| Summary of Content STOCK UPDATE Zydus Wellness
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs669
Current market price: Rs642 Price target revised to Rs669 Key points -
FY2011-strong operational performance: It was yet another year of a strong performance by Zydus Wellness Ltd (ZWL) with the revenue growing by 26% year on year (YoY) and the profit after tax (PAT) rising by 27% YoY in FY2011. The growth was achieved on back of a strong performance by all its brands, which maintained their strong position in their respective niche categories in the domestic market. The operating profit margin (OPM) was maintained at 25% during the year. -
Negative working capital: Leveraging the strength of its brands and its relationship with its channel partners through the group's pharmaceutical business, ZWL runs its business on advance collection terms from distributors and customers. The cash conversion cycle stood at negative 44 days in FY2011 (reduced from negative 80 days in FY11). This implies minimal working capital blockage and zero bad debt risk. -
No debt on books: The company has excellent cash generation ability and has a cash pile of around Rs87 crore, which is around 47% of its balance sheet size. Given the strong cash pile, the company will not need to raise any funds as debt or equity for its organic growth. Also, it provides an opportunity to the company to go for inorganic expansion in the domestic market (an acquisition of a brand in a niche category). -
Return ratios remain strong: The company's return ratios though declined from the levels of FY2010 but the same remained strong in FY2011. The return on equity (RoE) stood at 49.0% while the return on capital employed (RoCE) stood at 74% during the year. -
Improvement in dividend pay-out: The dividend pay-out ratio of the company improved from 27% in FY2009 to 31% in FY2011. The strong generation ability firms up our view that the company has the potential to pay a hefty dividend on a recurring basis. -
Focus on new launches: The company has maintained its thrust to enhance the product portfolio by developing new products in niche categories/new variants under the existing brands to maintain the strong growth momentum. The company has new products in the pipeline, which will be launched in the coming quarters. The new launches will be supported by brand building and promotional activities. Hence, we expect advertisement spend of the company to increase in the next two years. -
Revision in estimates: With vegetable oil likely to show a downtrend (in line with the other edible oils) in the coming quarters, we expect the pressure on the company's gross margin to ease out in FY2013. Hence we have upgraded our earnings estimates for FY2013 by 4%. -
Outlook and valuation: With a portfolio of strong brands and thrust on enhancing the product portfolio, we expect the company to achieve the turnover of Rs500 crore well in advance of its target of FY2014. However, we expect the OPM to slide a bit due to a higher raw material cost and an increase in advertisement spend towards the new launches. The tax benefit from new facility in Sikkim would aid in strong bottom line compounded annual growth rate (CAGR) growth of 32% over FY2011-12 (strong compared to that of the other fast moving consumer goods [FMCG] companies). Hence, we have upgraded our price target to Rs669 (based on 25x its FY2013E earnings per share [EPS] of Rs26.7). However, with a limited upside of around 5% from the current level, we maintain our Hold recommendation on the stock. At the current market price the stock trades at 32.8x its FY2012E EPS of Rs19.6 and 24.0x its FY2013E EPS of Rs26.7.
SECTOR UPDATE Automobiles June'11 volumes: Industry resilient even as macro headwinds whirlwind -
The commercial vehicle segment has thrown the biggest surprise in June 2011. The medium - heavy commercial vehicles (MHCVs) segment in particular dealt with quite a few irritants such as rate hikes, fuel price increase, driver shortage and Reserve Bank of India (RBI)'s restriction on lending to non banking financial company (NBFC)s for further priority sector lending at concessional rates. Tata Motors' MHCV segment grew by 6.2% year on year (YoY) and 3.2% month on month (MoM) in June 2011. The light commercial vehicles (LCVs) segment reported a strong growth as freight requirement for last mile connectivity remained robust. Mahindra & Mahindra (M&M) was the star gainer as their pick-ups raced at full speed. -
The rural centric demand theme also remained strong and surprised positively. M&M grew its tractor volumes by 37% YoY and 20% MoM. Similarly TVS Motors grew its rural centric moped by 20% YoY in June 2011. Hero Honda yet again crossed the 5 lakh units mark in the month (June 2011) and reported a 20% volume growth due to its strong rural focus. -
The growth slowdown remained more selective. Maruti Suzuki (Maruti) saw a deep adverse impact due to a strike at its Manesar plant and bi-annual maintenance shutdown. Similarly Tata Motors saw its ageing product portfolio struggling to revive. It reported sluggish sales of the Nano, Indigo and utility vehicles (UVs) although there was some respite for Indica which might have benefited due to the Maruti strike.
SHAREKHAN SPECIAL Q1FY2012 IT earnings preview Key points -
Top line numbers likely to remain strong: We expect average sequential revenue growth of the top four information technology (IT) companies to be around 5.2% for the June quarter as against 3.9% in Q4FY2011, with an average volume growth of around 4.1% and cross currency tailwinds of 85 basis points. For the June quarter, Tata Consultancy Services (TCS) is expected to lead the pack with a 7% sequential revenue growth followed by HCL Technologies with a 5.8% quarter on quarter (QoQ) growth. Whereas, on account of organizational restructuring Infosys and Wipro are likely to report a relatively soft set of numbers. Infosys is expected to grow by 4.4% in topline while Wipro's IT services is likely to post a 3.4% QoQ growth. Under our mid-cap coverage, Polaris Software Lab (Polaris) and NIIT Technologies (NIIT Tech) are likely to report an around 5% sequential revenue growth in dollar terms for the June ending quarter. -
Margins to weaken tracking wage hikes: The earnings before interest, tax, depreciation and amortisation (EBITDA) margins for the June quarter are likely to remain weak primarily on account of the wage hike cycle effective during the quarter for majority of the companies except HCL Technologies and Wipro (wage cycle is June 2011). Infosys and TCS are likely to post a more than 200 basis points sequential fall in their EBITDA margins whereas among the mid-caps NIIT Tech's margins are likely to decline by around 270 basis points QoQ and Polaris' margins could likely decline by 90 basis points QoQ. Wipro's IT services margins are likely to fall by 80 basis points QoQ while HCL Technologies' margins are likely to improve by 70 basis points QoQ. -
Management commentary on sustainability of demand and visa issue: Weak datapoints emerging from US and Euro-zone coupled with looming debt crisis in the US have sparked renewed debate and apprehension on the sustainability of demand for the IT sector beyond CY2011. Further, issues pertaining to visas and potential aggravation of protectionist policy in the US have raised an alarm for an outsourcing backlash in the coming years. Although most of the companies' managements have indicated at a strong demand undercurrent for FY2012, they and industry bodies have also voiced concerns on the visa issue. Given the backdrop, we believe that in the upcoming earnings season there will be larger focus on specific management commentary on these issues, which will provide clarity and roadmap for the future. -
Valuation: The recent quarterly performance of Accenture and Oracle suggest strong demand momentum and uptick in discretionary spending. Coupled with it the recent upward revision of worldwide IT spending to 7.1% by Gartner from 5.6% earlier has provided further support to the demand thesis. We continue to remain positive on the Indian IT sector for the next 12 months; however, in the short term negative newsflows and quarterly performance disappointments would impact stock performances. On an absolute risk reward ratio our top IT picks remain HCL Technologies and Polaris.
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