Fw: IRFC Tax Free Bonds: Opening on 27 Jan 2012

 

Indian Railway Finance Corporation Ltd Issue period: 27 January 2012 to 10 February 2012. Issue of Tax Free Secured Redeemable Non Convertible Bonds Basis of allotment: On a first-come-first-serve basis within each category The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income as per provisions under section 10 (15) (iv) (h) of IT Act, 1961. Issue size is Rs. 3,000 Crores, with option to retain oversubscription upto Rs. 6,300 Crores. Investment Opportunity: Interest rates are at peak level; best time to invest in fixed income tax free instruments. Interest rate cycle has peaked out Given the sharp slowdown in the industrial activity and softening of the food inflation, the interest rate cycle has peaked out. Reserve Bank of India has restrained from increasing the interest rates in the last policy review meet and is expected to begin reducing rates in March or April 2012. The bond yields which have increased close to 9% levels have corrected significantly and show easing of pressure on rates. High post tax yield for triple A rated product Tax free bond with yield of 8% - 8.30% is comparable with yields offered on government bonds and offer extremely attractive pre-tax yield close to 12% for a long period of time. The bond issue has got AAA (stable) rating from the rating agencies - Crisil, ICRA and CARE. The bonds would also be listed and tradable on NSE/BSE. Company Overview: Financing arm of the Indian Railways Notified as a Public Financial Institution under Section 4A of the Companies Act, 1956 Registered as a NBFC-ND-IFC (Infrastructure Finance Company) with Reserve Bank of India 100% shareholding held by Government of India Consistently profit making Public Sector Undertaking Terms of the Issue: Particulars Issue details Face Value per Bond Rs 1,000 Tenor 10 years 15 years Minimum Application Rs 10,000 (in multiples of Rs 5,000 thereafter) Rs 10,000 (in multiples of Rs 5,000 thereafter) Interest Rate % p.a. (Category I & II) 8.00 8.10 Interest Rate % p.a. (Category III) 8.15 8.30 Frequency of Interest payment Annual Annual Issuance demat form or physical form demat form or physical form Interest on application % p.a. 8.00 Interest on refund % p.a 4.00 Issue Structure: Category I Category II Category III Upto 45% of Overall Issue Size* Upto 25% of Overall Issue Size* Upto 30% of Overall Issue Size* QIB & Corporate Individuals & HUF applying for more than Rs. 5 Lakhs Individuals & HUF applying for upto Rs. 5 Lakhs *on first come first serve basis to be determined on the basis of date of receipt of applications duly acknowledged by the Bankers to the Issue. * The coupon rates of 8.15% p.a. and 8.30% p.a. shall be payable only to the original allottees under Category III for the Tranche 1 and Series I Bonds and Tranche 1 and Series II Bonds respectively and shall not be payable to the transferees in case the Bonds are transferred or sold by the original allottees Please refer to the final prospectus for details. * For the purpose of information only, invest only after referring to the final prospectus.

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Fw: Investor's Eye: Pulse - RBI Monetary policy update; Update - Torrent Pharmaceuticals, Larsen & Toubro, Kewal Kiran Clothing, Yes Bank, Lupin, Federal Bank; Viewpoint - Hero MotoCorp

 

 

Investor's Eye [January 24, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK RBI Monetary policy update RBI eases CRR by 50 basis points  In its third quarter review of the monetary policy the Reserve Bank of India (RBI) has surprised the market by easing the cash reserve ratio (CRR) rate by 50 basis points to 5.5 % while the policy rates (repo and reverse repo rates) have been kept unchanged. Apart from addressing the tight systemic liquidity, which has affected the flow of credit, the CRR cut also suggests a change in the RBI's stance on growth which would result in the easing of the rates in the period ahead. Nevertheless, the RBI has again cautioned against the external risks (the euro crisis, geo-political risks etc), the rising fiscal deficit and the high inflation rate which could affect the domestic economy. Though the RBI appears to be in a softening mode, further monetary actions would be guided by the pace of decline in inflation and the government's efforts to rein in the fiscal deficit. Easing CRR positive for banks The reduction in the CRR rate is positive for banks as the additional liquidity available would be deployed towards credit and investment. Banks will be cautious in reducing the lending rates immediately as the deposit rates remain high on account of the higher rates offered by alternative instruments (tax-free bond etc). Therefore, we believe the lending rates will decline materially once the deposit rates start trending downwards (which is expected to happen towards the end of the fiscal). However, the reduction in the CRR would lead to a nominal increase (of 4 to 5 basis points) in the margins. Importantly, the reduction of the CRR suggests a change in the RBI's stance, implying willingness on its part to unwind the rates. This augurs well for the banking sector.   