| | STOCK UPDATE Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: 1,911
Current market price: Rs1,336 Q2FY2012 results: First-cut analysis Result highlights -
Decent quarterly performance but guidance downgrade dents sentiments: Larsen and Toubro (L&T)'s Q2FY2012 results exceeded our expectations with a strong execution in the engineering and construction (E&C) division as well as margin sustenance in a tough business environment. However, the Q2 order inflow was moderate at Rs16,096 crore (down 21% year on year [YoY]). The H1 order inflow also fell by 11% to Rs32,286 crore. Moreover, the management has reduced its order intake growth guidance to 5% as against its earlier guidance of a 15-20% growth in the order inflow for FY2012. Achieving the revised guidance would also be an uphill task for the company and implies a growth of 20% in order intake in the second half of FY2012 as compared to the corresponding period last fiscal. -
Stand-alone sales up 19%: L&T has reported a strong growth in its revenues (stand-alone) for Q2FY2012; the same was higher than our expectation. This was on account of the sound execution in the E&C division which reported a 21% revenue growth. The electrical and electronics (E&E) division also reported a robust 26% growth in revenue led by robust sales in the medium voltage switchgears. However, the machinery and industrial products (MIP) division was sluggish with a year-on-year (Y-o-Y) fall of 3% in revenue owing to lower industrial offtake. The others segment reported a strong 38% growth driven by integrated engineering. -
OPM under pressure but better than our expectation: The overall operating profit margin (OPM) stood at 10.4%, higher than our expectation of 10% but lower than 10.6% reported in Q2FY2012. The margin was under pressure led by the cost input pressure as well as a sharp jump in the employee expense (33% growth Y-o-Y). The operating profit grew by a lower rate of 17% on a yearly basis. For FY2012, the management has revised the margin dip in the E&C division to 75-125 basis points on a yearly basis from the earlier guidance of 50-75 basis points. -
Net profit up 15%: The depreciation charge increased by 40% on account of higher capital expenditure (capex) undertaken in recent times. The interest charges were subdued in spite of a higher debt mainly due to good mix of low cost foreign debt. Further, boosted by a low tax rate, the adjusted profit after tax (PAT) grew by 15% YoY, which was 9% higher than our expectation. -
Order inflow modest: For the quarter, the order inflow was moderate at Rs16,096 crore (down 21% YoY). The H1 order inflow also fell by 11% to Rs32,286 crore. Moreover, the management has reduced its order intake growth guidance to 5% as against its earlier guidance of a 15-20% growth in the order backlog for FY2012. This implies a required run rate of Rs50,000 crore plus of order inflow in H2 which looks a challenging task given the current slowdown in the economy. The company has an overall order book of around Rs142,185 crore (up by 23% YoY). Of the total order book position, about 89% is from the domestic customers and the remaining 11% comprises overseas orders. Overseas orders' contribution to the overall order book increased sharply to 25% in the quarter from the past level of 10-15%. -
Outlook and view: The Street was worried about L&T's margins and order inflow. The company's performance has been mixed on these parameters. While the margin has been decent for the quarter, trimming down of order inflow guidance today has further deep-rooted the concerns on future earnings growth. We are likely to downgrade our estimates to internalise the revised guidance. At the current levels, the stock is trading at 13.9x our FY2013 earnings estimates. We maintain our Buy rating and would soon come out with a detailed note taking a thorough account of the H1 results. Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs487
Current market price: Rs404 Q2FY2012 results: First-cut analysis Result highlights -
