Fw: Investor's Eye: Update - Maruti Suzuki India, NIIT Technologies, Bajaj Auto, Punj Lloyd

 

 

Investor's Eye [July 19, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Maruti Suzuki India Cluster: Apple Green Recommendation: Hold Price target: Rs1,399 Current market price: Rs1,117 Labour unrest turns ugly; risk of earnings downgrade looms Impact of strike on Maruti Suzuki's financials: we estimate revenue loss of Rs60 crore a day  The Manesar facility produces around 1,500 vehicles a day. The key products manufactured at the plant are Swift, Dzire and Ertiga. These are high-value products where there are no discounts and the customer waiting period is long. We assume a 25% higher realisation, of over Rs4 lakh a vehicle, for these vehicles as most of the variants sold are diesel models. Based on the output, we estimate a Rs60-crore revenue loss a day if the production at Manesar stops (assuming there's little inventory in the warehouse). A prolonged strike would affect the company's margins as well as profitability on account of the lower economies of scale and large fixed costs. The knee-jerk reaction in the stock price has factored in the short-term impact but a delayed resolution of the matter can cause further downside as well as a downgrade of the earnings estimate for FY2013.  Valuation  We are still assessing the situation at the Manesar plant and keeping our FY2013 earnings expectation unchanged. There would be serious risks if the situation lasts for more than three to four days. Our worries have considerably increased with the death of the general manager (HR) of the Manesar plant and the large-scale arrest of the suspects for an attempt to murder.  The knee-jerk reaction of the stock price has already factored in the short-term production risks. However, given the increased vulnerability of labour, as seen in the past year, the company's earnings may see significant downgrades. We maintain our Hold recommendation on the stock.   NIIT Technologies Cluster: Ugly Duckling Recommendation: Buy Price target: Rs340 Current market price: Rs291 Price target revised to Rs340 Result highlights Soft quarter; rupee benefits aid profitability: The June quarter is traditionally a soft quarter for NIIT Technologies (NTL) as it is a seasonally slow quarter for Geospatial Information Services (GIS; revenues of GIS dropped by 15.3% quarter on quarter [QoQ] in Q1FY2013). Thus, the consolidated revenues of the company remained flat for the quarter on a constant currency basis (0.5% QoQ). However, driven by rupee depreciation, the revenues in Indian rupee (INR) terms were up by 5.9% QoQ to Rs469.6 crore.  During the quarter, the revenues from the Morris Communication joint venture (JV) were up 5.7% QoQ to Rs25.9 crore, whereas Proyecta reported revenues of Rs14.2 crore, down 1.4% QoQ. The Room Solutions revenues have jumped 16.9% QoQ (after a sharp fall of 16.7% in Q4FY2012) to Rs41.5 crore and reported a margin of 23%, up 300 basis points QoQ.  The EBITDA margins were down 80 basis points to 16% (below our expectations of 17%). The fall in the margins can be attributed to wage hikes (-235 basis points), whereas rupee benefits (+150 basis points) and offshoring in the Morris JV (+40 basis points) remain the margin tailwinds for the quarter.  The net other income for the quarter came in at Rs21 crore, as against Rs4.6 crore of losses in Q4FY2012. The higher other income was driven by Rs17.3 crore of foreign exchange gain from revaluation of assets and liabilities as against a loss of Rs7 crore in Q4FY2012. The net profit for the quarter was higher by 24.5% QoQ to Rs57.5 crore, ahead of our estimates of Rs54.1 crore.  During the quarter the company added five new clients - two in the transportation space and one each in the banking, financial services and insurance (BFSI); manufacturing; and government verticals. In the government space, the company added the state of Odisha under the Crime and Criminal Tracking Network and System (CCTNS) program (deal size Rs41 crore).  Healthy order intake; backlog remains strong: The company witnessed a healthy order intake of $83 million in the quarter under review. The order intake for the quarter includes a renewal from a banking and financial services (BFS) client worth $15 million. The order intake was fairly spread across geographies with 30% coming from the USA, 36% from Europe, Middle East & Africa (EMEA) region and the balance 28% from the rest of the world (RoW) geography. The orders executable in the next 12 months stood at $240 million against $243 million at the end of the sequential previous quarter, up 20% year on year (YoY). The company has seen an uptick in the executable order book from around $140 million in Q1FY2011 - Q4FY2011 to around the $240 million levels in the last four quarters.  Valuation and view: With a strong order backlog of $240 million and strong client engagements, NTL's management remains confident of beating Nasscom's growth guidance for FY2013. However, given the macro uncertainties, the management has cautioned on volatility in the sectoral demand environment. We continue to remain positive on NTL given its predictable earnings profile in the current uncertain industry environment. We have reset our currency estimates to Rs54.5 and Rs54; consequently we increase our earnings per share (EPS) estimates by 7.2% and 5.6% for FY2013 and FY2014 respectively. We maintain our Buy rating on the stock with a revised price target of Rs340.    