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| PULSE TRACK RBI Monetary policy update RBI eases CRR by 50 basis points
In its third quarter review of the monetary policy the Reserve Bank of India (RBI) has surprised the market by easing the cash reserve ratio (CRR) rate by 50 basis points to 5.5 % while the policy rates (repo and reverse repo rates) have been kept unchanged. Apart from addressing the tight systemic liquidity, which has affected the flow of credit, the CRR cut also suggests a change in the RBI's stance on growth which would result in the easing of the rates in the period ahead. Nevertheless, the RBI has again cautioned against the external risks (the euro crisis, geo-political risks etc), the rising fiscal deficit and the high inflation rate which could affect the domestic economy. Though the RBI appears to be in a softening mode, further monetary actions would be guided by the pace of decline in inflation and the government's efforts to rein in the fiscal deficit. Easing CRR positive for banks
The reduction in the CRR rate is positive for banks as the additional liquidity available would be deployed towards credit and investment. Banks will be cautious in reducing the lending rates immediately as the deposit rates remain high on account of the higher rates offered by alternative instruments (tax-free bond etc). Therefore, we believe the lending rates will decline materially once the deposit rates start trending downwards (which is expected to happen towards the end of the fiscal). However, the reduction in the CRR would lead to a nominal increase (of 4 to 5 basis points) in the margins. Importantly, the reduction of the CRR suggests a change in the RBI's stance, implying willingness on its part to unwind the rates. This augurs well for the banking sector.
STOCK UPDATE Torrent Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs680
Current market price: Rs547 Q3FY2012 results: First-cut analysis Result highlights -
Q3FY2012 results broadly in line with expectations: Torrent Pharmaceuticals (Torrent)'s net sales grew by 21.8% year on year (YoY) to Rs675.5 crore on the back of a 40% YoY rise in international revenues to Rs396 crore. The revenue from the Indian market, which constitutes revenues from the sale of branded formulations and contract manufacturing, grew moderately by 7.7% to Rs292.5 crore. The operating profit margin (OPM) declined by 177 basis points (bps) YoY to 14.9% during the quarter, which led to the net profit recording a restricted growth of 8.2% to Rs83.2 crore. A decline in the operating margin is mainly attributable to higher other expenditure, which may have an element of foreign exchange (forex) loss related to derivative contracts. Despite a sharp fall in the operating margins, the net profit during the quarter was broadly in line with our estimates (Rs85 crore) mainly due to higher other operating income off-setting the impact of fall in margins. -
Indian sales pick up; yet underperform the industry: The revenue from the Indian market grew by 7.7% YoY to Rs292.5 crore during the quarter, which is lower than our expectation of Rs314 crore. The branded business grew by 8.8% YoY to Rs230 crore while revenue from contract manufacturing activities posted a 4.2% YoY increase to Rs60.9 crore. The growth achieved during the quarter from the Indian business is better than that in the sequential previous quarter (Q2FY2012), which recorded the slowest growth (5.8% YoY) in the past 8 quarters.
The growth in the Indian market has been mainly impacted due to a slower offtake in acute segments. The growth achieved during the quarter is slower than the industry growth rate of 13% during the quarter. However, we expect the growth to pick up in the subsequent quarters on an increased contribution from the newly added field force. -
International business is buoyed by favourable forex: During Q3FY2012, the revenue from the international business jumped by 39.8% YoY to Rs396 crore, thanks to the depreciation of the Indian Rupee (INR) against major international currencies. During the quarter, the rupee depreciated 12% against the US dollar and 11% against the euro, which contributed to the growth in the international business. -
Higher material costs and other expenditure impacts margins: The OPM declined during the quarter by 177 basis points YoY to 14.8% against our estimate of 18%. The fall in the margin is mainly due to higher raw material costs and other expenditure during the quarter. Valuation
We expect the company's strong performance in the international market to continue with increased pace of product launches in the US and Brazil. The performance in the Indian market would strengthen on increased contribution from the newly added field force and higher capacity utilisation of the Sikkim plants. We believe the major capital expenditure (capex) cycle is over for Torrent and the company could be expected to give a better return on investment. We expect a 17% and 23% revenue and profit after tax (PAT) compounded annual growth rate (CAGR) respectively over FY2011-13.
