strong order book: At the end of March 2011, BEL had a strong order book of Rs23,600 crore, more than double its FY2010 order book. However, the order execution period is now longer. BEL has an export order book of about $66.36 million which includes an offset order book of $42.28 million. The strong order book at 4x FY2011 gross sales gives strong visibility for the next few years.
The company's management has set a revenue target of Rs6,200 crore for FY2012 which is a 12.1% growth over FY2011. Given the strong order book, we believe that the company would be able to comfortably surpass the revenue target.
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Q1FY2012 earnings preview: The first quarter is the slowest quarter in terms of revenues for Bharat Electronics Ltd (BEL) as in this quarter the government finalises its capital expenditure (capex) plan for the whole year. For Q1FY2012 we expect the company to report revenues of Rs1,078.5 crore, showing a growth of 18.1% on a year-on-year (Y-o-Y) basis. The company had started the new fiscal with a strong order book of Rs23,600 crore which may aid its growth in the first quarter. The EBITDA margin for the quarter is expected to improve by 60 basis points year on year (YoY) to 9.5%. The net profit for the quarter is expected to grow by 12.6% to Rs91.7 crore.
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Valuation: BEL is one of the best plays on the defence capex space. With the increase in the defence budget and the focus on modernisation of the defence technology, BEL is best placed to take a sizeable pie of the defence spend. With its partnerships with leading defence original equipment manufacturers, the company is well placed to benefit from the offset clause. It has a strong order book which provides growth visibility. Moreover, it has huge cash reserve of Rs6,519 crore which translates into cash per share of Rs815. Given the recent correction in the stock price, the company's strong business positioning and healthy cash reserves, we are upgrading the stock to Buy with a target price of Rs2,100. However, kindly note that BEL's quarterly performance is quite volatile and Q1 is a seasonally lean quarter for the company.
Bajaj FinServ
Cluster: Apple Green
Recommendation: Buy
Price target: Rs600
Current market price: Rs540 Price target revised to Rs600 Result highlights -
Bajaj FinServ reported a strong 95% year on year (YoY) growth in its net profits to Rs129 crore (consolidated). The income from operations showed a five-fold increase on a year-on-year (Y-o-Y) basis to Rs613 crore contributing to an approximately 400% Y-o-Y growth in the operating profit. However, the Y-o-Y growth figures are not strictly comparable due to the consolidation of Bajaj Finance Ltd (BFL)'s numbers, which became its subsidiary in Q2FY2011. However, excluding the Bajaj Finance numbers, Bajaj Finserv has shown a growth of approximately 20% YoY.
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Life insurance-top line contracts: During Q1FY2012 the life insurance business reported a policyholder's surplus of Rs225 crore, a growth of 45.2% YoY. However, the gross written premium declined by 24.8% YoY with renewal premiums declining by 18.7% YoY. The assets under management increased by 12.2% YoY to Rs39,234 crore.
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General insurance-steady growth: The general insurance business registered a growth of 25.8% YoY in its net profit to Rs39 crore as against Rs31 crore in Q1FY2011. This was despite making higher provisions (Rs42 crore vs Rs11 crore) for the motor pool. A strong growth in underwriting profits and higher investment income were the key drivers for profitability. The gross premiums also increased by 11.1% YoY, during the quarter.
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Bajaj Finance-robust growth in core income drives profits: The earnings of BFL for Q1FY2012 grew by 93.6% YoY to Rs91 crore as against Rs47 crore during Q1FY2011. The deployments of the company grew by 75% YoY to Rs3,588 crore during the quarter while the assets under management (AUM) grew by 19.2% quarter on quarter (QoQ) to Rs9,025 crore.
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Valuation: Bajaj FinServ has reported a strong set of numbers for Q1FY2012 aided by a strong growth in the financing and insurance businesses. While the management is working on rationalising the cost structure as per the new regulatory environment, the life insurance business continues to show some moderation in line with the industry. Due to continued ambiguity relating to the Reserve Bank of India (RBI)'s circular on transfer of shares from Indian residents to non residents, we continue to value Bajaj FinServ on the average of the two target prices ie the one arising out of factoring in the potential upside from the RBI circular and the other arrived at by excluding the impact of the circular on the company's valuations. We have revised our sum of the parts (SOTP) based target price to Rs600 from Rs634 earlier as we are assuming a slower growth in premiums. We maintain our Buy recommendation on the stock with a price target of Rs600.
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