| Summary of Contents
| STOCK UPDATE Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs28
Current market price: Rs23 Q1FY2013 results: First-cut analysis Result highlights Ashok Leyland's Q1FY2013 results: PAT 23% below estimates on higher employee and interest costs
Ashok Leyland Ltd (ALL)'s performance in Q1FY2013 was significantly below our and the street's estimates. Higher employee costs impacted the operating margin that came in 70 basis points below our estimates at 8%. Higher interest costs further marred profitability leading to a profit after tax (PAT) of Rs67 crore, 23% below estimates. Positive surprises -
Contribution per vehicle improved on a sequential basis despite increased proportion of buses and the traded light commercial vehicle (LCV) Dost. -
Depreciation at Rs89 crore was below our estimates of Rs98 crore. Negative surprises -
Employee costs increased on both, year-on-year (Y-o-Y) and quarter-on-quarter (Q-o-Q) basis. The employee/sales at 8.9% was much above our expectation of 7.1%. -
Financial charges at Rs83 crore were higher on a sequential basis despite of it being a seasonally lean period. This may be due to higher inventory levels at the stockyard. Valuation
In the recent analyst interaction of July 4, 2012, the company maintained its volume guidance of 1.07 lakh units ex-Dost but lowered its FY2013 margin guidance to 10%. We would seek further clarity on volume and margin expectations from the conference call to be held tomorrow. We maintain our Hold recommendation on the stock but may revise our estimates post an interaction with the management in our subsequent note. Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs597
Current market price: Rs582 Q1FY2013 results: First-cut analysis Result highlights -
An impressive all-round performance; higher tax incidence affects profit: Lupin reported better than expected revenues and profit for Q1FY2013 on a good all-around performance during the quarter. Its net sales grew by 42.8% year on year (YoY) to Rs2,219.2 crore during the quarter and its profit before tax rose by 67.2% YoY to Rs405.8 crore. The profit growth was driven by a 158-basis-point year-on-year (Y-o-Y) rise in the operating profit margin (OPM) to 19.1% and a 126% Y-o-Y growth in the other income during the quarter. However, a sharp rise in the tax incidence (29.8% in Q1FY2013 vs 11.8% in Q1FY2012) restricted the profit growth to 33.5% YoY at Rs280.39 crore. But even that is impressive. -
US, Japan and India lead the growth: During the quarter the revenues from the US market rose by 62.8% YoY to Rs802 crore while the revenues from the Japanese market (excluding the newly acquired Irom Pharma) jumped by 36.7% YoY to Rs227.8 crore. The revenues from Japan (including Irom Pharma) now account for 15% of the total revenues of the company. Lupin continues to outpace the domestic formulation market with a 25% Y-o-Y growth recorded during the quarter. The growth in the other emerging markets was also impressive at 54% YoY to Rs117.4 crore. We have Buy rating on the stock with a price target of Rs597. Wipro
Cluster: Apple Green
Recommendation: Hold
Price target: Rs360
Current market price: Rs345 Downgrade to Hold Result highlights -
Performance below expectations, disappointing guidance: Wipro's overall performance for Q1FY2013 was below our expectation. The most disappointing part was the Q2FY2013 guidance, which suggested a 0.3% to 2.3% sequential growth to $1,520-1,550 million, much below our as well as the street's expectations. This is in spite of the September quarter being a traditionally strong quarter for the IT sector. -
Soft volume growth: IT services revenues were down 1.4% quarter on quarter (QoQ) to $1,514.8 million (our expectation was of $1,531 million). On a constant currency basis, the revenues were up 0.3% QoQ to $1,540 million. The volume growth came in at 0.8% QoQ. Onsite pricing was down by 0.9% QoQ (up 0.2% on constant currency basis) and offshore pricing was down 2% (down 1% on constant currency basis). -
Margins disappoint, incremental investments continue in S&M space: The IT services' earnings before interest and tax (EBIT) margins have shown an improvement of 30 basis points to 21% (much below our expectations of 22.5%), despite the rupee benefits (11.1% rupee depreciation) and absence of full quarter impact of wage hikes (effective from June 1, 2012). The lower margin performance has been attributed to incremental allocation to selling and marketing (S&M), which has gone up by 22.9% to Rs533 crore (additional investment of Rs100 crore on QoQ basis). As a matter of fact, on a trailing twelve month (TTM) basis, Wipro's S&M investments have gone up by 34% to Rs1,781 crore. Wipro is heavily investing and strengthening its front end as a part of its business transition. Thus the margins are expected to continue to remain in a narrow range in the next few quarters, as the benefits of investments will take time to reflect. -
