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THEMATIC REPORT Closing M&M to Maruti Switch call 40% returns made on M&M to Maruti Switch call
In our note dated December 27, 2011, we had given a Switch call from Mahindra and Mahindra (M&M) to Maruti Suzuki. From the levels of Rs968 for Maruti Suzuki and Rs702 for M&M, the call would have given 40% returns if equal amounts had been invested in both the stocks. This compares with the 9.5% return given by benchmark index, the Nifty, over the same period. Rationale for closing the "M&M to Maruti Switch" call Maruti: positives priced in with no re-rating triggers in the near term; scope for negative news flow in the form of recurrence of labour issues
Maruti Suzuki has given over 40% return; much higher than the general index as well as the automobile index. The diesel portfolio story, successful launches of new products on the Swift platform and reduced competitive intensity played out well for the company. The sharp appreciation in the stock price factored in the positives. However, the risk-reward ratio seems to be balancing out for Maruti Suzuki and the stock may react immediately to any negative news flow. The Manesar workers are now demanding a five-fold increase in the basic pay; conveyance facilities within a 100km radius; higher dearness allowance etc. The company has also increased dealer margins on petrol cars from 4% to 10%. We believe that the stock has not priced in the negative news as yet. Currently, we have a Hold rating on Maruti Suzuki. M&M: potential revival in tractor sales in H2FY2013; good monsoon forecast can lead to outperformance in the near term
M&M, on the other hand, has significantly underperformed the Sensex as well as the automobile index. The much anticipated diesel tax did not come in the Union Budget for FY2013. The slowdown in the tractor segment has been factored in the stock price. In fact, a good monsoon and the launch of a new tractor platform could help revive the demand for tractors in H2FY2013. We believe that there are limited downsides for M&M as there may not be many reasons for its underperformance from the current levels. Currently, we have a Hold rating on M&M.
STOCK UPDATE Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,364
Current market price: Rs1,059 Price target revised to Rs1,364 Result highlights -
Back with a bang, outperformance across parameters: Tata Consultancy Services (TCS) reported an impressive set of numbers for Q4FY2012, with a top line growth of 2.4% quarter on quarter (QoQ) to $2,648 million (a tad higher than our expectation of $2,620.5 million). The top line growth was aided by a 3.3% sequential blended volume growth (ahead of our expectation and in contrast to Infosys' 1.5% volume de-growth). On a constant currency basis, the revenues were up 2.3% QoQ to $2,641 million and pricing was down 97 basis points (bps). In Indian Rupee (INR) terms the revenues were up 0.4% QoQ to Rs13,259.3 crore, impacted by sequential rupee appreciation of 1.9%.
For the quarter under review, the earning before interest and tax (EBIT) margin has declined by 155bps to 27.7% (ahead of our expectations of 27.2%) on account of appreciation in the rupee (-71bps) and higher selling, general and administration (SG&A) expenses (-120bps). The net other income turned positive to Rs107.7 crore as against losses of Rs92 crore in Q3FY2012, driven by lower foreign exchange losses to the tune of Rs91.4 crore as compared to Rs280 crore in Q3FY2012. The net profit was higher by 1.6% QoQ to Rs2,932.4 crore (ahead of our estimate of Rs2,817.4 crore). During the quarter the company made a net addition of 11,832 headcounts and indicated at adding at least 50,000 headcounts in FY2013 including 43,600 campus offers. TCS has added 42 new clients and signed six large deals in the quarter. -
Management commentary allays concerns for the sector, indicates at strong demand momentum: After Infosys' relatively weak demand commentary and subdued growth guidance for FY2013, TCS' management commentary was in stark contrast with affirmation of demand momentum and confidence of comfortably outpacing the Nasscom growth projection (11-14%) for FY2013. Although TCS' management indicated at growing uncertainties owing to the volatile macro economic environment, at the same time it instilled confidence with indication of strong business visibility with deals signing happening on the anticipated line and pick up in the discretionary projects which would lend comfort to earning sustainability in the coming quarters. Further, TCS' gross hiring plans of about 50,000 headcounts for FY2013 (on the backdrop of an already strong bench strength) and 8% average wage hikes with no cuts in the variable pay, is a strong testimonial to robust revenue visibility for the company for the year ahead. -
