Sensex

Tuesday, February 07, 2012

Fw: Investor's Eye: Update - Mahindra & Mahindra, Hindustan Unilever

 
Sharekhan Investor's Eye
 
Investor's Eye
[February 07, 2012] 
Summary of Contents
STOCK UPDATE
Mahindra & Mahindra 
Cluster: Apple Green
Recommendation: Hold
Price target: Rs676
Current market price: Rs689
Q3FY2012 results: First-cut analysis
Result highlights

Q3FY2012 PAT in line adjusted for one time exchange reversal
Our profit after tax (PAT) estimate for Mahindra & Mahindra (M&M) at Rs625 crore was the lowest among the consensus estimates. The company reported a standalone PAT of Rs662 crore. This includes a one time gain of Rs39.86 crore related to reversal of an exchange difference charge. Adjusting for this extraordinary gain, the company reported a post tax PAT of Rs635 crore, marginally higher than our estimates.

Positive surprises
  • The company reported a 30bps sequential improvement in the earnings before interest tax (EBIT) margin for the tractor business. Our concerns of deteriorating profitability in tractors due to raw material price escalations were unfounded. 
  • A favourable operating leverage was witnessed in staff costs which moderated to 5.4% of sales - the lowest in the last six quarters.
  • Other expenses after adjusting for Rs39.86 crore exchange reversal were the lowest ever for any quarter at 8.6% to sales. 
Negative surprises 
  • The Q3FY2012 automotive EBIT was the lowest in the last two years at 8.2%, ie lower by 170bps quarter on quarter (QoQ), in spite of a 10% sequential jump in automotive realisations. The lower EBIT margins would also have a higher depreciation effect post the launch of the XUV5OO. However margin pressure due to cost escalation was quite evident.
  • The Q3FY2012 raw material (RM)/sales at 74.3% was the highest ever for any quarter. This was on account of very aggressive pricing of the XUV5OO and limited ability to take price increases in the tractors segment.
  • The operating margin adjusting for exchange reversal was the lowest in the last two years at 11.7%.
Outlook and valuation
The demand for tractors and automotive profitability are our key concerns related to the company. The company has guided for a 17-18% tractor growth for FY2012 which in all probability is likely to be lowered. On the automotive side, the company took a 3% price hike from January 2012 to protect margins. We will incorporate inputs from the management during the results conference call to revise our estimates if required. Our target price as well as 'Hold' recommendation remain unchanged as of now.
 
Hindustan Unilever 
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs382
Personal product segment disappoints
Result highlights
  • Q3FY2012-trimming of ad spends aided bottom line growth: It was yet another quarter when Hindustan Unilever Ltd (HUL) posted strong profitability at the operating level by trimming its advertisement and promotional spends and controlling its operating cost. The operating profit margin (OPM) improved by 271 basis points year on year (YoY) to 15.1% and the operating profit grew by 41.9% YoY to Rs885.6 crore during the quarter. The sales volume growth sustained in higher single digits at 9.1% in Q3FY2012. The same was largely in line with the 9.8% volume growth in Q2FY2012. However, the 14% year-on-year (Y-o-Y) growth in the revenues of the personal product segment and a 294-basis-point Y-o-Y decline in its profit before interest and tax (PBIT) margin were the key disappointers for the quarter.
Outlook and valuation
We have fine-tuned our earning estimates for FY2012 and FY2013 to factor in the higher than expected operating performance during the quarter. The sustenance of a high single-digit volume growth and a sequential improvement in the GPM were the highlights of the quarter. Having said that, the personal product business performance failed to meet the Street's expectations. The performance of the same has to be keenly monitored in the coming quarters.

At the current market price the stock is trading at 32.8x its FY2012E EPS of Rs11.6 and 27.6x its FY2013E EPS of Rs13.8. The stock is trading at a substantial premium of mean average of 26x. Though the company's business fundamentals are intact, the same is already factored in its stock's current valuation. Hence, we do not see any upside in the stock price from the current level. In view of this, we maintain our preference for ITC over HUL. We also maintain our Hold recommendation on the stock with price target under review.
 
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
 
 

Click here to read report: Investor's Eye
Regards,
The Sharekhan Research Team
myaccount@sharekhan.com
 


Fw: Notice for Extraordinary General Meeting - Dena Bank



DENA BANK
Head Office: Dena Corporate Centre, C-10, "G" Block, Bandra-Kurla Complex,
Bandra (East), Mumbai- 400 051.
 
