Sensex

Friday, August 03, 2012

Fw: Investor's Eye: Update - Glenmark Pharmaceuticals, Corporation Bank, Orient Paper and Industries

 
Sharekhan Investor's Eye
 
Investor's Eye
[August 02, 2012] 
Summary of Contents
STOCK UPDATE
Glenmark Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs468
Current market price: Rs388
Q1FY2013 results: First-cut analysis
Result highlights
  • Weaker than expected revenue growth on lower licencing income and domestic sales: In Q1FY2013 the net sales of Glenmark Pharmaceuticals (Glenmark) grew by 19.8% year on year (YoY) to Rs1,040.4 crore. The same is 9% below our expectation primarily due to a weaker than expected growth in both the specialty business and the licencing income. In Q1FY2013 the revenue was mainly driven by the generic business, which grew by 57.67% YoY to Rs530 crore (we had expected a 51.6% growth YoY). However, the specialty business (excluding the licencing income) increased by 22.8% YoY to Rs504.645 crore (against our estimate of a 52.7% growth YoY). The specialty business includes the Indian formulation business, which grew by 24.1% YoY during the quarter. Though the growth rate is better than the industry growth rate of 15% but it falls short of our expectation.
  • Core OPM declines 380bps YoY, but better than expected: The core operating profit margin (OPM; excluding the out-licencing income) declined by 380 basis points YoY to 20.7% due to a high base effect. However, the same is better than our expectation of 19.1%. 
  • Forex loss and lower licencing income weaken profit line; adjusted core PAT jumps 44%: The company provided Rs55 crore of foreign exchange (forex) loss during the quarter as compared with a forex gain of Rs9 crore in Q1FY2012. Moreover, the company recorded nearly Rs5 crore of licencing income during the quarter as compared with Rs111.2 crore in Q1FY2012. This caused the net profit to decline by 62.8% YoY to Rs78.2 crore. However, the core net profit (excluding the out-licencing income and the forex loss/gain) jumped by 44.3% YoY to Rs129.6 crore, which is virtually in line with our expectation of Rs132 crore.
We have a Buy rating on the stock with a price target of Rs468. 

We will revisit the estimates and come out with a detailed report on the company after the company's teleconference call scheduled for tomorrow (ie August 3, 2012) at 8.30pm.
 
