Fw: Investor's Eye: Update - Ashok Leyland, Lupin, Wipro, Hindustan Unilever, Larsen & Toubro, Torrent Pharmaceuticals, Polaris Financial Technology, Telecommunications; Viewpoint - Idea Cellular

 

 

Investor's Eye [July 24, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Ashok Leyland Cluster: Ugly Duckling Recommendation: Hold Price target: Rs28 Current market price: Rs23 Q1FY2013 results: First-cut analysis Result highlights Ashok Leyland's Q1FY2013 results: PAT 23% below estimates on higher employee and interest costs Ashok Leyland Ltd (ALL)'s performance in Q1FY2013 was significantly below our and the street's estimates. Higher employee costs impacted the operating margin that came in 70 basis points below our estimates at 8%. Higher interest costs further marred profitability leading to a profit after tax (PAT) of Rs67 crore, 23% below estimates. Positive surprises Contribution per vehicle improved on a sequential basis despite increased proportion of buses and the traded light commercial vehicle (LCV) Dost. Depreciation at Rs89 crore was below our estimates of Rs98 crore. Negative surprises  Employee costs increased on both, year-on-year (Y-o-Y) and quarter-on-quarter (Q-o-Q) basis. The employee/sales at 8.9% was much above our expectation of 7.1%. Financial charges at Rs83 crore were higher on a sequential basis despite of it being a seasonally lean period. This may be due to higher inventory levels at the stockyard. Valuation In the recent analyst interaction of July 4, 2012, the company maintained its volume guidance of 1.07 lakh units ex-Dost but lowered its FY2013 margin guidance to 10%. We would seek further clarity on volume and margin expectations from the conference call to be held tomorrow. We maintain our Hold recommendation on the stock but may revise our estimates post an interaction with the management in our subsequent note.    Lupin Cluster: Apple Green Recommendation: Buy Price target: Rs597 Current market price: Rs582 Q1FY2013 results: First-cut analysis Result highlights An impressive all-round performance; higher tax incidence affects profit: Lupin reported better than expected revenues and profit for Q1FY2013 on a good all-around performance during the quarter. Its net sales grew by 42.8% year on year (YoY) to Rs2,219.2 crore during the quarter and its profit before tax rose by 67.2% YoY to Rs405.8 crore. The profit growth was driven by a 158-basis-point year-on-year (Y-o-Y) rise in the operating profit margin (OPM) to 19.1% and a 126% Y-o-Y growth in the other income during the quarter. However, a sharp rise in the tax incidence (29.8% in Q1FY2013 vs 11.8% in Q1FY2012) restricted the profit growth to 33.5% YoY at Rs280.39 crore. But even that is impressive. US, Japan and India lead the growth: During the quarter the revenues from the US market rose by 62.8% YoY to Rs802 crore while the revenues from the Japanese market (excluding the newly acquired Irom Pharma) jumped by 36.7% YoY to Rs227.8 crore. The revenues from Japan (including Irom Pharma) now account for 15% of the total revenues of the company. Lupin continues to outpace the domestic formulation market with a 25% Y-o-Y growth recorded during the quarter. The growth in the other emerging markets was also impressive at 54% YoY to Rs117.4 crore.  We have Buy rating on the stock with a price target of Rs597.     Wipro Cluster: Apple Green Recommendation: Hold Price target: Rs360 Current market price: Rs345 Downgrade to Hold Result highlights Performance below expectations, disappointing guidance: Wipro's overall performance for Q1FY2013 was below our expectation. The most disappointing part was the Q2FY2013 guidance, which suggested a 0.3% to 2.3% sequential growth to $1,520-1,550 million, much below our as well as the street's expectations. This is in spite of the September quarter being a traditionally strong quarter for the IT sector.  Soft volume growth: IT services revenues were down 1.4% quarter on quarter (QoQ) to $1,514.8 million (our expectation was of $1,531 million). On a constant currency basis, the revenues were up 0.3% QoQ to $1,540 million. The volume growth came in at 0.8% QoQ. Onsite pricing was down by 0.9% QoQ (up 0.2% on constant currency basis) and offshore pricing was down 2% (down 1% on constant currency basis).  Margins disappoint, incremental investments continue in S&M space: The IT services' earnings before interest and tax (EBIT) margins have shown an improvement of 30 basis points to 21% (much below our expectations of 22.5%), despite the rupee benefits (11.1% rupee depreciation) and absence of full quarter impact of wage hikes (effective from June 1, 2012). The lower margin performance has been attributed to incremental allocation to selling and marketing (S&M), which has gone up by 22.9% to Rs533 crore (additional investment of Rs100 crore on QoQ basis). As a matter of fact, on a trailing twelve month (TTM) basis, Wipro's S&M investments have gone up by 34% to Rs1,781 crore. Wipro is heavily investing and strengthening its front end as a part of its business transition. Thus the margins are expected to continue to remain in a narrow range in the next few quarters, as the benefits of investments will take time to reflect.  Net profit below expectation: The consolidated revenues of the company for the quarter were up 6.8% QoQ to Rs10,483.2 crore. The net other income was down 33% QoQ to Rs132.5 crore driven by higher foreign exchange (forex) losses pertaining to external commercial borrowing (ECB) to the tune of Rs100.2 crore as compared to Rs33.7 crore in Q4FY2012. The net profit was up 6.7% QoQ to Rs1,580.2 crore (below our expectations of Rs1,708.9 crore).  Performance/guidance does not favour revival thesis: Wipro has failed to meet the upper end of its revenue guidance in constant currency terms in four of the last six quarters. Volume growth continues to languish with an average 1.1% sequential growth in the last three preceding quarters (lowest among the peers). Further, a lackluster guidance for the seasonally strong September quarter reflects at a slower than anticipated ramp up in the clients' accounts. We draw comfort from the incremental investments in the S&M area (130 people in the hunting team) and clients mining ($100 million clients moved to 8 from 4 in one year). However any meaningful benefit from the S&M investments would take time to reflect in numbers (management indicates at 8-12 months time frame). Overall, looking at the current business traction and increasing uncertainties in the macro environment, we expect Wipro to take atleast three quarters to come closer to match its peer companies' (TCS, HCL Technologies, Cognizant) growth levels.  