February 6, 2012
 
Dear Shareholder,
 
Sub: Notice for Extraordinary General Meeting
 
Shareholders are hereby informed that an Extraordinary General Meeting of the shareholders of Dena Bank will be held on Friday, 9th March 2012 at 11.00 A.M. at Auditorium, Sir Sorabji Pochkhanawala Bankers' Training College, J.V.P.D. Scheme, Near Cooper Hospital, Vile Parle (West), Mumbai – 400 056 to transact the business as detailed in the Notice.
 
In line with the "Green Initiative" circulars issued by the Ministry of Corporate Affairs (MCA) on April 21, 2011 and April 29, 2011 and Bank's participation in the initiative, the Notice of the said Meeting including the various Notes, Explanatory Statement, Declaration, Nomination Form, Personal Information, Declaration & Undertaking, Attendance Slip, Entry Pass & Ballot Paper Pass, Form of Proxy and Extract of Relevant Act, Schemes & Regulations are attached.
 
Please note that the said Notice is also available on the Bank's website www.denabank.com.
 
In case you desire to receive the documents in physical form, you are requested to send an e-mail to denabank@shareproservices.com on or before 11th February, 2012 and on receipt of request for physical document, the same will be sent free of cost.
 
We are sure that as a responsible citizen, you would appreciate the efforts made by Bank to save the environment as part of the "Green Initiative" taken by MCA and will whole-heartedly support the same.
 
For Dena Bank
 
S. K. Jain
General Manager (Fin. Mgmt, IRC & Treasury)

 




Monday, February 06, 2012

Fw: Investor's Eye: Update - Hindustan Unilever, GlaxoSmithKline Consumer Healthcare, India Cements; Special - Q3FY2012 IT earnings review

