| Summary of Contents
| STOCK UPDATE Marico
Cluster: Apple Green
Recommendation: Hold
Price target: Rs196
Current market price: Rs189 Price target revised to Rs196 Result highlights -
Q1FY2013 results-a strong improvement in margins: Marico's Q1FY2013 performance was better than our expectation largely because of a higher than expected operating profit margin (OPM), which stood at 14.8% against our estimate of 13.5%. The gross profit margin (GPM) witnessed a strong improvement of 659 basis points year on year (YoY) to 49.5%, largely on account of a sharp correction in the copra prices (copra accounts for 40% of the raw material cost). The domestic consumer business maintained its strong growth momentum with a 16% sales volume growth during the quarter. An 18% year-on-year (Y-o-Y) sales volume growth in Parachute rigid packs was the highlight of the quarter. Around 3% Y-o-Y organic growth in the international business and a single-digit same-store sales growth in the domestic Kaya business were the low points of the quarter. -
Results snapshot: Marico's net sales grew by 21.8% YoY to Rs1,270.3 crore in Q1FY2013 (it was slightly below our expectation of Rs1,285.5 crore). The growth was driven by a 14% sales volume growth during the quarter. The GPM improved significantly by 659 basis points YoY to 49.5% on the back of a 40% correction in the copra prices on a Y-o-Y basis and a low base of Q1FY2012. Like most of the other fast moving consumer goods (FMCG) companies, Marico spent a large part of the GPM savings on advertisement activities. The advertisement spend as a percentage of its total sales increased by about 300 basis points YoY to 12.3% during the quarter. Hence, the OPM improved by 262 basis points YoY to 14.8% (ahead of our expectation of 13.5%). The operating profit grew by 48.0% YoY to Rs187.9 crore and the adjusted profit after tax (PAT) rose by 45.4% YoY to Rs125.8 crore. -
Outlook and valuation: Q1FY2013 was a quarter of strong operating performance for Marico with the volume of the domestic consumer product business growing in mid teens. However, the management in its commentary has adopted a cautious stance for the future quarters, considering the domestic macro uncertainties and the deficient rainfall in most parts of India (which is likely to affect the rural market for FMCG products). Having said that, the long-term domestic growth story is intact for Marico.
We broadly maintain our earnings estimates for FY2013 and FY2014. Marico has traded at an average one-year forward multiple of ~25x in the last two years on the back of a consistently good business performance. Hence, we value the stock at 25x its FY2014E EPS of Rs7.9 and revise our price target to Rs196. At the current market price the stock trades at 29.5x its FY2013E EPS of Rs6.4 and 24.1x its FY2014 EPS of Rs7.9. In view of the limited upside from the current level, we maintain our Hold recommendation on the stock. Federal Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs522
Current market price: Rs405 Q1 results in line with expectation at NII level Result highlights -
Federal Bank's Q1FY2013 results were in line with our expectation at the net interest income (NII) level (NII up 6.9% year on year [YoY]). But the performance was slightly short of expectation at the net profit level (net profit up 30% YoY to Rs190 crore). This was due to a slower growth in the non-interest income and an increase in the provision expenses. -
The net interest margin (NIM) declined by 14 basis points quarter on quarter (QoQ) to 3.42% in Q1FY2013 due to a marked-to-market (MTM) impact on the foreign exchange (forex) borrowings, the reversal of the income on the slippages and a drop in investment yields. The bank continued to focus on the better rated corporate advances. -
The advances grew at a healthy rate (up 22.5% YoY and 3.8% QoQ) driven by the corporate advances (up 23.9% YoY). The deposits also grew by 17.8% YoY while the current account and savings account (CASA) ratio expanded to 28.7% from 27.5% in Q4FY2012. -
The asset quality deteriorated mainly due the slippages of a large account (about Rs100 crore) while the slippages in the retail and small and medium enterprises (SME) sectors were lower. The bank restructured Rs207 crore of advances during the quarter, taking the total restructured book to 6.4% of the total advances. -
The non-interest income reported a muted growth of 6.4% YoY due to lower treasury and recovery incomes. However, the fee income growth was steady-the fee income grew by 9.5% YoY. The cost/income ratio increased to 43.7% from 38.6% in Q1FY2012. Valuation and outlook
Barring a few one-offs (slippages and NIMs) Federal Bank's Q1FY2013 results were stable. The management's focus on risk adjusted returns by shifting to better rated loans and shedding the bulk deposits has had a positive impact on the bank's performance. With traction in the CASA deposits and the non-resident Indian (NRI) deposits the liability base has been strengthened which could keep the margins stable. Further, the moderation in the slippages (mainly in the retail and SME sectors) and a higher provision coverage offer comfort with regard the asset quality. We expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 16% (FY2012-14). We maintain our Buy rating with a price target of Rs522.