The stock is currently trading at 13.9x and 11.4x FY2012E and FY2013E earnings respectively. We have a Buy recommendation on the stock with a price target of Rs680. We may revisit our earnings estimates post the conference call. Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,588
Current market price: Rs1,350 Price target revised to Rs1,588 Result highlights -
L&T's Q3FY2012 results were a mixed bag: The revenue of Larsen and Toubro (L&T) exceeded our expectations with strong order execution in the engineering and construction (E&C) division. But the margins were under pressure mainly due to the marked-to-market (MTM) foreign exchange (forex) losses of Rs400 crore on the forward contracts booked by the company. The profit after tax (PAT) was boosted by a strong growth in the other income, mainly dividend from subsidiaries (viz L&T Infotech and L&T Infocity) and treasury income. In Q3FY2012 the order inflow was moderate at Rs17,129 crore (a growth of 28% year on year [YoY], 6% sequentially). The management has maintained its order intake growth guidance at 5% for FY2012 though with the caution that this achievement would depend on a few critical orders in the infrastructure sector. The order inflow in the first nine months of the fiscal was flattish at Rs49,415 crore, requiring a run rate of Rs34,308 crore for Q4FY2012. That is a requirement of a 13% yearly growth on a strong base. -
Guidance maintained: The company has maintained its guidance of a year-on-year (Y-o-Y) growth of 25% in revenue for FY2012. In M9FY2012, the company achieved a 21% Y-o-Y growth in the top line, requiring a yearly growth rate of 73% in Q4FY2012. This, we feel, would be quite a difficult task. We have assumed a 20% yearly growth in our FY2012 revenue estimate. The management has also maintained its guidance of margin dip in the E&C division to 75-125 basis points on a yearly basis on account of an increase in the input cost. However, owing to a higher share of overseas revenue and currency fluctuation, there could be more forex gain/loss in the coming quarters. -
Estimates fine-tuned: In view of the higher other income and low tax rate we have marginally upgraded our earnings estimates. We have also trimmed our margin assumption to reflect the impending margin pressure particularly in the E&C and the electrical and electronics (E&E) divisions. Our stand-alone estimates for FY2012 and FY2013 have increased by about 5% and 6% respectively and our revised consolidated earnings per share (EPS) estimates for FY2012 and FY2013 stand at Rs81.1 and Rs93.5 respectively. We expect the company's stand-alone earnings to grow at a compounded annual growth rate (CAGR) of 16% over the next two years. -
Price target revised to Rs1,588: Overall, though the company reported decent results for the quarter, but the order inflow guidance would be highly subjective to an uptick in infrastructure development activities in the country and in the Middle-East. The slow moving orders' share in the total order book has increased to 11-12% on account of the addition of a power equipment order worth Rs1,400 crore in this category. At the current market price the stock is trading at 14.4x on its FY2013 consolidated estimate. We continue to believe that L&T is the best proxy play on India's infrastructure growth theme and maintain our Buy rating on the stock. We also feel that its diversity continues to cushion its financials in the existing tough business environment. The recent cut in the cash reserve ratio (CRR) would also augur well for the stock in view of the expected uptick in investment sentiments. Our sum-of-the-parts (SOTP) price target for the stock stands revised to Rs1,588. The key positive triggers for the stock remain an uptick in business sentiments, winning of big-ticket orders in the power/infrastructure sector and easing of margin pressure. Kewal Kiran Clothing
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs800
Current market price: Rs644 Price target revised to Rs800 Result highlights
Q3FY2012 results weak and below estimates
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Kewal Kiran Clothing Ltd (KKCL)'s Q3FY2012 report card was weak and the results were below our expectation on both revenue (up 2% year on year [YoY]; volumes down 9.6% YoY) and earnings (down 22.4% YoY) fronts. The margin at 18.6% contracted by 850 basis points YoY. -
The revenue performance was dismal, with the company reporting flat apparel revenue (a 10.6% increase in the realisation was knocked off by an equal magnitude of volume contraction). Along with the subdued consumer environment in the last two months of the quarter, an early festive season this year led to this soft performance. -
The increased cost of goods sold (up 23.5% YoY) coupled with the introductory expense of the newly launched accessories category (other expenses up 60% YoY) played havoc with the margins (down 850 basis points YoY). Consequently the operating profit was down 30% YoY. -
