Fw: Investor's Eye: Update - Wipro, Marico, GlaxoSmithKline Consumer Healthcare, Union Bank of India, V-Guard Industries, Eros International Media, Dishman Pharmaceuticals & Chemicals, Deepak Fertilisers & Petrochemicals Corporation, Insurance

 

    

Investor's Eye [November 02, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   Wipro Cluster: Apple Green Recommendation: Hold Price target: Rs390 Current market price: Rs363 Hive off of non-core businesses to support valuations Result highlights Muted volume growth continues, pricing uptick salvages performance: Wipro continues to disappoint on the volume front. In Q2FY2013 the company's volume growth dropped sequentially to the lowest level in 12 quarters at 0.2% quarter on quarter (QoQ). The growth is lower than our expectation of a 1.5% sequential growth. However, a sequential pricing uptick (1.4% offshore and 1.9% onsite) saved the day on the revenue front, as the revenues of IT services business rose by 1.7% QoQ to $1,540.7 million (marginally lower than our estimate of $1,545 million), and met the mid level of the guidance range ($1,520-1,550 million). On a constant currency basis, the revenues of IT services business rose by 1.3% QoQ to $1,535 million. In rupee terms, revenues of IT services business grew 0.7% QoQ to Rs8,373.2 crore.  Margin surprises positively helped by productivity improvement: The IT services business' earnings before interest and tax (EBIT) margin showed a marginal decline of 30 basis points QoQ to 20.7% (ahead of our expectations of 18.8%), driven largely by realisation improvement.  Net other income jumped by 103.5% QoQ to Rs269.7 crore on account of a higher treasury income and lower marked-to-market (MTM) foreign exchange (forex) losses on the external currency borrowings (ECB). The treasury income rose by 20% QoQ to Rs323.4 crore and the forex loss was lower by 73% QoQ at Rs27.2 crore.  The consolidated revenues for the quarter were up by 1.5% QoQ to Rs10,639.7 crore and the net profit was up by 1.9% QoQ to Rs1,610.6 crore (ahead of our expectations of Rs1,526 crore).  Management sees deal pipeline improving but decision making remains uncertain: Wipro signed a few large deals towards the end of the quarter and expects to see a ramp-up in these deals in Q4FY2013. The management also foresees a decent deal pipeline but the decision making on the deals remains uncertain. The deals are coming in the traditional outsourcing business as well as the newer service lines of cloud and mobility. On client mining, the company has as of now made investments in the top 55 client accounts. Going ahead, the company plans to extend the investments to 134 client accounts. On the other hand, the company is moving out of the so-called tail accounts, which, it believes, are not strategic to the company's growth. The tail accounts have reduced from 87 to 45 and would go down to zero in the coming quarters. This strategy has led to loss of revenue to the tune of $8 million in the quarter. Outlook and valuation: Wipro's IT services business continues to struggle to catch up with the peers and has reported less than 1% sequential volume growth in the last three quarters. Worst still, we do not anticipate any dramatic improvement in the volume growth in the near future. Nevertheless, the company's move to hive off the non-core businesses provides opportunity to investors to earn a decent return by opting for the 7% redeemable preference shares in Wipro Enterprises (for details refer to the box). Thus, we believe the business demerger move would support the stock price in the medium term. However, we remain circumspect about any meaningful revival in Wipro's core IT services business in the medium term and continue to prefer Tata Consultancy Services (TCS) and HCL Technologies (HCL Tech). We increase our price target to Rs390 and maintain our Hold recommendation on the stock.  Marico Cluster: Apple Green Recommendation: Hold Price target: Rs217 Current market price: Rs204 Price target revised to Rs217 Result highlights Q2FY13 - moderation in organic volume growth: Marico posted a disappointing performance in Q2FY2013 with profit after tax (PAT) growing by 11% year on year (YoY), lower than our and the Street's expectation of close to 30% YoY growth for the quarter. The organic sales volume growth stood at 9% YoY in Q2FY2013, which is lower than the 16% volume growth in Q1FY2013.The lower canteen stores department (CSD) sales and deceleration in the rate of acquisition of new customer on its products led to moderation in volume growth during the quarter. The international business continues to disappoint with a constant currency growth of 3% YoY during the quarter. However, the highlight of the quarter was performance of Kaya Skin Care (Kaya) business, which registered a revenue growth of 38% YoY and achieved a profit before interest and tax of ~Rs6.0 crore  Results snapshot: Marico's net sales grew by 19.4% YoY to Rs1,159.5 crore in Q2FY2013. The growth was driven by a 14% year-on-year (Y-o-Y) sales volume growth during the quarter. The organic volume growth (excluding contribution for Paras brand) stood at 9% YoY. The gross profit margin (GPM) improved significantly by 684 basis points YoY to 49.5% on account of a 33% Y-o-Y correction in the copra prices on a Y-o-Y basis and a low base of Q2FY2012. The large part of GPM savings were invested towards advertisement activities behind existing products and new products such as Saffola Oats, Saffola Muesli and Parachute Advansed Body Lotion. The advertisement spends as a percentage of its total sales increased by about 450 basis points YoY to 13.7% during the quarter. This along with 24% Y-o-Y growth in other expenses led to a 79-basis-point Y-o-Y improvement in the operating profit margin (OPM) to 13.0%. The operating profit grew by 27.2% YoY to Rs151.2 crore. However, the lower Y-o-Y other income and higher incidence of tax led to just 11.0% Y-o-Y growth in the PAT before minority interest to Rs88.9crore (lower than our expectation of Rs103.1crore).  