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| STOCK UPDATE Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,523
Current market price: Rs1,278 Q3FY2012 results: First-cut analysis Result highlights -
Q3 results a mixed bag: Larsen and Toubro (L&T)'s Q3FY2012 results were a mixed bag. The revenue exceeded our expectations with strong execution in the engineering and construction (E&C) division but the margins were under pressure mainly due to the mark to market (MTM) forex losses of Rs 400 crore. The margins were the lowest in 13 quarters. The profit after tax (PAT) was boosted by a strong growth in other income, mainly dividend from subsidiaries (mainly 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! -
Stand-alone sales up 24%: L&T has reported a strong growth in its revenues (stand-alone) for Q3FY2012; the same were higher than our expectation. This was on account of the sound order execution in the E&C division, which reported a 25% revenue growth for the period. However, the business in the machinery and industrial product (MIP) and electrical and electronics (E&E) divisions was sluggish with a year-on-year (Y-o-Y) revenue growth of 6% owing to a lower industrial offtake. The "Others" segment reported a strong 59% growth driven by the integrated engineering business. -
OPM under pressure due to forex losses: The overall operating profit margin (OPM) stood at 9.6%, which was lower than our expectation of 10%. The margin was under pressure mainly led by MTM forex losses. There was a forex loss of Rs400 crore in the third quarter shown in other expenses (Rs200 crore on foreign debt and Rs200 crore were translation losses) as compared to Rs50 crore in Q3FY2011. -
Net profit up 15%: The depreciation charge increased by 41% on account of the higher capital expenditure (capex) undertaken in recent times. The other income jumped by 32.5% YoY owing to higher dividend from subsidiaries while the net interest charge remained subdued. Further, boosted by a low tax rate the adjusted PAT grew by 23% YoY, which was 13% higher than our expectation. -
Order inflow modest: The order inflow for the quarter was moderate at Rs17,129 crore (a growth of 28% YoY, 6% sequentially). The management has maintained its order intake growth guidance at 5% for FY2012 though with the caution that this achievement would highly depend on the winning of 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. This implies a run rate of Rs34,308 crore required for Q4FY2012; that is requirement of a 13% yearly growth on a strong base. The same appears a challenging task given the current slowdown in the economy. The company has an overall order book of around Rs145,768 crore (up 27% YoY and 3% sequentially). Of the total order book, about 88% is from the domestic customers and the remaining 12% comprises overseas orders. The overseas orders' contribution to the overall order inflow increased sharply to around 20% in M9FY2012 from the past level of 10-15%. -
Outlook and view: The concerns on the margin front and forex losses aggravated in this quarter whereas the order inflow was decent. At the current levels, the stock is trading at 14.3x our FY2013 consolidated earnings estimates. We maintain our Buy rating on the stock and would soon come out with a detailed note taking a thorough account of the company's Q3 results. Federal Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs460
Current market price: Rs383 Q3FY2012 results: First-cut analysis Result highlights -
Federal Bank's Q3FY2012 results were ahead of our estimates as the net profit expanded by 41% year on year (YoY) to Rs202 crore on account of a strong growth in the net interest income (NII). However, the asset quality disappointed as the gross and the net non-performing assets (NPAs) increased on a sequential basis after showing some improvement in Q2FY2012. -
The NII showed a strong growth of 18.1% YoY and that of 11% quarter on quarter (QoQ); the same was higher than our estimate. A growth of around 21% in the advances coupled with an expansion in the margins (calculated) supported the growth in the NII during the quarter. -
In Q3FY2012 the non-interest income showed a growth of 13.3% YoY. On a sequential basis the non-interest income expanded by 18% QoQ. -
The operating profit (pre-provisional profit [PPP]) increased by 17.4% YoY to Rs419 crore. The operating expenses increased by 16.5% YoY while the cost/income ratio was at 37% compared with 38.9% in Q2FY2012. -
