| Summary of Content STOCK UPDATE Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs70
Current market price: Rs51 Q1FY2012 results: First-cut analysis Result highlights -
Q1FY2012 revenues driven by higher realisation: In Q1FY2012 the revenues of Ashok Leyland Ltd (ALL) grew by 6.3% year on year (YoY) despite a 10% year-on-year (Y-o-Y) decline in the volumes during the quarter. The net realisation for the quarter increased by 18% YoY led by sharp price hikes in the commercial vehicle (CV) segment taken during the quarter. The large YoY variation is also due to the fact that there was no effect of new emission norms in the corresponding quarter. -
Contribution per vehicle improves QoQ despite unfavourable product mix: In Q1FY2012 the raw material cost as a percentage of sales at 72.1% came in as a positive surprise against our expectation of 73.2%. The contribution per vehicle improved by Rs1,847 despite an unfavourable product mix towards the bus segment. Bus sales as a percentage of sales stood at 27.6% as against 23.5% and 23.8% in Q4FY2011 and Q1FY2011 respectively. The other expenses as a percentage of sales were 90 basis points higher than our expectation. The operating profit margin (OPM) came in at 9.8% (slightly higher than our expectation of 9.5%). Adjusting for a Rs9.5-crore lower impact on the other expenditure due to a change in the accounting policy of amortisation on land the adjusted OPM stands at 9.4%. -
Lower tax rate implies higher production from Pantnagar; Q1FY2012 PAT in line: The depreciation for the quarter was 9% higher than expected. However, mitigating this impact was the lower than expected tax rate, which came in at 22.1% (against our expectation of 24%). That, we believe, was primarily on account of higher production from the Pantnagar plant. Consequently, the profit after tax (PAT) came in line with our expectation at Rs86.3 crore, indicating a decline of 29.7% YoY. -
Our view: The Q1FY2012 results were in line with our expectations. Moreover, the stable contribution margin on a quarter-on-quarter (Q-o-Q) basis was commendable (we were expecting a 108-basis-point drop in the same on a Q-o-Q basis). Though the macro headwinds in the form of interest rates hikes and commodity cost pressure remain the key risks, we believe that any further increase in the production from the tax-free Pantnagar plant will aid the margins from here on. We maintain our Buy recommendation on ALL and will release a detailed note on the company after its post-results conference call. Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs303
Current market price: Rs208 Q1FY2012 results: First-cut analysis Result highlights -
Results marred by losses in subsidiaries: Crompton Greaves Ltd (CGL)'s Q1FY2012 consolidated results were severely below our expectations mainly because of the losses booked in its subsidiaries and margin pressure in the stand-alone business. Prima facie, the losses in the subsidiaries appear to have been caused by the significant rise in the raw material cost which could be led by consolidation of its recent two acquisitions with itself in this quarter. Also, on account of this consolidation the consolidated numbers of the company are not strictly comparable. We would like to wait for the management's commentary tomorrow to better understand the impact of the consolidation of the recent acquisitions. -
Stand-alone revenues below expectation led by sluggish industrial systems: The stand-alone revenues grew by 9.4% year on year (YoY)-the growth was below our expectation at 12.6% YoY. The revenue growth was mainly led by a robust 16.2% Y-o-Y growth in the revenues of the consumer products division. The power system division's revenue growth was largely in line with our expectation of a 12% Y-o-Y growth. However, the industrial system division was the biggest disappointment in the stand-alone results with a mere 2.2% Y-o-Y growth in sales. -
Stand-alone OPM under pressure: The OPM was lower at 12.7% (vs 15.6% in Q1FY2011) because of the cost input pressure seen across divisions. This was mainly led by the rise in the raw material and employee costs. Overall, the profit after tax (PAT) fell by 9.2% YoY to Rs129 crore vs our estimate of Rs158.6 crore. -
Consolidated revenue growth marred by subsidiaries' flattish revenue: The net revenue of the consolidated entity rose by merely 5.8% YoY (below our projection of a 16.5% growth) mainly on account of a 1% Y-o-Y rise in the revenue from the subsidiaries. Here we are little negatively surprised as we were expecting some positive impact arising from the recent appreciation of the euro against the rupee to get reflected in this quarter's performance. -