Outlook and valuation: We have fine-tuned our earning estimates to factor in the higher advertisement spends, higher interest expenses and incremental revenues from youth brands. We expect Marico's top line and bottom line to grow at a compounded annual growth rate (CAGR) of 19% and 29% over FY2012-14. However, any significant moderation in the sales volume growth of some of the key domestic segments and any substantial increase in the prices of the key inputs would act as a key risk to the earning estimates. At the current market price, the stock trades at 33.2x its FY2013E earnings per share (EPS) of Rs6.2 and 25.0x its FY2014E EPS of Rs8.2. In view of the limited upside from the current level, we maintain our Hold recommendation on the stock with the revised price target of Rs217 (rolling it over average earnings of FY2014-15). GlaxoSmithKline Consumer Healthcare Cluster: Evergreen Recommendation: Buy Price target: Rs3,450 Current market price: Rs3,079 Upgrade to Buy, price target revised to Rs3,450 Result highlights Operating performance came in line with expectation: In Q3CY2012, GlaxoSmithKline Consumer Healthcare (GSK Consumer)'s operating performance was largely in line with our expectation, with a ~15% year-on-year (Y-o-y) growth in revenues and the operating profit margins (OPMs) standing at 17%. Despite a slowdown in canteen store department sales, the company was able to achieve a volume growth of 6% year on year (YoY; ahead of 3% volume growth in Q2CY2012). However, excluding the impact of lower canteen sales department (CSD) sales, the volume growth in the domestic market would have been 7.5% for the quarter. The export sales continue to disappoint with 3% sales growth. Performance snapshot: GSK Consumer's net sales grew by 14.9% YoY to Rs827.5 crore (our expectation was of Rs832 crore) driven by a 6% volume growth and an approximately 10% YoY price-led growth in Q3CY2012. The malted food drinks (MFD) segment grew by 16.2% YoY (volume growth of 6%) with Horlicks growing by 16% YoY (volume growth of 4.5% YoY) and Boost growing by 22% YoY (volume growth of 8.5% YoY). The gross profit margins (GPMs) improved by 39 basis points YoY to 62.5%. The steady GPMs are largely on judicious price increases in the portfolio. The OPM improved by 59 basis points YoY to 17.0% and the operating profit grew by 19.0% YoY to Rs140.5 crore. The business auxiliary income grew by 23% YoY to Rs30.2 crore and the other income grew by 19.5% YoY to Rs27.6 crore during the quarter. This led to a strong 24.8% Y-o-Y growth in the reported profit after tax (PAT) to Rs128.6crore (slightly ahead of our expectation of Rs122.6 crore) during the quarter. Outlook and valuation: In view of the portfolio of strong brands and a thrust on enhancing the distribution reach, we believe GSK Consumers is well poised to achieve a mid-to-high teens topline growth in the coming years (with volume growth standing in range of 6-9%). If the key inputs' prices continue to remain stable in the coming quarters, we expect the company to post better profitability in CY2013 and CY2014. Overall, we expect GSK Consumer's top line and bottom line to grow at a CAGR of 16% and 18% over CY2011-14. At the current market price, the stock is trading at 29.7x its CY2012E EPS of Rs103.5 and 25.7x its CY2013E EPS of Rs119.7. Our revised price target stands at Rs3,450, rolling it over to CY2014 earnings of Rs138.2. In view of a strong market positioning in the MFD segment and a robust cash pile of above Rs1,350 crore (could be utilised for growth initiatives or to reward investors with good dividend), we upgrade our rating on the stock from Hold to Buy. Union Bank of India Cluster: Ugly Duckling Recommendation: Reduce Price target: Rs206 Current market price: Rs223 Price target revised to Rs206, downgrade to reduce Result highlights In Q2FY2013, Union Bank of India (Union Bank)'s net profit was marginally lower than our estimates as it grew by 57.2% year on year (YoY; 8.4% quarter on quarter [QoQ]) to Rs554.6 crore. The growth in profit was on account of lower provisions, which declined by 21.8% YoY (down 6.1% QoQ). The net interest income (NII) grew by 11.4% YoY (1.6% QoQ) in line with our estimates. However, the net interest margins (NIMs) were stable at 3.02% in Q2FY2013 as the drop in yield was offset by a similar decline in the cost of funds. The business growth was steady as advances grew by 19.4% YoY (- 0.6% QoQ), while the deposits grew 15.6% YoY. The current account savings account (CASA) stood at 30.5% as against 30.9% in the previous quarter. During Q2FY2013, the asset quality improved as gross and net non-performing assets (NPAs) declined led by lower slippages and improved recoveries. However, the bank restructured Rs839 crore of advances in Q2FY2013 taking the restructured advances book to 8.3% of total advances.  The non-interest income grew by a healthy at 11.1% QoQ on account of a strong growth in the fee income, which grew by 19% QoQ. The treasury profits also grew 36% QoQ but foreign (forex) income declined significantly on a quarter-on-quarter (Q-o-Q) basis. Valuation and outlook: In Q2FY2013, Union Bank's results were stable with some improvement in asset quality on a sequential basis. Further, the asset quality is likely to be under pressure with rise in restructured loans and exposure to troubled sectors. We expect the return ratios to lag as compared with its peers, though the valuations seem unreasonable in view of the asset quality concerns. We have revised our target price to Rs206 (0.85x FY14 adjusted book value). We downgrade the recommendation to reduce. V-Guard Industries Cluster: Ugly Duckling Recommendation: Hold Price target: Rs451 Current market price: Rs430 Growth on track, price target revised to Rs451 Result highlights Top line growth led by non-south region and products like digital UPS, pumps and fans: In Q2FY2013, V-Guard Industries (V-Guard) continued to a post stellar performance with revenues growing by 49% year on year (YoY) to Rs312 crore (10% above expectations). This was driven by a robust growth in the sales of digital uninterrupted power supply (UPS; up 255% YoY), fans (up 55% YoY) and pumps (54% YoY). Further, the non-south region, which accounts for 23% of the company's sales, demonstrated a robust growth of 67% in Q2FY2013.  