| Summary of Contents STOCK UPDATE IL&FS Transportation Networks
Recommendation: Buy
Price target: Rs312
Current market price: Rs200 Price target revised to Rs312 Result highlights -
Revenues above expectation due to faster execution: In Q3FY2013, the consolidated revenues of IL&FS Transportation Networks Ltd (ITNL) grew by a robust 39% year on year (YoY) to Rs1,764 crore (higher than our estimate) led by a strong execution and a consistent toll collection across projects. The construction revenues rose by 37% YoY to Rs1,239 crore. However, the company booked a low fee income during the quarter at Rs94 crore (a decline of 37% YoY). The revenues from the operational build-operate-transfer (BOT) assets grew at a healthy rate of 39% to Rs146 crore led by a consistent traffic in its operational project and also consolidation of Chongqing project (which was acquired in December last year, contributing nearly Rs40 crore to the BOT revenues in the current quarter). -
Revenue mix dents margin sequentially: However, the operating profit margin (OPM) contracted by 754 basis points quarter on quarter (QoQ) to 25.5%, which was lower than our estimate of 30%. The contraction in the margin was mainly on account a higher contribution of revenues from the low margin construction income vis-a-vis the BOT income. This was further aided by a lower contribution of revenues from the fee income (Rs94 crore as against Rs209 crore during Q2FY2013). Consequently, the EBITDA margin remained almost flat sequentially at Rs450 crore. -
Growth in PAT limited by surge in the interest, depreciation and tax charges: Though the company reported a robust top line growth, the huge surge in interest charges (up 53% YoY) and depreciation (up 30% YoY) coupled with higher effective tax rate (ETR) took a toll on the profitability of ITNL, which reported a lower than estimated growth in the consolidated net profit by 19% YoY to Rs104 crore. -
Strengthening bid pipeline: At the end of Q3FY2013, ITNL has witnessed a robust increase in the request for proposal (RFP) stage (post-qualification) and the request for qualification (RFQ) stage (pre-qualification) bid pipeline. The post-qualification order pipeline grew by 2.2x times to Rs14,352 crore while the pre-qualification orders grew by 1.9x to Rs54,568 crore. We believe the sharp rise in bid pipeline promises a better order intake leading to a strong revenue visibility for ITNL. -
Estimates revised: We have revised our revenue estimates upwards for FY2013 and FY2014 by 9.4% and 4.9% respectively to factor in the better execution in a few projects. However, we have reduced our margin expectations by factoring in the higher project cost in a couple of projects for the same period. Consequently, our net profit stands reduced by 7% and 9% for FY2013 and FY2014 respectively. Further, we have introduced FY2015 estimate with the earnings per share (EPS) estimate of Rs32.1. -
Maintain Buy with a revised price target of Rs312: Considering the strong order backlog, an expected pick-up in the execution and a healthy new project award pipeline of National Highway Authority of India (NHAI), we remain positive on ITNL's financial performance going ahead. Moreover, we expect ITNL to be among the key gainers from the easing of competitive pressure in large NHAI projects. On account of an increase in the project costs of a few projects and a reduction in margin, we have revised our sum-of-the-parts (SOTP)-based price target to Rs312 and have maintained our Buy rating on the stock. However, we have not factored valuation of three toll projects under implementation awaiting financial closure. At the current market price, the stock trades at 7.4x and 6.7x its FY2013E and FY2014E earnings respectively. Relaxo Footwears
Recommendation: Buy
Price target: Rs845
Current market price: Rs740 Price target revised to Rs845; upgrade to Buy Result highlights -
Q3FY2013-subdued performance: Relaxo Footwear (Relaxo)'s Q3FY2013 results were disappointing, with the top line growth remaining in the high single digits (moderated from ~20% in H1FY2013). The operating profit margin (OPM) of Relaxo remained stable on a year-on-year (Y-o-Y) basis despite a significant expansion in the gross profit margin (GPM). We believe that an uncertain macro environment and persistent inflationary environment have pulled down the growth value for the company. However, the highlight of the quarter was a sharp expansion in the GPM (by 825 basis points on a Y-o-Y basis due to a correction in the rubber prices). Performance snapshot -
Relaxo posted a muted top line growth of 9.2% on a Y-o-Y basis to Rs224.2 crore. The company derived a significant benefit from benign rubber prices during the last year or so to post a robust Y-o-Y growth of 28.5% in the gross profit to Rs123.04 crore. Consequently, the GPM increased to 54.9% in Q3FY2013 as against 46.6% in Q3FY2012, an improvement of 825 basis points on a Y-o-Y basis. -
However, the company's operational performance was dented by an increase in employee expenses and other expenses. The employee expenses increased by 38.9% YoY to Rs35.5 crore. The other expenses also increased significantly to Rs67.5 crore, translating into a Y-o-Y growth of 30.1% (an increase of 510 basis points as a % of sales on a Y-o-Y basis). We believe that the significant increase in the other expenses during the current quarter is attributable to pre-operational expenses related to starting of production at the company's Bahadurgarh unit, which mainly manufactures the Flight PU, fashion footwear brand. -
As a result, the OPM came in almost flat at 8.9% in Q3FY2013 as against 9.1% in Q3FY2012. As a result, the operating profit grew by 6.6% year on year (YoY) to Rs19.9 crore. -
A subdued performance at the operating level coupled with a marginal increase in the depreciation expenses and tax expenses resulted in a marginal deterioration in the bottom line performance. The adjusted profit after tax (PAT) stood at Rs5.97 crore as against Rs6.02 crore, translating into a PAT margin of 2.7% for Q3FY2013. -
Revision in earnings estimates: Relaxo's Q3FY2013 performance was subdued as the top line growth moderated from the high teens in Q2FY2013 to high single-digit revenue growth in Q3FY2013. The sharp moderation in the top line reflects the fact that the macro environment still remains uncertain, which is having its impact in the form of a subdued consumer spending. We believe that with the current uncertain economic environment, the company's performance may remain challenged in the near term. Also, the OPM stood flat on a Y-o-Y basis. Hence, we have revised our earnings estimates downwards for FY2013 and FY2014 by 16.3% and 27.4% respectively. We have also introduced our estimate for FY2015E. -
Outlook and valuation: Relaxo is an established player in the branded footwear segment with an array of brands and is expected to benefit significantly from the current softness in rubber prices. The company has a healthy balance sheet with minimal leverage. Also, the enhanced production capacity would lead to economies of scale in the medium term. Thus, we remain enthused about the company's medium- to long-term growth prospects. At the current market price, the stock trades at 17.5x and 14.0x its FY2014E and FY2015E earnings per share (EPS) of Rs42.3 and Rs52.8 respectively. We have rolled over our target P/E multiple to FY2015E, valuing the company at 16x its FY2015E EPS, arriving at a fair value of Rs845/share. In view of the strong balance sheet and the healthy long-term growth prospects along with a decent upside from the current levels, we have upgraded the stock from Hold to Buy.
