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STOCK UPDATE Bajaj Holdings & Investment
Recommendation: Buy
Price target: Rs1,334
Current market price: Rs912 Price target revised to Rs1,334 Result highlights -
The consolidated income of Bajaj Holdings and Investment Ltd (BHIL) grew by 27.3% year on year (YoY) to Rs81.2 crore in Q4FY2013. For the last nine quarters the company reported a lacklustre top line of under Rs100 crore. In the fourth quarter of FY2013 the company's income declined 12% on a sequential basis. -
The income from the company's associates grew by 3.2% YoY in Q4FY2013. This led to a 5.6% year-on-year (Y-o-Y) increase in the profit after tax (PAT) to Rs664.4 crore. -
During Q4FY2013, the total market value of its investments declined 13.7% sequentially whereas the cost of its investments grew 1.2% due to an increased exposure to fixed deposits. The company reduced its exposure in equities marginally during the quarter. -
The market value of its equity investment in the core associate companies (an 80% contribution) declined by 15.3% sequentially while the value of the other equity investments declined by 10.9% quarter on quarter (QoQ). Valuation
Bajaj Auto is the key investment of BHIL and has been valued at 14x FY2015E earnings per share (EPS). Though the company reported quarterly results slightly ahead of expectations (largely due to a higher other income), but there are concerns over the slowdown in the domestic motorcycle demand and increasing competion from Honda Motorcycle & Scooter India (Honda). Our price target for Bajaj FinServ is based on the sum-of-the-parts (SOTP) valuation method.
Given the strategic nature of BHIL's investments, we have given a holding company discount of 50% to BHIL's equity investments. The liquid investments have been valued at cost. Our price target of Rs1,334 implies a 46% upside for the stock. We maintain our Buy recommendation on BHIL. India Cements
Recommendation: Hold
Price target: Rs95
Current market price: Rs87 Earnings below estimates Result highlights -
Net profit declined by 59.5% YoY; below estimate: In Q4FY2013, India Cements posted a net profit of Rs26 crore (a decline of 59.5% year on year [YoY]), which is much below our as well as the Street's estimates on account of a lower than expected operating profit margin (OPM) due to a cost escalation in terms of freight and other expenses. Further, an increase in the depreciation charges coupled with a higher effective tax rate dented the earnings during the quarter. -
Revenue growth supported by cement volume: The net sales of the company grew by 6.7% YoY to Rs1,190.6 crore, which also include revenues from the Indian Premier League (IPL), wind power and shipping businesses. The revenues from the cement division (which is its core business) improved by 6.1% YoY to Rs1,171.3 crore, which is driven by a 6.7% growth in its overall volume. On the other hand, the average blended cement realisation during the quarter declined by 0.6% YoY and 3.4% quarter on quarter (QoQ) to Rs4,221 per tonne. The decline in realisation is on account of a weak pricing environment in Andhra Pradesh and also due to an increase in the proportion of non-trade sales. However, the cement prices in the southern region have increased by Rs10-15/bag in the past couple of days on account of a supply control, which could benefit the company in the quarters coming ahead. -
Cost pressure results in margin contraction: On the margin front, the continued cost pressure-in terms of (a) freight charges (up 17.8% YoY); and (b) an increase in the other expenses (up 23.6% YoY to Rs162 crore)-resulted in a margin pressure. Hence, the OPM contracted by 518 basis points YoY to 14.1%. The overall cost of production on per-tonne basis increased by 5.5% YoY and the EBITDA per tonne declined by 27.4% YoY to Rs572 per tonne. Consequently, the operating profit of the company decreased by 22% YoY to Rs167.9 crore as compared with a 6.7% growth registered at the revenue front. -
CPP of 50MW to be operational by H1FY2014: In order to achieve an operational efficiency and save on power cost, the company is setting up a captive power plant (CPP) of 50MW (25MW in two phases each) in Andhra Pradesh. The CPP is expected to be operational in H1FY2014. After the commissioning of CPP, the company is expected to save around Rs1-1.5/unit of power. Further, the first shipment of coal from its Indonesian mine has already taken place and the cargo will arrive by the end of May 2013. -
Enters infrastructure space by incorporating ICIL: During the quarter, the company has entered into the infrastructure space by incorporating India Cement Infrastructure Ltd (ICIL), which is a wholly owned subsidiary company of India Cements. Currently, ICIL has undertaken a few small-size infrastructure projects in certain cities of Kerala. The move to enter into the infrastructure space is to capture any upcoming opportunity in the future. Further, according to the management, the scale of business at the moment will not be significant and will not have any adverse impact on the balance sheet or cash flow of the parent company. -
Downgrading earnings estimates for FY2014 and FY2015: We are downgrading our earnings estimates for FY2014 and FY2015 mainly to incorporate an increase in the power tariff in Andhra Pradesh and also marginally lowered down our cement realisation assumption due to an increase in the proportion of non-trade sales. Consequently, the revised earnings per share (EPS) estimates for FY2014 and FY2015 now stand at Rs7.5 and Rs9.4 respectively. -