Margin under slight pressure: The operating profit margin (OPM) for the quarter came in at 9.6%, slightly lower than our expectation of 10%, on account of input cost pressure. The raw material cost as a percentage of sales increased to 73.8% from ~71% it maintained earlier, mainly led by an increase in the purchase of traded goods. However, the margins are not comparable with a 7.1% margin recorded in Q2FY2012 as it was abnormally low on account of discounts and incentives offered to increase the then subdued demand. The selling and distribution expenses came much lower at 4.2% of sales this quarter (vs 7-9% in the previous year). Overall, the operating profit nearly doubled to Rs30 crore from Rs15 crore reported in Q2FY2012.  Net profit rose by 163% YoY: A lower increase in the interest and depreciation expenses coupled with a higher other income contributed towards the profit after tax (PAT) of Rs18 crore (up 163% YoY), which is 15% higher than our expectation. The tax rate remained low during the quarter at 24.8% because of the increased contribution from the company's new Kachipuram plant, which enjoys tax benefits.  Estimates fine-tuned: The company has upgraded its revenue growth target for FY2013 to 35-40% YoY (from 30% growth guidance given earlier) and indicated an OPM of 9.5-10% for the same period. We have fine-tuned our earnings estimates for FY2013 and FY2014 after incorporating better revenue offtake in digital UPS segment. We are now expecting a compounded annual growth rate (CAGR) of 31% in the company's revenues and 38% in its earnings over FY2012-14.  Maintain Hold: The company has continued to deliver results in line or ahead of its growth guidance. Hence, V-Guard remains our preferred pick on the Indian consumption boom theme. The company's foray into product segments like induction cookers and switchgears also holds promise. Amid tough competition, the company has been able to register a good growth in its distribution network, while the working capital cycle also improved. At the current level, the stock is trading at 17.1x and 13.4x its FY2013 and FY2014 expected earnings, which looks a bit stretched, and offer limited upside from the current level. Hence, we maintain our Hold rating on the stock with a price target of Rs451 (14x target multiple on its FY2014 earnings per share [EPS]). Eros International Media Cluster: Emerging Star Recommendation: Buy Price target: Rs267 Current market price: Rs168 Performance above expectation Result highlights Performance above expectation: For the second quarter of FY2013, Eros International Media Ltd (EIML) reported a strong performance in a seasonally weak quarter, which is much ahead of our and the Street's expectations. The outperformance was led by a higher catalogue revenues and partial pre-booking of film revenues from the next quarter. The revenues were up by 31.2% year on year (YoY) to Rs229.3 crore ahead of our expectation of Rs192.3 crore. The EBITDA margin was down by 530 basis points YoY to 18.4%, which is ahead of our expectation of 14.5%. The net profit was down by 4.8% YoY to Rs26.1 crore, which is much ahead of our expectation of Rs17.1 crore. The consolidated revenues grew by 31.2% YoY to Rs229.3 crore. The revenues of the Hindi film business (stand-alone) grew by 50.2% to Rs227.2 crore. The company released three Hindi films and 16 regional films, including Tamil. The Hindi film revenues were boosted by revenues from the films released in the quarter like "Cocktail" and "Shirin Farhad Ki Toh Nikal Padi" as well booking of television syndication revenues of deals signed in the quarter. The outperformance was mainly driven by booking of partial revenues of music rights and minimum guarantee for theatrical release from "English Vinglish" and "Maatraan" released in October 2012. The EBITDA margins were down 530 basis points YoY to 18.4% affected by the higher film acquisition/production costs coupled with loss in subsidiary (Ayngaran International) to the tune of Rs 6.9 crore The effective tax rate increased to 38.4% from 28.6% in the corresponding quarter of the previous year, mainly due to the timing differences of tax incidence. The management expects the tax rate to normalise in the coming quarters.  On the account of lower margins and higher tax rate, the net profit fell by 4.8% to Rs26.1 crore. However, it is still much ahead of our and the Street's expectations.  Valuation: EIML continues to see strong revenues visibility (notwithstanding quarterly volatility) owing to impressive slate of films and healthier monetisation capabilities through the satellite rights, which lend support to improve the margins in the coming years. On the other hand, compulsory digitalisation by the end of 2014 would act as a further catalyst for demand of films amongst the broadcasters, which would help in getting better prices for the satellite rights in the coming years. EIML, with a films catalogue of more than 1,100 films, will be a key beneficiary. We continue to maintain our preference for EIML as the best player in the entertainment space. At the current market price of Rs168, the stock is attractively available at 8.8x and 7.2x FY2013 and FY2014 earnings estimates. We maintain our Buy rating on the stock with a price target of Rs267.   Dishman Pharmaceuticals & Chemicals Cluster: Ugly Duckling Recommendation: Buy Price target: Rs135 Current market price: Rs96 Strong traction continues Result highlights Unsold stock influences operating results; expect stronger traction ahead: In Q2FY2013, Dishman Pharmaceuticals &Chemicals (Dishman) reported a moderate 7.4% year-on-year (Y-o-Y) rise in the net sales to Rs289.3 crore, which is 11% lower than our estimates. However, if we consider the unsold stock (increase in stock-in-trade by Rs59.9 crore in), the revenues would have been much higher. Such increase in the stock in trade also helped operating profit margin (OPM) to surge by 963 basis points year on year (YoY) to 20.1%. However, OPM was also benefited from the cost optimisation at Carbogen Amcis and Dishman Netherlands. This led the net profit turning around to Rs26.6 crore as compared with a net loss of Rs6.3 crore in Q2FY2012. However, adjusted for foreign exchange gains of Rs11.2 crore, adjusted net profit is worked out at Rs15.4 crore. We expect stronger traction in H2FY2013, as the unsold stock would be realised by Carbogen Amcis and the newly started facilities would give better contribution.  