Investor's Eye
[February 13, 2012] | | | Summary of Contents
| STOCK UPDATE State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,400
Current market price: Rs2,129 Price target revised to Rs2,400 Result highlights -
State Bank of India (SBI)'s Q3FY2012 results were ahead of our estimates as the net profits grew by 15.4% year on year (YoY; 16.1% quarter on quarter [QoQ]) to Rs3,263 crore. This was on account of a strong growth in the net interest income and a decline in the provision expenses. -
The net interest income (NII) grew by 26.7% YoY (10% QoQ) which was ahead of our estimates. The growth in NII was contributed by a sequential expansion in margins and a strong growth in advances. The domestic net interest margin (NIM) expanded by 32bps QoQ to 4.39%. -
Business growth remained strong as the advances of the bank grew by 19.6% YoY (10% QoQ) led by a strong growth in international as well as agriculture advances. The deposits of the bank registered a growth of 13.9% YoY while the current account savings account (CASA) ratio was at 47.5% (47.6% in Q2FY2012). -
The non interest income of the bank declined by 35.8% YoY due to the losses (Rs1,090 crore) contributed by treasury, largely from the equity book. The fee income growth also remained subdued, partly contributed by a large base of Q3FY2011. -
The asset quality of the bank deteriorated on a sequential basis as the gross and net non performing assets (NPAs) increased to 4.61% and 2.22% respectively during the quarter from 4.19% and 2.04% in Q2FY2012. The provision coverage ratio (PCR) of the bank declined to 62.5% from 63.5%. The bank also restructured Rs2,188 crore of advances in Q3FY2012. Outlook
SBI registered a robust growth in its core income, contributed by expansion in margins and growth in advances. Despite a lackluster non interest income, the bank posted a strong growth in profits. While slippages have been a cause of concern, the strong traction in core income supported by higher NIM will compensate for the credit costs. We have fine-tuned our estimates for FY2012 and FY2013 to factor higher NIMs, slippages and expect its earnings to grow at a compounded annual growth rate (CAGR) of 32.4% over FY2011-13. We also revise our sum of the parts (SOTP) based target price to Rs2,400 (valuing the standalone bank at Rs1,795). We upgrade our recommendation from Hold to Buy. Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs692
Current market price: Rs552 Taro jacks up growth; price target set at Rs692 Result highlights -
Q3FY2012 results better than expected; guidance revised for FY2012: Sun Pharmaceutical Industries (Sun Pharma) in Q3FY2012 reported a 34% year on year (YoY) growth in net sales to Rs2,145 crore, which exceeds our estimates by 12%. The operating profit margin (OPM) swelled by 1,740bps YoY to 44.9% during the quarter, which helped the company register a 90% YoY rise in net profits to Rs668 crore. The better than expected result during the quarter is mainly on account of (a) an impressive performance by Taro Pharmaceutical Industries (Taro; 66.3% subsidiary of Sun Pharma) (b) favorable currency and (c) an upsurge in the bulk drug business (35% YoY rise in sales). The company's management has revised the revenue growth guidance to 32-34% for FY2012 from the earlier 28-30%. -
Impressive performance of Taro: During the quarter Taro reported a 44% YoY rise in net sales to $148 million on price increases in select product segments. This also helped the gross profit margin surge by 1,200bps YoY to 71.6% during the quarter. The net profit of Taro jumped by 278% to $62 million despite a $6.3 million loss on foreign exchange (forex). -
We fine tune our estimates; also introduce FY2014 estimates: Taking cues from M9FY2012 results and our interactions with the management of Sun Pharma, we revise our revenue estimates upward by 9% and 6% for FY2012 and FY2013 respectively while our net profit stands revised upward by 7% and 5% respectively. Besides, we introduce estimates for FY2014. -
We set a target price of Rs692 based on FY2014 estimates; maintain Buy: As we get close to the end of FY2012, we base our target price on FY2014 estimates. Our new target price at Rs692 implies 23x FY2013E earnings. We maintain our Buy rating on the stock. The stock is currently trading at 18.4x FY2014E earnings per share (EPS). Tata Chemicals
Cluster: Vulture's Pick
Recommendation: Hold
Price target: Rs400
Current market price: Rs362 Downgraded to Hold Result highlights -
Q3FY2012 results significantly higher than expectated: Tata Chemicals Ltd (TCL)'s revenue from operations during Q3FY2012 was significantly higher than our expectation mainly due to a higher than expected growth in the volume offtake and a higher realisation across segments. The operating profit margin (OPM) at 14.6% decreased by 70 basis points (as per our expectation) compared to the Q2FY2011 OPM due to an increased input cost. The adjusted profit after tax (PAT; after minority interest) increased by 76.4% to Rs249.9 crore on account of a lower than expected minority interest out go. During the quarter there were some extraordinary items, which included an unrealised loss of Rs7 crore on revaluation of an unhedged external commercial borrowing (ECB), impairment of assets worth Rs23 crore of bio fuel and Rallis (Turbhe plant), a voluntary retirement scheme (VRS) of Rs17 at Rallis India and a profit of Rs21 crore from the sale of assets. -