A strong other income (up 93.8 YoY) coupled with a reduction in the effective tax rate (down 31.7% vs 33% in Q3FY2011) restricted the earnings contraction to 22%. -
The balance sheet continues to be strong with cash and cash equivalents at about Rs107 crore (about Rs88 per share), and return on capital employed (RoCE) and return on equity (RoE) at 25% and 24% respectively. Downgrading earnings estimates: Incorporating the weak results for Q3FY2012 (on the revenue and margin fronts), we have downgraded our estimates for FY2012 and FY2013 by 7.4% and 4.6% respectively. Our revised earnings per share (EPS) estimates for FY2012 and FY2013 now stand at Rs43.4 and Rs53.6 respectively. Maintain Hold: KKCL's superior business model (strong portfolio of brands that are sold on outright basis via various distribution channels) coupled with its management's financial acumen (profitable growth approach and superior corporate governance practices) keep us bullish on its business. We ascribe a price/earnings ratio (PER) of 15x our FY2013E EPS of Rs53.6 to arrive at a price target of Rs800. 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. Yes Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs360
Current market price: Rs319 Strong operating performance, CASA ratio improves Result highlights -
Yes Bank's Q3FY2012 results were largely in line with our estimates at the net profit level as the earnings grew by 32.9% year on year (YoY) and 8.1% quarter on quarter (QoQ) to Rs254 crore. This was driven by a strong growth in the net interest income (NII) and the non interest income. -
The NII of the bank grew by 32.3% YoY and 10.9% QoQ on account of strong growth in assets. The bank's advances (including credit substitutes) grew by 28.1% YoY while deposits grew by 18.9% YoY (6.5% QoQ). -
The net interest margin (NIM) of the bank dipped by 10 basis points (bps) sequentially to 2.8%. The yields on advances expanded 20bps QoQ, being outpaced by higher borrowings and increase in savings deposits rates. However, the current account savings account (CASA) of the bank increased to 12.6% in the quarter under review from 10.9% in Q2FY2012. -
The non interest income grew by 30.8% YoY but remained flat sequentially due to a sequential decline in the financial advisory income. The cost- income ratio of the bank grew to 37.6% in Q3FY2012 as against 35.6% in Q2FY2012. -
The asset quality remained stable as the gross and net non performing assets (NPA) were reported at 0.2% and 0.04% respectively, which is in line with Q2FY2012. The specific loan loss coverage ratio stood at 80.4%, also similar to that of Q2FY2012. -
Outlook: Yes Bank yet again delivered a strong set of numbers in Q3FY2012 driven by a strong operating performance and healthy asset quality. The bank's margins have declined by 10bps QoQ but have remained stable in the range of 2.8%-3.1% for the past several quarters. In addition, the sharp increase in savings deposits was a positive surprise and the management is confident of achieving a 30% CASA by 2015. On the asset side an increase in the retail book entails some risk but is likely to be in manageable limits. We believe the bank would continue to grow ahead of the industry and is likely to retain its asset quality. We expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 27% over FY2011-13. We maintain our Buy recommendation with a price target of Rs360 (2x FY2013E book value [BV]) for the stock. Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs538
Current market price: Rs445 Higher tax rate impacts bottom-line Result highlights -
Q3FY2012 results in line with expectations; higher tax rate impacts net profit: Lupin reported a 22.1% year on year (YoY) rise in its net sales to Rs1,792 crore in Q3FY2012, mainly driven by India sales and favourable currency inflating international sales. The company's operating profit margin (OPM) improved 293 basis points (bps) Y-o-Y to 21.3%, mainly due to lower material costs. The profit before tax jumped 37% Y-o-Y to Rs345 crore during the quarter. However, due to a sharp jump in the effective tax rate (22.5% in Q3FY2012 as compared to 9.4% in Q3FY2011) and Rs34 crore translation foreign exchange (forex) loss during the quarter, the net profit after tax (PAT) recorded a restricted growth of 5% YoY to Rs235.7 crore. However, when adjusted for the forex loss, the PAT grew by 20% YoY to Rs270 crore, which is 5% higher than our estimates of Rs257 crore. -
We fine tune our estimates for FY2012 and FY2013: We have fine tuned our estimates for FY2012 and FY2013 in the light of last 9 months' results and drawing cues from management interactions. Accordingly, while we have revised our revenue estimates marginally upward on the back of strong India sales, earning estimates have been revised downward by 3.6% and 3.7% for FY2012 and FY2013 respectively, mainly to factor in a lower interest cost and higher effective tax rates. -