 
Sharekhan Investor's Eye
 
Investor's Eye
[February 06, 2012] 
Summary of Contents
STOCK UPDATE
Hindustan Unilever 
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs387
Q3FY2012 results: First-cut analysis
Result highlights
  • Hindustan Unilever Ltd (HUL)'s Q3FY2012 results have come ahead of our as well as the Street's expectations largely on account of a better than expected operating performance during the quarter. The volume growth momentum in the domestic consumer business sustained at high single digit with a 9.1% year on year (YoY) growth during the quarter (as against a 9.8% YoY volume growth in Q2FY2012).
  • Net sales grew by 16.4% YoY to Rs5,852.7 crore (largely in line with our expectation of Rs5,897.3 crore) in Q3FY2012. The growth was driven by an 18% YoY growth in the home and personal care (HPC) business (which contributes more than 75% to the total revenue) and a 12.0% YoY growth in the foods 
    business .
  • The strong growth in the HPC business can be attributed to an approximately 21% YoY growth in the soaps and detergents segment revenues and around 14% YoY growth in the personal products business. We believe an above 21% YoY growth in the soaps and detergents business can be attributed to price increases undertaken in the portfolio, while the growth in the revenues of the personal products business has been largely volume driven. The profit before interest and tax (PBIT) margins of soap and detergents segment improved by 573bps YoY to 13.5% during the quarter. However the PBIT margins in the personal products segment declined by 294bps YoY to 25.9%, which is a kind of a disappointer for the quarter.
  • The foods business also posted a steady performance with the beverage segment growing by 11.3% YoY and the packaged foods segment expanding by 13.5% YoY during the quarter. The beverage segment's PBIT margin was down by 115bps to 15.7% largely on account of higher coffee prices. The losses in the packaged food segment declined by 63.0% YoY to Rs6.0 crore.
  • The higher raw material prices continued to put pressure on the gross profit margin (GPM) of the company. The GPM contracted by 143bps YoY to 47.5% in Q3FY2012. However the GPM improved sequentially by 181bps.
  • Despite a decline in the gross margins, the operating profit margin (OPM) improved by 271bps YoY to 15.1%, largely on account of lower advertisement spends (as a percentage of sales) and other expenses (as a percentage of sales) on a Y-o-Y basis. The ad-spends as a percentage to sales were at 11.8% in Q3FY2012 as against 14.8% in Q3FY2011. Thus the operating profit grew by 41.9% YoY to Rs885.6 crore.
  • However a lower other income Y-o-Y and a higher incidence of tax resulted in a 30.3% YoY growth in the adjusted profit after tax (PAT) to Rs763.5 crore for the quarter. The post tax exceptional loss stood at Rs9.7 crore against an exceptional gain of Rs51.5 crore in the corresponding quarter of the previous year. Hence the reported PAT grew by 18.2% YoY to Rs753.8 crore during the quarter. 
It was yet another quarter of strong operating performance for HUL with volume growth in the domestic consumer business standing in higher single digits. The sequential improvement in the gross margins was the highlight of the quarter. We will review our estimates for FY2012E and FY2013E post the conference call tomorrow. The stock is currently trading at 28.6x its FY2013E earnings per share (EPS) of Rs13.5 (ahead of mean PEx of 26x). We maintain our Hold recommendation on the stock.
GlaxoSmithKline Consumer Healthcare 
Cluster: Evergreen
Recommendation: Buy
Price target: Rs3,000
Current market price: Rs2,637
PAT largely in line with expectations
Result highlights
  • Q4CY2011 performance snapshot: The net sales grew by 18.6% YoY during the quarter with the overall volume growth standing at 11% YoY. The price-led growth during the quarter stood at 8% YoY. The raw material cost inflation for the quarter stood at 13%. However the price hikes in the portfolio aided in mitigating cost pressure and hence the gross margins stood almost flat at 64.4% (down by 44bps YoY). However a substantial increase in ad-spends and other expenses resulted in operating margins declining by 127bps YoY to 10.2%. Hence the operating profit grew by just 5.5% YoY to Rs61.6 crore. However a 33.3% YoY growth in the business auxiliary income and a 37.5% YoY growth in the interest resulted in a 21.2% YoY growth in the profit before tax (PBT). The adjusted profit after tax (PAT) grew by 23.0% YoY to Rs66.0 crore (excluding the prior period tax adjustment of Rs6.9 crore), which is largely in-line with our expectation of Rs63 crore for the quarter.
  • MFD segment registered double digit volume growth: The malted food drinks (MFD) segment (contributes close to 94% to the top line) registered a volume growth of 12% YoY during the quarter. The same was driven by a 16% YoY volume growth in the company's flagship brand - Horlicks. The brand's volume growth improved on a Q-o-Q basis from 10% YoY in Q3CY2011 to 16% in Q4CY2011. Boost's sales volume grew by just 2% YoY in Q4CY2011. This flat growth can largely be attributed to a high base of Q4CY2010 (volume growth of 25% YoY). The value growth in Horlicks and Boost stood at approximately 23% YoY (price-led growth of 7%) and an approximately 10% YoY growth (price-led growth of 8%) during the quarter. With food inflation likely to soften in the near term, we expect the volume growth for the MFD segment to stand in the range of 10-12% in the coming quarters.
  • Performance of non-MFD segment: The biscuit segment (contributes close to 5%) registered a value growth of 29% YoY (with volume growth standing at 15% YoY) during the quarter. The recently launched Horlicks Oats got a good response in the southern market and is now the number two brand in Tamil Nadu and Kerala.
Outlook and valuation
We have broadly maintained our earnings estimates for CY2012 and CY2013. We expect GSK Consumers' top line to grow at a compounded annual growth rate (CAGR) of 20% over CY2011-13E with sales volume growth standing in the range of 10-12% over the same period. With the operating margins likely to position in the range of 16-17%, we expect the bottom line to grow at a CAGR of 20% over the same period. 
We like GSK Consumer largely on account of its market leadership positioning in the lowly penetrated MFD segment, strong balance sheet with cash of more than Rs1,000 crore and its good dividend payout policy. We maintain our Buy recommendation on the stock with a price target of Rs3,000. At the current market price the stock is trading at 25.8x its CY2012E earnings per share (EPS) of Rs102.0 and 21.7x its CY2013E EPS of Rs121.7.
 
