Fw: Investor's Eye: Update - Marico, Thermax, Andhra Bank, Madras Cements, Cement

 

 

Investor's Eye [February 03, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Marico  Cluster: Apple Green Recommendation: Hold Price target: Rs171 Current market price: Rs163 Price target revised to Rs171 Result highlights Results synopsis: Marico's Q3FY2012 consolidated net sales grew by 29.4% year on year (YoY) to Rs1,057.8 crore, driven by a mix of volume growth (of 20% YoY) and price-led growth (of approximately 10% YoY) in Q3FY2012. The gross margins improved by 114bps YoY and 518bps sequentially to 48.5%. However the operating margins were down by 68bps YoY to 11.5% mainly on account of a higher than expected surge in the ad-spends during the quarter. The operating profit grew by 22.1% YoY to Rs121.7 crore. However higher Y-o-Y depreciation charges and a higher incidence of tax (after adjusting for reversal of excess income tax provision of Rs5.6 crore for the previous year) resulted in a 12.9% YoY growth in the adjusted profit after tax (PAT) to Rs78.5 crore. Upward revision in estimates: We have revised upward our earnings estimates for FY2012 and FY2013 by 1.3% and 4.1% respectively to factor in a higher than expected top line growth and an improvement in the gross margins. Outlook and valuation Despite of inflationary pressures, Marico continued to surprise us with the volume in its domestic consumer products business growing by mid-teens in the past two quarters. This gives us an indication that the categories in which Marico is operating are not feeling the heat of sustained inflationary pressure. We expect the mid-teen volume growth to sustain in the domestic market. We expect the international business to grow by around 20% YoY on the back of several initiatives undertaken by the company in various international markets. Overall we expect the top line to grow at a compounded annual growth rate (CAGR) of approximately 25% over FY2011-13 and the bottom line to grow at a CAGR of 30% over the same period (on the back of expected improvement in the margins due to softening of raw material prices). In line with the upward revision in earnings estimates, we revise our price target to Rs171 (based on 24x its FY2013E EPS of Rs7.1). The stock has run up after posting a strong operating performance in Q3FY2012, hence there is limited upside visibility from the current levels. Thus we maintain our Hold recommendation on the stock. At the current market price the stock trades at 31.0x its FY2012E EPS of Rs5.3 and 22.9x its FY2013E EPS of Rs7.1. Thermax Cluster: Emerging Star Recommendation: Hold Price target: Rs526 Current market price: Rs522 Maintain hold with price target of Rs526 Result highlights Results below expectation: Thermax' Q3FY2012 results were below our expectation led by revenue sluggishness and margin pressure. Moreover, the standalone order inflow for the quarter remained muted at Rs590 crore (down 40% on a yearly basis and 50% on a sequential basis). On the positive side, the setting up of its power equipment manufacturing plant is progressing as scheduled. The company has also seen an uptick in inquiries since January and expects good demand from the consumption led sectors like auto and durables and also from the food sector.  Top line grew by a mere 2%: Thermax' Q3FY2012 net income from operations increased by a mere 2% year on year (YoY) on account of flattish revenue in the energy segment versus our expectation of a 7% growth. The company had been reporting sluggishness in order inflow for the past few quarters, which has translated in a revenue slowdown during the quarter. The environment division posted a Y-o-Y growth of 3% in revenue.  OPM under pressure: The company reported an operating profit margin (OPM) of 10.7%, which is lower than the Q3FY2011 OPM of 11.8%. The margin was lower because of Rs12.6 crore of foreign exchange (forex) loss booked under other expenses and lower operating leverage. The employee expense was higher by 7% on a Y-o-Y basis at Rs104.2 crore.  Net profit fell by 5%: In spite of a higher other income and lower tax rate, the net profit fell by 5% YoY to Rs95.5 crore, which is lower than our estimated net profit by 8%. The company availed of working capital loan to the tune of Rs90 crore, which has led to a rise in the interest cost. The same is likely to exert further pressure on the company's margins going ahead. Maintain "Hold": The growth in the company's order book remains highly dependent on the momentum in capex cycle of India, making it highly susceptible to swing in investment sentiments. Marred by poor order inflow and tough business environment, the stock has languished in the last one year. However, on a positive note, recent data indicates some revival in the manufacturing sector, auguring well for Thermax and the capital goods sector. At the current market price, the stock trades