Monday, July 30, 2012

>Macroeconomic Backdrop –Q1 FY13

The RBI is scheduled to conduct its First Quarter Monetary Policy Review on July 31, 2012 and the prevailing macroeconomic conditions are expected to dictate its policy stance with regard to interest rates. Accordingly, this update covers the performance of the Indian economy in FY13 so far in the domestic and external sector.
Domestic Macro-economy

Continuing with lacklustre performance of the last year, industrial production remained subdued in the first two months of FY13; weighed down by negative growth in mining (April and May) and manufacturing (April for entire sector and capital goods in both months) and moderation in productive activity in electricity sector.

The slowdown in industrial activity is due a combination of factors of low consumer, investment and government demand which has been driven partly by a policy of high interest rates to control inflation. While core inflation has moderated to around 5% (from a peak of 8.2% (November 2011) in the last fifteen months), overall inflation continues to remain high with food inflation moving back into double-digits.

To read report in detail: MACROECONOMIC BACKDROP


>Styrolution ABS (India)

For 2QCY2012, Styrolution ABS (India) Ltd. (formerly known as INEOS ABS India Ltd.) reported sequentially flat top line at `236cr, 8.2% higher than our estimate of `218cr. EBITDA came in at `14cr, far lower than our estimate of `18cr. Operating margins fell by 357bp sequentially to 6.1% owing to 385bp higher raw material cost. The company reported net profit of `10cr, 40% lower sequentially on the back of poor operating performance.

Persisting short supply coupled with capacity expansion to boost growth
Styrolution has recently expanded its capacity of ABS and SAN. This provides company an opportunity to reap benefits owing to domestic ABS demand supply gap (met by imports) which has persisted for long and continues to exist. In addition to capacity expansion company has come up with many tailor made products taking advantage of ABS’ flexibility of composition and structure, which allows its use in diverse applications.

Outlook and valuation
We expect Styrolution’s revenue to post a CAGR of 14.5% to `1,081cr over CY2011-13E on the back of consistent developments by the company. EBITDA is expected to grow at 18.7% CAGR to `115cr leading to margin expansion of 74bp to 10.6% in CY2013E. Net profit is expected to post CAGR of 23.1% to `82cr in CY2013E. At CMP of `670, stock is trading at PE of 14.4x and EV/Sales of 1.1x for CY2013E. We remain positive on the stock and recommend Accumulate with a target price of `744, based on target PE of 16x and implied EV/Sales of 1.2x for CY2013E earnings.

To read report in detail: STYROLUTION ABS


>ITC LIMITED: Ban on gutkha to aid cigarette volumes

FMCG losses declining; margins improve…

ITC’s Q1FY13 results were in line with our estimates with earnings witnessing growth of 20.2%. Cigarettes volume growth was flat on the back of ~15% price hike following the ~20% excise duty hike in the 2012 Budget. Based on our reverse calculations (through excise duty) we
believe there is a marginal de-growth in cigarette volumes. However, we expect cigarettes volumes to pick up in the rest of the year as the ban on Gutkha and Pan in six states would result in a shift in consumption from other tobacco products to cigarettes. FMCG revenues also witnessed 23% increase YoY led by 11-13% volume growth and ~10% price hike in selected products. We expect ITC to take further price hike in cigarettes in H2FY13E and break-even in FMCG business by FY14E; driving revenue and earnings growth, going forward. Maintain HOLD.

FMCG losses slide; cigarette volumes dip
In Q1FY13, FMCG losses declined ~50% YoY on the back of considerable price rise hikes and strong volume growth. However, cigarette volumes were flat due to ~15% increase in prices. We believe that cigarette margins improved led by a dip in raw tobacco prices. Agri business’s
earnings improved 16% YoY led by currency gains from export of raw tobacco. Hotel business earnings were down 50% due to an increase in operating expenditure after the commencement of Chennai property.

Ban on gutkha to aid cigarette volumes
Six state governments have already banned gutkha and pan masala. We believe other state governments would follow suit and implement the ban under the COTPA act. We believe this would shift consumption from other tobacco product to cigarettes hence driving ITC’s volume growth.

