| Summary of Contents
| PULSE TRACK RBI Q1FY2013, Monetary policy review -
RBI keeps policy rates unchanged, raises the ante on inflation and revises down GDP estimates: As expected, the Reserve Bank of India (RBI) in its Q1FY2013 monetary policy review kept the key policy rates (repo rate at 8.0% and, cash reserve ratio [CRR] at 4.75%) unchanged. However, the central bank surprised by reducing the statutory liquidity ratio (SLR) rate by 100 basis points in order to improve the liquidity in the system.
The RBI raised the ante on inflation by raising its inflation forecast to 7% (6.5% earlier) by March 2013 due to deficient monsoons, inherent supply constraints and suppressed inflation from subsidised energy prices. Since other factors (policy bottlenecks) are responsible for a dip in the growth, the RBI believes that easing rates at this point would not necessarily boost growth but would risk higher inflation. Notwithstanding the downward revision in the GDP estimates to 6.5% in FY2013, the RBI seems to have taken a more aggressive stance this time around.
STOCK UPDATE Ipca Laboratories
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs436
Current market price: Rs400 Q1FY2013 results: First-cut analysis Result highlights -
Q1FY2013 revenue in line with expectations; institutional revenue seems to have declined: Ipca Laboratories (Ipca)'s net sales jumped by 19.7% year on year (YoY) to Rs630.3 crore in Q1FY2013, which is broadly in line with our estimates. The revenue was mainly driven by the formulation business in the domestic market, which grew by 18.6% YoY to Rs224.2 crore (outperforming the industry growth rate of near 15%) and the active pharmaceutical ingredient (API) business which grew by 39% YoY to Rs181.6 crore. The API business got a boost from the consolidation of Tonira Pharma. The growth in the domestic market has been better than that in the six sequential previous quarters, when the company witnessed the impact of sales force restructuring and addition of new field force. However, the revenue from the institutional business seems to have declined during Q1FY2013 as exports of formulations (including institutional tender business) recorded a meager 8.7% YoY rise, despite the benefits of a favourable currency. -
Healthy rise in margin; reversal of trend: A better product mix helped the company to record a healthy rise in the operating margin by 460 basis points YoY to 21.8%. This is a reversal of trend, as Q1 records generally lower margin due to seasonality involved in some products. Even on a quarter on quarter (QoQ) basis, the margin expanded by 206 basis points. A strong revenue from the domestic market and synergies from Tonira Pharma are some of the factors which contributed towards the expansion in margins. -
MTM forex loss impacts bottom-line; expect subsequent reversals: During Q1FY2013, the company provided for a foreign exchange (forex) loss of Rs58.85 crore against a forex gain of Rs9.10 crore in Q1FY2012. The forex loss partly represents forex differences on transactions and partly loss on translation of derivatives covering forex exposure. The translation provision is subject to further adjustments and we expect a part of it to be reversed in the subsequent quarters, assuming the Indian Rupee does not see any sharp movement against major currencies in the subsequent quarter. Due to the forex loss provision, the net profit after tax declined by 30% YoY to Rs43 crore. -
Valuation: The stock is currently trading at 12x average earnings for FY2013E and FY2014E. We have a Buy rating on the stock with a target price of Rs436 (implies 13x average earnings for FY2013E and FY2014E).