STOCK UPDATE Torrent Pharmaceuticals  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs680 Current market price: Rs547 Q3FY2012 results: First-cut analysis Result highlights Q3FY2012 results broadly in line with expectations: Torrent Pharmaceuticals (Torrent)'s net sales grew by 21.8% year on year (YoY) to Rs675.5 crore on the back of a 40% YoY rise in international revenues to Rs396 crore. The revenue from the Indian market, which constitutes revenues from the sale of branded formulations and contract manufacturing, grew moderately by 7.7% to Rs292.5 crore. The operating profit margin (OPM) declined by 177 basis points (bps) YoY to 14.9% during the quarter, which led to the net profit recording a restricted growth of 8.2% to Rs83.2 crore. A decline in the operating margin is mainly attributable to higher other expenditure, which may have an element of foreign exchange (forex) loss related to derivative contracts. Despite a sharp fall in the operating margins, the net profit during the quarter was broadly in line with our estimates (Rs85 crore) mainly due to higher other operating income off-setting the impact of fall in margins.  Indian sales pick up; yet underperform the industry: The revenue from the Indian market grew by 7.7% YoY to Rs292.5 crore during the quarter, which is lower than our expectation of Rs314 crore. The branded business grew by 8.8% YoY to Rs230 crore while revenue from contract manufacturing activities posted a 4.2% YoY increase to Rs60.9 crore. The growth achieved during the quarter from the Indian business is better than that in the sequential previous quarter (Q2FY2012), which recorded the slowest growth (5.8% YoY) in the past 8 quarters.  The growth in the Indian market has been mainly impacted due to a slower offtake in acute segments. The growth achieved during the quarter is slower than the industry growth rate of 13% during the quarter. However, we expect the growth to pick up in the subsequent quarters on an increased contribution from the newly added field force.  International business is buoyed by favourable forex: During Q3FY2012, the revenue from the international business jumped by 39.8% YoY to Rs396 crore, thanks to the depreciation of the Indian Rupee (INR) against major international currencies. During the quarter, the rupee depreciated 12% against the US dollar and 11% against the euro, which contributed to the growth in the international business.  Higher material costs and other expenditure impacts margins: The OPM declined during the quarter by 177 basis points YoY to 14.8% against our estimate of 18%. The fall in the margin is mainly due to higher raw material costs and other expenditure during the quarter. Valuation We expect the company's strong performance in the international market to continue with increased pace of product launches in the US and Brazil. The performance in the Indian market would strengthen on increased contribution from the newly added field force and higher capacity utilisation of the Sikkim plants. We believe the major capital expenditure (capex) cycle is over for Torrent and the company could be expected to give a better return on investment. We expect a 17% and 23% revenue and profit after tax (PAT) compounded annual growth rate (CAGR) respectively over FY2011-13. The stock is currently trading at 13.9x and 11.4x FY2012E and FY2013E earnings respectively. We have a Buy recommendation on the stock with a price target of Rs680. We may revisit our earnings estimates post the conference call. Larsen & Toubro  Cluster: Evergreen Recommendation: Buy Price target: Rs1,588 Current market price: Rs1,350 Price target revised to Rs1,588 Result highlights L&T's Q3FY2012 results were a mixed bag: The revenue of Larsen and Toubro (L&T) exceeded our expectations with strong order execution in the engineering and construction (E&C) division. But the margins were under pressure mainly due to the marked-to-market (MTM) foreign exchange (forex) losses of Rs400 crore on the forward contracts booked by the company. The profit after tax (PAT) was boosted by a strong growth in the other income, mainly dividend from subsidiaries (viz L&T Infotech and L&T Infocity) and treasury income. In Q3FY2012 the order inflow was moderate at Rs17,129 crore (a growth of 28% year on year [YoY], 6% sequentially). The management has maintained its order intake growth guidance at 5% for FY2012 though with the caution that this achievement would depend on a few critical orders in the infrastructure sector. The order inflow in the first nine months of the fiscal was flattish at Rs49,415 crore, requiring a run rate of Rs34,308 crore for Q4FY2012. That is a requirement of a 13% yearly growth on a strong base. Guidance maintained: The company has maintained its guidance of a year-on-year (Y-o-Y) growth of 25% in revenue for FY2012. In M9FY2012, the company achieved a 21% Y-o-Y growth in the top line, requiring a yearly growth rate of 73% in Q4FY2012. This, we feel, would be quite a difficult task. We have assumed a 20% yearly growth in our FY2012 revenue estimate. The management has also maintained its guidance of margin dip in the E&C division to 75-125 basis points on a yearly basis on account of an increase in the input cost. However, owing to a higher share of overseas revenue and currency fluctuation, there could be more forex gain/loss in the coming quarters.  