| Summary of Content | STOCK UPDATE Apollo Tyres
Cluster: Apple Green
Recommendation: Hold
Price target: Rs71
Current market price: Rs67 Price target revised to Rs71 Result highlights -
Apollo Tyres reported a 55% year on year (YoY) growth in its revenues for Q1FY2012, which was driven by a 34% volume growth and the remaining 21% was on account of a combination of price increase and product mix. -
Despite a strong revenue growth, the consolidated operating profit growth at 21% YoY was relatively much lower due to higher commodity prices. The consolidated operating profit margin (OPM) at 8.5% was much lower than our expectation of 9.9%. -
Adding to the woes, higher interest costs further hit the net profits as the quarter saw net debt increasing by Rs550 crore on account of higher working capital and a rise in interest rates. Consequently net profits grew by a marginal 4% YoY to Rs77.1 crore. -
We expect FY2013 to witness a full impact of the revival in the truck and bus replacement tyre segment and OEM demand. Moreover, the cooling off of natural rubber prices and the peaking of the interest rate cycle is expected to have a positive impact on Apollo Tyres' FY2013 earnings. -
We have revised downwards our consolidated earning per share (EPS) estimates for FY2012 by 9% to factor in (i) higher interest rates, and (ii) the recent removal of the anti dumping duty on Chinese radial tyres, which is likely to have a negative impact on the tyre manufacturers. Our FY2013 EPS stands revised marginally downwards as we build in a conservative operating margin scenario at 10.1%. Consequently our consolidated EPS estimates for FY2012 and FY2013 stand revised at Rs8.5 and Rs10.9 respectively. We maintain our Hold recommendation on the stock with a revised price target of Rs71 (6.5x FY2013E earnings). Madras Cements
Cluster: Cannonball
Recommendation: Hold
Price target: Rs95
Current market price: Rs765 Higher realisation leads to an impressive performance in Q1 Result highlights -
Earnings ahead of estimate: Madras Cement delivered an impressive performance for Q1FY2012 with an adjusted net profit of Rs98.3 crore, up 35.3% year on year (YoY) and much ahead of our and the street's estimates. The quarter's performance was impressive on account of a sharp increase in the average realisation that increased by 26.1% YoY and a lower than expected effective tax rate. -
Sharp increase in the cement realisation offset by the drop in the volume: The overall revenue of the company increased by 9.6% YoY to Rs764.2 crore, which includes revenue of Rs32.1 crore from the windmill division. During the quarter the average realisation of the company surged by 26.1% YoY to Rs4,207 per tonne on account of the supply discipline followed by the cement manufacturers. However, due to lacklustre demand in the southern market the volume fell by 11.9% YoY. As a result, the revenue growth in the cement division was limited to 11.1%. The demand environment in the southern region remains sluggish and could improve only gradually going ahead. In terms of realisation, the cement realisation has corrected by Rs8-10 per bag compared with the average realisation of Q1FY2012. Hence, in Q2FY2012 we could see a sequential drop in the realisation. -
Margin expansion due to higher realisation: In spite of the continued cost pressure, the operating profit margin (OPM) expanded by 437 basis points YoY to 31.9%. The OPM expanded on account of an increase in the realisation. However, cost pressure continued to play its role with a 60% increase in the raw material cost on a per tonne basis, higher power & fuel cost (up 6.3% on a per tonne basis) and freight cost (up 8.5% on a per tonne basis). Further, on account of poor volume, the operating leverage for the quarter was poor. Hence the overall cost of production increased by 16.8% YoY on a per tonne basis. The EBDITA per tonne for the quarter stood at Rs1,220 as against Rs781 in the corresponding quarter of the previous year. -
Cement capacity of 2mtpa at Ariyalur to be commissioned shortly: To augment the cement capacity, the company is in the process of adding 2mtpa of additional cement capacity at its Ariyalur plant. The work is in the final stage of completion and the new capacity is likely to come on stream by the end of August 2011. With the commissioning of the new capacity the overall cement capacity of the company will increase from 10.5mtpa to 12.5mtpa. -
Earnings estimates fine-tuned: We have fine-tuned our earnings estimates for FY2012 and FY2013 mainly to factor the lower than expected volume growth and higher than expected cement realisation. The revised earnings per share (EPS) estimates now stand at Rs10.7 and Rs12.1 for FY2012 and FY2013 respectively. -
Maintain Hold with price target of Rs95: In spite of an unfavourable demand-supply scenario in the southern region the prices have increased sharply on account of the supply discipline followed by the cement manufacturers. Further, the cement offtake in the region is expected to improve gradually only due to slower than expected execution of infrastructure projects in the region and political issues in the state of Andhra Pradesh. In addition, the cost pressure will continue to play its role and keep the margin under pressure. Hence, we maintain our Hold recommendation on the stock with a price target of Rs95. However, in the longer run we believe Madras Cement has the potential to deliver a good return to its investors due to its operational efficiency. At the current market price the stock trades at a price/earnings (PE) of 7.3x and an enterprise value (EV)/EBDITA of 5.2x its FY2013 earnings estimate. Divi's Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,047
Current market price: Rs765 Growth outlook remains robust Result highlights -