Corporation Bank
Cluster: Apple Green
Recommendation: Hold
Price target: Rs480
Current market price: Rs403
Price target revised to Rs480
Result highlights
  • Corporation Bank's Q1FY2013 net interest income (NII) was in line with our estimate (it grew by 14.3% year on year [YoY]) and net profit was higher than our estimate (up 5.7% YoY to Rs371 crore) due to lower than expected provisions during the quarter.
  • The net interest margin (NIM) declined by 12 basis points sequentially to 2.29% due to a dip in the yields and a rise in the cost of funds in Q1FY2013. The current account and savings account (CASA) ratio declined to 20.7% from 22.1% in Q4FY2012. 
  • The advances reported a growth of 21.1% YoY (a decline of 4.9% sequentially) led by the small and medium enterprises (SME) sector (advances to the SME sector rose 2.3% sequentially and 23% YoY) and the corporate segment. The deposits grew by 13.9% YoY. 
  • The non-interest income grew by 13.1% YoY (fell by 22.6% sequentially). The commission income grew by 11% YoY while the treasury gains came in at Rs43 crore. The cost/income ratio remained stable at 41%, in line with that in Q1FY2012.
  • The asset quality deteriorated as slippages increased to Rs722 crore, mainly from the large corporate accounts. During the quarter the bank restructured Rs1,075 crore of loans (mainly from the Uttar Pradesh State Electricity Board account), taking the total restructured book to 8.7% of the total advances.
  • The provision expenses rose by 29.5% YoY, though the rise was aided by a reversal of an investment provision of Rs64 crore. The provision coverage ratio (PCR) also declined to 61% from 65.3% in Q4FY2012.
Outlook and valuation
Corporation Bank's operating performance was affected by a dip in the margins and increased slippages. We, therefore, downgrade our earnings estimates for FY2012-14 by about 8%. Currently, the stock is trading at 0.7x FY2014 adjusted book value. We revise the price target on the bank to Rs480 (0.8x FY2014 book value) and downgrade our recommendation on it to Hold.  
Orient Paper and Industries
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs70
Current market price: Rs65
Results dented by paper business and cost inflation in cement business
Result highlights
  • Earnings dented by losses in paper business and one-off maintenance expense in cement business: Orient Paper & Industries (Orient Paper) posted a 17.7% decline in its net profit to Rs48.9 crore in Q1FY2013. The earnings growth fell short of our and the Street's expectations due to the continued losses in the paper business (a loss of Rs15.9 crore at the EBIT level) and a lower than expected margin in the cement business (partially due to a one-off plant maintenance cost).
  • Strong volume driven growth in cement business: The overall revenue of the company grew by 25.4% year on year (YoY) to Rs656.9 crore, which is in line with our estimate. The top line growth was driven by the cement division, which posted a revenue growth of 23.1% YoY. The revenue growth of the cement division was driven by an increase in the volume (up 13.6% YoY) and a higher average realisation (up 8.3% YoY). The volume growth of the company is ahead of the industry's growth as well as the growth of its peers. The paper and electrical divisions have delivered a revenue growth of 63.2% and 18.3% respectively for the quarter. 
  • Margin dented by input cost inflation, and one-off expense and loss in the paper business: In spite of an 8.3% increase in the cement realisation, the overall operating profit margin (OPM) of the company contracted by 446 basis points YoY to 13.3%. The profitability contracted on account of a decrease in the EBIT margin of the cement and electrical divisions (down by over 11 and 4 percentage points YoY respectively). The sharp contraction in the cement division's margin was on account of the purchase of imported coal at a higher price due to a shortage of coal in the domestic market. Further, the paper division of the company has continued to post losses at the EBIT level-it posted a loss of Rs15.9 crore in Q1FY2013. Consequently, the operating profit decreased by 6% YoY to Rs87.7 crore (as compared with the 25.4% growth witnessed in the revenues). 
  • Received approval from Orissa High Court for demerger of cement division: The company has incorporated a new subsidiary named Orient Cement. Orient Paper's cement business will be transferred to the new company. Orient Paper received the approval from the High Court of Orissa for the proposed demerger of the cement division on July 27, 2012. The demerger of the cement division will come into effect from April 2012. We believe the development is positive for the company as it will unlock value for the shareholder through a direct exposure to a pure cement player. However, as per our interaction with the management of the company, it will take around four months to get Orient Cement listed on bourses. 
  • Huge outstanding water tax, company applied for waiver as per agreement: As per the auditor's report, no provision against the water tax of Rs232.7 crore has been made by the company since its application for a waiver thereof is under consideration by the state government Madhya Pradesh.
  • Downgrading earnings estimates for FY2013 and FY2014: We are downgrading our earnings estimates for FY2013 and FY2014 mainly to factor in the higher than expected power & fuel cost. The company has started procuring around 15% of coal through imports due to a coal shortage in the domestic market. Consequently, our revised earnings per share (EPS) estimates now stand at Rs10.8 and Rs12.4 for FY2013 and FY2014 respectively.
  • Maintain Buy with price target of Rs70: Due to a change in the market mix in favour of the western market, the company's volume growth shall improve. However, a likely increase in the supply could pressurise the cement realisation going ahead. In the electrical division, the introduction of new products will drive the revenue growth. On the other hand, the performance of the paper division will remain a key concern for the company. However, we prefer Orient Paper due to its strong balance sheet, attractive valuation and the demerger of its cement division which will act as re-rating trigger for the stock. Hence, we maintain our Buy recommendation on the stock with a price target of Rs70 (rolled forward to FY2014). At the current market price, the stock trades at price/earnings (PE) of 5.2x and enterprise value (EV)/EBIDTA of 3.8x discounting its FY2014 earnings estimate.
 
 

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.
 
 

Tuesday, July 31, 2012

Fw: Investor's Eye: Pulse - RBI Q1FY2013, Monetary policy review; Update - Ipca Laboratories, Zydus Wellness, GAIL India, Allahabad Bank; Viewpoint - Cipla, Titan Industries


----- Forwarded Message -----
From: Sharekhan Fundamental Research <newsletter@mailer.sharekhan.com>
To: n.siva@yahoo.com
Sent: Wednesday, August 1, 2012 1:38 AM
Subject: Investor's Eye: Pulse - RBI Q1FY2013, Monetary policy review; Update - Ipca Laboratories, Zydus Wellness, GAIL India, Allahabad Bank; Viewpoint - Cipla, Titan Industries


Sharekhan Investor's Eye
 
Investor's Eye
[July 31, 2012] 
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
  • 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.
 
