| Summary of Contents
| STOCK UPDATE Crompton Greaves
Cluster: Apple Green
Recommendation: Hold
Price target: Rs164
Current market price: Rs106 Q4FY2012 results: First-cut analysis Result highlights -
Results marred by losses in subsidiaries: Crompton Greaves Ltd (CGL)'s Q4FY2012 consolidated results were severely below our expectations mainly because of a net loss of Rs41 crore booked in its subsidiaries, while the standalone business saw operating margin pressure. We suspect that the losses in subsidiaries could be because of more cost overruns recognised in its overseas projects. The company already saw cost overrun in Q3FY2012 where it closed a US order worth $50 million on nil margin. At that time, the management had indicated that this was a one-time event and would not be repeated. We would wait for management commentary to better understand the results. -
Standalone revenue in line of expectation: CGL's stand-alone revenues grew by 10% year on year (YoY). The revenue growth was mainly led by a 15.4% YoY growth in the revenues of the power systems division. The consumer durables division also reported its highest ever revenue at Rs606 crore, a growth of 10% YoY. The industrial systems division posted a yearly fall of 2% in revenue. -
Standalone operating margin under pressure: The operating margin at 10.2% (vs 15% in Q4FY2011) was the lowest in at least the past four years because of cost input pressure seen across the divisions. This was mainly led by the rise in raw material cost, which has increased to 74.7% as a percentage of sales from the earlier level of 67-68%. Overall, the profit after tax (PAT) fell by 37% YoY to Rs137 crore, which is lower than our estimate of Rs148 crore. -
Consolidated revenue grew by 6%: The net revenue of the consolidated entity rose by 5.8% YoY (below our projection of a 13% growth) mainly on account of the subsidiaries' sluggish revenue. -
Consolidated profitability was badly hit on subsidiaries' losses: Margins were under severe pressure at 6.9% (vs 12.8% in Q4FY2011 and 6% in Q3FY2012) as subsidiaries reported a mere operating profit of Rs16 crore. We feel that this margin pressure could be on cost overruns in some overseas projects as well as inventory write offs. The subsidiaries reported a net loss of Rs41 crore. Overall, the PAT fell by 66% YoY to Rs100 crore vs our estimate of Rs148 crore. -
View: The company continued to disappoint with huge margin pressure. The net loss at the subsidiaries was totally unexpected and needs more clarity from the management. We are likely to further downgrade our estimates. We would come up with a detailed note on Q4FY2012 results post our interaction with the management, reviewing our estimates and the price target. ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs255
Current market price: Rs232 Price target revised to Rs255 Result highlights -
Q4FY2012 results-ahead of expectations: ITC's Q4FY2012 results are ahead of expectations largely on account of a higher than expected other income during the quarter. The above 20% year-on-year (Y-o-Y) growth in the non-cigarette fast moving consumer goods (FMCG) business along with a 75% decline in the losses of the business at the PBIT level was the key highlight of quarter. The cigarette business' margin improved by 233 basis points year on year (YoY) to 31.1% during the quarter. The volume growth of the cigarette business stood at 4.5% YoY (in line with our expectation). The hotel business' performance was a disappointer with a drop of 4.8% YoY in the revenues and a 420-basis-point contraction in the PBIT margin to 29% during the quarter. Overall, it was a quarter of stable operating performance but a higher other income fuelled the bottom line growth. -
Performance snapshot: The income from operations (including the other operational income) grew by 16.9% YoY to Rs6,954.5 crore, ahead of our expectation of Rs6,780.1 crore for the quarter. The higher realisation in the cigarette business helped the gross profit margin (GPM) to improve by 118 basis points YoY to 59.7% while the operating profit margin (OPM) improved by 51 basis points YoY to 32.5% (which was lower than our expectation of 34.4%) in Q4FY2012. Hence the operating profit grew by 18.8% YoY to Rs2,263.3 crore. The other income grew by 80.7% YoY to Rs207.9 crore. The strong growth in the other income was largely on account of higher yields on investments. This led to a strong growth of 26% YoY in the bottom line to Rs1,614.2 crore. -