Focus on de-risking the business: Although the products pipeline for the contract research and manufacturing services (CRAMs) business is pretty strong, the revenues have not been consistent due to irregular offtake by client companies. To de-risk this scenario, the company is focusing on new revenue streams from the commercialisation of generic active pharmaceutical ingredient (API). This will give a consistency in the revenue stream for the company. The company is currently working on 20 APIs, part of which will be filed as drug master files with US Food and Drug Administration. The sizeable revenues are expected from this business in FY2014 and FY2015, which will supplement the growth from the CRAMs business.  We maintain our estimates, price target and recommendation: Although H1FY2013 profits constitute nearly 62% of our annual estimates for FY2013, we prefer to maintain our estimates intact given time uncertainty in CRAMs business. The stock is currently trading at 5.6x FY2014E earnings per share (EPS). We maintain our Buy rating on the stock with a price target of Rs135 (8x FY2014E earnings).  Deepak Fertilisers & Petrochemicals Corporation Cluster: Ugly Duckling Recommendation: Buy Price target: Rs179 Current market price: Rs129 Higher input cost erodes margin  Result highlights Revenue in line with expectation; margin disappoint: The revenues of Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) were up by 20.1% year on year (YoY), which was in line with our expectation. DFPCL reported total revenues of Q2FY2013 to Rs693.4 crore. The revenues were mainly driven by higher volume in the fertiliser segment. Growth in fertiliser segment was led by a higher volume (both production and traded) growth and an increase in realisation. The operating profit margin (OPM) stood at 11.6%, which was lower by 540 basis points on a year-on-year (Y-o-Y) basis (our estimate was 17.0%), on account of a higher input cost (ammonia, major raw material), unexpected plant shut down of isopropyl alcohol (IPA) for 20 days and zero production of methanol during the quarter due to higher gas price. Margin pressure along with high depreciation led to profit decline: During the Q2FY2013, the RPAT for the company declined by 24.2% YoY to Rs40.6 crore, which was much lower than ours and the Street's expectation. The margin pressure along with higher depreciation charges led to a decline of profit during the quarter as compared with the same period of last year. During the quarter, depreciation has increase by 25.6% to Rs25 crore due to the capitalisation of the new technical ammonium nitrate (TAN) plant. During the quarter, the tax rate stood at 25.5%, which was in line with our expectation.  Favourable demand environment going ahead for chemical and fertiliser segments: The demand in the chemical segment will remain firm despite a slow down in the mining activities. In the chemical segment, the company has started to focus on export market, which will drive the incremental volumes in TAN (16% of the total revenue in Q2FY2013). In the fertiliser segment, the demand for the manufactured and traded fertiliser will remain robust because of a good start to the rabi season. The overall volumes in manufactured chemicals saw a decline of 24% during the quarter inspite of a robust demand, mainly on account of a lower production of IPA (unexpected IPA plant shut down for 20 days) and shut down of methanol plant due to high spot gas price. In the fertiliser segment, the volume has seen a sharp increase of 20% due to revival in the monsoon season in later part of the quarter.  Outlook and valuation: Though the profits of DFPCL were marginally subdued on account of margin pressure due to increase in the price of ammonia and shut down of the IPA plant. We have marginally revised our revenue estimates upward, mainly to factor in better volume growth in the fertiliser and chemical segments. However, we have also factored in the high price of key inputs in the chemical segment (ammonia and propylene), thus lowering our margin expectation. We continue to prefer DFCL and maintain our "Buy" rating with a price target of Rs179. At the current market price of Rs129, the stock trades at a very attractive valuation of 5.3 and 3.9x its FY2013E and FY2014E earnings respectively.   SECTOR UPDATE Insurance APE growth continues to slow down  The growth in the annual premium equivalent (APE) of the life insurance industry continues to slow down. It declined by 18.7% year on year (YoY) in September 2012, the third consecutive month of slowing growth. The slowdown was mainly contributed by Life Insurance Corporation of India (LIC), which showed a decline of 13.4%, 26.5% and 19.% in the months of July, August and September respectively. The private players posted a decline of 18.3% YoY in September. On a year-till-date (YTD) basis (April-September 2012), the private players fared better than LIC as these fell by merely 0.4% YoY as compared with the 10.9% year-on-year (Y-o-Y) decline seen by LIC. The industry's APE decline by 7.5% on a YTD basis. The YTD growth in the private industry was led by players like ICICI Prudential Life (ICICI Prudential; 14.4%) and Bajaj Allianz (15.1%).  On a month-on-month (M-o-M) basis, the APE numbers for the industry declined by 14.1% led by a 22.4% fall in the APE of LIC. However, the private players posted a growth of 1.1% month on month (MoM). On an M-o-M basis, 16 out of 22 players posted an increase in the APE, with Max Life Insurance and Bajaj Allianz posting a growth of 28.2% and 14.7% respectively.  The market share of the private players improved by about 250 basis points to 34.9% (LIC, 65.1%) in the April-September 2012 period compared with 32.4% in the corresponding period of the previous year. During the period under review, companies like Tata AIA Life Insurance (2.3 vs 4.4%), Max Life Insurance (7.6% vs 8.0%) and Reliance Life Insurance (5.9%vs 6.3%) showed a decline in their market share. Moreover, ICICI Prudential turned out to be a major gainer as its market share improved by about 260 basis points to 20.1%. The APE growth for the industry has been affected by the regulatory overhaul and the uncertainty with regard the new regulations. However, the government is likely to take several measures to boost the insurance sector, which includes faster approval of products, tax breaks, easing of investment norms, easier know-your-customer (KYC) norms etc. Therefore, the growth in the APE is likely to pick up in the second half of FY2013. Click here to read report: Investor's Eye

