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STOCK UPDATE Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs597
Current market price: Rs521 Q4FY2012 results: First-cut analysis Result highlights Better than expected revenue; bottom-line impacted by higher fixed costs and tax
Lupin's net sales for Q4FY2012 rose by 23.8% year on year (YoY) to Rs1,883 crore, which is 8% higher than our estimates. The operating profit dropped to 17.6% in Q4FY2012 vs 18.3% in Q4FY2011. This is substantially lower than our estimate of 21.6%. A higher interest cost (56% YoY rise) and depreciation (52.5% YoY rise) impacted the profit before tax (PBT), which registered a 9.7% Y-o-Y rise to Rs296 crore. During the quarter, the effective tax rate (excluding a one time tax payment of Rs13.3 crore on unrealised gains on inventories of foreign subsidiaries) jumped to 41% (vs 11.5% in Q4FY2011). This resulted in a drop in reported profit by 31.5% YoY to Rs155.6 crore, which is 38% lower than our estimate of Rs242 crore. Valuation
The stock is currently trading at 20.5x and 15.8x FY2013E and FY2014E earnings. We have a Buy recommendation on the stock with a price target of Rs597.
We will revisit the numbers and target price after an interaction with the company's management. Apollo Tyres
Cluster: Apple Green
Recommendation: Buy
Price target: Rs91
Current market price: Rs82 Rolling on a growth path Result highlights Standalone margins recover
Apollo Tyres Ltd (ATL)'s Q4FY2012 revenues grew 28.2% year on year (YoY) on the back of a 14% YoY volume growth and an equal contribution from the price and product mix. The operating margins recovered 160 basis points sequentially to 9.6% on account of lower material costs. Natural rubber prices reduced to Rs210/kg in Q4FY2012 as against Rs223/kg in Q3FY2012, giving a boost to contribution as well as operating margins. Higher tax rates impacted profitability which recorded a moderate growth of 9.2% YoY. The tax rate for Q4FY2012 was 31.5% as against 29.6% for FY2012. Changes in accounting norms led to higher costs under the interest head as earlier interest income was not netted off. The same got reported under the other income head. The company took a marginal price hike of 1% in the truck segment in the month of May 2012. Europe continues to be the star performer
Revenues from Europe grew 9% YoY in Q4FY2012 on the back of a 4% growth from volumes and the balance through price mix and currency. Europe continued to report strong margins (190 basis points improvement on a seasonally strong Q3FY2012). The margins were higher on account of renewed season end winter tyre sales in February 2012. The European operations also saw the impact of a Rs20 crore gain on actuarial valuation leading to lower employee costs. South African operations disappointed with a loss against our expectation of a turnaround
ATL's South African operations declined 4% YoY in Q4FY2012, on the back of volume decline of 18% in the quarter. The company reported a loss for the second consecutive quarter at the earnings before interest and tax (EBIT) level. The operations were impacted by planned shutdowns and rising threat of imported tyres. However with a better volume growth expected, both in the original equipment manufacturer (OEM) and the replacement segment, ATL expects the plant to breakeven in FY2013. The company had taken a price increase of 3% each in February 2012 and May 2012. Valuation
We believe Apollo Tyres is the best sustainable tyre play in the Indian context on account of its product and regional diversification. The lower prices of natural rubber are expected to help its margins. Of late, the most crucial truck tyre replacement market has shown signs of revival and this is expected to benefit the company. The company expects a turnaround in South Africa and has given a stable outlook for Europe. We keep our FY2014 earnings per share (EPS) estimate of Rs15.0 and the target price of Rs91 per share unchanged. The near term overhang on the stock is CCI's penalty threat on tyre manufacturers. We see a high probability of cartelisation charge being slapped on all tyre companies including Apollo Tyres and the same would be a dampener on the stock. However, the event would also provide an attractive investment opportunity from a long term perspective. We retain our Buy recommendation on the stock. IRB Infrastructure Developers
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs175