Estimates fine-tuned: In view of the higher other income and low tax rate we have marginally upgraded our earnings estimates. We have also trimmed our margin assumption to reflect the impending margin pressure particularly in the E&C and the electrical and electronics (E&E) divisions. Our stand-alone estimates for FY2012 and FY2013 have increased by about 5% and 6% respectively and our revised consolidated earnings per share (EPS) estimates for FY2012 and FY2013 stand at Rs81.1 and Rs93.5 respectively. We expect the company's stand-alone earnings to grow at a compounded annual growth rate (CAGR) of 16% over the next two years.  Price target revised to Rs1,588: Overall, though the company reported decent results for the quarter, but the order inflow guidance would be highly subjective to an uptick in infrastructure development activities in the country and in the Middle-East. The slow moving orders' share in the total order book has increased to 11-12% on account of the addition of a power equipment order worth Rs1,400 crore in this category. At the current market price the stock is trading at 14.4x on its FY2013 consolidated estimate. We continue to believe that L&T is the best proxy play on India's infrastructure growth theme and maintain our Buy rating on the stock. We also feel that its diversity continues to cushion its financials in the existing tough business environment. The recent cut in the cash reserve ratio (CRR) would also augur well for the stock in view of the expected uptick in investment sentiments. Our sum-of-the-parts (SOTP) price target for the stock stands revised to Rs1,588. The key positive triggers for the stock remain an uptick in business sentiments, winning of big-ticket orders in the power/infrastructure sector and easing of margin pressure. Kewal Kiran Clothing  Cluster: Ugly Duckling Recommendation: Hold Price target: Rs800 Current market price: Rs644 Price target revised to Rs800 Result highlights Q3FY2012 results weak and below estimates Kewal Kiran Clothing Ltd (KKCL)'s Q3FY2012 report card was weak and the results were below our expectation on both revenue (up 2% year on year [YoY]; volumes down 9.6% YoY) and earnings (down 22.4% YoY) fronts. The margin at 18.6% contracted by 850 basis points YoY. The revenue performance was dismal, with the company reporting flat apparel revenue (a 10.6% increase in the realisation was knocked off by an equal magnitude of volume contraction). Along with the subdued consumer environment in the last two months of the quarter, an early festive season this year led to this soft performance.  The increased cost of goods sold (up 23.5% YoY) coupled with the introductory expense of the newly launched accessories category (other expenses up 60% YoY) played havoc with the margins (down 850 basis points YoY). Consequently the operating profit was down 30% YoY.  A strong other income (up 93.8 YoY) coupled with a reduction in the effective tax rate (down 31.7% vs 33% in Q3FY2011) restricted the earnings contraction to 22%. The balance sheet continues to be strong with cash and cash equivalents at about Rs107 crore (about Rs88 per share), and return on capital employed (RoCE) and return on equity (RoE) at 25% and 24% respectively.  Downgrading earnings estimates: Incorporating the weak results for Q3FY2012 (on the revenue and margin fronts), we have downgraded our estimates for FY2012 and FY2013 by 7.4% and 4.6% respectively. Our revised earnings per share (EPS) estimates for FY2012 and FY2013 now stand at Rs43.4 and Rs53.6 respectively.  Maintain Hold: KKCL's superior business model (strong portfolio of brands that are sold on outright basis via various distribution channels) coupled with its management's financial acumen (profitable growth approach and superior corporate governance practices) keep us bullish on its business. We ascribe a price/earnings ratio (PER) of 15x our FY2013E EPS of Rs53.6 to arrive at a price target of Rs800. Though we continue to like the business, the near-term sluggishness in the discretionary spent category makes us stick to our Hold rating on the stock.  Yes Bank  Cluster: Emerging Star Recommendation: Buy Price target: Rs360 Current market price: Rs319 Strong operating performance, CASA ratio improves Result highlights Yes Bank's Q3FY2012 results were largely in line with our estimates at the net profit level as the earnings grew by 32.9% year on year (YoY) and 8.1% quarter on quarter (QoQ) to Rs254 crore. This was driven by a strong growth in the net interest income (NII) and the non interest income.  The NII of the bank grew by 32.3% YoY and 10.9% QoQ on account of strong growth in assets. The bank's advances (including credit substitutes) grew by 28.1% YoY while deposits grew by 18.9% YoY (6.5% QoQ).  The net interest margin (NIM) of the bank dipped by 10 basis points (bps) sequentially to 2.8%. The yields on advances expanded 20bps QoQ, being outpaced by higher borrowings and increase in savings deposits rates. However, the current account savings account (CASA) of the bank increased to 12.6% in the quarter under review from 10.9% in Q2FY2012. The non interest income grew by 30.8% YoY but remained flat sequentially due to a sequential decline in the financial advisory income. The cost- income ratio of the bank grew to 37.6% in Q3FY2012 as against 35.6% in Q2FY2012.  