| STOCK UPDATE Genus Power Infrastructures
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs18
Current market price: Rs13 Price target revised to Rs18 Result highlights -
Q2FY2012 results, a mixed bag: Genus Power Infrastructure Ltd (GPIL)'s Q2FY2012 results were in line with our expectation on the operating front. However, a high interest cost driven by high working capital requirement spoiled the overall profit after tax (PAT) picture. The receivables days rose sharply to over 200 days led by a delay in receiving payments from the state electricity boards (SEBs). -
Top line growth in line with estimate: The net sales during the quarter rose by 9% and was in line with our expectation of Rs177.8 crore. The management indicated that this growth was on account of a good growth in the meter segment (which accounts for about 55% of revenue) while the project segment was sluggish. -
Margin under slight pressure: The operating profit margin (OPM) of 15.3% was in line with our expectation of 15% but lower than the 16.9% margin reported in Q2FY2011. The raw material cost was in line with the rise in the revenues. However, sharp rise in the other expenses offset this positive impact. The management indicated that GPIL would maintain a robust margin of about 15% in the coming quarters on the back of a healthy growth in the sales of meters, which have high margins. -
PAT fell by 44% YoY: The interest cost increased sharply to Rs15.5 crore, which included a foreign exchange (forex) loss of Rs6.14 crore. Consequently, the PAT fell by 44% to Rs8.6 crore as against our expectation of Rs13.6 crore. The loans increased to Rs340.5 crore, led by a delay in receiving payments from its key clients, the SEBs. The SEBs are currently facing a financial crunch, which could be eased by the hiking of tariffs. But due to the impending elections and therefore political pressure, most of the state utilities are reluctant to hike tariffs. The SEBs form 80% of GPIL's current debtors owing the company Rs414.7 crore. -
Order book at Rs605 crore: The current order book of the company stands at Rs605 crore as against Rs602 crore at the end of Q1FY2012. This implies an order inflow of Rs184 crore (up 50% year on year [YoY]) for the quarter. The company has already participated in tenders worth Rs2,500 crore. Nonetheless, the book-to-bill ratio has fallen to 0.83x, indicating poor revenue visibility. -
Estimates downgraded: We have updated the annual report details in our model and built in the higher interest cost. Consequently, our estimates for FY2012 and FY2013 have been downgraded by 12% and 22% respectively. We are expecting a negative compounded annual growth rate (CAGR) of 1.4% in the bottom line over FY2011-13. We would like to see good order inflows and recovery in receivables in order to upgrade our estimates for the company. -
Price target revised to Rs18: GPIL, a mid-cap company under our coverage, has a leadership position in the Indian meter space with a growing presence in the transmission and distribution space. However, in recent times its order inflow and execution have been below our expectation and its guidance. Further, the delay in the receivable payments has added to its woes. On these concerns, in recent times, the stock's price has seen a steep fall. At the current market price, the valuation remains attractive at 3.9x FY2013E earning per share (EPS) while it discounts its historical (FY2011) book value by 0.5x. Hence we maintain our Buy recommendation on the stock with a revised price target of Rs18 (5.5x FY2013E EPS). Improved order inflow, timely payment from its debtors and profitable execution are the key positive triggers for the stock in the near term.
SHAREKHAN SPECIAL Q2FY2012 Banking earnings review Key points -
The Q2FY2012 earnings of our banking universe were marginally higher than our estimates mainly due to a better than expected performance on the net interest income (NII) front. This could be attributed to steady margins, which increased for most banks on a sequential basis. However, the asset quality deteriorated sharply for the public sector banks (PSBs) led by a shift to the system-based non-performing asset (NPA) recognition, slippages from restructured book and some large corporate accounts resulting in a sharp rise in the provision expenses. The non-interest income growth remained subdued due to nominal treasury gains and weakness in the fee income growth. -
Going ahead, we expect the business growth to moderate in line with the weak macro environment, thereby affecting the core income, which has shown a steady growth so far. Meanwhile, the slower growth, the rising stress across sectors of the economy and the asset quality risks will take the centre-stage. While bank stocks have corrected significantly (the correction partly factors in the concerns over the rise in the NPAs and the earnings slowdown), the risks on asset quality have increased with the deterioration in the macro environment. We, therefore, prefer banks having a relatively stable earnings profile and less asset quality pressure in the emerging environment. We recommend Yes Bank (a strong growth and reasonable valuation), HDFC bank (a consistent performance) and ICICI Bank (upgraded to Buy due to attractive valuation). Though we remain cautious on the PSBs, but we prefer Bank of Baroda (BoB), which has consistently delivered on all fronts and is trading at a reasonable valuation. -
Valuations and outlook: In view of the slower growth, weak macro environment and emerging concerns on asset quality the bank index has underperformed the broader markets for the past several months. The stocks especially the ones showing higher NPAs (such as SBI, Union Bank of India, Bank of India) have declined sharply and are trading at lower than three-year mean valuations. We believe the asset quality remains the dominant risk to the banking sector especially in the backdrop of a weak macro environment, persistently high interest rates and policy issues on the infrastructure sector. While the PSBs are more vulnerable to the NPA pressures due to their higher exposure to the sensitive segments (agriculture, SME, exports, state electricity boards), the private sector banks are placed better.
We, therefore, remain selectively positive on the banking sector with a preference for the private banks Yes Bank (a strong growth and reasonable valuations), HDFC Bank (a consistent performance) and ICICI Bank (upgraded to Buy on reasonable valuations). In general we remain cautious on the PSBs but prefer BoB, which has consistently delivered on all fronts and is available at reasonable valuations. |