It was the quarter of strong operating performance by GCPL with the consolidated top line growing by around 23.3% year on year (YoY) and the operating profit growing by 24.2% YoY during the quarter. The gross profit margin (GPM) and the operating profit margin (OPM) improved by 114 basis points and 327 basis points sequentially during the quarter. -
The consolidated total revenues grew by 23.2% YoY to Rs1,191.9 crore (ahead of our estimate of Rs1,112.1 crore). The strong revenue growth can be attributed to the robust performance by the domestic business (grew by 24% YoY on a comparable basis) and the sustained strong growth in the international business (grew by 19% YoY on comparable basis). -
The domestic business grew by 24% YoY on a comparable basis with the key segments posting a strong growth despite the current inflationary scenario. It was yet another quarter of strong performance by the household insecticide and soap segments, which registered a value growth of 29% YoY (twice the category growth) and 32% YoY (ahead of the category growth of 10% YoY) during the quarter. The hair colour segment was able to maintain around 15% year-on-year (Y-o-Y) growth during the quarter. -
The international business maintained its 20% Y-o-Y growth (on a comparable basis) during the quarter. The Indonesian business grew by a strong 27% YoY while the Latin American business grew by 13% YoY during the quarter. The African business (including the Darling group's figures) grew by around 47% YoY during the quarter. Despite a gloomy macro environment the UK business grew by 10% YoY during the quarter. -
Though the consolidated GPM was down by 87 basis points YoY to 52.4%, the same improved sequentially by 114 basis points. Also the consolidated OPM improved by 327 basis points to 18.1% (ahead of our estimate of 16.8%). The operating profit grew by a strong 24% YoY to Rs214.2 crore. -
However, the higher (than expected) interest cost, exchange fluctuation loss (against the gain of the previous year) and higher incidence of tax resulted in a flat bottom line of Rs131.0 crore. This was slightly below our expectation of Rs135.4 crore for the quarter. The exchange fluctuation loss during the quarter stood at Rs16.6 crore as against a gain of Rs9.0 crore in the corresponding quarter of the last year. -
We believe topline growth of above 20% YoY will be the mix of price-led growth and sustained strong volume growth during the quarter. The sequential improvement in the GPM and OPM was the highlight of the quarter. If the raw material prices correct from the current level, we expect GCPL to post a better margin picture in the second half of the year. Overall, Q2FY2012 saw a strong operating performance by GCPL. We will review our earnings estimates for FY2012 and FY2013 after tomorrow's conference call. At the current market price the stock trades at 23.9x its FY2012E earnings per share (EPS) of Rs16.9 and 19.7x its FY2013E EPS of Rs20.5. We maintain our Buy recommendation on the stock with a price target of Rs487. Thermax
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs471
Current market price: Rs425 Price target revised to Rs471 Result highlights -
Results above expectation: Thermax' Q2FY2012 results were above our expectation on almost all fronts due to strong execution of projects. However, the margins were lower on a yearly basis on account of a strong growth witnessed in the revenue from the lower-margin engineering procurement and construction (EPC) project segment and a higher input cost. -
Top line growth led by strong execution: The net income from operations increased by 22.8% year on year (YoY) led by a robust execution in the energy segment. The environment division reported a 19.6% year on year (Y-o-Y) growth in sales. -
OPM under pressure: The company reported an operating profit margin (OPM) of 10.8%, which was lower than the Q2FY2011 OPM of 11.8%. This was mainly due to a higher raw material cost. The margin was also lower because of a higher contribution from the lower-margin EPC orders to the revenue. The EPC business constitutes 28-30% of its current order book. The employee expense was contained at Rs98.5 crore (flattish on a Y-o-Y basis) owing to cost rationalisation (lower increments) and lower provisioning as compared to Q2FY2011. -
