Fw: Investor's Eye: Update - Divi's Laboratories, Zydus Wellness

 

 

 

Investor's Eye [May 21, 2013]  Sharekhan www.sharekhan.com     If you do not wish to receive this research report in future, please click here

Summary of Contents   STOCK UPDATE Divi's Laboratories Recommendation: Buy Price target: Rs1,262 Current market price: Rs1,008 Expansion process at DSN SEZ impacts Q4  Result highlights Q4FY2013 results below expectations: Divi's Laboratories (Divi's Lab) reported weaker than expected results during Q4FY2013 as the facility expansion process at DSN special economic zone (SEZ) impacted the production. The company's consolidated revenues declined by 8.7% to Rs655.8 crore while the operating profit margin (OPM) declined marginally by 87 basis points year on year (YoY) to 39.1%. Moreover, a higher effective tax rate (at 23% in Q4FY2013 v/s 20.2% in Q4FY2012) and a foreign exchange (forex) loss of Rs7.8 crore impacted the net profit, which declined by 16.8% YoY to Rs180.6 crore. Excluding the impact of forex loss, the adjusted net profit declined by 13% YoY to Rs188.3 crore (v/s our estimate of Rs207 crore). FY2013 misses growth guidance: The company reported a 15% year-on-year (Y-o-Y) rise in the revenues to Rs2,140 crore in FY2013, which is materially below the management's guidance of 20-25% top line growth for the year. Though the company has expanded the OPM by 100 basis points to 37.9% during the year, the effective tax rate jumped by 163 basis points to 23.3%, which restricted the adjusted net profit growth at 10.7% to Rs590.6 crore. Including the forex gains of Rs11.5 crore, the company reported a net profit growth of 12.9% to Rs602 crore. We fine-tune our estimates for FY2014 and FY2015: Taking cues from Q4FY2013 results, we have reduced our earnings estimates by 9.7% and 3% for FY2014 and FY2015 respectively. However, since we have rolled over our valuation to FY2015, we have kept our price target intact at Rs1,262 (19x FY2015E revised earnings per share [EPS]). We maintain our Buy rating on the stock.  Zydus Wellness Recommendation: Buy Price target: Rs671 Current market price: Rs542 Price target revised to Rs671  Result highlights Q4FY2013 results-strong revenue growth momentum sustained: Zydus Wellness' Q4FY2013 results are ahead of expectations largely on account of better than expected top line growth and other income. The net sales grew by 25.3% year on year (YoY) to Rs103 crore during the quarter driven by a strong double-digit growth in the pillar brands, such as Everyuth and Sugarfree (the low base effect of Q4FY2012 had also come into play during the quarter). Despite a strong year-on-year (Y-o-Y) improvement in the gross profit margin (GPM; up 176 basis points YoY) the operating profit margin (OPM) was down by 79 basis points due to higher other expenses during the quarter. The other expenses as a percentage of sales were up by 363 basis points YoY to 21.6% in Q4FY2013. The operating profit grew by 22.0% YoY to Rs30.1 crore. This along with a higher other income helped the profit before tax to grow by 24.7% YoY to Rs33.1 crore. The company received a minimum alternate tax (MAT) credit amounting to Rs11.5 crore during the quarter, resulting in a net tax credit of Rs5.1 crore. This resulted in the reported profit after tax (PAT) growing by 59.3% YoY to Rs37.4 crore during the quarter.  GPM improved YoY: The improvement in the revenue mix due to higher sales of the Everyuth and Sugarfree brands led to a 176-basis-point Y-o-Y increase in the GPM to 69.7% during the quarter. With the company likely to gain the benefits of lower vegetable oil prices and with its revenue mix improving, we expect the GPM to remain higher YoY in the coming quarters as well. However, we might see the company passing on some of the benefits of the declining vegetable oil prices through likely price-offs in the Nutralite brand in the near future.  Outlook and valuation: The relaunch of products and distribution expansion would be the key revenue growth drivers for Zydus Wellness going ahead. For Nutralite, improving the awareness of the product and expanding its distribution reach would improve its growth prospects in the long run. Overall, we expect Zydus Wellness' revenues to grow at a compounded annual growth rate (CAGR) of 18% over FY2013-15. We believe the incremental benefits from the lower input prices would be utilised to carry out higher media spending and promotional activities. Hence, we expect the OPM to sustain in the range of 24-25% over the next two years. We expect Zydus Wellness' bottom line to grow at a CAGR of 18% over FY2013-15. At the current market price the stock trades at 18.9x FY2014E earnings per share (EPS) of Rs28.7 and 15.3x FY2015E EPS of Rs35.3. With an upward revision in the earnings estimates our price target also stands revised to Rs671. We maintain our 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 position in the companies mentioned in the article.

