| Summary of Content STOCK UPDATE Hindustan Unilever
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs323 Upgraded to Hold Result highlights -
Hindustan Unilever Ltd (HUL)'s Q1FY2012 results are ahead of our expectation largely on account of a lower than expected advertisement and promotional expenditure, which aided the operating profit margin (OPM) to sustain at 12.3% on a year-on-year (Y-o-Y) basis (ahead of our expectation of 11% for the quarter). -
Its net sales grew by 14.8% year on year (YoY) to Rs5,503.9 crore (in line with our expectation of Rs5,503.9 crore). The growth was driven by a mix of both sales volume growth and price increases undertaken to reduce the pressure on the margins. The sales volume growth in the domestic consumer business stood at 8.3% YoY (the growth moderated slightly from 13.0% Y-o-Y growth in Q4FY2011). -
The key input prices stood significantly higher on a Y-o-Y basis (palm oil-32% YoY; LABfs-47% YoY; caustic soda [flakes]-34.2% YoY). Hence the gross margin declined by 482 basis points YoY to 44.1% during the quarter. However, pruning the advertisement spend helped HUL to maintain the operating profit margin (OPM) during the quarter. The advertisement spend as a percentage of sales stood at 11.5% in Q1FY2012 as against 15.7% in Q1FY2011. -
Thus the operating profit grew by 13.4% YoY to Rs678.8 crore (ahead of our estimate of Rs603.2 crore) and the adjusted net profit grew by 12.4% YoY to Rs581.3 crore during the quarter (ahead of our estimate of Rs549.0 crore). -
All the segments of the company posted a better performance in Q1FY2012. The HPC business grew by 15.4% YoY with the soap and detergent and personal segments registering a strong double-digit growth of 12.8% YoY (in line with our expectation of a 12.0% Y-o-Y growth) and a 19.3% Y-o-Y growth during the quarter. While the profit before interest and tax (PBIT) margin of the soap and detergent segment improved sequentially by 172 basis points to 9.2%; the PBIT margin of the personal wash segment was maintained at about 25% during the quarter. -
Also the food business registered a strong performance with the business revenues growing by a robust 14.9% YoY during the quarter. The revenues of the packaged food segment (including the processed foods and ice cream categories) and the beverage segment grew by 18.0% YoY and 13.1% YoY respectively during the quarter. -
It was the seventh consecutive quarter of a volume-led growth for HUL with all the segments performing well during the quarter. Though the input cost pressure is likely to sustain for the next one to two quarters, the company's ability to maintain the double-digit top line growth (with a decent sales volume) gives us hope of a decent bottom line growth in FY2012. Hence we upgrade our recommendation on the stock from Reduce to Hold. However, we will revise our price target after fine-tuning our estimates after tomorrow's conference call. At the current market price the stock trades at 30.1x and 26.2x its FY2012E and FY2013E earnings. ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs223
Current market price: Rs206 Q1FY2012 results: First-cut analysis Result highlights -
ITC's Q1FY2012 results are ahead of our estimates largely on account of a slightly higher than expected top line growth and a higher than expected other income during the quarter. -
The net sales (including the other operating income) grew by 20.6% year on year (YoY) to Rs5,860.2 crore (ahead of our estimate of Rs5,669.7 crore) on the back of a strong performance by all the business verticals during the quarter. The operating profit margin (OPM) sustained at around 34.0% in Q1FY2012. Hence the operating profit grew by 20.2% YoY to Rs1,976.1 crore. -
This along with a higher other income resulted in a 24.5% year-on-year (Y-o-Y) growth in the reported profit after tax (PAT) to Rs1,332.7 crore (ahead of our estimate of Rs1,260.7 crore) during the quarter. -
The core cigarette business' revenue grew by about 13.0% YoY in Q1FY2012. The cigarettes sales volume growth must have stood at higher single digits during the quarter. The profit before interest and tax (PBIT) margin of the business improved to about 30.0% during the quarter. -
It was yet another quarter of an excellent performance by the non-cigarette fast moving consumer goods (FMCG) business with its revenues growing by 19.4% YoY. The losses of business were down by 15% YoY. -
The performances of the agri business and paper, paperboard and packaging businesses were the highlights of the quarter. The revenues of the agri business grew by about 27% YoY to Rs1,707.1 crore on the back of the strong sales of soy, wheat and coffee during the quarter. The profit before interest and tax (PBIT) margin of the agri business was maintained at 9.2% during the quarter. The revenues of paper, paperboard & packaging business grew by strong 22% YoY with the PBIT margin sustaining at 22.0% on the back of an improved product mix and better realisations. -