Fw: Revision in trading timings for Commodities

 

Dear Customer, This is to inform you that, in view of the change in US daylight saving timings, the trading timings are being revised. Kindly take a note of revision in trading timings as below. The below trading timings will be effective from November 05, 2012 to March 09, 2013 (both days inclusive).

Days Timings Commodities Monday to Friday 10:00 a.m. to 5:00 p.m. (A)Agricultural Commodities 10:00 a.m. to 11:55 p.m. (B) All commodities (currently traded upto 11:30 p.m.expect agricultural commodities as mentioned above) Saturday 10:00 a.m. to 2:00 p.m. (C ) All Commodities

If you require any clarifications or assistance, you may please write to us at comm@indiainfoline.com or Reach our Customer Care Desk at (022) 40071000 or at our zonal customer service numbers: North -011-49315020, East - 033-44048600, Maharashtra-022-40609292, Gujarat and Madhya Pradesh -079-40271800 and South-080-40547030.

Regards, Loveena Khatwani Head, Customer Service India Infoline Commodities Limited

Fw: Investor's Eye: Update - Bharat Heavy Electricals, Bank of India, GAIL India, Ipca Laboratories, Torrent Pharmaceuticals

 

   

Investor's Eye [October 29, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   Bharat Heavy Electricals Cluster: Apple Green Recommendation: Hold Price target: Rs250 Current market price: Rs227 Dismal results, order position worsens Result highlights Results marginally below expectation, while subdued orders inflow majorly disappoints: The Q2FY2013 results of Bharat Heavy Electricals Ltd (BHEL) were marginally below our expectation mainly led by a fall in the other income. It may be noted here that our net profit estimate at Rs1,296 crore was sharply below the Street's expectation of Rs1,446 crore. The containment of the raw material costs and a change in the policy of computation of leave encashment (which has increased the profit before tax by Rs166 crore) aided better than expected operating profit margins (OPMs). The order inflow also continued to disappoint as the derived order inflow is coming at a mere Rs349 crore. During the quarter, the company has downwardly adjusted the order book to factor in the currency movement for the orders having import content. This resulted in a drastic fall of about 24% year on year (YoY) and 8% on a sequential basis in its order backlog, which is the worst in at least the past 14 quarters.  Estimates downgraded marginally: In view of the dismal implied order inflow of Rs5,939 crore (down by 65% YoY) in H1FY2013, we have further downgraded our order inflow assumption to Rs35,000 crore for FY2013. Overall, we are downgrading our estimates by 3% for FY2014, while keeping the estimates for FY2013 unchanged. We are estimating a negative compounded annual growth rate of 7% in both the top line and adjusted earnings over FY2012-14. A poor ordering environment in the power sector remains a major worry for BHEL. The book-to-bill ratio has fallen down to 2.4x this quarter, which is the lowest in the past 28 quarters, aggravating future growth concerns. Price target cut to Rs250: Poor financial position of the state electricity board has further elongated the company's working capital cycle to 51 days, with cash balance falling to Rs5,308 crore from Rs6,672 crore at the end of Q4FY2012. We also feel that there is a growing risk of liquidation damages being slapped by some of its clients who are blaming BHEL for delaying the project execution. On the positive side, some breakthrough seen in the non-thermal power businesses, likes nuclear power, railways, logistics, and transmission and distribution, would help BHEL to diversify away from the thermal power equipment business. At the current market price, the stock trades at 9.1x FY2014E earnings. We have revised our price target to Rs250 (10x FY2014E). In view of the limited potential, we maintain Hold rating on the stock.   Bank of India Cluster: Apple Green Recommendation: Hold Price target: Rs290 Current market price: Rs280 Price target revised to Rs290 Result highlights Bank of India (BoI) declared disappointing set of numbers for Q2FY2013 as the net profit declined by 38.5% year on year (YoY; down by 66.0% quarter on quarter [QoQ]). This was on account of a sharp increase in provisions (up by 34.5% YoY and 228.7% QoQ) to Rs1,552.1 crore. However, the tax provisions were negligible at Rs10 lakhs due to higher provisioning, which restrained a further decline in the net profit.  The net interest income (NII) growth was in line with our expectations as it grew by 15.3% YoY (up by 7.5% QoQ) to Rs2,196 crore led by a 15 basis points sequential increase in the margins to 2.42%. The interest reversal on the non-performing assets (NPAs) affected the growth in NII. The business growth was subdued on a quarter-on-quarter (QoQ) basis as the advances fell by 3.0%, mainly contributed by decline in the retail and overseas advances. The deposits fell by 1.9% on a Q-o-Q basis as the volatile current account deposits fell by 17.2% QoQ.  Asset quality of the bank deteriorated significantly contributed by a sharp rise in slippages (Rs2,733 crore in Q2FY2013), which shored up the gross and net NPAs to 3.42% and 2.04% in Q2FY2013 from 2.58% and 1.69% in Q1FY2013 respectively. The bank restructured advances to the tune of Rs810 crore during the quarter, taking the total restructured book to ~Rs17,500 crore.  The non-interest income grew by mere 6.2% YoY as the fee income fell by 5.10% (down 11.6% QoQ) to Rs287.6 crore. However, the foreign exchange income, which increased 24.1% YoY to Rs184 crore, aided the growth in the non-interest income. Valuation and outlook: BoI's earnings growth and other operational parameters continue to remain volatile. The continued weakness in the asset quality and below par net interest margins (NIMs) remain a concern for the bank. We believe that BOI's return ratios are unlikely to improve significantly (ROE of 13.6% and ROA of 0.7%) and the bank would continue to underperform its peers. We revise the price target to Rs290 (0.9x FY2014 adjusted book value) and maintain Hold recommendation.   GAIL India Cluster: Apple Green Recommendation: Hold Price target: Rs410 Current market price: Rs359 Subsidy burden, subdued volume and tariff revision affected earnings Result highlights Gas trading drives sales, but tariff revision in LPG transmission hurts: During Q2FY2013, the net sales of GAIL grew by 17% year on year (YoY) and 3% quarter on quarter (QoQ), in line with our expectation. The year-on-year (Y-o-Y) sales growth was largely driven by a higher realisation in the natural gas (NG) trading business (up 33% YoY and 9% QoQ), though the business registered about 3% slippage in volume on both on Y-o-Y and sequential bases. Sequentially, the sales were supported by better volume in the petrochemical business in addition to the better realisation in the NG trading business.  