Outlook and valuation: We have reset our currency estimates to Rs54.4 and Rs54 and have lowered our earnings estimates by 4.7% and 5.8% on the back of lower revenue estimates of 4.2% and 9.2% respectively for FY2013E and FY2014E. In the last one month Wipro's stock price has corrected by close to 14% and is trading at close to 12x FY2014E earnings. Though any major downside from the current levels looks unlikely, we remain circumspect on upside triggers. With lack of positive investment triggers in the medium term, we have downgraded our rating to Hold from Buy and lowered the target price to Rs360.     Hindustan Unilever Cluster: Apple Green Recommendation: Hold Price target: Rs479 Current market price: Rs476 Price target revised to Rs479 Result highlights Strong beginning to FY2013: Hindustan Unilever Ltd (HUL) began FY2013 on a strong note by posting a strong operating performance in the first quarter of the fiscal. Despite macro uncertainties and sustained high food inflation HUL was able to maintain a strong growth in the domestic consumer business, which grew by 19% year on year (YoY) in Q1FY2013. The sales volume growth stood at 9% (close to 10% volume growth in Q4FY2012). This was the fourth consecutive quarter when HUL's volume growth in the consumer business stood in the range of 9-10%. The highlight of the quarter was close to a 220-basis-point year-on-year (Y-o-Y) improvement in the gross profit margin (GPM).  Performance snapshot: HUL's net sales grew by 13.7% YoY to Rs6,250.2 crore in Q1FY2013, driven by a 21% growth in the home and personal care (HPC) business. The food business' revenue growth remained at 11% YoY during the quarter. The stand-alone business' GPM improved by 216 basis points YoY to 46.1% and its operating profit margin (OPM) improved by 137 basis points YoY to 13.4%. Judicious price increases in the product portfolio, the benefits of a low-cost inventory and effective buying of the key inputs at the global level helped HUL to post a strong improvement in the GPM during the quarter. Hence, the operating profit grew by 26.7% YoY to Rs837.9 crore. However a higher than expected other income (including the other operating income) led to a 46% Y-o-Y growth in the adjusted profit after tax (PAT) to Rs848.8 crore. The other income (including income from other operations) stood at Rs347.2 crore in Q1FY2013 as against Rs126.1 crore in Q1FY2012. The surge in the other income was aided by a Rs71.7-crore profit on the sale of long-term investments and the interest on an income tax refund of Rs34.5 crore.  Upward revision in estimates: We have revised upwards our earnings estimates for FY2013 and FY2014 by 5.0% and 6.2% respectively to factor in the higher than expected OPM and other income during the quarter. With the prices of the key inputs showing a softening trend, we expect the OPM to stand in the range of 13.5-13.8% in the coming years. Outlook and valuation: Though the strong volume growth momentum sustained in Q1FY2013, we believe the volume growth has to be keenly monitored in the coming quarters in view of the poor monsoon and the persistent high food inflation. We believe HUL's portfolio of strong brands (catering to the masses as well as the premium end of the market) will help overcome the concerns and maintain the growth momentum in the coming quarters. Also, banking on the Indian consumer growth story the company has maintained its thrust on innovation and enhanced its distribution reach. These will be the key growth drivers for the company in the long run. We expect HUL's top line and bottom line to grow at a compounded annual growth rate (CAGR) of 17% and 19% respectively over FY2012-14. HUL has traded at an average one-year forward multiple of 27x in the uncertain market environment of the last twelve months. That is 6% above its four-year average multiple of 25.5x. We have revised our price target to Rs479 (valuing the stock at 27x its FY2014E earnings of Rs17.7). However, with a limited upside from the current level we maintain our Hold recommendation on the stock. At the current market price the stock is trading at 31.3x its FY2013E earnings per share (EPS) of Rs15.2 and 26.8x its FY2014E EPS of Rs17.7.    Larsen & Toubro Cluster: Evergreen Recommendation: Buy Price target: Rs1,584 Current market price: Rs1,355 Price target revised to Rs1,584 Result highlights Results exceed expectations; forex loss hurts margins: Larsen and Toubro (L&T)'s Q1FY2013 results were better than expected mainly on account of a robust performance by its engineering and construction (E&C) division and a higher other income. However, the good operating performance was shadowed by a foreign exchange (forex) loss of Rs267 crore. The order inflow registered a year-on-year (Y-o-Y) rise of 21% to Rs19,594 crore, led by the spill-over of the delayed orders from FY2012. The company has maintained its guidance of a 15-20% growth in both revenues and order inflow for FY2013. Order inflow boosted by spill over from FY2012: Of the total order intake of Rs19,594 crore, about Rs5,000 crore (~25% of total intake) is attributable to spillovers from the previous quarter; excluding which the order inflow for Q1 would show a de-growth of 10% on a yearly basis. The share of slow moving orders in the order book has risen to 10% since FY2012. The current order book stands at Rs1,53,095 crore (up 12% YoY and 5% quarter on quarter [QoQ]). The majority of the orders were received from the private players in the transportation, and building and factory segments. Going forward, the company expects good traction from the new markets like West Asia and South-East Asia. Cautious in taking BOT projects: The management indicated that they would be cautious in taking fresh build-operate-transfer (BOT) orders as their prime focus now in executing current projects on hand and want to keep equity investment requirement under check. They have not mentioned of any new projects in order inflows expected in FY2013.  