Net profit below expectation: The consolidated revenues of the company for the quarter were up 6.8% QoQ to Rs10,483.2 crore. The net other income was down 33% QoQ to Rs132.5 crore driven by higher foreign exchange (forex) losses pertaining to external commercial borrowing (ECB) to the tune of Rs100.2 crore as compared to Rs33.7 crore in Q4FY2012. The net profit was up 6.7% QoQ to Rs1,580.2 crore (below our expectations of Rs1,708.9 crore). -
Performance/guidance does not favour revival thesis: Wipro has failed to meet the upper end of its revenue guidance in constant currency terms in four of the last six quarters. Volume growth continues to languish with an average 1.1% sequential growth in the last three preceding quarters (lowest among the peers). Further, a lackluster guidance for the seasonally strong September quarter reflects at a slower than anticipated ramp up in the clients' accounts. We draw comfort from the incremental investments in the S&M area (130 people in the hunting team) and clients mining ($100 million clients moved to 8 from 4 in one year). However any meaningful benefit from the S&M investments would take time to reflect in numbers (management indicates at 8-12 months time frame). Overall, looking at the current business traction and increasing uncertainties in the macro environment, we expect Wipro to take atleast three quarters to come closer to match its peer companies' (TCS, HCL Technologies, Cognizant) growth levels. -
Outlook and valuation: We have reset our currency estimates to Rs54.4 and Rs54 and have lowered our earnings estimates by 4.7% and 5.8% on the back of lower revenue estimates of 4.2% and 9.2% respectively for FY2013E and FY2014E. In the last one month Wipro's stock price has corrected by close to 14% and is trading at close to 12x FY2014E earnings. Though any major downside from the current levels looks unlikely, we remain circumspect on upside triggers. With lack of positive investment triggers in the medium term, we have downgraded our rating to Hold from Buy and lowered the target price to Rs360. Hindustan Unilever
Cluster: Apple Green
Recommendation: Hold
Price target: Rs479
Current market price: Rs476 Price target revised to Rs479 Result highlights -
Strong beginning to FY2013: Hindustan Unilever Ltd (HUL) began FY2013 on a strong note by posting a strong operating performance in the first quarter of the fiscal. Despite macro uncertainties and sustained high food inflation HUL was able to maintain a strong growth in the domestic consumer business, which grew by 19% year on year (YoY) in Q1FY2013. The sales volume growth stood at 9% (close to 10% volume growth in Q4FY2012). This was the fourth consecutive quarter when HUL's volume growth in the consumer business stood in the range of 9-10%. The highlight of the quarter was close to a 220-basis-point year-on-year (Y-o-Y) improvement in the gross profit margin (GPM). -
Performance snapshot: HUL's net sales grew by 13.7% YoY to Rs6,250.2 crore in Q1FY2013, driven by a 21% growth in the home and personal care (HPC) business. The food business' revenue growth remained at 11% YoY during the quarter. The stand-alone business' GPM improved by 216 basis points YoY to 46.1% and its operating profit margin (OPM) improved by 137 basis points YoY to 13.4%. Judicious price increases in the product portfolio, the benefits of a low-cost inventory and effective buying of the key inputs at the global level helped HUL to post a strong improvement in the GPM during the quarter. Hence, the operating profit grew by 26.7% YoY to Rs837.9 crore. However a higher than expected other income (including the other operating income) led to a 46% Y-o-Y growth in the adjusted profit after tax (PAT) to Rs848.8 crore. The other income (including income from other operations) stood at Rs347.2 crore in Q1FY2013 as against Rs126.1 crore in Q1FY2012. The surge in the other income was aided by a Rs71.7-crore profit on the sale of long-term investments and the interest on an income tax refund of Rs34.5 crore. -
Upward revision in estimates: We have revised upwards our earnings estimates for FY2013 and FY2014 by 5.0% and 6.2% respectively to factor in the higher than expected OPM and other income during the quarter. With the prices of the key inputs showing a softening trend, we expect the OPM to stand in the range of 13.5-13.8% in the coming years. -
Outlook and valuation: Though the strong volume growth momentum sustained in Q1FY2013, we believe the volume growth has to be keenly monitored in the coming quarters in view of the poor monsoon and the persistent high food inflation. We believe HUL's portfolio of strong brands (catering to the masses as well as the premium end of the market) will help overcome the concerns and maintain the growth momentum in the coming quarters. Also, banking on the Indian consumer growth story the company has maintained its thrust on innovation and enhanced its distribution reach. These will be the key growth drivers for the company in the long run. We expect HUL's top line and bottom line to grow at a compounded annual growth rate (CAGR) of 17% and 19% respectively over FY2012-14.