Being a lean quarter the hotel business revenues grew by just 12.2% YoY to Rs252.5 crore. The PBIT margin of the business improved by 321bps YoY to 20.3% during the quarter -
We will review our estimates for FY2012 and FY2013 after our interaction with the management of the company and shall come out with a detailed note on the results. We maintain our Buy recommendation on the stock with a price target of Rs223. At the current market price the stock trades at 26.2x and 22.2x its FY2012E and FY2013E earnings respectively. Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs534
Current market price: Rs518 Q1FY2012 results: First-cut analysis Result highlights -
Earnings ahead of Street estimates: Sun Pharmaceutical Industries (Sun) in its Q1FY2012 results posted an 11.2% de-growth in the net profit to Rs501 crore but the same was ahead of Street estimates. The net sales of the company grew by 19.8% year on year (YoY) to Rs1,635.7 crore. Since Taro Pharmaceutical Industries (Taro) became a subsidiary of Sun from September 20, 2010 the latter's performance for the current quarter includes the results of Taro and its subsidiaries and therefore is not comparable with the corresponding figures of the previous quarter. -
Performance by geography: Indian branded generic sales grew by 18% YoY to Rs638 crore. The revenue growth of the company in the Indian generic market was supported by 7 new product launches. In the export market, US formulation which accounts for 37% of the total sales, posted revenue of $139 million whereas generic formulation in the rest of world (RoW) markets accounted for $56 million. -
Operating margins contracted by 11 percentage points YoY but improved QoQ: Sun reported a sharp contraction in its operating profit margin (OPM) by 11 percentage points to 33.5% on account of the high base effect and a sharp increase in the employee cost (up by 123% YoY). However on a sequential basis the OPM of the company improved by 315bps which is on account of a decrease in other expenditure by 13.3% and also due to a decrease of research and development (R&D) expenditure as a percentage of sales to 5.4% as against 6.2% in Q4FY2011. -
Healthy other income through receipt of interest: During the quarter the company booked healthy other income of Rs96.9 crore of which Rs31.5 crore is on account of net interest income. -
Performance of Taro: Taro reported a 14% YoY increase in its revenue to $112 million whereas net profit has come significantly higher at $36 million. -
Caraco became wholly owned subsidiary: Caraco has convened a shareholder meeting on June 14, 2011 and become a wholly owned subsidiary of Sun. -
ANDA approvals for 7 new products have been received during Q1FY2012: During the quarter abbreviated new drug applications (ANDAs) for 6 products have been filed of which 4 products are by Sun and the remaining 2 by Taro. Cumulatively the company has filed ANDAs for 383 products. In terms of approvals the company has received ANDAs for 7 products in Q1FY2012 taking the total number of approvals to 232. Further the total number of patent applications submitted now stand at 551 with 250 patents granted so far. -
We expect Sun's strong domestic business, its niche US market (controlled release substances, hormones etc) and the improving visibility of its patent pipeline to drive a steady growth in the long term. With a strong cash balance, Sun is well positioned to capitalise on the growth opportunities. We shall come out with a detailed note post attending the conference call. We maintain our Buy recommendation on the stock with a price target of Rs534. At the current market price, the stock trades at 24.2x FY2012E earnings and 21.1x FY2013E earnings. Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,410
Current market price: Rs1,103 Strong operating performance Result highlights -
Punjab National Bank (PNB) reported a strong set of numbers for Q1FY2012 as net profits grew 3.4% year on year (YoY) to Rs1,105 crore despite making a one off provision of Rs389 crore (as per revised provisioning norms) and lower treasury profits. This was driven by a strong growth in net interest income (NII) which grew 19% YoY and 2.9% quarter on quarter (QoQ). The margins remained steady at 3.84% and showed a marginal decline of 7bps QoQ. The asset quality deteriorated as gross non performing assets (NPAs) increased to 2% compared to 1.79% in Q4FY2011. We estimate PNB's earnings to grow at a compounded annual growth rate (CAGR) of 19% over FY2011-13 led by a 22% CAGR growth in advances. We maintain our Buy rating with a price target of Rs1,410 (1.5x FY2013E book value [BV]). -
Strong growth in NII: The NII increased by 19% YoY and ~3% QoQ , in line with our estimates. The growth in NII was driven by steady margins and a healthy growth in advances. During Q1FY2012 the advances growth remained flat on a sequential basis while it increased by 23.4% YoY driven by small and medium enterprise (SME; +36% YoY), retail (+24% YoY) and overseas advances (+77% YoY). We have assumed an advances growth of 22% CAGR over FY2011-13. -
