| Summary of Contents
| PULSE TRACK GDP growth slips to 5.3% in Q4FY2012 -
India's gross domestic product (GDP) for Q4FY2012 came in at Rs1,395,071 crore, registering a year-on-year (Y-o-Y) growth of 5.3%, which was significantly below the market's expectation. This was contributed by a negative growth in the manufacturing segment, and a slower growth in the agriculture and services segments. For FY2012 the GDP growth was at 6.5% as against 8.4% in FY2011. Outlook
The GDP growth of 5.3% was the lowest since the beginning of the new series (2004-05) and reflects the impact of the RBI's monetary tightening and policy paralysis. The FY2012 growth of 6.5% was below expectations and growth estimates for FY2013 continue to get revised downwards (to 6.5% from 7.5% earlier). This calls for coordinated actions from the government and the RBI to revive growth. Given the extremely weak IIP numbers and below expected GDP growth, the probability of RBI taking action on CRR or repo rates (reduction by 25bps) in July (if not immediately on June 18 mid quarter monetary policy review) has increased substantially.
STOCK UPDATE Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Hold
Price target: Rs757
Current market price: Rs652 Price target revised to Rs757 M&M: Q4FY2012 results mixed; automotive business saw MADPL consolidation -
Mahindra & Mahindra (M&M) has consolidated the full year impact of its 100% subsidiary - Mahindra Automotive Distributors Pvt Ltd (MADPL), the makers of Verito cars in Q4FY2012's standalone results. This has added Rs740 crore in Q4FY2012's standalone revenues. Excluding this impact, the standalone revenue came 4% higher than our estimates as compared to 13.5% seen on reported revenues. -
Farm equipment segment (FES) realisations in Q4FY2012 jumped 7.3% sequentially on account of price hikes taken in January 2012 as well as inclusion of higher Powerol and construction equipment sales. Similarly, automotive realisations jumped 20.6% quarter on quarter (QoQ) in Q4FY2012 on consolidation of MADPL financials during the quarter. -
To get a closer assessment on Q4FY2012 margins, we saw M&M+ Mahindra Vehicle Manufacturers Ltd (MVML) automotive earnings before interest and tax (EBIT) segmental margins drop 140bps YoY while FES' EBIT margins as reported in standalone financials dropped 130bps YoY. While there has been a sequential margin improvement in both the segments, we see them moderating in H1FY2013 compared to corresponding period of previous year. -
The consolidation of MADPL with M&M saw an exceptional write back of impairment charge worth Rs108 crore in Q4FY2012. The tax outgo was lower on account of the tax shield worth Rs148 crore available to set off MADPL losses. Valuation
M&M's key strength is its strong product pipeline and its aggressive launch plan. The benefits of the same would accrue in H2FY2013 and beyond. However, we are concerned on likely lackluster volume growth in H1FY2013. Hence, we are reducing our FY2013 & FY2014 estimates as we incorporate lower volume growth. Our sum of the parts (SOTP) valuation incorporates FY2014 expected earnings and gives a target of Rs757/share on the stock. Inspite of valuation based upside, we would keep our recommendation on Hold as we see volume and margin related issues in H1FY2013. The policy overhang on taxing diesel vehicles has resurfaced post a status quo in the budget and will be a major negative. Tata Chemicals
Cluster: Vulture's Pick
Recommendation: Hold
Price target: Rs338
Current market price: Rs309 Price target revised to Rs338 Result highlights -
Revenue growth robust but earnings dented by margin pressure and one-off items: Tata Chemicals Ltd (TCL)'s revenue growth of 29% was ahead of our and the street's expectations. However, the operating profit margin (OPM) declined by 280bps to 15.6% due to severe input costs pressure, especially in the fertiliser segment. Adjusted for one-off items such as unrealised loss of Rs24.7 crore on revaluation of unhedged external commercial borrowing (ECB) and impairment of assets by Rs25.9 crore in the fertiliser segment, the adjusted earnings after minority Interest declined marginally to Rs189.6 crore during the quarter. -
Input costs put pressure on margins: In spite of the benefit of the IPP on higher production from cut off level for urea during the quarter, the input cost pressure remains in the fertiliser segment. In Q4FY2012 the volume growth in the chemical segment saw a slight moderation across geographies. The worst affected locations were Africa (-9.8% drop in volumes) and Europe (-6.6% drop in volume). The working in Europe has improved during the quarter as well as during the year mainly on the back of improved realisation and better cost management (EBIDTA margin for FY2012 stood at 19% vs 9% in FY2011). -
Outlook weak due to softening of demand and margin pressure: The margins in the fertiliser division and inorganic chemicals are expected to remain under pressure due to firm increase in input cost on the back of depreciation in the rupee against the dollar. The urea operational capacity has increased by 100,000 tonne per annum through debottlenecking at Babrala. However, in Q1FY2013 the production of urea may be lower due to a shut down of the Babrala plant in the month of April 2012 for a month in order to debottleneck its urea capacity. The capacity utilisation at the Haldia plant was also on the lower side due to lower availability of phosphoric acid from IMACID which was shut down for 45 days for its maintenance. -