Glenmark Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs468
Current market price: Rs409 Steady growth in core business Result highlights -
Impressive growth continues in core business: The net sales of Glenmark Pharmaceuticals (Glenmark) grew by 19.8% year on year (YoY) to Rs1040.4 crore in Q1FY2013. The growth was mainly driven by the generic business, which grew by 57.67% YoY to Rs530 crore. However, the specialty business (excluding the licencing income) increased by 22.8% YoY to Rs504.645 crore in the same period. The specialty business includes the Indian formulation business, which grew by 24.1% YoY during the quarter. Though the growth of the specialty business is better than the industry growth of 15%, but the same falls short of our expectation. -
Core OPM declines 380bps YoY, yet better than expected: The core operating profit margin (OPM; excluding the out-licencing income) declined by 380 basis points YoY to Rs20.7 due to a high base effect. However, it was better than our expectation of 19.1%. -
Forex loss and lower licencing income weaken profit; adjusted core PAT jumps 44%: The company provided Rs55 crore for foreign exchange (forex) loss during the quarter as compared with a forex gain of Rs9 crore in Q1FY2012. Moreover, the company did not receive any licencing income during this quarter as compared with that of Rs111.2 crore in Q1FY2012 (which made for the high base). This caused the net profit to decline by 62.8% YoY to Rs78.2 crore. However, the core net profit (excluding the out-licencing income and the forex loss/gain) jumped by 44.3% YoY to Rs129.6 crore, which is virtually in line with our expectation of Rs132 crore. -
No change in growth guidance; we maintain estimates and price target: The management of Glenmark is confident of carrying forward the same level of performance and therefore no change has been made in the growth guidance. Earlier the management had given a guidance of a 22-25% growth in the revenue in FY2013. We maintain our revenue and profit estimates for FY2013 and FY2014, and expect its revenues to grow at a compounded annual growth rate (CAGR) of 16% over FY2012- 4E from the base business (without considering the out-licencing income). The core profit after tax (PAT) is expected to grow at a CAGR of 19% over this period. We have a price target of Rs468, which implies 15x core business' EPS for FY2014 and values the research and development (R&D) pipeline at Rs88 per share. Madras Cements
Cluster: Cannonball
Recommendation: Hold
Price target: Rs190
Current market price: Rs173 Price target revised to Rs190 Result highlights -
Healthy performance; PAT grew by 25.1% YoY: In Q1FY2013 Madras Cements delivered a healthy performance with a net profit of Rs123 crore (a growth of 25.1% over the previous year). The net profit is marginally lower than our estimate. The quarter's performance was driven by a healthy growth in the volume and the average realisation. The company also benefited in terms of higher than expected profitability in its windmill division (which posted EBIT of 60.6% as compared with 47% in Q1FY2012). However, the interest and depreciation charges were higher than our estimates. -
Strong volume growth and healthy realisation drive revenue growth: The overall revenue of the company increased by 29.5% year on year (YoY) to Rs989.3 crore, which included the revenues of Rs41 crore from the windmill division. The revenue growth was driven by a strong cement volume growth of 21.3% YoY (on account of the stabilisation of its new capacity and a partial revival in demand in the southern region excluding Andhra Pradesh). Further, the average cement realisation increased by 6.8% YoY to Rs4,494 per tonne. The demand environment in the southern region has partially recovered particularly in Tamil Nadu, Karnataka and Kerala. In terms of realisation, we believe the average realisation for FY2013 will remain higher compared with the average realisation of FY2012. -
Margin contraction due to increase in cost of production: In spite of a 6.8% increase in the average cement realisation YoY and expansion in the EBIT margin of the windmill division (60.6% in Q1FY2013 vs 47% a year ago), the overall operating profit margin (OPM) contracted by 97 basis points YoY to 31% (but was ahead of our estimate). The year-on-year (Y-o-Y) contraction in the OPM was on account of an increase in the cost of production. During the quarter the freight cost increased by 35.3% on a per tonne basis and the other expenses increased by 30.4% to Rs104.2 crore. Hence, the overall cost of production increased by 8.3% YoY on a per tonne basis. The EBDITA per tonne for the quarter increased by 3.2% YoY to Rs1,260. -
Addition of cement capacity of 2mtpa and power plant of 45MW come on stream: During the quarter, the company commenced 2 million tonne per tonne (mtpa) of grinding capacity at Ariyalur. With this the overall cement capacity of the company enhanced to 12.5mtpa. In addition, the company commissioned total captive power capacity of 45MW (20MW in Ariyalur and 25MW in RR Nagar). The capacity addition in the cement business will support the volume growth of the company in FY2013 and the commissioning of the captive power plants (CPPs) will reduce the company's dependence on grid and improve its efficiency. -