Margins remain firm, on higher yields: Unlike other public sector unit (PSU) banks, PNB's net interest margin reported a marginal decline of 7bps QoQ to 3.84%. This was driven by a 55bps QoQ increase in yields on advances to 11.4% which offset the 64bps increase in the cost of deposits. The reported yield on investment also went up by 55bps QoQ due to shifting of investments towards longer dated securities. Due to rising cost pressures and shifting to higher rated advances the bank expects to maintain its net interest margin (NIM) at ~3.5% levels. -
Strong growth in fee income: The overall non interest income increased by 24.3% YoY despite lower treasury profits (Rs48 crore vs Rs121 crore in Q1FY2011). This was on account of a strong growth in fee income and higher recovery from written off accounts (Rs109 crore vs Rs76 crore in Q1FY2011). The core fee income growth during the quarter was 25% YoY and 6% QoQ. -
Asset quality disappoints: The gross NPAs and net NPAs increased to 2% and 0.88% respectively compared to 1.79% and 0.85% in Q4FY2011. The bank reported slippages of Rs1,177 crore (~2% annualised) while recoveries were to the tune of Rs663 crore. The bank made Rs389 crore of one off provisions (Rs243 crore for NPAs and Rs146 crore for standard advances) based on revised Income Recognition Asset Classification (IRAC) norms. During the quarter Rs512 crore of advances were restructured while outstanding restructured loans were ~6.3% of advances. The bank maintained its guidance to hold NPAs at around 2% levels. -
Opex increases QoQ due to pension provisions: The employee expenses surged sequentially (despite a high base) by 7% mainly contributed by the pension provisions of Rs260 crore (excluding Rs166 crore on second pension liability). Consequently, the cost to income ratio increased to 41.8% from 39.9% in Q4FY2011. -
Plans to acquire 30% stake in MetLife: The bank has finalised Metlife as its insurance partner and will acquire a 30% stake in the company. The bank is likely to acquire a stake via issue of fresh equity shares in the insurance company. According to the management the capital infusion in MetLife is largely over and it would help the bank in increasing its fee income. -
Valuations: PNB delivered a superior performance in Q1FY2012 led by healthy core performance. The margins remained steady despite pressures while fee income showed strong growth. In view of slower credit volumes, likely compression in margins and higher credit cost we have slightly trimmed our FY2012 and FY2013 estimates. We expect PNB's earnings to grow at a CAGR of 19% over FY2011-13, leading to a return on equity (RoE) of around 22%. We maintain our Buy rating with a price target of Rs1,410. Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs690
Current market price: Rs514 Price target revised to Rs690 Result highlights -
Corporation Bank in Q1FY2012 reported a net profit of Rs351.4 crore, a growth of 5.3% year on year (YoY), which is higher than our estimates. During the quarter there was a write back of tax provision amounting to Rs63.3 crore which aided profit growth. Excluding the one-time gain of tax reversal, the earnings of the bank declined by 13.7% YoY and 16.2% quarter on quarter (QoQ) to Rs288 crore. The net interest income (NII) of the bank was short of our estimates as it remained flat on a year-on-year (Y-o-Y) basis and declined sequentially by 7.1% led by a sequential decline in advances and margins (margins stood at 2.1% for the quarter compared to 2.48% in Q4FY2011). The asset quality of the bank also deteriorated as gross and net non performing assets (NPAs) increased to 1.07% and 0.52% respectively compared to 0.91% and 0.46% in Q4FY2011. We have reduced our estimates for FY2012 & FY2013 and revised the price target to Rs690 from Rs720 earlier . We maintain our BUY rating on the stock. -
NII growth remains flat on Y-o-Y basis: The NII of the bank remained flat on a Y-o-Y basis and declined by 7.1% QoQ to Rs707.5 crore. This was on account of a sequential dip in advances and a contraction in margins. The advances of the bank grew by 21.8% YoY while they declined by 9.1% sequentially. Deposits of the bank increased by 29.4% YoY and increased marginally by 1% QoQ. Consequently the credit to deposit ratio of the bank declined to 67% in Q1FY2012 from 74.4% in Q4FY2011. -
NIM contracts 38bps sequentially; CASA ratio slips to 21%: The margins of the bank came off sharply by 38bps QoQ to 2.1%. This was led by a sharp increase in the cost of deposits of the bank which grew by 87bps sequentially to 7.27%. The current account-savings account (CASA) of the bank also declined sharply to 21% from 26% in the earlier quarter leading to a sharp jump in the cost of deposits. -
Subdued growth in non-interest income: The non -interest income of the bank increased by 8.9% YoY mainly on account of a decline in treasury profits (Rs34.3 crore vs Rs53.8 crore in Q1FY2011) and lower recoveries from written off accounts (Rs39 crore vs Rs59.2 crore in Q1FY2011). The core fee income showed a growth of 12% YoY. -