Estimates marginally upgraded: In view of robust execution and order inflow in Q1FY2013 along with spectacular performance of "others" segment (mainly integrated engineering services) we have upgraded our earnings estimates by 4-5% for FY2013 and FY2014. We expect the company's stand-alone earnings to grow at a compounded annual growth rate (CAGR) of 9% over the next two years. Our revised consolidated earnings per share (EPS) estimate stands at Rs97.9 and Rs106.5 for FY2013 and FY2014 respectively. Its overseas business (exports) has increased to 17% this quarter from the past level of 11-12%, led by sound execution of orders bagged in FY2012. With such increasing contribution of its overseas business, we feel that the impact of fluctuations in foreign currencies on its performance could become more unpredictable in the coming quarters.  Price target revised to Rs1,584: While the company reported overall robust results for the quarter, the achievement of yearly order inflow guidance would be highly subjective to an uptick in infrastructure development activities in the country and in the Middle East region. Moreover, excluding BOT projects might limit the growth in order inflow, especially in the public private partnership (PPP) projects. At the current market price the stock is trading at 12.7x its FY2014 consolidated estimates. Our sum-of-the-parts (SOTP) based price target stands revised upwards to Rs1,584 on account of revised estimate of the standalone business. We continue to believe that L&T is the best proxy play on India's infrastructure growth theme and hence maintain our Buy rating on the stock.     Torrent Pharmaceuticals Cluster: Ugly Duckling Recommendation: Buy Price target: Rs760 Current market price: Rs662 Strong performance; forex loss spoils the show Result highlights Q1FY2013 results in line with expectations: During Q1FY2013 the net sales of Torrent Pharmaceuticals (Torrent) grew by 20.4% year on year (YoY) to Rs736 crore on the back of a 33% year-on-year (Y-o-Y) rise in the international business and a 13% Y-o-Y increase in the domestic formulation business. The operating profit margin (OPM) excluding the foreign exchange (forex) loss was 82 basis points higher YoY at 20.3%. Moreover, the other operating income jumped by 179% YoY to Rs31.2 crore, which included Rs15 crore of non-recurring revenues. This led the profit before tax (PBT) to jump by 48.3% YoY to Rs165 crore. However, the profit after tax (PAT) remained flat at Rs102 crore mainly due to a forex loss of Rs24.7 crore. Excluding the forex loss the PAT would grow stronger by 53.4% to Rs127 crore. The revenues and profit are largely in line with our expectations.  Better rupee realisation and new launches in key markets drive growth: During the quarter, the revenues from the USA jumped by 88% YoY to Rs78.9 crore while the revenues from Brazil, which witnessed three product launches during the quarter, recorded a 26% growth YoY (from a high base due to the spill-over effects in Q1FY2012) to Rs135.5 crore. The revenue growth in the international market can partly be attributed to a 15% better rupee realisation (Rs55/dollar in Q1FY2013 vs Rs47-48/dollar in Q1FY2012). However, new launches in the US and emerging markets also played a vital role in driving the strong revenue growth. We maintain our estimates, price target and recommendation: The Q1FY2013 performance has been in line with our expectations. Therefore, we maintain our estimates for FY2013 and FY2014. We maintain our Buy recommendation with the old price target of Rs760 (implies 13x average earnings for FY2013-14).    Polaris Financial Technology Cluster: Ugly Duckling Recommendation: Buy Price target: Rs163 Current market price: Rs115 Price target revised to Rs163 Result highlights Revenues in line: In Q1FY2013, Polaris Financial Technology (Polaris)'s revenues were up 3.9% quarter on quarter (QoQ) to $107.6 million (in line with our expectations of $106.7 million). On a constant currency basis, the revenues were up 5.6% QoQ to $109.3 million. IT services' (including BPO) revenues were up 3.2% QoQ to $83.1 million, whereas Intellect revenues were up 6.4% QoQ to $24.5 million.  Margins disappoint: The margins continued to disappoint; despite rupee benefits for the quarter and absence of wage hikes. The EBITDA margins declined by 20 basis points to 12.2% in the quarter. Adjusting for hedging loss of Rs12.4 crore in the revenue line (company has adopted Accounting Standard 30 with effect from April 1, 2012), the EBITDA margins look more decent at 14.1%. Going forward, the management expects margins to move in a narrow range in the coming quarters as currency benefits would be offset by wage hikes and incremental research and development (R&D) investments in the products space.  Net income in line, includes profit on real estate sale: The adjusted net income for the quarter excluding one offs stood at Rs51.2 crore, up by 32.5% QoQ. However, the reported net income including profit on sale of real estate of Rs10 crore and one offs of Rs22.5 crore in Q4FY2012 (pertaining to sale of real estate of Rs15 crore and tax benefit on merger of Optimus business of Rs7.5 crore) remained flat at Rs61.2 crore.  Margins to remain in narrow range due to investments in R&D and hedging losses in revenues line: Polaris' management indicates at stable EBITDA margins for the coming quarters and for FY2013 despite rupee benefits. The lower margins performance could largely be attributed to hedging losses in the revenues line (revenue of around $25 million hedged at around Rs50.34 for the next eight quarters). Thus there will be around Rs11-12 crore of hedging loss per quarter in the revenue line. This coupled with incremental investments of Rs95 crore towards product R&D for FY2013E would restrict any meaningful margin improvement in the coming quarters.  Valuation and view: We reset our currency estimates to Rs53.2 and Rs53.1 and also tweak our margins estimates to 12.6% and 13.2% for FY2013 and FY2014 respectively. Consequently we have lowered our earnings estimates by 5.2% and 8.6% respectively for FY2013 and FY2014. We continue to remain optimistic on Polaris' Intellect side of the business. However macro uncertainties might pose some hindrance in the medium term. The stock has corrected close to 24% in the last three months and at the current price of Rs114, it is available at attractive valuation of 4.7x FY2013 and 4.2x FY2014 earnings estimates. We maintain our Buy recommendation on the stock with a revised price target of Rs163.   