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PULSE TRACK Inflation for April 2012 climbs to 7.23% Outlook
The inflation pressures have come to fore again due to a sharp jump in primary article prices and fuel price though the government is yet to announce hike in fuel prices. Given the high crude price and depreciating rupee the inflation pressures are likely to persist. This could result in further revision in growth outlook for FY2013 which is expected to be anywhere between 7.1%-7.5%. Going ahead in spite of the weak IIP numbers, the Reserve Bank of India could hold on the rates as now inflation control hinges more on government action.
STOCK UPDATE Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,588
Current market price: Rs1,160 Q4FY2012 results: First-cut analysis Result highlights -
Q4 results exceed expectations; guidance for FY2013 order inflows surprises positively: Larsen and Toubro (L&T)'s Q4FY2012 results were better than our expectations mainly on account of a robust performance in its engineering and construction (E&C) division. However, the order inflow for Q4 was disappointing, registering a year-on-year (Y-o-Y) decline of 30% to Rs21,159 crore, falling behind market expectations. The company has surprised positively with its order inflow guidance for FY2013. It expects a 15-20% growth in fresh order inflow revenue for FY2013. -
Standalone sales up 22%: L&T has reported a strong rise in its revenues (stand-alone) for Q4FY2012 which was slightly higher than our expectation of a 20% Y-o-Y growth. This was mainly on account of strong execution in the E&C segment. The E&C division reported a 23% growth in the revenues, which was above our and the street's expectations. The electrical and electronics (E&E) division reported a 14% Y-o-Y growth in revenue while the machinery and industrial products (MIP) division lagged reporting a fall of 6% YoY in revenue. -
Operating margin declined: The operating margin declined to 13.9%, beating our expectation of 13.2% and lower than 15.4% in Q4FY2011. This was primarily due to a rise in employee cost (up 22% YoY) and input cost (up 25% YoY) and was partially offset by the containment in selling and administration costs. The company has indicated that the current fiscal year's margin would be maintained, although it could see a margin pressure of about 50 basis points in FY2013 on account of volatility in the input cost, mainly metal prices. -
Adjusted net profit up by 28%: After excluding an one-time income of Rs55 crore from the sale of stake in one of its subsidiaries, L&T's adjusted net profit stood at Rs1,865 crore (up 28% YoY), which exceeds our as well as the street's expectations. -
Order inflow subdued at Rs21,159 crore: The order inflow has been modest at Rs21,159 crore (fall of 30% YoY). Overall the order inflow in FY2012 fell by 12% YoY, which is much lower than the 5% growth guidance given at the start of the year. The current order book stands at Rs1,45,723 crore (up 12% YoY and flattish quarter on quarter [QoQ]). -
Outlook and view: While the street was worried about L&T's margins and interest cost amid the rising interest rate scenario, the company has outperformed on these parameters during the quarter. However, the lackluster fresh order inflows continue to remain a drag on the valuations. The street would look for signs of revival in the investment cycle before factoring in the higher than expected order intake and revenue growth guidance for FY2013. At the current level the stock is trading at 12.5x its FY2013E earnings. We maintain our Buy recommendation on the stock and would soon come out with a detailed note taking a thorough account of the Q4FY2012 results. Divi's Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,122
Current market price: Rs883 Incremental contribution from DSN SEZ units fuels growth Result highlights -
Bumper Q4: Divi's Laboratories (Divi's Labs) reported a 49.7% year on year (YoY) rise in revenue to Rs718 crore during Q4FY2012, mainly due to additional revenue from the newly commercialised DSN special economic zone (SEZ) unit at Vishakhapatnam (Vizag) and with the favourable currency contributing near to 5% of the growth. The operating margins remained flat YoY at 39.9% during the quarter; however, they were healthier than in the sequential previous quarter during FY2012. Despite the jump in the effective tax rate by 1,320bps YoY to 20.3%, the net profit jumped by 24% YoY to Rs216.9 crore, which is substantially higher (48%) than our estimate of Rs146 crore. -