Consolidated margins were badly hit on subsidiaries' losses: The company's margins were under severe pressure at 7.5% (vs 12.9% in Q1FY2011), as its subsidiaries reported an operating loss of Rs4.8 crore. This margin contraction was led by a 14.8% Y-o-Y rise in the raw material cost on subdued sales. The subsidiaries reported a net loss of Rs51.3 crore. Overall, the PAT fell by 58.3% YoY to Rs79.5 crore, which is much below our estimate. -
We will come up with a detailed note on the company's Q1FY2012 results after an interaction with its management, and review our estimates and price target for the stock. HDFC Bank
Cluster: Evergreen
Recommendation: Hold
Price target: Rs518
Current market price: Rs511 Price target revised to Rs518 Result highlights -
HDFC Bank's Q1FY2012 results were in line with our estimates as net profits registered a growth of 33.6% year on year (YoY) to Rs1,085 crore. The growth in profits was driven by a healthy growth in the net interest income (NII; 18.6% YoY) and a 20.1% YoY decline in the provisions. The margins remained stable at 4.2% YoY as an increase in the funding costs was largely offset by an increase in the yields on loans. The asset quality remained stable as gross and net non performing assets (NPAs) were broadly at Q4FY2011 levels. -
Strong growth in advances though NII growth moderated a bit: While overall advances grew 20% YoY and 9.7% quarter on quarter (QoQ) in Q1FY2012, adjusting for one time short term wholesale loans in Q1FY2011 the advances growth was 29.1% YoY. However, the NII growth was slightly off colour due to a higher acquisition cost and amortisation expenses during the quarter. The advances growth was mainly driven by the corporate segment which grew 14.8% QoQ although the advances growth in the retail segment also remained strong at 28.6% YoY and 4.7% QoQ. -
Margins remain stable: The net interest margin (NIM) remained stable at 4.2% on a sequential basis as the bank passed on the incremental cost to borrowers. The yield on loans (calculated) expanded by 35 basis points QoQ which aided margins despite a rise in funding costs. The current account - savings account (CASA) ratio slipped to 49.1% from 52.7% in Q4FY2011 as temporary current account balances accumulated in Q4FY2011 moved out during the quarter (Q1FY2012). -
Steady growth in fee income: During Q1FY2012, the non interest income grew 13% YoY to Rs1,120 crore. This was mainly driven by fee income and foreign exchange (forex) income which grew by 16% YoY and 34% YoY respectively. However, the bank had a treasury loss of Rs41.3 crore compared to a profit of Rs21.5 crore in Q1FY2011 which led to a slightly slower growth in non interest income. -
Asset quality stays healthy: The gross and net NPAs were at 1.04% and 0.18% respectively broadly in line with Q4FY2011 levels. However, the micro finance portfolio showed some weakness and contributed Rs139 crore QoQ to the net addition in gross NPAs. During the quarter, the bank provided Rs250 crore towards floating provisions while the overall provision coverage ratio (excluding write offs) increased slightly to 83% from 82.5% in Q4FY2011. -
Valuation: HDFC Bank continues to deliver a strong growth in earnings with superior operating metrics. We expect the bank's earnings to grow at a compounded annualised growth rate (CAGR) of 25.5% over FY2011-13. However, the stock has run up sharply and trades at 3.7x FY2013E book value (BV), which is at a significant premium to its peers (Axis Bank, ICICI Bank, Indusind Bank etc). Given the consistent earnings growth we have maintained estimates for FY2012 and FY2013 and value the bank at 3.7x FY2013E BV (earlier 3.5x FY2013 BV). Therefore our target price gets revised to Rs518 (post adjustment to split). We maintain our Hold rating on the stock as the stock trades at premium valuations, leaving little room for an upside. NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs285
Current market price: Rs203 Inline performance... Result highlights -
