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STOCK UPDATE Reliance Industries
Cluster: Evergreen
Recommendation: Hold
Price target: Rs1,215
Current market price: Rs1,054
Q1FY2011 results: First-cut analysis
Result highlights -
Reliance Industries Ltd (RIL)?s Q1FY2011 results were in line with our expectations both at top-line and operating levels. However, the net income came in at Rs4,851 crore (a 32.3% year-on-year growth), marginally above our estimate of Rs4,696 crore, due to a higher-than-anticipated other income and a lower-than-expected effective income tax rate during the quarter. The company reported a gross refining margin (GRM) of USD7.3 per barrel in Q1FY2011 versus USD6.8 per barrel in Q1FY2010 and USD7.5 per barrel in Q4FY2010. The quarterly GRM at USD7.3 per barrel was marginally lower than our expectation of USD7.7 per barrel. -
The Q1FY2011 net sales were up by a phenomenal 87 % year on year (yoy) to Rs58,228 crore. The increase in volumes accounted for 48.4% growth in revenue whereas higher prices made 39.7% of the revenue growth. The revenue from petrochemical business was up 19% yoy; that for refining business surged up by 107% and; that for oil & gas business was up a strong 150% yoy. -
The operating profit margin (OPM) shrunk by 443 basis points yoy to 16% (in line with our expectation of 15.9%) mainly led by decline in the profitability of the petrochemical segment. A slight fall in the margins of the refining segment also hit the OPM. The operating profit was up 46.3% yoy to Rs9,342 crore. In terms of segments: -
The margins of the petrochemical division declined by 325 basis points yoy in the quarter to 14.8% on account of incremental PP production, which witnessed significant margin reduction over propylene. The margins of the division on sequential basis were however up by 38 basis points. -
The margins of the refining division contracted by 129 basis points yoy to 4% in the quarter due to a higher depreciation on account of special economic zone (SEZ) refinery and a base effect of higher revenue arising from volume growth. The margins of the division on sequential basis were however flat. -
The exploration and production (E&P) division?s margin contracted by a sharp 1,290 basis points yoy to 41.2% in the quarter due to higher depletion rate for KG D-6 block. The same on sequential basis was however up by 176 basis points. -
Led by growth in operating profit and lower effective income tax rate (due to lower provisioning for deferred tax by Rs98 crore), the company?s net income grew by 32.3% yoy to Rs4,851 crore. This was marginally higher than our estimate of Rs4,696 crore. The net income was however restrained by higher depreciation (a 86% y-o-y increase) and interest expenses (a 17.6% y-o-y rise) during the quarter. -
We positively view RIL?s recent acquisition of two shale gas assets (from Atlas Energy and Pioneer Natural Resources with investment of over USD3 billion), its foray into telecommunication sector (with investment of around USD5 billion) and its proposed entry into the power sector (investment details not specific), as it would help the company to efficiently utilise the cash flow of around USD10-12 billion, which it is expected to generate over the next two-three years? period. -
Currently, the stock is trading at 13xFY2012 earnings estimate and an enterprise value/earnings before interest, depreciation, tax and amortisation of 7.2x. We maintain our Hold recommendation on the stock and will follow this up with a detailed note shortly. Hindustan Unilever
Cluster: Apple Green
Recommendation: Reduce
Price target: Rs243
Current market price: Rs260
Q1FY2011 results: First-cut analysis
Result highlights -
Hindustan Unilever Ltd (HUL)?s Q1FY2011 results are below our expectations on account of a sharp decline in the operating profit margin (OPM), which was affected by higher year-on-year (y-o-y) advertisement cost and other expenses coupled with a price reduction undertaken in the key categories to improve the sales volume and maintain the market share. As expected, the volume growth picked up by a good 11% year on year (yoy) in the domestic consumer business. -
Despite the double-digit volume growth, the net sales grew by just 7.1% yoy to Rs4,793.9 crore in Q1FY2011 due to aggressive pricing reductions implemented in the key categories (especially in the soap and detergent categories) to improve the sales volumes and maintain the market share in a competitive scenario. The net sales were below our expectation of Rs4,475.7 crore during the quarter. -
As anticipated, the soap and detergent segment delivered a muted performance with the revenues of the segment growing by just 2.4% yoy to Rs2,264.5 crore. The muted performance was on account of a lower sales realisation due to the price reductions in the soap and detergent category. The company?s pricing action helped it to recover the sales volume with the detergent volume growing in double digits. On the other hand, the personal care segment grew by 11.4% yoy to Rs1,365.5 crore, entirely a volume driven growth. Overall, the home and personal care (HPC) business? revenues grew by 5.6% yoy to Rs3,630 crore (a volume-led growth). -