PAT boosted by other income: In spite of a lower growth in the OPM the net margin grew by 13.6% YoY to Rs101.7 crore. This was primarily due to a 56% growth in the other income (mainly from interest/dividend from fixed deposits and mutual funds). However, the company availed of debt to the tune of Rs90.2 crore, showing an increase which is likely to exert further pressure on its margins going ahead. -
Order inflow needs to pick up: Order finalisation in the infrastructure sector especially in projects where the cost is greater than Rs100 crore has not yet picked up. The company's current order backlog at the group level stands muted at Rs6,513 crore (down 10.2% YoY) owing to lack of any large-ticket orders. The order inflow during the quarter stood at Rs1,284 crore. In the stand-alone order inflow of Rs1.188 crore (down 12% YoY), energy contributed Rs844 crore (down 20% YoY) and environment segment Rs344 crore (up 25% YoY). The petrochemical sector accounted for 35% of the order book with the other sectors contributing the rest: power 8%, cement 6%, and mining, chemicals and food processing 4% each. If the order finalisation doesn't pick up in H2FY2012 then the growth in the company's order book could remain muted in FY2012, jeopardising the FY2013 growth outlook. -
Estimates remain: In spite of the robust performance in H1, the subdued growth in order inflow in the last one year could slow down the revenue booking in H2. Hence, we have maintained our estimates for now and would wait for an uptick in order awarding activities in infrastructure to revisit our estimates. Overall, we are expecting the company to post a compounded annual growth rate (CAGR) of 10.5% in profit over FY2011-13.We also feel that the company could aggressively bid for projects in the coming times to keep its order book ringing though competition is rising. This would adversely affect its margins leading to margin pressure in the coming quarters. -
Remain cautious on a muted growth outlook: Despite decent quarterly results and supportive valuations, the stock could continue to languish due to slowdown in order inflows which leads to uncertainty on growth outlook beyond FY2013. The company has forayed into new space like solar, construction chemicals etc which hold a lot of potential and would help in further diversification. But these businesses are in a nascent stage and would not make material contribution in the near future. Thus, the key positive triggers in the stock remain the winning of big ticket size power equipment orders and some relief on margins in view of the recent cooling off of commodity prices.
At the current market price, the stock trades at 11.8x and 10.8x its FY2012 and FY2013 estimated earnings respectively. The stock has grossly underperformed since we turned cautious and recently downgraded it to a Hold rating. Since the order inflow has not seen an uptick in this quarter also, we maintain our cautious view on the stock and revise our target multiple downwards to 12x from 14x earlier. Accordingly we have revised our target price to Rs471 (12x FY2013 estimated earnings). We also feel that a further de-rating risk exists if order inflows do not pick up in the second half of the current fiscal. We maintain our Hold rating on the stock. Kewal Kiran Clothing
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs840
Current market price: Rs800 Strong all round performance, price target revised to Rs840 Result highlights -
Kewal Kiran Clothing Ltd (KKCL)'s Q2FY2012 report card has come out good; the results came ahead of our expectation on the revenue (+38.5% year on year [YoY]) as well as the earnings (+22.3% YoY) front. The margin at 26.1% for the quarter contracted by 400 basis points (bps) on a year-on-year (Y-o-Y) basis and was 150bps lower than our estimate.