In line operational performance; profit outperformance led by higher other income: NIIT Technologies (NTL) reported an in line operational performance for Q1FY2012, with a 4.1% sequential growth in revenues to Rs328.8 crore (our estimate was of Rs325.3 crore). In USD terms revenues were up 5.1% quarter on quarter (QoQ) to $72.4 million. The soft top line performance was on account of seasonality factors (slow domestic business), with a 34.5% sequential decline in geospatial information services (GIS) revenues to Rs19.9 crore, whereas ROOM Solutions showed a sequential growth of 4% to Rs38.2 crore. The IT services revenues grew by 4.7% QoQ to $52.9 million. The EBITDA margins declined by 200 basis points QoQ to 18.5% on account of wage hikes effected during the quarter. The net profit for the quarter was down by 17.6% QoQ to Rs41.2 crore, ahead of our expectations of Rs35.6 crore. The outperformance was on account of higher other income, which was up by 85.7% QoQ to Rs3.9 crore on account of higher foreign exchange (forex) and treasury income coupled with a lower than expected tax rate of 26.5% (our expectation was of 29%). -
Margins likely to remain soft in FY2012, witness gradual improvement in FY2013: On account of transition costs and higher initial onsite activity involved in the recent two large deals (the Eurostar deal and the joint venture [JV] with Morris Communications [Morris]), NTL's management has indicated at margin pressure in the coming quarters. In Q2FY2012, there will be a one time transition cost of $2.5 million pertaining to the Morris JV and an investment of GBP3 million towards infrastructure cost for the Eurostar deal. We have adjusted downwards our margin estimates for FY2012; we expect margins to decline by 160 basis points in FY2012 to 17.9% and with a gradual shift of work to offshore locations and steady state operations in the large deals, the margins would see a gradual improvement in FY2013E. -
Large deal wins gaining momentum: NTL is gaining momentum and moving to the next level with signing of large deals worth more than $30-40 million. NTL announced two large managed services deals recently. The company won a multi-year, multi-million pound IT infrastructure deal from Eurostar, the official train carrier for the London Olympics 2012. NTL would be executing 17 transformational deals before the start of the Olympics 2012. It would be investing about GBP3 million towards infrastructure requirement for the deal. It also signed a deal with Morris, a US media company for assured revenues of $85 million over five years to provide integrated IT & business process outsourcing (BPO) services. As part of the deal, NTL has formed a JV (NIIT Media Technologies LLC) with Morris wherein NTL would invest $3.2 million for a 60% stake. NTL would take a charge on its profit & loss account of $2.5 million towards professional fees and transition expenses in Q2FY2012. The benefit for NTL would be offshoring of work from the JV as well as getting near shore capabilities for its customers in the USA. The revenues from the JV would start kicking in from Q3FY2012 but steady state revenues would start only in FY2013. -
Valuation and view: NTL continues to show strong operating performance and the recent large deal wins suggest the company's next level of growth trajectory coming from higher ticket size deal wins. However, in the medium term NTL is also likely to bear the pain of margin pressure involved in the large deals, nevertheless a successful execution of the large deals will pave way for the strong growth momentum in the coming years. We have broadly maintained our earnings estimates for FY2012 and FY2013. We continue to remain positive on NTL and maintain our Buy rating on the stock with a 12 month target price of Rs285. At our target price the stock would be valued at 8x FY2013E earrings.
SECTOR UPDATE Telecommunications Net adds drop for fourth consecutive month; moderation sets in -
For June 2011, the all-India GSM operators (excluding Reliance Communications [RCom] and Tata Telecommunications [Tata Tele]) added 8.58 million SIM cards. This is a 10% drop on a month-on-month (M-o-M) basis and is the fourth consecutive month of declining net additions which is almost 50% lower than the peak net additions of over 17 million reported for the November-December 2010 period. The total subscriber base post June stood at ~598.7 million, which is approximately an increase of 1.45% over May. -
Circle-wise, on an aggregate basis, metros reported the steepest monthly decline (down 29.8% month on month [MoM) followed by Circle C (down 28.6%); Circle A posted a 24.1% growth in the monthly net additions for June though the same came on the lower base of the previous month (in the previous month Circle A had reported a M-o-M decline of 37.6%).
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