Current market price: Rs121 Price target revised to Rs175 Result highlights -
Earnings above estimates, margins expand: For Q4FY2012 IRB Infrastructure Developers (IRB)'s earnings grew by 17% year on year (YoY) to Rs120.3 crore (above our estimate of Rs109 crore) led by a decent revenue growth and huge margin expansion. The consolidated revenues were up by 10.6% YoY and 14% quarter on quarter (QoQ) to Rs848 crore (much in line with our expectation of Rs828 crore) led by a strong execution in the construction segment (up 7% YoY and 20% QoQ) and consistent toll collection across projects (up 19% YoY and 2% QoQ). The operating profit margin (OPM) improved sharply to 44.9% (higher than our estimate of 42.2%) as against 41% in Q4FY2011 and 45.8% in Q3FY2012 resulting in a 21% Y-o-Y growth in EBITDA. Despite a robust growth at the operating level, the profit after tax (PAT) growth was restricted due to an increase of approximately 73% in depreciation mainly on account of the Surat - Dahisar project. -
Strong execution and stable toll collection supported revenue growth: The consolidated revenue of IRB continued to grow consistently, clocking a 10.6% YoY and 14% QoQ growth to Rs848 crore in Q4FY2012. The momentum was led by a strong order execution in the construction segment, which registered a growth of 7.4% YoY, and consistent toll collection across projects where revenues were up by a good 19% YoY. The growth in the construction division was largely led by the Jaipur - Deoli, Talegaon - Amravati and Tumkur - Chitradurga projects where the execution continues to be on schedule. There was no major toll revision during the quarter. The traffic growth across projects was stable with weakness continuing in both Surat-Dahisar and Surat-Bharuch projects due to diversion of traffic from Nasik on account of construction of bridges in that area. -
OPM witnesses huge expansion: The OPM for the quarter improved sharply to 44.9% as against 41% in Q4FY2011 and 45.8% in Q3FY2012 resulting in a 21% Y-o-Y growth in EBITDA. The expansion was on account of the construction segment witnessing an increase in margins to 26.9% vs 22.6% in Q4FY2011 (and 24.2% in Q3FY2012) since the newer under-construction build operate transfer (BOT) assets have higher margins. Further in the Tumkur-Chitradurg project, only earthwork is being carried out currently which involves less cost. Conversely though, the BOT margins came down a bit to 88.1% vs 90.5% in Q4FY2011 and 89.8% in Q3FY2012. -
Net profit growth restricted due to sharp rise in depreciation: In spite of a good revenue growth and huge margin expansion the consolidated PAT growth was restricted to 17% YoY and was down 8.4% QoQ to Rs120.3 crore. This was due to a sharp rise in the depreciation charge (up 73% YoY) on account of depreciation for the Surat-Dahisar asset which completed construction during Q2FY2012 and was operational since December 15, 2011. The interest cost was up by only 7% YoY and 6% QoQ as of the portfolio of 16 projects, 6 projects are debt free and 4-5 projects are under construction where interest cost gets capitalised. The consolidated debt figure now stands at Rs7,121 crore vs Rs6,600 crore in Q3FY2012. The tax rate too came in higher for the quarter at 28%. -
IRB acquires an operational project in Tamil Nadu: The company has acquired a 100% stake in MVR Infrastructure & Tollways which is implementing the two to four laning of the Omallur Salem -Namakkal BOT road project. The concession agreement for the project was executed on February 16, 2006 for a 20-year period, of which IRB will now inherit 14.5 years. The cost of the project was Rs308 crore. The toll collection started in August 2009 and is witnessing a daily toll collection of Rs16 lakhs (FY2012). IRB has acquired the project for Rs128 crore which works out to 2x its price to book value (P/BV). The management is seeking an internal rate of return (IRR) of 21% based on traffic growth assumption of approximately 7% for the initial seven years and later stabilising at 6% with a 6.5% tariff hike. However as per our calculation the IRR works out to be 16% thereby adding a value of Rs.1.1 per share. -
Earnings estimates revised downwards: We have reduced our revenue estimates for FY2013 and FY2014 by 5% and 4% respectively mainly to factor in the delay in start of the tolling of Kolhapur project and delay in the commencement of execution of the Ahmedabad- Vadodara project. The earnings estimates, on the other hand, have been reduced by 11% and 15% for FY2013E and FY2014E respectively to factor in higher depreciation than our estimate and higher interest cost due to higher debt than our assumption. -