Earnings growth limited by upsurge in effective tax rate: In Q1FY2012, Divi's Laboratories (Divi's) net sales reported a robust growth of 36.6% on a year on year (YoY) basis to Rs358.6 crore, supported by an impressive performance in both custom synthesis (CCS) and generic businesses. However, a sharp increase in the effective tax rate (21% in Q1FY2012 as against 8.2% in the corresponding previous year quarter) has limited the earnings growth to 18.9% at Rs102.6 crore. The tax rate increased sharply as the company's export oriented unit (EoU) came out of the tax shelter and the new special economic zone (SEZ) unit being eligible for only 50% tax exemption. -
Operating margin contracted due to increase in material costs: The operating profit margin contracted by 82bps YoY to 35.6% on account of an increase in material cost as a percentage of sales to 39.8% as compared to 38.7% in the corresponding quarter previous year. Consequently the operating profit increased by 33.5% YoY to Rs127.7 crore. Further, the employee cost increased by 40.9% to Rs24.5 crore. Consequently the growth at the operating profit level stood at 33.5% as compared to a 36.6% revenue growth. -
DSN SEZ unit at Visakhapatnam commences operation: During the quarter the company commissioned commercial operation of the new DSN SEZ unit at Visakhapatnam (from June 2011). We expect the commissioning of this facility to support revenue growth in FY2012. The company would further be investing Rs1.75 billion as capital expenditure (capex) in FY2012E in order to address shortfall in capacities in FY2013. -
Maintain Buy recommendation with price target of Rs1,047: With a pickup in order inflow and commissioning of its new plant, Divi's has a strong revenue growth visibility and the operating leverage in the business will boost its margins. Consequently, we estimate the company's revenue and earnings to grow at a compounded annual growth rate (CAGR) of 23% and 21% respectively over FY2011-13. At the current market price, the company trades at 20x FY2012E and 16.1x FY2013E earnings. We recommend Buy on the stock with a price target of Rs1,047, which implies a potential upside of 35% over the next 12 months. Tata Global Beverages
Cluster: Apple Green
Recommendation: Hold
Price target: Rs109
Current market price: Rs103 Price target revised to Rs109 Result highlights -
Disappointing operating performance: The first quarter of FY2012 was yet another quarter of disappointing operating performance by Tata Global Beverages Ltd (TGBL). For the first time in last three fiscals the company's consolidated operating profit margin (OPM) slid to 8% due to a higher raw material cost year on year (YoY). An exceptional item of Rs89.0 crore fueled the bottom line growth during the quarter. An improved sales volume of the stand-alone business and a reduction in the interest cost were the only positives in the company's report card. -
Single-digit top line growth: The consolidated revenue (including the other operating income) of the company grew by 6.5% YoY to Rs1,466.7 crore in the quarter. Of the 6.5% year-on-year (Y-o-Y) top line growth around 2% was on account of the impact of favourable currency movement. The stand-alone (domestic) business' revenue grew by 14.4% YoY to Rs519.5 crore (it was largely a volume-driven growth) while the revenue of Tata Coffee (consolidated) increased by just 6% YoY during the quarter. The revenue of Eight O'clock Coffee declined by about 6% YoY largely on account of a lower sales volume due to the price increases implemented by the company. -
OPM stood at 8%: The higher prices of raw tea and coffee badly affected the gross margin of the company, which contracted by 283 basis points YoY to 54.5% during the quarter. This indicates that the price increases undertaken by the company in its domestic and international portfolios were not sufficient to maintain its profitability. The gross margin of Tata Coffee (consolidated) dropped by 781 basis points YoY to 58.6% largely on account of a spike in the green coffee prices. The consolidated operating profit margin (OPM) contracted by 190 basis points YoY to 8.0% during the quarter. Therefore, the operating profit declined by 13.9% YoY to Rs5.8 crore. -
Extraordinary item boosted bottom line growth: The interest cost dropped significantly to Rs0.95 crore from Rs11.5 crore in Q1FY2011 on account of the repayment and restructuring of its debts. The consolidated debt on its books came down to Rs885 crore in Q1FY2012 from Rs1,752 crore in Q1FY2011. Thus, the profit before tax (PBT; before extraordinary items) declined by 6.3% YoY to Rs98.7 crore. An extraordinary gain of Rs89.0 crore (Rs77.6 crore post-tax) resulted in a 3.5x growth in the reported profit to Rs160.9 crore during the quarter. -
Revision in estimates: We have lowered our FY2012 earnings estimate by 13.5% to factor in the higher than expected raw material cost and the lower than expected revenue growth in Tata Coffee. We have marginally lowered our FY2013 earnings estimate (by 1%). -
Outlook and valuation: With the prices of the key raw materials (raw tea and coffee) expected to remain firm (on the back of the global demand-supply mismatch), we believe the profitability of the consolidated entity will remain under pressure in the near term. Though the domestic business has seen an improvement in the volume growth, the other key geographies (such as the USA, the UK) have yet to witness an improvement in the sales volume. Going ahead, new product launches under various strategic alliances (the joint ventures with PepsiCo and Kerala Ayurveda) and an improvement in the operating performance of both Eight O'clock Coffee and Tetley would act as the key triggers for the stock. In line with the slight downward revision in our earnings estimates, we have revised our price target for the stock to Rs109 (based on 16.0x its FY2013 earnings per share [EPS] estimate of Rs6.8). We maintain our Hold rating on the stock. At the current market price the stock trades at 20.7x its FY2012E EPS of Rs5.0 and 15.1x its FY2013E EPS of Rs6.8.