 

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.
 
   


Thursday, July 26, 2012

Fw: Investor's Eye: Update - ITC, Bharat Heavy Electricals, Mahindra Lifespace Developers, Raymond; Special - Monthly economy review

 


Sharekhan Investor's Eye
 
Investor's Eye
[July 26, 2012] 
Summary of Contents
 STOCK UPDATE
ITC
Cluster: Apple Green
Recommendation: Hold
Price target: Rs271
Current market price: Rs249
Price target revised to Rs271
Result highlights
  • Results in line with expectation: ITC's Q1FY2013 results are broadly in line with our expectation with the bottom line growing by 20.2% year on year (YoY) to Rs1,602.1 crore. As anticipated, the sales volume of the core cigarette business stood flat during the quarter. The highlight of the quarter was once again the strong performance of the non-cigarette fast moving consumer goods (FMCG) business whose revenues grew by 23.0% YoY and whose losses declined by 52.0% YoY during the quarter. The hotel business disappointed with flat revenues and a drop in the business profitability during the quarter. 
  • Performance snapshot: The income from operation (including the other operational income) grew by 14.7% YoY to Rs6,713.1 crore in Q1FY2013, marginally lower than our expectation of Rs6,848.2 crore. The steady top line growth could be attributed to 15% year-on-year (Y-o-Y) revenue growth in the core cigarette business and above 20% Y-o-Y growth in the non-cigarette FMCG business. The higher sales realisation (especially in the core cigarette business) and the improved revenue mix aided the gross profit margin (GPM) to improve by 109 basis points YoY to 61.6%. The operating profit margin (OPM) improved by a strong 183 basis points YoY to 35.3%. Hence, the operating profit grew by 21.0% YoY to Rs2,368.3 crore and the reported net profit grew by 20.2% YoY to Rs1,602.1 crore. 
  • Segmental performance: The performance of the core cigarette business was in line with expectations with a 15% Y-o-Y growth in the gross revenues and a 142-basis-point Y-o-Y improvement in the PBIT margins to 31.3% in Q1FY2013. The cigarette sales volume affected by a significant price increase in the cigarette portfolio stood almost flat during the quarter. Q1FY2013 was the fourth consecutive quarter of above 20% revenue growth YoY in the non-cigarette FMCG business. The agri business' revenues stood flat YoY but the PBIT margin improved by 93 basis points YoY to 10.1% during the quarter. The first quarter of a fiscal is normally a lean period for the hotel industry in India. This along with the macro uncertainties in the global markets led to flat revenues and a sharp decline of above 1,000 basis points in the PBIT margin of the hotel business during the quarter.
  • Outlook and view: We broadly maintain our earnings estimates for FY2013 and FY2014. We expect the non-cigarette FMCG business to maintain the strong growth momentum in the coming quarters. ITC's cigarette business sales volumes are likely to remain flat in FY2013, but its revenues are expected to grow by ~18% YoY largely on account of the price increases undertaken in the cigarette portfolio. The hotel business is expected to improve with an improvement in the global macro environment. Overall, we expect ITC's top line to grow at a compounded annual growth rate (CAGR) of 17.2% over FY2012-14. With an OPM of about 36%, we expect the bottom line to grow at a CAGR of 21.0% over FY2012-14. 
    At the current market price the stock is trading at 26.6x its FY2013E earnings per share (EPS) of Rs9.4 and 22.1x its FY2014E EPS of Rs11.3. In the last twelve months ITC has traded at an average one year forward multiple of 24.0x on the back of its strong business performance. We have revised our price target upwards to Rs271 (based on 24x its FY2014E EPS of Rs11.3). However we maintain our Hold recommendation on the stock due to limited upside in the stock price from the current level. 
 
