| Summary of Contents
| STOCK UPDATE ITC
Cluster: Apple Green
Recommendation: Hold
Price target: Rs271
Current market price: Rs249 Price target revised to Rs271 Result highlights -
Results in line with expectation: ITC's Q1FY2013 results are broadly in line with our expectation with the bottom line growing by 20.2% year on year (YoY) to Rs1,602.1 crore. As anticipated, the sales volume of the core cigarette business stood flat during the quarter. The highlight of the quarter was once again the strong performance of the non-cigarette fast moving consumer goods (FMCG) business whose revenues grew by 23.0% YoY and whose losses declined by 52.0% YoY during the quarter. The hotel business disappointed with flat revenues and a drop in the business profitability during the quarter. -
Performance snapshot: The income from operation (including the other operational income) grew by 14.7% YoY to Rs6,713.1 crore in Q1FY2013, marginally lower than our expectation of Rs6,848.2 crore. The steady top line growth could be attributed to 15% year-on-year (Y-o-Y) revenue growth in the core cigarette business and above 20% Y-o-Y growth in the non-cigarette FMCG business. The higher sales realisation (especially in the core cigarette business) and the improved revenue mix aided the gross profit margin (GPM) to improve by 109 basis points YoY to 61.6%. The operating profit margin (OPM) improved by a strong 183 basis points YoY to 35.3%. Hence, the operating profit grew by 21.0% YoY to Rs2,368.3 crore and the reported net profit grew by 20.2% YoY to Rs1,602.1 crore. -
Segmental performance: The performance of the core cigarette business was in line with expectations with a 15% Y-o-Y growth in the gross revenues and a 142-basis-point Y-o-Y improvement in the PBIT margins to 31.3% in Q1FY2013. The cigarette sales volume affected by a significant price increase in the cigarette portfolio stood almost flat during the quarter. Q1FY2013 was the fourth consecutive quarter of above 20% revenue growth YoY in the non-cigarette FMCG business. The agri business' revenues stood flat YoY but the PBIT margin improved by 93 basis points YoY to 10.1% during the quarter. The first quarter of a fiscal is normally a lean period for the hotel industry in India. This along with the macro uncertainties in the global markets led to flat revenues and a sharp decline of above 1,000 basis points in the PBIT margin of the hotel business during the quarter. -
Outlook and view: We broadly maintain our earnings estimates for FY2013 and FY2014. We expect the non-cigarette FMCG business to maintain the strong growth momentum in the coming quarters. ITC's cigarette business sales volumes are likely to remain flat in FY2013, but its revenues are expected to grow by ~18% YoY largely on account of the price increases undertaken in the cigarette portfolio. The hotel business is expected to improve with an improvement in the global macro environment. Overall, we expect ITC's top line to grow at a compounded annual growth rate (CAGR) of 17.2% over FY2012-14. With an OPM of about 36%, we expect the bottom line to grow at a CAGR of 21.0% over FY2012-14.
At the current market price the stock is trading at 26.6x its FY2013E earnings per share (EPS) of Rs9.4 and 22.1x its FY2014E EPS of Rs11.3. In the last twelve months ITC has traded at an average one year forward multiple of 24.0x on the back of its strong business performance. We have revised our price target upwards to Rs271 (based on 24x its FY2014E EPS of Rs11.3). However we maintain our Hold recommendation on the stock due to limited upside in the stock price from the current level. Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Hold
Price target: Rs250
Current market price: Rs212 Robust performance but fall in order book a concern Result highlights -
Results above expectation, future growth uncertain: The Q1FY2013 results of Bharat Heavy Electricals Ltd (BHEL) were above expectation due to good order execution and a foreign exchange (forex) gain of Rs140 crore. The order inflow continues to be subdued aggravating the concerns about the company's growth. The management maintained its order inflow guidance of Rs60,000 crore in FY2013 (less than 10% of this target was achieved in Q1FY2013) which looks an uphill task in the current environment of slow industrial capital expenditure (capex) and tough competition. -
Robust 18% growth in revenue: In Q1FY2013, the turnover of BHEL grew by 18%, which was higher than our expectation of a 10% year-on-year (Y-o-Y) growth. The industry division's revenues grew by a robust 19% year on year (YoY). The power division also reported a pick-up in execution with a 17% yearly growth in its revenues. -