SECTOR UPDATE Telecommunications Weak reported net adds; Bharti continues to lead In June 2012 the GSM operators across India (excluding Reliance Communications [RCom] and Tata Telecommunications [Tata Tele]) added 4.64 million SIM cards, taking the overall base to approximately 677.3 million. That is an increase of 0.7% over May 2012's base. On the net additions front, the June net additions (of about 4.64 million) reported a 36.1% decline than that reported in the previous month. After May witnessing a robust growth in net adds, the industry subscriber addition dipped again in June led by weak performance from the new players. The overall subscriber base grew by a mere 0.7% month on month (MoM; on a restated basis) taking the aggregate GSM subscriber base across India (excluding RCom and Tata Tele) to 677.3 million. View: The Indian telecommunications space is plagued with a myriad of policy issues and regulatory uncertainty. We believe that constant media news on the sector with regards issues like 2G spectrum auction, base pricing, spectrum refarming, excess payment of spectrum charges beyond 6.2 MHz and the new 4G spectrum are weighing on the sector. Thus telecom stocks could be under pressure in the near term. However, we remain positive on Bharti from a long-term perspective in view of its valuation. We maintain our Buy recommendation and price target of Rs362 on Bharti.   VIEWPOINT Idea Cellular        Displays competitive intensity amid regulatory uncertainty Idea Cellular (Idea)'s Q1FY2013 results were below our as well as the street's expectations on the revenue/margin as well as the earnings front. The key performance indicators showed a mixed trend. The volume growth came in at 5.3% quarter on quarter (QoQ), while a strong competitive environment continued to exert pressure on the realised rate.  What happened in the quarter gone by? Muted top line growth; misses estimates: Idea's Q1FY2013 revenue showed a modest 2.5% sequential growth that was lower than our as well as the street's expectations. We expected a 5.2% revenue growth. The lower revenue growth was on account of pricing pressure (the average revenue per minute [ARPM] saw a 2.4% dip on a sequential basis) with no elasticity (flat minutes of usage on a sequential basis; stood at 379 minutes per user). Reported operating profit up 5.8% QoQ; while on an adjusted basis the same contracted 4.8%: The leveraging advantage was missing in Idea's Q1FY2013 performance; prima facie on a reported front though the operating profit showed an uptick of 5.8% on a Q-o-Q basis. The same was a result of an exceptional expense of Rs150 crore booked in Q4FY2012. Adjusting for the same, the operating profit showed a contraction of 4.8%; consequently the adjusted margin too contracted by 200 basis points. Earnings miss estimates as well: The net earnings too missed expectations in line with the miss on revenue and operating performance fronts. The net earnings for Q1FY2013 came in at Rs234 crore (-2% QoQ; +32.1% year on year [YoY]).  Our view: Idea's Q1FY2013 quarterly performance displayed strong competitive forces playing on the industry. The same was visible from the limited elasticity (2.4% QoQ decline in the realised rate); flat minutes of usage (MoU) and a 2.5% decline in ARPU. Despite strong execution capabilities, Idea failed to deliver on margin expansion. In fact on an adjusted basis, the operating profit margin (OPM) contracted by 200 basis points on a sequential basis. Along with a challenging operating environment, the regulatory risk and ambiguity continue to plague the sector and Idea in specific. Thus we believe that the stock's performance is more likely to be directed by regulatory moves and despite a decent valuation (at 13x 1 year forward price earning ratio [PER] and 5x EV/EBITDA) we continue with our neutral stance on the stock.     Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Hindustan Unilever, Larsen & Toubro, Reliance Industries, Crompton Greaves, Kewal Kiran Clothing

 

 

Investor's Eye [July 23, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Hindustan Unilever Cluster: Apple Green Recommendation: Hold Price target: Under review Current market price: Rs443 Q1FY2013 results: First-cut analysis Result highlights Results ahead of expectations; driven by robust performance of HPC business and higher other income: Hindustan Unilever Ltd (HUL)'s Q1FY2013 results are ahead of our as well as the Street's expectations. The impressive numbers were achieved on the back of the price hike-led strong performance of the home and personal care (HPC) segment (soaps, detergents and personal products) and a surge in the other income during the quarter. The consumer business recorded a volume growth of 9%, which was largely in line with the 10% volume growth in Q4FY2012. Revenues grow by 13.6%, in line with expectations: HUL's Q1FY2013 results are not strictly comparable on a year-on-year (Y-o-Y) basis due to the demerger of its export business. The net sales grew by 13.6% year on year (YoY) to Rs6,250.2 crore, exactly in line with our expectation of Rs6,250.9 crore for the quarter. The strong growth in the net sales was driven by a 21% growth in the HPC business (a 23.7% growth in the revenues of the soap and detergent segment and 16.7% growth in the revenues of the personal product business YoY).  Soaps and detergents also show improvement in margins: The steep growth of 23.7% in the soaps and detergents business was partially driven by the price increases undertaken in the portfolio. On the other hand, the growth in the revenues of the personal products business was largely volume driven. The profit before interest and tax (PBIT) margin of the soap and detergent business expanded by 295 basis points YoY to 12.2% whereas the PBIT margin of the personal product segment sustained at 26% during the quarter. Margin improvement leads to 23.4% growth at operating level: The stand-alone business' gross profit margin (GPM) improved by 197 basis points YoY to 46.1% in Q1FY2013. The GPM also improved by 128 basis points on a sequential basis. The operating profit margin (OPM) improved by 107 basis points YoY to 13.4%, which was in line with our expectation of 13.2%. Hence, the operating profit grew by 23.4% YoY to Rs837.9 crore (which was slightly ahead of our expectation of Rs813.3 crore).  