The asset quality remained stable as the gross and net non performing assets (NPA) were reported at 0.2% and 0.04% respectively, which is in line with Q2FY2012. The specific loan loss coverage ratio stood at 80.4%, also similar to that of Q2FY2012.  Outlook: Yes Bank yet again delivered a strong set of numbers in Q3FY2012 driven by a strong operating performance and healthy asset quality. The bank's margins have declined by 10bps QoQ but have remained stable in the range of 2.8%-3.1% for the past several quarters. In addition, the sharp increase in savings deposits was a positive surprise and the management is confident of achieving a 30% CASA by 2015. On the asset side an increase in the retail book entails some risk but is likely to be in manageable limits. We believe the bank would continue to grow ahead of the industry and is likely to retain its asset quality. We expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 27% over FY2011-13. We maintain our Buy recommendation with a price target of Rs360 (2x FY2013E book value [BV]) for the stock. Lupin  Cluster: Apple Green Recommendation: Buy Price target: Rs538 Current market price: Rs445 Higher tax rate impacts bottom-line Result highlights Q3FY2012 results in line with expectations; higher tax rate impacts net profit: Lupin reported a 22.1% year on year (YoY) rise in its net sales to Rs1,792 crore in Q3FY2012, mainly driven by India sales and favourable currency inflating international sales. The company's operating profit margin (OPM) improved 293 basis points (bps) Y-o-Y to 21.3%, mainly due to lower material costs. The profit before tax jumped 37% Y-o-Y to Rs345 crore during the quarter. However, due to a sharp jump in the effective tax rate (22.5% in Q3FY2012 as compared to 9.4% in Q3FY2011) and Rs34 crore translation foreign exchange (forex) loss during the quarter, the net profit after tax (PAT) recorded a restricted growth of 5% YoY to Rs235.7 crore. However, when adjusted for the forex loss, the PAT grew by 20% YoY to Rs270 crore, which is 5% higher than our estimates of Rs257 crore. We fine tune our estimates for FY2012 and FY2013: We have fine tuned our estimates for FY2012 and FY2013 in the light of last 9 months' results and drawing cues from management interactions. Accordingly, while we have revised our revenue estimates marginally upward on the back of strong India sales, earning estimates have been revised downward by 3.6% and 3.7% for FY2012 and FY2013 respectively, mainly to factor in a lower interest cost and higher effective tax rates.  We maintain Buy: The stock is currently trading at 16.8x FY2013E earning per share (EPS; revised). We maintain our Buy recommendation on the stock with a target price of Rs538 (20.4x FY2013E EPS).  Federal Bank  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs460 Current market price: Rs392 Core income growth improves, asset quality weakens Result highlights Federal Bank's Q3FY2012 results came ahead of our estimates as the earnings of the bank grew by 41.1% year on year (YoY) and 5.6% quarter on quarter (QoQ) to Rs202 crore led by a strong growth in the net interest income (NII).  The NII of the bank was also ahead of our estimate as it grew by 18.1% YoY (11.3% QoQ) led by a sequential jump in the margin to 3.94% from 3.77% in Q2FY2012.  The advances of the bank grew by 17.6% YoY but declined by 1.2% QoQ whereas the deposits of the bank grew by 26.6% YoY (but declined by 1.1% QoQ). The current account and savings account (CASA) of the bank stood at 28.2% as against 26.4% in Q2FY2012. The non-interest income grew by 13.3% YoY and 17.9% QoQ majorly led by a strong growth in the fee income and the foreign exchange (forex) income of the bank.  The asset quality of the bank deteriorated as the gross and net non-performing assets (NPAs) of the bank increased to 3.97% and 0.74% from 3.61% and 0.58% respectively in Q2FY2012. The provision coverage ratio (PCR) of the bank declined to 80.5% from 83% in Q2FY2012.  Outlook Federal Bank continues to show strength in core operations driven by a steady growth in the advances and high margins. The slippages increased in Q3FY2012 after showing an improvement in Q2FY2012 mainly due to slippages in the corporate segment. However, the recoveries remain strong which mitigates any significant asset quality risks. The stock's valuations are attractive (1x FY2013E book value) considering the return on equity (RoE) and return on asset (RoA) of about 14% and 1.2% respectively expected by FY2013 due to the structural changes undertaken by the new management. We maintain our Buy recommendation on the stock with a price target of Rs460 (1.3x FY2013E book value). VIEWPOINT Hero MotoCorp        Currency - A pillion rider for this Hero Currency to be the key influencer in Hero MotoCorp's earnings and stock performance We estimate that from hereon the currency will play the biggest role in influencing earnings as well as stock performance of Hero MotoCorp. An appreciation in the rupee would be extremely beneficial for the company and its depreciation would hit the company the most. The company has amortised a fixed sum of royalty every quarter with currency risk vested on it. The originally estimated quarterly royalty bill at the time of split with Honda was Rs180 crore. However, a sharp depreciation in the rupee has inflated the quarterly bill to Rs228 crore in Q3FY2012. In the month of January 2012, the rupee has appreciated by 5% each against the US dollar and the yen. If the rupee sustains at the current levels, then the royalty benefit under the depreciation head would be to the tune of Rs11-12 crore. The company has 2% of its imports as dollar denominated and 14% of the imports by vendors are dollar and yen denominated. The rupee's depreciation has a direct bearing on raw material costs. However, the same reverses favourably if the rupee appreciates. We estimate a 0.75% margin impact on every 5% movement in the rupee against the dollar and the yen.  