w The revenue growth outperformance was led by both volume as well as realisation growth - the volume rose 20% YoY while the realisation rose
9.1% YoY. -
The operating profit grew by 18.1% on a Y-o-Y basis, which is lower than the revenue growth. This is due to an increase in the raw material cost (on account of high cotton prices coupled with costs related to the Addiction brand) and increase in manufacturing (+48.2% YoY on account of outsourcing) and selling expenses (+35.6% YoY on account of promotional spent on Killer deodorant). -
The balance sheet continues to be strong with cash and cash equivalents at approximately Rs125 crore (~Rs102 per share) and return on capital employed (RoCE) and return on equity (RoE) at 25% and 29% respectively. -
Upgrade earnings estimates: To incorporate the strong outperformance on the revenue and the earnings front for Q2FY2012, we upgrade our estimates for FY2012 and FY2013 (though we still continue to monitor the consumer discretionary space where we feel some moderation has started). Our revised earnings per share (EPS) estimates for FY2012 and FY2013 are Rs45.7 (earlier Rs44.7) and Rs56 (earlier Rs51.6) respectively. -
Maintain Hold: KKCL's superior business (business model built on strong brands sold on outright basis via various distribution channels) coupled with its management's financial acumen, profitable growth approach, and superior corporate governance practices followed, keep us bullish on it. We ascribe a price earning ratio (PER) of 15x our FY2013E EPS of Rs56 to arrive at a target price of Rs840, Though we continue to like the business, the valuation suggests a limited upside from the current level, compelling us to continue with our Hold rating on the stock. We believe that any trend defying the consumption moderation and volume offtake is likely to result in a multiple expansion and thus would offer upside risk to our rating and target price. Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs188
Current market price: Rs168 Price target revised to Rs188 Result highlights -
Overall result higher than expectation: Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) reported a 40.4% growth in its total revenue for Q2FY2012 to Rs576.9 crore. The operating profit margin (OPM) stood at 16.8%, lower by 180 basis points (bps) on a year on year (Y-o-Y) basis (our estimate was of 20%) on account of higher raw material cost coupled with higher employee expenses. However, adjusting for a one time foreign exchange (forex) loss of Rs8 crore pertaining to import of key raw materials, the adjusted OPM stood at 18.2%. On the other hand, the interest cost has gone up by 65.4% year on year (YoY) to Rs14.9 crore on account of capitalisation of the new technical ammonium nitrate (TAN) plant. The adjusted net profit for the quarter grew at 28.1% to Rs53.1 crore, which is higher than our expectation of Rs50.8 crore. -
Impressive volume growth: The net sales grew mainly on account of a healthy volume growth in the chemical and fertiliser segments. During the quarter, the volume in the TAN segment grew by 96% driven by the commissioning of its new TAN plant. But the volume was lower than expectation owing to prolonged monsoon and the Telangana issue which affected the mining activity in that area. Going forward, the new TAN plant will remain the key growth driver despite the possibility of lower than expected exports due to the economic slowdown globally. However, a slow uptick in the domestic coal mining and infrastructure activities could lead to moderate volume growth in the medium term. Further, The TAN plant was shut down for three weeks during the month of October on account of modification and repair works, which will impact TAN volume during Q3FY2012. The overall volume growth from the other chemicals segment will remain intact due to a higher demand in the domestic market. -
Margins likely to remain soft owing to higher input cost: The OPM of the company contracted by 180bps to 18.9% YoY in Q2FY2012 on account of a higher raw material cost coupled with higher employee expenses. However, adjusting for a one time forex loss of Rs8 crore pertaining to import of key raw materials, the adjusted OPM stood at 18.2%. The new TAN plant has a lower margin as it uses imported ammonia for manufacturing TAN and the price of ammonia in the international market is ruling high and firm at $570 per tone. This puts pressure on the margin of the chemical segment. The isopropanol (IPA) margin also contracted slightly during the quarter due to an increase in the price of the raw materials and the company's inability to pass on the increase in the raw material prices. Going forward, DFPCL may see some margin pressure in the chemical segment from the current level because the price of ammonia is ruling firm in the international market. The management has indicated at a blended OPM of 20% for FY2012E. However we have built an operating margin of 18.7% and 19.7% in our estimates for FY2012 and FY2013 respectively. -
Maintain "Buy" with a price target of Rs188: We have fine-tuned our estimates for FY2012 and FY2013 factoring for lower volume growth assumptions in TAN (owing to plant shutdown and moderation in mining activities) and owing to margins pressure on account of rising raw material costs. However, we remain positive on the performance of the agri-inputs business, which is likely to show a strong growth in the coming years. The TAN division is also likely to show a strong uptick once the domestic mining and infrastructure activities pick up. Overall, we remain optimistic on the growth prospects of DFPCL on a longer term perspective. At the current market price of Rs168, the stock trades at an attractive valuation of 6.3x FY2013E earnings. We maintain our Buy recommendation on the stock with a price target of Rs188. | |
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