We will come-out with a detailed note after an interaction with the company's management. The company is holding teleconference calls with analysts tomorrow (August 1, 2012) at 11 am. Zydus Wellness
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs430
Current market price: Rs416 Price target revised to Rs430 Result highlights -
Result ahead of expectation: Zydus Wellness' Q1FY2013 results have come ahead of our expectations largely on account of a better than expected operating performance during the quarter. The highlight of the quarter was the significant increase in the gross margins by close to 700 basis points year on year (YoY). The company has significantly enhanced its media spends towards its key brands. This has helped Zydus Wellness to witness a strong revival in the performance of some of its key brands (including Sugarfree and Everyuth) during the quarter. -
Gross revenues grew by 14%: Zydus Wellness' revenue growth has revived in the last two quarters on the back of increased media spends towards key brands. The gross revenues grew by 13.9% YoY to Rs103.3 crore. The company has to pay excise duty on production from the Sikkim facility (which got fully operationalised from Q2FY2012). Hence the net sales grew by just 4% YoY to Rs94.4 crore in Q1FY2013. The Sugarfree brand has witnessed a revival in revenue growth from mid-single digits to high single digits while the Everyuth brand has achieved better revenue growth in comparison to some of the previous quarters. Nutralite's growth remained in lower single digits during the quarter. -
Profitability improves Y-o-Y: The gross margins improved by 681 basis points YoY to 71%, largely on account of improved revenue mix and the price hike of ~5% undertaken in the product portfolio at the end of Q4FY2012. The large savings at the gross margin level were utilised towards advertisement activities for various brands. The ad-spends as a percentage to sales stood at 33.3% in Q1FY2013 as against 25.3% in Q1FY2012. Hence the operating profit margin (OPM) improved by 228 basis points YoY to 16.3% (ahead of our expectation of 15.3%) during the quarter. The operating profit grew by 20.8% YoY to Rs15.4 crore in Q1FY2013. Though the palm oil prices have softened from their highs, the significant depreciation in the rupee will keep the key input prices higher in the domestic market. Hence the palm oil prices have to be keenly monitored in the coming quarters. -
PAT growth aided by lower tax: The adjusted profit after tax (PAT) grew by 63.7% YoY to Rs13.7 crore. The strong bottom line growth was driven by an improvement in the margins and lower tax expenses Y-o-Y during the quarter. The tax expenses were down by 27.8% YoY to Rs4.1 crore, as the company is gaining tax benefits from its Sikkim facility. Outlook and valuation
Zydus Wellness is targeting revenues of Rs500 crore by FY2014. In view of this the company has increased its focus on enhancing the product portfolio by introducing new variants under umbrella brands and expanding the reach of its products in the domestic market. This will help it to improve the growth prospects in the coming years. We expect the company's top line to grow at a compounded annual growth rate (CAGR) of 9% and the bottom line to grow at a CAGR of 11% over FY2012-14.
We have revised upwards our price target to Rs430 (valuing the stock at 20x its FY2014E earnings which is at a 23% discount to the FMCG basket valuation of 26x). With visibility of little upside in the stock price from the current levels, we maintain our Hold recommendation on the stock. At the current market price the stock is trading at 22.2x its FY2013E earnings per share (EPS) of Rs18.8 and 19.3x its FY2014E EPS of Rs21.5.
GAIL India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs410
Current market price: Rs353
Robust Q1 performance unlikely to sustain Result highlights -
Earnings ahead of estimated with better margin and lower subsidy: GAIL reported sales at Rs11,112 crore, in line with our estimate. However, the profit after tax (PAT) was reported significantly (47%) above our estimate with better than estimated margins in the LPG segment and natural gas (NG) trading business. However, the big push came from the lower than expected subsidy burden (at Rs700 crore vs our estimate of Rs838 crore). -
