Investor's Eye
[February 08, 2012] | | | Summary of Contents
| STOCK UPDATE Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs450
Current market price: Rs354 Price target revised to Rs450 Result highlights -
Results below expectation: Bharti Airtel (Bharti)'s Q3FY2012 earnings fell short of our as well as the Street's expectations. The adjusted net profit for the quarter stood at Rs1,003 crore (-15.7% quarter on quarter [QoQ]) and the same was 23% lower than our expectation. The biggest negative surprise for the quarter came in the form of a 140bps QoQ contraction in the operating margins. The consolidated operating margin for the quarter came in at 32.2% vs our expectation of 34.4%. -
Non mobile business the biggest culprit for the underperformance: The core business (India mobile business + Africa business) that forms approximately 90% of the company's total business, performed decently on the revenue as well as the margin front. The non mobile business saw a deterioration in the performance for the quarter - telemedia, digital TV and enterprises, all witnessing margin pressure, bringing down the overall consolidated margins by 140bps for the quarter. -
Some negative elasticity seen in India operations; Africa continued with the growth: On the mobile business front, Bharti undertook a price correction in all the 22 circles. As a result we saw negative elasticity in the system whereby despite Q3 being a seasonally strong quarter, the volume did not witness a pick-up (traffic growth remained flat at +0.8% QoQ). The management re-iterated that the business environment remains very competitive and if need be felt Bharti may change its strategy to regain lost market share. On the Africa business front, revenue as well as profitability continues to chug well, but at a slower pace than expected. -
Incorporating results; adjust earnings for FY2012 & FY2013: Incorporating a weak Q3FY2012 performance and building for lower than earlier expected margin expansion in the African venture, we have likewise adjusted our FY2012 and FY2013 earnings downwards by 19.2% and 13% respectively. Further any clarity on pending regulatory issues is likely to drive stock performance in the near term. -
Intact core business performance and likely improvement in competitive environment keeps us bullish: The core business continued to deliver well. There were signs of improving competitive intensity in the market place (read Supreme Court verdict on cancellation of 122 competitors' licenses). Further the potential in the Africa business keep us bullish on Bharti. We maintain our Buy rating on the stock with a revised price target at Rs450 (8.1x FY2013 EV/EBITDA).
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Hold
Price target: Rs740
Current market price: Rs687
Price target revised to Rs740
Q3FY2012 PAT in line, adjusted for one-time exchange reversal
Our profit after tax (PAT) estimate for Mahindra & Mahindra (M&M) at Rs625 crore was the lowest among such estimates. The company reported a stand-alone profit after tax (PAT) of Rs662 crore. This includes a one-time gain of Rs39.86 crore related to the reversal of an exchange difference charge. Adjusting for this extraordinary gain, the company reported a PAT of Rs635 crore, which is marginally higher than our estimate.
Highlights of Q3FY2012 -
A 30-basis-point sequential improvement in the earnings before interest and tax (EBIT) margin for the tractor business has surprised us. Our concerns of deteriorating profitability of the tractor division due to higher raw material prices were unfounded. -
A favourable operating leverage was witnessed in the staff cost which moderated to 5.4% of sales, the lowest in the last six quarters. The other expenses after adjusting for the Rs39.86 crore of exchange reversal were the lowest ever for any quarter at 8.6% of the sales. -
The Q3FY2012 automotive EBIT disappointed us and was the lowest in two years at 8.2%, ie lower by 170 basis points quarter on quarter (QoQ), in spite of a 10% sequential jump in the automotive realisations. -
The operating profit margin (OPM) adjusting for exchange reversal was the lowest in two years at 11.7% on account of a sharp increase in the raw material cost. Outlook and valuation
We value M&M stand-alone company at Rs550 a share, discounting the FY2013E earnings by 13x. We have given a lower discount to the stock as we expect the parent company's margin to drop to lower double digits in FY2013 as the proportion of the traded products manufactured by Mahindra Vehicle Manufacturers Ltd (MVML) increases. We have valued MVML separately at Rs55 a share. The total value of the subsidiaries including MVML is estimated at Rs190 a share. We arrive at a price target of Rs740 a share for the company and recommend Hold on the stock.