Maintains Hold with price target of Rs95: The demand for cement in Tamil Nadu and Karnataka has recovered partially and will support the volume growth of India Cements. However, the demand and pricing environment in Andhra Pradesh continue to remain weak. Also, a recent increase in the power tariff by the state electricity board (SEB) of Andhra Pradesh is likely to keep the margin under pressure. Hence, we maintain our Hold recommendation on the stock with a price target of Rs95. At the current market price, the stock trades at price earnings (PE) of 11.5x discounting its EPS for FY2014 and EV/EBITDA of 4.9x its FY2014 earnings estimates. NIIT Technologies
Recommendation: Hold
Price target: Rs305
Current market price: Rs257 Margin improvement remain key for re-rating Result highlights -
Performance in line with estimates: The Q4FY2013 results of NIIT Technologies (NIIT) were broadly in line with our expectations, with a net income of Rs56.6 crore (our estimate was Rs56.2 crore). The revenues grew by 4.4% sequentially to Rs537 crore (our estimate was Rs529.8 crore). On a year-on-year (Y-o-Y) basis, the revenues rose by 21.1%. The company's revenue growth can primarily be attributed to a steady ramp-up in the government vertical, which grew by 43.6% sequentially and contributed around 80% (Rs18 crore) of the total incremental revenues (Rs23 crore). For FY2013, the company has declared a dividend of Rs8.5 per share (an 85% dividend, a pay-out of 24% against 24.5% in FY2012). -
Net income in line with expectations: The net income for the quarter was flat sequentially and up by 22.5% year on year (YoY) to Rs56.6 crore (our estimate was Rs56.2 crore) in the quarter. The net income was negatively affected by a foreign exchange (forex) loss of Rs5.9 crore as against a forex profit of Rs10.3 crore in Q3FY2013. However, a lower tax of 18% as compared with 28.9% in Q3FY2013 (due to a 7% saving on account of other income loss and minor tax benefits in the UK) helped the performance meet expectations at the net income level. -
Management sees "green shoots" in margin improvement: The margin performance for the quarter was ahead of our estimate at 16.5% (a 66-basis-point sequential improvement). The growth in the margin could largely be attributed to the improvement in the margin of the GIS business (from -7% to 9%). Going forward, the management foresees margin improvement in FY2014 with a gradual improvement in the margin of the government contracts (almost $90 million including deals from the Airport Authority of India [AAI] and the Andhra Pradesh state government). Additionally, most of the bad news around the GIS business is behind it and the Morris Communications joint venture is expected to evolve into a transaction-based engagement that will support the margin improvement in FY2014. On the flip side, wage hikes (a 7% hike in offshore wages effective from April 2013 coupled with a higher incremental contribution from the low-margin government business could act as margin headwinds in FY2014). Currently, we have broadly maintained our margin estimates for FY2014 and FY2015. We shall wait for the management execution on improvement of the margin profile of the Government business before changing our margin estimates. -
Valuation: NIIT is among a few mid-cap IT companies that have rich potential for earnings improvement in the coming years. However, the change in its portfolio mix and the transition of some bigger contracts would keep the earnings profile volatile in the medium term. We have tweaked our earnings estimates for FY2014 and FY2015 to incorporate a higher depreciation charge and tax rate changes. At the current market price of Rs260, stock trades at 6.3x and 5.6x FY2014 and FY2015 earnings estimates. We believe improvement in the margin trajectory and consistency in the earnings performance remain the two key events that may lead to the re-rating of NIIT from the current levels. We maintain our Hold rating on the stock with the existing price target of Rs305.
MUTUAL GAINS Debt Mutual Fund Picks Bond / Debt market round up -
Bond yields fell during the month of April on growing expectations that the central bank will cut key policy rates in its annual monetary policy review. On the first trading day of the month, however, yields touched its highest level in three months because of record high CAD, which raised concerns over the future course of monetary easing. But thereafter, yields fell on the back of improved liquidity conditions and on drop of global crude oil prices, which raised hopes of a positive impact on domestic inflationary pressures. Yields dropped again after sluggish industrial output data, lower-than-expected Wholesale Price Index (WPI) figure and improved trade data, which will help ease pressure on the CAD, supported bond prices. The RBI has singled out CAD as one of the key factors in monetary policy decisions. -
The 10-year benchmark bond yield hit its 33-month low in April and closed down 22 bps at 7.73% against previous month's close of 7.95%. Since then, the bond yields have fallen further and are now ruling at 7.43%. Bond / Debt Outlook -
The RBI on May 3 cut benchmark interest rates for the third time this year and signalled that there is little space to ease rates further, citing a current-account shortfall and the possibility of price pressures returning post September. Moreover, upward revision of February WPI data is likely to be tracked by the central bank closely. Although lower-than-expected inflation data puts forward a strong case of rate cut but the widening trade deficit numbers and the impact of the same on the country's CAD may act as dampeners. Moreover, the RBI has announced the new 10-year bond to be auctioned on May 17.
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