India Cements 
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs105
Current market price: Rs94
Price target revised to Rs105
Result highlights
  • Earnings ahead of estimates: India Cements in its Q3FY2012 results delivered an impressive performance and posted a 177.4% year-on-year (Y-o-Y) growth in its adjusted net profit. The adjusted net profit for the quarter stood at Rs56 crore which is well ahead of our as well as the Street's estimates largely on account of better than expected operating profit margin (OPM) and much lower than expected effective tax rate. 
  • Revenue growth driven by healthy realisation and volume growth: The net sales of the company grew by 20.6% YoY to Rs941.5 crore (much in line with our estimates). The net sales also include revenues from the Indian Premier League (IPL) franchise, wind power and shipping businesses. The revenue from the cement division (which is its core business) has improved by 24% YoY to Rs926.7 crore. The same was driven by a 15.7% growth in the average cement realisation due to supply discipline followed by cement companies in south India. On the other hand the southern region has witnessed partial recovery in the cement offtake and hence the volume grew 7.1% on a Y-o-Y basis. However, the revenue from the IPL franchise declined to Rs4 crore as against Rs21 crore in the corresponding quarter of the previous year. The shipping division has booked a revenue of Rs10 crore during the quarter. 
  • Margin expansion led by surge in realisation; cost pressure continues: On the margin front the OPM expanded by 450 basis points (bps) YoY to 20.7%. The margin expansion is due to a 15.7% increase in realisations to Rs4,241 per tonne. However, on the other hand the cost pressure continued to play its role with a) the raw material cost (blended basis) increasing by 41.3% on a per tonne basis, b) power & fuel cost increasing by 7.2% on a per tonne basis and c) employee cost increasing by 12.6% YoY to Rs70.8 crore. Hence the overall cost of production on a per tonne basis has increased by 5.3% on a YoY basis. However, with a healthy growth in the average realisation, the blended EBITDA per tonne has increased by 89% YoY to Rs861. Consequently, the operating profit of the company has increased by 54.1% YoY to Rs194.6 crore. 
  • Surge in interest cost due to increased borrowings & forex charges: The interest cost during the quarter increased by 84.4% YoY to Rs75 crore on account of increase in borrowings at a higher rate to redeem the outstanding foreign currency convertible bonds (FCCBs) and to meet working capital requirements. The total borrowings of the company currently stood at Rs2,900 crore as compared to Rs2,456 crore at the end of FY2011. The interest cost of Rs75 crore also includes foreign exchange (forex) translation charges on the forex loans to the tune of Rs15.6 crore. 
  • Lower than expected effective tax rate supports earnings growth: The effective tax rate during the quarter worked out to just 9.2% as compared to 35% in the corresponding quarter of the previous year. We had factored a 33% tax rate in our estimates. The lower than expected effective tax rate during the quarter is on account of tax paid on redemption of FCCBs amounting to Rs177.9 crore which has been adjusted against Securities Premium Account. 
  • Captive power plant for 50MW commissioned in Jan 2012: A power plant of 50MW capacity at Sankar, Tamil Nadu for captive requirement has been commissioned during the month of January 2012 and the trial runs of the plant have been undertaken. Hence the positive impact in terms of regular power supply and cost savings will reflect in FY2013. Further the work on the development of its coal mine in Indonesia has been delayed and is now expected to be completed during Q4FY2012. 
  • Upgrading estimates for FY2012 & FY2013: We are incorporating better than expected average realisations. Further we also factor a marginal cut in the volume estimates for FY2012. Overall we are upgrading our earnings estimates for FY2012 and FY2013 and the revised earnings per share (EPS) now stands at Rs9.7 and Rs11.9 respectively. 
  • Maintains Hold with revised price target of Rs105: The cement demand in India Cements' key market area (the southern region of India) has witnessed a sign of partial recovery driven by private sector housing and rural demand. Hence going ahead we expect the volume growth to support revenue growth. On the realisation front, the supply discipline mechanism has worked well and realisation in the southern region stood at a healthy level. However, in order to deliver higher volume the realisation could come under pressure. Further cost pressure in terms of higher imported coal price and freight cost through increase in lead distance will partially offset the positive impact of increase in realisation. Hence we maintain our Hold recommendation on the stock with a revised price target of Rs105 (valued at enterprise value [EV]/tonne of $65). At the current market price the stock trades at a price earning (PE) of 8x discounting the EPS for FY2013E and EV/EBITDA of 4.5x its FY2013E earnings.