Continues to command 2x premium to Nifty
The stock is trading at a 120% premium to the Nifty compared to the historic average of 70% on PE multiples. With strong growth in the FMCG business and sustained margins in the cigarettes business, we believe ITC would continue to command this premium. We have valued the stock on an SOTP basis and maintained our target price of | 270 with HOLD rating.


Sales Growth Below Estimate; Downgrade To Hold 

Revenue growth of Bata India (BIL) slowed to 17% in 2QCY12 compared to 30.6%/22.6% in 1QCY12/CY11, respectively, at Rs5,065mn, 4.1% lower than our estimate. It seems BIL was geared up for slower growth, which is visible from the fact that inventory days reduced to 96 in 2QCY12 from 102/108 in 2QCY11/CY11, respectively. Following buoyant performance in CY11/1QCY12, the stock price increased 42.9% over the past six months. Third quarter is generally a weak quarter for BIL due to the monsoon season. In such a scenario further re-rating seems difficult until BIL resumes its earlier growth trajectory. Following limited upside from current levels, we downgrade the stock to Hold from Buy. We maintain our estimates and the TP of Rs1,008 based on 16x CY13 EV/EBITDA. 

Slower pace of growth: BIL opened 108/145/61 stores in CY10/CY11/1QCY12, which drove its revenue up by 22.6%/30.6% in CY11/1QCY12, respectively. Compared to 68/145 new outlets in 1HCY11/CY11, BIL has opened over 100 outlets in 1HCY12. However, with high base and lower demand, tentatively due to the monsoon season as per the management, revenue growth moderated to 17% in 2QCY12. Inventory days increased to 108 in CY11 from 99 in CY10 on account of lower demand and aggressive expansion in 4QCY11. However, BIL appears to be prepared for lower growth which can be seen from the fact that inventory days reduced to 96 in 2QCY12 from 102/108 in 2QCY11/CY11, respectively. We expect the valuation to be capped until BIL resumes its high-growth trajectory. BIL incurred a capex of Rs34mn in 1HCY12, mainly to increase retail outlets. 

Better gross margin drove operating margin: BIL witnessed a drop in gross margin from 3QCY11 to 1QCY12, and even after that it was able to report better operating margin due to lower employee costs. However, with a better product mix, BIL was able to improve its gross margin by 99bps to 51.5% in 2QCY12, which led to a 86bps increase in operating margin. Following aggressive expansion, lease rent as a percentage of sales increased by 213/186bps to 10.6%/9.1% in 1QCY12/1HCY12, respectively. It would be difficult for BIL to improve operating margin from the current levels if the pace of revenue growth moderates in 2HCY12. 

Valuation: We expect the valuation of BIL, which trades at CY13E P/E of 23.5x and EV/EBITDA of 14.3x, to be capped until revenue growth resumes its earlier trajectory.


Performance Likely To Moderate 

Bharat Heavy Electricals (BHEL) reported revenue of Rs83.3bn for 1QFY13, up 16.9% YoY and 9.5%/6.4% higher than our/Bloomberg consensus estimates, respectively. However, we believe the pace of order execution may not sustain in the coming quarters with a declining order book, subdued order placement activity and possible delay from the clients’ side owing to structural issues in the power sector. Consequently, we maintain our revenue estimates for FY13E/FY14E. Driven by higher revenue, EBITDA/PAT were higher than our estimates by 7.9%/8.6%, respectively, but margins were largely in line with our estimates. EBITDA grew 17.8% YoY to Rs10.9bn, translating to an operating margin of 13.1%, 20bps lower than our estimate of 13.3%. PAT registered 12.9% YoY growth at Rs9.2bn, resulting in a net profit margin of 11.1%, in line with our estimate. Consequently, we maintain our view of sharp erosion in profitability for BHEL over FY12-14E. We retain our Hold rating on the stock with a target price of Rs221 based on 9xFY14E EPS. 

Order intake to remain weak: Procedural delays on account of land acquisition, fuel linkage and environment/forest clearance continued to hamper order placement activity in the power sector. For the quarter, BHEL reported order inflow of only Rs56bn (weak order intake in four out of the past five quarters) leading to order backlog of Rs1,329bn, 13.3% lower YoY. BHEL is yet to be awarded orders worth Rs93.8bn by NTPC through its bulk tenders. Although the management reiterated its order inflow guidance of Rs600bn for FY13E, we are factoring in order inflow assumption of Rs450bn as we expect the policy paralysis in the power sector to continue. 

Margin compression likely: We expect a sharp erosion in profitability for BHEL over FY12-14E due to pricing pressure in the BTG (boiler, turbine and generator) space owing to dual impact of oversupply and weak demand. The industry segment is also beginning to witness softening margins as it registered a 160bps YoY decline in operating margin to 21% for the quarter. Consequently, we expect BHEL’s operating margin to fall 160bps/150bps YoY in FY13E/FY14E to 17.7%/16.2%, respectively. 

Outlook and Valuation: BHEL is unlikely to sustain its revenue growth traction on such a high base, considering the subdued order placement activity. Also, compression in operating margin is likely to lead to earnings CAGR decline of 7.9% over FY12-14E. However, we believe the recent correction in its stock price factors in these negatives. At Rs212, BHEL trades at 8.0x/8.6x FY13E/FY14E earnings, respectively, compared to average PE of 16x over the past 10 years and least PE of 7.9x/6.5x over the past 6/10 years, respectively. We value the stock at 9xFY14E EPS of Rs24.6 with a target price of Rs221 and retain our Hold rating on it.


>Deepak Fertilisers & Petrochemicals Corporation

Recommendation: Buy
Price target: Rs179
Current market price: Rs129
Price target revised to Rs179
Result highlights
  • Margin pressure severe than expected: For Q1FY2013 Deepak Fertilizers and Petrochemicals Corporation Ltd (DFPCL) reported a revenue growth of 33.8% to Rs634 crore, which was marginally lower than expected mainly on account of a lower than expected growth in the fertiliser segment. However, the major disappointment was on the margin front?the margin declined sharply by 770 basis points to 16.1% on account of higher prices of the inputs especially ammonia (a major raw material) and propane. 
  • Surge in interest burden pulls down earnings: The interest cost went up by 109.6% year on year (YoY) to Rs26.6 crore due an increase in the working capital requirement with the delayed receipt of the subsidy from the government and the full capitalisation of the new TAN plant (with effect from Q2FY2012). The reported profit after tax (PAT) for Q1FY2013 shows a decline of 28.8% at Rs45.5 crore, which is lower than our estimate of Rs49.7 crore. 
  • Demand in chemical segment remains buoyant: Despite the prevailing slowdown in the economy, the company reported a fairly healthy volume growth of 14.7% in its chemical segment (products such as IPA, CAN etc). A better utilisation of the TAN plant also boosted the volume growth by 19.5% in Q1FY2013. However, the volume growth in the fertiliser segment declined marginally as the lower availability of phosphoric acid resulted in a lower production.
  • Outlook and valuation: Though the volume growth continues to be robust for the key products in the chemical segment, but we have revised downwards our earnings estimates for FY2013 and FY2014 by 8% and 6% respectively to factor in the higher than expected pressure on the margins. However, the valuations are supportive and we maintain our Buy rating on the stock with a revised price target of Rs179. At the current market price of Rs129, the stock trades at very attractive valuations of 4.9 and 4.3x its FY2013E and FY2014E earnings respectively.


Recommendation: Buy
Price target: Rs405
Current market price: Rs282
Results dented by high purchase cost; retail business improves
Result highlights
  • Sales reported in line with estimate: CESC's sales in Q1FY2013 grew by 20% year on year (YoY) but declined by 4% quarter on quarter (QoQ) to Rs1,404 crore. The company reported sales in line with our estimate along with power generation units at 2430 million units (MU). The company purchased 632 MU (32% above our estimate) of power during the quarter while transmission and distribution (T&D) losses stood at 595 MU (14% higher than our estimate).
    The YoY sales growth would be attributed to both - higher power sent out (+11%) and tariff hike (+9%). Sequentially the revenue reported a growth of 4% despite the power sold volume improving by 36% (reflecting summer season demand) as CESC got approval for a 14% tariff revision in Q4FY2012 which brings in a one-off adjustment in Q4FY2012. Therefore sequentially the numbers are not comparable. 
  • ..but higher power purchase cost pushed operating profit lower than estimates: Though the sales have been reported in line with our estimate, a higher than estimated power purchase cost pushed the operating profit below our estimate by 6% to Rs290 crore. The power purchase cost jumped briskly with a growth rate of 80% YoY and 193% QoQ, driven by a surprisingly high volume (up 50% YoY and 200% QoQ). During Q1FY2013, the cost of purchased power stood at Rs5.4/unit, up 20% YoY and down 3% QoQ.
    The Operating profit grew 9% YoY against a 20% sales growth, primarily on account of a surge in the power purchase cost (up 80%). Even sequentially, the higher power purchase cost impacted numbers; however due to tariff revision adjustment built in Q4FY2012 numbers, the sequential number is not comparable. However, sequentially, the operating profit declined 33%. 
  • Net profit grew by 13% YoY, though lower than estimate: Below the operating profit, a higher than estimated interest and depreciation cost pushed the profit after tax (PAT) 14% below our estimate to Rs125 crore in Q1FY2013. This reflects a growth of 13% YoY. The numbers are not comparable sequentially due to one-time tariff revision adjustment done in Q4FY2012. This translates into earnings per share (EPS) of Rs9.9 for Q1FY2013. 
  • Spencers store level profitability improved coupled with a 15% same store sales growth: The rationalisation and restructuring efforts in the retail business seem to be bearing results as store level profitability has improved significantly to 3.7% (against 2.4% in Q1FY2012 and 3.2% in Q4FY2012) with sustained same store sale growth of a healthy 15% YoY in this quarter. The management aims to take store level profitability to 4% in FY2013; the same would be a key monitorable.
    Despite the closure of 43 stores over last year (163 operational now), Spencer?s total trading area has improved from 9,54,000 sq ft to 9,75,000 sq ft in Q1FY2013. This indicates the focused attempt of the company to operate on a larger format to spread overheads. 
  • View: retain Buy rating and target price at Rs405: Currently, the stock is trading at 0.6x its FY2013 and 0.5x its FY2014 book value (BV; standalone). We continue to remain positive on CESC as its standalone business (power) is doing fairly well and as a growth trigger, development of new projects is on track. We believe the loss making retail business is the key reason for the discounted valuations assigned to the stock. But we read the recent improvement in the retail business as a silver lining. Tactical efforts by the management to improve its loss making retail business and attempts towards bringing it into the black (store level profitability improved to 3.7% vs 2.4% over the same quarter last year) are visible. Therefore, we maintain our Buy on CESC and retain our target price of Rs405. 


Recommendation: Buy
Price target: Rs1,131
Current market price: Rs735
Price target revised to Rs1,131
Result highlights
  • The consolidated income of Bajaj Holdings and Investment Ltd (BHIL) declined by 7.8% year on year (YoY) to Rs72.4 crore in Q1FY2013 against Rs78.5 crore reported in the corresponding period of the previous year. During the last six quarters the company has reported a lacklustre top line of under Rs100 crore. The subdued equity market has presented limited profit-booking opportunities for the company in recent times.
  • However, the income from the company?s associates improved by 8.7% YoY in the same quarter. This led to a 6% year-on-year (Y-o-Y) increase in the profit after tax (PAT) to Rs349 crore.
  • During Q1FY2013, the total market value of the company?s investments declined by 2.1% sequentially whereas the cost of investments rose by 0.9% due to an increased exposure to the equity market.
  • The market value of its equity investments in the core associate companies (accounting for 78% contribution) declined by 2.9% sequentially while the value in the other equity investments increased by 6% quarter on quarter (QoQ).
ValuationBajaj Auto is the key investment of BHIL and has been valued at 12.5x FY2014 earnings per share (EPS). Though the company reported quarterly results in line with expectations but there are concerns over a sharp moderation in the domestic volume growth. 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 Rs1,131 implies a 51% upside for the stock. We maintain our Buy recommendation on BHIL. 


