Fw: Investor's Eye: Update - Bharat Heavy Electricals, Bank of India, GAIL India, Ipca Laboratories, Torrent Pharmaceuticals

 

   

Investor's Eye [October 29, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   Bharat Heavy Electricals Cluster: Apple Green Recommendation: Hold Price target: Rs250 Current market price: Rs227 Dismal results, order position worsens Result highlights Results marginally below expectation, while subdued orders inflow majorly disappoints: The Q2FY2013 results of Bharat Heavy Electricals Ltd (BHEL) were marginally below our expectation mainly led by a fall in the other income. It may be noted here that our net profit estimate at Rs1,296 crore was sharply below the Street's expectation of Rs1,446 crore. The containment of the raw material costs and a change in the policy of computation of leave encashment (which has increased the profit before tax by Rs166 crore) aided better than expected operating profit margins (OPMs). The order inflow also continued to disappoint as the derived order inflow is coming at a mere Rs349 crore. During the quarter, the company has downwardly adjusted the order book to factor in the currency movement for the orders having import content. This resulted in a drastic fall of about 24% year on year (YoY) and 8% on a sequential basis in its order backlog, which is the worst in at least the past 14 quarters.  Estimates downgraded marginally: In view of the dismal implied order inflow of Rs5,939 crore (down by 65% YoY) in H1FY2013, we have further downgraded our order inflow assumption to Rs35,000 crore for FY2013. Overall, we are downgrading our estimates by 3% for FY2014, while keeping the estimates for FY2013 unchanged. We are estimating a negative compounded annual growth rate of 7% in both the top line and adjusted earnings over FY2012-14. A poor ordering environment in the power sector remains a major worry for BHEL. The book-to-bill ratio has fallen down to 2.4x this quarter, which is the lowest in the past 28 quarters, aggravating future growth concerns. Price target cut to Rs250: Poor financial position of the state electricity board has further elongated the company's working capital cycle to 51 days, with cash balance falling to Rs5,308 crore from Rs6,672 crore at the end of Q4FY2012. We also feel that there is a growing risk of liquidation damages being slapped by some of its clients who are blaming BHEL for delaying the project execution. On the positive side, some breakthrough seen in the non-thermal power businesses, likes nuclear power, railways, logistics, and transmission and distribution, would help BHEL to diversify away from the thermal power equipment business. At the current market price, the stock trades at 9.1x FY2014E earnings. We have revised our price target to Rs250 (10x FY2014E). In view of the limited potential, we maintain Hold rating on the stock.   Bank of India Cluster: Apple Green Recommendation: Hold Price target: Rs290 Current market price: Rs280 Price target revised to Rs290 Result highlights Bank of India (BoI) declared disappointing set of numbers for Q2FY2013 as the net profit declined by 38.5% year on year (YoY; down by 66.0% quarter on quarter [QoQ]). This was on account of a sharp increase in provisions (up by 34.5% YoY and 228.7% QoQ) to Rs1,552.1 crore. However, the tax provisions were negligible at Rs10 lakhs due to higher provisioning, which restrained a further decline in the net profit.  The net interest income (NII) growth was in line with our expectations as it grew by 15.3% YoY (up by 7.5% QoQ) to Rs2,196 crore led by a 15 basis points sequential increase in the margins to 2.42%. The interest reversal on the non-performing assets (NPAs) affected the growth in NII. The business growth was subdued on a quarter-on-quarter (QoQ) basis as the advances fell by 3.0%, mainly contributed by decline in the retail and overseas advances. The deposits fell by 1.9% on a Q-o-Q basis as the volatile current account deposits fell by 17.2% QoQ.  Asset quality of the bank deteriorated significantly contributed by a sharp rise in slippages (Rs2,733 crore in Q2FY2013), which shored up the gross and net NPAs to 3.42% and 2.04% in Q2FY2013 from 2.58% and 1.69% in Q1FY2013 respectively. The bank restructured advances to the tune of Rs810 crore during the quarter, taking the total restructured book to ~Rs17,500 crore.  The non-interest income grew by mere 6.2% YoY as the fee income fell by 5.10% (down 11.6% QoQ) to Rs287.6 crore. However, the foreign exchange income, which increased 24.1% YoY to Rs184 crore, aided the growth in the non-interest income. Valuation and outlook: BoI's earnings growth and other operational parameters continue to remain volatile. The continued weakness in the asset quality and below par net interest margins (NIMs) remain a concern for the bank. We believe that BOI's return ratios are unlikely to improve significantly (ROE of 13.6% and ROA of 0.7%) and the bank would continue to underperform its peers. We revise the price target to Rs290 (0.9x FY2014 adjusted book value) and maintain Hold recommendation.   GAIL India Cluster: Apple Green Recommendation: Hold Price target: Rs410 Current market price: Rs359 Subsidy burden, subdued volume and tariff revision affected earnings Result highlights Gas trading drives sales, but tariff revision in LPG transmission hurts: During Q2FY2013, the net sales of GAIL grew by 17% year on year (YoY) and 3% quarter on quarter (QoQ), in line with our expectation. The year-on-year (Y-o-Y) sales growth was largely driven by a higher realisation in the natural gas (NG) trading business (up 33% YoY and 9% QoQ), though the business registered about 3% slippage in volume on both on Y-o-Y and sequential bases. Sequentially, the sales were supported by better volume in the petrochemical business in addition to the better realisation in the NG trading business.  On the negative side, the company derecognised Rs123 crore on account of a revision in the liquefied petroleum gas (LPG) pipeline tariff (which eroded the entire revenue for the quarter, having a quarterly run rate of Rs100-120 crore). Also, a decline in the realisation in the LPG and liquid hydrocarbon (LHC) segments adversely affected this segment's sales by 22% YoY and 28% QoQ.  