SHAREKHAN SPECIAL
Q3FY2012 IT earnings review 
Key points
  • Rupee led growth in a seasonally soft quarter: The performance of the top four IT companies remained broadly in line with our as well as the Street's estimates for the seasonally soft December 2011 quarter. However, there was some moderation seen in volume growth adjusted for seasonal weakness. The aggregate sequential revenue growth in USD terms was at 2.6% for the December quarter, impacted by cross currency headwinds. However on a constant currency basis the revenue growth was more decent at 4.3%. Nevertheless, a steep rupee depreciation of 9.7% during the quarter helped the companies to report fascinating numbers in rupee terms. The favourable rupee has also translated into strong margin performance during the quarter. The quarter saw some strong deals signing with Infosys and TCS bagging five and ten large deals respectively while HCL Technologies (HCL Tech) reported cumulative deal signings worth $1 billion. However, the management commentary of the leading companies in the sector has seen some tear down in optimism on the back of the macro-economic headwinds. Most of the companies' managements indicated at facing delays in decision making in some projects and also softness in the discretionary spends. With expectations of IT budgets for CY2012 remaining flat to marginally down, there was unanimous optimism about increase in offshore IT budgets. 
  • Volume growth moderation owing to seasonal weakness: Seasonally, the December quarter has always been a soft quarter in terms of volume growth owing to lower billing days and planned shutdowns by clients. The quarter saw moderation in volume growth; the average volume of the top four IT companies grew by a modest 3% sequentially as against a 5.5% growth in the September 2011 quarter. Incidentally the sequential volume growth for the December 2011 quarter was the lowest in the last five years (the average being 4.5% in the last five years). TCS, Infosys and HCL Tech's volume growth was below expectations; Wipro disappointed the most posting just a 1.8% quarter-on-quarter (Q-o-Q) volume growth. On the positive side, there was a pricing uptick of 40-200bps in the quarter on a constant-currency basis for the top four IT companies. Overall, a modest volume growth coupled with the adverse impact of cross currency headwinds (150-200bps) led to a soft 2.6% sequential aggregate revenue growth for the quarter. 
  • Margins benefited primarily led by rupee: For the December 2011 quarter, most of the companies have reported an improvement in their operating margins, primarily led by a favourable rupee. Infosys has led the pack with a 265bps improvement and Wipro has shown the least improvement (93bps) among the top four. On the other hand, an improvement in pricing (led by a change in the mix and a higher proportion of fixed price projects) has also contributed to the improvement, though employee utilisation saw a decline. Going forward, we expect margins to remain in a narrow band (internal levers like utilisation could pick up in the coming quarters). However a further strengthening of the rupee could adversely impact margin performance from the current levels. 
  • Valuation: In the last one month (since January 6, 2012), the BSE IT Index (up 1%) has underperformed the Sensex (up 11.4% for the commensurate period) after a smart outperformance in the preceding three months. Going forward, with external levers (rupee benefits) showing sign of fading, the internal variables (volume, price and productivity) need to gear up to sustain earnings momentum in the coming quarters. With the Street's earnings expectations for FY2013E still at a modest level, any surprises in the form of an improvement in the global macro environment would translate into a better stock performance in the coming months. We continue to remain cautiously positive on the sector over a 12-month horizon. However, we like TCS and HCL Tech as our top picks among the large-cap IT companies and NIIT Technologies (NIIT Tech) and Polaris Financial Technology (Polaris) are our preferred bets in the mid-cap space..
 
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
 
 

Click here to read report: Investor's Eye
Regards,
The Sharekhan Research Team
myaccount@sharekhan.com
 


Sunday, February 05, 2012

Fw: Sharekhan Top Picks

 
Sharekhan Investor's Eye
 
Top Picks
[February 04, 2012] 
Summary of Contents
SHAREKHAN TOP PICKS
After a rather subdued end of 2011, the market surprised pleasantly with a strong rally in January of the new year. The rebound in many battered-down mid-cap stocks was massive with the CNX Mid-Cap Index appreciating by close to 20% since the beginning of this year. Some of the mid-cap stocks in our Top Picks basket also gave fabulous returns with IL&FS Transportation Networks Ltd (ITNL) appreciating by over 40% and PTC India (despite its disappointing third quarter results) moving up by 26% over the same period. In spite of the massive outperformance by a couple of mid-cap stocks our Top Picks basket appreciated at a relatively lower rate of 10.6% as compared to the 14-15% appreciation in the benchmark indices in the same period. This was because the Top Picks basket has a higher proportion of defensive stocks.
This month, we are making three changes to the basket including two churns within sectors. First, we are replacing ITC with Marico due to the latter's strong Q3FY2012 performance. Besides, ITC usually underperforms prior to the announcement of the Union Budget in anticipation of a hike in excise duty on tobacco products, its core business. Second, we are replacing ITNL by Pratibha Industries. Again the churn is driven by the robust Q3FY2012 results of Pratibha Industries along with its comparatively better valuations. The third change is the replacement of PTC India due to its disappointing results and the continued pressure on its business due to the outstanding dues from the state electricity boards. We are replacing PTC India with Eros International purely because of the latter's valuations and the expectations of good quarterly results from the company.
 