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Hold
Price target: Rs250
Current market price: Rs212
Robust performance but fall in order book a concern
Result highlights
  • Results above expectation, future growth uncertain: The Q1FY2013 results of Bharat Heavy Electricals Ltd (BHEL) were above expectation due to good order execution and a foreign exchange (forex) gain of Rs140 crore. The order inflow continues to be subdued aggravating the concerns about the company's growth. The management maintained its order inflow guidance of Rs60,000 crore in FY2013 (less than 10% of this target was achieved in Q1FY2013) which looks an uphill task in the current environment of slow industrial capital expenditure (capex) and tough competition. 
  • Robust 18% growth in revenue: In Q1FY2013, the turnover of BHEL grew by 18%, which was higher than our expectation of a 10% year-on-year (Y-o-Y) growth. The industry division's revenues grew by a robust 19% year on year (YoY). The power division also reported a pick-up in execution with a 17% yearly growth in its revenues. 
  • Margin stable at 13.1%: The company reported an operating profit margin (OPM) of 13.1%, which was lower than our expectation of 13.5% but higher than 13% posted in Q1FY2012. An increase in the raw material cost was largely in line with the increase in the revenues. The other expenses jumped by 32% YoY, led by higher provisioning as well as power and freight charges. In terms of segments, the power segment reported a rise in its PBIT margin to 17.8% from 16.5% in Q1FY2012 whereas the industry segment reported slight margin pressure at 21%. 
  • PAT increased by 13% YoY: The other income rose by a subdued 10% YoY as a result of a jump in the foreign exchange (forex) gain of approximately Rs140 crore while the interest on cash and deposits fell on a lower base. The depreciation charge jumped by 34% YoY on the capital expenditure (capex) undertaken in the later part of FY2012. The adjusted net profit rose to Rs920.9 crore, which was above our estimate of Rs854 crore.
  • Disappointing order backlog position for the quarter: The company's order book stood at Rs132,900 crore (down 17% YoY and 2% on a sequential basis) at the end of Q1FY2013 as against Rs159,600 crore at the end of Q1FY2012. The power sector accounted for 80% of the orders, the industry 13% and the rest was contributed by exports. The reported order inflow for the quarter was Rs5,590 crore (up 126% YoY on an extremely low base and 18% down sequentially). The order booking from the power sector stood at Rs3,797 crore (2,970MW); the industrial segment's order intake plummeted by 62% YoY to Rs833 crore. The book/bill ratio declined further to 2.6x (the lowest in 24 quarters) from the past levels of 4x+, which has aggravated the concerns about its growth. It indicated that the order inflow could pick up in the subsequent quarters on the back of a pick-up in the power sector's orders. The company is also increasingly focusing on non-power sectors like railways, transport, power transmission and distribution as well as exports to diversify away from the power sector. 
  • Estimates maintained: We had sharply downgraded our earnings estimate in FY2012 when the company had reported a 63% fall in the order inflow. Hence, after the decent Q1 results, we are for now maintaining our estimates. Overall, we are estimating a negative compounded annual growth rate (CAGR) of 1% in the top line and that of 2% in the adjusted earnings over FY2012-13. The management maintained its order inflow guidance of Rs60,000 crore in FY2013 (less than 10% of this target was achieved in Q1FY2013) which looks an uphill task in the current environment of slow industrial capex and tough competition. The company is hoping to achieve this target by winning some major orders in the power and transmission & distribution sectors in the coming quarters. 
  • Future growth visibility remains a concern, maintain Hold: Overall, the company's performance was outstanding but it continued to disappoint with a sluggish order inflow. The long awaited import duty on power equipment has been recently approved by the government. However, the move is perceived to be too late to be effective as most of the ordering for the 12th Five-Year Plan has already taken place and the move is likely to benefit once the ordering for the 13th Five-Year Plan starts. BHEL's management also stressed that the import duty might help only to the extent of a 4% differential duty to the domestic players after accounting for the excise duty and the high import content in the super-critical power projects (which account for 25-30% of the equipment cost). Further, the domestic boiler and turbine manufacturing capacity is likely to face an overcapacity situation by 2015, which is likely to intensify the pricing competition. The supercritical orders expected from NTPC could boost BHEL's order book in the coming quarters. But these orders are also largely priced in now. Due to a lack of any near-term trigger we see limited upside from the current level. Hence, we maintain our Hold rating on the stock. At the current market price, the stock trades at 7.6x FY2014E earnings. We maintain our price target of Rs250 (9x FY2014E). 
 
