| Summary of Content STOCK UPDATE Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Under review
Current market price: Rs882 Q1FY2012 results: First-cut analysis Result highlights -
PAT in line with estimate, despite higher sales as margin contracted: Reliance Industries Ltd (RIL)'s earnings in Q1FY2012 have been reported at Rs5,661 crore (in line with our estimate). Though the sales were 15% higher than expected, earnings fell in line of our estimates due to the lower than anticipated margin in petrochem and upstream exploration & production (E&P) segment. The E&P margins were dented by lower production and spreads in the polyester & polymer chains were also under pressure, but the gross refining margins (GRM) were healthy at $10.3 per barrel. This is better than the GRM margin of $9.2 per barrel in Q4FY2011 and $7.3 per barrel in Q1FY2011. -
Impressive sales growth driven by refining segment: RIL reported net sales of Rs81,018 crore, 15% higher than our estimate. This reflects a year-on-year (Y-o-Y) growth of 39% and a quarter-on-quarter (QoQ) growth of 12%. The Y-o-Y growth was mainly driven by a 32% growth in the petrochemical segment and a stupendous 46% growth in the refining segment. Nevertheless, the revenue of the exploration & production (E&P) segment declined 17% YoY. Sequentially, sales have been primarily driven by an 18% growth in the refining division. The refining segment reported sales 24% higher than we estimated. -
Operating margins lower than estimated though profit marginally lower: The operating profit margin (OPM) came in 218bps lower than our estimate at 12.25%. This is a contraction of 379bps YoY and 129bps QoQ. The profit before interest and tax (PBIT) margin of the exploration & production (E&P) segment contracted by 335 basis points YoY to 37.8% in Q1FY2012, primarily on account of a 19% YoY lower gas production at 44.7 mmscmd. Moreover, the PBIT margin of the petrochemical division also contracted by 271bps YoY and 237bps QoQ to 12.06%. This is against our estimated PBIT margin of 13%. Nevertheless, the profitability in the refining segment improved marginally, both on YoY as well as QoQ basis, to 4.3% which again is better than our estimate. The operating profit of RIL in Q1FY2012 increased by 6.3% YoY and remained flat sequentially at Rs9,926, which is 2% lower than our estimate. -
PAT in line with our estimate due to higher other income: The profit after tax (PAT) grew 17% YoY on a 6% growth of operating profit in Q1FY2012 due to a significant (49%) improvement in other income and lower depreciation cost. On a sequential basis, the PAT grew by 5% while the operating profit remained flat due to lower interest and depreciation cost apart from higher other income. A higher other income would be attributed to a significantly higher cash balance. -
Valuation: Currently, the RIL stock is trading at 12x and 11x its FY2012E and FY2013E earnings. It is trading at an enterprise value/earnings before interest, depreciation, tax and amortisation (EV/EBIDTA) multiple of 5x. Currently our target price is under review though we continue to have a Buy recommendation on RIL. We will release a detailed note shortly. Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs433 Continuous positive domestic data points lead us to upgrade to Buy -
Bharti Airtel has hiked its pre-paid on-net tariff rates (Airtel to Airtel) in six circles by 20% from 1 paise per second to 1.2 paise per second. -
The six circles where the tariff hike has been effected are Delhi, Rajasthan, Andhra Pradesh, Gujarat, Madhya Pradesh and Uttar Pradesh (East). -
The new tariff is effective from July 22, 2011 on new recharge by the subscribers. -
Remain bullish on Bharti Airtel, price target under review: We maintain our bullish stance on Bharti Airtel due to an improving domestic environment, return of pricing power to the telecom players and margin levers from the African venture. Thus, we upgrade our rating on the stock from Hold to Buy. In view of the impending announcement of the Q1FY2012 results in the next week (on August 3, 2011) we keep our earnings estimate unchanged and our price target under review. Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs487
Current market price: Rs440 Price target revised to Rs487 Result highlights -
GCPL's Q1FY2012 (consolidated) performance was a mixed bag: Godrej Consumer Products Ltd (GCPL)'s top line growth of about 40% year on year (YoY) was in line with our expectation on the back of a strong revenue growth in both the domestic and international businesses during the quarter. However, for the first time in the last ten quarters GCPL's operating profit margin (OPM) slid below 17.0% due to higher year-on-year (Y-o-Y) advertisement spends and other expenses. Hence, the adjusted profit after tax (PAT) growth decelerated to 12.9% YoY during the quarter. However, the reported PAT grew by a handsome 94.2% YoY largely on account of a post-tax one-time income of Rs136.6 crore on termination of the licence to manufacture and market the Kiwi brand in India and Sri Lanka. -