Margin declined with tariff revision, higher subsidy and lower trading margin: The subsidy burden jumped sharply by 39% YoY and 12% QoQ to Rs786 crore in Q2FY2013. This figure is also 13% higher than our estimate. Moreover, the derecognition of Rs123 crore on account of the revision in the LPG pipeline tariff resulted in an operating loss for the segment. The NG trading margin (profit before interest and tax [PBIT] margin) witnessed a contraction of 126 basis points YoY and 284 basis points QoQ to 2.5% during the quarter. The management has guided that the margin would be in the 2.5-3.0% range normally.  Consequently, the operating profit of GAIL declined by 16% YoY and 27% QoQ to Rs1,412 crore. However, with a higher other income (of about Rs100 crore incremental dividend earned from its joint ventures and subsidiaries) and a lower tax rate, the profit after tax (PAT) declined by 10% YoY and 13% QoQ to Rs985 crore, which is 10% lower than our estimate.  Valuation: We have marginally revised our earnings estimates to Rs31.5 and Rs34 for FY2013 and FY2014 respectively. Though we retain our price target of Rs410, but we downgrade our rating on the stock from Buy to Hold due to a lack of near-term triggers and a flattish earnings outlook because of gas availability constraint. Nevertheless, both gas and petrochemical segments should witness volume growth in FY2015.   Ipca Laboratories Cluster: Ugly Duckling Recommendation: Hold Price target: Rs504 Current market price: Rs452 Price target revised to Rs504; change ratings to Hold Result highlights Q2FY2013 results better than expected; institutional business jacks up the growth: In Q2FY2013, the net sales of Ipca Laboratories (Ipca) jumped by 22.6% year on year (YoY) to Rs757.5 crore, mainly driven by the exports business, which surged by 31.5% YoY to Rs464.3 crore during the quarter. This is partly due to the currency benefits and increased offtake in the institutional business, which grew by 43% YoY to Rs129.5 crore during the quarter. The operating profit margin (OPM) declined by 290 basis points YoY (from a high base) to 21.8%. The net profit jumped by 61% YoY to Rs125.1 crore, mainly due to a 125% year-on-year (Y-o-Y) rise in the other income to Rs18.2 crore and foreign exchange (forex) gains of Rs6.4 crore (compared with forex loss of Rs27.2 crore) coupled with a extraordinary income of Rs4.69 crore. However, the adjusted net profit (adjusted for the forex gains and extraordinary income) increased moderately by 8.5% YoY to Rs114 crore, mainly due to a sharp rise in the effective tax rate by 473 basis points to 24.7%. The overall performance during the quarter has been ahead of our expectations. Growth momentum to continue but no fresh trigger: We expect the growth momentum to continue in the subsequent quarters at most front on account of the promotional branded business and institutional sales. The management has revised its revenues' guidance from Rs360 crore earlier to Rs370-380 crore for FY2013 from the institutional business. However, the management of the company does not expect new approval from its Indore facility before Q1FY2014, by U.S. Food and Drug Administration (USFDA). This will delay the ramp up in the US market. We believe the absence of trigger for the incremental growth and the poor performance of the active pharmaceutical ingredient (API) business would restrict the valuation of the stock in the mid-term. We revise up price target but change recommendation from Buy to Hold: Taking our cues from H1FY2013 results and interaction with the management, we fine-tune our estimates for FY2013 and FY2014. We revise our price target up by 5% to Rs504. However, due to a limited upside over the current market price of the stock, we change our recommendation from Buy to Hold.   Torrent Pharmaceuticals Cluster: Ugly Duckling Recommendation: Buy Price target: Rs760 Current market price: Rs664 Long-term growth elements remain intact  Result highlights Weaker operating performance in Q2FY2013: Torrent Pharmaceuticals (Torrent) reported a moderate growth of 13.6% year on year (YoY) in its net sales to Rs747 crore in Q2FY2013, mainly due to temporary disruptions in sales in the Brazilian market and coupled with a slower offtake in the contract manufacturing business. The core operating profit margin (OPM) declined by 73 basis points YoY to 16.8%, mainly due to a provision of foreign exchange (forex) loss of Rs14 crore. However, the other operating income grew by 352% YoY to Rs30.1 crore, while the non-operating other income jumped by 190% YoY to Rs12 crore. As a result, the net profit jumped by 32% YoY to Rs107 crore, which is exactly in line with our expectations. Temporary disruptions affected Q2FY2013 performance; long-term outlook intact: The performance of Q2FY2013 was affected by three major factors: (1) strike at the state regulatory agency led to a halt in the new batch order and non-clearance from port in the Brazilian market during June 15 and August 15; (2) slowdown in some molecules in the Brazilian market; and (3) lower offtake in the contract manufacturing business, as client company lost some contracts. Although, the business has been normalised in the Brazilian market, the company expects only a part of lost sales to be recoverable in the subsequent quarters. However, as the company continues to focus on the new products filings and contract manufacturing is expected to see a better performance on resumption of supplies to the clients, we believe the long-term outlook will remain intact.  We maintain our estimates and price target, and recommendations: The stock is currently trading at 10x FY2014E. We maintain our earning estimates and price target at Rs760, which implies 13x FY2014E earnings per share (EPS). We maintain Buy recommendation on the stock. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Hindustan Unilever, ICICI Bank, Punjab National Bank, Bajaj Holdings & Investment