Downgrading earnings estimates for FY2013 and FY2014: We are downgrading our earnings estimates for FY2013 and FY2014 mainly on account of a lower than expected cement realisation and higher than expected interest and depreciation charges. Consequently, the revised earnings per share (EPS) estimates for FY2013 and FY2014 now stand at Rs14.9 and Rs16.6 respectively. -
Maintain Hold with a revised price target of Rs190: Going ahead, we expect the cement offtake in the southern region to improve gradually. Hence, we expect the company to post a volume growth of close to 6% in FY2013 as compared with the flat volume growth posted in FY2012. However, a likely increase in the supply in the southern region is a key risk to the cement price. Further, cost pressure in terms of a higher freight cost is expected to pressurise the margin. We, therefore, maintain our Hold recommendation on the stock with a revised price target of Rs190 (valued at EV/EBITDA of 6.5x on FY2014 estimate) as we roll forward our valuation to FY2014. However, in the longer run we believe Madras Cements has the potential to deliver good returns to its investors due to its operational efficiency. At the current market price the stock trades at a PE of 10.5x and an EV/EBITDA of 6x its FY2014 earnings estimate. Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,685
Current market price: Rs1,263 Price target revised to Rs1,685 Result highlights -
Weak operational performance continues, margins contract: Bharat Electronics Ltd (BEL) continued its weak performance with a 15.4% year-on-year (Y-o-Y) fall in the operating revenues in the first quarter of FY2013 hit by a delay in billing. The margins at EBITDA level turned negative with a loss of Rs124 crore against a profit of Rs32.2 crore in Q1FY2012 mainly on account of a higher proportion of the low-margin business. On the back of a 10% increase in the other income to Rs180.9 crore, the fall in the net profit was restricted to 84.3% year on year (YoY) at Rs19.3 crore. -
Soft revenue performance affected by delay in billing: The first quarter is traditionally the weakest for the company as BEL sees limited deliveries in this period and as its customers open work orders in this quarter after the budgeting in the March quarter. However, in the quarter under review, the performance was softer than usual with a 15.4% Y-o-Y drop in the revenues to Rs779.2 crore. The quarter's revenues are about 12% of the targeted revenues for FY2013 as against about 16-17% clocked in the same quarter of the previous two years. There was a marked increase in the inventory of finished goods and work-in-progress in the quarter. The change in the inventory in the quarter stood at Rs120.8 crore against Rs22.3 crore in the corresponding quarter of the previous year. This indicates a pile-up of inventory with the company due to either work pending on a large order or work pending for billing. We believe that the revenues were soft because the company was not able to bill its clients and hence the increase in the inventory. Going ahead, as the company starts delivering for the orders won in FY2012 (Akash System, coastal survellience system, radars, electronic warfare systems etc), the revenue trajectory would come back on track. -
Margins contract: The margin performance remained under pressure in the quarter under review. The company reported an EBITDA loss of Rs124 crore against a profit of Rs32.2 crore in the corresponding quarter of the previous year. The margin was affected by higher raw material cost and other expenses. The cost of the raw materials consumed increased by 680 basis points to 67.9% as a percentage of the total revenues and the other expenses increased by 500 basis points to 11.3% of the total revenues. The raw material cost was higher mainly due to the execution of low-margin civilian orders. The same had accounted for 27% of the total revenues in FY2012 against 20% in FY2011. On the back of a 10.1% Y-o-Y increase (down 14.8% sequentially) in the other income to Rs180.9 crore, the fall in the net profit was restricted to 84.3% YoY at Rs19.3 crore. -
Valuation and view: BEL has reported a soft performance on account of a delay in the completion/billing of orders in hand. BEL remains one of the best plays in the defence capital expenditure (capex) space. With the increase in the defence budget and the focus on the modernisation of the defence technology, BEL is best placed to take a sizeable pie of the defence spend. The order book at 4.5x FY2012 sales gives BEL strong revenue visibility for at least the next two to three years. The huge cash reserve gives the stock further support. The key risks, however, remain the timely delivery of orders and the margin performance, which has been deteriorating. In view of the Q1FY2013 performance we have revised our margin expectation. We revise our price target to Rs1,685 and maintain our Buy rating on the stock in view of the strong long-term growth outlook for the company. | | 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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