On the negative side, the company derecognised Rs123 crore on account of a revision in the liquefied petroleum gas (LPG) pipeline tariff (which eroded the entire revenue for the quarter, having a quarterly run rate of Rs100-120 crore). Also, a decline in the realisation in the LPG and liquid hydrocarbon (LHC) segments adversely affected this segment's sales by 22% YoY and 28% QoQ.  Margin declined with tariff revision, higher subsidy and lower trading margin: The subsidy burden jumped sharply by 39% YoY and 12% QoQ to Rs786 crore in Q2FY2013. This figure is also 13% higher than our estimate. Moreover, the derecognition of Rs123 crore on account of the revision in the LPG pipeline tariff resulted in an operating loss for the segment. The NG trading margin (profit before interest and tax [PBIT] margin) witnessed a contraction of 126 basis points YoY and 284 basis points QoQ to 2.5% during the quarter. The management has guided that the margin would be in the 2.5-3.0% range normally.  Consequently, the operating profit of GAIL declined by 16% YoY and 27% QoQ to Rs1,412 crore. However, with a higher other income (of about Rs100 crore incremental dividend earned from its joint ventures and subsidiaries) and a lower tax rate, the profit after tax (PAT) declined by 10% YoY and 13% QoQ to Rs985 crore, which is 10% lower than our estimate.  Valuation: We have marginally revised our earnings estimates to Rs31.5 and Rs34 for FY2013 and FY2014 respectively. Though we retain our price target of Rs410, but we downgrade our rating on the stock from Buy to Hold due to a lack of near-term triggers and a flattish earnings outlook because of gas availability constraint. Nevertheless, both gas and petrochemical segments should witness volume growth in FY2015.   Ipca Laboratories Cluster: Ugly Duckling Recommendation: Hold Price target: Rs504 Current market price: Rs452 Price target revised to Rs504; change ratings to Hold Result highlights Q2FY2013 results better than expected; institutional business jacks up the growth: In Q2FY2013, the net sales of Ipca Laboratories (Ipca) jumped by 22.6% year on year (YoY) to Rs757.5 crore, mainly driven by the exports business, which surged by 31.5% YoY to Rs464.3 crore during the quarter. This is partly due to the currency benefits and increased offtake in the institutional business, which grew by 43% YoY to Rs129.5 crore during the quarter. The operating profit margin (OPM) declined by 290 basis points YoY (from a high base) to 21.8%. The net profit jumped by 61% YoY to Rs125.1 crore, mainly due to a 125% year-on-year (Y-o-Y) rise in the other income to Rs18.2 crore and foreign exchange (forex) gains of Rs6.4 crore (compared with forex loss of Rs27.2 crore) coupled with a extraordinary income of Rs4.69 crore. However, the adjusted net profit (adjusted for the forex gains and extraordinary income) increased moderately by 8.5% YoY to Rs114 crore, mainly due to a sharp rise in the effective tax rate by 473 basis points to 24.7%. The overall performance during the quarter has been ahead of our expectations. Growth momentum to continue but no fresh trigger: We expect the growth momentum to continue in the subsequent quarters at most front on account of the promotional branded business and institutional sales. The management has revised its revenues' guidance from Rs360 crore earlier to Rs370-380 crore for FY2013 from the institutional business. However, the management of the company does not expect new approval from its Indore facility before Q1FY2014, by U.S. Food and Drug Administration (USFDA). This will delay the ramp up in the US market. We believe the absence of trigger for the incremental growth and the poor performance of the active pharmaceutical ingredient (API) business would restrict the valuation of the stock in the mid-term. We revise up price target but change recommendation from Buy to Hold: Taking our cues from H1FY2013 results and interaction with the management, we fine-tune our estimates for FY2013 and FY2014. We revise our price target up by 5% to Rs504. However, due to a limited upside over the current market price of the stock, we change our recommendation from Buy to Hold.   Torrent Pharmaceuticals Cluster: Ugly Duckling Recommendation: Buy Price target: Rs760 Current market price: Rs664 Long-term growth elements remain intact  Result highlights Weaker operating performance in Q2FY2013: Torrent Pharmaceuticals (Torrent) reported a moderate growth of 13.6% year on year (YoY) in its net sales to Rs747 crore in Q2FY2013, mainly due to temporary disruptions in sales in the Brazilian market and coupled with a slower offtake in the contract manufacturing business. The core operating profit margin (OPM) declined by 73 basis points YoY to 16.8%, mainly due to a provision of foreign exchange (forex) loss of Rs14 crore. However, the other operating income grew by 352% YoY to Rs30.1 crore, while the non-operating other income jumped by 190% YoY to Rs12 crore. As a result, the net profit jumped by 32% YoY to Rs107 crore, which is exactly in line with our expectations. Temporary disruptions affected Q2FY2013 performance; long-term outlook intact: The performance of Q2FY2013 was affected by three major factors: (1) strike at the state regulatory agency led to a halt in the new batch order and non-clearance from port in the Brazilian market during June 15 and August 15; (2) slowdown in some molecules in the Brazilian market; and (3) lower offtake in the contract manufacturing business, as client company lost some contracts. Although, the business has been normalised in the Brazilian market, the company expects only a part of lost sales to be recoverable in the subsequent quarters. However, as the company continues to focus on the new products filings and contract manufacturing is expected to see a better performance on resumption of supplies to the clients, we believe the long-term outlook will remain intact.  We maintain our estimates and price target, and recommendations: The stock is currently trading at 10x FY2014E. We maintain our earning estimates and price target at Rs760, which implies 13x FY2014E earnings per share (EPS). We maintain Buy recommendation on the stock. 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.