Surge in other income boosts PAT: A higher than expected other income (including the other operating income) led to a 46% Y-o-Y growth in the adjusted profit after tax to Rs848.8 crore (adjusted for a pre-tax one-time income of Rs605 crore), which was much ahead of our expectation of Rs709.0 crore for the quarter. The other income stood at Rs347.2 crore in Q1FY2013 as against Rs126.1 crore in Q1FY2012. The surge in the other income was aided by a Rs71.7 crore profit on the sale of long-term investments and interest on income tax refund of Rs34.5 crore. Outlook and valuation: We will review our earnings estimates for FY2013 and FY2014 post the company's conference call tomorrow. At the current market price the stock trades at 30.6x and 26.5x its FY2013E and FY2014E earnings respectively. We maintain our Hold recommendation on the stock.    Larsen & Toubro Cluster: Evergreen Recommendation: Buy Price target: Rs1,529 Current market price: Rs1,375 Q1FY2013 results: First-cut analysis Result highlights Results exceed expectations; forex loss hurts margins: Larsen and Toubro (L&T)'s Q1FY2013 results were better than expected mainly on account of a robust performance by its engineering and construction (E&C) division and a higher other income. However, the good operating performance was shadowed by a foreign exchange (forex) loss of Rs267 crore. The order inflow registered a year-on-year (Y-o-Y) rise of 21% to Rs19,594 crore, led by the spill-over of the delayed orders from FY2012. The company has maintained its guidance of a 15-20% growth in both revenues and order inflow for FY2013.  Stand-alone sales up 26%: L&T has reported a strong rise of 26% in its revenues (stand-alone) for Q1FY2013. The revenue growth was higher than our expectation of a 13% Y-o-Y growth. This was mainly on account of strong execution in the engineering and construction (E&C) segment, which reported a 30% growth in revenues. The electrical and electronics (E&E) division reported a subdued 2% Y-o-Y growth in revenues while the machinery and industrial product (MIP) division disappointed with a 17% Y-o-Y fall in revenues.  OPM marred by forex loss: The reported operating profit margin (OPM) stood at 9.1%, much lower than our expectation of 11.5%. But it included a one-time forex related marked-to-market (MTM) provision (on forex borrowings/ exposure) of Rs267 crore which was shown under the "Selling, administration and other expenses" head. Adjusting for the same, the margin at 11.3% was largely in line with our expectation for Q1FY2013.  Other income and lower tax rate aid PAT growth: A healthy other income, which doubled to Rs606 crore led by higher treasury gain and dividends from subsidiaries and associates, and a lower tax rate of 29.1% boosted the adjusted net profit (including forex losses) to Rs902 crore. This was a Y-o-Y increase of 21% and higher than our as well as the Street's expectations. There was an exceptional item (expense) of Rs38.3 crore pertaining to the compensation paid under a voluntary retirement scheme.  Order inflow robust at Rs19,594 crore: The order inflow was robust at Rs19,594 crore (up 21% YoY) on the back of the spill-over of the delayed orders from the previous quarters. The management believes that the company's performance is on track to achieve its guidance of a 15-20% growth in both inflows and revenues in FY2013. The current order book stands at Rs1,53,095 crore (up 12% YoY and 5% quarter on quarter [QoQ]). The majority of the orders were received from the private players from the transportation, and building and factory segments. Going forward, the company expects good traction from the new markets like West Asia and South-East Asia. Outlook and view: The Street was worried about L&T's order book and execution amid a tough business environment. The company outperformed on these parameters during the quarter. However, a forex loss of Rs267 crore negatively impacted operating margin. We feel that with the increasing level of its overseas business, the impact of fluctuations in foreign currencies on its performance could become more unpredictable in the coming quarters. At the current level the stock is trading at 16.8x its FY2014E earnings. We would soon come out with a detailed note on its Q1FY2013 results.    Reliance Industries Cluster: Evergreen Recommendation: Buy Price target: Rs800 Current market price: Rs718 Petchem margin surprises negatively Result highlights PAT exceeds expectations on the back of higher other income and lower effective tax rate: In Q1FY2012 Reliance Industries Ltd (RIL) posted a net profit of Rs4,473 crore (a decline of 21% year on year [YoY]). The same is higher than our as well as the Street's estimates. In addition to better than expected refining margin ($7.6/barrel as against expectations of $7/barrel), a surge in the other income (up 76.6% YoY to Rs1,904 crore) and a lower tax rate (17.7% in Q1FY2013 vs 22% in Q1FY2012) led to better than expected earnings during the quarter. The net sales grew by 13.4% YoY to Rs91,875 crore, aided by a healthy revenue growth of 18.9% in its petrochemical division and that of 15.9% in its refining business. However, the revenues of the exploration and production (E&P) division declined by 35.6% on account of a falling output from the Krishna-Godavari (KG)-D6 basin.  Refining margin sustained QoQ; better than expected: During the quarter the refining plant of the company achieved 111% of utilisation rate and refined 17.3 million tonne of crude oil against 17 million tonne refined in Q1FY2012. The gross refining margin (GRM) was maintained at $7.6/barrel as against the Street's expectation of a contraction quarter on quarter (QoQ). However, on a year-on-year (Y-o-Y) basis the GRM remained low as in Q1FY2012 the company had posted a healthy GRM of $10.3/barrel. The Y-o-Y contraction in the GRM was largely on account of a correction in the gas oil and gasoline cracks. The refining segment's revenues grew by 15.9% YoY to Rs85,383 crore but on account of a Y-o-Y fall in the GRM the earnings before interest and tax (EBIT) declined by 32.8% YoY.  Petchem margin surprises negatively: During the quarter the revenues from the petrochemical (petchem) division grew by 18.9% YoY and by 2% QoQ. However, due to a reduction in the deltas across PP, PTA and MEG, the overall EBIT margin of the division contracted by 402 basis points YoY and 211 basis points QoQ to 8% (as against the expectation of a sequential improvement in the margin). Consequently, the EBIT from the division declined by 20.7% YoY to Rs1,756 crore.  