The food business (including beverages, processed foods and ice creams) grew by 12.0% yoy during the quarter. The processed food segment grew by 22.7% yoy to Rs211.1 crore with most of the brands achieving a robust volume growth. The ice cream segment registered a strong growth of 18.0% yoy during the quarter. However, the beverages (contributing around 60% to the food business) grew by 7.7% yoy to Rs537.8 crore. -
Despite a lower raw material cost as a percentage of sales, the OPM declined by 289 basis points yoy to 12.5% on account of higher advertisement cost and other expenses on a y-o-y basis. HUL?s advertisement cost as percentage to sales increased by 313 basis points to 15.7% on account of large spends for building brands, sustaining the market share and creating new categories. Thus, the operating profit declined by 13.0% yoy to Rs598.6 crore, which was lower than our expectation of Rs665.4 crore for the quarter. -
The adjusted net profit stood at Rs517.2 crore, which was lower than our expectation of Rs553.3 crore of net profit for the quarter. -
Though the company?s sales volume growth is expected to remain robust, the higher advertisement spend to maintain market share and the muted top line growth (on account of the price reductions in the key categories) would keep its profitability under pressure in the coming quarters (especially when the prices of its key raw materials are showing an upward trend). We shall review our estimates after the conference call with the management of the company. At the current market price the stock trades at 25.0x its FY2011E earnings per share (EPS) of Rs10.4 and 21.5x its FY2012E EPS of Rs12.1. We maintain our Reduce rating on the stock.
Larsen & Toubro
Cluster: Evergreen
Recommendation: Hold
Price target: Rs1,927
Current market price: Rs1,863
Price target revised to Rs1,927
Result highlights -
Revenue growth marred by slow execution in E&C: Larsen and Toubro (L&T)?s Q1FY2011 earnings were below our expectations mainly hit by slower execution in the company?s engineering and construction (E&C) business. However, the company has indicated that execution is expected to pick up in H2FY2011. -
Stand-alone sales up 6.4%: L&T has reported a subdued 6.4 % year-on-year (y-o-y) increase in its stand-alone revenue to Rs7,835.1 crore led primarily by slower execution in E&C division. The E&C division reported a mere1.1% y-o-y growth in revenue, which is sharply lower than our expectation. This dismal growth was due to longer execution cycles arising from increasingly complex long cycle jobs. The management has indicated that due to lagging effect of large orders booked in H2FY2010, the execution is expected to pick pace from H2FY2011 only, which implies that execution will continue to remain sluggish even in Q2FY2011. The electricals & electronics (E&E) division?s revenue was up by 29.4% yoy, driven by favourable domestic industrial climate. The Machinery & Industrial Products (MIP) division reported a 25.5% y-o-y growth in revenue, led by a favourable base effect and industrial recovery particularly in construction and mining business. -
Operating leverage boosts margins: The operating profit margin (OPM) improved by 150 basis points to 12.2%, driven by operating leverage and lower input cost for E&C division. Other segments are however facing cost pressure on account of rising metal prices. The employee cost was up by 20% yoy in line with increase in manpower. -
PAT up 15.2%: The other income was marginally up to Rs277 crore with the interest cost rising by 29.9% yoy to Rs142.3 crore. The net profit (net of extraordinaries) came in at Rs666.2 crore (against our estimate of Rs713.9 crore), implying a y-o-y growth of 15.2%. -
Order inflow up 63%: The overall order inflow picked up during the quarter, up 63% yoy, at impressive Rs15,626 crore with the order inflow for E&C division up by 65% during the year. The orders mainly stemmed form power and infrastructure space. A noticeable order could be Rs5,200-crore order bagged by L&T Power Development Project in association with the state electricity board (SEB) in Rajpura. L&T?s current order backlog stands at Rs1,07,816 crore, out of which Rs1,05,554 crore orders are for the company?s E&C segment. This provides strong visibility to the company?s earnings. The investments are expected to remain robust in fertiliser and road space, and hydrocarbon space in the Middle East. -
