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STOCK UPDATE Shree Cement
Cluster: Cannonball
Recommendation: Hold
Price target: Rs3,100
Current market price: Rs2,657 Q4FY2012 results: First-cut analysis Result highlights -
Strong volume growth in cement and power drives overall revenue growth: Shree Cement in its Q4FY2012 results posted a revenue of Rs1,477.8 crore which is higher by 38% on a year-on-year (Y-o-Y) basis. The revenue growth is driven by a 25% growth in its cement business and a sharp jump in the revenue from the sale of power units (around Rs289 crore as compared to Rs120 crore in Q4FY2011). The revenue growth of the cement division is supported by a 20.5% growth in the volume and 3.8% improvement in the average blended realisation. In the power division the robust revenue growth has been driven by a 67% increase in the power volume due to commissioning of its second phase of power plant of 150MW. -
Increase in cost of production results in margin pressure: The operating profit margin (OPM) during the quarter contracted by 246 basis points YoY to 25.2%. The margin contraction is largely on account of loss posted by the company in its power division to the tune of Rs68.6 crore as against a profit of Rs15.8 crore at the earnings before interest and tax (EBIT) level due to an increase in the production cost of power units. On the other hand the EBIT margin of its cement division has improved significantly to 21.1% from just 1.8% in Q4FY2011. -
The other income surged to Rs77.4 crore: The other income of the company increased to Rs77.4 crore as compared to Rs20.7 crore in the corresponding quarter of the previous year. The increase is due to provision of earlier year amounting to Rs37 crore being no longer required. Hence the surge in the other income has also supported the overall earnings of the company. -
Provided full tax rate as compared to write back of tax in Q4FY2011: The effective tax rate during the quarter works out to 33% (higher than our estimates) as compared to the overall write back of tax to the tune of Rs100 crore in the corresponding quarter of the previous year. -
Net profit increased by 73.6% YoY; in line with estimates: The net profit of the company grew by 72.8% YoY to Rs114.3 crore which is much in line with our estimates. The board of directors of the company has recommended a second interim dividend of Rs6 per share. Further the company has decided to change the accounting period from the current 12 months ending March to 12 months ending June.
We shall come out with a detailed update post our interaction with the management. Currently we have a Hold rating on the stock with a target price of Rs3,100. At the current market price the stock is trading at an EV/EBDITA of 6.7x its FY2013E earnings. Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,416
Current market price: Rs1,223 Price target revised to Rs1,416 Result highlights -
Q4 results exceed expectations; order inflow disappoints: 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 and lower tax rate. The operating margin at 13.9% was also better than our expectation. 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 given an aggressive growth guidance of 15-20% in order inflow for FY2013 although it missed its guidance of 5% growth in FY2012. -
Aggressive guidance for FY2013, E&C segment to support growth in FY2013: The company has given a robust Y-o-Y growth guidance of 15-20% in revenue and order inflow for FY2013. We feel that achieving the target for FY2013 would be an uphill task for the company, given the slowdown in the demand environment and policy paralysis in the infrastructure sector. The slow moving orders' share in the total order book (around Rs1,45,723 crore) is at 9-10% which could face cancellation in future. The company's growth guidance in revenue is backed by the robust execution plan of its E&C projects. The company is expecting a robust growth of 15-20% in this segment without compromising on margins. It is also said that the growth is likely to be lower, ie in the range of 8-12% in the other two segment- electrical and electronics (E&E) and the machinery and industrial products (MIP). The company also expects the margins to sustain at the FY2012 level of 11.8% with +-50 basis point deviation because of fluctuation in material cost. The working capital cycle may see some pressure in FY2013 also because of a tough business environment and tightening liquidity situation. The company would be undertaking a capital expenditure (capex) of approximately Rs2,000 crore (Rs1,700 crore in FY2012). -