at 15.1x and 13.8x its FY2012 and FY2013 estimated earnings respectively. Based on revised earnings and target multiple of 14x (past 1 year average) we have revised our target price to Rs526. In view of limited upside potential we maintain our "Hold" rating on the stock. The key positive triggers in the stock remain the winning of big ticket size power equipment orders and some relief on margins in view of the recent cooling off of commodity prices. Andhra Bank Cluster: Cannonball Recommendation: Buy Price target: Rs140 Current market price: Rs110 Price target revised to Rs140 Result highlights Andhra Bank's Q3FY2012 results were in line with our estimates as the net profit at Rs303 crore showed a decline of 8.4% year on year (YoY) and 4.1% quarter on quarter (QoQ). The de growth in profits was mainly due to a sharp rise in provisions (80% YoY).  The net interest income (NII) growth was slightly higher than our estimates as it grew by 17.1% YoY. The growth in NII was contributed by a sequential growth in advances (6.3% QoQ) and stable net interest margins (NIMs; ie 3.81% in Q3FY2012 vs 3.82% in Q2FY2012).  Led by a strong growth in recoveries the asset quality improved on a sequential basis as gross and net non performing assets (NPAs) were at 2.38% and 1.21% respectively compared to 2.67% and 1.48% in Q2FY2012. The bank restructured Rs1,200 crore of advances in Q3FY2012 (outstanding restructured advances at Rs3,676 crore). The non interest income registered a growth of 18.4% YoY and 32.3% QoQ contributed by a growth in fee income (11.9% YoY and 24.7% QoQ). The cost to income ratio declined to 37% from 39.2% in Q2FY2012. Valuations Andhra Bank's Q3FY2012 results were characterised by a decline in NPAs aided by sharp increase in the recoveries. The operational performance remained healthy backed by higher NIM and steady growth in advances. We believe sturdy margins and robust recoveries will lower the credit cost in the coming quarters. We expect the earnings of the bank to grow at a compounded annual growth rate (CAGR) of 11.5% (FY2011-13) leading to a return on asset (RoA) of approximately 1.1%. Therefore due to improving trends on the asset quality front and attractive valuations (0.7x FY2013 book value [BV]) we revise our target price to Rs140 (0.9x FY2013E earnings). We upgrade the rating on the stock from Hold to Buy. Madras Cements Cluster: Cannonball Recommendation: Hold Price target: Rs138 Current market price: Rs129 Price target revised to Rs138 Result highlights Impressive performance; earnings well ahead of estimates: Madras Cements in its Q3FY2012 results delivered an impressive performance and posted an adjusted net profit of Rs76.8 crore (up 76.7% year on year [YoY]) which is well ahead of our as well as the Street's estimates. The impressive performance during the quarter was on account of a healthy growth in its volume as well as average realisation. Further the company has also benefited in terms of a better operating leverage.  Strong volume growth and healthy realisation drives revenue growth: The overall revenue of the company increased by 27.9% YoY to Rs741 crore which includes revenue of Rs7.7 crore from the windmill division. The revenue growth during the quarter has been driven by a strong volume growth of 15.9% YoY to 1.72 million tonne on account of stabilisation of its new capacity and increase in average realisation by 11.7% YoY to Rs4,264 per tonne on account of supply discipline followed by the cement manufacturers. The demand environment in the southern region has partially recovered particularly in Tamil Nadu and Kerala. In terms of realisation, the present cement realisation (as in early Q4) has increased by Rs8-10/bag compared to the average of Q3FY2012. Hence in Q4FY2012 also we could see healthy realisation.  Margin expansion due to increase in realisation: The operating profit margin (OPM) expanded by 243 basis points YoY to 28%. The expansion in the OPM is on account of increase in the realisation by 11.7%. However, cost pressure has partially offset the benefit arising from increase in realisation. During the quarter freight cost increased by 18.8% on a per tonne basis and other expenses increased by 43.1% to Rs103.8 crore. Further, a loss in the windmill division to the tune of Rs6.7 crore at the profit before interest and tax (PBIT) level has also limit expansion in the overall OPM. Hence the overall cost of production has increased by 6.8% YoY on a per tonne basis. The EBDITA per tonne for the quarter increased by 27.2% YoY  to Rs1,161.  Upgrading earnings estimates for FY2012 & FY2013: We are upgrading our earnings estimates for FY2012 and FY2013, mainly to factor in higher than expected cement realisation. We also factor higher than expected freight costs. The revised earning per share (EPS) for FY2012 now stands Rs14.9 and for FY2013 we estimate the EPS to be Rs16.3.  