Net sales grew by 40% YoY: In Q1FY2012 GCPL's (consolidated) net sales grew by 40% YoY to Rs997.8 crore, in line with our expectation of Rs993.4 crore. The strong top line growth was achieved on the back of a 20% year-on-year (Y-o-Y) revenue growth in the domestic business (the soap segment revenues grew by 17% YoY, the hair colour segment revenues grew by 19% YoY and the household insecticide segment revenues grew by 40% YoY) and a 93% Y-o-Y revenue growth in the international business during the quarter. The sustenance of the steady volume growth in the domestic soap and hair colour businesses and a strong growth in the domestic household insecticide business were two of the highlights of the quarter's performance. -
OPM stood at 14.8%: The consolidated gross margin stood flat at 51% YoY (down by 304 basis points sequentially). However, higher than anticipated employee and advertisement costs dragged the operating profit margin (OPM) by 381 basis points YoY to 14.8% (which was lower than our expectation of 17.8%). The advertisement expenses as a percentage of sales rose by 138 basis points YoY to 11.7% during the quarter. The new product launches in the domestic and international markets were supported by higher advertisement spends which inflated the advertisement expenses significantly during the quarter. Also, the other expenses, which went up by 52% YoY, affected the profitability resulting in an operating profit growth of just 10.6% YoY during the quarter. -
Exceptional profit boosted the bottom line growth: The adjusted profit after tax (PAT) grew by 12.9% YoY to Rs102.7 crore, which was in line with the growth in the operating profit during the quarter (lower than our expectation of Rs123.0 crore). The exceptional item of Rs175.17 crore (Rs136.6 crore post-tax) aided the reported PAT to grow by 94.2% YoY to Rs239.3 crore during the quarter. GCPL and its wholly owned subsidiary, Godrej Household Product Lanka (Pvt) Ltd, have received Rs156.19 crore and Rs18.98 crore respectively as one-time compensation for the termination of the licence to manufacture and distribute the Kiwi shoe care and Kiwi Keen brands in India and Sri Lanka. -
Outlook and valuation: Though we have tinkered with our estimates for FY2012 to factor in the higher than expected advertisement spends, we have broadly maintained our estimates for FY2013. With the sustenance of the steady volume growth in the core (domestic) segments, such as soaps and hair colour, and the sustenance of strong growth in the international business, we expect GCPL's top line and bottom line to grow at a compounded annual growth rate (CAGR) of 18.5% and 18.0% over FY2010-12. However, the key things to watch out for in the coming quarters are the movement in the prices of the key inputs (including palm oil), the growth performance of the domestic business and the timely integration of the recent acquisitions. We value GCPL's existing business at 23x its FY2013E earnings per share (EPS) of Rs20.5. We have also assigned a value to GCPL's stake in the Darling group at Rs16 per share. Hence, our new sum-of-the-parts price target stands at Rs487, which provides an upside of 11% from the current level. We, therefore, maintain our Buy recommendation on the stock. At the current market price the stock trades at 26.0x its FY2012E EPS of Rs16.9 and 21.5x its FY2013E EPS of Rs20.5. Thermax
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs679
Current market price: Rs610 Downgraded to Hold Result highlights -
Thermax' Q1FY2012 results were above our expectations on almost all fronts due to strong execution reported in the energy segment. However, margins were lower on a yearly basis on account of strong growth witnessed in revenue from the lower margin engineering procurement and construction (EPC) projects segment and higher input cost. -
Top line growth led by strong execution: The net income from operations increased by 32.6% year on year (YoY) led by a robust growth in energy segment revenues. The environment division reported a moderate 18% year on year (YoY) growth in sales. -
Operating margin under slight pressure: The company reported an operating profit margin (OPM) of 10.9%, which was lower than Q1FY2011 OPM of 12.2%. This was mainly due to higher raw material cost. Margins were also lower as the contribution from the lower margin EPC orders to the revenue increased to Rs316 crore from Rs180 crore in Q1FY2011. The profit before interest and tax (PBIT) margin in both the divisions was under pressure. -
Net profit grew by 20.7%: In spite of an almost nil interest charge and subdued depreciation, pressurised margins led to a lower year on-year (Y-o-Y) growth in profit after tax (PAT) by 20.7% to Rs79.9 crore. -
Order inflow moderated, but needs to pick up: The company's current order backlog at the group level stands at Rs6,804 crore (down 3% YoY). The order inflow during the quarter stood at Rs1,688 crore (down 8% YoY). In the standalone order inflow of Rs1,444 crore, ferrous metal accounted for 35% of the order book while other sectors - textiles, cement, and sugar accounted for 22%, 12% and 4.5% of the order book respectively. The order inflow was down 17% YoY on account of one big order worth Rs580 crore getting booked in Q1FY2011. The company has indicated that a delay in finalisation of orders from the client side has resulted in subdued order inflow, particularly in the captive power segment. Moreover, if the order finalisation doesn't pick up in H2FY2012 then the company's order book growth could remain muted in FY2012. Nonetheless, the company is seeing an improving demand from the new sector - textile for captive power projects. -