The asset quality of the bank deteriorated significantly as its gross and net NPAs increased to 3.97% and 0.74% from 3.61% and 0.58% respectively in Q2FY2012. In absolute terms, the gross NPAs increased 9.1% on a sequential basis. Outlook: Though in Q3FY2012 the bank showed strength in the core income growth, the deterioration in its asset quality is a cause for concern. The management has shifted focus from growth in advances to improvement in risk management, efficiency and portfolio mix, which is positive for the bank in the medium term. Currently, the stock trades at 1.1x FY2013 book value and we have a Buy recommendation on it. We will come out with a detailed note after attending the bank's conference call scheduled on January 24, 2012. Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs497
Current market price: Rs418 Price target revised to Rs497 Key points -
Q3FY2012 results-a blockbuster performance: For Q3FY2012 Godrej Consumer Products Ltd (GCPL) has reported a blockbuster performance with a sequential improvement of 214 basis points in the operating profit margins (OPMs) and a 50% growth in the bottom line for the quarter. The consolidated net sales grew by 36% year on year (YoY) to Rs1,344.1 crore (which was ahead of our estimate of Rs1,235.4 crore) during the quarter. This growth was driven by a 20.0% year-on-year (Y-o-Y) increase in the domestic business and a 68.2% Y-o-Y growth in the international business. Though the gross profit margin (GPM) remained almost flat but the OPM improved by 292 basis points YoY to 20.2%, largely on account of a 284-basis-point Y-o-Y decline in the advertisement and promotional spend during the quarter. The operating profit grew by 58.9% YoY to Rs272.1 crore and the adjusted profit after tax (PAT; before minority interest) grew by 54.3% YoY to Rs183.1 crore (which was ahead of our expectation of Rs143.2 crore). The foreign exchange (forex) loss due to the rupee's depreciation stood at Rs5.5 crore (in line with our expectation of Rs5 crore). -
Raising Rs685 crore through preferential allotment: GCPL is planning to raise Rs685 crore by issuing around 1.67 crore equity shares of Re1 each of the company to Baytree Investments (Mauritius) Pte Ltd (an arm of Singapore-based investment firm Temasek) at a premium of Rs409 per equity share. With this preferential allotment the share capital of the company will go up to 34.0 crore from 32.4 crore currently. The funds thus raised will be utilised largely to reduce the debt on books and to fund acquisitions. The management expects the debt/equity ratio to come down to 0.7x by FY2013 from 1.1x at present. -
To acquire 60% stake in Latin American Cosmetica: GCPL has entered into an agreement to acquire a 60% stake in Cosmetica Nacional (Cosmetica), a leading player in Chile's hair colorant and cosmetic markets. The acquisition is in line with GCPL's 3x3 strategy of enhancing presence in the emerging markets. GCPL is likely to pay close to Rs195 crore for its 60% stake in Cosmetica. The acquisition is valued at 9x its enterprise value (EV)/EBIDTA and 1.8x its sales, which is in line with some of the acquisitions done by GCPL recently. The acquisition will be funded through the mix of low cost foreign currency debt and the money raised from the preferential allotment to Temasek. The management of GCPL expects the acquisition to be earnings accretive from the first year of its consolidation. GCPL is planning to buy the remaining 40% stake in the company over a period of the next three to five years. -
Revision in earnings estimates: We have factored in the higher than expected operating performance of Q3FY2012 in our estimates for FY2012 and FY2013 and this has resulted in an upward revision of 2.8% and 1.3% in the adjusted PAT estimates for the respective fiscals. However, the equity dilution to result from the preferential allotment to Temasek has caused us to reduce the earnings per share (EPS) estimates for FY2012 and FY2013 by 5% each. We have also not incorporated Cosmetica's numbers in our estimates due to the non-availability of the figures of the key balance sheet items. Nevertheless, a back-of-the-envelope calculation shows that the consolidation of Cosmetica would result in an increase of 5-6% in the FY2013 earnings estimate. However, we will wait for the balance sheet details of Cosmetica before revising our earning estimates. -