Gas output at KG-D6 basin continues to fall: The gas production from the KG-D6 basin during Q1FY2013 dropped both YoY and QoQ. The average daily production during the quarter dropped to 33mmscmd from 49mmscmd in Q1FY2012 and 36mmscmd in Q4FY2012. In case of the Panna-Mukta oilfield, the oil production during the quarter declined by 18.4% due to a natural decline in the reserve. The average crude oil price realisation for the quarter under review was $100 per barrel for the KG-D6 basin and $118 per barrel for the Panna-Mukta oilfield. Maintain Buy with price target of Rs800: We have maintained our earnings estimates for FY2013 and FY2014 at Rs61.5 and Rs64.9 respectively. Though the operational matrices are showing signs of concern, we believe most of the negatives are factored in the current valuation of the stock. This implies a limited downside from the current level. On the other hand, there is no trigger for RIL in the near term due to the overhang in terms of the output from the KG-D6 basin and the continued margin pressure in its petrochemical business. However, any development in terms of approval for further development of the KG-D6 block and/or margin improvement in the petrochemical business could be positive for RIL. Hence we maintain our Buy recommendation on the stock with a price target of Rs800 (based on the sum-of-the-parts valuation method). Currently, the RIL stock is trading at 11.7x and 11.1x of FY2013 and FY2014 estimated earnings respectively.     Crompton Greaves Cluster: Apple Green Recommendation: Hold Price target: Rs133 Current market price: Rs118 Price target revised to Rs133 Result highlights Accounting changes boost earnings; international business still struggling with losses: Crompton Greaves Ltd (CGL)'s Q1FY2013 consolidated results were marginally above expectations mainly led by a change in the depreciation policy (which boosted the net profit by Rs18.8 crore). The overseas subsidiaries of the company continued to book losses. The quarter saw a slowdown in CGL's industrial division owing to lower sales volumes of HT motors. The company is facing severe pricing pressure, sub-optimal capacity utilisation and cost overruns (mainly at the Belgium plant) in its overseas power system business.  Order inflow shows growth on a low base: The consolidated order inflow for the quarter was robust at Rs2,718 crore, up 60% year on year (YoY) on a low base of Rs1,704 crore. This growth was led by a 67% year-on-year (Y-o-Y) growth in the power system business and a 38% Y-o-Y growth in the industrial system orders. The consolidated order backlog for the quarter stood at Rs9,172 crore, which is a growth of about 29% on a yearly basis. During the quarter, India's contribution to the total order inflow was the highest at 47%, followed by 25% by Europe, the Middle-East and Africa (EMEA); and 20% by the Americas.  Margin guidance looks difficult to achieve; recovery still some quarters away: The management maintained its guidance of a 12-14% top line growth and an 8-9% margin for FY2013. This looks like an uphill task as the management is unsure of the pricing environment and hence is not sure if the margins would sustain in the domestic and overseas markets. Further, the restructuring of its Belgium operations could result in cost overruns in the coming few quarters. Hence, we feel that achieving an operating profit margin (OPM) of even 8% in FY2013 would be difficult, given the current competitive scenario in the Indian power sector and the slowdown in Europe. However, after the restructuring of its global operations, we feel that the company's profitability may start to improve from FY2014 onwards.  Estimates fine-tuned: In view of the impending cost of restructuring the overseas operations, we have marginally downgraded our earnings estimate for FY2013 by 4% but revised upward our FY2014 earnings estimate by 8% on the back of the revival of demand for consumer products (revenues up 20% YoY) and better order inflow in the power system business. Overall, we are now expecting the company to post a yearly growth rate of 38% over FY2012-14E on a low base of FY2012.  Price target revised to Rs133: The intense competition in the power transmission and distribution (T&D) segment remains a cause for worry for the power business (which accounts for over 40% of its stand-alone revenues). The recovery in the demand for consumer durables was the key positive development of the quarter. A slowdown in the capital expenditure (capex) in India and the overseas market (mainly Europe) doesn't augur well for the company. Further, the restructuring of its Belgium operations could result in cost overruns in the coming quarters. We believe that the turn-around would take at least a few more quarters and the stock would continue to languish in the meantime. Overall, we have revised our price target to Rs133 (12x FY2014 estimated earnings). The current valuation at 10.7x FY2014E earnings provides a limited upside to our price target. Hence, we maintain our Hold recommendation on the stock.    Kewal Kiran Clothing Cluster: Ugly Duckling Recommendation: Hold Price target: Rs598 Current market price: Rs502 Price target revised to Rs598 Result highlights Q1FY2013 results - Muted discretionary demand resulted in dismal performance  The environment on consumer discretionary spent continues to face contraction and challenges led by a bleak economic environment and high inflation. In the light of such a situation, Kewal Kiran Clothing Ltd (KKCL)'s Q1FY2013 performance reflected the general trend. The company's top line, operating profit as well as the net earnings for the quarter contracted by 18%, 45% and 42.4% respectively on a year-on-year (Y-o-Y) basis.  The revenue contraction of 18% was a result of a 17% Y-o-Y decline in volumes, for which, the management attributed three reasons viz - soft environment, low inventory built up in Q1FY2013 and a high base effect of last year (wherein in Q1FY2012 the company had registered a 53% revenue growth). The management further mentioned that excluding the base effect and inventory impact, the revenue growth would have been flat for the quarter.  