 

     

Investor's Eye [October 26, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Hindustan Unilever Cluster: Apple Green Recommendation: Reduce Price target: Rs520 Current market price: Rs552 Downgraded to Reduce Result highlights Results in line with expectations, volume growth disappoints the Street: Hindustan Unilever Ltd (HUL)'s Q2FY2013 results are ahead of our expectations largely on account of a higher than expected other income (including the other income from operations) during the quarter. The adjusted profit after tax (PAT) grew by 23.1% year on year (YoY) to Rs805.3 crore, ahead of our expectation of Rs776.8 crore. The volume of the domestic consumer business grew by 7% YoY in the quarter, lower than the 9% growth in Q1FY2013 and the Street's expectation of a 9-10% growth. The soap and detergent segment's performance was the highlight of the quarter with the segment's revenues growing by 22.3% YoY and profit before interest and tax (PBIT) margin improving by 191 basis points YoY to 14.3%. On the other hand, the personal product segment has sprung a negative surprise with just a 12.1% year-on-year (Y-o-Y) revenue growth and a 125-basis-point Y-o-Y decline in the PBIT margin to 24.2%. Performance snapshot: In Q2FY2013, HUL's net sales grew by 11.6% YoY to Rs6,155.4 crore, largely in line with our expectation of Rs6,207.1 crore. Benign raw material prices, effective buying of the key inputs and judicious price hikes in the product portfolio aided the gross profit margin (GPM) to improve by 143 basis points YoY to 46.9%. However, the company increased the advertisement spending because of heightened competition in most of its key segments. The advertisement spends as a percentage of sales increased by 68 basis points YoY to 12.5% and the other expenses as a percentage of sales increased by 52 basis points YoY to 15.7% in Q2FY2013. Hence, the operating profit margin (OPM) stood flat at 13.3% during the quarter. The operating profit grew by 12.1% YoY to Rs821.1 crore. However, an 83% Y-o-Y growth in the other income to Rs148.8 crore (including the investment income and a gain on the sale of non-current investments) and a 65% Y-o-Y growth in the other operational income to Rs155.4 crore led to a 23.1% Y-o-Y growth in the adjusted PAT to Rs805.3 crore. Revision in estimates: We have marginally lowered our earnings estimates by 1% and 2% for FY2013 and FY2014 respectively to factor in the lower than expected revenue growth in the personal product and processed food businesses in Q2FY13. We have introduced our FY2015 earnings estimates for the company in this note. Outlook and valuation: The moderation in the volume growth in Q2FY2013 indicates that the sustained inflationary environment and heightened competition are giving a tough time to HUL's key segments. However, the company is aiming to improve the volume growth by increasing the media and promotional spending, enhancing the distribution reach and innovating & renovating its product portfolio in the coming quarters. The decline in the prices of the key inputs (including palm oil) would aid in improving the GPM in the coming quarters. However, an increased advertisement and media spending would keep the OPM in the range of 13.5-14.0% in the coming quarters.  At the current market price the stock is trading at 31.8x its FY2014E earnings per share (EPS) of Rs17.4, which is 22% higher than the average multiple of 26x of the last four years. Hence, in view of the premium valuation and the concern over the volume growth, we downgrade our recommendation on the stock from Hold to Reduce with a revised price target of Rs520 (we roll over the target to 28x its average FY2014-15 earnings).    ICICI Bank Cluster: Apple Green Recommendation: Buy Price target: Rs1,230 Current market price: Rs1,078 Price target revised to Rs1,230 Result highlights ICICI Bank's Q2FY2012 results were ahead of our estimates as the net profits grew by 30.1% year on year (YoY) to Rs1,956 crore. The growth in profits was mainly driven by a strong growth in the net interest income (NII), which grew by 34.5% YoY to Rs3,371 crore (higher than our estimates). The net interest margins (NIMs) remained stable on a quarter-on-quarter (Q-o-Q) basis at 3.0% as a decline in the overseas' NIMs was compensated by an improvement in the domestic NIMs (3.43% vs 3.32% in Q1FY2013). The business growth continued to remain strong as advances grew by 17.6% YoY, while deposits grew by 14.8% YoY. The current account savings account (CASA) ratio was 40.7% vs 40.6% in Q1FY2013. The asset quality remained stable as the gross and net non-performing assets (NPAs) were almost similar to Q1FY2013 levels. The bank has provided ~85% for its exposure towards Deccan Chronicle, which turns into NPA in Q2FY2013. The outstanding restructured loans were almost unchanged at Rs4,158 crore.   