Outlook and valuation: The integration of the recent acquisitions and the cross pollination strategy would help GCPL to achieve a strong growth in long run. We believe the company is comfortably positioned to achieve a growth of around 20% YoY in the bottom line in the coming years. In addition, the company is focusing on reducing the debt on books to improve the balance sheet at the consolidated level. Hence, we like GCPL in the mid-cap space and maintain our Buy recommendation on the stock. In line with the reduction in the earnings estimates due to the impending equity dilution, our price target for GCPL now stands reduced to Rs497. At the current market price the stock trades at 24.6x its FY2012E EPS of Rs17.0 and 19.4x its FY2013E EPS of Rs21.6. Maruti Suzuki India
Cluster: Apple Green
Recommendation: Hold
Price target: Rs1,138
Current market price: Rs1,163 Expect a Swift recovery Realisation expansion a positive surprise in Q3FY2012
During Q3FY2012, Maruti Suzuki (Maruti) reported a 7.1% quarter on quarter (QoQ) increase in net realisations. Lower discounts, price hikes and an improved product mix took the realisation to an all time high. The contribution/vehicle also surprised and reached to its highest level in the last six quarters. Worst for margins behind; expect gradual improvement from Q4FY2012
The company is expected to see a 100-150 basis points (bps) margin savings on account of favourable operating leverage as production ramps up in Q4FY2012. However, some hit is expected as vendors are compensated for higher costs with a lag. Vendor compensation is expected to have a positive effect of 100bps. Foreign exchange (forex) related marked to market (MTM) losses in commodities and direct and indirect imports were to the tune of Rs75 crore, thereby impacting margins by 100bps. In case the currency remains stable, the company may see a 100-250bps margin expansion from Q4FY2012 onwards. FY2013 may see further improvement once the benefit of vendor hedges comes through. Open positions may cause margin volatility; 100bps Q-o-Q impact felt in Q3FY2012
Maruti saw a 100bps impact on margins on account of adverse forex movement. The company hedged its dollar/ yen as well as dollar/euro exposure for Q4FY2012 while FY2013 exposure is completely open. During Q3FY2012 the dollar appreciated 0.7% against the yen while it appreciated 4.5% against the euro. While the company hedged stable currencies, it has kept the most volatile dollar/rupee exposure open. An adverse currency movement in the rupee can have a direct bearing on the margins. During Q3FY2012, the pure currency impact on royalty is to the tune of Rs75 crore which includes reinstatement of liabilities of Rs20 crore and Rs19 crore of royalty hit related to H1FY2012. Valuation
We are marginally cutting our earnings per share (EPS) estimates for the company as we incorporate the management's expectations of the future. Since our last Buy recommendation, the stock has achieved our target price. Our revised target price of Rs1,138 discounts FY2013 expected EPS of Rs81.3 by 14x. We believe that the current price is factoring in the positives. We recommend a Hold on the stock.
UltraTech Cement
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs1,275
Current market price: Rs1,209 Price target revised to Rs1,275 Result highlights -
Operating profit in line with estimate; PAT ahead of estimate: In Q3FY2012 UltraTech Cement (UltraTech) posted an operating profit of Rs964.9 crore (up 36.3%), which is in line with our estimate. However, on account of a surge in the other income and a decline in the interest cost (due to the subsidies received in the earlier years under the State Investment Promotion Scheme) the net profit of the company grew by 93.4% year on year (YoY) to Rs616.9 crore, which is ahead of our estimate. -
Revenue growth largely driven by realisation growth: The revenue growth of 23.1% was supported by an increase of 16.2% in the average blended realisation YoY to Rs4,509 per tonne. On the volume front, the overall sales volume (including cement, clinker, export and white cement volumes) grew by 5.9% on a year-on-year (Y-o-Y) basis to 10.14 million tonne. On a sequential basis, the volume has witnessed sign of post monsoon recovery and grew by 7%. The blended realisation was higher by 9.3% on a quarter-on-quarter (Q-o-Q) basis. Going ahead in Q4FY2012 we believe cement prices will remain strong with a likely increase in the cement offtake. -
Expansion in the OPM due to higher realisation: On the margin front, the operating profit margin (OPM) expanded by 205 basis points YoY to 21.1% on account of a 21.2% increase in the realisation. However, on the cost front the key cost elements like the raw material cost, the power & fuel cost and the freight charges continued their upward trend. This increased the overall cost of production by 18.1% to Rs3,618 per tonne. The operating profit increased by 36.3% YoY to Rs964.9 crore and the EBITDA per tonne increased by 28.7% YoY to Rs952. -