Outlook and view: L&T?s management has maintained 20% revenue growth guidance for FY2011. However, due to lagging effects of the large orders taken in HFY2010, where pick-up in execution is expected only from H2FY2011, The revenue will continue to be sluggish in Q2FY2011 also. However, on margins front, the company has indicated towards slight stress in FY2011 in view of rising cost of metal and other inputs, though the margins of the E&C segment is expected to be maintained at FY2010 level (at 12.7%). Further, value unlocking for its finance services business is expected in FY2011 either via private placement or initial public offer. -
While we maintain our FY2011 and FY2012 estimates, we would revisit them once the annual report becomes available. At the current market price, the stock is trading at 24.9x FY2011E and 20.7x FY2012E consolidated earnings. For now we have marginally upgraded our sum of the parts (SOTP) target multiple to incorporate better outlook in information technology, finance and other associates? businesses. We have revised our SOTP based price target to Rs1,927 and maintain our Hold recommendation on the stock. Glenmark Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs400
Current market price: Rs285
Subdued base business performance
Result highlights -
Muted base business performance: Glenmark Pharmaceuticals (Glenmark)? Q1FY2011 earnings were subdued on the base business front with the revenue growing by mere 9% on a year-on-year (y-o-y) basis, largely due to a 7.8% y-o-y growth in the branded formulation business. The generic formulation business reported a lower than expected revenue from USA (up 6%). The 240-basis-point increase in staff cost led to a flattish operating margin at core level (at 22%) during the quarter. The base business performance was below our estimates. -
Out-licencing revenue spurts Q1FY2011 growth: Glenmark?s reported sales grew by 25.4% year on year (yoy) aided by out-licencing revenue of Rs90 crore and a 17% y-o-y growth in the domestic formulation business. On reported front, the operating margin was up by 990 basis points to 32.2%. Glenmark reported a net profit of Rs155.5 crore for Q1FY2011, which is in keeping with our estimate of Rs156 crore. The strong operating margin along with lower interest rates and lower depreciation charges aided the bottom line in the quarter. -
Key highlights: a) The management has reiterated 20-25% growth in the base revenue and a steady rise in the operating profit margin (OPM) for the next two years on the back of tight cost control measures and a lower research and development (R&D) expenditure. b) The receivable days dropped to 130 days from 160 days in FY2010, which is in line with the management?s guidance of 120 days by the end of FY2012. We view this as a positive development for the company as rising receivables had been a cause for concern for the investors for long. c) The inventory days were also reduced to 100 days as against 104 days in FY2010. d) The management has paid off debt to the tune of Rs270 crore in the quarter. Currently, the debt on the company?s books stands at Rs1,600 crore. However the delay in GGL IPO could raise some concerns over debt reduction. -
Maintain Buy: Though the base business growth was lower-than-expected in Q1FY2011, we remain upbeat about the future growth prospects on the back of new product launches in the domestic market and ramp-up in semi-regulated markets. Tarka?s launch will show in fully from Q2FY2011, thereby improving the visibility on the company?s US business. We like the company?s prime focus of improving the stretched balance sheet position. We believe the risk-reward ratio is favourable for the stock at the current levels. The out-licencing deal of GRC 15300 has reaffirmed the strength in its new chemical entity (NCE) pipeline. More out-licensing deals and milestone payments could thus spring a positive surprise to our estimates. We maintain our Buy recommendation on the stock with a price target of Rs400. Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs780
Current market price: Rs640
Results above estimates
Result highlights -
Beats estimates: Cadila Healthcare (Cadila) has reported better-than-expected results for Q1FY2011 with the bottom line marked by a 26.6% year-on-year (y-o-y) growth in the adjusted profit after tax (PAT) to Rs160.9 crore, which is above our estimate of Rs149.3 crore, on account of a strong operating performance. The company also received one time income of Rs47.4 from Abbott licencing deal. The reported profit grew by 59.6% to Rs199.2 crore. -
Net sales up 20.2% yoy: The net sales increased by 20.2% yoy due to: a) A 50.6% y-o-y increase in the US generics business, arising from higher volumes in the existing products; b) A 27.6% y-o-y increase in the consumer business; c) A ramped up, 17.3% y-o-y growth, domestic formulations business on account of internal restructuring of its specialty therapeutic divisions?CVS and respiratory. d) 74.4% growth in the API exports (excluding Nycomed). -
Adjusted OPM expands 50 basis points: The adjusted operating profit margin (OPM) expanded by 50 basis points on a y-o-y basis to 23%, largely driven by a 130-basis-point y-o-y dip in input costs. The gross margins for the quarter stood at 70%. The OPM stood at 23% for the quarter. -