Margin stable at 13.1%: The company reported an operating profit margin (OPM) of 13.1%, which was lower than our expectation of 13.5% but higher than 13% posted in Q1FY2012. An increase in the raw material cost was largely in line with the increase in the revenues. The other expenses jumped by 32% YoY, led by higher provisioning as well as power and freight charges. In terms of segments, the power segment reported a rise in its PBIT margin to 17.8% from 16.5% in Q1FY2012 whereas the industry segment reported slight margin pressure at 21%. -
PAT increased by 13% YoY: The other income rose by a subdued 10% YoY as a result of a jump in the foreign exchange (forex) gain of approximately Rs140 crore while the interest on cash and deposits fell on a lower base. The depreciation charge jumped by 34% YoY on the capital expenditure (capex) undertaken in the later part of FY2012. The adjusted net profit rose to Rs920.9 crore, which was above our estimate of Rs854 crore. -
Disappointing order backlog position for the quarter: The company's order book stood at Rs132,900 crore (down 17% YoY and 2% on a sequential basis) at the end of Q1FY2013 as against Rs159,600 crore at the end of Q1FY2012. The power sector accounted for 80% of the orders, the industry 13% and the rest was contributed by exports. The reported order inflow for the quarter was Rs5,590 crore (up 126% YoY on an extremely low base and 18% down sequentially). The order booking from the power sector stood at Rs3,797 crore (2,970MW); the industrial segment's order intake plummeted by 62% YoY to Rs833 crore. The book/bill ratio declined further to 2.6x (the lowest in 24 quarters) from the past levels of 4x+, which has aggravated the concerns about its growth. It indicated that the order inflow could pick up in the subsequent quarters on the back of a pick-up in the power sector's orders. The company is also increasingly focusing on non-power sectors like railways, transport, power transmission and distribution as well as exports to diversify away from the power sector. -
Estimates maintained: We had sharply downgraded our earnings estimate in FY2012 when the company had reported a 63% fall in the order inflow. Hence, after the decent Q1 results, we are for now maintaining our estimates. Overall, we are estimating a negative compounded annual growth rate (CAGR) of 1% in the top line and that of 2% in the adjusted earnings over FY2012-13. The management maintained its order inflow guidance of Rs60,000 crore in FY2013 (less than 10% of this target was achieved in Q1FY2013) which looks an uphill task in the current environment of slow industrial capex and tough competition. The company is hoping to achieve this target by winning some major orders in the power and transmission & distribution sectors in the coming quarters. -
Future growth visibility remains a concern, maintain Hold: Overall, the company's performance was outstanding but it continued to disappoint with a sluggish order inflow. The long awaited import duty on power equipment has been recently approved by the government. However, the move is perceived to be too late to be effective as most of the ordering for the 12th Five-Year Plan has already taken place and the move is likely to benefit once the ordering for the 13th Five-Year Plan starts. BHEL's management also stressed that the import duty might help only to the extent of a 4% differential duty to the domestic players after accounting for the excise duty and the high import content in the super-critical power projects (which account for 25-30% of the equipment cost). Further, the domestic boiler and turbine manufacturing capacity is likely to face an overcapacity situation by 2015, which is likely to intensify the pricing competition. The supercritical orders expected from NTPC could boost BHEL's order book in the coming quarters. But these orders are also largely priced in now. Due to a lack of any near-term trigger we see limited upside from the current level. Hence, we maintain our Hold rating on the stock. At the current market price, the stock trades at 7.6x FY2014E earnings. We maintain our price target of Rs250 (9x FY2014E). Mahindra Lifespace Developers
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs400
Current market price: Rs324 Property sale boosted earnings Result highlights -
One-time item boosts Q1 results: For Mahindra Lifespace Developers (MLD) the divestment of the Ghatkopar property resulted in a strong revenue growth of 27.8% in Q1FY2013 and a 71.2% surge in the net profit to Rs29.3 crore. The management has not disclosed the exact amount from the sale of the Ghatkopar property. But it has indicated that after adjusting for the same the revenues would have declined by close to 20% YoY and the operating profit margin (OPM) would have been maintained sequentially while the profit after tax (PAT) would have been flat. The same would have been in line with our expectations. -