Growth driven by LNG trading and LPG business: Sales grew by 25% year on year (YoY) and 6% quarter on quarter (QoQ) during Q1FY2013. The Y-o-Y sales growth was predominantly driven by better realisation in the NG trading business and LPG and liquid hydrocarbons (lower subsidy contribution). Sequentially, a healthy gain in the LPG and liquid hydrocarbons segment was partially offset by lower sales in the petchem segment (due to lower volume as a result of plant shut down for 17 days). -
Margin expansion across segments except petchem business: In absolute terms, LNG trading and LPG and liquid hydrocarbons contributed to the growth at the profit before interest and tax (PBIT) level, overcompensating the dip in the profit of the petchem business which was affected by lower volume. The LNG trading business witnessed margin expansion (102 basis points YoY and 354 basis points QoQ), despite flattish or negative volume, indicating a strong improvement in realisation. Again, the LPG and liquid hydrocarbons segment reported better profitability influenced by improved realisation. Further, a significantly lower subsidy over Q4FY2012 reflects in improved profitability of the LPG and the liquid hydrocarbons segment. -
Upcoming projects improve long term outlook: A new LNG terminal at Dabhol is likely to be commissioned in the next five to six months (by December 2012) and the next LNG terminal at Kochi is expected to be commissioned in December 2013. Further, its petchem capacity expansion at Pata, Uttar Pradesh has seen 45% execution progress as of now and is expected to be commissioned by December 2013. The company plans for a capital expenditure (capex) of Rs7,354 crore in FY2013 and Rs7,260 crore in FY2014. Out of the capex requirement, around 55% would be met from borrowing while the remaining is expected to be sourced from internal accruals. GAIL has recently raised Rs750 crore of INR bond and is looking to finalise around $450 billion of foreign exchange debts in a month's period. -
Retain Buy with price target of Rs410: Recently, PNGRB cut tariff in one of GAIL's pipeline Dadri-Bawana-Nangal (DBN) by ~57% to Rs11.85/mmbtu, based on difference between some factors submitted by GAIL. Therefore we have incorporated that tariff revision and consequently reduced our estimates by 1-2% for FY2013 and FY2014. However, we continue to remain positive on GAIL considering that most of its pipelines' tariff is approved by the regulator. Further, we believe the Dhabol and Kochin LNG terminals would give volumes in two years time from now. We retain our target price of Rs410 per share.
Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs205
Current market price: Rs134 Price target revised to Rs205 Result highlights -
Allahabad Bank's Q1FY2013 results came in ahead of estimates as the net profits grew by 22.9% year on year (YoY; 28.4% quarter on quarter [QoQ]) to Rs514 crore. This was largely contributed by a decline in the provision expenses and lower tax rates (20% vs 26.6% in Q1FY2012). -
The net interest income (NII) was in line with our estimates as it grew by 11.1% YoY and 1.4% QoQ to Rs1,306 crore. The net interest margin (NIM) declined 5 basis points QoQ to 3.17%. The current account savings account (CASA) ratio also declined sequentially (29.6% vs 30.5%). -
The advances grew by 11.9% YoY and remained flat sequentially. The incremental advances growth was in the corporate segment (1.1% QoQ) and the retail segment 1.4% YoY. However the small and medium enterprise (SME) and agri advances declined on a Q-o-Q basis by 2.9% and 2.2% respectively. -
The asset quality came under stress as the bank reported slippages of Rs590 crore (2.1% annualized), mainly from the priority segment. Further, the bank also restructured Rs4,777 crore of advances during the quarter of which Rs3,100 crore were accounted by state electricity boards (SEBs). The recoveries were strong; the bank recovered Rs235 crore which led to a lower net addition to non performing assets (NPAs). -
The non-interest income grew by 8.3% YoY (12.8% QoQ) mainly driven by an 8.9% YoY (-12.3% QoQ) growth in the commission income. The cost to income ratio grew to 40.8% for the quarter as against 39.1% in Q1FY2012 (45.2% in Q4FY2012). Outlook and valuation
Allahabad Bank reported better than expected numbers on the back of lower provisions and tax rates. Though asset quality concerns remain, we derive comfort from the higher recoveries and better provision coverage compared to peer banks. We expect Allahabad Bank to maintain its return on equity (RoE) of ~17% and return on assets (RoA) of ~1% going ahead. Due to revision in our estimates, our target price gets revised to Rs205 (0.9x FY2014 adjusted book value [BV]). We maintain our Buy rating on the bank.