Cadila Healthcare
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs734
Current market price: Rs661 Disappointment on many fronts Result highlights -
Q3FY2012 results broadly in line; forex loss of Rs34 crore hurts net profit: Cadila Healthcare (Cadila) reported an 18.5% year-on-year (Y-o-Y) rise in its net sales to Rs1,383 crore for Q2FY2012. The same is better than our estimate of Rs1,323 crore. However, a 317-basis-point Y-o-Y decline in the operating profit margin (OPM), higher fixed costs and a foreign exchange (forex) loss of Rs34.17 crore affected the net profit, which declined by 7.9% to Rs149.2 crore. However, ignoring the forex loss, the net profit would grow by 10% year on year (YoY) to Rs183 crore. -
Disappointment in most segments: In this quarter the company recorded a 12% Y-o-Y decline in the revenues from the consumer business (Zydus Wellness), virtually flat revenues in Europe and a meagre 2.8% Y-o-Y growth from the emerging markets. However, a higher offtake in the revenues from the joint ventures and the contribution from the newly acquired entities supported the growth. -
We fine-tune our estimates: Taking our cues from the M9FY2012 results and management interactions, we fine-tune our revenue and profit estimates. Accordingly, we have reduced our earnings estimates by 3.6% and 5.3% for FY2012 and FY2013 respectively, mainly to factor the revenue decline in certain segments as well as the higher fixed costs. -
We downgrade the stock to Hold with a reduced price target: We reduce our price target by 24% to Rs734 mainly to factor the weaker performance of the consumer business, the slower ramp-up in the US market and the pressure on the balance sheet due to multiple acquisitions. The stock is currently trading at 14x FY2013E. Our new price target is 16x FY2013E earnings per share (EPS).
IL&FS Transportation Networks
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs330
Current market price: Rs208
Strong performance continues Result highlights -
Strong revenue growth at 74% (in line with estimates): IL&FS Transportation Networks Ltd (ITNL)'s consolidated revenues for Q3FY2012 grew by a robust 74% year on year (YoY) to Rs1,268 crore led by a strong execution across a few projects, especially the Jharkhand project which gained momentum during the quarter. The Jharkhand project is expected to get completed in Q4FY2012 before its scheduled date. The construction revenue grew by 124% YoY to Rs905 crore. On the other hand, toll collections were steady across projects and grew by 32% YoY to Rs112 crore. Almost all the projects clocked a double digit Y-o-Y growth. There are a few regulatory and land clearance related issues in certain projects, which the company feels, would be sorted soon, thereby pushing up execution. Elsamex on the other hand continued to disappoint with its performance registering a de-growth of 23% YoY and 14% quarter on quarter (QoQ) on the revenue front mainly due to non renewal of completed contracts that the company had in hand. However, going ahead, with new projects coming in, traction is expected on this front as well. -
Margins contract higher than expectation: The operating profit margin (OPM) contracted to 25.3% as compared to 29.8% in Q3FY2011 and 28.4% in Q2FY2012. During the quarter there were a couple of one time items namely 1) fees paid towards consultancy charges for exploring a few shortlisted international projects and 2) provisioning of some non recoverable debt on account of Elsamex. Both of these aggregate to an amount of Rs50 crore which led to margin contraction. Subsequently the EBITDA has declined on a Q-o-Q basis by 10% (though it is up 47% on a Y-o-Y basis). -
PAT growth at 42% in line with estimates: The net profit came in line with our expectation at Rs101.2 crore registering a growth of 42%. The profit after tax (PAT) growth was limited vis a vis revenue growth due to shrinking of the EBITDA margin and with interest charges surging by 61% YoY and 10% QoQ. The interest charges are expected to remain high in case of annuity projects under construction. This is because as the execution progresses, additional debt is drawn, thereby increasing the debt component. -
New project wins- after a long time: The company finally bagged a new project after a haul of 18 months, which is of four-laning of the Kiratpur to Ner-Chowk section of the NH-21 in the state of Himachal Pradesh. The project is on toll basis with a concession period of 28 years including the construction period of three years and is worth Rs1,900 crore. The company had quoted a grant of Rs134.57 crore for the project. Furthermore, Elsamex, a subsidiary of ITNL also bagged a project worth Rs265.3 crore from the Ministry of Civil Works, Transports & Communications, Government of Haiti, for rehabilitation works on the National Route 3 between Hinche and Saint Raphael to be completed in 30 months. The contract value is of Euro40.72 million (approx. Rs2,65.3 crore). The company also acquired a 49% stake in an operational Chinese project, Yu He Expressway Company - Chongqing Expressway Group, for $160 million during the quarter. -
Chonquing to start consolidation in Q4: ITNL had acquired the Chonquing highway project in November 2011. This is an operational project. Thus the consolidation of the books beginning from December 2011 would result in incremental revenue growth as well as better margins for the company (since operational projects have better margins compared to under construction projects). Estimates revised upward for FY2013
We have revised our revenue estimates downwards for FY2012 by 3% mainly to factor in a poor performance of Elsamex and regulatory hurdles faced in a couple of projects. However for FY2013, we have upgraded our top line estimates by 3% led by consolidation of the Chonquing project. Further the consolidation would reflect in a healthy PAT growth of nearly 9% in our estimates on account of top line growth as well as expansion in margins.