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
 
 

 

Click here to read report: 
Sharekhan Top Picks
Regards,
The Sharekhan Research Team
myaccount@sharekhan.com
 


Friday, February 03, 2012

Fw: Investor's Eye: Update - Marico, Thermax, Andhra Bank, Madras Cements, Cement

 
Sharekhan Investor's Eye
 
Investor's Eye
[February 03, 2012] 
Summary of Contents
STOCK UPDATE
Marico 
Cluster: Apple Green
Recommendation: Hold
Price target: Rs171
Current market price: Rs163
Price target revised to Rs171
Result highlights
  • Results synopsis: Marico's Q3FY2012 consolidated net sales grew by 29.4% year on year (YoY) to Rs1,057.8 crore, driven by a mix of volume growth (of 20% YoY) and price-led growth (of approximately 10% YoY) in Q3FY2012. The gross margins improved by 114bps YoY and 518bps sequentially to 48.5%. However the operating margins were down by 68bps YoY to 11.5% mainly on account of a higher than expected surge in the ad-spends during the quarter. The operating profit grew by 22.1% YoY to Rs121.7 crore. However higher Y-o-Y depreciation charges and a higher incidence of tax (after adjusting for reversal of excess income tax provision of Rs5.6 crore for the previous year) resulted in a 12.9% YoY growth in the adjusted profit after tax (PAT) to Rs78.5 crore.
  • Upward revision in estimates: We have revised upward our earnings estimates for FY2012 and FY2013 by 1.3% and 4.1% respectively to factor in a higher than expected top line growth and an improvement in the gross margins.
Outlook and valuation
Despite of inflationary pressures, Marico continued to surprise us with the volume in its domestic consumer products business growing by mid-teens in the past two quarters. This gives us an indication that the categories in which Marico is operating are not feeling the heat of sustained inflationary pressure. We expect the mid-teen volume growth to sustain in the domestic market. We expect the international business to grow by around 20% YoY on the back of several initiatives undertaken by the company in various international markets. Overall we expect the top line to grow at a compounded annual growth rate (CAGR) of approximately 25% over FY2011-13 and the bottom line to grow at a CAGR of 30% over the same period (on the back of expected improvement in the margins due to softening of raw material prices).
In line with the upward revision in earnings estimates, we revise our price target to Rs171 (based on 24x its FY2013E EPS of Rs7.1). The stock has run up after posting a strong operating performance in Q3FY2012, hence there is limited upside visibility from the current levels. Thus we maintain our Hold recommendation on the stock. At the current market price the stock trades at 31.0x its FY2012E EPS of Rs5.3 and 22.9x its FY2013E EPS of Rs7.1.
Thermax
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs526
Current market price: Rs522
Maintain hold with price target of Rs526
Result highlights
  • Results below expectation: Thermax' Q3FY2012 results were below our expectation led by revenue sluggishness and margin pressure. Moreover, the standalone order inflow for the quarter remained muted at Rs590 crore (down 40% on a yearly basis and 50% on a sequential basis). On the positive side, the setting up of its power equipment manufacturing plant is progressing as scheduled. The company has also seen an uptick in inquiries since January and expects good demand from the consumption led sectors like auto and durables and also from the food sector. 
  • Top line grew by a mere 2%: Thermax' Q3FY2012 net income from operations increased by a mere 2% year on year (YoY) on account of flattish revenue in the energy segment versus our expectation of a 7% growth. The company had been reporting sluggishness in order inflow for the past few quarters, which has translated in a revenue slowdown during the quarter. The environment division posted a Y-o-Y growth of 3% in revenue. 
  • OPM under pressure: The company reported an operating profit margin (OPM) of 10.7%, which is lower than the Q3FY2011 OPM of 11.8%. The margin was lower because of Rs12.6 crore of foreign exchange (forex) loss booked under other expenses and lower operating leverage. The employee expense was higher by 7% on a Y-o-Y basis at Rs104.2 crore. 
  • Net profit fell by 5%: In spite of a higher other income and lower tax rate, the net profit fell by 5% YoY to Rs95.5 crore, which is lower than our estimated net profit by 8%. The company availed of working capital loan to the tune of Rs90 crore, which has led to a rise in the interest cost. The same is likely to exert further pressure on the company's margins going ahead.
  • Maintain "Hold": The growth in the company's order book remains highly dependent on the momentum in capex cycle of India, making it highly susceptible to swing in investment sentiments. Marred by poor order inflow and tough business environment, the stock has languished in the last one year. However, on a positive note, recent data indicates some revival in the manufacturing sector, auguring well for Thermax and the capital goods sector. At the current market price, the stock trades at 15.1x and 13.8x its FY2012 and FY2013 estimated earnings respectively. Based on revised earnings and target multiple of 14x (past 1 year average) we have revised our target price to Rs526. In view of limited upside potential we maintain our "Hold" rating on the stock. The key positive triggers in the stock remain the winning of big ticket size power equipment orders and some relief on margins in view of the recent cooling off of commodity prices.

Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs140
Current market price: Rs110
Price target revised to Rs140
Result highlights
  • Andhra Bank's Q3FY2012 results were in line with our estimates as the net profit at Rs303 crore showed a decline of 8.4% year on year (YoY) and 4.1% quarter on quarter (QoQ). The de growth in profits was mainly due to a sharp rise in provisions (80% YoY). 
  • The net interest income (NII) growth was slightly higher than our estimates as it grew by 17.1% YoY. The growth in NII was contributed by a sequential growth in advances (6.3% QoQ) and stable net interest margins (NIMs; ie 3.81% in Q3FY2012 vs 3.82% in Q2FY2012). 
  • Led by a strong growth in recoveries the asset quality improved on a sequential basis as gross and net non performing assets (NPAs) were at 2.38% and 1.21% respectively compared to 2.67% and 1.48% in Q2FY2012. The bank restructured Rs1,200 crore of advances in Q3FY2012 (outstanding restructured advances at Rs3,676 crore).
  • The non interest income registered a growth of 18.4% YoY and 32.3% QoQ contributed by a growth in fee income (11.9% YoY and 24.7% QoQ). The cost to income ratio declined to 37% from 39.2% in Q2FY2012.
Valuations
Andhra Bank's Q3FY2012 results were characterised by a decline in NPAs aided by sharp increase in the recoveries. The operational performance remained healthy backed by higher NIM and steady growth in advances. We believe sturdy margins and robust recoveries will lower the credit cost in the coming quarters. We expect the earnings of the bank to grow at a compounded annual growth rate (CAGR) of 11.5% (FY2011-13) leading to a return on asset (RoA) of approximately 1.1%. Therefore due to improving trends on the asset quality front and attractive valuations (0.7x FY2013 book value [BV]) we revise our target price to Rs140 (0.9x FY2013E earnings). We upgrade the rating on the stock from Hold to Buy.