We maintain Buy: The stock is currently trading at 16.8x FY2013E earning per share (EPS; revised). We maintain our Buy recommendation on the stock with a target price of Rs538 (20.4x FY2013E EPS). Federal Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs460
Current market price: Rs392 Core income growth improves, asset quality weakens Result highlights -
Federal Bank's Q3FY2012 results came ahead of our estimates as the earnings of the bank grew by 41.1% year on year (YoY) and 5.6% quarter on quarter (QoQ) to Rs202 crore led by a strong growth in the net interest income (NII). -
The NII of the bank was also ahead of our estimate as it grew by 18.1% YoY (11.3% QoQ) led by a sequential jump in the margin to 3.94% from 3.77% in Q2FY2012. -
The advances of the bank grew by 17.6% YoY but declined by 1.2% QoQ whereas the deposits of the bank grew by 26.6% YoY (but declined by 1.1% QoQ). The current account and savings account (CASA) of the bank stood at 28.2% as against 26.4% in Q2FY2012. -
The non-interest income grew by 13.3% YoY and 17.9% QoQ majorly led by a strong growth in the fee income and the foreign exchange (forex) income of the bank. -
The asset quality of the bank deteriorated as the gross and net non-performing assets (NPAs) of the bank increased to 3.97% and 0.74% from 3.61% and 0.58% respectively in Q2FY2012. The provision coverage ratio (PCR) of the bank declined to 80.5% from 83% in Q2FY2012. Outlook
Federal Bank continues to show strength in core operations driven by a steady growth in the advances and high margins. The slippages increased in Q3FY2012 after showing an improvement in Q2FY2012 mainly due to slippages in the corporate segment. However, the recoveries remain strong which mitigates any significant asset quality risks. The stock's valuations are attractive (1x FY2013E book value) considering the return on equity (RoE) and return on asset (RoA) of about 14% and 1.2% respectively expected by FY2013 due to the structural changes undertaken by the new management. We maintain our Buy recommendation on the stock with a price target of Rs460 (1.3x FY2013E book value).
VIEWPOINT Hero MotoCorp Currency - A pillion rider for this Hero Currency to be the key influencer in Hero MotoCorp's earnings and stock performance We estimate that from hereon the currency will play the biggest role in influencing earnings as well as stock performance of Hero MotoCorp. An appreciation in the rupee would be extremely beneficial for the company and its depreciation would hit the company the most. The company has amortised a fixed sum of royalty every quarter with currency risk vested on it. The originally estimated quarterly royalty bill at the time of split with Honda was Rs180 crore. However, a sharp depreciation in the rupee has inflated the quarterly bill to Rs228 crore in Q3FY2012. In the month of January 2012, the rupee has appreciated by 5% each against the US dollar and the yen. If the rupee sustains at the current levels, then the royalty benefit under the depreciation head would be to the tune of Rs11-12 crore. The company has 2% of its imports as dollar denominated and 14% of the imports by vendors are dollar and yen denominated. The rupee's depreciation has a direct bearing on raw material costs. However, the same reverses favourably if the rupee appreciates. We estimate a 0.75% margin impact on every 5% movement in the rupee against the dollar and the yen. Highlights of the conference call -
The company has confirmed of a slowdown and rising inventory levels. The overall growth expectation for Q4FY2012 and FY2013 is modest at 10-12% with rural demand more resilient. -
The company also revealed that all the new product launches would attract a royalty of upto 5% and will be paid over and above the fixed charge amortised under depreciation every quarter. -
The company is in advanced talks for technology tie-ups with Ricardo and AVL for engine development. -
The company targets exports of 1 million units in the next 5 years. Valuation
We are aligning our earnings estimates at a rupee-dollar rate of Rs50 and a rupee-yen rate of Rs0.64. Every 5% appreciation in the rupee would benefit earnings by 5.5%. Our earnings per share (EPS) for FY2012 and FY2013 are estimated at Rs121 and Rs147.8 respectively. Assuming the rupee sustains at the current levels, then the stock can trade at 13.5x one year forward earnings. However, if the rupee breaches its recent low against the dollar and the yen, then our earnings expectations would require a downward revision. Assuming stable state conditions, we have a positive view 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. | | | | | |
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