Fw: Investor's Eye: Update - Bajaj Holdings & Investment, India Cements, NIIT Technologies; MG - Debt Mutual Fund Picks

 

 

Investor's Eye [May 20, 2013]  Sharekhan www.sharekhan.com     If you do not wish to receive this research report in future, please click here

Summary of Contents   STOCK UPDATE Bajaj Holdings & Investment Recommendation: Buy Price target: Rs1,334 Current market price: Rs912 Price target revised to Rs1,334  Result highlights The consolidated income of Bajaj Holdings and Investment Ltd (BHIL) grew by 27.3% year on year (YoY) to Rs81.2 crore in Q4FY2013. For the last nine quarters the company reported a lacklustre top line of under Rs100 crore. In the fourth quarter of FY2013 the company's income declined 12% on a sequential basis.  The income from the company's associates grew by 3.2% YoY in Q4FY2013. This led to a 5.6% year-on-year (Y-o-Y) increase in the profit after tax (PAT) to Rs664.4 crore. During Q4FY2013, the total market value of its investments declined 13.7% sequentially whereas the cost of its investments grew 1.2% due to an increased exposure to fixed deposits. The company reduced its exposure in equities marginally during the quarter. The market value of its equity investment in the core associate companies (an 80% contribution) declined by 15.3% sequentially while the value of the other equity investments declined by 10.9% quarter on quarter (QoQ).  Valuation Bajaj Auto is the key investment of BHIL and has been valued at 14x FY2015E earnings per share (EPS). Though the company reported quarterly results slightly ahead of expectations (largely due to a higher other income), but there are concerns over the slowdown in the domestic motorcycle demand and increasing competion 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, 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 Rs1,334 implies a 46% upside for the stock. We maintain our Buy recommendation on BHIL. India Cements Recommendation: Hold Price target: Rs95 Current market price: Rs87 Earnings below estimates  Result highlights Net profit declined by 59.5% YoY; below estimate: In Q4FY2013, India Cements posted a net profit of Rs26 crore (a decline of 59.5% year on year [YoY]), which is much below our as well as the Street's estimates on account of a lower than expected operating profit margin (OPM) due to a cost escalation in terms of freight and other expenses. Further, an increase in the depreciation charges coupled with a higher effective tax rate dented the earnings during the quarter. Revenue growth supported by cement volume: The net sales of the company grew by 6.7% YoY to Rs1,190.6 crore, which also include revenues from the Indian Premier League (IPL), wind power and shipping businesses. The revenues from the cement division (which is its core business) improved by 6.1% YoY to Rs1,171.3 crore, which is driven by a 6.7% growth in its overall volume. On the other hand, the average blended cement realisation during the quarter declined by 0.6% YoY and 3.4% quarter on quarter (QoQ) to Rs4,221 per tonne. The decline in realisation is on account of a weak pricing environment in Andhra Pradesh and also due to an increase in the proportion of non-trade sales. However, the cement prices in the southern region have increased by Rs10-15/bag in the past couple of days on account of a supply control, which could benefit the company in the quarters coming ahead. Cost pressure results in margin contraction: On the margin front, the continued cost pressure-in terms of (a) freight charges (up 17.8% YoY); and (b) an increase in the other expenses (up 23.6% YoY to Rs162 crore)-resulted in a margin pressure. Hence, the OPM contracted by 518 basis points YoY to 14.1%. The overall cost of production on per-tonne basis increased by 5.5% YoY and the EBITDA per tonne declined by 27.4% YoY to Rs572 per tonne. Consequently, the operating profit of the company decreased by 22% YoY to Rs167.9 crore as compared with a 6.7% growth registered at the revenue front. CPP of 50MW to be operational by H1FY2014: In order to achieve an operational efficiency and save on power cost, the company is setting up a captive power plant (CPP) of 50MW (25MW in two phases each) in Andhra Pradesh. The CPP is expected to be operational in H1FY2014. After the commissioning of CPP, the company is expected to save around Rs1-1.5/unit of power. Further, the first shipment of coal from its Indonesian mine has already taken place and the cargo will arrive by the end of May 2013. Enters infrastructure space by incorporating ICIL: During the quarter, the company has entered into the infrastructure space by incorporating India Cement Infrastructure Ltd (ICIL), which is a wholly owned subsidiary company of India Cements. Currently, ICIL has undertaken a few small-size infrastructure projects in certain cities of Kerala. The move to enter into the infrastructure space is to capture any upcoming opportunity in the future. Further, according to the management, the scale of business at the moment will not be significant and will not have any adverse impact on the balance sheet or cash flow of the parent company. Downgrading earnings estimates for FY2014 and FY2015: We are downgrading our earnings estimates for FY2014 and FY2015 mainly to incorporate an increase in the power tariff in Andhra Pradesh and also marginally lowered down our cement realisation assumption due to an increase in the proportion of non-trade sales. Consequently, the revised earnings per share (EPS) estimates for FY2014 and FY2015 now stand at Rs7.5 and Rs9.4 respectively. Maintains Hold with price target of Rs95: The demand for cement in Tamil Nadu and Karnataka has recovered partially and will support the volume growth of India Cements. However, the demand and pricing environment in Andhra Pradesh continue to remain weak. Also, a recent increase in the power tariff by the state electricity board (SEB) of Andhra Pradesh is likely to keep the margin under pressure. Hence, we maintain our Hold recommendation on the stock with a price target of Rs95. At the current market price, the stock trades at price earnings (PE) of 11.5x discounting its EPS for FY2014 and EV/EBITDA of 4.9x its FY2014 earnings estimates.   NIIT Technologies Recommendation: Hold Price target: Rs305 Current market price: Rs257 Margin improvement remain key for re-rating   Result highlights Performance in line with estimates: The Q4FY2013 results of NIIT Technologies (NIIT) were broadly in line with our expectations, with a net income of Rs56.6 crore (our estimate was Rs56.2 crore). The revenues grew by 4.4% sequentially to Rs537 crore (our estimate was Rs529.8 crore). On a year-on-year (Y-o-Y) basis, the revenues rose by 21.1%. The company's revenue growth can primarily be attributed to a steady ramp-up in the government vertical, which grew by 43.6% sequentially and contributed around 80% (Rs18 crore) of the total incremental revenues (Rs23 crore). For FY2013, the company has declared a dividend of Rs8.5 per share (an 85% dividend, a pay-out of 24% against 24.5% in FY2012).  Net income in line with expectations: The net income for the quarter was flat sequentially and up by 22.5% year on year (YoY) to Rs56.6 crore (our estimate was Rs56.2 crore) in the quarter. The net income was negatively affected by a foreign exchange (forex) loss of Rs5.9 crore as against a forex profit of Rs10.3 crore in Q3FY2013. However, a lower tax of 18% as compared with 28.9% in Q3FY2013 (due to a 7% saving on account of other income loss and minor tax benefits in the UK) helped the performance meet expectations at the net income level.  Management sees "green shoots" in margin improvement: The margin performance for the quarter was ahead of our estimate at 16.5% (a 66-basis-point sequential improvement). The growth in the margin could largely be attributed to the improvement in the margin of the GIS business (from -7% to 9%). Going forward, the management foresees margin improvement in FY2014 with a gradual improvement in the margin of the government contracts (almost $90 million including deals from the Airport Authority of India [AAI] and the Andhra Pradesh state government). Additionally, most of the bad news around the GIS business is behind it and the Morris Communications joint venture is expected to evolve into a transaction-based engagement that will support the margin improvement in FY2014. On the flip side, wage hikes (a 7% hike in offshore wages effective from April 2013 coupled with a higher incremental contribution from the low-margin government business could act as margin headwinds in FY2014). Currently, we have broadly maintained our margin estimates for FY2014 and FY2015. We shall wait for the management execution on improvement of the margin profile of the Government business before changing our margin estimates.  Valuation: NIIT is among a few mid-cap IT companies that have rich potential for earnings improvement in the coming years. However, the change in its portfolio mix and the transition of some bigger contracts would keep the earnings profile volatile in the medium term. We have tweaked our earnings estimates for FY2014 and FY2015 to incorporate a higher depreciation charge and tax rate changes. At the current market price of Rs260, stock trades at 6.3x and 5.6x FY2014 and FY2015 earnings estimates. We believe improvement in the margin trajectory and consistency in the earnings performance remain the two key events that may lead to the re-rating of NIIT from the current levels. We maintain our Hold rating on the stock with the existing price target of Rs305. MUTUAL GAINS Debt Mutual Fund Picks Bond / Debt market round up Bond yields fell during the month of April on growing expectations that the central bank will cut key policy rates in its annual monetary policy review. On the first trading day of the month, however, yields touched its highest level in three months because of record high CAD, which raised concerns over the future course of monetary easing. But thereafter, yields fell on the back of improved liquidity conditions and on drop of global crude oil prices, which raised hopes of a positive impact on domestic inflationary pressures. Yields dropped again after sluggish industrial output data, lower-than-expected Wholesale Price Index (WPI) figure and improved trade data, which will help ease pressure on the CAD, supported bond prices. The RBI has singled out CAD as one of the key factors in monetary policy decisions.  The 10-year benchmark bond yield hit its 33-month low in April and closed down 22 bps at 7.73% against previous month's close of 7.95%. Since then, the bond yields have fallen further and are now ruling at 7.43%. Bond / Debt Outlook The RBI on May 3 cut benchmark interest rates for the third time this year and signalled that there is little space to ease rates further, citing a current-account shortfall and the possibility of price pressures returning post September. Moreover, upward revision of February WPI data is likely to be tracked by the central bank closely. Although lower-than-expected inflation data puts forward a strong case of rate cut but the widening trade deficit numbers and the impact of the same on the country's CAD may act as dampeners. Moreover, the RBI has announced the new 10-year bond to be auctioned on May 17.  Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Fw: Investor's Eye: Update - ITC, Bajaj Auto, Kalpataru Power Transmission

 

 

Investor's Eye [May 17, 2013]  Sharekhan www.sharekhan.com     If you do not wish to receive this research report in future, please click here

Summary of Contents   STOCK UPDATE ITC Recommendation: Hold Price target: Rs342 Current market price: Rs335 Downgraded to Hold with a revised price target of Rs342  Result highlights Maintained the growth momentum; non-cigarette FMCG breaks even in Q4FY2013: ITC posted a strong set of numbers in Q4FY2013 with the revenues and profit after tax (PAT) growing by close to 20% during the quarter. The highlight of the quarter was the break even of the non-cigarette fast moving consumer goods (FMCG) business. The cigarette business maintained its strong growth momentum with a price led growth of ~18% and the profit before interest and taxes (PBIT) margin standing at 31.5%. The sales volume growth of the cigarette business improved sequentially to above 2.5% in Q4FY2013. As anticipated, the performance of the hotel business was muted with a sharp decline in the profitability as the business continued to get impacted by a subdued macro environment. Quarterly performance snapshot: The income from operations (including the other operational income) grew strongly by 18.8% year on year (YoY) to Rs8,257.4 crore in Q4FY2013, which is slightly ahead of our expectation of Rs8,156.8 crore. The strong revenue growth is attributable to ~18% year-on-year (Y-o-Y) growth in the gross revenues of the cigarette business, ~26% Y-o-Y growth in the non-cigarette FMCG business, and a 31% Y-o-Y growth in the agri business during the quarter. The gross profit margin (GPM) declined by 261 basis points YoY to 57.0% in Q4FY2013. The operating profit margin (OPM) stood flat at 32.8% and the operating profit grew by 18.9% YoY to Rs2,706.3 crore. The strong operating performance along with a higher other income led to a 19.4% Y-o-Y growth in the reported profit after tax (PAT) to Rs1,928.0 crore. Segmental performance: The gross revenues of the cigarette business grew by ~18% to Rs6,698.7 crore (in line with our expectation of Rs6,689.1 crore) and the PBIT margin improved by 44 basis points YoY to 31.5%. The sales volume growth of the cigarette business was above 2.5% during the quarter. It was yet another quarter of strong performance by the non-cigarette FMCG business with a strong revenue growth of 25.9% YoY to Rs2,043.3crore. The non-cigarette FMCG business for the first time has posted a profit of ~Rs12 crore during the quarter. The revenues of the agri business grew by 31.1% YoY to Rs1,854.5 crore and the PBIT grew by 20.8% YoY to Rs127.5 crore. ITC's hotel business grew by 10.4% YoY to Rs315.6 crore and the PBIT margin was significantly down by above 1,600 basis points YoY to 12.9% in Q4FY2013. Outlook and valuation: We have marginally tweaked our earning estimates for FY2014 and FY2015 to factor in a little higher than expected revenue and other income in Q4FY2013. We expect the sales volume growth of the cigarette business to remain subdued in FY2014. However, the business is expected to clock a double-digit revenue growth and the PBIT margin is expected to be above 30% on account of a higher Y-o-Y realisation. On the other hand, the non-cigarette FMCG business is expected to maintain a strong growth momentum on account of the new product launches and an enhancement in the distribution reach. The agri business is expected to post a steady performance, with the margin likely to sustain in the high single digits. We believe the performance of the hotel business will improve, with an overall improvement in the global macro environment. Overall, we believe ITC is well poised to achieve top line and bottom line compounded annual growth rate (CAGR) growth of 17% and 20% over FY2013-15. At the current market price, the stock trades at 29.5x its FY2014E earnings per share (EPS) of Rs11.4 and 24.5x its FY2015E EPS of Rs13.7. Our price target stands revised to Rs342 with tweaking of the earning estimate. Due to a limited upside from the current level, we have downgraded our recommendation on the stock from Buy to Hold. However, we continue with ITC as our best pick in the FMCG space from the long-term perspective.   Bajaj Auto  Recommendation: Hold Price target: Rs2028 Current market price: Rs1,834 Price target revised to Rs2,028  Key points Domestic motorcycle industry to remain sluggish in the near term The domestic motorcycle industry has been witnessing pressure since Q4FY2013, with the growth slipping in the negative territory. The industry ended FY2013 on a flat note. The motorcycle demand is expected to remain sluggish in the near term. We expect a recovery in the demand in H2FY2014 on account of an improved macro-economic scenario and further softening of the interest rates. We expect a mid-single-digit growth for the domestic motorcycle market in FY2014. Focus on the executive segment to gain market share Bajaj Auto Ltd (BAL)'s market share in the domestic motorcycle declined by 1% to 24.5% in FY2013. BAL plans to focus on the executive segment (bikes priced above Rs40,000) to gain market share in FY2014. It plans to launch six models of the Discover family in FY2014 starting from June 2013. The executive segment comprises 64% of the market size. BAL has a market share of about 16% in the executive category as compared with the overall market share of 24%. Margin to witness uptick on favourable currency BAL is likely to witness a margin uptick in FY2014 on account of favourable export realisations. The company has hedged about 70% of its FY2014 exports at a higher rate of Rs54/$ as against Rs49.5/$ realised in FY2013. It plans to pass on half of the export benefits to its overseas markets (in the form of price reduction, higher advertisement) in order to compete effectively. Export volumes to recover in FY2014 BAL's export volumes had declined in FY2013 on account of a slowdown in the key export markets such as Sri Lanka (due to a steep rise in the duty) and Latin America (due to a weak economic scenario). In FY2014, BAL expects the export volumes to grow by 10-12%. This is on account of stabilisation of demand in the above markets. Also, it expects a strong growth in Egypt going forward. Further, it would use Kawasaki Motors Corp (Kawasaki)'s network in Indonesia to enhance the exports. Three-wheeler growth to remain strong BAL expects the domestic three-wheeler growth to remain strong on account of likely fresh permits in states such as Delhi. Further, it would revamp its entire product range by launching new products in Q2FY2014, which would trigger the replacement demand. Also, BAL expects a strong demand for the three-wheeler segment in the export markets such as Africa and Egypt. We expect the three-wheeler segment to record a double-digit growth in FY2014. Valuation We are lowering our revenue estimates for FY2014 and FY2015 on account of a sluggish demand in the domestic market. Also, we have marginally reduced our margin assumption on account of an increased proportion of the executive motorcycles, which have relatively lower margin. We have reduced our earnings per share (EPS) estimates for FY2014 and FY2015 by 5.6% and 3.9% respectively. Our revised EPS estimates stand at Rs125.4 per share and Rs144.9 per share for FY2014 and FY2015 respectively. We maintain Hold recommendation with a revised price target of Rs2,028. Kalpataru Power Transmission Recommendation: Buy Price target: Rs115 Current market price: Rs78 Price target revised to Rs115  Result highlights Q4 performance was slightly lower than estimated: Kalpataru Power & Transmission Ltd (KPTL; the stand-alone entity) reported an adjusted net profit of Rs49 crore for Q4FY2013. The adjusted net profit is 11% lower than our estimate, reflecting the trend at the sales level (sales too are 12% lower than estimated). Nevertheless, the operating profit margin (OPM) of 9.7% earned by the company during the quarter is in line with our estimate. The adjusted net profit of the stand-alone business slipped by 14% year on year (YoY; while sales declined by 3% YoY) due to a lower margin. However, on a sequential basis, along with a stable margin and healthy sales growth of 16%, the adjusted profit after tax (PAT) grew by 23%.  Margin woes continue in JMC Projects: The margin pressure of the construction subsidiary, JMC Projects, continued in Q4FY2013 which was expected. Further, the management guided that the margin is expected to remain in a similar range for the next two quarters and look up from Q3FY2014 onwards with an improving mix of projects. In Q4FY2013, JMC Projects reported an OPM of 4.7% against 7.3% in Q4FY2012. Hence, the PAT declined sharply on a year-on-year (Y-o-Y) basis to Rs87 crore. However, sequentially higher sales helped the PAT to jump by 160%.  Fine-tuned estimate; retained Buy: We have revised down our sales estimates by 10% each for FY2014 and FY2015 to factor in the toned down guidance by the management. However, we have retained our margin estimate for FY2014 and FY2015. As a result of the same revision, the earnings were revised down. Consequently, we have cut our price target by 8% to Rs115. Currently; the stock is trading at 7x its FY2014 and 6x its FY2015 earnings. We believe the measures taken by the management to improve the margin and return on capital employed (RoCE) should augur well for the company. Hence, we retain Buy rating on the stock.  Click here to read report: Investor's Eye

Fw: Company Report - BPCL - Twin Gains - BUY

 

BPCL: Twin Gains - BUY CMP Rs409, Target Rs480, Upside 17.3% BPCL is one of our top picks in the Indian Oil & Gas sector and the most preferred amongst the oil marketing companies (OMCs). It is set to gain on two folds: 1) current fall in crude oil prices from US$120/bbl to US$104/bbl and the consequent decline in under recoveries and 2) ascription of value to Mozambique block (most prolific upstream asset of BPCL) once the stake sale of Videocon and Anadarko goes through. We retain our BUY recommendation with a price target of Rs480. Under recoveries set to decline: Over the past couple of months, crude prices and product spreads have seen a marked decline, causing a sharp fall in gross under-recoveries. Diesel under-recovery has reduced from Rs11.2/litre in March 2013 to Rs2.9/litre currently. Assuming crude averages at US$100/bbl and product spreads stay at current levels, total gross under recoveries will reduce from Rs1,600bn in FY13 to Rs800bn in FY14. This would result in better cash flows and reduced leverage for OMCs. Also, if OMCs continue to raise diesel prices by Rs0.5/litre, diesel will be deregulated fully within six months. This will be a strong sentiment booster. Value ascription to Mozambique block: BPCL has a prolific upstream portfolio led by the Mozambique block (10% stake) which has estimated in-place reserves of 35-65tcf of natural gas. We note that Anadarko (operator with 35% stake) and Videocon (10%) have put up their joint 20% stake for sale. The last stake sale happened in July 2012, whereby PTTEP bought 8.5% stake in Mozambique from Ireland's Cove Energy at US$1.9bn. However, since then, new discoveries have been made and reserve estimates have been upgraded. Media reports have suggested that Videocon and Anadarko are looking for a valuation close to US$6bn for the combined 20% stake. If the sale goes through, it will ascribe a value of ~Rs220/share for BPCL's 10% stake. On the Brazilian asset front, extensive drilling is lined up in CY13 post the 100% exploration success achieved in CY12. Any further positive news flow would only improve! the prospects of the block and enhance its valuations too. Click here for the detailed report on the same. Warm Regards, Amar Ambani