During the quarter the impact of lower raw material prices came into play; the same got reflected in the gross margins which expanded by 81 basis points on a Y-o-Y basis. The gross margins improved from 60.4% in Q1FY2012 to 61.2% for the quarter under consideration. The deleveraging impact of lower sales on relatively inelastic fixed overheads played havoc for the operating margins. The operating margin for the quarter tumbled down by 820 basis points on a Y-o-Y basis from 25% in Q1FY2012 to 16.7% in Q1FY2013.  The balance sheet continues to be strong with cash and cash equivalents at about Rs136 crore (constituting ~21% of the current market capitalisation). The return on capital employed (RoCE) and return on equity (RoE) for the quarter stood at 17.8% and 16% respectively.  Downgrading earnings estimates: Incorporating weak Q1FY2013 results into our estimates, and building for another two to three quarters of soft demand, we have reduced our earnings by 20% for FY2013E and 14.7% for FY2014. Our revised earnings per share (EPS) estimates for FY2013 and FY2014 stand at Rs38.5 and Rs49.8 respectively. Click here to read report: Investor's Eye   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 Rs49.8 to arrive at a price target of Rs598. 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. Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

 

Fw: Investor's Eye: Update - Maruti Suzuki India, NIIT Technologies, Bajaj Auto, Punj Lloyd

 

 

Investor's Eye [July 19, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Maruti Suzuki India Cluster: Apple Green Recommendation: Hold Price target: Rs1,399 Current market price: Rs1,117 Labour unrest turns ugly; risk of earnings downgrade looms Impact of strike on Maruti Suzuki's financials: we estimate revenue loss of Rs60 crore a day  The Manesar facility produces around 1,500 vehicles a day. The key products manufactured at the plant are Swift, Dzire and Ertiga. These are high-value products where there are no discounts and the customer waiting period is long. We assume a 25% higher realisation, of over Rs4 lakh a vehicle, for these vehicles as most of the variants sold are diesel models. Based on the output, we estimate a Rs60-crore revenue loss a day if the production at Manesar stops (assuming there's little inventory in the warehouse). A prolonged strike would affect the company's margins as well as profitability on account of the lower economies of scale and large fixed costs. The knee-jerk reaction in the stock price has factored in the short-term impact but a delayed resolution of the matter can cause further downside as well as a downgrade of the earnings estimate for FY2013.  Valuation  We are still assessing the situation at the Manesar plant and keeping our FY2013 earnings expectation unchanged. There would be serious risks if the situation lasts for more than three to four days. Our worries have considerably increased with the death of the general manager (HR) of the Manesar plant and the large-scale arrest of the suspects for an attempt to murder.  The knee-jerk reaction of the stock price has already factored in the short-term production risks. However, given the increased vulnerability of labour, as seen in the past year, the company's earnings may see significant downgrades. We maintain our Hold recommendation on the stock.   NIIT Technologies Cluster: Ugly Duckling Recommendation: Buy Price target: Rs340 Current market price: Rs291 Price target revised to Rs340 Result highlights Soft quarter; rupee benefits aid profitability: The June quarter is traditionally a soft quarter for NIIT Technologies (NTL) as it is a seasonally slow quarter for Geospatial Information Services (GIS; revenues of GIS dropped by 15.3% quarter on quarter [QoQ] in Q1FY2013). Thus, the consolidated revenues of the company remained flat for the quarter on a constant currency basis (0.5% QoQ). However, driven by rupee depreciation, the revenues in Indian rupee (INR) terms were up by 5.9% QoQ to Rs469.6 crore.  During the quarter, the revenues from the Morris Communication joint venture (JV) were up 5.7% QoQ to Rs25.9 crore, whereas Proyecta reported revenues of Rs14.2 crore, down 1.4% QoQ. The Room Solutions revenues have jumped 16.9% QoQ (after a sharp fall of 16.7% in Q4FY2012) to Rs41.5 crore and reported a margin of 23%, up 300 basis points QoQ.  The EBITDA margins were down 80 basis points to 16% (below our expectations of 17%). The fall in the margins can be attributed to wage hikes (-235 basis points), whereas rupee benefits (+150 basis points) and offshoring in the Morris JV (+40 basis points) remain the margin tailwinds for the quarter.  The net other income for the quarter came in at Rs21 crore, as against Rs4.6 crore of losses in Q4FY2012. The higher other income was driven by Rs17.3 crore of foreign exchange gain from revaluation of assets and liabilities as against a loss of Rs7 crore in Q4FY2012. The net profit for the quarter was higher by 24.5% QoQ to Rs57.5 crore, ahead of our estimates of Rs54.1 crore.  During the quarter the company added five new clients - two in the transportation space and one each in the banking, financial services and insurance (BFSI); manufacturing; and government verticals. In the government space, the company added the state of Odisha under the Crime and Criminal Tracking Network and System (CCTNS) program (deal size Rs41 crore).  Healthy order intake; backlog remains strong: The company witnessed a healthy order intake of $83 million in the quarter under review. The order intake for the quarter includes a renewal from a banking and financial services (BFS) client worth $15 million. The order intake was fairly spread across geographies with 30% coming from the USA, 36% from Europe, Middle East & Africa (EMEA) region and the balance 28% from the rest of the world (RoW) geography. The orders executable in the next 12 months stood at $240 million against $243 million at the end of the sequential previous quarter, up 20% year on year (YoY). The company has seen an uptick in the executable order book from around $140 million in Q1FY2011 - Q4FY2011 to around the $240 million levels in the last four quarters.  Valuation and view: With a strong order backlog of $240 million and strong client engagements, NTL's management remains confident of beating Nasscom's growth guidance for FY2013. However, given the macro uncertainties, the management has cautioned on volatility in the sectoral demand environment. We continue to remain positive on NTL given its predictable earnings profile in the current uncertain industry environment. We have reset our currency estimates to Rs54.5 and Rs54; consequently we increase our earnings per share (EPS) estimates by 7.2% and 5.6% for FY2013 and FY2014 respectively. We maintain our Buy rating on the stock with a revised price target of Rs340.    