Lower NPA provisions and write back of tax supported bottom line: The provision expenses for the quarter were reduced to Rs167 crore as against Rs270 crore in Q4FY2011. This was mainly due to lower provisions for NPAs at Rs90 crore during the quarter as against Rs187 crore during the previous quarter. Of the provisions for NPAs of Rs90 crore, Rs35 crore are on account of one time provision as per new Income Recognition Asset Classification (IRAC) guidelines. Provisions on investments were at Rs70.6 crore during the quarter. -
Asset quality deteriorates: The asset quality of the bank deteriorated during the quarter as gross NPAs increased sequentially to 1.07% (from 0.91%) while net NPAs increased to 0.52%. The slippages during the quarter were Rs154.8 crore (~1% annualized). The provision coverage ratio of the bank stood at 74.90% in line with that of the preceding quarter. -
Tax write back led to reduction in tax rate: The tax/ profit before tax (PBT) ratio of the bank during the quarter declined to 14.1% as against 27.7% in Q4FY2011. This was majorly due to the one time write back of tax provision of Rs63.3 crore during the quarter. -
Outlook: Corporation Bank's Q1FY2012 numbers were qualitatively weak as tax write back and lower provisions aided growth in profits. The bank's margins and CASA ratio have slipped to much lower levels compared to its peer banks. We have reduced our estimates for FY2012 and FY2013 by 7% and 3% respectively. We have also revised our target price downwards to Rs690 (1.05x FY2012E book value [BV]). Currently the stock is trading at 0.8x FY2013E BV. We maintain our Buy recommendation on the stock.
Orient Paper and Industries
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs70
Current market price: Rs60 Demerger of cement business to unlock value Result highlights -
Impressive performance, earnings in line with estimate: For Q1FY2012 Orient Paper & Industries Ltd (OPIL) has posted a net profit of Rs59.4 crore (improved by 73.4% year on year [YoY]), which is in line with our estimate. The impressive performance was driven mainly by a surge in the average blended realisation of 30.6% YoY and of 6.6% on a sequential basis. However, the paper division continued its disappointing performance during the quarter with a loss at the earnings before interest and tax (EBIT) level. -
Cement and electrical divisions drive overall revenue growth: The net sales of the company grew by 20.9% YoY to Rs533.9 crore. The top line growth was driven by the electrical division (which grew by 22.3% YoY) and the cement division (which grew by 11.4% YoY). Despite a 14.7% year-on-year (Y-o-Y) decline in the volume the cement division's revenue growth was supported by a sharp increase in the realisation (up 30.6% YoY). The demand environment in one of its key markets continues to be sluggish and hence the volume growth in the coming two quarters will remain under pressure. -
Margin expanded in spite of overall cost inflation and loss in paper business: On the margin front the operating profit margin (OPM) expanded by 312 basis points YoY to 19.4%. The increased profitability of the cement division due to the increase in the realisation largely offset the cost pressure and the loss in the paper division. Further, the profitability of the electrical division also improved marginally which added to the overall OPM. Consequently, the operating profit increased by 44.1% YoY to Rs103.5 crore. -
Other income boosted through sale of CER: The other income during the quarter increased by 65.5% YoY to Rs14.5 crore, which was supported by Rs8.5 crore received on account of CER sale. -
Approved demerger of cement business into separate entity, which will get listed: The board of directors of the company has decided to demerge the cement undertaking of the company by transferring the same to a newly formed wholly owned subsidiary, Orient Cement. The shareholder of OPIL will get one new equity share of Orient Cement for each share held in OPIL. Further, Orient Cement is proposed to be listed on the BSE and NSE, and the appointed date for the scheme is April 2012. We believe the development is a positive move for the company as it will unlock the value for the shareholder through direct exposure to a pure cement player. -
Huge outstanding water tax, company applied for waiver as per agreement: As per the auditor's report, no provision against the water tax amounting to Rs181.7 crore has been made by the company since the company's application for waiver thereof is under consideration by the state government of Madhya Pradesh. -
Planning to introduce new range of products in electrical division: The board of directors of the company has decided to further diversify the range of its consumer electrical products by adding household appliances such as mixers, geysers, coolers and room heaters in addition to fans and lighting products. Initially the company will do trading of aforesaid new products and the activity is expected to start from Q3FY2012. -