DSN SEZ unit boosts revenue and margins: The DSN SEZ unit which got commercialised in June 2011 contributed nearly Rs200 crore to its revenue stream in FY2012. This resulted in a 42% rise in the revenue during FY2012 to Rs1,858.6 crore. The improved utilisation of the new unit also helped improve operating margins during the year by 75bps to 36.9%. -
We revise our estimates upward, maintain target price: We revise our earnings estimates upward by 8.8% and 10% for FY2013 and FY2014 respectively in view of the additional revenue and improvement in margins from the new unit. We maintain our target price of Rs1,122, which implies 20x average earnings for FY2013E and FY2014E. Thermax
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs447
Current market price: Rs426 Price target revised to Rs447 Result highlights -
Results below expectation: Thermax' Q4FY2012 results were below our expectation led by revenue sluggishness in the power segment; however other income boosted the overall profit after tax (PAT). The group order inflow for the quarter remains muted at Rs918 crore (down 25% on a yearly basis). As the FY2012 closing order backlog has fallen by 25% year on year (YoY), the management indicated that the revenue for FY2013 could fall from FY2012 levels. -
Top line fell by 5%: Thermax' net income from operations fell by 5 % YoY versus our expectation of a 7% growth. This was because of a fall in the energy segment's revenue by 8% YoY. The company had been reporting sluggishness in order inflow for the past few quarters, which has translated in a revenue slowdown in Q4FY2012. The environment division posted a Y-o-Y growth of 10% in revenues for the quarter. Exports for the year have also risen by 7% YoY to Rs1,143 crore and formed 22% of annual sales. -
OPM under pressure: Employee and input costs were lower on a yearly basis, which partly compensated for the increase in other expenses. The margin in Q4FY2012 was stable at 11% on a yearly basis but has come off from the historical levels of 12-13%. -
Net profit rose by 3%: A higher other income and lower tax rate boosted the net profit by 3% YoY to Rs129.8 crore, which was below our estimate of Rs134 crore. The interest cost jumped to Rs3 crore led by a rise in short-term borrowings. The company availed of working capital loan, which is reflected in rise in interest cost. The same is likely to exert further pressure on the margins going forward. -
Muted order intake position yet again: Order finalisation in the infrastructure sector has not yet picked up. The company's current order backlog at the group level stands muted at Rs4,828 crore (down 25% YoY) owing to lack of any large-ticket order acquisition. The order inflow during the quarter was subdued at Rs918 crore (down 40% YoY). In the stand-alone order inflow of Rs809 crore (down 36% YoY), energy contributed Rs536 crore and the environment segment Rs273 crore. The metallurgy sector accounted for 35% of the order book. The other major sectors contributing to the order book were power (10%), textiles (14%), sugar (10%) and cement (10%). While order inflows are still showing a downward trend due to the sluggish industrial capital expenditure (capex) cycle, the management indicated that there are a few good enquiries in the pipeline in the captive power space. -
Estimates downgraded by 10-11%: Led by a slowdown in the order inflow in recent times, we have cut our revenue and order inflow assumption. Overall, we have downgraded our estimates by 10-11% each for FY2013 and FY2014. Overall, we are expecting the company to post a compounded annual growth rate (CAGR) of 0.4% in profit over FY2012-14. We also feel that the company could aggressively bid for projects in the coming times to keep its order book ringing though competition is rising. This would adversely affect its margins leading to margin pressure in the coming quarters. -
Price target cut to Rs447: The growth in the company's order book remains highly dependent on momentum in the capex cycle of India, making it highly susceptible to swing in investment sentiments. Further, the optional value in its power equipment venture is also fading out. In the event of no order win in this segment, this venture involving Rs850 crore of capex would be a drag on the company's resources. The company also indicated that the annual running cost of this plant could run as high as Rs100 crore. Marred by poor order inflow and tough business environment, the stock has languished in the last one and a half year period. At the current market price, the stock trades at 13.0x and 12.4x its FY2013 and FY2014 estimated earnings respectively. Based on our revised earnings and target multiple of 13x (past 1 year average) we have revised our target price to Rs447. In view of the limited upside potential, we maintain our Hold rating on the stock. The key positive triggers in the stock remain the winning of big-ticket power equipment orders. However, a pick up in capex activities would augur well for the company. Federal Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs522