Firm domestic demand drives overall revenue: The revenue for the quarter grew by 31.9% year on year (YoY) to Rs3,809.9 crore. The revenue from the chemical segment grew by 26.6% to Rs1,667.0 crore and the revenue from the agri input segment jumped by 34.5% to Rs434.4 crore driven by a 40.4% jump in the volume offtake in the fertiliser business. During the quarter the company took a mild price rise of $10 per tonne in soda ash across geographies which helped it to maintain its margin. -
Price hikes mitigate impact of rising input cost: The price hike implemented across locations during the quarter helped the company to maintain its margin and limit the increase in the input cost. In Q3FY2012 the volume growth in the chemical segment moderated across geographies with Africa being the worst affected (volumes down 14.7%). In contrast, TCL's domestic volumes declined marginally by 2.9% during the same period. The African (Magadi) operations were mainly affected due to a power outage and a lack of rakes. During Q3FY2012 TCL's European operations witnessed an improvement in utilisation due to a delay in the onset of winter. The domestic soda ash business also saw a good growth (a price rise of Rs500 per tonne in Q3FY2012) in volume and realisation due to a higher demand from across sectors. -
Outlook weak due to softening of demand and margin pressure: The margins in the fertilier and inorganic chemical divisions are expected to remain under pressure due to the firm prices of the inputs, such as lime stone, coke and phosphoric acid. On the other hand, the urea business would get affected by a planned shutdown of a plant in March and April this year. The outlook for soda ash and its prices would depend on the Chinese demand, which could soften in the coming months. There are signs of slower volume offtake in the North East Asia, China and Japan. -
Downgraded to Hold with price target of Rs400: We have largely kept our consolidated earning estimate unchanged for FY2012, however we are marginally reducing our revenue and earnings estimates for FY2013 to factor lower than expected volume growth due to planned shutdown of urea plant in April 2012. On the valuation front, we value TCL at 9.3x FY2013E earnings per share (EPS) and investment value of Rs45 per share and arrive at fair price of Rs400. Given the limited upside from the current level and relatively weak outlook, we downgrade our recommendation to 'Hold' rating for the stock.
CESC
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs405
Current market price: Rs270
Price target revised to Rs405 Result highlights -
Sales reported lower than estimated on lower generation and realisation: CESC's sales in Q3FY2012 grew by 11% year on year (YoY) but declined by 17% quarter on quarter (QoQ) to Rs1,032 crore, 5% lower than our estimate. During the quarter, against our estimate of 2,038 million units, power sent out was 2,005 million units, 3% higher Y-o-Y and 14% lower Q-o-Q. We learned that the tariff order for 2011-12 is awaited; hence consumers are billed based on the existing tariff regulations (which don't adjust the recent rise in operation and maintenance [O&M] expenses). -
Higher fuel cost and provisioning for O&M expense pressurised operating margin: Fuel cost as a percentage of sales surged from 36% in Q3FY2011 and 37% in Q2FY2012 to 42% in Q3FY2012, indicating higher cost for fuel coupled with lower volume. The per unit cost of generation grew by 17% YoY while declined by 10% QoQ. On an absolute basis, there is a decline of Rs40-50 crore at the operating profit level, both Y-o-Y and Q-o-Q. -
Lower sales impact operating and net profit on absolute basis: The reported sales came in around Rs56 crore lower than our estimates during Q3FY2012; a similar quantum of impact was also observed at the operating profit level (Rs48 crore) and the profit before tax (PBT) level (Rs50 crore). With an effective tax rate of approximately 20%, the PAT recorded a decline of 33% YoY and 35% QoQ to Rs74 crore, against our estimate of Rs113 crore. -
We fine tune estimates and target price: Based on the M9FY2012 numbers, we have fine tuned our estimates for FY2012. We have revised down our sales estimate by 3% in both FY2012 and FY2013. However, to factor in a higher operating cost, we have trimmed down our operating profit by 8% and 6% respectively in FY2012 and FY2013. Effectively, we cut our PAT estimate by 15% in FY2012 and 13% in FY2013. Consequently, we cut our target price from Rs413 to Rs405 (factoring a cut of Rs8 in the existing power business valuation based on book value [BV]). -
Spencer's sustained store level profitability: The total number of Spencer's outlets by the end of M9FY2012 is 195 and the total trading area remains at 1,017,000 sq ft by the end of M9FY2012. The same store sales have increased from Rs1,000/sq ft in M9FY2011 to Rs1,159/sq ft in M9FY2012, which is a growth of 15.9%. The average sales have increased from Rs964/sq ft in M9FY2011 to Rs1,087/sq ft in M9FY2012, a growth of 12.76%. Spencer`s retail has sustained store level profitability since last year. In M9FY2012, it recorded an EBITDA of Rs35/sq ft per month (against Rs31/sq ft in H1FY2012). Currently the store level EBITDA margin is hovering around 3.5%, which the management aims to take to 4% in FY2013; the same would be a key monitorable. -
Valuation and view: Currently, the stock is trading at 0.6x its FY2012 and 0.5x its FY2013 standalone book value. Given the revision in our estimates, we revise down our target price from Rs413 to Rs405 (affecting BV of existing business). However, we continue to rate CESC as "Buy" as we believe it is one of the cheapest utility stocks available in the Indian market, trading at a significant discount to its book value and the average multiple of the comparable companies.