Outlook and valuation: We have marginally revised upwards our earnings estimates for FY2013 and FY2014 by 1% and 2% respectively to factor in the slightly higher than expected other income. In line with the upward revision in the earnings estimates our price target stands revised at Rs255. At the current market price the stock trades at 25.1x its FY2013E earnings per share (EPS) of Rs9.3 and 20.9x its FY2014E EPS of Rs11.1. The long-term growth prospects of the company are intact with the non-cigarette FMCG business delivering a strong performance and the company focusing on enhancing its presence in the hotel business. In view of the strong earnings visibility, profitability less sensitive to input cost pressure, and strong balance sheet we maintain our Buy recommendation on the stock. Max India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs234
Current market price: Rs189 Focus on profitability Result highlights For Q4FY2012, Max India reported a profit before tax of Rs49 crore on a consolidated basis. However the results are not comparable on quarterly basis as the adjustments with respect to new ULIP guideline in life insurance segment were made in Q4FY2011 itself. For FY2012 the consolidated profits were Rs155 crore compared to Rs8.7 crore in FY2011. The operating performance remained strong as the operating revenues were up 16.3% year on year (YoY) to Rs2,256 crore. Gross premiums for life insurance income grew by 14% YoY though margins declined YoY (17.8% vs 19.5% in FY2011) due to new ULIP guidelines. Market share of Max New York Life (MNYL) increased from 7.5% in FY2011 to 8.6% in FY2012 while conservation ratio was at 82%. -
Consolidated PBT up 250% QoQ: On a consolidated basis Max India reported a profit before tax of Rs49 crore for Q4FY2012 compared with Rs174 crore in Q4FY2011 (results not comparable on quarterly basis). For FY2012 the operating revenues increased by 16% YoY while profits increased to Rs155 crore vs Rs8.7 crore in FY2011 due to increased profit from life insurance segment. -
Life insurance-steady growth continues: MNYL reported a shareholder surplus of Rs121 crore in Q4FY2012. For full year FY2012 the profit was Rs460 crore vs Rs194 crore in FY2011. The annualised premium equivalent (APE) during FY2012 showed a decline of 13% YoY, while it increased 2% quarter on quarter (QoQ). The expenses/premium ratio for FY2012 dropped to 28.7% from 34.3% in Q4FY2011. -
Healthcare continues its negative trend: Max Healthcare's Q4FY2012 revenues were up 27.9% YoY to Rs229 crore. However, at EBITDA level, the company reported a loss of Rs4 crore. This was due to an increase in the capacity to 1,800 (from 975) beds and the hiring of employees at senior levels. The number of operational beds will increase to ~1600 in FY2013 and the business will turn profitable from FY2014 onwards. -
Specialty films-profit growth rebounds: Max Specialty Products (MSP) reported a 48% Y-o-Y increase in its revenues to Rs176 crore in Q4FY2012. The EBITDA margin grew to 12% from 10% in Q4FY2011. The profit before tax from this segment showed a sharp jump of 57.1% YoY to Rs11 crore. -
Health insurance: Max Bupa, the health insurance business of Max India, registered a gross written premium (GWP) of Rs38.4 crore in Q4FY2012, a growth of 263% YoY. The company enrolled more than 100,000 lives in the quarter. Maintain Buy with a price target of Rs234: Max India's strategy to focus on traditional products targeting the affluent segment, aids in maintaining a high persistency ratio and posting healthy margins despite an adverse industry scenario. The company has invested in capacity addition in the healthcare business which could significantly add to the revenues in the coming quarters. Nevertheless, the other businesses (specialty films, health insurance etc) continue to grow at a healthy rate. The company will be comfortable on the capital front after the stake sale in Max Healthcare and the recent deal on insurance business (Mitsui Sumitomo). The life insurance business is already delivering profits. In addition, the treasury corpus of Rs397 crore and inflows from the life insurance business will take care of the funding requirements of the health insurance and healthcare segments. We maintain our Buy recommendation on the stock with our sum-of-the-parts (SOTP) based price target of Rs234. Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs630
Current market price: Rs571 Strong Q1CY2012 results of Taro to boost Sun's performance Result highlights Taro Pharmaceuticals (Taro), which is 66.3% subsidiary of Sun Pharmaceuticals (Sun) has reported strong results for Q1CY2012. This is the third consecutive quarter of strong growth for Taro. As Taro accounts for nearly 30% of Sun's consolidated revenues, we expect Sun to show a better performance in Q4FY2012. Highlights of Taro's results -