Fw: Investor's Eye: Pulse - Inflation drops to a 41-month low of 4.89%, Update - Bank of India, Fertilisers; Viewpoint - Eicher Motors

 

Investor's Eye [May 14, 2013]  Sharekhan www.sharekhan.com

If you do not wish to receive this research report in future, please click here     Summary of Contents   PULSE TRACK Inflation drops to a 41-month low of 4.89% The Wholesale Price Index (WPI)-based inflation for April 2013 surprised positively as it came in below estimate and slipped to a 41-month low of 4.89% (5.96% in March 2013). The month-on-month (M-o-M) decline of 107 basis points in inflation can be attributed to a decline in all the three major constituents of the WPI but largely to the drop in the primary articles and the fuel group category. However, the inflation rate for February 2013 was revised upwards to 7.28% from 6.84% as per the provisional estimate. The primary article inflation declined to 5.75% (as compared with 7.60% in March 2013) largely driven by food inflation as it declined by 265 basis points sequentially to 6.08%. The fuel group inflation dipped to 8.84% from 10.18% in March 2013 on the back of a dip in the mineral oil prices. Moreover, the manufacturing inflation continued to show a downtrend as it declined to 3.41% (4.07% in March 2013).  On an M-o-M basis, the WPI reading was marginally up by 0.5% to 171.5. The primary articles index was up by 2.0% to 228.0 led by a 2.6% increase in the food articles index. The fuel index dipped marginally by 0.7% month on month (MoM) to 194.6 as the mineral oil index declined to 214.0 in April 2013 from 216.0 in March 2013. The manufacturing index was up by 0.2% in April 2013 to 148.7. The inflation data for March 2013 has once again surprised positively as it is the lowest in 41 months. Though there has been an upward revision in the provisional numbers, but the headline inflation has dropped within the Reserve Bank of India (RBI)'s comfort level (ie about 5%). The manufacturing inflation has continued to decline and the core inflation has slipped to 2.8%. We expect the RBI to continue to reduce the policy rates though at a much measured pace now and are factoring in an additional reduction of 50 basis points in the repo rates during the course of the current fiscal. STOCK UPDATE Bank of India Recommendation: Hold Price target: Rs376 Current market price: Rs324 Asset quality challenges remain  Result highlights Bank of India (BoI)'s Q4FY2013 performance was in line with our estimates as the bank's net earnings declined by 20.6% year on year (YoY; down by 5.8% sequentially) to Rs756.6 crore. Though a tax write-back of Rs192.1 crore cushioned the earnings to an extent, but a slower growth in the net interest income (NII) and a dramatic rise in the provisions contributed to a year-on-year (Y-o-Y) decline in the profits. The NII growth was in line with our estimate as it declined by 1.0% YoY (up 7.3% quarter on quarter [QoQ]) to Rs2,476.0 crore. The sequential rise in NII was on the back of a 10-basis-point improvement in the net interest margin (NIM; global) to 2.46%.  The advances grew by 16.3% YoY (up 4.7% QoQ) driven by loans to the small and medium enterprise (SME) segment (up 14.3% QoQ) and the agri segment (up 10.7% QoQ). The current account and savings account (CASA) ratio dipped marginally to 31.9% from 32.8% in Q3FY2013. During the quarter slippages remained high (2.7% of the opening advances) whereas the bank also restructured loans to the tune of Rs2,159 crore. However, the reductions in the non-performing assets (NPA; mainly contributed by write-offs) were in tandem with the slippages which led to the marginal decline in the gross NPAs on a quarter-on-quarter (Q-o-Q) basis. The non-interest income grew by 16.7% QoQ (up 13.1% YoY), largely driven by a higher treasury income (Rs157.3 crore vs Rs73.6 crore in Q4FY2012) and an 8% Y-o-Y rise in the fee income. The cost/income ratio of the bank dipped to 41.9% as compared with 42.8% in Q3FY2013. Valuation BoI's Q4FY2013 performance was relatively better since the NIM improved and the gross NPA declined on a Q-o-Q basis. The management has guided for a reduction in the gross NPAs to 2.7% in FY2014, an improvement in the NIM and the return on assets (RoAs). However, given the weak economic environment any significant improvement in the operating performance seems difficult. We expect BoI's earnings to grow at a compounded annual growth rate (CAGR) of 18.9% (FY2013-15), leading to return on equity (RoE) and RoA of 14.0% and 0.7% respectively. We maintain our Hold rating on the stock with a price target of Rs376. SECTOR UPDATE Fertilisers Normal monsoon and price reduction to support demand ahead  Key points Sales decline marginally in April 2013: During April 2013, the aggregate sales of the fertilisers (by 