Maintain Buy
The recent project wins and a Chinese acquisition are very positive as the company had not won any big road build operate transfer (BOT) project over the last 12-18 months. Thus, the absence of any new win was the key concern and an overhang on the stock. ITNL had not been bidding aggressively unlike the other players to bag projects which we believe was a prudent step. Now these project wins have allayed the concerns and provide revenue visibility. Further the continuous strong execution across projects provides impetus to growth. Meanwhile, given its strong balance sheet, it is also looking at inorganic growth, like the recent acquisition of a Chinese project. We believe that given its strong parentage and scale of operations, the company stands to gain from the expected consolidation in the sector. We maintain our Buy rating on the stock with a price target of Rs330. However we have not considered the recent project win in Himachal Pradesh in our estimates which would be incorporated post the financial closure, thereby resulting in a further upside in our estimates. At the current market price the stock is trading at 8.7x and 7.1x its FY2012E and FY2013E earnings respectively.
Bajaj Corp
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs142
Current market price: Rs114 Growth momentum continues Result highlights -
Results largely in-line, strong revenue growth sustained: Bajaj Corp's Q3FY2012 results were largely in line with our expectation mainly on account of sustenance of strength in the top line growth and higher than expected other income during the quarter. Q3FY2012 is the third consecutive quarter of around 30% year on year (YoY) revenue growth, which was largely driven by strong volume growth. The only disappointment during the quarter was the decline in operating margins, which dropped by 434bps YoY to 25.5% (which is broadly in line with our expectation). -
Net sales grew by 30% YoY: Bajaj Corp's revenues grew by 30% YoY in Q3FY2012, largely driven by a strong volume of 20.5% YoY. The price-led growth stood at ~10.0% during the quarter. Bajaj Almond Drops, the flagship brand of Bajaj Corp, registered a strong volume growth of more than 20.4% YoY. Q3FY2012 is the fourth consecutive quarter where the company witnessed an above 20% YoY volume growth in a quarter. The strong volume growth can be attributed to consumers upgrading to light hair oil, improvement in rural penetration and share gains from value-added hair oil brand. -
Margins are down Y-o-Y: The prices of key raw material such as LLP, glass bottle and vegetable oil were up by 29.3% YoY, 7% YoY and 19.3% YoY respectively during the quarter. The company has not implemented any price hikes in the past few quarters. Hence the gross margins were down 162bps to 54.2%. However the same improved sequentially by 53bps. The decline in the gross margins along with increase in ad-spends as a percentage of sales resulted in a 434bps drop in the operating margins to 25.5%. Hence the operating profit grew by 11.8% YoY to Rs28.6 crore. -
PAT grew by 18.2% YoY: Though the operating profit grew by 11.8% YoY, the reported profit after tax (PAT) grew by 18.2% YoY to Rs28.9 crore mainly on account of higher than expected other income during the quarter. The other income grew by 52.0% YoY to Rs7.9 crore, largely on account of higher yields on investment done by the company. Outlook and valuation
We have fine-tuned our FY2012 and FY2013 earning estimates to factor higher than expected volume growth in Bajaj Almond Drops and slightly higher than expected other income. We expect the mid to high teens volume growth to sustain in the coming quarters as the company is focusing on enhancing its rural penetration and tapping the consumers upgrading to light hair oil category. Having said that, increasing competition in the light hair oil category remains a key risk to our volume growth assumption. Any new product launch or acquisition in the domestic or international markets would act as a key trigger for the stock. We maintain our Buy recommendation with a price target of Rs142. At the current market price the stock trades at 14.2x its FY2012E earnings per share (EPS) of Rs8.0 and 11.7x its FY2013E EPS of Rs9.7. Opto Circuits India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs355
Current market price: Rs268 Q3 performance better than expected Result highlights -
Performance better than expected: Buoyed by the contribution from Cardiac Science, which contributed only one month's revenue in Q3FY2011, the net sales of Opto Circuits India (Opto) jumped by 46.4% year on year (YoY) to Rs611.3 crore in Q3FY2012. On a quarter-on-quarter (Q-o-Q) basis, the net sales jumped by 8.8%. However, the operating profit margin (OPM) declined during the quarter by 143 basis points to 28% of net sales mainly due to a ramp-up in the Malaysian facility which increased the administration costs. The net profit during the quarter jumped by 30.7% YoY to Rs125 crore, which is better than our estimate of Rs110 crore. -