Estimates fine-tuned: In view of low order inflow in FY2012 and the current macro headwinds, we have marginally downgraded our order inflow and revenue estimates. We have also trimmed our margin assumption to reflect the impending margin pressure particularly in the E&C and the MIP divisions. However, the tax rate is expected to be lower because of a higher capex and research and development (R&D) expenditure. Our stand-alone estimates for FY2014 have decreased by about 7% while our FY2013 earnings estimate is largely unchanged. Our revised consolidated earnings per share (EPS) estimate stands at Rs94.6 and Rs102.6 for FY2013 and FY2014 respectively. We expect the company's stand-alone earnings to grow at a compounded annual growth rate (CAGR) of 9% over the next two years. -
Price target revised to Rs1,416: While the company reported overall decent results for the quarter, the order inflow guidance would be highly subjective to an uptick in infrastructure development activities in the country and in the Middle East region. We also feel that its diversity continues to cushion the overall financials in a tough business environment. At the current market price the stock is trading at 11.9x on its FY2014 consolidated estimate. Our sum-of-the-parts (SOTP) based price target stands revised downwards to Rs1,416 on account of revised estimate of the standalone business, fine tuning of the target multiple and estimates from L&T InfoTech and L&T Finance Holding. We continue to believe that L&T is the best proxy play on India's infrastructure growth theme and maintain our Buy rating on the stock. The key positive triggers in the stock remain uptick in business sentiments, winning of big-ticket orders in the power/ infrastructure sector and easing of margin pressure. Kewal Kiran Clothing
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs700
Current market price: Rs592 Price target revised to Rs700 Result highlights Q4FY2012 results - resilient in difficult times -
In spite of the the present difficult macroeconomic environment, Kewal Kiran Clothing Ltd (KKCL)'s Q4FY2012 performance was resilient. The top line, operating profit as well as the earnings grew by 22.1%, 12.6% and 11.8% respectively on a year-on-year (Y-o-Y) basis. -
The revenue growth of 22% YoY was led by a strong volume performance from the apparels (+19% YoY; rose from 7.6 lakh pieces in Q4FY2011 to 9 lakh pieces in the current quarter), while realisation grew by a mere 2.4% YoY from Rs703 a piece to Rs720 a piece. -
A strong performance on the revenue front could not result into an equally good profitability, whereas the operating profit was up, but only by 10% YoY (margins contracted by 220bps YoY). This was largely due to a higher raw material to sales ratio. The gross profit margin for the quarter came off by 580bps from 60.6% in Q4FY2011 to 54.9% in the quarter under consideration. -
The balance sheet continues to be strong with cash and cash equivalents at about Rs102 crore (about Rs82 per share; constituting 13.7% of the current m-cap). The return on capital employed (RoCE) and return on equity (RoE) stood at 23% and 24% respectively. Downgrading earnings estimates: Though the results were resilient in spite of the weak macro environment, the same lagged behind our expectations on the profitability front. Going forward, for the next two quarters, we expect the discretionary environment to remain subdued till the arrival of the festive season. Hence, building the same into our estimate, we have revised our FY2013 estimates, and further have introduced our FY2014 estimates for the company. Our earnings per share (EPS) for FY2013E and FY2014E stand at Rs48.0 (Rs53.6) and Rs58.4 respectively. Maintain Hold: KKCL's superior business model (strong brands sold on outright basis via various distribution channels) coupled with its management's financial acumen (profitable growth approach and abidance to superior corporate governance practices) keep us bullish on its business. We ascribe a price/earnings ratio (PER) of 12x our FY2014E EPS of Rs58.4 to arrive at a price target of Rs700. Though we continue to like the business, the near-term sluggishness in the discretionary spent category makes us stick to our Hold rating on the stock. Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs28
Current market price: Rs26 A "Dost" comes to rescue growth Result highlights -
For Q4FY2012, the realisation from the medium and heavy commercial vehicle (MHCV) segment for Ashok Leyland Ltd (ALL) was flat on a sequential basis. This is on account of lower sales to the defence segment where the realisations are high. ALL sold 63 vehicles to the defence in Q4FY2012 as against 171 in Q4FY2011. -
