| Summary of Contents
| STOCK UPDATE Marico
Cluster: Apple Green
Recommendation: Hold
Price target: Rs171
Current market price: Rs163 Price target revised to Rs171 Result highlights -
Results synopsis: Marico's Q3FY2012 consolidated net sales grew by 29.4% year on year (YoY) to Rs1,057.8 crore, driven by a mix of volume growth (of 20% YoY) and price-led growth (of approximately 10% YoY) in Q3FY2012. The gross margins improved by 114bps YoY and 518bps sequentially to 48.5%. However the operating margins were down by 68bps YoY to 11.5% mainly on account of a higher than expected surge in the ad-spends during the quarter. The operating profit grew by 22.1% YoY to Rs121.7 crore. However higher Y-o-Y depreciation charges and a higher incidence of tax (after adjusting for reversal of excess income tax provision of Rs5.6 crore for the previous year) resulted in a 12.9% YoY growth in the adjusted profit after tax (PAT) to Rs78.5 crore. -
Upward revision in estimates: We have revised upward our earnings estimates for FY2012 and FY2013 by 1.3% and 4.1% respectively to factor in a higher than expected top line growth and an improvement in the gross margins. Outlook and valuation
Despite of inflationary pressures, Marico continued to surprise us with the volume in its domestic consumer products business growing by mid-teens in the past two quarters. This gives us an indication that the categories in which Marico is operating are not feeling the heat of sustained inflationary pressure. We expect the mid-teen volume growth to sustain in the domestic market. We expect the international business to grow by around 20% YoY on the back of several initiatives undertaken by the company in various international markets. Overall we expect the top line to grow at a compounded annual growth rate (CAGR) of approximately 25% over FY2011-13 and the bottom line to grow at a CAGR of 30% over the same period (on the back of expected improvement in the margins due to softening of raw material prices).
In line with the upward revision in earnings estimates, we revise our price target to Rs171 (based on 24x its FY2013E EPS of Rs7.1). The stock has run up after posting a strong operating performance in Q3FY2012, hence there is limited upside visibility from the current levels. Thus we maintain our Hold recommendation on the stock. At the current market price the stock trades at 31.0x its FY2012E EPS of Rs5.3 and 22.9x its FY2013E EPS of Rs7.1.
Thermax
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs526
Current market price: Rs522 Maintain hold with price target of Rs526 Result highlights -
Results below expectation: Thermax' Q3FY2012 results were below our expectation led by revenue sluggishness and margin pressure. Moreover, the standalone order inflow for the quarter remained muted at Rs590 crore (down 40% on a yearly basis and 50% on a sequential basis). On the positive side, the setting up of its power equipment manufacturing plant is progressing as scheduled. The company has also seen an uptick in inquiries since January and expects good demand from the consumption led sectors like auto and durables and also from the food sector. -
Top line grew by a mere 2%: Thermax' Q3FY2012 net income from operations increased by a mere 2% year on year (YoY) on account of flattish revenue in the energy segment versus our expectation of a 7% growth. The company had been reporting sluggishness in order inflow for the past few quarters, which has translated in a revenue slowdown during the quarter. The environment division posted a Y-o-Y growth of 3% in revenue. -
OPM under pressure: The company reported an operating profit margin (OPM) of 10.7%, which is lower than the Q3FY2011 OPM of 11.8%. The margin was lower because of Rs12.6 crore of foreign exchange (forex) loss booked under other expenses and lower operating leverage. The employee expense was higher by 7% on a Y-o-Y basis at Rs104.2 crore. -
Net profit fell by 5%: In spite of a higher other income and lower tax rate, the net profit fell by 5% YoY to Rs95.5 crore, which is lower than our estimated net profit by 8%. The company availed of working capital loan to the tune of Rs90 crore, which has led to a rise in the interest cost. The same is likely to exert further pressure on the company's margins going ahead. -
Maintain "Hold": The growth in the company's order book remains highly dependent on the momentum in capex cycle of India, making it highly susceptible to swing in investment sentiments. Marred by poor order inflow and tough business environment, the stock has languished in the last one year. However, on a positive note, recent data indicates some revival in the manufacturing sector, auguring well for Thermax and the capital goods sector. At the current market price, the stock trades at 15.1x and 13.8x its FY2012 and FY2013 estimated earnings respectively. Based on revised earnings and target multiple of 14x (past 1 year average) we have revised our target price to Rs526. In view of limited upside potential we maintain our "Hold" rating on the stock. The key positive triggers in the stock remain the winning of big ticket size power equipment orders and some relief on margins in view of the recent cooling off of commodity prices.
Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs140
Current market price: Rs110
Price target revised to Rs140 Result highlights -
Andhra Bank's Q3FY2012 results were in line with our estimates as the net profit at Rs303 crore showed a decline of 8.4% year on year (YoY) and 4.1% quarter on quarter (QoQ). The de growth in profits was mainly due to a sharp rise in provisions (80% YoY). -
The net interest income (NII) growth was slightly higher than our estimates as it grew by 17.1% YoY. The growth in NII was contributed by a sequential growth in advances (6.3% QoQ) and stable net interest margins (NIMs; ie 3.81% in Q3FY2012 vs 3.82% in Q2FY2012). -
Led by a strong growth in recoveries the asset quality improved on a sequential basis as gross and net non performing assets (NPAs) were at 2.38% and 1.21% respectively compared to 2.67% and 1.48% in Q2FY2012. The bank restructured Rs1,200 crore of advances in Q3FY2012 (outstanding restructured advances at Rs3,676 crore). -
The non interest income registered a growth of 18.4% YoY and 32.3% QoQ contributed by a growth in fee income (11.9% YoY and 24.7% QoQ). The cost to income ratio declined to 37% from 39.2% in Q2FY2012. Valuations
Andhra Bank's Q3FY2012 results were characterised by a decline in NPAs aided by sharp increase in the recoveries. The operational performance remained healthy backed by higher NIM and steady growth in advances. We believe sturdy margins and robust recoveries will lower the credit cost in the coming quarters. We expect the earnings of the bank to grow at a compounded annual growth rate (CAGR) of 11.5% (FY2011-13) leading to a return on asset (RoA) of approximately 1.1%. Therefore due to improving trends on the asset quality front and attractive valuations (0.7x FY2013 book value [BV]) we revise our target price to Rs140 (0.9x FY2013E earnings). We upgrade the rating on the stock from Hold to Buy.
Madras Cements
Cluster: Cannonball
Recommendation: Hold
Price target: Rs138
Current market price: Rs129
Price target revised to Rs138 Result highlights -
Impressive performance; earnings well ahead of estimates: Madras Cements in its Q3FY2012 results delivered an impressive performance and posted an adjusted net profit of Rs76.8 crore (up 76.7% year on year [YoY]) which is well ahead of our as well as the Street's estimates. The impressive performance during the quarter was on account of a healthy growth in its volume as well as average realisation. Further the company has also benefited in terms of a better operating leverage. -
Strong volume growth and healthy realisation drives revenue growth: The overall revenue of the company increased by 27.9% YoY to Rs741 crore which includes revenue of Rs7.7 crore from the windmill division. The revenue growth during the quarter has been driven by a strong volume growth of 15.9% YoY to 1.72 million tonne on account of stabilisation of its new capacity and increase in average realisation by 11.7% YoY to Rs4,264 per tonne on account of supply discipline followed by the cement manufacturers. The demand environment in the southern region has partially recovered particularly in Tamil Nadu and Kerala. In terms of realisation, the present cement realisation (as in early Q4) has increased by Rs8-10/bag compared to the average of Q3FY2012. Hence in Q4FY2012 also we could see healthy realisation. -
Margin expansion due to increase in realisation: The operating profit margin (OPM) expanded by 243 basis points YoY to 28%. The expansion in the OPM is on account of increase in the realisation by 11.7%. However, cost pressure has partially offset the benefit arising from increase in realisation. During the quarter freight cost increased by 18.8% on a per tonne basis and other expenses increased by 43.1% to Rs103.8 crore. Further, a loss in the windmill division to the tune of Rs6.7 crore at the profit before interest and tax (PBIT) level has also limit expansion in the overall OPM. Hence the overall cost of production has increased by 6.8% YoY on a per tonne basis. The EBDITA per tonne for the quarter increased by 27.2% YoY