Bonus shares to expand equity by 30%: The company has announced a plan to issue three bonus shares for every ten equity shares held in the company. Accordingly, equity would be expanded by 30% (5.6 crore shares to be issued on the current number of shares of 18.6 crore). -
We revise our earnings estimates: Taking our cues from the M9FY2012 results and management interactions, we have revised our revenue earnings estimates for FY2012 and FY2013. Our revised earnings estimates are higher by 10% and 7.9% for FY2012 and FY2013 respectively. -
Valuation and view: The stock is currently trading at 9.1x FY2013E. We maintain our price target at Rs355 (implies 12x FY2013E EPS) and Buy rating on the stock Zydus Wellness
Cluster: Emerging Star
Recommendation: Reduce
Price target: Rs323
Current market price: Rs389 Maintain Reduce with revised price target of Rs323 Result highlights -
Disappointment continues: It is the third consecutive quarter where Zydus Wellness has posted a disappointing performance at the operating level. The intensified competition in the face wash and scrub category and slowdown in premium categories such as Sugarfree has resulted in a sharp decline in the revenue during the quarter. The operating margin, affected by higher input costs and high year-on-year (Y-o-Y) ad-spends, witnessed a decline of 266bps. -
Everyuth feeling the heat of competition: This is the first time since its inception that, Zydus Wellness has registered a double-digit decline in its net sales, which are down 17.1% YoY (in Q3FY2012) to Rs75.3 crore (lower than our expectation of Rs98.7 crore). The Everyuth brand is feeling the heat of intensified competition from multinationals such as HUL and Johnson & Johnson in the face wash and scrub categories in the domestic market. Hence the Everyuth brand has registered a double digit decline (likely to be more than 20%) in revenues during the quarter. On the other hand Nutralite and Sugarfree registered a single digit revenue growth during the quarter. -
Margins decline YoY: The gross margins declined by 100bps YoY and 609bps QoQ to 61.9%. This is largely because of the change in the revenue mix, as the Everyuth brand registered a sharp Y-o-Y decline during the quarter. Also the contribution of Nutralite to overall sales picks up in Q3 every fiscal. Nutralite's margins are lower in comparison to other brands such as Everyuth and Sugarfree. The decline in gross margins along with higher ad-spends (as a percentage of sales) on a Y-o-Y basis resulted in a 272bps Y-o-Y decline in the operating profit margin (OPM) to 28.3% (slightly better than our expectation of 27.6%). Hence the operating profit was down 24.0% YoY to Rs21.3 crore during the quarter. -
PAT declined by 3.4% YoY: The company is reaping tax benefits from the Sikkim facility, which resulted in a drop in the tax rate from 33.2% in Q3FY2011 to 15.9% in Q3FY2012. Hence the tax expense declined sharply by 63.3% YoY to Rs3.6 crore during the quarter. This has helped in arresting a sharp drop in the reported profit after tax (PAT) during the quarter. The PAT declined by 3.4% YoY to Rs18.9 crore (lower than our expectation of Rs23.0 crore) in Q3FY2012. Enhancing focus on improving sales
The company is planning to rework on it strategies to get back to the double-digit revenue growth trajectory. It is planning to support Everyuth with higher media and promotional spends in the current intensified competitive environment. The company is promoting the small pack (sachet priced at Rs14) of Peel Off in the domestic market. The company is also planning to launch new variants in Nutralite to push sales at modern retail levels. Actilife (nutritional milk additive) is being sold at all-India level and is performing in line with the company's expectations. The company expects its contribution to sales to improve significantly by FY2015. Downward revision in estimates
We have significantly revised downwards our earning estimates for FY2012 and FY2013 by 13.8% and 18.8% respectively to factor in the sharp decline in revenues during the quarter. However any significant improvement in the performance of any of the key branches would act as an upside risk to our earnings estimates. Outlook and Valuation
It is the third consecutive quarter of dismal performance by Zydus Wellness. Though the company is focusing on regaining its double digit growth trajectory, we think it will take some time for it to happen considering the increasing competition in the face wash and scrub categories and the prevalence of an uncertain macro environment (which has affected the sales growth of premium categories).
In view of near term uncertainties on growth prospects of the company, we have reduced our target multiple on the stock to 18x (which is at a 15% discount to its mean price earning multiple of 21.0x). Hence our revised price target stands at Rs323 (based on 18x its FY2013E earning per share [EPS] of Rs17.9). We maintain our Reduce rating on the stock. At the current market price the stock trades at 25.1x its FY2012E EPS of Rs15.5 and 21.7x its FY2013E EPS of Rs17.9. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | | | | Regards,
The Sharekhan Research Team | myaccount@sharekhan.com | | | |