Sales booking continues to be muted; added two new land parcels: The sales booking continued to be muted in Q1FY2013 with MLD recording sales of Rs52 crore (0.16 million square feet [mn sq ft]) vs sales of Rs53 crore (0.13mn sq ft) in Q4FY2012 and Rs172 crore (0.34mn sq ft) in Q1FY2012. The sales primarily took place in its Nagpur project Bloomdale where it also launched the second phase during the quarter. MLD is awaiting approvals for its projects at Pune, Hyderabad and the subsequent phases of Iris Court at Chennai. During the quarter, the company acquired two new land parcels in Chennai and Pune each with the total developable area being 0.8mn sq ft. In Chennai, it will be coming out with its first affordable housing project. -
Muted addition of clients in MWC Jaipur: At Mahindra World City (MWC), the integrated business city promoted by the company, the total number of operational facilities grew by one (as compared with the previous quarter) to 39 vs 60 in Chennai. On the other hand, in Jaipur three clients were added to the operational list taking the count to 11 with another eight having initiated developments. At MWC Chennai and MWC Jaipur MLD also added two clients and one client respectively in the domestic tariff area. Further, during the quarter exports also commenced from the Handicrafts Zone in MWC Jaipur. -
Approvals hold the key: MLD has already sold more than 75% of its ongoing projects and execution on a majority of them is in advanced stages. Thus, the revenue visibility now completely depends on the new launches, which, in turn, depend upon the pending approvals. For the next two to three years MLD has a strong pipeline of 6.48mn sq ft awaiting approvals. Hence, timely approvals hold the key. Currently, it is awaiting final approvals for its projects at Pune and Hyderabad both of which got environmental clearance in Q1FY2013 and the subsequent phases of Iris Court at Chennai. All three are expected to be launched by the end of Q2FY2013. Any further delay in it might pose a problem for the company. -
Maintain Buy with price target of Rs400: We continue to like MLD due to the quality of its management and its strong balance sheet that can be leveraged for acquiring new land parcels in the distressed markets and for better execution of the existing land bank. But we continue to attribute a 10% discount to our net asset value (NAV) to factor in the risk of the projects getting further delayed on account of a delay in obtaining clearances. Hence, we maintain our Buy recommendation on the stock with a price target of Rs400. We would revisit our estimates after H1FY2013 once we get more clarity on the pending approvals for a few of its projects. At the current market price, the stock is trading at 0.8x its NAV, 10.6x FY2013 earnings estimate and 1.1x FY2013E price/book value (P/BV). Raymond
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs463
Current market price: Rs335 Price target revised to Rs463 Result highlights -
Q1FY2013's performance dismal on poor show by core textiles and branded apparels: Raymond posted dismal results for Q1FY2013, mainly led by a subdued performance in its core textile and branded apparel business. The revenue growth was muted at 10% year on year (YoY); it was largely in line with our estimates. Multiple factors like- (a) a sharp change in the product mix (fall of polyester wool's contribution by 400 basis points), (b) lack of wedding dates and (c) a general slowdown in the macroeconomic environment took a toll of the profitability of the textile business (reported an earnings before interest and tax [EBIT] loss of Rs8.6 crore for Q1FY2013 vs a profit of Rs24.1 crore in Q1FY2012), and also of the branded apparels business. Raymond reported a loss at the profit before tax (PBT) level and at the net level. The consolidated net loss for the quarter was Rs35 crore vis a vis a profit of Rs10.7 crore in Q1FY2012. -
Branded apparels & Retail continue to face challenges: On the branded apparels front, a visibly high slowdown in the consumer discretionary space impacted sentiments as was reflected in the negative same store sales growth (same store sales growth registered a 3% decline for the quarter). Consequently there was a contraction in the overall revenues of the branded apparels business. Low sales with high fixed overheads adversely impacted the margin (the same contracted by 710 basis points from 13% in Q1FY2012 to 5.8% in Q1FY2013). The management in the conference call reiterated that the macro environment still appears gloomy till the festive season that would start later this year by Q3FY2013. -