Highlights of the conference call  The company has confirmed of a slowdown and rising inventory levels. The overall growth expectation for Q4FY2012 and FY2013 is modest at 10-12% with rural demand more resilient. The company also revealed that all the new product launches would attract a royalty of upto 5% and will be paid over and above the fixed charge amortised under depreciation every quarter.  The company is in advanced talks for technology tie-ups with Ricardo and AVL for engine development.  The company targets exports of 1 million units in the next 5 years. Valuation  We are aligning our earnings estimates at a rupee-dollar rate of Rs50 and a rupee-yen rate of Rs0.64. Every 5% appreciation in the rupee would benefit earnings by 5.5%. Our earnings per share (EPS) for FY2012 and FY2013 are estimated at Rs121 and Rs147.8 respectively. Assuming the rupee sustains at the current levels, then the stock can trade at 13.5x one year forward earnings. However, if the rupee breaches its recent low against the dollar and the yen, then our earnings expectations would require a downward revision. Assuming stable state conditions, we have a positive view on the stock.   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 - Larsen & Toubro, Federal Bank, Godrej Consumer Products, Maruti Suzuki India, UltraTech Cement; Viewpoint - Idea Cellular

 

 

Investor's Eye [January 23, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Larsen & Toubro  Cluster: Evergreen Recommendation: Buy Price target: Rs1,523 Current market price: Rs1,278 Q3FY2012 results: First-cut analysis Result highlights Q3 results a mixed bag: Larsen and Toubro (L&T)'s Q3FY2012 results were a mixed bag. The revenue exceeded our expectations with strong execution in the engineering and construction (E&C) division but the margins were under pressure mainly due to the mark to market (MTM) forex losses of Rs 400 crore. The margins were the lowest in 13 quarters. The profit after tax (PAT) was boosted by a strong growth in other income, mainly dividend from subsidiaries (mainly L&T Infotech and L&T Infocity), and treasury income. In Q3FY2012 the order inflow was moderate at Rs17,129 crore (a growth of 28% year on year [YoY], 6% sequentially). The management has maintained its order intake growth guidance at 5% for FY2012 though with the caution that this achievement would depend on a few critical orders in the infrastructure sector. The order inflow in the first nine months of the fiscal was flattish at Rs49,415 crore, requiring a run rate of Rs34,308 crore for Q4FY2012. That is a requirement of a 13% yearly growth on a strong base! Stand-alone sales up 24%: L&T has reported a strong growth in its revenues (stand-alone) for Q3FY2012; the same were higher than our expectation. This was on account of the sound order execution in the E&C division, which reported a 25% revenue growth for the period. However, the business in the machinery and industrial product (MIP) and electrical and electronics (E&E) divisions was sluggish with a year-on-year (Y-o-Y) revenue growth of 6% owing to a lower industrial offtake. The "Others" segment reported a strong 59% growth driven by the integrated engineering business.  OPM under pressure due to forex losses: The overall operating profit margin (OPM) stood at 9.6%, which was lower than our expectation of 10%. The margin was under pressure mainly led by MTM forex losses. There was a forex loss of Rs400 crore in the third quarter shown in other expenses (Rs200 crore on foreign debt and Rs200 crore were translation losses) as compared to Rs50 crore in Q3FY2011.  Net profit up 15%: The depreciation charge increased by 41% on account of the higher capital expenditure (capex) undertaken in recent times. The other income jumped by 32.5% YoY owing to higher dividend from subsidiaries while the net interest charge remained subdued. Further, boosted by a low tax rate the adjusted PAT grew by 23% YoY, which was 13% higher than our expectation.  Order inflow modest: The order inflow for the quarter was moderate at Rs17,129 crore (a growth of 28% YoY, 6% sequentially). The management has maintained its order intake growth guidance at 5% for FY2012 though with the caution that this achievement would highly depend on the winning of a few critical orders in the infrastructure sector. The order inflow in the first nine months of the fiscal was flattish at Rs49,415 crore. This implies a run rate of Rs34,308 crore required for Q4FY2012; that is requirement of a 13% yearly growth on a strong base. The same appears a challenging task given the current slowdown in the economy. The company has an overall order book of around Rs145,768 crore (up 27% YoY and 3% sequentially). Of the total order book, about 88% is from the domestic customers and the remaining 12% comprises overseas orders. The overseas orders' contribution to the overall order inflow increased sharply to around 20% in M9FY2012 from the past level of 10-15%.  