Estimates downgraded by 6-7%: In view of a muted order inflow in the last few quarters and the lull in the order awarding activities in infrastructure, we have downgraded our earnings estimates by 6-7% for FY2012 and FY2013. We now expect the company to post a compounded annual growth rate (CAGR) of 14.8% in profit over FY2011-13.We also feel that the company could aggressively bid for projects in coming times to keep its order book ringing although competition is rising. This would adversely impact its margins leading to margin pressure in the coming quarters. -
Price target revised to Rs679: We are particularly not enthused by the fall in order inflow in the recent few quarters. However, the company has recently forayed into new space like solar which holds a lot of potential and would help in further diversification. Today, Thermax has also announced an agreement with US based Amonix Inc, to bring proven CPV technology for clean power generation to India. In this exclusive partnership, Amonix will offer high-performance solar power generation systems and the company will be the EPC partner to provide turnkey solutions to customers in India. In line with the company's expectations, we feel that an improvement in the order awarding scenario in the next six months has become critical for building up of growth outlook from FY2013 onwards. We are downgrading our target multiple to 16x from 18x on a muted growth outlook and impending margin pressure. Accordingly, we are revising our price target to Rs679 at 16x FY2013E earning per share (EPS). At the current market price, the stock trades at 16.9x and 14.4x its FY2012 and FY2013 earnings estimates respectively. The current valuations are factoring in this muted outlook and hence we downgrade our Buy rating to Hold on the stock. We feel that the key positive triggers in the stock remain the winning of big ticket size orders, sound execution of orders and some relief on margins in view of the recent cooling off of commodity prices. Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs460
Current market price: Rs403 Price target revised to Rs460 Result highlights -
Bank of India's Q1FY2012 result came in significantly below our estimates as net profits declined by 28.6% year on year (YoY) to Rs517.5 crore, led by a slower growth in net interest income (NII) and higher provisions. The NII declined by 20.2% quarter on quarter (QoQ) mainly due to the reversal of Rs175 crore of interest income. The margins reported a steep decline of 75 basis points QoQ to 2.19%. The slippages shored up during the quarter to Rs1,684 crore contributed by agriculture and restructured advances. We have reduced our estimates for FY2012 and FY2013 and target price to Rs460 (from Rs500 earlier). Currently the stock trades at 1x FY2013E book value, which is at a significant discount to its peers (Punjab National Bank [PNB], Bank of Baroda [BOB]) due to asset quality pressures. Consequently we maintain our Buy rating on the stock. -
Steep fall in margins: The net interest margin (NIM) registered a steep fall as it declined by 75 basis points sequentially to 2.19%. This was due to a sharp increase in the cost of funds which grew 70 basis points QoQ to 6% and contraction in yield on funds (at 7.6% compared to 7.8% in Q4FY2011). The investment yields also contracted 67 basis points QoQ to 7.4% due to investment in short term securities. Going forward, the management has guided at a NIM of 2.5% for FY2012. -
NII impacted by reversal of interest and slower business growth: Bank of India's NII declined 20.2% QoQ and grew 5.8% YoY due to the reversal of Rs175 crore of interest income. Adjusting for the interest reversal, the NII would have grown by 15.8% YoY. The advances growth remained subdued as domestic advances declined by 2.4% QoQ. -
Subdued growth in non interest income: The total non-interest income fell ~20% QoQ while it grew 12.7% YoY. The fee income growth remained weak as it grew 13% YoY while foreign exchange (forex) income grew 12% YoY. However the treasury profits were the key driver for non interest income as the bank booked Rs110 crore of treasury profits compared to Rs100 crore in Q1FY2011. -
Significant increase in slippages: In Q1FY2012 the bank reported slippages to the tune of Rs1,684 crore contributed by agriculture (Rs600 crore) and restructured accounts (Rs359 crore). The bank shifted agri accounts in excess of Rs5 lakh to system based non performing asset (NPA) recognition which contributed to a sharp rise in slippages from the agri segment. Consequently the gross and net NPAs increased to 2.69% and 1.27% respectively from 2.23% and 0.91% in Q4FY2011. The management has guided for higher NPAs in Q2FY2012 but expects recoveries to cushion the impact. We have increased loan loss provision estimates for FY2012 to factor higher provisions. -