Fw: Investor's Eye: Update - Hindustan Unilever, ICICI Bank, Punjab National Bank, Bajaj Holdings & Investment

 

     

Investor's Eye [October 26, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Hindustan Unilever Cluster: Apple Green Recommendation: Reduce Price target: Rs520 Current market price: Rs552 Downgraded to Reduce Result highlights Results in line with expectations, volume growth disappoints the Street: Hindustan Unilever Ltd (HUL)'s Q2FY2013 results are ahead of our expectations largely on account of a higher than expected other income (including the other income from operations) during the quarter. The adjusted profit after tax (PAT) grew by 23.1% year on year (YoY) to Rs805.3 crore, ahead of our expectation of Rs776.8 crore. The volume of the domestic consumer business grew by 7% YoY in the quarter, lower than the 9% growth in Q1FY2013 and the Street's expectation of a 9-10% growth. The soap and detergent segment's performance was the highlight of the quarter with the segment's revenues growing by 22.3% YoY and profit before interest and tax (PBIT) margin improving by 191 basis points YoY to 14.3%. On the other hand, the personal product segment has sprung a negative surprise with just a 12.1% year-on-year (Y-o-Y) revenue growth and a 125-basis-point Y-o-Y decline in the PBIT margin to 24.2%. Performance snapshot: In Q2FY2013, HUL's net sales grew by 11.6% YoY to Rs6,155.4 crore, largely in line with our expectation of Rs6,207.1 crore. Benign raw material prices, effective buying of the key inputs and judicious price hikes in the product portfolio aided the gross profit margin (GPM) to improve by 143 basis points YoY to 46.9%. However, the company increased the advertisement spending because of heightened competition in most of its key segments. The advertisement spends as a percentage of sales increased by 68 basis points YoY to 12.5% and the other expenses as a percentage of sales increased by 52 basis points YoY to 15.7% in Q2FY2013. Hence, the operating profit margin (OPM) stood flat at 13.3% during the quarter. The operating profit grew by 12.1% YoY to Rs821.1 crore. However, an 83% Y-o-Y growth in the other income to Rs148.8 crore (including the investment income and a gain on the sale of non-current investments) and a 65% Y-o-Y growth in the other operational income to Rs155.4 crore led to a 23.1% Y-o-Y growth in the adjusted PAT to Rs805.3 crore. Revision in estimates: We have marginally lowered our earnings estimates by 1% and 2% for FY2013 and FY2014 respectively to factor in the lower than expected revenue growth in the personal product and processed food businesses in Q2FY13. We have introduced our FY2015 earnings estimates for the company in this note. Outlook and valuation: The moderation in the volume growth in Q2FY2013 indicates that the sustained inflationary environment and heightened competition are giving a tough time to HUL's key segments. However, the company is aiming to improve the volume growth by increasing the media and promotional spending, enhancing the distribution reach and innovating & renovating its product portfolio in the coming quarters. The decline in the prices of the key inputs (including palm oil) would aid in improving the GPM in the coming quarters. However, an increased advertisement and media spending would keep the OPM in the range of 13.5-14.0% in the coming quarters.  At the current market price the stock is trading at 31.8x its FY2014E earnings per share (EPS) of Rs17.4, which is 22% higher than the average multiple of 26x of the last four years. Hence, in view of the premium valuation and the concern over the volume growth, we downgrade our recommendation on the stock from Hold to Reduce with a revised price target of Rs520 (we roll over the target to 28x its average FY2014-15 earnings).    ICICI Bank Cluster: Apple Green Recommendation: Buy Price target: Rs1,230 Current market price: Rs1,078 Price target revised to Rs1,230 Result highlights ICICI Bank's Q2FY2012 results were ahead of our estimates as the net profits grew by 30.1% year on year (YoY) to Rs1,956 crore. The growth in profits was mainly driven by a strong growth in the net interest income (NII), which grew by 34.5% YoY to Rs3,371 crore (higher than our estimates). The net interest margins (NIMs) remained stable on a quarter-on-quarter (Q-o-Q) basis at 3.0% as a decline in the overseas' NIMs was compensated by an improvement in the domestic NIMs (3.43% vs 3.32% in Q1FY2013). The business growth continued to remain strong as advances grew by 17.6% YoY, while deposits grew by 14.8% YoY. The current account savings account (CASA) ratio was 40.7% vs 40.6% in Q1FY2013. The asset quality remained stable as the gross and net non-performing assets (NPAs) were almost similar to Q1FY2013 levels. The bank has provided ~85% for its exposure towards Deccan Chronicle, which turns into NPA in Q2FY2013. The outstanding restructured loans were almost unchanged at Rs4,158 crore.   