SECTOR UPDATE Insurance APE jumps 44% MoM in December 2012 -
The growth in the annual premium equivalent (APE) of the life insurance industry declined for the sixth consecutive month during December 2012 as it declined by 19.7% year on year (YoY). The slowdown was mainly contributed by the Life Insurance Corporation of India (LIC), which showed a decline of 27.2% YoY in the APE. On the other hand, the private players reported a decline of 7.2% YoY in December, with MetLife India Insurance Company (MetLife; down 72.1% YoY), Aviva Life (down 31.1% YoY) and Birla Sun Life (down 43.4% YoY) posting steepest decline in the APE. On the other hand, SBI Life (up 49.1% YoY) and HDFC Life Insurance (HDFC Life; up 22.8% YoY) posted an increase in the APE on a year-on-year (Y-o-Y) basis. -
On a month-on-month (M-o-M) basis, the APE for industry grew by 43.8% with the private players and LIC showing a growth of 44.1% and 43.5% respectively. On an M-o-M basis, mere two out of the 22 players posted a decline in their APE. The companies like SBI Life, Max Life and ICICI Prudential reported a growth of 111.6%, 78.8% and 47.3% respectively in their APE. -
On a year-to-date (YTD) basis (April-December 2012), the private players fared better than the LIC as their APE declined by mere 1.9% YoY as compared with a 15.0% Y-o-Y decline by the LIC and a 10.5% Y-o-Y decline by the industry. The growth (April-December 2012) in the APE of the private players was mainly led by players like SBI Life (up 18.5% YoY) and Bajaj Allianz (7.2% YoY). -
The market share of the private players improved by ~330 basis points to 37.5% (LIC, 62.5%) in April-December 2012 compared with 34.2% in the corresponding period of the previous year. During the period under review, the companies like TATA AIA (2.2% vs 3.7%), MetLife (2.8% vs 3.4%) and Birla Sun Life (8.0% and 8.6%) showed a decline in the market share. However, SBI Life, ICICI Prudential and HDFC Life turned out to be major gainers as their market share improved by ~220, 140 and 90 basis points respectively. -
The growth in the life insurance premiums has been tepid for the industry, though private players have posted a better performance. The media reports suggest that the Insurance Regulatory and Development Authority (IRDA) may soon release guidelines for traditional products that would make minimum death benefit and minimum surrender value mandatory, besides aligning them with pension products in some aspects of benefits. The insurers will be required to refile the products for approval before June 2013, which could impact the premium growth. Therefore, compared with a 15-20% growth expectation at the beginning of the fiscal, the market expects the premium growth to be flattish in FY2013.
VIEWPOINT Escorts Improvement in tractor margin to sustain Tractor demand to remain sluggish in near term
The company expects the demand for tractor to remain under pressure in the near term. It expects the industry to end on a flat note in FY2013. The weak sentiments and moderation in the non-farm usage (which contributes about 40% of the demand) have led to sluggish sales. The demand is expected to recover after two to three quarters. Margin improvement to sustain
The company expects the margin improvement in the tractor segment to continue. This is on back of continued efforts of cost reduction, improved mix on back of higher horse power (HP) tractors, and rationalisation in manpower expenses. Further, with an improvement in the construction equipment and the railway segment's revenues, we expect the company's margin to improve going forward. Market share of tractor intact with improved mix
Escorts' market share in the tractor segment has remained stable at 11%. The lower end of the tractor segment, the 21-30HP range forming 13-15% of the mix, has seen its contribution dropping to merely 2%. The 31-40HP segment has seen its market share increase at the expense of the lower range. This segment currently contributes 45% of the overall volumes. Also, the core 41-50HP segment, contributing 55% of the volumes, saw a drop in the mix. With new launches in the over 50HP range, the company has managed to migrate the customers up the value chain. Revival in the constriction equipment crucial
The construction equipment segment contributes about 13% of the overall revenues. The segment has remained subdued in the last three to four quarters on back of a weak economic environment. The margin of the segment has been impacted due to the high nature of fixed costs. We expect the sluggishness to continue in the near term. Valuation
We have marginally reduced our revenues estimate for FY2013 to factor in subdued tractor and the construction equipment demand. We expect the revenues to grow by 10% in FY2013. However, the margin is expected to improve by 90 basis points to 5.6% in FY2013 on back of an improved margin in the tractor segment. The stock trades at 7.2x its FY2013 estimated earnings. We have a positive view on the company.
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