15 leading manufacturers) saw a marginal decline of 11% as compared with the same period of the last year. The sales of fertilisers were lower mainly because of the poor sales of non-urea fertilisers. In April 2013, the production and import of diammonium phosphate (DAP), NPK (nitrogen, phosphorus and potash) and muriate of potash (MOP) fertilisers declined drastically due to a lower demand because of a drought and poor agriculture activity during the period. The production of DAP and complex fertilisers have also declined drastically on account of a low rainfall and high prices. The demand for urea witnessed some turnaround. Normal monsoon and price reduction to drive sales ahead: The India Meteorological Department (IMD) has issued the first stage of long range forecast for the south-west monsoon to be normal. The south-west monsoon seasonal rainfall for the country as a whole is most likely to be normal (96-104% of long period average [LPA]), with the highest probability of 46%. However, the probability for the seasonal rainfall to be deficient (below 90% of LPA) is 10%, whereas the chance of excess rainfall (above 110% of LPA) is 3%. The LPA of the seasonal rainfall over the country as a whole for the period of 1951-2000 is 89cm. The IMD will issue the second stage forecast in June, 2013. A recent reduction in the maximum retail price (MRP) of the non-urea fertilisers will also help in reviving the demand of fertilisers in the upcoming sowing season. Outlook: We believe that going ahead the demand for the fertilisers is likely to increase from the current level on account of a normal monsoon and a recent price cut in the non-urea fertilisers (in range of 5%). However, in the near term (next two quarters), the fertiliser manufacturers may witness a muted to negative growth in revenues on account of lower trading and the margin may remain under pressure due to liquidation of the high-cost inventory. But going ahead, the normal monsoon and a recent decline in the prices of non-urea fertilisers will drive the demand. For a long-term perspective, we have a positive view on the sector. We prefer stocks like Chambal Fertilisers, Coromandel International and Rama Phosphates which are attractively valued after the recent price correction.       VIEWPOINT Eicher Motors Two-wheelers in high growth trajectory; CV sales subdued Q1CY2013 conference call highlights Two-wheeler business on robust growth path EML is witnessing a robust demand for the two-wheeler business. The business recorded a volume growth in excess of 50% in FY2013. EML continues to have a waiting period of about four to six months on its products. With the new plant (having capacity of 1.75 lakh units per annum) commencing operations recently, we expect EML volumes to continue to witness a strong growth going ahead. MHCV industry to remain subdued in near term The medium and heavy commercial vehicle (MHCV) industry has been facing pressure with a double-digit decline in the volumes for the past two quarters. With not much improvement in the economic outlook in the near term, we expect the MHCV sales to remain under pressure in the near term. We expect the MHCV volumes to remain lacklustre in H1FY2014 with the recovery expected in the H2FY2014. Gaining market share in the MHCV space  EML has been gaining market share in the MHCV space on account of an increased penetration both in the geographic as well as the product (heavy duty space). EML's market share increased from 10.9% in FY2012 to 13.3% in FY2013. With the increasing dealer network and broadening product profile (focus into the heavy CV and the bus segment), we expect EML to continue gaining market share in the MHCV industry. Margin improvement to sustain EML reported a better than expected margin in Q1CY2013 on account of a record margin in the two-wheeler space and an improvement in the CV business. With the strong volume growth expected in the two-wheeler business, we expect the benefits of the operating leverage to continue having favourable impact on the margin. Also, with the recovery in the CV business, the levels of discounting would reduce helping to sustain margin improvement going forward. Valuation We have reduced our revenue assumptions for CY2013 and CY2014 given the sluggish CV demand. However, we have raised our margin assumption given the strong operating performance both in the two-wheeler and the CV space. Our revised earnings per share (EPS) estimates for CY2013 and CY2014 stand at Rs162.6/share and Rs227.6/share respectively. The stock can trade at 14x one-year forward earnings. Additionally, we assign Rs100/share book value for the engine business. Given the recent run-up in the stock price, we have a neutral view on the company. 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