VIEWPOINT Page Industries Brand resilience keeps paying; we remain bullish Result highlights -
Spectacular results-exceeded expectation by a huge margin: For Q1FY2012 Page Industries (Page)' results were way above our expectation on all the key parameters- viz revenue, margin and earnings. The revenue showed a phenomenal 47.4% year on year (YoY) and 58.4% sequential growth aided by both volume and price rise. The margin expanded by a phenomenal 620bps YoY while the earnings grew by 102% YoY. -
Top line growth aided by interplay of realisation and volumes: The YoY top line growth of 47.4% was aided by both volume as well as realisation. Despite an around 30% rise in prices, the volume growth for the quarter was strong at 15%. Leisure wear reported the strongest volume growth at 35% followed by women's wear at 22% and men's wear at 12% for the quarter. -
Frenetic margin expansion was aided by lower advertisement spent: During the quarter, the other expenditure to sales saw a substantial drop of around 300bps on a YoY basis from 13.4% in Q1FY2011 to 10.4% in Q1FY2012. This sharp drop in other expenditure is a result of low advertisement spent in the quarter. The next quarter would see a spurt in other expenditure. Consequently the operating profit grew by 97% on a YoY basis and 155% on a QoQ basis; it came almost double of our estimate. -
Earnings growth mirrored the strong operating performance: As a result of a strong top line, frenetic expansion in margins, and increase in other income, the profit after tax (PAT) grew by 102% YoY and 115% QoQ at Rs27.7 crore (almost double our expectation which was of Rs15.1 crore). -
We maintain our bullish stance on Jockey: Page's presence in the fast growing under penetrated category with a strong entry barrier (in the form of brand equity and distribution reach), coupled with a robust balance sheet, attractive return ratios (return on capital employed [RoCE] and return on equity [RoE] averaging 40% and 42% respectively) and high pedigree management continue to keep us bullish on its business. Further, now with the strategic tie-up with Speedo, the risk of being dependent on one brand also wanes off thus providing further revenue diversification and increased strength to play the strong and growing Indian brand and consumption story. -
At the current market price the stock is trading at 33.1x and 23.7x its FY2012E and FY2013E EPS of Rs78.4 and Rs109.8 respectively (ex Speedo). We expect Page to continue to command a premium over other listed retail peers and continue to trail the FMCG valuation. We value the company at 25x FY2013E earnings of Rs109.8 to arrive at our fair price of Rs2,745 that offers an approximately 6% upside from the current levels. Though we do not have an active coverage on the stock we continue to like the business, as well as the stock from a long term perspective.
MUTUAL FUND: INDUSTRY UPDATE SEBI brings new guidelines to revive the mutual fund industry The Securities and Exchange Board of India (SEBI) in its board meeting held on July 28, 2011 discussed the following plans: -
A levy of Rs100 per transaction imposed on mutual fund (MF) investments for the existing investors; the new or first-time investors would have to pay extra Rs50 (total Rs150) on an investment above Rs10,000. -
For systematic investment plans (SIPs), the transaction charges can be recovered in three or four months. However, whether the new SIP transactions of less than Rs10,000 would also attract the one-time fee of Rs150 is not clear yet. -
Now, AMCs to do the due diligence and regulate distributors such as who have Multiple point presence in more than 20 locations, AUM raised over Rs100 crore across industry in non-institutional category but HNIs etc. -
The existing mutual funds have been allowed to set up infrastructure debt funds (IDFs). Also, an existing companies in infrastructure financing for a period not less than five years can also set up a mutual fund exclusively for the purpose of launching an IDF scheme.
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