Maintain Buy with price target of Rs70: Due to the supply discipline mechanism followed by the manufacturers in the southern region, the company is benefited in terms of a strong growth in the realisation but going ahead we believe cement prices would come under pressure with a likely increase in the supply. However, the company's efficient cost structure gives it an advantage over the other players. Further, the company is in the process of introducing a new range of products in the electrical division which could lead to a strong revenue growth in the electrical division. Further, in addition to a strong balance sheet and attractive valuation, the demerger of the cement division will act as a re-rating trigger for the stock. Hence, we maintain our Buy recommendation on the stock with a price target of Rs70. At the current market price the stock trades at a PE of 5.8x and EV/ EBIDTA of 3.8x, discounting its FY2012 earnings estimates. Glenmark Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs426
Current market price: Rs331 Price target revised to Rs426 Result highlights -
Earnings growth ahead of Street's estimate: Glenmark Pharmaceuticals (Glenmark) reported a strong growth (of 23.1% year on year [YoY]) in its net profit on a consolidated basis and stood at Rs210 crore, which is ahead of the Street's estimate. The higher than expected earnings growth was largely driven by a better than expected revenue growth in some key geographies and margin expansion. -
Revenue grew by 27.8% supported by rebound in the US generic business and formulation business in the Indian market: The revenue of the company (excluding out-licencing fees) grew by 27.8% to Rs757 crore. The specialty business division, which accounts for 55% of the total revenue, reported a 29% growth. Geographically, the Indian market witnessed a 20% growth due to the launch of two new products, named Vorth TP and Doriglen. The Latin American market registered a 62% growth, which was supported by the launch of nine new products across the region. On the other hand, the generic business, which forms 45% of the total revenue, also supported the overall revenue growth. Geographically, the US market rebounded with a revenue growth of 37% whereas from the European market the company booked revenue of Rs17.5 crore (a growth of 118% YoY). In addition the company has also booked out-licencing fees to the tune of Rs111.2 crore as compared to Rs89.5 crore in the corresponding quarter of the previous year. -
OPM expanded due to a decrease in material cost and increase in out-licencing fees: The operating profit margin (OPM) of the company increased by 53 basis points YoY to 34.2% on account of a decrease in the material cost as a percentage of sales and increase in the out-licencing fees by 24%. However, adjusting for the out-licencing fees, the OPM for the quarter stood at 24.5%, which is ahead of the management guidance of 22-23%. However, the management has maintained its earlier OPM guidance of 22-23%. -
ANDA approval received for 4 new products: During the quarter the company received the final abbreviated new drug application (ANDA) approval for four products and filed three ANDAs with the US Food and Drug Administration (USFDA). In the forthcoming quarter the company plans to file four new products and anticipates the launch of seven new products. At the end of Q1FY2012, the company had a portfolio of 69 generic products authorised for distribution in the US market as well as 40 ANDAs in various stages of approval process with the USFDA. -
Glenmark has received $15 million from Salix Pharmaceuticals, Inc, USA (Salix). This is as per an agreement for advance against the commitment fee, which is to cover the risks associated with the upgradation of its manufacturing facilities to meet the anticipated increased requirements of Salix for Crofelemer, which is for multiple diarrhoeal conditions. Through an agreement between the two companies, Salix agreed to pay Glenmark a $21.6-million commitment fee in five equal annual installments, with the first annual installment in July 2012. The commitment fee is in addition to the compound purchase price payable by Salix to Glenmark. -
Upgrading earnings estimates for FY2012 and FY2013: We are upgrading our earnings estimates for FY2012 and FY2013 mainly to incorporate the higher than expected revenue growth particularly from the geographies like the USA, India and Latin America. We believe new product launches and ability to maintain the market share of the existing products will help sustain the momentum in the revenue growth. The revised earnings per share (EPS) estimates for FY2012 and FY2013 now stand at Rs24.1 and Rs22.6 respectively. -
Maintain Buy with revised price target of Rs426: Given the expectation of a healthy performance by the core business and a favourable risk-reward ratio, we maintain our Buy recommendation on the stock with a revised price target of Rs426 (15x FY2012E core earnings for the base business and Rs64 for research and development [R&D]). At the current market price, the stock trades at 13.8x FY2012E earnings and 14.7x FY2013E earnings.
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