Bajaj Auto Cluster: Apple Green Recommendation: Hold Price target: Rs1,690 Current market price: Rs1,549 Top gear-low speed combination giving an uneasy drive Cutting FY2013 volume estimates  Bajaj Auto Ltd (BAL)'s management has maintained its volume target at 5 million units, that is a 15% year on year (YoY) volume growth target for FY2013. However it also expressed caution on account of the poor show of Q1FY2013 (where volumes declined 1.3%YoY). This has made the full year target challenging. The optimism is built around expectations of a sharp growth revival in H2FY2013 on account of new product launches, revival in exports and general improvement in sentiments.  We remain conservative as we expect increased competitive intensity in the domestic market, sustenance of the inflationary trend due to poor monsoon pick-up, and a volatile export market scenario. We are cutting our volume estimates for FY2013 to 4.65 million units reflecting a growth of 7% YoY. We expect the management to eventually cut its volume guidance in the due course.  Margins on path of structural improvement through FY2014 We expect the company to report better operating margins in the next three quarters on account of price hikes taken, better product mix and improved three-wheeler mix. As we eventually move towards FY2014, the export realisations would see a quantum jump with the dollar strengthening against the rupee from Rs50 to Rs55. Valuation We remain conservative and cut down volume growth expectations for FY2013 to 7% to 4.65 million units while we expect FY2014 volumes at 5.2 million units, ie +13.1% YoY. We take a positive view on the margins over the next few quarters and thereafter in FY2014. While we are cutting our FY2013 earnings per share (EPS) estimate by 2% to Rs112 per share; we maintain our FY2014 EPS estimates at Rs135 per share. Based on FY2014 valuations, our target price of Rs1,690 remains unchanged. We maintain our Hold recommendation on the stock.    Punj Lloyd Cluster: Apple Green Recommendation: Hold Price target: Rs63 Current market price: Rs54 Annual report review Key points Delivers strong revenue growth in FY2012 after two years of decline: After two consecutive years of reporting a decline Punj Lloyd (Punj) managed to deliver a strong 31% growth year on year (YoY) in its revenues to Rs10,313 crore in FY2012. The growth was largely led by robust order inflows and better execution in FY2012. In FY2011 its revenues had been affected because work in Libya, which accounted for a major chunk of its order book till FY2011, had come to a complete halt due to a political crisis. However, with the company bagging projects worth Rs15,370 crore from the other regions, the share of Libya came down (few Libyan projects removed from order book too) significantly to 16% of the order book in FY2012. The current order book is 2.6x its FY2012 revenues which provides strong revenue visibility for the future. Further, the Libyan orders are expected to resume work in H2FY2013 which would boost the revenues.  Witnesses turnaround at the operating level too: At the EBITDA level too, Punj was able to improve its margins from 4.9% in FY2011 to 6.5% in FY2012. The turnaround was possible due to (1) improved execution of orders; (2) the withdrawal of financial support to Simon Carves; and (3) cost control. Punj followed centralised procurement for many of its core items like steel, cement, consumables and equipment in FY2012. It also laid emphasis on procuring material from the low-cost countries. However, despite the sharp growth at the EBITDA level, Punj reported a loss at the earnings level due to high interest and depreciation charges and low other income, though the loss was lower at Rs151 crore against the loss of Rs166 crore in FY2011. But on a reported basis, it made a profit of Rs92 crore supported by a net gain of Rs83 crore on account of the deconsolidation of Simon Carves and a foreign exchange (forex) gain of Rs190 crore. Working capital days improve but problem at debt level persists: The consolidated debt for Punj stood at Rs5,603 crore at the end of FY2012, with the debt/equity ratio rising to 1.9x for FY2012 vs 1.5x each in FY2011 and FY2010. In the previous two years the company had been adversely affected by the political crisis in Libya and the slower execution of its legacy orders which had resulted in a surge in its working capital and debt level. However, in FY2012 as the execution of orders improved and Simon Carves was put under administration, the working capital days improved from 189 days in FY2011 to 145 days in FY2012. However, this did not reflect in the debt level. The total debt in FY2012 surged by more than Rs1,000 crore due to the debt taken to fund the capital expenditure (capex) during the fiscal. Further, the average cost of debt for the company went up by about 200 basis points because the additional funds were being raised at much higher rates.  Maintain estimates with Hold recommendation: Punj witnessed strong order inflow in FY2012 which improved the revenue visibility for the next two years. Further, it has started showing an improvement at the execution level over the last few quarters along with a gradual improvement in the operating profit margin (OPM). Even the situation in Libya is improving though it has not stabilised yet. The company has started mobilising resources in the country and we expect order execution to pick up soon. Thus, the worry for Punj now remains bringing its debts under control, as this would help in reducing its interest burden and help the operating profit to percolate through to the net level. The company plans to restructure its debts by replacing the domestic debt with foreign debt which would reduce the cost of debt. Hence, any success in lowering the cost of debt will add to the growth at the net profit level. We maintain our Hold rating on Punj and keep our estimates for the company unchanged. At the current market price, the stock is trading at 17.9x and 6.6x its FY2013E and FY2014E earnings.     Click here to read report: Investor's Eye Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.