Madras Cements
Cluster: Cannonball
Recommendation: Hold
Price target: Rs138
Current market price: Rs129
Price target revised to Rs138
Result highlights
  • Impressive performance; earnings well ahead of estimates: Madras Cements in its Q3FY2012 results delivered an impressive performance and posted an adjusted net profit of Rs76.8 crore (up 76.7% year on year [YoY]) which is well ahead of our as well as the Street's estimates. The impressive performance during the quarter was on account of a healthy growth in its volume as well as average realisation. Further the company has also benefited in terms of a better operating leverage. 
  • Strong volume growth and healthy realisation drives revenue growth: The overall revenue of the company increased by 27.9% YoY to Rs741 crore which includes revenue of Rs7.7 crore from the windmill division. The revenue growth during the quarter has been driven by a strong volume growth of 15.9% YoY to 1.72 million tonne on account of stabilisation of its new capacity and increase in average realisation by 11.7% YoY to Rs4,264 per tonne on account of supply discipline followed by the cement manufacturers. The demand environment in the southern region has partially recovered particularly in Tamil Nadu and Kerala. In terms of realisation, the present cement realisation (as in early Q4) has increased by Rs8-10/bag compared to the average of Q3FY2012. Hence in Q4FY2012 also we could see healthy realisation. 
  • Margin expansion due to increase in realisation: The operating profit margin (OPM) expanded by 243 basis points YoY to 28%. The expansion in the OPM is on account of increase in the realisation by 11.7%. However, cost pressure has partially offset the benefit arising from increase in realisation. During the quarter freight cost increased by 18.8% on a per tonne basis and other expenses increased by 43.1% to Rs103.8 crore. Further, a loss in the windmill division to the tune of Rs6.7 crore at the profit before interest and tax (PBIT) level has also limit expansion in the overall OPM. Hence the overall cost of production has increased by 6.8% YoY on a per tonne basis. The EBDITA per tonne for the quarter increased by 27.2% YoY 
    to Rs1,161. 
  • Upgrading earnings estimates for FY2012 & FY2013: We are upgrading our earnings estimates for FY2012 and FY2013, mainly to factor in higher than expected cement realisation. We also factor higher than expected freight costs. The revised earning per share (EPS) for FY2012 now stands Rs14.9 and for FY2013 we estimate the EPS to be Rs16.3. 
  • Maintain Hold with revised price target of Rs138: In spite of an unfavorable demand supply scenario in the southern region there is a sharp price hike witnessed on account of supply discipline followed by the manufacturers. However, the cement offtake in the region has partially recovered in Q3FY2012. Going ahead we expect cement offtake in the region to improve in a gradual manner. However, a failure to adhere to supply discipline will be a key concern on the cement realisation and the profitability of the company. Hence we maintain our Hold recommendation with a revised price target of Rs138 (valued at enterprise value [EV]/tonne of $85). However, in the longer run we believe Madras Cements holds the potential to deliver returns to investors due to its operational efficiency. At the current market price the stock trades at a price earnings (PE) of 7.9x and EV/EBITDA of 5.2x its FY2013 estimated earnings.

SECTOR UPDATE
Cement     
Seasonal pickup in demand
Key points
  • Cumulative volume for pan India players grew by 8.6%: The volume growth of the top three domestic cement players - ACC, Ambuja Cements and Ultratech Cement (Ultratech) for the month of January 2012 was impressive on a year-on-year (Y-o-Y) basis on account of a pick-up in cement offtake in the north, west and the eastern region due to a pick-up in the execution in infrastructure projects. Among the large players Ultratech took lead and posted an impressive dispatches growth of 11.2% YoY. On the other hand ACC and Ambuja Cements posted a growth of 8.8% and 3.8% respectively in their dispatches. Hence, cumulatively, the pan India players have registered an 8.6% volume growth. On a sequential basis (compared to December 2011) the cumulative dispatches of the pan India players have increased by 3.1%. 
  • Cement offtake picked up in north, west & central regions; partial recovery in southern region: In terms of demand, dealers have confirmed that the cement offtake in most parts of the country has shown signs of recovery in the past couple of months due to post monsoon pick-up in infrastructure activity. Further, demand in the southern region during January 2012 has partially recovered. Going ahead dealers expect momentum in demand to continue for the coming couple of months. 
  • Cement prices increased in most parts of the country: Cement prices have increased in January in the range of Rs5-12/bag of 50kg in most parts of the country. The eastern region has witnessed the highest price hike on a month-on-month (M-o-M) basis whereas in the southern region prices have remained largely unchanged sequentially. The price hike has been largely driven by a revival in the cement offtake. Further, dealers are of the view that the cement price may increase further in the near term as cement offtake is expected to be strong going ahead. 
  • Outlook-Maintain bullish stance on Grasim & Orient Paper: The cement sector has outperformed the broader market in recent times due to positives such as a recovery in the cement offtake and strong realisations. However with a pick-up in cement offtake, the supply discipline may break which can put pressure on cement prices going ahead. Hence we maintain our neutral stand on the sector but we are selectively positive and prefer Grasim Industries (Grasim) in the large size space and Orient Paper & Industries (Orient Paper) in the mid size space.
 
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.
 
 

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Regards,
The Sharekhan Research Team
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