Price target revised to Rs175, maintain Buy: We continue to like IRB given its vast portfolio, rich experience, strong financials and the healthy cash flows from its operational toll-based projects, all of which provide comfort. With a strong pipeline of projects up for award from the National Highways Authority of India (NHAI) and the bidding process becoming less aggressive, the management is confident of securing projects at equity IRR of 18%. However, the recent legal trouble for the promoter will continue to be an overhang on the stock till it gets solved. Hence, we reduce our target price to Rs175 by roll forward of net asset value (NAV) of BOT projects to FY2013 and by reducing our multiple for the construction business to 5x from 6x (giving discount due to the legal trouble) on FY2013 earnings. Given the huge upside, we maintain our Buy recommendation on IRB. At the current market price, the stock is trading at 8.5x & 8.2x its FY2013E and FY2014E earnings respectively. Cadila Healthcare
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs768
Current market price: Rs757 Q4FY2012 results in line with expectations, except for higher tax provisioning Result highlights -
Q4 revenue in line with expectations; higher fixed costs and tax impacts bottom-line: Cadila Healthcare (Cadila Health)'s net sales grew by 15.3% year on year (YoY) to Rs1,398 crore in Q4FY2012, which is in line with our expectations. However, the operating profit margin (OPM) at 20.2% (up 145bps YoY) stood lower than our expectation of 22.2%. Moreover, higher interest costs (up by 48% YoY), depreciation (up by 158% YoY) and higher tax provisioning (effective rate 19.5%) impacted the net profit to drop by 4.5% YoY to Rs171 crore. Adjusting for a foreign exchange (forex) loss (Rs9 crore), the net profit jumped by 10.7% YoY to Rs180 crore, which is 17% lower than our estimate of Rs218 crore. -
Weaker base business sales in most geographies: During Q4FY2012, most of the export markets like Europe, Latin America, Japan and other emerging markets witnessed a single digit growth. Growth in the US market (by 26% YoY) was backed by additional revenue from the newly acquired Nesher Pharma. However, the domestic formulation business, coupled with the newly acquired Biochem Pharma, witnessed a sharp jump in base business (by 23% YoY). -
We maintain our estimates, recommendation and target price: We maintain our estimates for FY2013 and FY2014 and Hold rating on the stock with a target price of Rs768.
SECTOR UPDATE Fertilisers Production remained subdued, lean season played a role Key points -
Decline in volume during April 2012: In April 2012, the aggregate sales of the domestically produced fertilisers (by 15 leading manufacturers) declined by 11% year on year (YoY). In April 2012 the import of fertilisers (urea, DAP, MOP and complex fertilisers) increased from 1.17 lakh tonne to 1.33 lakh tonne despite a decline in urea import. The import of DAP, MOP and complex fertilisers has grown by 72%, 52% and 48% respectively. The import of urea decreased from 33,847 tonne to 3,681 tonne during April 2012. -
Fertiliser subsidy paid by government for FY2012: The subsidy paid by the Government of India for April 2011 to March 2012 is Rs74,170 crore, which is 16% higher compared with the previous year's. The amount of fertiliser subsidy released in the last three years.
Currently, urea units are manufacturing urea as per the New Pricing Scheme (NPS), stage III. The policy for the existing urea units beyond NPS, stage III is still under consideration of the government. -
Lower production of complex fertilisers drag the total fertiliser volume: A lower production of complex fertilisers due to a higher inventory level with retailers has forced companies to reduce the production of complex fertilisers. The volume of urea declined marginally while DAP volumes remained flat during month. The import of non-urea fertilisers increased in April 2012 due to a decline in the price of DAP, MOP and the other key inputs. Going ahead, we believe that the price of DAP, MOP and phosphoric acid (the key raw material for manufacturing DAP) in the international market will remain under pressure because of a decline in the demand across the world due to higher prices.
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