The non-interest income grew by 17.4% YoY mainly driven by the treasury income of Rs172 crore. The fee income growth remained flat on a year-on-year (Y-o-Y) basis due to a slowdown in the corporate fees. Valuation: ICICI Bank has yet again delivered a robust performance on all fronts. Therefore, we have raised our estimates on an average by 3-5 % for FY2013 and FY2014 and expect the earnings to grow at a compounded annual growth rate (CAGR) of 15.7% over FY2012-14. We also revise our sum-of-the-part (SOTP)-based target price upwards for ICICI Bank to Rs1,230 (valuing the stand-alone bank at 1.6x FY2014 book value). We maintain Buy rating on the stock.   Punjab National Bank Cluster: Ugly Duckling Recommendation: Hold Price target: Rs800 Current market price: Rs749 Price target revised to Rs800 Result highlights Punjab National Bank (PNB)'s Q2FY2013 results were disappointing as the net profits declined by 11.6% year on year (YoY) to Rs1,065.6 crore (below our estimate). This was on account of a tepid growth in the net interest income (NII) and a sharp rise in the provision (51.2% YoY).  The net interest margin (NIM) declined by 10 basis points quarter on quarter (QoQ) to 3.5% in Q2FY2013 from 3.6% in Q1FY2013, mainly due to a 43-basis- point quarter-on-quarter (Q-o-Q) decline in the yield on advances. Further, there was also an interest reversal of Rs163 crore, which affected the NII and NIMs. The business growth appeared to be steady on a year-on-year (Y-o-Y) basis but was muted on a sequential basis. The advances grew by 22.8% YoY (up 0.1% QoQ), whereas the deposits grew by 17.3% YoY (up 4.0% QoQ). The current account savings account (CASA) ratio increased to 35.8% from 34.6% in Q1FY2013. The key disappointment came from the asset quality front as the slippages shored up to Rs4,544 crore, leading to the gross non-performing assets (NPAs) inching to 4.66%.The bank also restructured Rs2,677 crore of advances in Q2FY2013, thereby increasing the restructured book to 9.5% of the advances. The non-interest income growth was also sluggish as it grew by a mere 1.9% YoY but declined by 22.4% on a Q-o-Q basis. The fee income grew by 1.1%, whereas the foreign exchange income fell to Rs127 crore in Q2FY2013 from Rs212 crore in Q1FY2013.  Valuation PNB's Q2FY2013 result points to a significant pressure on the asset quality, which is beginning to erode the core income growth. Therefore, we revise the earnings estimates downwards, factoring the asset quality concerns, and expect the earnings to grow at a compounded annual growth rate (CAGR) of 6.3% over FY2012-14. We revise the target price to Rs800 (1.05x FY2014 adjusted book value). We downgrade the recommendation from Buy to Hold.   Bajaj Holdings & Investment Cluster: Apple Green Recommendation: Buy Price target: Rs1,236 Current market price: Rs853 Price target revised to Rs1,236 Result highlights The consolidated income of Bajaj Holdings and Investment Ltd (BHIL) remained flat at Rs91 crore on a year-on-year (Y-o-Y) basis. During the last seven quarters, the company reported a lacklustre top line of under Rs100 crore but the top line improved sequentially by 25.7% in Q2FY2013. However, the income from the company's associates improved by 8.4% year on year (YoY) in the same quarter. This led to a 7.4% Y-o-Y increase in the profit after tax (PAT) to Rs390.5 crore. During Q2FY2013, the total market value of the company's investments grew by 16.5% sequentially, whereas the cost of investments was up by 2.8% due to an increased exposure in the fixed income securities and other equity investments. The market value of its equity investments in the core associate companies (80% contribution) grew by 18.8% sequentially, while the market value in the other equity investments increased by 8.8% quarter on quarter (QoQ). BHIL invested Rs368 crore towards its entitlement in rights issue of Bajaj FinServ (BFS) on October 8, 2012, which would be reflected in Q3FY2012. Valuation BHIL's key investment, Bajaj Auto, has been valued at 13x FY2014 earnings per share (EPS). Though Bajaj Auto reported quarterly results in line with our expectations but there are concerns over increasing competitive intensity from Honda Motorcycle & Scooter India (Honda). Our price target for Bajaj FinServ is based on the sum-of-the-parts (SOTP) valuation method. Given the strategic nature of BHIL's investments (namely Bajaj Auto and Bajaj FinServ), we have given a holding company discount of 50% to BHIL's equity investments. The liquid investments have been valued at cost. Our price target of Rs1,236 implies a 45% upside for the stock. We maintain our Buy recommendation on BHIL.      Click here to read report: Investor's Eye