HUL has traded at an average one-year forward multiple of 27x in the uncertain market environment of the last twelve months. That is 6% above its four-year average multiple of 25.5x. We have revised our price target to Rs479 (valuing the stock at 27x its FY2014E earnings of Rs17.7). However, with a limited upside from the current level we maintain our Hold recommendation on the stock. At the current market price the stock is trading at 31.3x its FY2013E earnings per share (EPS) of Rs15.2 and 26.8x its FY2014E EPS of Rs17.7. Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,584
Current market price: Rs1,355 Price target revised to Rs1,584 Result highlights -
Results exceed expectations; forex loss hurts margins: Larsen and Toubro (L&T)'s Q1FY2013 results were better than expected mainly on account of a robust performance by its engineering and construction (E&C) division and a higher other income. However, the good operating performance was shadowed by a foreign exchange (forex) loss of Rs267 crore. The order inflow registered a year-on-year (Y-o-Y) rise of 21% to Rs19,594 crore, led by the spill-over of the delayed orders from FY2012. The company has maintained its guidance of a 15-20% growth in both revenues and order inflow for FY2013. -
Order inflow boosted by spill over from FY2012: Of the total order intake of Rs19,594 crore, about Rs5,000 crore (~25% of total intake) is attributable to spillovers from the previous quarter; excluding which the order inflow for Q1 would show a de-growth of 10% on a yearly basis. The share of slow moving orders in the order book has risen to 10% since FY2012. The current order book stands at Rs1,53,095 crore (up 12% YoY and 5% quarter on quarter [QoQ]). The majority of the orders were received from the private players in the transportation, and building and factory segments. Going forward, the company expects good traction from the new markets like West Asia and South-East Asia. -
Cautious in taking BOT projects: The management indicated that they would be cautious in taking fresh build-operate-transfer (BOT) orders as their prime focus now in executing current projects on hand and want to keep equity investment requirement under check. They have not mentioned of any new projects in order inflows expected in FY2013. -
Estimates marginally upgraded: In view of robust execution and order inflow in Q1FY2013 along with spectacular performance of "others" segment (mainly integrated engineering services) we have upgraded our earnings estimates by 4-5% for FY2013 and FY2014. We expect the company's stand-alone earnings to grow at a compounded annual growth rate (CAGR) of 9% over the next two years. Our revised consolidated earnings per share (EPS) estimate stands at Rs97.9 and Rs106.5 for FY2013 and FY2014 respectively. Its overseas business (exports) has increased to 17% this quarter from the past level of 11-12%, led by sound execution of orders bagged in FY2012. With such increasing contribution of its overseas business, we feel that the impact of fluctuations in foreign currencies on its performance could become more unpredictable in the coming quarters. -
Price target revised to Rs1,584: While the company reported overall robust results for the quarter, the achievement of yearly order inflow guidance would be highly subjective to an uptick in infrastructure development activities in the country and in the Middle East region. Moreover, excluding BOT projects might limit the growth in order inflow, especially in the public private partnership (PPP) projects. At the current market price the stock is trading at 12.7x its FY2014 consolidated estimates. Our sum-of-the-parts (SOTP) based price target stands revised upwards to Rs1,584 on account of revised estimate of the standalone business. We continue to believe that L&T is the best proxy play on India's infrastructure growth theme and hence maintain our Buy rating on the stock. Torrent Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs760
Current market price: Rs662 Strong performance; forex loss spoils the show Result highlights -
