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

 

 

Investor's Eye [July 26, 2012]  Sharekhan www.sharekhan.com

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.   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 - 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.