Robust realisation; await ramp-up in production volumes
Result highlights
Strong results driven by realisation; volume growth unimpressive though: In Q3FY2012, the net revenues (adjusted for the petroleum profit) of Selan Exploration Technology (Selan) grew by 54% year on year (YoY), as a 76% year-on-year (Y-o-Y) improvement in the realisation over-compensated for the 6% decline in the volume during the quarter. Though sequentially the volume improved by 14% to 41,853 barrels of oil, but the realisation supported 6% growth QoQ taking the sequential sales growth to 20%.
PAT records 65% growth YoY: The operating profit grew by 77% YoY and 5% quarter on quarter (QoQ) to Rs14.7 crore. Following the trend, the profit before tax (PBT) grew by 80% YoY and 5% QoQ to Rs16.7 crore in Q3FY2012. However, there was an extraordinary item to the tune of Rs2.4 crore pertaining to foreign currency variation in Q3FY2012. Therefore, the reported profit after tax (PAT) recorded a growth of 65% YoY and 17% QoQ to Rs10.5 crore. Excluding this extraordinary item, the adjusted PAT seems to jump by 100% YoY and 12% QoQ to Rs12.9 crore.
Volume estimate revised down; consequently profit estimate trimmed: Given the delay in obtaining regulatory approvals for further exploration & development of the company's oil fields, we are fine-tuning our assumptions for the production volume in FY2012 and FY2013. However, the impact of the delay on the net revenue will be limited by the higher than expected blended realisation. We are also introducing our FY2014 estimates for the company in this note. We remain positive about the field development programme and the potential ramp-up in the volume from the same in the coming years. Thus, we maintain our Buy recommendation on Selan with a price target of Rs500.
SHAREKHAN SPECIAL
Q3FY2012 Banking earnings review
Key points
Net earnings ahead of estimates: In Q3FY2012 the earnings of our banking universe showed a growth of 12.6% year on year (YoY) compared with our estimate of a 9.5% year-on-year (Y-o-Y) growth for the period. This was mainly contributed by a better than expected performance on the net interest income (NII) front.
Strong margin drives NII growth: The NII growth of 17.1% YoY was also higher than our estimate driven by a stable margin and a better growth in the advances. The private sector banks delivered a slightly higher growth (up 17.5%YoY) compared with the public sector banks (PSBs; up 16.9% YoY).
Slippages decline QoQ, restructuring picks up: Though the slippage for most PSBs declined sequentially, but the same remained at elevated levels (2.4% vs 2.8% in Q2FY2012) contributed by the slippage from the corporate segment (aviation, media, agriculture). The restructured advances also increased on a sequential basis (Bank of Baroda [BoB], Bank of India [BoI], Punjab National Bank [PNB], Union Bank of India [Union Bank] etc) partly contributed by the telecommunications (telecom) sector.
Valuation and outlook The Q3FY2012 results show a relatively better growth in the core income led by a stronger net interest margin (NIM). Going ahead, the interest rates are likely to soften which will aid the core income growth of banks and support the growth in their net earnings. Though the higher slippage and increased restructuring (especially chunky accounts like state electricity boards [SEBs], Air India) remain causes for concern for banks but with the likely easing of rates the growth in advances could improve while the pressure on asset quality could ease, thereby benefitting the banks.
Factoring in the likely easing of the interest rates and the asset quality issues the banking stocks have seen a sharp run-up (13% appreciation in the Bankex in the last one month). In this note we have introduced our FY2014 estimates and rolled over our valuation estimates to the FY2014 estimates which has resulted in a revision in the price target for most banks. Given the sharp run-up in the prices of most banking stocks we prefer Axis Bank, Yes Bank, BoB, Allahabad Bank and HDFC as these could see a re-rating from the current levels.
Q3FY2012 Auto earnings review
Revenue growth in double digits while PAT remains flat in Q3FY2012: Sharekhan's automobile (auto) universe grew its revenues by 13.9% in Q3FY2012. The EBIDTA grew at a slower pace of 7.4% year on year (YoY) while the profit after tax (PAT) remained flat on a year-on-year (Y-o-Y) basis. Ex Maruti Suzuki the universe's revenues and EBIDTA grew by 27.1% and 25.2% YoY respectively while its PAT grew at a slower pace of 16.3%.
Operating performance under stress, margins decline across the board: Raw material pressure failed to recede during the quarter leading to a lower growth in the EBIDTA vis-a-vis the revenue. About 65% of the auto companies under Sharekhan tracking universe witnessed a sequential drop in their contribution margin, indicating sustained pressure on the material front. The absence of operating leverage put further pressure leading to a decline in the operating profit margin (OPM).
Maruti faced triple whammy: strike, poor demand for petrol cars and yen-hit margins; but the worst is over: Dual blows of a strike at the Manesar plant and a lower demand for petrol cars led to a 27.6% Y-o-Y drop in Maruti Suzuki's volumes in Q3FY2012. Apart from the higher discounts on petrol cars, a sharp appreciation in the yen inflated the import cost and the royalty pay-out. The company reported the lowest OPM in the last few years. The sharp depreciation in the rupee against the dollar and the appreciating yen affected the auto companies by way of marked-to-market (MTM) losses on export hedges, outstanding loans and yen-denominated royalty payables.Maruti Suzuki and Hero MotoCorp are vulnerable to large yen exposures while Mahindra and Mahindra (M&M) felt the impact of the depreciating rupee on its foreign currency denominated outstanding loans. Bajaj Auto also saw a notional MTM loss on its exports as it has hedged its export receivables at lower levels of the rupee for the next one year.
Outlook and valuation: We have introduced our FY2014 estimates for Sharekhan's auto universe and have revised our price target upwards for most companies as we have rolled over our valuations to the FY2014 earnings estimates. The upward revision has been major for Maruti Suzuki as we believe that the worst is over for the company. Given the sharp appreciation in the auto stock prices we have kept our recommendations unchanged. Apollo Tyres is poised to outperform our coverage universe. Valuation-based gains are also available for M&M but we have kept a Hold recommendation on the stock due to the overhang of higher duty on diesel vehicles in the forthcoming Union Budget. Our view on the sector remains cautious.