Mahindra Lifespace Developers
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs400
Current market price: Rs324
Property sale boosted earnings
Result highlights
  • One-time item boosts Q1 results: For Mahindra Lifespace Developers (MLD) the divestment of the Ghatkopar property resulted in a strong revenue growth of 27.8% in Q1FY2013 and a 71.2% surge in the net profit to Rs29.3 crore. The management has not disclosed the exact amount from the sale of the Ghatkopar property. But it has indicated that after adjusting for the same the revenues would have declined by close to 20% YoY and the operating profit margin (OPM) would have been maintained sequentially while the profit after tax (PAT) would have been flat. The same would have been in line with our expectations. 
  • Sales booking continues to be muted; added two new land parcels: The sales booking continued to be muted in Q1FY2013 with MLD recording sales of Rs52 crore (0.16 million square feet [mn sq ft]) vs sales of Rs53 crore (0.13mn sq ft) in Q4FY2012 and Rs172 crore (0.34mn sq ft) in Q1FY2012. The sales primarily took place in its Nagpur project Bloomdale where it also launched the second phase during the quarter. MLD is awaiting approvals for its projects at Pune, Hyderabad and the subsequent phases of Iris Court at Chennai. During the quarter, the company acquired two new land parcels in Chennai and Pune each with the total developable area being 0.8mn sq ft. In Chennai, it will be coming out with its first affordable housing project. 
  • Muted addition of clients in MWC Jaipur: At Mahindra World City (MWC), the integrated business city promoted by the company, the total number of operational facilities grew by one (as compared with the previous quarter) to 39 vs 60 in Chennai. On the other hand, in Jaipur three clients were added to the operational list taking the count to 11 with another eight having initiated developments. At MWC Chennai and MWC Jaipur MLD also added two clients and one client respectively in the domestic tariff area. Further, during the quarter exports also commenced from the Handicrafts Zone in MWC Jaipur.
  • Approvals hold the key: MLD has already sold more than 75% of its ongoing projects and execution on a majority of them is in advanced stages. Thus, the revenue visibility now completely depends on the new launches, which, in turn, depend upon the pending approvals. For the next two to three years MLD has a strong pipeline of 6.48mn sq ft awaiting approvals. Hence, timely approvals hold the key. Currently, it is awaiting final approvals for its projects at Pune and Hyderabad both of which got environmental clearance in Q1FY2013 and the subsequent phases of Iris Court at Chennai. All three are expected to be launched by the end of Q2FY2013. Any further delay in it might pose a problem for the company. 
  • Maintain Buy with price target of Rs400: We continue to like MLD due to the quality of its management and its strong balance sheet that can be leveraged for acquiring new land parcels in the distressed markets and for better execution of the existing land bank. But we continue to attribute a 10% discount to our net asset value (NAV) to factor in the risk of the projects getting further delayed on account of a delay in obtaining clearances. Hence, we maintain our Buy recommendation on the stock with a price target of Rs400. We would revisit our estimates after H1FY2013 once we get more clarity on the pending approvals for a few of its projects. At the current market price, the stock is trading at 0.8x its NAV, 10.6x FY2013 earnings estimate and 1.1x FY2013E price/book value (P/BV). 
 
Raymond
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs463
Current market price: Rs335
Price target revised to Rs463
Result highlights
  • Q1FY2013's performance dismal on poor show by core textiles and branded apparels: Raymond posted dismal results for Q1FY2013, mainly led by a subdued performance in its core textile and branded apparel business. The revenue growth was muted at 10% year on year (YoY); it was largely in line with our estimates. Multiple factors like- (a) a sharp change in the product mix (fall of polyester wool's contribution by 400 basis points), (b) lack of wedding dates and (c) a general slowdown in the macroeconomic environment took a toll of the profitability of the textile business (reported an earnings before interest and tax [EBIT] loss of Rs8.6 crore for Q1FY2013 vs a profit of Rs24.1 crore in Q1FY2012), and also of the branded apparels business. Raymond reported a loss at the profit before tax (PBT) level and at the net level. The consolidated net loss for the quarter was Rs35 crore vis a vis a profit of Rs10.7 crore in Q1FY2012.
  • Branded apparels & Retail continue to face challenges: On the branded apparels front, a visibly high slowdown in the consumer discretionary space impacted sentiments as was reflected in the negative same store sales growth (same store sales growth registered a 3% decline for the quarter). Consequently there was a contraction in the overall revenues of the branded apparels business. Low sales with high fixed overheads adversely impacted the margin (the same contracted by 710 basis points from 13% in Q1FY2012 to 5.8% in Q1FY2013). The management in the conference call reiterated that the macro environment still appears gloomy till the festive season that would start later this year by Q3FY2013. 
  • Our estimates stand revised downwards: Building in the pathetic performance of Q1FY2013, and further expecting Q2 and early Q3 to remain subdued, and expecting a recovery from late Q3FY2012 on account of festive season demand coupled with a favourable base of FY2012, we revise our FY2013 earnings estimate downwards by 15% from Rs30.4 to Rs25.8, while for FY2014 the estimates get tweaked downwards by 5.8% on a revised earnings per share (EPS) of Rs34.8 (from Rs36.9 earlier). 
  • We find value at current price; maintain Buy: Despite a weak Q1FY2013 performance (which lead us to reduce our FY2013 estimates), we continue with our bullish stance on Raymond as we expect the revival in consumer discretionary spent to start by late Q3FY2013 and continue till FY2014. Thus we expect Raymond to post a strong performance in FY2014. Besides performance, we believe that Raymond's strong brand equity strength, unmatched distribution network, strong focus on rejuvenating and innovating brands and increasing consumer connect are yet not captured in the valuations (Raymond currently trades at <10x its FY2014 price earning ratio [PER]). Further, any development with regard to the Thane land in the form of either joint development or disposal would lead to value unlocking and provide significant cash to the company. We continue to maintain our Buy rating and our revised sum of the parts (SOTP) based price target for the stock of Rs463 (valuing the core business at 10.5x FY2014E earnings +50% value for the Thane land bank parcel). 