Bajaj Auto Cluster: Apple Green Recommendation: Hold Price target: Rs1,690 Current market price: Rs1,549 Top gear-low speed combination giving an uneasy drive Cutting FY2013 volume estimates  Bajaj Auto Ltd (BAL)'s management has maintained its volume target at 5 million units, that is a 15% year on year (YoY) volume growth target for FY2013. However it also expressed caution on account of the poor show of Q1FY2013 (where volumes declined 1.3%YoY). This has made the full year target challenging. The optimism is built around expectations of a sharp growth revival in H2FY2013 on account of new product launches, revival in exports and general improvement in sentiments.  We remain conservative as we expect increased competitive intensity in the domestic market, sustenance of the inflationary trend due to poor monsoon pick-up, and a volatile export market scenario. We are cutting our volume estimates for FY2013 to 4.65 million units reflecting a growth of 7% YoY. We expect the management to eventually cut its volume guidance in the due course.  Margins on path of structural improvement through FY2014 We expect the company to report better operating margins in the next three quarters on account of price hikes taken, better product mix and improved three-wheeler mix. As we eventually move towards FY2014, the export realisations would see a quantum jump with the dollar strengthening against the rupee from Rs50 to Rs55. Valuation We remain conservative and cut down volume growth expectations for FY2013 to 7% to 4.65 million units while we expect FY2014 volumes at 5.2 million units, ie +13.1% YoY. We take a positive view on the margins over the next few quarters and thereafter in FY2014. While we are cutting our FY2013 earnings per share (EPS) estimate by 2% to Rs112 per share; we maintain our FY2014 EPS estimates at Rs135 per share. Based on FY2014 valuations, our target price of Rs1,690 remains unchanged. We maintain our Hold recommendation on the stock.    Punj Lloyd Cluster: Apple Green Recommendation: Hold Price target: Rs63 Current market price: Rs54 Annual report review Key points Delivers strong revenue growth in FY2012 after two years of decline: After two consecutive years of reporting a decline Punj Lloyd (Punj) managed to deliver a strong 31% growth year on year (YoY) in its revenues to Rs10,313 crore in FY2012. The growth was largely led by robust order inflows and better execution in FY2012. In FY2011 its revenues had been affected because work in Libya, which accounted for a major chunk of its order book till FY2011, had come to a complete halt due to a political crisis. However, with the company bagging projects worth Rs15,370 crore from the other regions, the share of Libya came down (few Libyan projects removed from order book too) significantly to 16% of the order book in FY2012. The current order book is 2.6x its FY2012 revenues which provides strong revenue visibility for the future. Further, the Libyan orders are expected to resume work in H2FY2013 which would boost the revenues.  Witnesses turnaround at the operating level too: At the EBITDA level too, Punj was able to improve its margins from 4.9% in FY2011 to 6.5% in FY2012. The turnaround was possible due to (1) improved execution of orders; (2) the withdrawal of financial support to Simon Carves; and (3) cost control. Punj followed centralised procurement for many of its core items like steel, cement, consumables and equipment in FY2012. It also laid emphasis on procuring material from the low-cost countries. However, despite the sharp growth at the EBITDA level, Punj reported a loss at the earnings level due to high interest and depreciation charges and low other income, though the loss was lower at Rs151 crore against the loss of Rs166 crore in FY2011. But on a reported basis, it made a profit of Rs92 crore supported by a net gain of Rs83 crore on account of the deconsolidation of Simon Carves and a foreign exchange (forex) gain of Rs190 crore. Working capital days improve but problem at debt level persists: The consolidated debt for Punj stood at Rs5,603 crore at the end of FY2012, with the debt/equity ratio rising to 1.9x for FY2012 vs 1.5x each in FY2011 and FY2010. In the previous two years the company had been adversely affected by the political crisis in Libya and the slower execution of its legacy orders which had resulted in a surge in its working capital and debt level. However, in FY2012 as the execution of orders improved and Simon Carves was put under administration, the working capital days improved from 189 days in FY2011 to 145 days in FY2012. However, this did not reflect in the debt level. The total debt in FY2012 surged by more than Rs1,000 crore due to the debt taken to fund the capital expenditure (capex) during the fiscal. Further, the average cost of debt for the company went up by about 200 basis points because the additional funds were being raised at much higher rates.  Maintain estimates with Hold recommendation: Punj witnessed strong order inflow in FY2012 which improved the revenue visibility for the next two years. Further, it has started showing an improvement at the execution level over the last few quarters along with a gradual improvement in the operating profit margin (OPM). Even the situation in Libya is improving though it has not stabilised yet. The company has started mobilising resources in the country and we expect order execution to pick up soon. Thus, the worry for Punj now remains bringing its debts under control, as this would help in reducing its interest burden and help the operating profit to percolate through to the net level. The company plans to restructure its debts by replacing the domestic debt with foreign debt which would reduce the cost of debt. Hence, any success in lowering the cost of debt will add to the growth at the net profit level. We maintain our Hold rating on Punj and keep our estimates for the company unchanged. At the current market price, the stock is trading at 17.9x and 6.6x its FY2013E and FY2014E earnings.     Click here to read report: Investor's Eye Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.