Our estimates stand revised downwards: Building in the pathetic performance of Q1FY2013, and further expecting Q2 and early Q3 to remain subdued, and expecting a recovery from late Q3FY2012 on account of festive season demand coupled with a favourable base of FY2012, we revise our FY2013 earnings estimate downwards by 15% from Rs30.4 to Rs25.8, while for FY2014 the estimates get tweaked downwards by 5.8% on a revised earnings per share (EPS) of Rs34.8 (from Rs36.9 earlier). -
We find value at current price; maintain Buy: Despite a weak Q1FY2013 performance (which lead us to reduce our FY2013 estimates), we continue with our bullish stance on Raymond as we expect the revival in consumer discretionary spent to start by late Q3FY2013 and continue till FY2014. Thus we expect Raymond to post a strong performance in FY2014. Besides performance, we believe that Raymond's strong brand equity strength, unmatched distribution network, strong focus on rejuvenating and innovating brands and increasing consumer connect are yet not captured in the valuations (Raymond currently trades at <10x its FY2014 price earning ratio [PER]). Further, any development with regard to the Thane land in the form of either joint development or disposal would lead to value unlocking and provide significant cash to the company. We continue to maintain our Buy rating and our revised sum of the parts (SOTP) based price target for the stock of Rs463 (valuing the core business at 10.5x FY2014E earnings +50% value for the Thane land bank parcel).
SHAREKHAN SPECIAL Monthly economy review Economy: industrial growth remains subdued; inflation remains above RBI's comfort zone -
In May 2012 the Index of Industrial Production (IIP) increased by 2.4% after remaining in the negative territory in the previous two months. The higher than expected growth for the month was led by a 2.5% growth in the manufacturing sector and a 5.9% growth in the electricity sector. The April 2012 IIP numbers have been revised downwards to -0.9% from 0.1%. For year-till-date (YTD) FY2013, the IIP growth stood at 0.8% vs 8.2% in the previous year. -
The Wholesale Price Index (WPI)-based inflation for June 2012 came in at 7.25% as against 7.55% in May 2012. The same was slightly below the market's expectation. However, the inflation rate for April 2012 has been revised upwards sharply to 7.5% from the provisional figure of 7.23% led by an upward revision in the fuel segment. -
The trade deficit for June 2012 came in at $10.3 billion, lower than the trade deficit recorded in May 2012. The trade deficit declined by 27% year on year (YoY). The growth in the exports remained weak showing a decline of 13.5% YoY (down 4.2% in May 2012). The imports saw a decline of 5.5% YoY (as against a decline of 7.4% in May 2012). Banking: Government policy action remains key to RBI action -
Though in the forthcoming policy meet on July 31, 2012 the market's expectation of a rate cut by the Reserve Bank of India (RBI) is not significant, but if the government takes any major action on the diesel pricing front the RBI may surprise with a 25-basis-point reduction in the cash reserve ratio (CRR)/repo rates. -
The credit offtake registered a growth of 17.7% YoY (as on July 13, 2012), which was in line with the growth recorded in the previous month. The credit growth is broadly in line with the RBI's guidance of 17%. -
The deposits registered a growth of 14.7% YoY (as on July 13, 2012), which is higher than the 14.3% growth seen during the previous month (on June 15, 2012). The growth in the deposits has been subdued due to the higher yields offered by the other debt instruments. -
The credit/deposit (CD) ratio was at 75.9% (as on July 13, 2012), marginally lower than 76.4% seen as on June 15, 2012. Meanwhile, the incremental CD ratio increased to 88.9% for the period and was lower than the ratio seen during the previous month, reflecting a lower credit offtake during the period. -
The yields on the government securities (G-Secs; of ten-year maturity) stood at 8.07% as on July 23, 2012, in line with the previous month's figure. The G-Sec yields across the long-term maturities have remained stable on a month-on-month (M-o-M) basis but have declined in the short term. Equity market: FIIs remain buyers
During the MTD period in July 2012 (July 1-23, 2012), the FIIs were the net buyers of equities and the domestic mutual funds were the net sellers of equities. For the MTD period in July 2012 (July 1-23, 2012), the FIIs bought equities worth Rs9,377 crore while the mutual funds sold equities worth Rs2,225 crore.
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