to Rs1,161. -
Upgrading earnings estimates for FY2012 & FY2013: We are upgrading our earnings estimates for FY2012 and FY2013, mainly to factor in higher than expected cement realisation. We also factor higher than expected freight costs. The revised earning per share (EPS) for FY2012 now stands Rs14.9 and for FY2013 we estimate the EPS to be Rs16.3. -
Maintain Hold with revised price target of Rs138: In spite of an unfavorable demand supply scenario in the southern region there is a sharp price hike witnessed on account of supply discipline followed by the manufacturers. However, the cement offtake in the region has partially recovered in Q3FY2012. Going ahead we expect cement offtake in the region to improve in a gradual manner. However, a failure to adhere to supply discipline will be a key concern on the cement realisation and the profitability of the company. Hence we maintain our Hold recommendation with a revised price target of Rs138 (valued at enterprise value [EV]/tonne of $85). However, in the longer run we believe Madras Cements holds the potential to deliver returns to investors due to its operational efficiency. At the current market price the stock trades at a price earnings (PE) of 7.9x and EV/EBITDA of 5.2x its FY2013 estimated earnings.
SECTOR UPDATE Cement Seasonal pickup in demand Key points -
Cumulative volume for pan India players grew by 8.6%: The volume growth of the top three domestic cement players - ACC, Ambuja Cements and Ultratech Cement (Ultratech) for the month of January 2012 was impressive on a year-on-year (Y-o-Y) basis on account of a pick-up in cement offtake in the north, west and the eastern region due to a pick-up in the execution in infrastructure projects. Among the large players Ultratech took lead and posted an impressive dispatches growth of 11.2% YoY. On the other hand ACC and Ambuja Cements posted a growth of 8.8% and 3.8% respectively in their dispatches. Hence, cumulatively, the pan India players have registered an 8.6% volume growth. On a sequential basis (compared to December 2011) the cumulative dispatches of the pan India players have increased by 3.1%. -
Cement offtake picked up in north, west & central regions; partial recovery in southern region: In terms of demand, dealers have confirmed that the cement offtake in most parts of the country has shown signs of recovery in the past couple of months due to post monsoon pick-up in infrastructure activity. Further, demand in the southern region during January 2012 has partially recovered. Going ahead dealers expect momentum in demand to continue for the coming couple of months. -
Cement prices increased in most parts of the country: Cement prices have increased in January in the range of Rs5-12/bag of 50kg in most parts of the country. The eastern region has witnessed the highest price hike on a month-on-month (M-o-M) basis whereas in the southern region prices have remained largely unchanged sequentially. The price hike has been largely driven by a revival in the cement offtake. Further, dealers are of the view that the cement price may increase further in the near term as cement offtake is expected to be strong going ahead. -
Outlook-Maintain bullish stance on Grasim & Orient Paper: The cement sector has outperformed the broader market in recent times due to positives such as a recovery in the cement offtake and strong realisations. However with a pick-up in cement offtake, the supply discipline may break which can put pressure on cement prices going ahead. Hence we maintain our neutral stand on the sector but we are selectively positive and prefer Grasim Industries (Grasim) in the large size space and Orient Paper & Industries (Orient Paper) in the mid size space. | | 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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