Q1FY2013 results in line with expectations: During Q1FY2013 the net sales of Torrent Pharmaceuticals (Torrent) grew by 20.4% year on year (YoY) to Rs736 crore on the back of a 33% year-on-year (Y-o-Y) rise in the international business and a 13% Y-o-Y increase in the domestic formulation business. The operating profit margin (OPM) excluding the foreign exchange (forex) loss was 82 basis points higher YoY at 20.3%. Moreover, the other operating income jumped by 179% YoY to Rs31.2 crore, which included Rs15 crore of non-recurring revenues. This led the profit before tax (PBT) to jump by 48.3% YoY to Rs165 crore. However, the profit after tax (PAT) remained flat at Rs102 crore mainly due to a forex loss of Rs24.7 crore. Excluding the forex loss the PAT would grow stronger by 53.4% to Rs127 crore. The revenues and profit are largely in line with our expectations. -
Better rupee realisation and new launches in key markets drive growth: During the quarter, the revenues from the USA jumped by 88% YoY to Rs78.9 crore while the revenues from Brazil, which witnessed three product launches during the quarter, recorded a 26% growth YoY (from a high base due to the spill-over effects in Q1FY2012) to Rs135.5 crore. The revenue growth in the international market can partly be attributed to a 15% better rupee realisation (Rs55/dollar in Q1FY2013 vs Rs47-48/dollar in Q1FY2012). However, new launches in the US and emerging markets also played a vital role in driving the strong revenue growth. -
We maintain our estimates, price target and recommendation: The Q1FY2013 performance has been in line with our expectations. Therefore, we maintain our estimates for FY2013 and FY2014. We maintain our Buy recommendation with the old price target of Rs760 (implies 13x average earnings for FY2013-14). Polaris Financial Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs163
Current market price: Rs115 Price target revised to Rs163 Result highlights -
Revenues in line: In Q1FY2013, Polaris Financial Technology (Polaris)'s revenues were up 3.9% quarter on quarter (QoQ) to $107.6 million (in line with our expectations of $106.7 million). On a constant currency basis, the revenues were up 5.6% QoQ to $109.3 million. IT services' (including BPO) revenues were up 3.2% QoQ to $83.1 million, whereas Intellect revenues were up 6.4% QoQ to $24.5 million. -
Margins disappoint: The margins continued to disappoint; despite rupee benefits for the quarter and absence of wage hikes. The EBITDA margins declined by 20 basis points to 12.2% in the quarter. Adjusting for hedging loss of Rs12.4 crore in the revenue line (company has adopted Accounting Standard 30 with effect from April 1, 2012), the EBITDA margins look more decent at 14.1%. Going forward, the management expects margins to move in a narrow range in the coming quarters as currency benefits would be offset by wage hikes and incremental research and development (R&D) investments in the products space. -
Net income in line, includes profit on real estate sale: The adjusted net income for the quarter excluding one offs stood at Rs51.2 crore, up by 32.5% QoQ. However, the reported net income including profit on sale of real estate of Rs10 crore and one offs of Rs22.5 crore in Q4FY2012 (pertaining to sale of real estate of Rs15 crore and tax benefit on merger of Optimus business of Rs7.5 crore) remained flat at Rs61.2 crore. -
Margins to remain in narrow range due to investments in R&D and hedging losses in revenues line: Polaris' management indicates at stable EBITDA margins for the coming quarters and for FY2013 despite rupee benefits. The lower margins performance could largely be attributed to hedging losses in the revenues line (revenue of around $25 million hedged at around Rs50.34 for the next eight quarters). Thus there will be around Rs11-12 crore of hedging loss per quarter in the revenue line. This coupled with incremental investments of Rs95 crore towards product R&D for FY2013E would restrict any meaningful margin improvement in the coming quarters. -
Valuation and view: We reset our currency estimates to Rs53.2 and Rs53.1 and also tweak our margins estimates to 12.6% and 13.2% for FY2013 and FY2014 respectively. Consequently we have lowered our earnings estimates by 5.2% and 8.6% respectively for FY2013 and FY2014. We continue to remain optimistic on Polaris' Intellect side of the business. However macro uncertainties might pose some hindrance in the medium term. The stock has corrected close to 24% in the last three months and at the current price of Rs114, it is available at attractive valuation of 4.7x FY2013 and 4.2x FY2014 earnings estimates. We maintain our Buy recommendation on the stock with a revised price target of Rs163.