Capital adequacy ratio at 11.57%: The bank had a capital adequacy ratio (CAR) of 11.57% with a tier I CAR of 8.02%. Given the slower growth in profits due to high provisions, the bank would seek capital from the government to meet funding requirements. In case of delay in capital availability the advances growth could get constrained. -
Valuations: Bank of India's Q1FY2012 results were marred by a sharp increase in slippages and a fall in margins. The core income growth slowed due to a reversal of interest income while higher provisions led by increase in slippages dented the bottom line. In order to factor slower business growth, lower margins and higher credit costs, we have reduced our estimates for FY2012 by 13% and FY2013 by 4%. We have also revised our target price to Rs460 (1.2x FY2013E book value). Currently the stock trades at 1x FY2013E book value, which is at a significant discount to its peers (PNB, BOB) due to asset quality pressures. Consequently we maintain our Buy rating on the stock. Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs270
Current market price: Rs221 A strong operating performance in Q1 Result highlights -
Allahabad Bank's Q1FY2012 results came in line with our estimates at the net interest income (NII) level while the net profit was slightly higher than our estimate-it grew by 20.4% year on year (YoY) to Rs418 crore. This was led by a strong growth in the bank's NII, which grew by 38.2% YoY due to strong growth in advances and a steady net interest margin (NIM; 3.4% compared to 3.5% in Q4FY2011). An improvement in the asset quality was another positive as the gross non-performing asset (NPA) and net NPA declined to 1.62% and 0.6% respectively (from 1.74% and 0.79% respectively in Q4FY2011). We estimate Allahabad Bank's earnings would grow at a compounded annual growth rate (CAGR) of 28.2% over FY2011-13 driven by a 18.6% growth in the NII. We maintain our Buy recommendation on the bank with a price target of Rs270 (1.4x FY2012 book value [BV]). -
Strong growth in NII: The NII of the bank increased by a strong 38.2% YoY and 2.1% quarter on quarter (QoQ) to Rs1,175.6 crore in Q1FY2012. This was driven by a healthy growth in the advances, which grew by a 30.4% YoY, and steady margins. The deposits grew by 23.5% YoY and 1.5% sequentially whereas the current account savings account (CASA) ratio was at 32.2%. Going forward, increased deposits from the government business are likely to boost the CASA ratio. -
Advances up 5.5% QoQ led by corporate and SME segments: The advances of the bank showed a robust growth of 30.4% YoY and 5.5% QoQ. This was led by a 13.7% sequential growth in the small and medium enterprise (SME) advances followed by a 5.5% sequential growth in the corporate advances. The bank has turned cautious towards lending to the infrastructure sector, which contributes around 21% of the book (of which 14% is to the power sector). The bank has around Rs8,000 crore exposure to the state electricity boards (SEBs) and there are no issues relating to servicing of these loans. Going forward, the management has guided for advances growth of 25% for FY2012. -
Margins remain firm at 3.4%: Despite rising cost pressures Allahabad Bank's margin remained steady QoQ at 3.4% (compared to 3.49% in Q4FY2011) led by a growth in the high-yielding segment and repricing of the advances. The yield on loans expanded to 11.6% in Q1FY2012 from 10.7% in Q4FY2011 which cushioned the margin. The cost of funds expanded by 86 basis points QoQ to 6.86% which was offset by almost a similar growth (of 80 basis points QoQ) in the yield on funds. The management expects to maintain the margin in excess of 3% in future. -
Steady growth in fee income: The overall non-interest income declined by 4.2% YoY to Rs286 crore mainly due to a lower treasury income. The fee income was the key driver of the non-interest income, which grew by 21.8% YoY to Rs207 crore. The treasury profits in the quarter were Rs26 crore compared to Rs90 crore in Q1FY2011. -
Asset quality improves: The slippages remained low during the quarter at Rs150 crore while the recoveries were higher at Rs250 crore. This led to an improvement in the asset quality as the gross and net NPAs declined to 1.62% and 0.6% respectively from 1.74% and 0.79% respectively in the earlier quarter. The bank has migrated to system-based NPA recognition for the accounts ranging from Rs50 lakh to Rs1 crore while accounts below Rs50 lakh (constituting 24% of the book) will be done in Q2FY2012. The restructured advances increased to Rs3,059 crore (3.1% of the advances) due to the restructuring of a Rs270-crore power project in Karnataka. The management has guided for a recovery of Rs10,150 crore in FY2012 which should cushion the asset quality. -
Valuations: Allahabad Bank's Q1FY2011 performance was characterised by a strong NII growth, a decline in the NPAs and a strong fee income growth. The bank targets to grow its advances in FY2012 by 25%, which is significantly higher than the industry growth rate. Currently the stock trades at 1.2x FY2012 BV. We expect the earnings of the bank to grow at a CAGR of 28.2% over FY2011-13. The bank is likely to maintain return on equity (RoE) of 21.1% and return on assets (RoA) of 1.1% over the next two years. We maintain our Buy rating on the stock with a price target of Rs270 (1.4x FY2012 BV estimate).
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