SHAREKHAN SPECIAL
Monthly economy review  
Economy: industrial growth remains subdued; inflation remains above RBI's comfort zone
  • In May 2012 the Index of Industrial Production (IIP) increased by 2.4% after remaining in the negative territory in the previous two months. The higher than expected growth for the month was led by a 2.5% growth in the manufacturing sector and a 5.9% growth in the electricity sector. The April 2012 IIP numbers have been revised downwards to -0.9% from 0.1%. For year-till-date (YTD) FY2013, the IIP growth stood at 0.8% vs 8.2% in the previous year. 
  • The Wholesale Price Index (WPI)-based inflation for June 2012 came in at 7.25% as against 7.55% in May 2012. The same was slightly below the market's expectation. However, the inflation rate for April 2012 has been revised upwards sharply to 7.5% from the provisional figure of 7.23% led by an upward revision in the fuel segment.
  • The trade deficit for June 2012 came in at $10.3 billion, lower than the trade deficit recorded in May 2012. The trade deficit declined by 27% year on year (YoY). The growth in the exports remained weak showing a decline of 13.5% YoY (down 4.2% in May 2012). The imports saw a decline of 5.5% YoY (as against a decline of 7.4% in May 2012).
Banking: Government policy action remains key to RBI action
  • Though in the forthcoming policy meet on July 31, 2012 the market's expectation of a rate cut by the Reserve Bank of India (RBI) is not significant, but if the government takes any major action on the diesel pricing front the RBI may surprise with a 25-basis-point reduction in the cash reserve ratio (CRR)/repo rates. 
  • The credit offtake registered a growth of 17.7% YoY (as on July 13, 2012), which was in line with the growth recorded in the previous month. The credit growth is broadly in line with the RBI's guidance of 17%.
  • The deposits registered a growth of 14.7% YoY (as on July 13, 2012), which is higher than the 14.3% growth seen during the previous month (on June 15, 2012). The growth in the deposits has been subdued due to the higher yields offered by the other debt instruments.
  • The credit/deposit (CD) ratio was at 75.9% (as on July 13, 2012), marginally lower than 76.4% seen as on June 15, 2012. Meanwhile, the incremental CD ratio increased to 88.9% for the period and was lower than the ratio seen during the previous month, reflecting a lower credit offtake during the period.
  • The yields on the government securities (G-Secs; of ten-year maturity) stood at 8.07% as on July 23, 2012, in line with the previous month's figure. The G-Sec yields across the long-term maturities have remained stable on a month-on-month (M-o-M) basis but have declined in the short term.
Equity market: FIIs remain buyers 
During the MTD period in July 2012 (July 1-23, 2012), the FIIs were the net buyers of equities and the domestic mutual funds were the net sellers of equities. For the MTD period in July 2012 (July 1-23, 2012), the FIIs bought equities worth Rs9,377 crore while the mutual funds sold equities worth Rs2,225 crore.
 

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