Maintain Hold with revised price target of Rs138: In spite of an unfavorable demand supply scenario in the southern region there is a sharp price hike witnessed on account of supply discipline followed by the manufacturers. However, the cement offtake in the region has partially recovered in Q3FY2012. Going ahead we expect cement offtake in the region to improve in a gradual manner. However, a failure to adhere to supply discipline will be a key concern on the cement realisation and the profitability of the company. Hence we maintain our Hold recommendation with a revised price target of Rs138 (valued at enterprise value [EV]/tonne of $85). However, in the longer run we believe Madras Cements holds the potential to deliver returns to investors due to its operational efficiency. At the current market price the stock trades at a price earnings (PE) of 7.9x and EV/EBITDA of 5.2x its FY2013 estimated earnings. SECTOR UPDATE Cement      Seasonal pickup in demand Key points Cumulative volume for pan India players grew by 8.6%: The volume growth of the top three domestic cement players - ACC, Ambuja Cements and Ultratech Cement (Ultratech) for the month of January 2012 was impressive on a year-on-year (Y-o-Y) basis on account of a pick-up in cement offtake in the north, west and the eastern region due to a pick-up in the execution in infrastructure projects. Among the large players Ultratech took lead and posted an impressive dispatches growth of 11.2% YoY. On the other hand ACC and Ambuja Cements posted a growth of 8.8% and 3.8% respectively in their dispatches. Hence, cumulatively, the pan India players have registered an 8.6% volume growth. On a sequential basis (compared to December 2011) the cumulative dispatches of the pan India players have increased by 3.1%.  Cement offtake picked up in north, west & central regions; partial recovery in southern region: In terms of demand, dealers have confirmed that the cement offtake in most parts of the country has shown signs of recovery in the past couple of months due to post monsoon pick-up in infrastructure activity. Further, demand in the southern region during January 2012 has partially recovered. Going ahead dealers expect momentum in demand to continue for the coming couple of months.  Cement prices increased in most parts of the country: Cement prices have increased in January in the range of Rs5-12/bag of 50kg in most parts of the country. The eastern region has witnessed the highest price hike on a month-on-month (M-o-M) basis whereas in the southern region prices have remained largely unchanged sequentially. The price hike has been largely driven by a revival in the cement offtake. Further, dealers are of the view that the cement price may increase further in the near term as cement offtake is expected to be strong going ahead.  Outlook-Maintain bullish stance on Grasim & Orient Paper: The cement sector has outperformed the broader market in recent times due to positives such as a recovery in the cement offtake and strong realisations. However with a pick-up in cement offtake, the supply discipline may break which can put pressure on cement prices going ahead. Hence we maintain our neutral stand on the sector but we are selectively positive and prefer Grasim Industries (Grasim) in the large size space and Orient Paper & Industries (Orient Paper) in the mid size space.   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.   Click here to read report: Investor's Eye

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Fw: Stock Idea: Gateway Distriparks (Ahead of the pack)

 

 

Stock Idea [February 02, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA Gateway Distriparks Cluster: Emerging Star Recommendation: Buy Price target: Rs173 Current market price: Rs131 Ahead of the pack Key points  Evolving as an integrated player: With its dominant presence in the container freight station (CFS) segment and forays into the rail freight and cold chain businesses Gateway Distriparks Ltd (GDL) has evolved as an integrated logistic player. The proposed capex planned in all three segments will strengthen its presence in each of the segment and increase its pan-India presence.  CFS-a steady cash cow business: GDL is one of the largest CFS players in India with a capacity of about 450,000 TEUs operating at four locations. The CFS business is the company's dominant business and contributed about 68% to its EBITDA in FY2011. Growing steadily the business has reached a stage where it continues to generate cash that can be utilized to not only grow the same business but also for investment in other businesses of cold storage and rail container freight. The CFS business is likely to remain the cash cow for GDL as it has high margins and very low debt on its books. Besides, the working capital requirement is not high in this business. Capacity expansion will further strengthen GDL's position in the CFS space.  