Valuation: We have marginally revised downward our earnings estimates for FY2013 and introduce earnings for FY2014. We have factored in the higher cost of raw material in the fertiliser segment along with slight margin pressure in the chemical segment. At the current market price the stock trades at 11.0x its FY2013E earnings per share (EPS) of Rs28.3 and 10.6x its FY2014E EPS of Rs29.3. On the valuation front, we value TCL at 10x FY2014E EPS and investment value of Rs45 per share and arrive at a fair price of Rs338. Given the limited upside from the current level and relatively weak outlook, we maintain our Hold rating on the stock. Unity Infraprojects
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs107
Current market price: Rs41 Strong performance continue Result highlights -
Witnesses robust revenue growth and healthy margins: The net sales of Unity Infraprojects (Unity) during Q4FY2012 grew by 26% year on year (YoY) and 47% quarter on quarter (QoQ) to Rs718 crore owing to scheduled execution of the company's ongoing projects. On the operational front as well the company posted good results with margins contracting by just 129bps YoY to 12.5% which is still healthy. This contraction is on account of a hike in cement and steel prices during the quarter. The operating profit is thus up by 14% YoY. -
Strong PAT growth led by lower tax outgo: Despite a 14% growth at the earnings before interest, tax, depreciation and amortization (EBITDA) level, the profit after tax (PAT) was up by 27% YoY due to flat depreciation and lower tax outgo. The interest cost was up 14% YoY as debt was at similar levels. -
Healthy order book on back of good order inflow: Unity has bagged fresh orders worth Rs2,850 crore in FY2012 as compared to an order intake of Rs1,725 crore in the previous year. With this the order book for FY2012 stands at Rs4,380 crore which is 2.2x its FY2012 revenues. Further the company is the lowest bidder (L1) in orders worth nearly Rs1,000 crore. Thus, there is good revenue visibility for the company over the next two to three years. -
3 road BOT projects in its kitty: Unity currently has three road build-operate-transfer (BOT) projects with itself with two projects won recently towards the end of Q4FY2012 and one won in early part of FY2012. The financial closure for two laning of the Chomu to Mahla project in Rajasthan has got delayed and is expected to take place in a month or two. The concession agreement for the two recently won projects will be signed next month, after which, it will take another four to six months for financial closure. The total equity required to be invested for these projects is approximately Rs250 crore which will be invested over the next two to three years. -
PE fund raising in real estate projects depending upon their progress: Unity is looking at raising upto Rs175 crore from private equity (PE) in two of its real estate projects viz in Nagpur and in Bangalore. It has identified a few funds. However the deal closure in Nagpur would happen once Unity ties up with a hotel operator out there. The company is in the final stage of such a tie up with Hyatt. In Bangalore, the deal closure would happen post the project's launch. However, due to political upheaval in Bangalore, the last few clearances are still left. -
Maintain Buy with a price target of Rs107: We continue to like the company given its strong order inflow momentum and healthy L1 position considering the adverse macro environment picture. Further we like its diversification in the road BOT space with prudent caution. Even its working capital days have improved by 12 days while debt is maintained at the same levels. We keep our estimates unchanged and expect a 20% revenue compounded annual growth rate (CAGR) over the next two years with 14% EBITDA margins. Further, successful PE fund raising would remove some overhang on account of real estate projects. We have not given any value to its road BOT projects as well as real estate projects which would further add to the valuation. We maintain our Buy recommendation on the stock with a price target of Rs107. At the current market price the stock is trading at a price earning (PE) multiple of 2.3x FY2013E and 1.8x FY2014E earnings respectively. ISMT
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs29
Current market price: Rs24 Price target revised to Rs29 Result highlights -
Sluggish revenues performance: For the quarter ended March 2012, ISMT reported a sluggish revenue performance on the back of a slowdown in domestic demand. Net sales fell 6.5% year on year (YoY) to Rs447.2 crore with a drop in volumes of both the tube and steel segments. The tube and steel segments reported a volume drop of 8.4% and 27.2% respectively. The realisations remained resilient, up 11.7% and 6.4% for tube and steel segments respectively. The company is seeing some sluggishness in the domestic demand and going ahead it remains uncertain about the domestic demand. The export business has continued to pick up pace with export sales accounting for close to 37% of the tube segment sales for FY2012, up from 30% in the previous year. The 'other operating income' was benefited by a refund against regulatory liability charges to be received from Maharashtra State Electricity Board of Rs9.9 crore. -