Current market price: Rs413 NPAs decline, growth outlook improves Result highlights -
Federal Bank's Q4FY2012 earnings were ahead of our estimates as they grew by 38.2% year on year (YoY; 17.7% quarter on quarter [QoQ]) to Rs237 crore. This was on account of a sharp decline in provisions (81% YoY). -
The net interest income (NII) growth was short of our estimates as it grew by 9.7% YoY (- 7% QoQ) to Rs491 crore. The sharp sequential decline in the net interest margin (NIM; to 3.56% vs 3.94% in Q3FY2012) was due to a rise in deposit cost and interest reversal (Rs25 crore). The same impacted growth in NII. -
Business growth remained healthy as advances grew by 18.2% YoY (13.7% QoQ) led by corporate and small and medium enterprise (SME) segments. The deposits grew by 13.8% YoY while the current account savings account (CASA) ratio declined to 27.4% from 29%. The bank's management has raised the loan growth target to 20-22% in FY2013 from approximately 18% earlier. -
The asset quality improved as the gross and net non performing assets (NPAs) declined to 3.35% and 0.53% respectively driven by moderation in slippages and better recoveries. However the bank restructured Rs960 crore worth of loans in the quarter (mainly pertaining to state electricity boards [SEBs] and Air India) taking the total restructured loans to Rs2,036 crore (5.4% of advances). -
The non interest income grew by 13.7% YoY (16.4% QoQ) led by a strong growth in the treasury income. The cost to income ratio increased to 42.9% from 37.1% in Q3FY2012 due to a 22% Q-o-Q increase in the non employee expenses. Outlook
Federal Bank's Q4FY2012 results were notable in terms of decline in slippages and pick up in recoveries, though restructured loans increased in line with the industry. We expect the earnings to grow at a compounded annual growth rate (CAGR) of 16% over FY2012-14 leading to return on equity (RoE) of 15.5% in FY2014. We continue to maintain our Buy recommendation with a price target of Rs522.
Greaves Cotton
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs83
Current market price: Rs74 Are the engines steaming out? Result highlights GCL Q4FY2012 result highlights: Strong operating performance and exceptional items boost profitability -
Greaves Cotton Ltd (GCL)'s revenues at Rs445.4 crore were 11.3% below our estimates largely on account of a sharp deceleration in the construction equipment segment (down 41.2% year on year [YoY]) and slowdown in the engine sales mainly of three-wheelers. -
However, the company reported a strong operating performance with a margin of 13.4% as against our expectation of 12.8%. GCL received price hikes from the original equipment manufacturers (OEMs) in the engine segment leading to a strong margin expansion. -
The core engine segment reported an EBIT margin of 18.6% (up 190 basis points sequentially). The construction equipment segment continued to witness lower offtake thereby impacting profitability. The segment has disappointed in FY2012 as losses widened. -
GCL took a charge of Rs20.3 crore in Q4FY2012 on account of devaluation of inventories. Further advertisement and brand building expenses led to an increase in other expenditure/sales, which is the highest in the last two years. -
During the quarter, the company had an exceptional gain of Rs43 crore (profit on sale of land), thereby resulting in a higher reported profit after tax (PAT). The recurring PAT (adjusted for exceptional items), however was 9.2% below our estimates. Valuation
Considering the muted growth expectation of 5% for FY2013 on account of a sharp deterioration in the three-wheeler business; we are downgrading our earnings per share (EPS) estimates for FY2013 and FY2014 to Rs5.9 and Rs6.9 respectively. We are also cutting our target price on the company to Rs83 per share discounting FY2014E earnings by 12x. We recommend a Hold as of now as existing segments are facing growth challenges. Any breakthrough with an OEM customer in the four-wheeler segment would act as a re-rating factor for the stock.
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