Surge in other income and decline in interest cost: The other income increased by 156.4% to Rs155.4 crore (which included Rs66.6 crore for the subsidies related to the earlier years availed of under the State Investment Promotion Scheme). Further, the net interest cost declined by 63.9% YoY to Rs29.5 crore on account of the net subsidies of Rs38.4 crore received. Hence, the reported net profit of the company grew by 93.4% YoY to Rs616.9 crore. -
Expansion at Chhattisgarh and Karnataka for 9.2mt cement capacity are on track: The company is setting up additional cement clinkerisation plants at Chhattisgarh and Karnataka. Work on both the plants is on track. The company has already placed the orders for the major equipment. The expansion will increase the total cement capacity by 9.2 million tonne and the additional capacities are expected to come on stream by Q1FY2014. After the commissioning of the aforesaid capacities the cement capacity of the company will enhance to 59 million tonne per annum (mtpa). -
Oversupply to continue for three years, cost inflation to pressurise margin: As per the management, the oversupply scenario in the domestic cement industry is likely to continue in the coming three years which will have an adverse impact on the cement prices. Further, the sharp increase in the domestic and imported coal prices coupled with a likely increase in the freight cost will keep the margins under pressure. -
Upgrading earnings estimates for FY2012 and FY2013: We are upgrading our earnings estimates for FY2012 and FY2013 mainly to factor in the higher than expected blended realisation in Q3FY2012. We are also factoring in some pressure on the power & fuel cost with the change in the pricing mechanism for domestic coal. The revised earnings per share (EPS) estimates work out to Rs72.8 for FY2012 and Rs82.3 for FY2013. -
Maintain Hold with a revised price target of Rs1,275: We like UltraTech due to its diversified pan-India presence and strong balance sheet. Further, the company's footprint in the growing markets like Bangladesh, Dubai, Sudan and Bahrain augurs well for its business. However, on account of the pressure expected on the cement prices in the coming one year and the cost inflation in terms of the rising prices of coal (imported as well as domestic) we maintain our Hold recommendation on the stock with a revised price target of Rs1,275 (valued at enterprise value [EV]/tonne of $120). At the current market price the stock trades at a price/earnings (PE) of 14.7x, discounting the FY2013 estimates. On an EV/EBITDA basis, the stock trades at 7x FY2013E.
VIEWPOINT Idea Cellular Strong operational performance; but regulatory overhang remains Idea Cellular (Idea) posted robust Q3FY2012 results, with the revenue (+8.9% quarter on quarter [QoQ]) as well as margin (+100bps QoQ) exceeding our as well as the Street's expectation. The management in its commentary sounded positive on both, the voice as well as the data business, but remained cautious on the regulatory environment.
Read across for Bharti- Traffic growth expected to be strong; we have modeled for 4% sequential volume growth
Reading from Idea's results we believe that Bharti Airtel (Bharti) too is likely to deliver a strong improvement in the volume/traffic movement in the present quarter, and the results are likely to be robust. We have modeled a 4% sequential growth in traffic, with a 2-3% improvement in ARRs and minutes of usage (MoU). Idea-well placed operationally; but regulatory uncertainty persists
The company has demonstrated its ability and operational efficiency through market share gains (as per Telecom Regulatory Authority of India [TRAI]; Idea's market share has grown from 12.1% in Q1FY2011 to 14% in Q2FY2012) and improvement in margins from the established circles. We believe that with its strong brand equity and sharp focus, Idea is operationally well placed to encash the strong wave of voice as well as data opportunity presented by India. But the persistent regulatory uncertainty (with regards to excess spectrum charges, spectrum refarming, license renewal fee, abolition of roaming charges) will continue to linger the stock. At the current market price the stock is trading at 5.9x its FY2012 enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA). | | 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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