Impressive Q1CY2012: The net sales of Taro grew by 35% year on year (YoY) to $145.1 million, which was better than our expectation. However, the sales growth was lower by 2% quarter on quarter (QoQ). The gross profit margin (GPM) improved by 970 basis points YoY to 68.3% on a better product mix during the quarter while the operating profit margin (OPM) surged by 1,463 basis points YoY to 45.6%, mainly on lower selling and advertising expenses. Despite a higher provision for taxes (at 27.3%) during the quarter, the profit after tax (PAT) jumped by 84% YoY to $47.25 million. However, on a quarter-on-quarter (Q-o-Q) basis, the net profit declined by 24%. -
Product pipeline: As of date, the total number of products awaiting approval of the US Food and Drug Administration (USFDA) for Taro is 16 abbreviated new drug applications (ANDAs) and one new drug application. Including Taro, Sun has total 145 ANDAs pending approvals from the USFDA. -
Taro in sync with Sun: Taro has changed its accounting year from December year ending to March year ending to coincide with Sun's accounting year. Sun recently inducted Kalyan Sundaram into the board of Taro (as chairman) to have better control of the affairs of the company. -
We maintain our estimates, price target and recommendation for Sun: Our revenue estimate for FY2012 would change marginally (up 1%) due to better than expected results of Taro in Q1CY2012. However, pending Q4FY2012 results of Sun (scheduled on May 30, 2012), we keep our estimates intact for FY2012-14. We maintain our Buy recommendation and price target of Rs630 (23x FY2014E earnings) on the stock.
SECTOR UPDATE Telecommunications Net additions moderate, policy overhang continues In April 2012 the GSM operators across India (excluding Reliance Communications [RCom] and Tata Telecommunications [Tata Tele]) added 6.5 million SIM cards, taking the overall base to approximately 671 million. That is an increase of 0.98% over the March 2012 base. On the net additions front, the April net additions (of about 6.5 million) were 5.5% lower than that reported in the previous month. Net addition momentum slows down, April additions at 6.9 million subscribers, down 5.5% MoM
On an already soft base of March (wherein 6.9 million subscribers were added, down 24.8% month on month [MoM]), the April aggregate GSM operators across India saw the net additions drop to 6.5 million subscribers, that is a 5.5% decline on a month-on-month (M-o-M) basis. Players across the board reported a decline in their net additions. Bharti Airtel added over 2 million subscribers; continued to lead the net additions trend
In terms of players, Bharti Airtel added over 2 million subscribers as against 2.5 million subscribers in March 2012, thus witnessing a decline of 19.6% on an M-o-M basis. In the last quarter (Q4FY2012 which included January, February and March) Bharti Airtel had come back very strongly, in terms of both subscribers and revenue market share. Our belief that Bharti Airtel would continue to gain market share and take its monthly SIM addition rate to an average of 2 million in the next two to three months is playing out. Idea's net additions dip on an M-o-M basis
For the month under review Idea Cellular (Idea)'s net additions came down by 26.1% (to 1.49 million). Idea's subscriber additions have declined for two months in a row after posting good net additions of 2.58 million subscribers in February 2012. Vodafone's net additions down 20%, Uninor's net additions also drop
After registering a decent growth for March 2012 (when it had added 1.03 million subscribers), Vodafone's net additions have flattered again to sub-1 million levels. For the month under review the company added only 0.82 million subscribers, down 20% on an M-o-M basis. Along with the incumbent players, the status of the new players also remained the same in April this year. The most serious issue was that Uninor saw a drop of 13.2% on an M-o-M basis. View
Despite a good operational performance by the players (Idea Cellular, Bharti Airtel and Vodafone have reported their Q4FY2012 results) the telecom stocks have been under pressure owing to the overhang of regulatory uncertainty. We believe that at an undemanding valuation of 6.2x FY2014 EV/EBITDA Bharti Airtel's stock price captures the negatives. Moreover, the company is much resilient and relatively better placed when compared with its peers in terms of financials and cash flow position. Thus, we continue to prefer Bharti Airtel in the telecom space but maintain our cautious stance on the telecom sector.
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