| Summary of Contents | | STOCK UPDATE Tata Tea
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,154
Current market price: Rs1,033
Price target revised to Rs1,154 Result highlights -
Tata Tea?s Q4FY2010 results are not exactly comparable on a year-on-year (y-o-y) basis due to the consolidation of the Russian beverage company, Grand, (Tata Tea acquired a 51% stake in Grand in Q2FY2010). -
Operating performance in line, higher tax leads to lower than expected net profit: The Q4FY2010 results (derived from FY2010 and M9FY2010 numbers disclosed by the company) are in line with our expectations till the profit before tax (PBT) levels, however a much higher than expected effective tax rate led the adjusted net profit to be below our estimates. -
The net sales grew by a strong 28.3% year on year (yoy) to Rs1,573.3 crore primarily led by price increases/improved revenue mix and around Rs100 crore (our estimate) from Grand. The operating profit margin shrunk by 256 basis points yoy to 11.2% due to higher raw material and advertisement costs. And this led the operating profit grew by only 4.5% despite a good top line growth. -
Lower interest and effective tax rate on a y-o-y basis led the adjusted net profit (before minority interest and share of profit from associates) to grow by 37.4% yoy to Rs77.4 crore. The same is however still below our estimate of Rs95.8 crore due to a higher than estimated tax rate. -
FY2010?moderate growth amidst high pressure on margins: For FY2010 the consolidated sales grew by 19.4% yoy largely driven by pricing increases, however a 350-basis-point increase in the raw material cost (despite control over other costs) led the operating profit margin contract by 95 basis points to 12.4%. Thus the operating profit grew by 10.9% yoy leading the adjusted net profit to grow by 10.6% yoy. -
The domestic operations witnessed a subdued 2% growth in volumes in FY2010. Eight? o clock coffee stood out in international operations posting a staggering 20% growth in volumes. -
Raw material cost likely to ease in FY2011: With tea output likely to increase in FY2011, raw tea prices are expected to ease in the coming times from the peaks in FY2010. We believe, this builds in a scope for expansion in the overall margins of the company in FY2011 and we factor in a 100-basis-point margin expansion in FY2011. -
Positive outlook, raise price target: With likely margin gains from potential easing of raw material prices in FY2011 we expect Tata Tea?s consolidated earnings to grow by 21%. Further, the company?s aggressive steps towards expansion in non-carbonated drinks space are likely to bring in growth levers for the coming years. Additionally, the focus on shifting the sales mix towards value added tea/products would ensure better profitability and profit growth. We thus maintain our Buy recommendation on the stock with a revised price target of Rs1,154 (14x FY2012E earnings per share [EPS]). Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,616
Current market price: Rs2,255
Price target revised to Rs2,616 Result highlights -
Q4FY2010 revenue growth robust led by power business: Bharat Heavy Electricals Ltd (BHEL)?s Q4FY2010 audited results were better than the provisional numbers. The net sales of the company grew by 25.3% to Rs13,559.1 crore led by a strong 29.6% increase in the revenues of the power division. The industry division?s revenues grew by 15.9% yoy to Rs3,149.1 crore during the quarter. -
Margins expand by 220 basis points: The operating profit margin (OPM) expanded by 220 basis points to 18.4% mainly on account of a lower material cost as a percentage of the net sales. The other expenses increased sharply by 89.7% to Rs1,301.19 crore mainly on account of the provisions related to a pension scheme. -
Net profit rose by 41.7%: The interest cost increased to Rs17.8 crore for the quarter (but remained negligible) while the depreciation charge rose by 63.3% to Rs164.7 crore. Consequently, the net profit of the company increased by 41.7% on a year-on-year (y-o-y) basis to Rs1,909.6 crore. -
FY2010 results also robust: For FY2010, the turnover of the company grew by 21.7% to Rs34,198.5 crore led by a 25.8% growth in the power segment. The OPM also improved to 16.9% from 14.5% in FY2009 backed by a lower raw material cost as a percentage of sales. This led the net profit to grow by 37.4% to Rs4,310.6 crore. -
Capacity expanded to 15,000MW: The company is already capable of delivering 15,000MW of power equipment per annum and expects to augment this capacity to 20,000MW per annum by March 2012. This new capacity will help expedite the execution of the company?s power equipment order book. -
Order book at 4.2x FY2010 revenue: BHEL has reported a total order inflow of Rs59,031 crore (down 1.1% yoy), finishing the year with a total order backlog of Rs143,800 crore. BHEL also received the highest ever number of orders amounting to Rs41,976 crore from the private sector in FY2010 for the supply of power equipment (16,489MW). In the industry segment, BHEL secured orders worth Rs14,366 crore, up 40% yoy. -
Outlook and valuation: We have fine-tuned our earnings estimates for both FY2011 and FY2012 by 4-6% in accordance with the management?s guidance, the FY2010 performance and the industry outlook. Our revised earnings per share (EPS) estimates for BHEL now stand at Rs113 and Rs129.4 for FY2011 and FY2012 respectively. Now we expect the company?s both revenue and net profit to grow at approximately 21% compounded annual growth rate (CAGR) over FY2010-12. -