The non-interest income grew by 17.4% YoY mainly driven by the treasury income of Rs172 crore. The fee income growth remained flat on a year-on-year (Y-o-Y) basis due to a slowdown in the corporate fees. Valuation: ICICI Bank has yet again delivered a robust performance on all fronts. Therefore, we have raised our estimates on an average by 3-5 % for FY2013 and FY2014 and expect the earnings to grow at a compounded annual growth rate (CAGR) of 15.7% over FY2012-14. We also revise our sum-of-the-part (SOTP)-based target price upwards for ICICI Bank to Rs1,230 (valuing the stand-alone bank at 1.6x FY2014 book value). We maintain Buy rating on the stock.   Punjab National Bank Cluster: Ugly Duckling Recommendation: Hold Price target: Rs800 Current market price: Rs749 Price target revised to Rs800 Result highlights Punjab National Bank (PNB)'s Q2FY2013 results were disappointing as the net profits declined by 11.6% year on year (YoY) to Rs1,065.6 crore (below our estimate). This was on account of a tepid growth in the net interest income (NII) and a sharp rise in the provision (51.2% YoY).  The net interest margin (NIM) declined by 10 basis points quarter on quarter (QoQ) to 3.5% in Q2FY2013 from 3.6% in Q1FY2013, mainly due to a 43-basis- point quarter-on-quarter (Q-o-Q) decline in the yield on advances. Further, there was also an interest reversal of Rs163 crore, which affected the NII and NIMs. The business growth appeared to be steady on a year-on-year (Y-o-Y) basis but was muted on a sequential basis. The advances grew by 22.8% YoY (up 0.1% QoQ), whereas the deposits grew by 17.3% YoY (up 4.0% QoQ). The current account savings account (CASA) ratio increased to 35.8% from 34.6% in Q1FY2013. The key disappointment came from the asset quality front as the slippages shored up to Rs4,544 crore, leading to the gross non-performing assets (NPAs) inching to 4.66%.The bank also restructured Rs2,677 crore of advances in Q2FY2013, thereby increasing the restructured book to 9.5% of the advances. The non-interest income growth was also sluggish as it grew by a mere 1.9% YoY but declined by 22.4% on a Q-o-Q basis. The fee income grew by 1.1%, whereas the foreign exchange income fell to Rs127 crore in Q2FY2013 from Rs212 crore in Q1FY2013.  Valuation PNB's Q2FY2013 result points to a significant pressure on the asset quality, which is beginning to erode the core income growth. Therefore, we revise the earnings estimates downwards, factoring the asset quality concerns, and expect the earnings to grow at a compounded annual growth rate (CAGR) of 6.3% over FY2012-14. We revise the target price to Rs800 (1.05x FY2014 adjusted book value). We downgrade the recommendation from Buy to Hold.   Bajaj Holdings & Investment Cluster: Apple Green Recommendation: Buy Price target: Rs1,236 Current market price: Rs853 Price target revised to Rs1,236 Result highlights The consolidated income of Bajaj Holdings and Investment Ltd (BHIL) remained flat at Rs91 crore on a year-on-year (Y-o-Y) basis. During the last seven quarters, the company reported a lacklustre top line of under Rs100 crore but the top line improved sequentially by 25.7% in Q2FY2013. However, the income from the company's associates improved by 8.4% year on year (YoY) in the same quarter. This led to a 7.4% Y-o-Y increase in the profit after tax (PAT) to Rs390.5 crore. During Q2FY2013, the total market value of the company's investments grew by 16.5% sequentially, whereas the cost of investments was up by 2.8% due to an increased exposure in the fixed income securities and other equity investments. The market value of its equity investments in the core associate companies (80% contribution) grew by 18.8% sequentially, while the market value in the other equity investments increased by 8.8% quarter on quarter (QoQ). BHIL invested Rs368 crore towards its entitlement in rights issue of Bajaj FinServ (BFS) on October 8, 2012, which would be reflected in Q3FY2012. Valuation BHIL's key investment, Bajaj Auto, has been valued at 13x FY2014 earnings per share (EPS). Though Bajaj Auto reported quarterly results in line with our expectations but there are concerns over increasing competitive intensity 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 (namely Bajaj Auto and Bajaj FinServ), 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 Rs1,236 implies a 45% upside for the stock. We maintain our Buy recommendation on BHIL.      Click here to read report: Investor's Eye