Fw: Investor's Eye: Update - NIIT Technologies, Axis Bank, CMC, Reliance Industries

 

      

Investor's Eye [October 16, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   NIIT Technologies Cluster: Ugly Duckling Recommendation: Hold Price target: Rs320 Current market price: Rs286 Downgraded to Hold; price target revised to Rs320  Result highlights Earnings below estimates: The disappointments in the revenues of Geospatial Information Services (GIS; revenues dropped by 3.8% quarter on quarter [QoQ]) business, Room Solutions (revenues dropped by 11.8% QoQ) coupled with lower than expected ramp up in the Crime and Criminal Tracking Network and System (CCTNS) revenues (hardware sales dropped by 36% QoQ) have led to revenues miss for the quarter for NIIT Technologies (NIIT Tech). The consolidated revenues were up by 6.5% QoQ to Rs500.1 crore (lower than our estimate of Rs529.2 crore). On a constant currency basis, the revenues were up by 3% QoQ and the benefit from currency movement was 3.5% QoQ.  During the quarter, the revenues from the Morris Communication joint venture were up 1.9% QoQ to Rs26 crore, whereas Proyecta reported revenues of Rs12.7 crore, down 10.6% QoQ.  The earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins were up by 100 basis points QoQ to 17% (below our expectation of 17.4%). Despite witnessing improvement in utilisation (130 basis points) and currency benefits (3.5%), margin improvement was restricted to 100 basis points on account of crash in margins in GIS business (dropped to 1% from 15% in Q1FY2013) and 400 basis points quarter-on-quarter (Q-o-Q) fall in Room Solutions margins to 19%.  The company reported a foreign exchange (forex) loss from revaluation of assets and liabilities of Rs15 crore as compared with a forex gain of Rs17 crore in Q1FY2013. The resultant net profit for the quarter was down by 25% QoQ to Rs 43.1 crore. Multiple headwinds in offing could restrict earnings momentum: The delay in the billing in the CCTNS projects coupled with slower traction in the GIS and Room Solutions (expect to ramp only by Q4FY2013) could lead to disappointments in the revenues in the next two quarters. The higher onsite cost pertaining to the initial ramp up of the recent deal wins could restrict the margins improvement in the coming quarters. Further, the possibility of pricing cut (2-5%) in the renewal deals as well as new deals coupled with absence of currency benefits could affect the earnings performance in FY2014.  Valuation and view: On account of the lowering of margin assumption and currency reset, we have revised our earnings estimates by 18.5% and 10.5% for FY2013E and FY2014E respectively. Further, the possible earning disappointments in the medium term could restrict any material re-rating of the stock. We are downgrading our rating from Buy to Hold with a revised price target of Rs320.     Axis Bank Cluster: Emerging Star Recommendation: Buy Price target: Rs1,370 Current market price: Rs1,146 Strong traction in retail business  Result highlights Axis Bank's Q2FY2013 results were in line with our estimates at the net interest income (NII) level but slightly lower than estimated at the net profit level (up 22% year on year [YoY] to Rs1,124 crore). Higher provisions (up 25.6% YoY) affected the growth in the earnings though the effect was partly offset by treasury profits. The NII growth of 16% YoY was in line with our estimate. The growth in the NII was driven by a sequential expansion in the net interest margin (NIM; 3.46% vs 3.37% in Q1FY2013) and a healthy growth in the advances (up 22.9% YoY). Led by a strong growth in the retail advances the total advances increased by 22.9% YoY. Further, the retail term deposits expanded to 40% of term deposits. The current account and savings account (CASA) ratio improved by 200 basis points quarter on quarter (QoQ) to 41% backed by a healthy savings deposit inflow. The non-interest income displayed a robust growth of 29.0% YoY (up 19.3% QoQ) on the back of a treasury gain of Rs207 crore and a 19.8% year-on-year (Y-o-Y; up 16.4% QoQ) increase in the fee income. The retail fee expanded by 43% YoY while the corporate fee grew by 15% YoY. The asset quality showed some stress as slippages were relatively higher contributed by a chunky account. Consequently, provisions increased by 25.6% YoY. The bank restructured Rs323 crore worth of advances in Q2FY2013. As a result, the restructured book increased to 2.3% of the net advances Axis Bank's Q2FY2013 performance points to a structural shift towards the retail business as both retail deposits and advances showed traction during the quarter. We largely retain our estimates and expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 15% over FY2012-14. We maintain our Buy rating on Axis Bank with a price target of Rs1,370.    CMC Cluster: Emerging Star Recommendation: Buy Price target: Rs1,551 Current market price: Rs1,118 Impressive margin performance  Result highlights Strong growth in SI business: In Q2FY2013 CMC maintained the strong growth momentum in the system integration (SI) business, which reported a strong sequential growth of 6.3% in its revenues. The customer services business' revenues were down by 13.8% quarter on quarter (QoQ) on account of lower equipment sales during the quarter. The consolidated revenues for the quarter increased by 1.4% QoQ and 28.2% year on year (YoY) to Rs458.6 crore.  The services business' revenues rose by 5.6% QoQ to Rs434.4 crore (accounting for 94.8% of the total revenues) whereas the equipment business' revenues were down by 41.7% QoQ to Rs23.8 crore (accounting for 5.2% of the total revenues). The revenues of CMC Americas (its US subsidiary) grew by 5% QoQ and 25% YoY in US dollar terms. In rupee terms, the revenues of the subsidiary rose by 6.3% QoQ to Rs197.7 crore. The revenues earned through joint go-to-market with Tata Consultancy Services (TCS) were stable at 56% of the total revenues on Q-o-Q basis.  The international revenues were up by 3.5% QoQ and 44.1% YoY to Rs304.1 crore (accounting for 66.4% of the total revenues). The domestic revenues were down by 2.8% QoQ but up by 5.5% YoY to Rs154.1 crore (accounting for 33.6% of the total revenues).  Impressive margin performance: Despite wage hike and lower benefits from rupee depreciation during the quarter, CMC managed to keep its operating profit margin (OPM) stable at 16.7% as against 16.6% in Q1FY2013. Lower equipment sales (down 41.7% QoQ) and a higher contribution from the services business helped stabilise the margin, which was ahead of our expectation of 15.7%. Going forward, the management has maintained the margin range of 16-17% for the coming quarters.  Higher tax and lower other income drags profitability: For the quarter, the net other income (NII) declined by 80% QoQ to Rs1.1 crore on account of a foreign exchange (forex) loss of Rs1.6 crore and a lower treasury income. Further, a significant rise of 33.2% QoQ in the tax provision to Rs22.7 crore on account of an amount of Rs4.5 crore pertaining to the tax on the dividend from CMC Americas led to a 15.5% sequential fall in the net income to Rs49.4 crore. On a Y-o-Y basis the net profit rose by 51.3%. However, adjusting for the one-off item of the tax on the dividend for the quarter, the net profit declinewas restricted at 7.8% QoQ to Rs53.9 crore.  Management remains upbeat about the demand environment: The CMC management remains upbeat about the business visibility. The company is experiencing strong traction in the SI business, which is the spearhead of the company's growth strategy. Within the SI segment, the company is witnessing traction in the embedded systems and real-time systems, product engineering services, validation and testing services in the USA. The company is also witnessing traction in the solution-led businesses in the insurance, port and transportation segments both in the domestic and international markets. CMC is exploring newer geographies like the Middle East, Africa, Asia Pacific and Eastern Europe for its solutions. The information technology enabled services (ITES) segment is also witnessing traction in the digitisation and work flow management segments. The company is strategically placing its services as knowledge process outsourcing services, like analytics and business intelligence. In India, the company expects increased spending on e-Governance and is well placed to garner an incremental share of the same.  Valuation: CMC continues to deliver a strong operational performance. The deal flows in the SI, ITES and IMS businesses have improved and the management has increased focus on the international and emerging geographies. All this would maintain the growth momentum in the coming quarters. We have marginally revised our earnings estimates for FY2013 and FY2014 on account of higher tax assumptions and currency reset. We maintain our positive stance on CMC on account of the strong predictability of its earnings among the mid-cap IT stocks and a 41% CAGR in earnings over FY2012-14E. We maintain our Buy rating on the stock with a price target of Rs1,551.    Reliance Industries Cluster: Evergreen Recommendation: Buy Price target: Rs915 Current market price: Rs813 Price target revised to Rs915  Result highlights Earnings in line with estimate: Despite an unexpected surge in the effective tax rate, Reliance Industries Ltd (RIL) posted an adjusted net profit of Rs5,376 crore (declined by 5.7% year on year (YoY) which is much in line with our estimate. The gross refining margin (GRM) of $9.5 per barrel reported by the company is also in line with expectations but the margin in the petrochemical business is ahead of the Street's expectations. A higher than expected net other income of Rs2,112 crore mitigated the impact of the surge in the tax rate during the quarter.  Strong growth in refining business; falling output dents E&P revenues: RIL reported a revenue growth of 15% YoY to Rs90,335 crore for the quarter. The revenue growth was mainly driven by a healthy revenue growth of 23.2% YoY in the refining division. The petrochemical division of the company registered a revenue growth of 4.7% YoY to Rs22,058 crore in the same quarter. However, the exploration and production (E&P) division continues to post a decline in revenues-its revenues declined by 36.7% in Q2FY2013 on account of a falling output from the Krishna-Godavari (KG)-D6 basin.  Refining margin improved QoQ supported by better product cracks: During the quarter the refining plant of the company achieved a 112% utilisation rate and refined 17.6 million tonne of crude oil against 17.1 million tonne in Q2FY2012. The GRM improved to $9.5/barrel in Q2FY2013 (in line with our estimate) from $7.6/barrel in Q1FY2013. The sequential improvement in the GRM was largely on account of an expansion in the gas oil and gasoline cracks. The refining segment's revenues grew by 23.1% YoY to Rs88,878 crore. However, on account of a year-on-year (Y-o-Y) fall in GRM the earnings before interest and tax (EBIT) grew by only 15.3% to Rs3,544 crore.  Petrochemical margin better than Street's expectation: During the quarter the revenues from the petrochemical division grew by 4.7% YoY and 1% quarter on quarter (QoQ). On the margin front, the division has displayed a better than expected performance with an EBIT margin of 7.9%, which is largely flat on a quarter-on-quarter (Q-o-Q) basis as against the Street's expectation of a higher contraction. However, on a Y-o-Y basis the margin was still on the lower side mainly on account of a reduction in the deltas across petrochemicals including polypropylene (PP), purified terephthalic acid (PTA) and mono ethylene glycol (MEG). Consequently, the EBIT from the division declined by 28.2% YoY to Rs1,740 crore.  Gas output from KG-D6 basin continues to fall: The gas production from the KG-D6 basin dropped on both Y-o-Y and Q-o-Q bases during Q2FY2013. The average daily production rate during the quarter dropped to 29 million metric standard cubic metre per day (mmscmd) as compared with 45mmscmd in Q2FY2012 and 33mmscmd in Q1FY2013. The oil production from the Panna-Mukta-Tapti (PMT) oilfield declined by 17.9% during the quarter due to a natural decline in the reserve. The average crude oil price realisation for H1FY2013 was $103 per barrel for the KG-D6 basin and $111 per barrel for the PMT oilfield. Maintain Buy with revised price target of Rs915: We have largely maintained our earnings estimates for FY2013 and FY2014 at Rs61.5 and Rs64.9 respectively. The declining output from the KG-D6 basin and the margin pressure in the petrochemical business are the key concerns for the company. On the flip side, the expected bottoming out of the petrochemical cycle with an improvement in the spreads going ahead, the increasing production of unregulated shale gas and the potential revival of capital expenditure (capex) in the E&P segment are some of the positive triggers for the stock. Hence, we maintain our Buy recommendation on RIL with a revised price target of Rs915 (arrived at using the sum-of-the-parts valuation method). Currently, the RIL stock is trading at a price/earnings (P/E) of 13.3x and 12.6x FY2013 and FY2014 estimated earnings. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Company Report - Talwalkars Better Value Fitness

 

Talwalkars Better Value Fitness: Best Fit – BUY CMP Rs180, Target Rs235, Upside 30.6% Talwalkars Better Value Fitness (TBVF) offers a unique opportunity to play the growing importance of fitness combined with increased penetration of organized players. TBVF itself has been on a strong growth momentum as reflected in 1) ~2x jump in owned gym base and 2) robust revenue/PAT cagr of 36%/68% over FY10-12. In addition, company has unveiled fresh initiatives like 'HiFi' gyms (for rural reach), 'NuForm Studios' (standalone high street studios aimed at upper end of consumer strata) and 'Zumba' (aerobics) which would increase penetration and raise brand awareness. We project consolidated gym base of 199 by end of March 2014 of which 13%/17% would be housed in subsidiaries/HiFi gyms. Stock currently trades at the lower end of its historic 1-yr fwd PE range; valuations are supportive at ~11x FY14 PE given an estimated 35% PAT cagr over FY12-14. We retain our BUY rating with a revised 9-mth target of Rs235 (earlier Rs190). Click here for the detailed report on the same. Warm Regards, Amar Ambani

Fw: Investor's Eye: Update - Bajaj Corp; Special - Q2FY2013 Auto earnings preview, Q2FY2013 Pharma earnings preview

 

 

Investor's Eye [October 08, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Bajaj Corp Cluster: Ugly Duckling Recommendation: Hold Price target: Rs208 Current market price: Rs187 Price target revised to Rs208 Result highlights  Results marginally ahead of expectation: Bajaj Corp Ltd's (BCL) Q2FY2013 results are marginally ahead of our expectation (by 5%), largely on account of a higher than expected gross margin (GPM) during the quarter. The net sales grew by 27.2% year on year (YoY) to Rs135.9crore (in line with our expectation of Rs134 crore) in Q2FY2013. With an improvement of around 375 basis points in the GPM, the reported profit after tax (PAT) grew by 33.6% YoY to Rs38.4 crore, which is marginally ahead of our estimate of Rs35.6 crore. Another quarter of close to 20% growth in sales volume: The second quarter of FY2013 was the seventh consecutive quarter of close to 20% growth in sales volume. It reported a sales volume growth of ~19% in Q2FY2013 on the back of sustained strong volume growth in its flagship brand Bajaj Almond Drops Hair Oil (ADHO). The sales volume of Bajaj Kailash Parbat Cooling Oil (KPCO) almost doubled on a year-on-year (Y-o-Y) basis to 12,745 cases during the quarter. The strong volume growth can be attributed to sustain conversion of the consumers from coconut oil to light hair oil category and an improvement in the distribution reach.  Profitability improved significantly: In Q2FY2013, the GPM of the company improved significantly, by 375 basis points YoY and 150 basis points quarter on quarter (QoQ), to 57.2%. The strong improvement in the GPM can be attributed to sustained strong volume growth, close to 7.3% YoY improvement in the blended realisations and around 5% Y-o-Y decline in the price of light liquid paraffin (LLP), a key input for the company. The operating profit margin (OPM) improved by 312 basis points YoY to 28.7% during the quarter. With the LLP prices showing a downward trend and vegetable oil prices likely to decline from the current level, we expect the GPM to remain firm in the coming quarters. Outlook and valuation: The second quarter of FY2013 was yet another quarter of strong operating performance by BCL. The highlight of the quarter was a strong improvement in the GPM on both Y-o-Y and sequential bases. We broadly maintain our earnings estimates for FY2013 and FY2014. With the volume growth likely to sustain at around 20%, we expect BCL's top line and bottom line to grow at compound annual growth rate (CAGR) of 23.2% and 26.3% respectively over FY2012-14.  At the current market price, the stock is trading at 17x its FY2013E earnings per share (EPS) of Rs11.0 and 14.4X its FY2014E EPS of Rs12.9. In view of the consistent strong performance for the past several quarters, we have revised upwards our target multiple for the stock to 16x, which is a 40% discount to the current valuation of our fast-moving consumer goods (FMCG) basket. Our revised price target for BCL now stands at Rs208. However, due to the minimal upside, we maintain our Hold recommendation on the stock. The key monitorables would be any development on acquisition front in the domestic and international markets, and the company's ability to adequately utilise the cash for improving the business fundamentals. SHAREKHAN SPECIAL Q2FY2013 Auto earnings preview    Tough quarter; expect earnings to pick up in H2FY2013  Widespread earnings decline to make Q2FY2013 the weakest quarter of recent times The Sharekhan automobile (auto) tracking universe (consisting of coverage and non-coverage auto companies) is expected to report a 7% year-on-year (Y-o-Y) earnings decline for Q2FY2013. Barring Eicher Motors and a few auto ancillaries, the quarter is expected to remain weak for most of the companies. The lower double-digit growth in the top line lost traction with a mid single-digit operating profit growth and ultimately failed to translate into a positive bottom line.  M&M and Eicher Motors to outperform OEMs, Apollo Tyres and Exide Industries to lead the ancillary pack Automobile original equipment manufacturers (OEMs) are expected to report an 11.3% Y-o-Y decline in profit after tax (PAT). Eicher Motors and, Mahindra and Mahindra (M&M) are expected to report a flat growth in an otherwise broad-based decline. A few ancillaries, such as Apollo Tyres and Exide Industries, are expected to report a significantly higher growth on the low corresponding base.  Maruti Suzuki (Maruti), TVS Motor Company (TVS Motor) and Ashok Leyland are expected to disappoint the most amongst the OEMs because the earnings got affected by specific issues related to these companies. Greaves Cotton would disappoint the most amongst the ancillaries. Q2FY2013, a wash-out quarter; a better outlook for H2FY2013 Given that the festive season is shifting largely to Q3FY2013 and Q4FY2013 being the strongest quarter of year in terms of demand, earnings are expected to bottom out in Q2FY2013. Apart from the festive buoyancy, the forthcoming period is expected to see the benefits of the recently lowered interest rates. In a structural upturn, companies that hold on to their market share or are expected to gain back the lost ground would gain the most. M&M and Maruti would outperform amongst the OEMs. We would avoid Hero MotoCorp as the rupee's appreciation alone cannot warrant outperformance of the stock.   Q2FY2013 Pharma earnings preview   Strong growth momentum to continue   Key points  Robust aggregate revenue growth of 32% supported by the international business: We expect our pharmaceutical (pharma) universe to report a 32% year-on-year (Y-o-Y) growth in revenues in Q2FY2013 on an aggregated basis, mainly led by a 39% Y-o-Y growth in the international business (aided by key launches in the US and depreciation of the rupee). On the other hand, the domestic formulations business is expected to grow moderately by 12.5% year on year (YoY), mainly due to the high base effect in case of Sun Pharma (flat growth YoY). However, companies like Lupin (22.5% YoY), Glenmark Pharma (19% YoY) and Cadila Healthcare (16.5% YoY) will be outperforming the domestic formulation market during the quarter.  Margin boosted by the better product mix and currency benefits: We expect the operating profit margin (OPM) to expand by 377 basis points YoY to 27.1% for our universe during the quarter. Except Ipca Laboratories (Ipca) and Opto Circuits, most of the players would see an expansion in the OPMs mainly due to the better product mix and currency benefits. However, players like Piramal Healthcare and Dishman Pharma are not strictly comparable on a Y-o-Y basis, due to business restructuring affecting the base business in Q2FY2012 for both these companies. However, even excluding these companies, OPM should expand by 145 basis points YoY to 24.7%. The OPM of Ipca would be affected due to the high base effect (reversal of certain portion of the employee's expenses helping stronger margins) while that of Opto Circuits would be affected due to the higher raw material costs and other expenditure.  Adjusted PAT to grow by 21% YoY: We expect our pharma universe to report 21% rise in the net profit excluding marked to market (MTM) foreign exchange losses or gains. The growth would be mainly led by Cadila Healthcare (up 46.9% YoY) and Ipca (up 39.5% YoY) followed by Piramal Healthcare (up37.6% YoY), Sun Pharma (35.1% YoY) and Torrent Pharma (up 32.9% YoY). Glenmark Pharma is likely to witness a decline of 41% YoY, mainly due to the deferred tax credit recorded in Q2FY2012, thus making a high base. Dishman Pharma is likely to see a turnaround in the profits during the quarter. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Sharekhan Fundamental Research

 

 

Sharekhan ValueGuide [October 08, 2012]  Sharekhan www.sharekhan.com

Summary of Contents  EQUITY FUNDAMENTALS THE STOCK IDEAS REPORT CARD FROM SHAREKHAN'S DESK Booster dose from policy makers  Policy makers from across the globe were expected to take critical decisions in September 2012 that were to provide direction to the equity markets globally, and sure enough they did. As European Central Bank, US Federal Reserve and the Chinese government announced stimulus measures one after another in a coordinated effort to support the sagging global economy, the market gained strength and moved closer to the higher end of its multi-month trading range (the Nifty level of 4600-5600). The booster dose for the Indian equity market, however, came from our own government, which shaking off months of policy inertia announced a series of policy measures in a surprise move last month. SPECIAL REPORT High on cocktail of policy measures   The equity markets are celebrating the recent flurry of policy measures. Another round of liquidity infusion by the central bankers in Europe and the USA is soothing investor nerves and unleashing a "risk-on" rally globally. In India also, the government has finally shaken off the policy inertia and announced some critical policy steps to curtail the bloating subsidy bill and attract foreign inflows in the retail and aviation sectors. The developments have come as an unexpected pleasant surprise and the domestic market has accordingly reacted with a sharp appreciation of close to 7-8% in the past one week. Nifty-within kissing distance of the higher end of range and the highs made earlier this year: Contrary to general pessimism and the bearish consensus view, we had always been convinced that the benchmark index (Nifty) would remain within its multi-month trading range (4600-5600) with an upward bias. Driven by the recent events, the Nifty has surged ahead touching the higher end of the range and tested the recent highs (at least on an intra-day basis). In the absolute near term, the equity market could give up some of the recent gains on account of profit booking and the growing political uncertainties domestically. However, we believe that the bias remains positive and the probability of the benchmark indices breaking out of their range has increased substantially now. The caveat is the that the government should follow up the recent moves with more policy actions and take corrective steps to support the key sectors such as power and small and medium enterprises as well as the other troubled sectors. Thus, the idea should be to buy on corrective pull-backs.  Risk/concerns: The stock market rally could lose steam if the crude oil prices remain at uncomfortable alleviated levels on the back of QE3-inducted speculative interest in commodities. Domestically, the ability of the government to move forward with reforms despite the discontent among allies and the growing pressure from the opposition on the government over the corruption charges would influence investor sentiments. SHAREKHAN TOP PICKS Sharekhan top picks  STOCK IDEAS CMC: Leveraging on its pedigree Persistent Systems: Persistently innovating Relaxo Footwears: Catch this Flite SWITCH IDEA Construction: Closure of switch call from ITNL to IRB with 18.5% returns STOCK UPDATES Apollo Tyres: Price target revised to Rs105 Bank of India: Margins likely to improve but asset quality worries remain Bharat Heavy Electricals: Maintain Hold with price target of Rs260 Cadila Healthcare: Price target revised to Rs1,064 Deepak Fertilisers & Petrochemicals Corporation: Annual report review Eros International Media: Annual report review GAIL India: Annual report review  Godrej Consumer Products: Annual report review; price target revised to Rs726 Grasim Industries: Price target revised to Rs3,405 Housing Development Finance Corporation: Growing steadily despite competition  India Cements: Downgraded to Hold; price target revised to Rs95 Infosys: Wait is over, Infosys' first major acquisition  Larsen & Toubro: Annual report review; price target revised to Rs1,627  Marico: Price target revised to Rs201 Mcleod Russel India: Downgraded to Hold; price target revised to Rs356 Punj Lloyd: Management meet highlights Tata Consultancy Services: Downgraded to Hold Torrent Pharmaceuticals: Growth revives SHAREKHAN SPECIAL Q2FY2013 Banking earnings preview Q2FY2013 IT earnings preview SECTOR UPDATES Automobiles: Forex gains for auto sector, impact on FY2013 earnings  Pharmaceuticals: New drug pricing policy-less severe than anticipated VIEWPOINT Aurobindo Pharma: Concerns abating  EQUITY TECHNICALS  Sensex: Higher tops, higher bottoms  EQUITY DERIVATIVES  Derivative view: Riding on reforms  COMMODITY FUNDAMENTALS  Macro-economy Crude oil: Tumbles on SPR release fears, rising US inventories Precious metals: Boosted by QE3 speculations Base metals: Possibility of a correction in short term Major economic events in October 2012   COMMODITY TECHNICALS  Gold: Above Golden ratio Silver: Aiming higher Crude oil: A vertical fall Copper: Near key resistance Lead: Pull-back matured Nickel: Sub-division  CURRENCY FUNDAMENTALS  Currency market: Reforms unleashed, liquidity tap flowing  INR-USD CMP: Rs52.56 (spot) INR-GBP CMP: Rs84.92 (spot) INR-EUR CMP: Rs67.85 (spot) INR-JPY CMP: Rs67.35 (spot)   CURRENCY TECHNICALS  USD-INR: Expecting recovery GBP-INR: Approaching channel support EUR-INR: Scope for a bounce JPY-INR: Potential for a pause  PMS DESK Sharekhan PMS funds: Fund manager's view and product performance ProPrime-Top Equity ProPrime-Diversified Equity ProTech-Diversified ProTech-Nifty Thrifty ProTech-Trailing Stops  ADVISORY DESK  Monthly performance of Advisory products MID Trades Derivative Ideas  MUTUAL FUNDS DESK  MF PICKS Sharekhan's top mutual fund picks (equity)  Sharekhan's top SIP fund picks  EARNINGS GUIDE Click here to read report: Sharekhan ValueGuide     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.