Outlook and view: The concerns on the margin front and forex losses aggravated in this quarter whereas the order inflow was decent. At the current levels, the stock is trading at 14.3x our FY2013 consolidated earnings estimates. We maintain our Buy rating on the stock and would soon come out with a detailed note taking a thorough account of the company's Q3 results. Federal Bank  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs460 Current market price: Rs383 Q3FY2012 results: First-cut analysis Result highlights Federal Bank's Q3FY2012 results were ahead of our estimates as the net profit expanded by 41% year on year (YoY) to Rs202 crore on account of a strong growth in the net interest income (NII). However, the asset quality disappointed as the gross and the net non-performing assets (NPAs) increased on a sequential basis after showing some improvement in Q2FY2012. The NII showed a strong growth of 18.1% YoY and that of 11% quarter on quarter (QoQ); the same was higher than our estimate. A growth of around 21% in the advances coupled with an expansion in the margins (calculated) supported the growth in the NII during the quarter. In Q3FY2012 the non-interest income showed a growth of 13.3% YoY. On a sequential basis the non-interest income expanded by 18% QoQ. The operating profit (pre-provisional profit [PPP]) increased by 17.4% YoY to Rs419 crore. The operating expenses increased by 16.5% YoY while the cost/income ratio was at 37% compared with 38.9% in Q2FY2012. The asset quality of the bank deteriorated significantly as its gross and net NPAs increased to 3.97% and 0.74% from 3.61% and 0.58% respectively in Q2FY2012. In absolute terms, the gross NPAs increased 9.1% on a sequential basis. Outlook: Though in Q3FY2012 the bank showed strength in the core income growth, the deterioration in its asset quality is a cause for concern. The management has shifted focus from growth in advances to improvement in risk management, efficiency and portfolio mix, which is positive for the bank in the medium term. Currently, the stock trades at 1.1x FY2013 book value and we have a Buy recommendation on it. We will come out with a detailed note after attending the bank's conference call scheduled on January 24, 2012. Godrej Consumer Products  Cluster: Apple Green Recommendation: Buy Price target: Rs497 Current market price: Rs418 Price target revised to Rs497 Key points Q3FY2012 results-a blockbuster performance: For Q3FY2012 Godrej Consumer Products Ltd (GCPL) has reported a blockbuster performance with a sequential improvement of 214 basis points in the operating profit margins (OPMs) and a 50% growth in the bottom line for the quarter. The consolidated net sales grew by 36% year on year (YoY) to Rs1,344.1 crore (which was ahead of our estimate of Rs1,235.4 crore) during the quarter. This growth was driven by a 20.0% year-on-year (Y-o-Y) increase in the domestic business and a 68.2% Y-o-Y growth in the international business. Though the gross profit margin (GPM) remained almost flat but the OPM improved by 292 basis points YoY to 20.2%, largely on account of a 284-basis-point Y-o-Y decline in the advertisement and promotional spend during the quarter. The operating profit grew by 58.9% YoY to Rs272.1 crore and the adjusted profit after tax (PAT; before minority interest) grew by 54.3% YoY to Rs183.1 crore (which was ahead of our expectation of Rs143.2 crore). The foreign exchange (forex) loss due to the rupee's depreciation stood at Rs5.5 crore (in line with our expectation of Rs5 crore). Raising Rs685 crore through preferential allotment: GCPL is planning to raise Rs685 crore by issuing around 1.67 crore equity shares of Re1 each of the company to Baytree Investments (Mauritius) Pte Ltd (an arm of Singapore-based investment firm Temasek) at a premium of Rs409 per equity share. With this preferential allotment the share capital of the company will go up to 34.0 crore from 32.4 crore currently. The funds thus raised will be utilised largely to reduce the debt on books and to fund acquisitions. The management expects the debt/equity ratio to come down to 0.7x by FY2013 from 1.1x at present.  