Valuation and view: After facing minor hiccups in Q3FY2012, TCS' performance surprised positively with a strong outperformance across the parameters. Further, affirmative management commentary on the demand environment and margin sustainability does lend comfort to our preference for TCS over Infosys. On the valuation front, the premium valuation of TCS over Infosys is likely to sustain and widen further owing to better and predictable earning profile of TCS and lesser investor confidence in Infosys. At the current market price of Rs1,059, the stock trades at 15.8x and 14x our FY2013 and FY2014 earnings estimates respectively. We have introduced our estimates for FY2014 and roll over our price earning (PE) multiple to FY2014 with a revised target price of Rs1,364. We maintain our Buy rating on the stock. Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs890
Current market price: Rs736 Earnings largely supported by other income Result highlights -
PAT ahead of expectations due to surge in other income and better gross refining margins: Reliance Industries Ltd (RIL) in its Q4FY2012 results posted a net profit of Rs4,236 crore which is a decline by 21.2% on a year-on-year (Y-o-Y) basis and 4.6% on a quarter-on-quarter (Q-o-Q) basis. The decline in the earnings is largely on account of severe contraction in profitability of the petrochemical division and the exploration and production (E&P) division of the company. However, the earnings of the company were ahead of our estimates on the back of a surge in the other income and better than expected gross refining margin (GRM). The GRM during the quarter stood at $7.6/bbl (better than the Street's expectation) as compared to $6.8/bbl during Q3FY2012 and $9.2/bbl in Q4FY2011. We had factored in a GRM of $6.5/bbl in our Q4FY2012 estimates. -
Net sales up 17.2% YoY: RIL reported a revenue growth of 17.2% YoY to Rs85,182 crore which is 2% lower than our estimates. The overall revenue growth has been largely driven by a healthy revenue growth of 21.5% in the refining business and a 17.7% revenue growth in the petchem division. However, the E&P division posted a de-growth in revenue by 36.4% on account of falling output from KG-D6. -
Margins decline by 584bps YoY: The operating profit margin (OPM) contracted by 584 basis points YoY to 7.7%. The key reason behind the severe margin pressure is a) a drop in the GRM to $7.6/bbl from $9.2/bbl in Q4FY2011, b) contraction in the petchem EBIT margin by 428bps and c) a drop in the EBIT margin of the E&P division to 36.5% as compared to 61.1% in Q4FY2011 and 45.7% in Q3FY2012. Consequently, the operating profit of the company declined by 33.3% YoY to Rs6,563 crore as compared to a 17.2% growth in revenues. -
Surge in other income limits de-growth in bottom line: The other income during the quarter surged to Rs2,295 crore as compared to Rs917 crore in the corresponding quarter of the previous year. The surge in the other income has been largely supported by the healthy cash on the books. Hence the de-growth in the bottom line has been limited to 21.2% as compared to a 33.3% de-growth at the operating level. -
Net profit for FY2012 declines: For the full year FY2012 the company has posted a 32.9% growth on the revenue front supported by the refining and petchem divisions. However, on account of margin (which contracted by 517bps) pressure the net profit of the company declined by 1.2% compared to FY2011 to Rs20,040 crore. Further the board of directors has recommended a final dividend of 85% (Rs8.5/share) for FY2012. -
Board approves buyback: The board has approved buyback of upto 12 crore fully paid up equity shares at a price not exceeding Rs870 per equity share. The buyback is upto an aggregate amount not exceeding Rs10,440 crore. During the year the company has bought and extinguished 36,63,431 equity shares for an amount of Rs279 crore. -
Downgrading earnings estimates for FY2013 & FY2014: We are downgrading our earnings estimates for FY2013 and FY2014 mainly to factor in lower than expected margin in the petchem business and drop in the output from the KG basin. Consequently the revised earnings per share (EPS) now stands at Rs62 for FY2013 and Rs64.3 for FY2014. -
Maintain Buy with a price target of Rs890: Though the operational matrices are showing signs of concern, we believe most of the negatives are factored in the current valuation of the stock, thereby leaving limited downside potential in the stock price from the current level. On the other hand there is no trigger in the near term for RIL due to the overhang in terms of output from KG basin and continued margin pressure in the petchem business. However, any development in terms of increase in gas price or margin improvement in the petrochemical business could be positive for RIL. Hence we maintain our Buy recommendation on the stock with a target price of Rs890 (based on sum of the parts [SoTP] valuation method). Currently, the RIL stock is trading at 11.9x and 11.5x its FY2013 and FY2014 estimated earnings. IDBI Bank
Cluster: Cannonball