Foray into rail freight adds to the value chain, time to reap fruits: GDL ventured into the rail freight business in 2007 after the government opened the sector to the private players. Despite its capital intensive nature the business managed to break even in Q3FY2011 even though GDL's competitors in this field are still struggling. Today, GDL has emerged as the country's second largest container rail freight operator after Concor and largest private player. It owns and operates a fleet of 21 trains from its three inland container depots (ICDs) and plans to increase its capacity further in terms of both rakes and ICDs. With its Faridabad ICD ready to become operational in a month and more rakes coming in, the business is going to fuel its growth over the coming years. We expect GDL's revenue and net profit to grow at 17% and 11% CAGR respectively over FY2012-14. Buy with price target of Rs173: We like GDL since it has evolved as an integrated logistic player. Its CFS business is a cash cow while its investments in the rail and cold storage businesses have started bearing fruits. The expansion in all the business segments would boost the earnings and support the valuations. The stock currently trades at 10.5x and 9.7x its FY2012E and FY2013E earnings. Using the DCF method we have valued all the three divisions, assigning values of Rs139 to the core CFS business Rs22 to the rail freight business and Rs12 to the cold storage venture. We thus arrive at a total value of Rs173. At our price target, GDL shall trade at 12.8x its FY2013E earnings, which is lower compared to its five-year average PER of 13.5x. We, therefore, recommend a Buy on GDL. Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.     Click here to read report: Gateway

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Fw: IRFC Tax Free Bonds: Opening on 27 Jan 2012

 

Indian Railway Finance Corporation Ltd Issue period: 27 January 2012 to 10 February 2012. Issue of Tax Free Secured Redeemable Non Convertible Bonds Basis of allotment: On a first-come-first-serve basis within each category The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income as per provisions under section 10 (15) (iv) (h) of IT Act, 1961. Issue size is Rs. 3,000 Crores, with option to retain oversubscription upto Rs. 6,300 Crores. Investment Opportunity: Interest rates are at peak level; best time to invest in fixed income tax free instruments. Interest rate cycle has peaked out Given the sharp slowdown in the industrial activity and softening of the food inflation, the interest rate cycle has peaked out. Reserve Bank of India has restrained from increasing the interest rates in the last policy review meet and is expected to begin reducing rates in March or April 2012. The bond yields which have increased close to 9% levels have corrected significantly and show easing of pressure on rates. High post tax yield for triple A rated product Tax free bond with yield of 8% - 8.30% is comparable with yields offered on government bonds and offer extremely attractive pre-tax yield close to 12% for a long period of time. The bond issue has got AAA (stable) rating from the rating agencies - Crisil, ICRA and CARE. The bonds would also be listed and tradable on NSE/BSE. Company Overview: Financing arm of the Indian Railways Notified as a Public Financial Institution under Section 4A of the Companies Act, 1956 Registered as a NBFC-ND-IFC (Infrastructure Finance Company) with Reserve Bank of India 100% shareholding held by Government of India Consistently profit making Public Sector Undertaking Terms of the Issue: Particulars Issue details Face Value per Bond Rs 1,000 Tenor 10 years 15 years Minimum Application Rs 10,000 (in multiples of Rs 5,000 thereafter) Rs 10,000 (in multiples of Rs 5,000 thereafter) Interest Rate % p.a. (Category I & II) 8.00 8.10 Interest Rate % p.a. (Category III) 8.15 8.30 Frequency of Interest payment Annual Annual Issuance demat form or physical form demat form or physical form Interest on application % p.a. 8.00 Interest on refund % p.a 4.00 Issue Structure: Category I Category II Category III Upto 45% of Overall Issue Size* Upto 25% of Overall Issue Size* Upto 30% of Overall Issue Size* QIB & Corporate Individuals & HUF applying for more than Rs. 5 Lakhs Individuals & HUF applying for upto Rs. 5 Lakhs *on first come first serve basis to be determined on the basis of date of receipt of applications duly acknowledged by the Bankers to the Issue. * The coupon rates of 8.15% p.a. and 8.30% p.a. shall be payable only to the original allottees under Category III for the Tranche 1 and Series I Bonds and Tranche 1 and Series II Bonds respectively and shall not be payable to the transferees in case the Bonds are transferred or sold by the original allottees Please refer to the final prospectus for details. * For the purpose of information only, invest only after referring to the final prospectus.