To acquire 60% stake in Latin American Cosmetica: GCPL has entered into an agreement to acquire a 60% stake in Cosmetica Nacional (Cosmetica), a leading player in Chile's hair colorant and cosmetic markets. The acquisition is in line with GCPL's 3x3 strategy of enhancing presence in the emerging markets. GCPL is likely to pay close to Rs195 crore for its 60% stake in Cosmetica. The acquisition is valued at 9x its enterprise value (EV)/EBIDTA and 1.8x its sales, which is in line with some of the acquisitions done by GCPL recently. The acquisition will be funded through the mix of low cost foreign currency debt and the money raised from the preferential allotment to Temasek. The management of GCPL expects the acquisition to be earnings accretive from the first year of its consolidation. GCPL is planning to buy the remaining 40% stake in the company over a period of the next three to five years. Revision in earnings estimates: We have factored in the higher than expected operating performance of Q3FY2012 in our estimates for FY2012 and FY2013 and this has resulted in an upward revision of 2.8% and 1.3% in the adjusted PAT estimates for the respective fiscals. However, the equity dilution to result from the preferential allotment to Temasek has caused us to reduce the earnings per share (EPS) estimates for FY2012 and FY2013 by 5% each. We have also not incorporated Cosmetica's numbers in our estimates due to the non-availability of the figures of the key balance sheet items. Nevertheless, a back-of-the-envelope calculation shows that the consolidation of Cosmetica would result in an increase of 5-6% in the FY2013 earnings estimate. However, we will wait for the balance sheet details of Cosmetica before revising our earning estimates. Outlook and valuation: The integration of the recent acquisitions and the cross pollination strategy would help GCPL to achieve a strong growth in long run. We believe the company is comfortably positioned to achieve a growth of around 20% YoY in the bottom line in the coming years. In addition, the company is focusing on reducing the debt on books to improve the balance sheet at the consolidated level. Hence, we like GCPL in the mid-cap space and maintain our Buy recommendation on the stock. In line with the reduction in the earnings estimates due to the impending equity dilution, our price target for GCPL now stands reduced to Rs497. At the current market price the stock trades at 24.6x its FY2012E EPS of Rs17.0 and 19.4x its FY2013E EPS of Rs21.6. Maruti Suzuki India  Cluster: Apple Green Recommendation: Hold Price target: Rs1,138 Current market price: Rs1,163 Expect a Swift recovery Realisation expansion a positive surprise in Q3FY2012 During Q3FY2012, Maruti Suzuki (Maruti) reported a 7.1% quarter on quarter (QoQ) increase in net realisations. Lower discounts, price hikes and an improved product mix took the realisation to an all time high. The contribution/vehicle also surprised and reached to its highest level in the last six quarters. Worst for margins behind; expect gradual improvement from Q4FY2012  The company is expected to see a 100-150 basis points (bps) margin savings on account of favourable operating leverage as production ramps up in Q4FY2012. However, some hit is expected as vendors are compensated for higher costs with a lag. Vendor compensation is expected to have a positive effect of 100bps. Foreign exchange (forex) related marked to market (MTM) losses in commodities and direct and indirect imports were to the tune of Rs75 crore, thereby impacting margins by 100bps.  In case the currency remains stable, the company may see a 100-250bps margin expansion from Q4FY2012 onwards. FY2013 may see further improvement once the benefit of vendor hedges comes through.  Open positions may cause margin volatility; 100bps Q-o-Q impact felt in Q3FY2012  Maruti saw a 100bps impact on margins on account of adverse forex movement. The company hedged its dollar/ yen as well as dollar/euro exposure for Q4FY2012 while FY2013 exposure is completely open. During Q3FY2012 the dollar appreciated 0.7% against the yen while it appreciated 4.5% against the euro.  While the company hedged stable currencies, it has kept the most volatile dollar/rupee exposure open. An adverse currency movement in the rupee can have a direct bearing on the margins. During Q3FY2012, the pure currency impact on royalty is to the tune of Rs75 crore which includes reinstatement of liabilities of Rs20 crore and Rs19 crore of royalty hit related to H1FY2012. Valuation We are marginally cutting our earnings per share (EPS) estimates for the company as we incorporate the management's expectations of the future. Since our last Buy recommendation, the stock has achieved our target price. Our revised target price of Rs1,138 discounts FY2013 expected EPS of Rs81.3 by 14x. We believe that the current price is factoring in the positives. We recommend a Hold on the stock. UltraTech Cement  Cluster: Ugly Duckling Recommendation: Hold Price target: Rs1,275 Current market price: Rs1,209 Price target revised to Rs1,275 Result highlights Operating profit in line with estimate; PAT ahead of estimate: In Q3FY2012 UltraTech Cement (UltraTech) posted an operating profit of Rs964.9 crore (up 36.3%), which is in line with our estimate. However, on account of a surge in the other income and a decline in the interest cost (due to the subsidies received in the earlier years under the State Investment Promotion Scheme) the net profit of the company grew by 93.4% year on year (YoY) to Rs616.9 crore, which is ahead of our estimate.  Revenue growth largely driven by realisation growth: The revenue growth of 23.1% was supported by an increase of 16.2% in the average blended realisation YoY to Rs4,509 per tonne. On the volume front, the overall sales volume (including cement, clinker, export and white cement volumes) grew by 5.9% on a year-on-year (Y-o-Y) basis to 10.14 million tonne. On a sequential basis, the volume has witnessed sign of post monsoon recovery and grew by 7%. The blended realisation was higher by 9.3% on a quarter-on-quarter (Q-o-Q) basis. Going ahead in Q4FY2012 we believe cement prices will remain strong with a likely increase in the cement offtake.  