VIEWPOINT Eicher Motors Consolidating before the next leap Consolidated business reports strong operating performance for Q4CY2011 -
The revenues grew strongly on both Y-o-Y and Q-o-Q bases on account of a better volume growth and a higher realisation in both VECV and the two-wheeler business. -
The consolidated margin at 9.8% exceeded expectations on the back of the strong operational performance of VECV. -
The net profit at Rs85.4 crore grew at a higher rate than the revenue in both the business. Valuation
For VECV, we estimate a volume growth of 8.9% and 20.2% in CY2012 and CY2013 respectively. We have assumed a 95% capacity utilisation level giving advantage to a low product base and the available opportunity for a pan-India spread. We expect the OPM to stabilise around 9% after considering the increased competitive scenario in the industry as well as the company's market development initiatives. Our EPS expectations for VECV during FY2012 and FY2013 are estimated at Rs70.7 and Rs85.7 respectively. The stand-alone motorcycle business is expected to report a volume growth of 23.3% and that of 45.8% in CY2012 and CY2013 respectively. We have assumed the maximum capacity utilisation as we see a waiting period of 6-12 months for the company's motorcycles. Our EPS expectations for the motorcycle business under stand-alone reporting are Rs54.2 and Rs76.6 for CY2012 and CY2013 respectively We arrive at the consolidated EPS estimates of Rs125 and Rs162 for CY2012 and CY2013 respectively after adjusting for the minority interest. Given the bright prospects of the company after its association with Volvo, the stock can trade at 10x CY2013E earnings. We give only a book value per share of Rs100 to the Volvo engine venture on account of the longer than expected gestation period of the business. Even as the current price factors in the positives, we are bullish on the business with a longer-term investment perspective.
SHAREKHAN SPECIAL Q3FY2012 Capital Goods & Engineering earnings review Key points -
Good growth in revenue: Most of the companies in our capital goods and engineering universe reported revenues better than our expectation for Q3FY2012. The performance was led by a good execution of projects, and also by a favourable effect accruing from currency fluctuations. These caused the top line to be 4% higher than expected. Conventionally in the capital goods space, the third quarter accounts for 20-25% of the yearly sales and therefore contributes lower revenues. -
Margins under pressure, as expected: We were already expecting the margins to be subdued for Q3FY2012, driven by a rise in the input cost and the competitive pricing pressure in a subdued demand environment. Overall, the margins at 11.9% were lower than our expectation of 12.7% (also way below the Q3FY2011 cumulative margin of 14%). Overall, the cumulative profit after tax (PAT) for our coverage companies was 3% lower than our estimates. Many companies continued reporting a rise in inventories which lowered the negative impact of the rise in their raw material costs. However, the same could lead to distress selling if the industry starts facing an oversupply situation. Moreover, the recent increase in the prices of metals like copper is likely to put the margins under stress in the coming quarters also. -
Order inflow continues to fall: The order inflow during the quarter remained lackluster and fell by 33% year on year (YoY) marred by negative order booking (order cancellation) in case of Bharat Heavy Electricals Ltd (BHEL). Most management commentaries indicated that order awarding activities were low during the first nine months of FY2012, particularly in the power equipment sector. However the managements expect the ordering scenario to improve post state elections in FY2013. The book-to-bill ratio for most companies, which had been stagnant, has now started falling, thereby aggravating the concerns of growth in future. The recent development of the government arriving at a consensus on slapping of an anti-dumping duty to curb overseas competition is positive for the domestic players like BHEL and Larsen & Toubro (L&T) though it lacks clarity in terms of quantum and the timeline for the imposition of a duty. -
Prefer performers for now: After a major downgrade in our earnings estimates during Q2, the third quarter saw some upgrades. We feel that companies with a diversified exposure to the infrastructure sector like L&T are likely to do better than pure manufacturing bets like BHEL. BHEL, which has singular focus towards power equipment, is likely to languish amid the follow on public offering (FPO) hangover and competition concerns. Most of the stocks in the capital goods space have been thrashed badly on a yearly basis. Concerns over competition, slow order booking, and margin pressures look already priced in, like in the case of PTC India. Hence any good news from here like an uptick in manufacturing activity, better order inflow and imposition of import duty should provide positive triggers to the sector. In terms of Q3 performance, L&T and V-Guard were the outperformers and remain our top picks in the capital goods space. In this note, we have introduced our FY2014 earnings estimates for the stocks under our coverage. We have also revised the price target for CGL to Rs164 on rolling over the target multiple for the stock to an average of the FY2013 and FY2014 earnings estimates. In terms of Q3 performance, L&T and V-Guard were the outperformers and remain our top picks in the capital goods space. Positive triggers for the sector would be (1) the imposition of an anti-dumping duty to curb the rising Chinese competition, (2) a pick-up in the order awarding activity and in execution of power projects, (3) further cooling off of metal prices and containment of inflation. | | 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 | | | |