OPM decline continues: The operating profit margin (OPM) continued its downward trend. For the quarter, the OPM was down 180 basis points to 10.9%. The drop in OPM can be attributed to the drop in volumes which led to higher fixed costs as a percentage of sales. The power & fuel costs also increased in the quarter with the power cost up to Rs7.03 per unit up from Rs5.97 per unit in Q4FY2011. On a segmental basis, the profit before interest and tax (PBIT) margin of the steel segment declined by 337bps to 8.5% whereas that of the tube segment fell by 170 basis points to 6.3%. Going ahead we expect the margins to improve on the back of lower power cost on commissioning of the 40MW power unit. We have maintained a subdued margin performance going ahead on the back of sluggish demand environment in FY2013. -
Forex charge dents bottom line: Despite the rupee appreciating against the US dollar in the quarter, the company saw the adverse impact of higher foreign exchange (forex) loss of Rs12.3 crore up 416% on rupee depreciation and adoption of AS-30. Also, the interest charges were higher by 44.9% YoY to Rs37 crore. On the back of tax credit of Rs6.1 crore, the net loss was restricted to Rs2.2 crore against a profit of Rs17 crore in the corresponding quarter of the previous year. -
Power plant commissioned: The company has announced the commissioning of the 40MW captive power plant at Chandrapur district, Maharashtra on May 28, 2012. The commissioning of the power plant would help in lowering the power costs for the company. The company has applied for coal linkages, however, we expect the same to take time and hence the company would have to acquire the coal from e-auctions leading to a higher coal price. Currently, the power costs are on an average at Rs6.7-7 per unit. We have assumed a lower plant load factor (PLF) for FY2013. For FY2013, we are now expecting savings of Rs29.2 crore and Rs45.7 crore in FY2014 as the PLF increases. -
Valuation and view: The quarter gone by saw the company being impacted by the sluggish domestic demand with the margin fall continuing. However, the export side of the business has been picking up pace. Going ahead we have revised downwards our FY2013 estimates and introduced our FY2014 estimates. We believe that the demand environment would gradually improve from the third quarter of FY2013 and expect a better FY2014. On the margins front, with the commissioning of the power plant, we expect the margins to be safeguarded. We roll over our multiple to FY2014, lower our target multiple to 5x FY2014 estimates and arrive at a reduced price target of Rs29 maintaining our Buy rating on the stock.
SHAREKHAN SPECIAL Q4FY2012 Banking earnings review Key points -
PAT ahead of estimates, but core performance (NII) growth in line with expectations: The Q4FY2012 net earnings of our banking universe were ahead of our estimates as the total earnings (ex- State Bank of India [SBI]) grew by 30% year on year (YoY) and 19.8% quarter on quarter (QoQ) as against our estimate of a 11.3% YoY and 6.7% QoQ growth. The higher than expected growth at the profit after tax (PAT) level was aided by tax write backs and better than expected growth in the non interest income. But the net interest income (NII) growth of 22.3% YoY (3.7% QoQ) was in line with our estimates. Banks like SBI, ICICI Bank, Bank of India (BOI) and IDBI Bank reported earnings significantly ahead of our and market estimates. -
Moderate pick up in advances, deposit growth slows down: Our banking universe posted an advances growth of 18.7% YoY (5.5% QoQ), slightly higher than the industry's growth (17.4% YoY). The deposits grew by approximately 15% YoY (3.1% QoQ) and were broadly in line with the industry. Due to a slower growth in deposits, the credit to deposits ratio inched up to 78.1% from 74.9% in Q3FY2012. Most banks under our coverage saw deterioration in margins and current account savings account (CASA) ratios on a Q-o-Q basis. -
Asset quality weakens - dichotomy continues between PSBs and private banks: Slippages during the quarter remained at elevated levels (2.4%; in-line with Q3FY2012), though the recoveries/upgradations also increased. The reported gross non performing assets (NPAs) were largely similar to Q3FY2012's for public sector banks (PSBs; except Punjab National Bank [PNB] and Bank of Baroda [BoB]) but restructured advances increased sharply mainly due to restructuring of big ticket accounts (state electricity boards [SEBs] and Air India). However, the asset quality of the private banks continues to be healthier (in terms of non performing assets [NPAs] and restructured loans) as compared to the PSBs over the past several quarters. -
Valuation and outlook: The operating environment remains quite challenging for the banking industry. The advances growth is expected to moderate considerably and the asset quality woes are likely to remain as a drag on the back of rising restructuring cases. We therefore continue to remain selective and prefer banks having lower asset quality issues, better capitalisation and valuation comfort. Our top picks are ICICI Bank (improving NPA and margins trends, high Tier I CAR), SBI (strong operating performance), and Federal Bank (attractive valuations and improved earnings profile). Among mid-cap state owned banks we prefer Allahabad Bank over its peers.
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