VIEWPOINT
Cipla Beats expectations Result highlights -
Strong domestic sales fuel top-line growth: Cipla has reported a strong performance during Q1FY2013 on the back of strong revenue from the domestic market and surge in operating margins on a better product mix. The net sales of the company jumped by 23.7% year on year (YoY) to Rs1,917 crore on a 30% YoY rise in revenue from domestic formulations and a 23% YoY rise in revenue from export formulations. However, the revenue from the active pharmaceutical ingredient (API) segment declined by nearly 2% YoY to Rs168 crore. -
OPM expands by 484 bps on better product mix: The operating profit margin (OPM) expanded by 484 basis points to 26% during the quarter mainly on account of a better product mix (lower proportion of anti-retrovirals and high contribution of anti-depressants, mainly Esciltalopram) and a favourable currency movement. As a result, raw material costs declined to 38.2% of net sales during the quarter from 43.1% in Q1FY2012. -
PAT jumps by 58% despite higher effective tax rate: During the quarter the effective tax rate rose by 198 basis points YoY to 22.8%. Nonetheless, the net profit after tax rose by 58.2% YoY to Rs400.8 crore, which is much higher (33%) than our as well as the street's estimates. -
No major capex going forward: The company is expected to spend Rs400-500 crore as capital expenditure (capex), mainly towards setting up an API facility and research and development (R&D) centers in FY2013. Going forward, the company has major capex commitments. This would give better leverage and the return on capital is likely to improve significantly. -
Management revises FY2013 guidance: A strong Q1FY2013 performance has prompted the management to revise its guidance for FY2013. The revenue growth guidance has been revised to near 15% for FY2013 while the net profit growth guidance has been revised upward to 15-20% (earlier, the revenue growth guidance and profit growth guidance were at 10% and 15% respectively). Outlook and view:
Cipla's Q1FY2013 performance has been a positive surprise. Although a few non-recurring items like supply of Esciltalopram (brand name - Lexapro; Teva has exclusivity on this product till August 2012) which must have earned thick margin, may not fetch similar profits in H2FY2013. Also, supplies of anti-retroviral (ARV) products which make discrete appearance in the revenue line as and when a related tender comes up, may dilute the margin of the company. But in Q1FY2013, we believe the base business itself has shown a better operating performance . We expect the domestic branded business to continue to post a 15% plus growth on a sustainable basis while exports revenue would be driven by key product supplies including inhalers which contribute nearly 15% of exports. We have a positive view on the company and expect it to record a 14% compounded annual growth rate (CAGR) in revenue and 20% CAGR in profit over FY2012-14E. The stock is currently trading at 18x FY2014E earnings per share (EPS), which is at a 27% discount compared to Sun Pharma (trading at 23x FY2014E EPS). Titan Industries Bleak performance Titan Industries (Titan)' Q1FY2013 results were below our expectation on the revenue and the earnings front. The top line / EBITDA and net earnings grew at 9.2%/14.3% and 9% year on year (YoY) respectively. This is among the lowest growth in revenue reported by the company in the last ten quarters, and is led by volume contraction in the jewelry segment (result of high price volatility, slowing discretionary demand and less marriage dates in the quarter). Key negatives -
Jewelry sales grew at a mere 8.7% YoY for the quarter, volume contracted 21% YoY, while prices increased by ~30% over the same period. The same store sales growth also came off from high teens to single digits while the Gold plus format reported an 8% decline in the same store sales growth. -
The watches business too showed growth moderation, and witnessed a volume decline of 3% YoY for the quarter.
Key positives
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Jewelry margin expanded by 30 basis points YoY, led by an increase in share of studded jewelery in the total jewelery sales (studded jewelry's contribution was 25% to total jewelry sales). -
Retail expansion momentum continues to be strong. For the quarter, Titan added 20 new stores, taking the overall retail area to 1.08 million sq ft. -
The loss from the others segment (includes precision engineering and eyewear) came off from Rs3.6 crore in Q1FY2012 to Rs1.6 crore for the quarter under consideration. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | |