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Fw: Investor's Eye: Pulse - RBI Monetary policy update; Update - Torrent Pharmaceuticals, Larsen & Toubro, Kewal Kiran Clothing, Yes Bank, Lupin, Federal Bank; Viewpoint - Hero MotoCorp

 

 

Investor's Eye [January 24, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK RBI Monetary policy update RBI eases CRR by 50 basis points  In its third quarter review of the monetary policy the Reserve Bank of India (RBI) has surprised the market by easing the cash reserve ratio (CRR) rate by 50 basis points to 5.5 % while the policy rates (repo and reverse repo rates) have been kept unchanged. Apart from addressing the tight systemic liquidity, which has affected the flow of credit, the CRR cut also suggests a change in the RBI's stance on growth which would result in the easing of the rates in the period ahead. Nevertheless, the RBI has again cautioned against the external risks (the euro crisis, geo-political risks etc), the rising fiscal deficit and the high inflation rate which could affect the domestic economy. Though the RBI appears to be in a softening mode, further monetary actions would be guided by the pace of decline in inflation and the government's efforts to rein in the fiscal deficit. Easing CRR positive for banks The reduction in the CRR rate is positive for banks as the additional liquidity available would be deployed towards credit and investment. Banks will be cautious in reducing the lending rates immediately as the deposit rates remain high on account of the higher rates offered by alternative instruments (tax-free bond etc). Therefore, we believe the lending rates will decline materially once the deposit rates start trending downwards (which is expected to happen towards the end of the fiscal). However, the reduction in the CRR would lead to a nominal increase (of 4 to 5 basis points) in the margins. Importantly, the reduction of the CRR suggests a change in the RBI's stance, implying willingness on its part to unwind the rates. This augurs well for the banking sector.   STOCK UPDATE Torrent Pharmaceuticals  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs680 Current market price: Rs547 Q3FY2012 results: First-cut analysis Result highlights Q3FY2012 results broadly in line with expectations: Torrent Pharmaceuticals (Torrent)'s net sales grew by 21.8% year on year (YoY) to Rs675.5 crore on the back of a 40% YoY rise in international revenues to Rs396 crore. The revenue from the Indian market, which constitutes revenues from the sale of branded formulations and contract manufacturing, grew moderately by 7.7% to Rs292.5 crore. The operating profit margin (OPM) declined by 177 basis points (bps) YoY to 14.9% during the quarter, which led to the net profit recording a restricted growth of 8.2% to Rs83.2 crore. A decline in the operating margin is mainly attributable to higher other expenditure, which may have an element of foreign exchange (forex) loss related to derivative contracts. Despite a sharp fall in the operating margins, the net profit during the quarter was broadly in line with our estimates (Rs85 crore) mainly due to higher other operating income off-setting the impact of fall in margins.  Indian sales pick up; yet underperform the industry: The revenue from the Indian market grew by 7.7% YoY to Rs292.5 crore during the quarter, which is lower than our expectation of Rs314 crore. The branded business grew by 8.8% YoY to Rs230 crore while revenue from contract manufacturing activities posted a 4.2% YoY increase to Rs60.9 crore. The growth achieved during the quarter from the Indian business is better than that in the sequential previous quarter (Q2FY2012), which recorded the slowest growth (5.8% YoY) in the past 8 quarters.  The growth in the Indian market has been mainly impacted due to a slower offtake in acute segments. The growth achieved during the quarter is slower than the industry growth rate of 13% during the quarter. However, we expect the growth to pick up in the subsequent quarters on an increased contribution from the newly added field force.  International business is buoyed by favourable forex: During Q3FY2012, the revenue from the international business jumped by 39.8% YoY to Rs396 crore, thanks to the depreciation of the Indian Rupee (INR) against major international currencies. During the quarter, the rupee depreciated 12% against the US dollar and 11% against the euro, which contributed to the growth in the international business.  Higher material costs and other expenditure impacts margins: The OPM declined during the quarter by 177 basis points YoY to 14.8% against our estimate of 18%. The fall in the margin is mainly due to higher raw material costs and other expenditure during the quarter. Valuation We expect the company's strong performance in the international market to continue with increased pace of product launches in the US and Brazil. The performance in the Indian market would strengthen on increased contribution from the newly added field force and higher capacity utilisation of the Sikkim plants. We believe the major capital expenditure (capex) cycle is over for Torrent and the company could be expected to give a better return on investment. We expect a 17% and 23% revenue and profit after tax (PAT) compounded annual growth rate (CAGR) respectively over FY2011-13. The stock is currently trading at 13.9x and 11.4x FY2012E and FY2013E earnings respectively. We have a Buy recommendation on the stock with a price target of Rs680. We may revisit our earnings estimates post the conference call. Larsen & Toubro  Cluster: Evergreen Recommendation: Buy Price target: Rs1,588 Current market price: Rs1,350 Price target revised to Rs1,588 Result highlights L&T's Q3FY2012 results were a mixed bag: The revenue of Larsen and Toubro (L&T) exceeded our expectations with strong order execution in the engineering and construction (E&C) division. But the margins were under pressure mainly due to the marked-to-market (MTM) foreign exchange (forex) losses of Rs400 crore on the forward contracts booked by the company. The profit after tax (PAT) was boosted by a strong growth in the other income, mainly dividend from subsidiaries (viz L&T Infotech and L&T Infocity) and treasury income. In Q3FY2012 the order inflow was moderate at Rs17,129 crore (a growth of 28% year on year [YoY], 6% sequentially). The management has maintained its order intake growth guidance at 5% for FY2012 though with the caution that this achievement would depend on a few critical orders in the infrastructure sector. The order inflow in the first nine months of the fiscal was flattish at Rs49,415 crore, requiring a run rate of Rs34,308 crore for Q4FY2012. That is a requirement of a 13% yearly growth on a strong base. Guidance maintained: The company has maintained its guidance of a year-on-year (Y-o-Y) growth of 25% in revenue for FY2012. In M9FY2012, the company achieved a 21% Y-o-Y growth in the top line, requiring a yearly growth rate of 73% in Q4FY2012. This, we feel, would be quite a difficult task. We have assumed a 20% yearly growth in our FY2012 revenue estimate. The management has also maintained its guidance of margin dip in the E&C division to 75-125 basis points on a yearly basis on account of an increase in the input cost. However, owing to a higher share of overseas revenue and currency fluctuation, there could be more forex gain/loss in the coming quarters.  Estimates fine-tuned: In view of the higher other income and low tax rate we have marginally upgraded our earnings estimates. We have also trimmed our margin assumption to reflect the impending margin pressure particularly in the E&C and the electrical and electronics (E&E) divisions. Our stand-alone estimates for FY2012 and FY2013 have increased by about 5% and 6% respectively and our revised consolidated earnings per share (EPS) estimates for FY2012 and FY2013 stand at Rs81.1 and Rs93.5 respectively. We expect the company's stand-alone earnings to grow at a compounded annual growth rate (CAGR) of 16% over the next two years.  Price target revised to Rs1,588: Overall, though the company reported decent results for the quarter, but the order inflow guidance would be highly subjective to an uptick in infrastructure development activities in the country and in the Middle-East. The slow moving orders' share in the total order book has increased to 11-12% on account of the addition of a power equipment order worth Rs1,400 crore in this category. At the current market price the stock is trading at 14.4x on its FY2013 consolidated estimate. We continue to believe that L&T is the best proxy play on India's infrastructure growth theme and maintain our Buy rating on the stock. We also feel that its diversity continues to cushion its financials in the existing tough business environment. The recent cut in the cash reserve ratio (CRR) would also augur well for the stock in view of the expected uptick in investment sentiments. Our sum-of-the-parts (SOTP) price target for the stock stands revised to Rs1,588. The key positive triggers for the stock remain an uptick in business sentiments, winning of big-ticket orders in the power/infrastructure sector and easing of margin pressure. Kewal Kiran Clothing  Cluster: Ugly Duckling Recommendation: Hold Price target: Rs800 Current market price: Rs644 Price target revised to Rs800 Result highlights Q3FY2012 results weak and below estimates Kewal Kiran Clothing Ltd (KKCL)'s Q3FY2012 report card was weak and the results were below our expectation on both revenue (up 2% year on year [YoY]; volumes down 9.6% YoY) and earnings (down 22.4% YoY) fronts. The margin at 18.6% contracted by 850 basis points YoY. The revenue performance was dismal, with the company reporting flat apparel revenue (a 10.6% increase in the realisation was knocked off by an equal magnitude of volume contraction). Along with the subdued consumer environment in the last two months of the quarter, an early festive season this year led to this soft performance.  The increased cost of goods sold (up 23.5% YoY) coupled with the introductory expense of the newly launched accessories category (other expenses up 60% YoY) played havoc with the margins (down 850 basis points YoY). Consequently the operating profit was down 30% YoY.  A strong other income (up 93.8 YoY) coupled with a reduction in the effective tax rate (down 31.7% vs 33% in Q3FY2011) restricted the earnings contraction to 22%. The balance sheet continues to be strong with cash and cash equivalents at about Rs107 crore (about Rs88 per share), and return on capital employed (RoCE) and return on equity (RoE) at 25% and 24% respectively.  Downgrading earnings estimates: Incorporating the weak results for Q3FY2012 (on the revenue and margin fronts), we have downgraded our estimates for FY2012 and FY2013 by 7.4% and 4.6% respectively. Our revised earnings per share (EPS) estimates for FY2012 and FY2013 now stand at Rs43.4 and Rs53.6 respectively.  Maintain Hold: KKCL's superior business model (strong portfolio of brands that are sold on outright basis via various distribution channels) coupled with its management's financial acumen (profitable growth approach and superior corporate governance practices) keep us bullish on its business. We ascribe a price/earnings ratio (PER) of 15x our FY2013E EPS of Rs53.6 to arrive at a price target of Rs800. Though we continue to like the business, the near-term sluggishness in the discretionary spent category makes us stick to our Hold rating on the stock.  Yes Bank  Cluster: Emerging Star Recommendation: Buy Price target: Rs360 Current market price: Rs319 Strong operating performance, CASA ratio improves Result highlights Yes Bank's Q3FY2012 results were largely in line with our estimates at the net profit level as the earnings grew by 32.9% year on year (YoY) and 8.1% quarter on quarter (QoQ) to Rs254 crore. This was driven by a strong growth in the net interest income (NII) and the non interest income.  The NII of the bank grew by 32.3% YoY and 10.9% QoQ on account of strong growth in assets. The bank's advances (including credit substitutes) grew by 28.1% YoY while deposits grew by 18.9% YoY (6.5% QoQ).  The net interest margin (NIM) of the bank dipped by 10 basis points (bps) sequentially to 2.8%. The yields on advances expanded 20bps QoQ, being outpaced by higher borrowings and increase in savings deposits rates. However, the current account savings account (CASA) of the bank increased to 12.6% in the quarter under review from 10.9% in Q2FY2012. The non interest income grew by 30.8% YoY but remained flat sequentially due to a sequential decline in the financial advisory income. The cost- income ratio of the bank grew to 37.6% in Q3FY2012 as against 35.6% in Q2FY2012.  The asset quality remained stable as the gross and net non performing assets (NPA) were reported at 0.2% and 0.04% respectively, which is in line with Q2FY2012. The specific loan loss coverage ratio stood at 80.4%, also similar to that of Q2FY2012.  Outlook: Yes Bank yet again delivered a strong set of numbers in Q3FY2012 driven by a strong operating performance and healthy asset quality. The bank's margins have declined by 10bps QoQ but have remained stable in the range of 2.8%-3.1% for the past several quarters. In addition, the sharp increase in savings deposits was a positive surprise and the management is confident of achieving a 30% CASA by 2015. On the asset side an increase in the retail book entails some risk but is likely to be in manageable limits. We believe the bank would continue to grow ahead of the industry and is likely to retain its asset quality. We expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 27% over FY2011-13. We maintain our Buy recommendation with a price target of Rs360 (2x FY2013E book value [BV]) for the stock. Lupin  Cluster: Apple Green Recommendation: Buy Price target: Rs538 Current market price: Rs445 Higher tax rate impacts bottom-line Result highlights Q3FY2012 results in line with expectations; higher tax rate impacts net profit: Lupin reported a 22.1% year on year (YoY) rise in its net sales to Rs1,792 crore in Q3FY2012, mainly driven by India sales and favourable currency inflating international sales. The company's operating profit margin (OPM) improved 293 basis points (bps) Y-o-Y to 21.3%, mainly due to lower material costs. The profit before tax jumped 37% Y-o-Y to Rs345 crore during the quarter. However, due to a sharp jump in the effective tax rate (22.5% in Q3FY2012 as compared to 9.4% in Q3FY2011) and Rs34 crore translation foreign exchange (forex) loss during the quarter, the net profit after tax (PAT) recorded a restricted growth of 5% YoY to Rs235.7 crore. However, when adjusted for the forex loss, the PAT grew by 20% YoY to Rs270 crore, which is 5% higher than our estimates of Rs257 crore. We fine tune our estimates for FY2012 and FY2013: We have fine tuned our estimates for FY2012 and FY2013 in the light of last 9 months' results and drawing cues from management interactions. Accordingly, while we have revised our revenue estimates marginally upward on the back of strong India sales, earning estimates have been revised downward by 3.6% and 3.7% for FY2012 and FY2013 respectively, mainly to factor in a lower interest cost and higher effective tax rates.  We maintain Buy: The stock is currently trading at 16.8x FY2013E earning per share (EPS; revised). We maintain our Buy recommendation on the stock with a target price of Rs538 (20.4x FY2013E EPS).  Federal Bank  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs460 Current market price: Rs392 Core income growth improves, asset quality weakens Result highlights Federal Bank's Q3FY2012 results came ahead of our estimates as the earnings of the bank grew by 41.1% year on year (YoY) and 5.6% quarter on quarter (QoQ) to Rs202 crore led by a strong growth in the net interest income (NII).  The NII of the bank was also ahead of our estimate as it grew by 18.1% YoY (11.3% QoQ) led by a sequential jump in the margin to 3.94% from 3.77% in Q2FY2012.  The advances of the bank grew by 17.6% YoY but declined by 1.2% QoQ whereas the deposits of the bank grew by 26.6% YoY (but declined by 1.1% QoQ). The current account and savings account (CASA) of the bank stood at 28.2% as against 26.4% in Q2FY2012. The non-interest income grew by 13.3% YoY and 17.9% QoQ majorly led by a strong growth in the fee income and the foreign exchange (forex) income of the bank.  The asset quality of the bank deteriorated as the gross and net non-performing assets (NPAs) of the bank increased to 3.97% and 0.74% from 3.61% and 0.58% respectively in Q2FY2012. The provision coverage ratio (PCR) of the bank declined to 80.5% from 83% in Q2FY2012.  Outlook Federal Bank continues to show strength in core operations driven by a steady growth in the advances and high margins. The slippages increased in Q3FY2012 after showing an improvement in Q2FY2012 mainly due to slippages in the corporate segment. However, the recoveries remain strong which mitigates any significant asset quality risks. The stock's valuations are attractive (1x FY2013E book value) considering the return on equity (RoE) and return on asset (RoA) of about 14% and 1.2% respectively expected by FY2013 due to the structural changes undertaken by the new management. We maintain our Buy recommendation on the stock with a price target of Rs460 (1.3x FY2013E book value). VIEWPOINT Hero MotoCorp        Currency - A pillion rider for this Hero Currency to be the key influencer in Hero MotoCorp's earnings and stock performance We estimate that from hereon the currency will play the biggest role in influencing earnings as well as stock performance of Hero MotoCorp. An appreciation in the rupee would be extremely beneficial for the company and its depreciation would hit the company the most. The company has amortised a fixed sum of royalty every quarter with currency risk vested on it. The originally estimated quarterly royalty bill at the time of split with Honda was Rs180 crore. However, a sharp depreciation in the rupee has inflated the quarterly bill to Rs228 crore in Q3FY2012. In the month of January 2012, the rupee has appreciated by 5% each against the US dollar and the yen. If the rupee sustains at the current levels, then the royalty benefit under the depreciation head would be to the tune of Rs11-12 crore. The company has 2% of its imports as dollar denominated and 14% of the imports by vendors are dollar and yen denominated. The rupee's depreciation has a direct bearing on raw material costs. However, the same reverses favourably if the rupee appreciates. We estimate a 0.75% margin impact on every 5% movement in the rupee against the dollar and the yen.  Highlights of the conference call  The company has confirmed of a slowdown and rising inventory levels. The overall growth expectation for Q4FY2012 and FY2013 is modest at 10-12% with rural demand more resilient. The company also revealed that all the new product launches would attract a royalty of upto 5% and will be paid over and above the fixed charge amortised under depreciation every quarter.  The company is in advanced talks for technology tie-ups with Ricardo and AVL for engine development.  The company targets exports of 1 million units in the next 5 years. Valuation  We are aligning our earnings estimates at a rupee-dollar rate of Rs50 and a rupee-yen rate of Rs0.64. Every 5% appreciation in the rupee would benefit earnings by 5.5%. Our earnings per share (EPS) for FY2012 and FY2013 are estimated at Rs121 and Rs147.8 respectively. Assuming the rupee sustains at the current levels, then the stock can trade at 13.5x one year forward earnings. However, if the rupee breaches its recent low against the dollar and the yen, then our earnings expectations would require a downward revision. Assuming stable state conditions, we have a positive view on the stock.   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.