Key highlights: The management remained extremely confident about the business prospects in FY2011 predicated on following developments. a) Hospira joint venture (JV) may see one or two product launches in the US in FY2011; b) The emerging markets would drive the uptrend with the Latin American markets (Latam) growing at a healthy rate of 15% in FY2011; c) The 14 active pharmaceutical ingredient (API) contract with Nycomed for its global requirement will start commercial production in H2FY2011 with the revenues flowing in from Q4FY2011; d) The licensing deal with Abbott would spruce up the growth in FY2012; and e) The net debt/equity ratio at 0.4x. -
Maintain Buy: The strong traction in the domestic and export businesses and the increasing visibility of business from Hospira JV reinforce our view on Cadila?s continued growth prospects. Further, backed by the licensing deals, the monetisation of its strong research and development (R&D) pipeline and the early success in trans-dermal and oncology segments would act as a trigger going forward. At the current market price of Rs640, the stock is available at valuation of 22.2x FY2011E and 18.5x FY2012E estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs780. Union Bank of India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs385
Current market price: Rs323
Strong all-round performance
Result highlights -
Union Bank of India (UBI) has reported a 36% year-on-year (y-o-y) growth in its net profit to Rs601.4 crore for Q1FY2011, which is above our estimate of Rs546 crore. The outperformance was a result of lower than expected provisions during the quarter. -
The net interest income (NII) came in at Rs1,348 crore, up a strong 68.2% year on year (yoy) driven by a robust 29.9% y-o-y growth in the advances. Meanwhile, the calculated net interest margin (NIM) deteriorated by 28 basis points sequentially to 2.74% led by a decline in the yield on assets led by a one-off impact from investment yields coupled with an increase in the cost of funds. -
The non-interest income declined by 15.2% yoy to Rs435 crore largely due to a weaker treasury performance. The core fee income growth remained healthy, rising by 9.9% yoy in the quarter. -
The overall operating expenses surged by 36% on a y-o-y basis but were flat on a sequential basis at Rs739.3 crore in the quarter. Having said that, the cost-to-income ratio remained flat on a y-o-y basis at 41.5%. -
The provisioning expenses too were flattish at Rs197.3 crore, led by a higher investment depreciation provision of Rs21 crore in the quarter vs a write-back of Rs135 crore in the year-ago quarter. Meanwhile, the loan loss provisions contracted by 58.5% yoy due to the release of the non-performing assets (NPAs) from the restructured accounts. -
The advances grew by a strong 29.9% yoy to Rs124,743 crore, led by the advances to the small and medium enterprises (SME) and retail segments. The loan growth was higher than the industry?s, leading to an improvement in the market share to 3.42% in the quarter from 3.27% in the previous year. The loan growth is expected to remain strong going ahead and the management has guided towards a credit growth of 25% for FY2011. The deposits grew at a slower pace than the advances at 19.2% yoy, leading to a 144-basis-point sequential increase in the credit-deposit (CD) ratio to 72.7% -
The asset quality of the bank was stable sequentially with the absolute gross NPAs (GNPA) increasing by just 2.4% sequentially to Rs2,736 crore. On a relative basis as well, %GNPA came in at 2.19% (versus 2.2% in the previous quarter). The overall provision coverage ratio stood at 58% (without technical write-offs) in the quarter, lower than around 64% in the previous quarter. Including the technical write-offs, the provisioning coverage is at 71.12%, above the 70% stipulated by the Reserve Bank of India. -
The bank restructured assets worth Rs21.55 crore during the quarter taking the overall restructured assets to Rs4,976.8 crore, which is about 4% of the bank?s loan book. So far, about 13% of the restructured assets has slipped into the NPA category. -
The capital adequacy ratio (CAR) stood at 12.59% at the end of Q1FY2011 with the tier-I CAR at 7.88%. -
UBI displayed a strong performance during the quarter led by a robust growth in its advances and lower provisioning. Its asset quality too remained stable sequentially. Going ahead, however, the bank?s provisioning expenses may increase on account of the slippages from the restructured accounts and the recognition of agri NPAs. At the current market price of Rs323.1, the stock trades at 5.2x FY2012E earnings per share, 3.1x FY2012E pre-provisioning profit per share and 1.1x FY2012E book value per share. We maintain our Buy rating on the stock with a price target of Rs385.
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