Fw: Investor's Eye: Update - Indian Hotels Company, Greaves Cotton

 

 

Investor's Eye [October 28, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Indian Hotels Company Cluster: Apple Green Recommendation: Buy Price target: Rs106 Current market price: Rs71 Q2FY2012 results: First-cut analysis Result highlights The Q2FY2012 results of Indian Hotels Company Ltd (Indian Hotels) are lower than our expectation largely on account of a lower than expected operating profit margin (OPM) during the quarter.  The quarter's net sales grew by 8.8% year on year (YoY) to Rs357.6 crore, which was largely in line with our expectation of Rs355.1 crore for the quarter. We had anticipated an average occupancy rate of 62% and a hike of 5% in the average room rate (ARR) in our estimates for Q2FY2012. The OPM declined by 33 basis points YoY to 10.8% (which was lower than our estimated OPM of 13.6%). Thus the operating profit grew by 5.6% YoY to Rs38.7 crore during the quarter. The adjusted net profit (before the extraordinary items) stood at Rs1.8 crore against the adjusted loss of Rs3.5 crore in Q2FY2011. The reported profit after tax (PAT) stood at Rs8.1 crore in Q2FY2012 against the loss of Rs6.3 crore in Q2FY2011. The extraordinary item for the quarter included an interest income of Rs13.72 crore on a deposit refund received after the surrender of a leasehold land in keeping with a Supreme Court order on the disputed allotment.  At the end of Q2FY2012, foreign currency translation differences pertaining to company's hedging instrument (Debt) and the hedged item (non integral investment in foreign operations) have been recognized under the reserves. Accordingly the foreign exchange (forex) translation difference of around Rs52 crore (net of tax) for the first half of FY2012 was recognised in the hedged reserve account while the corresponding translation difference of Rs140.3 crore pertaining to net investment in non-integral foreign operations for the first half was recognised under the foreign currency translation reserve account in the balance sheet. View: The first half of a year is normally dull for the hotel industry in India. Having said that, the business environment in the second half of the year has to be keenly monitored. Also, some clarity from the management on the performance of the overseas properties of the company would help us in reviewing our consolidated estimates for FY2012 and FY2013. We will review our earnings estimates and come out with a detailed note after an interaction with the management. At the current market price the stock trades at 35.2x and 17.2x its FY2012E and FY2013E earnings. Currently we have a Buy recommendation on the stock. Greaves Cotton Cluster: Emerging Star Recommendation: Buy Price target: Rs104 Current market price: Rs89 Price target revised to Rs104 Key points Quantum jump in engine revenues, other businesses a drag: We expect Greaves Cotton to deliver a 13.4% sales growth in FY2012 against the annualised FY2011 sales. The company commenced supplies to Tata Motors from Q2FY2012 and is now adding significant scaleability to this business. Based on the ramp-up plans, we estimate that the Tata Motors business alone would yield a 10% growth sequentially in Q3FY2012. Overall, we estimate H2FY2012 would deliver 24.7% higher revenues over H1FY2012. The engine business would be the key growth driver while the infrastructure segment, which has surprised us negatively, would remain a drag.  Operating performance fails to track top line growth; PAT expected to remain muted: Against our estimate of a 13.45% top line growth for FY2012, the operating profit is expected to grow by 4.2%. The sharp contrast in the revenue growth and margin was owing to an increased contribution from the low-margin business of Tata Motors. We are estimating a 100-basis-point increase in the raw material cost for FY2012 and expect the other expenses to go up by 30 basis points.  The FY2012 PAT is expected to grow marginally by 1.1% on account of a higher base of the other income in the corresponding period of the previous year together with higher depreciation and interest charges.  Valuation: We are increasing our FY2012 top line estimate by 6% on account of a better than expected offtake from Tata Motors. However, we are reducing our FY2012 earnings per share (EPS) estimate by 11% to Rs7 to factor in the margin contraction. For FY2013 we expect the company to report EPS of Rs8.3. Our new price target of Rs104 discounts the FY2013 EPS estimate by 12.5x. We maintain our Buy recommendation on the stock. Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com   www.sharekhan.com to manage your newsletter subscriptions