Recommendation: Hold
Price target: Rs131
Current market price: Rs105 Q4 earnings beat expectations, slippages decline Result highlights -
IDBI Bank's Q4FY2012 earnings were significantly ahead of our estimate as the same grew by 49.3% year on year (YoY) and 88% quarter on quarter (QoQ) to Rs771 crore. The earnings growth was driven by lower provision expenses, a strong growth in the fee income and the reversal of the deferred tax liability. -
The net interest income (NII) was in line with our estimate as it grew by 9.2% YoY (up 14.3% QoQ) to Rs1,211 crore. A sequential increase in the net interest margin (NIM) and a growth in the advances aided the growth in the NII. -
The NIM increased by 18 basis points sequentially to 2.07% led by a decline in the cost of funds. The current account and savings account (CASA) ratio expanded to 24.1% (19.7% in Q3FY2012) though the average CASA balances were at about 17% in Q4FY2012. -
The advances grew by 15.3% YoY (up 16% QoQ) led by a 20% year-on-year (Y-o-Y; up 14.4% QoQ) growth in the corporate advances and a 76% Y-o-Y growth (up 58.3% QoQ) in the agriculture advances. The deposits of the bank grew by 16.6% YoY (up 18.8% QoQ) during the quarter. -
The non-interest income grew by 15% YoY (up 79.9% QoQ) led by a strong growth in the fee income while the treasury income was modest. The operating expenses grew by 28.5% YoY leading to an increase in the cost-to-income ratio to 39.9% vs 34.6% in Q4FY2011. -
The asset quality of the bank improved as the gross and net non-performing assets (NPAs) declined to 2.49% and 1.61% respectively due to lower slippages. Consequently, the provisions declined by 2.9 YoY and 32.6% QoQ. We maintain our Hold recommendation on the stock due to the weak macro-economic environment which could result in asset quality pressures and lower return ratios (return on equity [RoE] of 11% and return on asset [RoA] of 0.7% in FY2013). Valuation
IDBI Bank's Q4FY2012 results were characterised by an improvement in the NIM and a decline in the NPAs. However, the NII growth was slightly subdued due to a slower growth in the advances and a relatively higher cost of funds. The bank's RoE and RoA are expected to remain at 11% and 0.75% respectively in FY2013 due to the increase in equity (capital infusion) and the slower growth targeted by the management. Though the NPAs declined in Q4FY2012, the weak macro-economic environment continues to cast a shadow on the asset quality of the bank. We, therefore, maintain our Hold recommendation on the stock with a price target of Rs131 (0.8x FY2014 BV).
VIEWPOINT FAG Bearings Savli factory to be the game changer FAG AGM notes: Savli factory to be the game changer -
FAG Bearings India (FAG Bearings) has undertaken the biggest capital expenditure (capex) in its history. With a capex of Rs155 crore the company plans to set up a state-of-the-art plant at Vadodra, Savli. The new plant would significantly increase its competitiveness in the industrial segment particularly in the wind farm segment where large bearings are used. Significant modernisation is being undertaken in the old Maneja plant at Vadodra as well. -
The company has supplied gen-3, bearing sub-assembly systems for the recently launched Maruti Ertiga and will do 100% supplies for the multi-purpose vehicle (MPV). -
X-life bearings introduced by the company last year boosted its exports, which increased 57% in 2011. The production of X-life cylindrical roller bearings and spherical roller bearings was expanded in the Maneja in Vadodra and the products have been widely approved by customers in Asia, Europe and the USA. Exports contribute 12% to the sales of FAG Bearings. -
At the Auto Expo 2012 the company showcased advanced drive solutions that could increase vehicle fuel efficiency by 30%. Some of these products would be produced at the newly commissioned Savli factory. View: FAG Bearings-a structural growth story with medium-term hiccups
FAG Bearings has expressed concerns over growth in the immediate period in both the automotive and the industrial segment. -
The company's margins are also expected to move lower from the 19.6% base of CY2011. In CY2012 the PAT growth is expected to be muted as the impact of depreciation would take place on account of the commissioning of the new Savli plant. -
The sharp run-up in the stock price has not fully priced in the issues of immediate slowdown and the stock price may start pricing the same in the days ahead. -
However, the Savli plant is expected to be the game changer for the company in the long run and place the company in a new league. The breakthrough products such as gen-3 bearing hub, X-life bearings, would position the company on a strong growth trajectory. -
FAG Bearings' growth story will pay rich rewards in the long run but there are growth and margin challenges in the medium term. We have a neutral view on the stock.
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