| Summary of Contents
| STOCK UPDATE Glenmark Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs468
Current market price: Rs388 Q1FY2013 results: First-cut analysis Result highlights -
Weaker than expected revenue growth on lower licencing income and domestic sales: In Q1FY2013 the net sales of Glenmark Pharmaceuticals (Glenmark) grew by 19.8% year on year (YoY) to Rs1,040.4 crore. The same is 9% below our expectation primarily due to a weaker than expected growth in both the specialty business and the licencing income. In Q1FY2013 the revenue was mainly driven by the generic business, which grew by 57.67% YoY to Rs530 crore (we had expected a 51.6% growth YoY). However, the specialty business (excluding the licencing income) increased by 22.8% YoY to Rs504.645 crore (against our estimate of a 52.7% growth YoY). The specialty business includes the Indian formulation business, which grew by 24.1% YoY during the quarter. Though the growth rate is better than the industry growth rate of 15% but it falls short of our expectation. -
Core OPM declines 380bps YoY, but better than expected: The core operating profit margin (OPM; excluding the out-licencing income) declined by 380 basis points YoY to 20.7% due to a high base effect. However, the same is better than our expectation of 19.1%. -
Forex loss and lower licencing income weaken profit line; adjusted core PAT jumps 44%: The company provided Rs55 crore of foreign exchange (forex) loss during the quarter as compared with a forex gain of Rs9 crore in Q1FY2012. Moreover, the company recorded nearly Rs5 crore of licencing income during the quarter as compared with Rs111.2 crore in Q1FY2012. This caused the net profit to decline by 62.8% YoY to Rs78.2 crore. However, the core net profit (excluding the out-licencing income and the forex loss/gain) jumped by 44.3% YoY to Rs129.6 crore, which is virtually in line with our expectation of Rs132 crore. We have a Buy rating on the stock with a price target of Rs468.
We will revisit the estimates and come out with a detailed report on the company after the company's teleconference call scheduled for tomorrow (ie August 3, 2012) at 8.30pm. Corporation Bank
Cluster: Apple Green
Recommendation: Hold
Price target: Rs480
Current market price: Rs403 Price target revised to Rs480 Result highlights -
Corporation Bank's Q1FY2013 net interest income (NII) was in line with our estimate (it grew by 14.3% year on year [YoY]) and net profit was higher than our estimate (up 5.7% YoY to Rs371 crore) due to lower than expected provisions during the quarter. -
The net interest margin (NIM) declined by 12 basis points sequentially to 2.29% due to a dip in the yields and a rise in the cost of funds in Q1FY2013. The current account and savings account (CASA) ratio declined to 20.7% from 22.1% in Q4FY2012. -
The advances reported a growth of 21.1% YoY (a decline of 4.9% sequentially) led by the small and medium enterprises (SME) sector (advances to the SME sector rose 2.3% sequentially and 23% YoY) and the corporate segment. The deposits grew by 13.9% YoY. -
The non-interest income grew by 13.1% YoY (fell by 22.6% sequentially). The commission income grew by 11% YoY while the treasury gains came in at Rs43 crore. The cost/income ratio remained stable at 41%, in line with that in Q1FY2012. -
The asset quality deteriorated as slippages increased to Rs722 crore, mainly from the large corporate accounts. During the quarter the bank restructured Rs1,075 crore of loans (mainly from the Uttar Pradesh State Electricity Board account), taking the total restructured book to 8.7% of the total advances. -
The provision expenses rose by 29.5% YoY, though the rise was aided by a reversal of an investment provision of Rs64 crore. The provision coverage ratio (PCR) also declined to 61% from 65.3% in Q4FY2012. Outlook and valuation
Corporation Bank's operating performance was affected by a dip in the margins and increased slippages. We, therefore, downgrade our earnings estimates for FY2012-14 by about 8%. Currently, the stock is trading at 0.7x FY2014 adjusted book value. We revise the price target on the bank to Rs480 (0.8x FY2014 book value) and downgrade our recommendation on it to Hold. Orient Paper and Industries
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs70
Current market price: Rs65 Results dented by paper business and cost inflation in cement business Result highlights -
Earnings dented by losses in paper business and one-off maintenance expense in cement business: Orient Paper & Industries (Orient Paper) posted a 17.7% decline in its net profit to Rs48.9 crore in Q1FY2013. The earnings growth fell short of our and the Street's expectations due to the continued losses in the paper business (a loss of Rs15.9 crore at the EBIT level) and a lower than expected margin in the cement business (partially due to a one-off plant maintenance cost). -
Strong volume driven growth in cement business: The overall revenue of the company grew by 25.4% year on year (YoY) to Rs656.9 crore, which is in line with our estimate. The top line growth was driven by the cement division, which posted a revenue growth of 23.1% YoY. The revenue growth of the cement division was driven by an increase in the volume (up 13.6% YoY) and a higher average realisation (up 8.3% YoY). The volume growth of the company is ahead of the industry's growth as well as the growth of its peers. The paper and electrical divisions have delivered a revenue growth of 63.2% and 18.3% respectively for the quarter. -
Margin dented by input cost inflation, and one-off expense and loss in the paper business: In spite of an 8.3% increase in the cement realisation, the overall operating profit margin (OPM) of the company contracted by 446 basis points YoY to 13.3%. The profitability contracted on account of a decrease in the EBIT margin of the cement and electrical divisions (down by over 11 and 4 percentage points YoY respectively). The sharp contraction in the cement division's margin was on account of the purchase of imported coal at a higher price due to a shortage of coal in the domestic market. Further, the paper division of the company has continued to post losses at the EBIT level-it posted a loss of Rs15.9 crore in Q1FY2013. Consequently, the operating profit decreased by 6% YoY to Rs87.7 crore (as compared with the 25.4% growth witnessed in the revenues). -
Received approval from Orissa High Court for demerger of cement division: The company has incorporated a new subsidiary named Orient Cement. Orient Paper's cement business will be transferred to the new company. Orient Paper received the approval from the High Court of Orissa for the proposed demerger of the cement division on July 27, 2012. The demerger of the cement division will come into effect from April 2012. We believe the development is positive for the company as it will unlock value for the shareholder through a direct exposure to a pure cement player. However, as per our interaction with the management of the company, it will take around four months to get Orient Cement listed on bourses. -
Huge outstanding water tax, company applied for waiver as per agreement: As per the auditor's report, no provision against the water tax of Rs232.7 crore has been made by the company since its application for a waiver thereof is under consideration by the state government Madhya Pradesh. -
Downgrading earnings estimates for FY2013 and FY2014: We are downgrading our earnings estimates for FY2013 and FY2014 mainly to factor in the higher than expected power & fuel cost. The company has started procuring around 15% of coal through imports due to a coal shortage in the domestic market. Consequently, our revised earnings per share (EPS) estimates now stand at Rs10.8 and Rs12.4 for FY2013 and FY2014 respectively. -
Maintain Buy with price target of Rs70: Due to a change in the market mix in favour of the western market, the company's volume growth shall improve. However, a likely increase in the supply could pressurise the cement realisation going ahead. In the electrical division, the introduction of new products will drive the revenue growth. On the other hand, the performance of the paper division will remain a key concern for the company. However, we prefer Orient Paper due to its strong balance sheet, attractive valuation and the demerger of its cement division which will act as re-rating trigger for the stock. Hence, we maintain our Buy recommendation on the stock with a price target of Rs70 (rolled forward to FY2014). At the current market price, the stock trades at price/earnings (PE) of 5.2x and enterprise value (EV)/EBIDTA of 3.8x discounting its FY2014 earnings estimate. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | |
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