SECTOR UPDATE Telecommunications Weak reported net adds; Bharti continues to lead In June 2012 the GSM operators across India (excluding Reliance Communications [RCom] and Tata Telecommunications [Tata Tele]) added 4.64 million SIM cards, taking the overall base to approximately 677.3 million. That is an increase of 0.7% over May 2012's base. On the net additions front, the June net additions (of about 4.64 million) reported a 36.1% decline than that reported in the previous month. After May witnessing a robust growth in net adds, the industry subscriber addition dipped again in June led by weak performance from the new players. The overall subscriber base grew by a mere 0.7% month on month (MoM; on a restated basis) taking the aggregate GSM subscriber base across India (excluding RCom and Tata Tele) to 677.3 million. View: The Indian telecommunications space is plagued with a myriad of policy issues and regulatory uncertainty. We believe that constant media news on the sector with regards issues like 2G spectrum auction, base pricing, spectrum refarming, excess payment of spectrum charges beyond 6.2 MHz and the new 4G spectrum are weighing on the sector. Thus telecom stocks could be under pressure in the near term. However, we remain positive on Bharti from a long-term perspective in view of its valuation. We maintain our Buy recommendation and price target of Rs362 on Bharti.
VIEWPOINT Idea Cellular Displays competitive intensity amid regulatory uncertainty Idea Cellular (Idea)'s Q1FY2013 results were below our as well as the street's expectations on the revenue/margin as well as the earnings front. The key performance indicators showed a mixed trend. The volume growth came in at 5.3% quarter on quarter (QoQ), while a strong competitive environment continued to exert pressure on the realised rate. What happened in the quarter gone by? -
Muted top line growth; misses estimates: Idea's Q1FY2013 revenue showed a modest 2.5% sequential growth that was lower than our as well as the street's expectations. We expected a 5.2% revenue growth. The lower revenue growth was on account of pricing pressure (the average revenue per minute [ARPM] saw a 2.4% dip on a sequential basis) with no elasticity (flat minutes of usage on a sequential basis; stood at 379 minutes per user). -
Reported operating profit up 5.8% QoQ; while on an adjusted basis the same contracted 4.8%: The leveraging advantage was missing in Idea's Q1FY2013 performance; prima facie on a reported front though the operating profit showed an uptick of 5.8% on a Q-o-Q basis. The same was a result of an exceptional expense of Rs150 crore booked in Q4FY2012. Adjusting for the same, the operating profit showed a contraction of 4.8%; consequently the adjusted margin too contracted by 200 basis points. -
Earnings miss estimates as well: The net earnings too missed expectations in line with the miss on revenue and operating performance fronts. The net earnings for Q1FY2013 came in at Rs234 crore (-2% QoQ; +32.1% year on year [YoY]). Our view: Idea's Q1FY2013 quarterly performance displayed strong competitive forces playing on the industry. The same was visible from the limited elasticity (2.4% QoQ decline in the realised rate); flat minutes of usage (MoU) and a 2.5% decline in ARPU. Despite strong execution capabilities, Idea failed to deliver on margin expansion. In fact on an adjusted basis, the operating profit margin (OPM) contracted by 200 basis points on a sequential basis. Along with a challenging operating environment, the regulatory risk and ambiguity continue to plague the sector and Idea in specific. Thus we believe that the stock's performance is more likely to be directed by regulatory moves and despite a decent valuation (at 13x 1 year forward price earning ratio [PER] and 5x EV/EBITDA) we continue with our neutral stance on the stock.
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