We are positive on BHEL in view of its strong revenue visibility (on account of its robust order book and the bids in the pipeline), its healthy balance sheet and its new initiatives like the joint venture with Toshibha Japan for the transmission and distribution (T&D) business. Further, the company has already increased its capacity to 15GW and is looking to increase the same further to 20GW by the end of this fiscal. This will enhance its execution capabilities. At the current market price, the stock trades at 17.5x FY2012E respectively. Our fair value for the stock works out to Rs2,616 (22x the average of the FY2011 and FY2012 estimates). We also maintain our Buy rating on the stock. The near-term triggers for the stock would be the company?s share in the NTPC bulk tendering, its order inflows, the sustenance of its margins due to fluctuating raw material prices, and the progress of its new initiatives like the T&D business. Madras Cement
Cluster: Cannonball
Recommendation: Reduce
Price target: Rs90
Current market price: Rs101
Price target revised to Rs90 Result highlights -
In spite of healthy volume growth earnings below expectation: For Q4FY2010 Madras Cement has reported a net profit of Rs29.4 crore (down 59.9% year on year [yoy]), which is below our as well as the Street?s expectation. The performance was dented by lower than expected cement realisation and a loss in the wind power division at the profit before interest and tax (PBIT) level (Rs10.9 crore). On a sequential basis, the profit of the company grew by 83.4%. On the revenue front, in spite of posting a strong volume growth of 30.4% yoy the revenue of the company grew marginally by 1.7% to Rs577.5 crore on account of a 22% drop in the realisation to Rs2,775 per tonne. The volume growth was healthy on account of the ramp-up of its new capacity. -
Margin contracted due to a fall in the realisation and poor performance in wind power: The operating profit margin (OPM) contracted by 835 basis points yoy to 21.4%. Though there was a marked reduction in the power & fuel cost (13.2% on per tonne basis) the sharp decline in the realisation and the poor performance of the wind power division caused the overall OPM to contract. Consequently, the operating profit declined by 26.8% yoy to Rs123.8 crore. -
Entry into the eastern region with commissioning of Kolaghut plant: The interest cost surged by 28.2% to Rs38.4 crore whereas the depreciation charge jumped by 34.9% to Rs52.8 crore. The increase in the interest outgo and the depreciation charge was on account of the capacity additions carried out by the company in both cement and windmill divisions. During the quarter the company commissioned a grinding unit at Kolaghut, West Bengal with a capacity of 0.95 million tonne per annum (MTPA). -
Reportedly setting up another 2MTPA capacity at Ariyalur: Media reports indicate that the company is planning to set up a second unit at Ariyalur (2MTPA capacity) by June 2011. This will take the overall capacity of the company to 12.5MTPA. The capital expenditure (capex) for setting up a 2MTPA capacity along with a captive power plant (CPP) of 85MW capacity is being estimated at Rs630 crore. However, we have not factored this capacity addition in our volume growth estimate, as this is just a media report. -
For FY2010 the company reported a revenue growth of 14% whereas its net profit declined by 2.7%. The board has approved the final dividend of Rs0.5 per share. With this and the Rs1.5 per share of the interim dividend paid already the total dividend for FY2010 stood at Rs2 per share. -
Maintain Reduce recommendation with revised price target of Rs90: In view of the severe pressure on the realisation in the southern region and the fact that Madras Cement is a regional player, we are downgrading our earnings estimates for the company to factor in the higher than expected pressure on the realisation. The revised earnings per share (EPS) estimates work out to Rs11.4 and Rs12.9 for FY2011 and FY2012 respectively. At the current market price the stock trades at a price/earnings ratio (PER) of 7.8x and an enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 4.8x its FY2012 earnings estimates. Given the muted growth outlook, we maintain our Reduce recommendation with a revised price target of Rs90 (4.5x EV/EBITDA FY2012 estimates).
VIEWPOINT Provogue India Export led top line outperformance casts dilutive impact on margins
The management has indicated a strong outlook for its retail business (pegging the same-store sales growth at 8%) and an aggressive store expansion. The company is looking forward to open 70 new stores (and have already tied up for 49 stores) in FY2011. In FY2010, the company opened just 12 own stores (with four being opened in Q4FY2010). Along with a revival in consumer spend and the core business resuming expansion, we expect the profit from the same to grow at a steady compounded annual growth rate of 18% over FY010-12. Additionally, the successful initiation of the Aurangabad Mall could prove to be a re-rating factor for the stock. | 
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