>PERSISTENT SYSTEMS LIMITED

Persistent Systems Ltd. (PSL) reported its Q1FY13 results which were inline on the revenue front but disappointed at the operating level. The revenue in $ terms grew 1.3% sequentially and 9.8% Y-o-Y to $54.9 mn due to higher IP-led revenues (grew 16.4% sequentially and 150.2% Y-o-Y to $7.6 mn) however linear business remained muted.


EBITDA margin contracted by 166 bps sequentially to 26.8% compared to expectations of significant expansion on the back of rupee depreciation. This was primarily due to unexpected wage hike of 4.2% for onsite employees, product acquisition (leading to hiring of 72 people in Malaysia and 12 in US) and higher SG&A expenses. Offshore salary hike of 10% is due in Q2FY13 hence margins will be under pressure going forward.


Net profit stood at Rs 416 mn up 50.8% Y-o-Y and only 0.9% sequentially despite strong rupee depreciation of 9.7% in the quarter due to EBITDA margin contraction and forex loss of Rs 92mn.


Linear business performance modest but PSL's IP focus bearing fruit
IP revenues contributed to 13.9% of the total revenue as against 12.1% in Q4FY12 while it more than doubled Y-o-Y to $7.65mn. The network performance management product acquired from IBM contributed to ~$0.75mn while the full-quarter contribution from Openwave of ~US$0.6mn also added to the incremental revenue sequentially. The linear business on the other hand continued to remain subdued as revenue declined 0.8% sequentially (0.6% Q-o-Q decline in volumes).


Revenues from four focus areas grew faster at 5.3% sequentially
The four focus areas of cloud, collaboration, mobility, and BI contributed ~39% to the overall revenues in Q1FY13 and grew 5.3% sequentially.


Wage hikes & headcounts
The company has given a wage hike of 4.4% to its onsite employees and a hike of 9.9% is in the offing to its offshore employees in the Q2FY13. Headcount declined for the 3rd quarter in a row with attrition increasing by ~60 bps sequentially to 18.9%. PSL absorbed the full employee cost (72 employees in Malaysia and 12 in the US) related to the end-of-life product acquisition from IBM (present for 2/3rds of the quarter) whereas revenue contribution from the same was modest in the quarter.


The large Forex loss in Q1FY13 could reverse in H2FY13
PSL reported forex losses of ~Rs121mn comprising of Rs91mn loss on the hedges and Rs30mn loss on asset translation. However, given that the hedges in Q3-Q4FY13 are at favorable rates, i.e. upwards of Rs57/$, we expect forex gains on hedges in H2FY13 if the exchange rate remains at similar levels.


Management guidance
Management has guided that the company would surpass Nasscom's industry growth forecast of 11-14% Y-o-Y (USD revenue) for FY13 with incremental growth driven by growth from the key focus areas of cloud, analytics and collaboration from partnerships with companies such as SalesForce.com, IBM, Cisco etc. It expects to maintain or improve EBIDTA margins. Though the IP revenues are expected to remain volatile going forward, the company expects good growth from it.



Outlook
Revenue momentum should pick up in the next few quarters (from revenue contribution from the
product acquisitions). We would expect margins to remain under pressure in Q2FY13 as well, given the impact of offshore wage hikes. We believe that the full-year revenue contribution from the Openwave location business ($6-7mn) and the IBM product takeover ($8-9mn) should together contribute nearly 6% to FY13 growth, lowering the burden on the organic business. PSL is into pureplay offshore product development (OPD), which is highly discretionary in nature and, thus, exposes the company to higher amount of risk as posed to its peers if situation deteriorates further. We revise our revenue and EPS estimates upwards from Rs 12.04bn/Rs 42.2 to Rs 12.04bn/Rs 42.2 respectively taking into account the depreciated Re and higher contribution from IP.


PSL is one of the cheapest midcaps which has operating margins much higher margins than its peers and comparable to some of the large caps. We believe PSL would in due course undergo a re-rating and trade inline with other good growth mid cap stocks like KPIT Cummins, Mindtree etc. However currently we value the company at 9x FY13E earnings, thus arriving at a target price of Rs 460, 9% higher than our earlier target of Rs 422.



On the margin front, GPM expanded by 94 bps. On the negative side it was impacted by three factors, increasing on-site salaries, the additional Visa cost and acquisition of people in U.S. and Malaysia which was offset by currency gains. On S&M front, the increase was mainly due to increase in on-site salaries and participation in couple of marketing events.


On employee related expenses, PSL witnessed 7.7% sequential increase, mainly due to 4.2% pay hike for its onsite delivery team effective April 1, 2012. As part of its acquisition of Network Performance


Management product, PSL added 72 employees in Malaysia and 12 employees in USA.
PSL's project related expenses went up by 67% sequentially. A higher VISA fee coupled with higher VISA applications was the main reason for this increase. PSL's sales and marketing cost increased due to increments given to the sales team in U.S. effective April 1, 2012 and also due to the participation of some of the branding and marketing events in U.S. The administrative cost increased by 6% due to hiring of additional premises in the SEZ.


PSL's investment income for the quarter came in at Rs75 mn, which was offset by hedging losses of Rs 121 mn, thus resulting in a net loss of Rs 47 mn in the other income portfolio.
The effective tax rate for the quarter was 27.9%, higher sequentially which also impacted the PAT in Q1FY13.


PSL's PAT for the quarter came in at Rs 415.7 mn, up 1% sequentially.
As on 30th June, PSL's hedge position stood at Rs 107.75 mn at an average rate of Rs 52.91. The management mentioned that PSL has consistently followed the policy of hedging ~50% of its net open position on 12 months rolling basis.


PSL's cash and investments as on 30th June stood at Rs 3,596 mn while the total CapEx for the quarter came in at Rs 104 mn. As PSL completed the Hinjawadi and Nagpur projects in Q4FY12 the CapEx for Q1FY13 was on a lower side.

>DISHMAN PHARMA & CHEMICALS

Back on track


Dishman Pharma & Chemicals’ (DPCL) results for Q1FY13 exceeded our expectations. The company reported 30%YoY growth in revenues, 650bps improvement in EBIDTA margin and 156%YoY growth in net profit. The company’s EBIDTA margin improved due to the reduction in the material cost and personnel expenses. There was no supply of Eprosartan mesylate (EM) API to Abbott due to inventory rationalisation. We have a Buy rating for the scrip with a revised target price of Rs101 (based on 7x FY14E EPS).  Strong revenue growth: DPCL reported 30%YoY growth in revenues from Rs2.43bn to Rs3.16bn. The CRAMS segment (62% of revenues) grew by 24%YoY from Rs1.59bn to Rs1.97bn. The others segment (38% of revenues) grew by 51%YoY from Rs785mn to Rs1183mn.


Excellent margin improvement: DPCL’s EBIDTA margin improved by 650bpsYoY from 20.3% to 26.8% due to the decline in the material cost and personnel expenses. Material cost declined by 460bps from 31.2% to 26.6% of revenues due to $5mn (Rs275mn) revenues from high margin contract research business at Bavla. Personnel expenses declined by 250bpsYoY from 29.7% to 27.2% due to the re-structuring at Carbogen Amcis (CA).


Hipo facility to expand: The company’s hipo facility for anticancer products at Bavla has commenced production for an innovative product of Merck. DPCL is likely to expand its capacity from two cells to four cells to cater the additional demand. Astellas, Cephalon and Lexicon have shown interest in using this facility.

Carbogen Amcis has turned around: DPCL’s 100% subsidiary Carbogen Amcis (CA) (42% of revenues) achieved 75%YoY growth in revenues from Rs760mn to Rs1330mn. Its EBIDTA margin improved from -3.7% to 16.0%. This has led to sharp improvement in EBIDTA margin of CRAMS segment. Leading player in vitamin D segment: DPCL has achieved 60%YoY growth in vitamin D segment from Rs398mn to Rs637mn. The EBIDTA margin for this business declined by 360bps YoY from 24.6% to 21.0%. The company’s new manufacturing facility at Bavla went on stream in Q4FY12 and is expected to
contribute significantly in FY13.


Valuations: We expect DPCL to benefit from good growth in CRAMS, Vitamin D3 and anticancer products. At the CMP of Rs79, the stock trades at 7.2x FY13E EPS of Rs11.0 and 5.5x FY14E EPS of Rs14.4. We have a Buy rating for the scrip with a revised target price of Rs101 (based on 7x FY14E EPS of Rs14.4) with an upside of 27.6% over CMP (earlier target of Rs72 based on 5x FY14E EPS).

RISH TRADER

>CIPLA: Launch of vancomycin in the US market

PAR EXCELLENCE


Cipla’s results for Q1FY13 were better than our expectations. The company reported 24%YoY growth in revenues, 480bps improvement in EBIDTA margin and 58%YoY growth in net profit. The sales growth predominantly came from domestic operations, which grew by 30%YoY. Cipla’s margin improvement came solely from reduction in material cost. Cipla supplied escitalopram to Teva , which has 180-day exclusivity in the US market. The company’s interest cost declined by 91%YoY from Rs120mn to Rs11mn due to the reduction in debt. We have a Buy rating for the scrip with a revised target price of Rs429 (based on 22x FY14E EPS) from the earlier target price of Rs390 (based on 20x FY14E EPS).

Excellent sales growth: Cipla reported 24%YoY growth in revenues from Rs15.83bn to Rs19.58bn due to excellent growth in the domestic market and benefit of rupee depreciation against the dollar. The sales growth in various geographies is as follows: India formulations 30%, Export- formulations 23%, API -2%. The strong domestic growth was in anti-infective and anti-asthmatic segments. Export of formulation was driven by supply of escitalopram to Teva during its 180-days exclusivity period in the US.
 
Margin improvement: Cipla’s EBIDTA margin improved by 480bpsYoY from 22.8% to 27.6% solely due to the reduction in material cost. Material cost declined by 480bps from 42.2% to 37.4% of revenues due to the change in product mix and lower sales of anti-HIV products. The improvement of margin was also due to the supply of escitalopram to Teva and launch of vancomycin in the US market.

Indore SEZ progressing well: Cipla’s Indore SEZ has witnessed increased capacity utilization of 45-50%. The SEZ unit contributes around Rs1.90bn to revenues per quarter. This is likely to be the future growth driver for the company.  Leading player in antiasthma segment: Cipla is the market leader in antiasthma segment and has over 80%MS in the inhaler segment. Four out of top 5 products of Cipla are in anti-asthmatic segment. The company markets the full range of anti-asthmatic products in the domestic market.
 
Valuations: We expect Cipla to benefit from favorable currency movement and supply of escitalopram to Teva. The company is likely to benefit from excellent growth in anti-infective and anti-asthmatic segments in the domestic market. At the CMP of Rs339, the stock trades at 20.5x FY13E EPS of Rs16.5 and 17.4x FY14E EPS of Rs19.5. We have a Buy rating on the scrip with a revised target price of Rs429 (based on 22x FY14E base EPS of Rs19.5) from our
earlier target of Rs390 (based on 20x FY14E EPS).





RISH TRADER

>WYETH: Leading player in oral contraceptive segment (Q1FY13 RESULT UPDATE)

Margins affected by weak rupee


Wyeth’s results for Q1FY13 were below our expectations. The company reported 14%YoY growth in revenues, 840bps reduction in EBIDTA margin and 8%YoY decline in net profit. Wyeth’s EBIDTA margin got affected by the weakening of rupee which had a bearing on imported raw material cost. The company’s material cost increased by 650bps YoY. Wyeth launched Prevenar 13 for adult usage during the quarter and hence the launch expenses were included in the other expenses. Wyeth is a debt-free cash rich company with Rs160 cash per share. We have a Buy rating for the scrip with a target price of Rs1,355 (based on 15x FY14E EPS).

Sales growth in line with the industry: Wyeth reported 14%YoY growth in revenues from Rs1.48bn to Rs1.68bn in line with the industry growth of 15%. The pharma segment (93% of revenues) grew by 14%YoY from Rs1.38bn to Rs1.57bn. The OTC segment (7% of revenues) grew by 13%YoY from Rs100mn to Rs113mn. Wyeth markets Anne French hair remover and Anacin in the OTC segment.
 
Sharp drop in Margin: Wyeth’s EBIDTA margin declined sharply by 840bpsYoY from 37.7% to 29.3% due to the increase in the material cost and other expenses. Material cost increased by 650bps from 31.7% to 38.2% of revenues due to the increase in imported material cost with the depreciation of rupee against the dollar. Other expenses increased by 230bpsYoY from 24.1% to 26.4% due to the launch expenses of Prevenar 13 for adult usage.



Branded value offerings: Wyeth launched six products in Branded Value Offering (BVO) segment. These are: Menocare 100, Menocare 200, Doris, Tussivil, Folvite MB and Pausera. These products are likely to drive future growth of the company.


Leading player in oral contraceptive segment: Wyeth is the market leader in the oral contraceptive (OC) segment and has over 23% MS in the OC segment. Its flagship brand Ovral-L has reported ~32% growth.


Valuations: We expect Wyeth to benefit from good growth in the domestic market, recent launch of BVO products and Prevenar 13 for adult use. At the CMP of Rs926, the stock trades at 12.2x FY13E EPS of Rs76.0 and 10.3x FY14E EPS of Rs90.3. We have a Buy rating for the scrip with a target price of Rs1,355 (based on 15x FY14E base EPS of Rs90.3) with an upside of 46.3% over CMP.

RISH TRADER

>SYMPHONY

4QFY12 results exceed expectations; we maintain a Buy


Symphony’s standalone 4QFY12 net profit rose 28% yoy to `197m (our estimate: `144m) on revenue that climbed 51.9% to `871m (`573m in 4QFY11) due to a 78% rise in domestic sales. The average realization in air-coolers (export + domestic) swelled to `5,776 a unit, up 46% yoy. We expect demand for air-coolers to be high in FY13 and retain a Buy, with a target of `308.


 4QFY12 result highlights. Symphony 4QFY12 revenues, at `871m, were 52% higher yoy (9% above expectations). The EBIDTA margin was 28.4% 167bps higher yoy due to lower raw material costs and ‘other expenditure’. Standalone profit came at `197m, 68% higher yoy.


 Robust volume growth. Domestic sales volumes, at 0.11m units, were up 59% yoy while export volumes were down 37% to 34,023 units. Symphony could not fulfil export demand for certain product categories due to higher sales in the home market. Sales in Jul ’12 were more than in all of 1QFY12 on account of the extended summer, though such sales would be difficult to sustain. The average domestic realisation was `6,224/unit (13.8% up yoy) and export realisation was 39.6% higher at `4,284 per unit due to the change in product-mix. The company now has over 750 distributors and 14,000 dealers in 4,100 towns


 Consolidated performance. FY12 revenues were `3.1bn (8% higher yoy) while net profit was 6% higher at `536m. Working capital came down significantly by `438m in FY12 due to lower inventory of coolers (`115m in FY12 vs `417m in FY11). Cash and investments for FY12 were `406m and `620m respectively. Revenues and net profit from IMPCO were `633m and `28m respectively.


 Valuation. At our target of `308, the stock trades at 14x Dec ’13e earnings. Risks. Demand slowdown, delay in arrival of summer.

RISH TRADER

>ORIENT PAPER

Recommendation: Buy

Target Price: Rs81

CMP: Rs65

Upside: 24.7%

Margins disappoint; maintain Buy on attractive valuations

Orient Paper & Industries’ (OPIL) Q1FY13 result was below expectations primarily due to lower margin in the cement business (EBIT margin declined 11pp YoY and 7.2pp QoQ). Cement business margin was under pressure due to higher energy cost (due to lower availability of linkage coal and increase in royalty on coal) and higher other expense (Rs110mn was spent on replacement of cement roller mill). EBITDA margin during the quarter was at 13.3% vs. est. 18.7%. As per the management, availability of linkage coal had improved and it was not importing coal as of now. It also expects the margin of the electrical business to improve going ahead with higher volumes in the CFL and Kitchen appliances business. The company has received the High Court’s approval for de-merger of the cement business and the share allotment process is expected to be completed by the end of Sept ‘2012. We believe that de-listing will unlock shareholders’ value and the company will attract better valuation for the cement business. We have revised our earnings estimates upwards by 9.9%/13.2% for FY13E/FY14E considering higher cement prices in key markets of the company. We maintain Buy on the stock with revised price target of Rs81 (earlier: Rs76), upside of 24.7% from the CMP.

m  Margins disappoint led by lower margins in the cement and electrical business: Revenues of the company increased 23%YoY to Rs6,569mn driven by 9.5% YoY/11.6% YoY/60.8% YoY growth in cement/electrical/paper business. EBITDA declined 15.2% YoY to Rs877mn led by lower margins in the cement and electrical business. EBIT margin of the cement business was down 11pp YoY (and 7.2pp QoQ) to 23.4% primarily due to higher energy cost and other expenses. EBIT margin of the electrical segment declined 3.7pp YoY to 3.7% mainly due to higher competition in the CFL and Kitchen appliances segment. Profit declined 17.7% YoY (and 43.5% QoQ) to Rs489mn.

m  Paper division’s dismal show continues: Though revenues from the paper division grew 60.8% YoY to Rs816mn, it continued to report EBIT level loss due to higher pulp prices and rise in coal costs. EBIT loss from the paper division was Rs159mn in the quarter against a loss of Rs229mn in Q1FY12. The management expects the margin from this segment to improve with the commissioning of 55MW power plant in 2HFY13.

m  Earnings estimates revised upwards: We have revised EPS estimates upwards by 9.9% to Rs11.2 for FY13E and 13.2% to Rs13.1 for FY14E considering improvement in cement realizations in its key markets. 

m  De-merger to unlock shareholders’ value: The company has received the High Court’s approval for de-merger of the cement business into a different company, “Orient Cement Ltd”. As per the management, allotment of shares for the new company should be completed by the end of Sept ’12 and after that, listing of Orient Cement should be completed in next 3-4months. We believe that de-merger of the cement business will unlock shareholders’ value in future and both companies will be able to independently pursue their growth plans.

m  Valuations attractive, maintain Buy: The stock trades at 5x FY13E EPS, 3.4x EV/EBIDTA, and EV/tonne of US$51.5. We maintain Buy on the stock with revised price target of Rs81, upside of 24.7% from the CMP.


RISH TRADER

>VOLTAS

Voltas - Global air conditioning and engineering Services Company has reported 40% decline in the consolidated Net profit to Rs 79.12 crore over 20% growth in the total income from operations to Rs 1616.82 crore. While all the three segments of the company have reported growth in revenues, UCP business has reported highest growth in revenues but steepest decline in segment margins. UCP business constituted 47% of total revenues and 54% of segment profits for the quarter.

OPM worsened 240bps to 5.8% which led to 15% de-growth in operating profits to Rs 93.91 crore and after meager EO benefit of Rs 1.11 crore against Rs 81.47 crore, PBT after EO declined 42% to Rs 110.57 crore. Decline in effective tax rate by 193 bps to 28.6% prevented further fall in the Net Profit.

Order book of EMPS business increased 0.5% to Rs 4574 crore at end of June 12 against Rs 4553 crore in the corresponding previous period.

Quarterly Performance

For the quarter ended June 12, the company has reported 20% growth in the consolidated total income from operations to Rs 1616.82 crore, as all the three segments have reported rise in the revenues. Revenues from Major – Electro Mechanical Projects and Services (EMPS) business grew 10% to Rs 741.3 crore and that of Unitary cooling products (UCP) business grew 34% to Rs 754.39 crore and constituted 46% and 47% of the total revenues respectively. On other hand, least contributor to revenues – Engineering products and services (EPS) business rose 10% to Rs 106.55 crore and constituted 7% of the revenues.

At segment level, the segment margins of EMPS business at 4.5%, down 9bps while the UCP business has reported 293 bps dip at 8.4%. The EPS business has improved margins by 70 bps to 18.2%. On the expenses front, the raw materials consumed as % of sales net of stock adjustments inched up 1107 bps to 62.7%. On the flip side, purchase of traded goods and employee cost declined 977bps to 11.2%, 17bps to 10.4% respectively. OPM slipped 240bps to 5.8% and led Operating Profit at Rs 93.91 crore, down 15%. Other income inched up 107% to Rs 34.94 crore and led PBIDT marginally up 1% to Rs 128.85 crore.

Interest cost jumped up 43% to Rs 12.09 crore but depreciation slipped 29% to Rs 7.3 crore and led PBT before EO up 1% to Rs 109.46 crore. At the segment front, profit from EMPS business grew 7% to Rs 33.24 crore, EPS business grew 14% to Rs 19.38 crore but UCP business declined 1% to Rs 63.21 crore.

The company has accounted 99% dip in the EO income at Rs 1.11 crore during the quarter against Rs 81.47 crore (mainly on transfer of material handling division). Further, taxation slipped 46% to Rs 31.6 crore. After accounting Rs 0.15 crore of MI income against Rs 0.41 crore and nil share of associates against loss share of Rs 0.05 crore, Net Profit was lower by 40% to Rs 79.12 crore.

On the standalone front, the company has reported 49% dip in the Net Profit at Rs 64 crore and 21% increase in the net sales at Rs 1674.42 crore.

Yearly Performance

For the year ended March 12, the company has reported 55% dip in the Net Profit at Rs 162.06 crore over flat growth in the consolidated total income from operations at Rs 5185.74 crore. Operating margins declined sharply 240 bps to 6.5% owing to pressure from all the segment margins. High interest rates, inflation and price rise in the raw materials and components had an adverse impact on operating profit at Rs 336.47 crore. After EO and charge of onerous contract, PBT was down 58% to Rs 219.13 crore.

On the standalone front, the company has posted 57% decline in Net Profit at Rs 152 crore over marginal 1% increase in the Net sales at Rs 5161 crore


RISH TRADER

>MADRAS CEMENTS

Recommendation: Hold
Price target: Rs190
Current market price: Rs173

Price target revised to Rs190

Result highlights

• Healthy performance; PAT grew by 25.1% YoY: In Q1FY2013 Madras Cements delivered a healthy performance with a net profit of Rs123 crore (a growth of 25.1% over the previous year). The net profit is marginally lower than our estimate. The quarter's performance was driven by a healthy growth in the volume and the average realisation. The company also benefited in terms of higher than expected profitability in its windmill division (which posted EBIT of 60.6% as compared with 47% in Q1FY2012). However, the interest and depreciation charges were higher than our estimates. 
  
  
• Strong volume growth and healthy realisation drive revenue growth: The overall revenue of the company increased by 29.5% year on year (YoY) to Rs989.3 crore, which included the revenues of Rs41 crore from the windmill division. The revenue growth was driven by a strong cement volume growth of 21.3% YoY (on account of the stabilisation of its new capacity and a partial revival in demand in the southern region excluding Andhra Pradesh). Further, the average cement realisation increased by 6.8% YoY to Rs4,494 per tonne. The demand environment in the southern region has partially recovered particularly in Tamil Nadu, Karnataka and Kerala. In terms of realisation, we believe the average realisation for FY2013 will remain higher compared with the average realisation of FY2012. 
  
  
• Margin contraction due to increase in cost of production: In spite of a 6.8% increase in the average cement realisation YoY and expansion in the EBIT margin of the windmill division (60.6% in Q1FY2013 vs 47% a year ago), the overall operating profit margin (OPM) contracted by 97 basis points YoY to 31% (but was ahead of our estimate). The year-on-year (Y-o-Y) contraction in the OPM was on account of an increase in the cost of production. During the quarter the freight cost increased by 35.3% on a per tonne basis and the other expenses increased by 30.4% to Rs104.2 crore. Hence, the overall cost of production increased by 8.3% YoY on a per tonne basis. The EBDITA per tonne for the quarter increased by 3.2% YoY to Rs1,260. 
  
  
• Addition of cement capacity of 2mtpa and power plant of 45MW come on stream: During the quarter, the company commenced 2 million tonne per tonne (mtpa) of grinding capacity at Ariyalur. With this the overall cement capacity of the company enhanced to 12.5mtpa. In addition, the company commissioned total captive power capacity of 45MW (20MW in Ariyalur and 25MW in RR Nagar). The capacity addition in the cement business will support the volume growth of the company in FY2013 and the commissioning of the captive power plants (CPPs) will reduce the company's dependence on grid and improve its efficiency.
  
  
• Downgrading earnings estimates for FY2013 and FY2014: We are downgrading our earnings estimates for FY2013 and FY2014 mainly on account of a lower than expected cement realisation and higher than expected interest and depreciation charges. Consequently, the revised earnings per share (EPS) estimates for FY2013 and FY2014 now stand at Rs14.9 and Rs16.6 respectively. 
  
  
• Maintain Hold with a revised price target of Rs190: Going ahead, we expect the cement offtake in the southern region to improve gradually. Hence, we expect the company to post a volume growth of close to 6% in FY2013 as compared with the flat volume growth posted in FY2012. However, a likely increase in the supply in the southern region is a key risk to the cement price. Further, cost pressure in terms of a higher freight cost is expected to pressurise the margin. We, therefore, maintain our Hold recommendation on the stock with a revised price target of Rs190 (valued at EV/EBITDA of 6.5x on FY2014 estimate) as we roll forward our valuation to FY2014. However, in the longer run we believe Madras Cements has the potential to deliver good returns to its investors due to its operational efficiency. At the current market price the stock trades at a PE of 10.5x and an EV/EBITDA of 6x its FY2014 earnings estimate. 

RISH TRADER

>GLENMARK PHARMACEUTICALS

Recommendation: Buy
Price target: Rs468
Current market price: Rs409

Steady growth in core business

Result highlights

• Impressive growth continues in core business: The net sales of Glenmark Pharmaceuticals (Glenmark) grew by 19.8% year on year (YoY) to Rs1040.4 crore in Q1FY2013. The growth was mainly driven by the generic business, which grew by 57.67% YoY to Rs530 crore. However, the specialty business (excluding the licencing income) increased by 22.8% YoY to Rs504.645 crore in the same period. The specialty business includes the Indian formulation business, which grew by 24.1% YoY during the quarter. Though the growth of the specialty business is better than the industry growth of 15%, but the same falls short of our expectation.
  
  
• Core OPM declines 380bps YoY, yet better than expected: The core operating profit margin (OPM; excluding the out-licencing income) declined by 380 basis points YoY to Rs20.7 due to a high base effect. However, it was better than our expectation of 19.1%.
  
  
• Forex loss and lower licencing income weaken profit; adjusted core PAT jumps 44%: The company provided Rs55 crore for foreign exchange (forex) loss during the quarter as compared with a forex gain of Rs9 crore in Q1FY2012. Moreover, the company did not receive any licencing income during this quarter as compared with that of Rs111.2 crore in Q1FY2012 (which made for the high base). This caused the net profit to decline by 62.8% YoY to Rs78.2 crore. However, the core net profit (excluding the out-licencing income and the forex loss/gain) jumped by 44.3% YoY to Rs129.6 crore, which is virtually in line with our expectation of Rs132 crore.
  
  
• No change in growth guidance; we maintain estimates and price target: The management of Glenmark is confident of carrying forward the same level of performance and therefore no change has been made in the growth guidance. Earlier the management had given a guidance of a 22-25% growth in the revenue in FY2013. We maintain our revenue and profit estimates for FY2013 and FY2014, and expect its revenues to grow at a compounded annual growth rate (CAGR) of 16% over FY2012- 4E from the base business (without considering the out-licencing income). The core profit after tax (PAT) is expected to grow at a CAGR of 19% over this period. We have a price target of Rs468, which implies 15x core business' EPS for FY2014 and values the research and development (R&D) pipeline at Rs88 per share. 

RISH TRADER

>FEDERAL BANK

Recommendation: Buy
Price target: Rs522
Current market price: Rs405

Q1 results in line with expectation at NII level

Result highlights

• Federal Bank's Q1FY2013 results were in line with our expectation at the net interest income (NII) level (NII up 6.9% year on year [YoY]). But the performance was slightly short of expectation at the net profit level (net profit up 30% YoY to Rs190 crore). This was due to a slower growth in the non-interest income and an increase in the provision expenses.
• The net interest margin (NIM) declined by 14 basis points quarter on quarter (QoQ) to 3.42% in Q1FY2013 due to a marked-to-market (MTM) impact on the foreign exchange (forex) borrowings, the reversal of the income on the slippages and a drop in investment yields. The bank continued to focus on the better rated corporate advances.
• The advances grew at a healthy rate (up 22.5% YoY and 3.8% QoQ) driven by the corporate advances (up 23.9% YoY). The deposits also grew by 17.8% YoY while the current account and savings account (CASA) ratio expanded to 28.7% from 27.5% in Q4FY2012.
• The asset quality deteriorated mainly due the slippages of a large account (about Rs100 crore) while the slippages in the retail and small and medium enterprises (SME) sectors were lower. The bank restructured Rs207 crore of advances during the quarter, taking the total restructured book to 6.4% of the total advances.
• The non-interest income reported a muted growth of 6.4% YoY due to lower treasury and recovery incomes. However, the fee income growth was steady-the fee income grew by 9.5% YoY. The cost/income ratio increased to 43.7% from 38.6% in Q1FY2012.

Valuation and outlookBarring a few one-offs (slippages and NIMs) Federal Bank's Q1FY2013 results were stable. The management's focus on risk adjusted returns by shifting to better rated loans and shedding the bulk deposits has had a positive impact on the bank's performance. With traction in the CASA deposits and the non-resident Indian (NRI) deposits the liability base has been strengthened which could keep the margins stable. Further, the moderation in the slippages (mainly in the retail and SME sectors) and a higher provision coverage offer comfort with regard the asset quality. We expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 16% (FY2012-14). We maintain our Buy rating with a price target of Rs522.

 RISH TRADER

>MARICO

Recommendation: Hold
Price target: Rs196
Current market price: Rs189

Price target revised to Rs196

Result highlights

• Q1FY2013 results-a strong improvement in margins: Marico's Q1FY2013 performance was better than our expectation largely because of a higher than expected operating profit margin (OPM), which stood at 14.8% against our estimate of 13.5%. The gross profit margin (GPM) witnessed a strong improvement of 659 basis points year on year (YoY) to 49.5%, largely on account of a sharp correction in the copra prices (copra accounts for 40% of the raw material cost). The domestic consumer business maintained its strong growth momentum with a 16% sales volume growth during the quarter. An 18% year-on-year (Y-o-Y) sales volume growth in Parachute rigid packs was the highlight of the quarter. Around 3% Y-o-Y organic growth in the international business and a single-digit same-store sales growth in the domestic Kaya business were the low points of the quarter. 
  
  
• Results snapshot: Marico's net sales grew by 21.8% YoY to Rs1,270.3 crore in Q1FY2013 (it was slightly below our expectation of Rs1,285.5 crore). The growth was driven by a 14% sales volume growth during the quarter. The GPM improved significantly by 659 basis points YoY to 49.5% on the back of a 40% correction in the copra prices on a Y-o-Y basis and a low base of Q1FY2012. Like most of the other fast moving consumer goods (FMCG) companies, Marico spent a large part of the GPM savings on advertisement activities. The advertisement spend as a percentage of its total sales increased by about 300 basis points YoY to 12.3% during the quarter. Hence, the OPM improved by 262 basis points YoY to 14.8% (ahead of our expectation of 13.5%). The operating profit grew by 48.0% YoY to Rs187.9 crore and the adjusted profit after tax (PAT) rose by 45.4% YoY to Rs125.8 crore.
  
  
• Outlook and valuation: Q1FY2013 was a quarter of strong operating performance for Marico with the volume of the domestic consumer product business growing in mid teens. However, the management in its commentary has adopted a cautious stance for the future quarters, considering the domestic macro uncertainties and the deficient rainfall in most parts of India (which is likely to affect the rural market for FMCG products). Having said that, the long-term domestic growth story is intact for Marico.
  We broadly maintain our earnings estimates for FY2013 and FY2014. Marico has traded at an average one-year forward multiple of ~25x in the last two years on the back of a consistently good business performance. Hence, we value the stock at 25x its FY2014E EPS of Rs7.9 and revise our price target to Rs196. At the current market price the stock trades at 29.5x its FY2013E EPS of Rs6.4 and 24.1x its FY2014 EPS of Rs7.9. In view of the limited upside from the current level, we maintain our Hold recommendation on the stock.

RISH TRADER