Expansion in the OPM due to higher realisation: On the margin front, the operating profit margin (OPM) expanded by 205 basis points YoY to 21.1% on account of a 21.2% increase in the realisation. However, on the cost front the key cost elements like the raw material cost, the power & fuel cost and the freight charges continued their upward trend. This increased the overall cost of production by 18.1% to Rs3,618 per tonne. The operating profit increased by 36.3% YoY to Rs964.9 crore and the EBITDA per tonne increased by 28.7% YoY to Rs952.  Surge in other income and decline in interest cost: The other income increased by 156.4% to Rs155.4 crore (which included Rs66.6 crore for the subsidies related to the earlier years availed of under the State Investment Promotion Scheme). Further, the net interest cost declined by 63.9% YoY to Rs29.5 crore on account of the net subsidies of Rs38.4 crore received. Hence, the reported net profit of the company grew by 93.4% YoY to Rs616.9 crore.  Expansion at Chhattisgarh and Karnataka for 9.2mt cement capacity are on track: The company is setting up additional cement clinkerisation plants at Chhattisgarh and Karnataka. Work on both the plants is on track. The company has already placed the orders for the major equipment. The expansion will increase the total cement capacity by 9.2 million tonne and the additional capacities are expected to come on stream by Q1FY2014. After the commissioning of the aforesaid capacities the cement capacity of the company will enhance to 59 million tonne per annum (mtpa). Oversupply to continue for three years, cost inflation to pressurise margin: As per the management, the oversupply scenario in the domestic cement industry is likely to continue in the coming three years which will have an adverse impact on the cement prices. Further, the sharp increase in the domestic and imported coal prices coupled with a likely increase in the freight cost will keep the margins under pressure.  Upgrading earnings estimates for FY2012 and FY2013: We are upgrading our earnings estimates for FY2012 and FY2013 mainly to factor in the higher than expected blended realisation in Q3FY2012. We are also factoring in some pressure on the power & fuel cost with the change in the pricing mechanism for domestic coal. The revised earnings per share (EPS) estimates work out to Rs72.8 for FY2012 and Rs82.3 for FY2013.  Maintain Hold with a revised price target of Rs1,275: We like UltraTech due to its diversified pan-India presence and strong balance sheet. Further, the company's footprint in the growing markets like Bangladesh, Dubai, Sudan and Bahrain augurs well for its business. However, on account of the pressure expected on the cement prices in the coming one year and the cost inflation in terms of the rising prices of coal (imported as well as domestic) we maintain our Hold recommendation on the stock with a revised price target of Rs1,275 (valued at enterprise value [EV]/tonne of $120). At the current market price the stock trades at a price/earnings (PE) of 14.7x, discounting the FY2013 estimates. On an EV/EBITDA basis, the stock trades at 7x FY2013E. VIEWPOINT Idea Cellular        Strong operational performance; but regulatory overhang remains Idea Cellular (Idea) posted robust Q3FY2012 results, with the revenue (+8.9% quarter on quarter [QoQ]) as well as margin (+100bps QoQ) exceeding our as well as the Street's expectation. The management in its commentary sounded positive on both, the voice as well as the data business, but remained cautious on the regulatory environment.  Read across for Bharti- Traffic growth expected to be strong; we have modeled for 4% sequential volume growth Reading from Idea's results we believe that Bharti Airtel (Bharti) too is likely to deliver a strong improvement in the volume/traffic movement in the present quarter, and the results are likely to be robust. We have modeled a 4% sequential growth in traffic, with a 2-3% improvement in ARRs and minutes of usage (MoU). Idea-well placed operationally; but regulatory uncertainty persists The company has demonstrated its ability and operational efficiency through market share gains (as per Telecom Regulatory Authority of India [TRAI]; Idea's market share has grown from 12.1% in Q1FY2011 to 14% in Q2FY2012) and improvement in margins from the established circles. We believe that with its strong brand equity and sharp focus, Idea is operationally well placed to encash the strong wave of voice as well as data opportunity presented by India. But the persistent regulatory uncertainty (with regards to excess spectrum charges, spectrum refarming, license renewal fee, abolition of roaming charges) will continue to linger the stock. At the current market price the stock is trading at 5.9x its FY2012 enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA).   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.   Click here to read report: Investor's Eye

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