Employee costs/sales was the lowest in the last four years. This was on account of lower provisioning requirement as per actuarial valuation to the tune of Rs20 crore. -
Other expenditure/sales increased 220 basis points on a year-on-year (Y-o-Y) basis. This was primarily on account of increase in advertising and brand building expenses and higher research and development (R&D) spend during the quarter. Also transportation of vehicles from the Pantnagar facility to the southern market increased costs by Rs25 crore. -
ALL was impacted by a foreign exchange (forex) loss of Rs15 crore on mark to market liabilities. -
The EBIDTA margin, impacted by a higher other expenditure, was down 240 basis points sequentially. ALL missed its FY2012 margin guidance of 10.5% by 70 basis points. -
Interest cost increased 31.6% on a sequential basis impacting profitability. -
The tax rate was lower in Q4FY2012 and FY2012 on account of higher R&D expenditure. -
ALL took a price hike of 1% in May 2012 apart from price increases of about 2% on account of increase in the excise duty in the budget. Valuation
For FY2013, we expect MHCV volumes to grow by 5.8% YoY while Dost's volumes are expected to grow by 19.2% YoY. Our margin assumption for FY2013 is of 9.9% - ie, a marginal improvement over FY2012. We expect the earnings per share (EPS) for FY2013 and FY2014 to be at Rs2.47 and Rs2.70 respectively. Given the challenging business environment and mid single digit growth prospects, we recommend Hold on the stock with a target price of Rs28.3/share, discounting its FY2014 earnings by 10.5x.
VIEWPOINT Liberty Phosphate Strong performance continues; maintain our preference for SSP manufacturers Strong result; way ahead of expectation Liberty Phosphate posted a good revenue growth in Q4FY2012 which was way ahead of expectations. The same was on account of higher volumes generated due to good demand. The total revenue in Q4FY2012 increased by 126.6% year on year (YoY) to Rs149.5 crore. The volume of SSP was robust, increasing from 80,000 tonne in Q4FY2011 to 1.49 lakh tonne in Q4FY2012, ie an increase of 86% YoY. In Q4FY2012 the reported profit after tax (RPAT) stood at Rs16.7 crore which is 89.6% higher than Q4FY2011's. The results include foreign exchange (forex) gains of Rs1.8 crore. Adjusting to this the profit after tax (PAT) stood at Rs15.2 crore which is 71.6% higher than in the corresponding quarter of the previous year. Going ahead we believe that the company will maintain good growth in terms of volume and realisation. Surge in input cost results in margin contraction The operating margin in Q4FY2012 declined by 760 basis points to 16.4%, mainly due to higher prices of key inputs - rock phosphate and sulphuric acid. Despite the rising input cost (accentuated by the weakening rupee) and pressure on margins, the company posted a 55% growth in operating profits and 90% growth in its net profits to Rs16.7 crore during the quarter. During the quarter the maximum retail price of SSP remained at Rs4,800 per tonne which is 34% higher than Q4FY2011's price.
Future expansion to drive growth ahead: Liberty Phosphate is planning to enhance its capacity for manufacturing SSP from 5.6 lakh tonne in FY2012 to 9.24 lakh tonne by the end of FY2013, which amounts to an increase in the installed capacity by 64%. This will make Liberty Phosphate the largest player in the SSP industry. Going ahead, capacity expansion will drive the volume growth. Currently the company is working at 75% capacity utilisation and going ahead it will maintain the capacity utilisation at around the same level. Outlook and valuation SSP is one of the cheapest fertilisers available in India after urea. SSP manufacturers have seen a turn-around at operating levels after the introduction of the nutrient based subsidy for non urea fertilisers. We believe that going ahead SSP will be the growth driver for the fertiliser industry and it may also replace the incremental usage of DAP which costs three times the cost of SSP. At the current market price the stock trades at 2.3x its FY2013 earnings and 2.1x FY2014 rough-cut earnings estimates. We continue to have a positive stance on the company and the SSP industry. Liberty Phosphate has appreciated by over 53% since we introduced the stock with a positive bias in the "Viewpoint" section of our daily online publication "Investor's Eye" on September 7, 2011. We maintain our positive bias on the stock.
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