>THERMAX: Q1FY2013 results

Recommendation: Hold
Price target: Rs482
Current market price: Rs481
Price target revised to Rs482
Result highlights
  • Results below expectations: Thermax Q1FY2013 results were below our expectations due to revenue sluggishness as well as a marked-to-market (MTM) foreign exchange (forex) loss of Rs12.4 crore for the quarter (as compared with a Rs0.15-crore forex gain in the previous year). The order inflow for the quarter picked up on a sequential basis (up 56%) to Rs1,258 crore (though the same was down 13% on a yearly basis). The company has also reported a loss of Rs15 crore in its various subsidiaries and joint ventures. 
  • Top line fell by 6%: Thermax? Q1FY2013 net income from the operations showed a fall of 6% year on year (YoY) to Rs983 crore, which is in line with our expectation. This was on account of a decline in the revenues seen across segments, with the energy and environment segments declining by 5% and 8% respectively on a yearly basis. The company had been reporting sluggishness in the order inflow for the past few quarters which translated into a revenue slowdown in this quarter. However, the company booked higher export revenues in this quarter at Rs222 crore (up 10% YoY).
  • Margin pressure led by forex loss: A 40% year-on-year (Y-o-Y) rise in the other expenses (led by the forex loss) resulted in a lower margin of 9.8% vs 10.9% reported in Q1FY2013. Overall, the operating profit fell by 15%. This was the lowest quarterly margin reported in the last 20 quarters. 
  • Net profit fell by 16%: In spite of a higher other income, the higher than expected interest and depreciation costs dragged down the net profit, which fell by 16% YoY to Rs71 crore and was lower than our expectation of Rs74 crore. 
  • Group order inflow improves QoQ: The company?s current order backlog at the group level stands muted at Rs5,042 crore (down 26% YoY) owing to a lack of any large-ticket order. The order inflow during the quarter picked up on a sequential basis at Rs1,412 crore (up 54% QoQ), led by a pick-up in international orders. For Q1, the company recorded export order intake of Rs324 crore, contributing 26% to the total order intake driven by an engineering, procurement and construction (EPC) order for 38MW captive power plant worth around Rs150 crore ($26.5 million). 
  • Stand-alone order book position: To the stand-alone order inflow of Rs1,258 crore, the energy segment contributed Rs949 crore and the environment segment Rs309 crore, showing a decline of 15% and 6% respectively. The major sectors likely to contribute to the order inflow in the coming quarters are cement, chemicals, water treatment and fertilisers while the demand from the steel and power sectors is expected to lag in the near term. Thermax foresees an unclear demand environment in the domestic market in the near term. Therefore, the management is looking to expand the overseas operations in the emerging markets like China, South-East Asia and Africa. 
  • Estimates maintained: In view of a poor order inflow in FY2012, we had sharply downgraded our estimates for FY2013 and FY2014. The sequential pick-up in the order inflow makes us maintain our estimates now. Overall, we are expecting the company to post a muted compounded annual growth rate (CAGR) of 0.4% in the profit over FY2012-14. We also feel that the company could aggressively bid for projects in the coming times to keep its order book ringing in spite of rising competition. This would adversely affect its margins leading to margin pressure in the coming quarters. 
  • Price target revised to Rs482: The growth in the company?s order book remains highly dependent on the momentum in the capital expenditure (capex) cycle of India, making the company highly susceptible to the swings in investment sentiments. The investment in its power equipment venture has started to post losses (for revenue expenses and working capital) as the venture has failed to win any orders. This venture involving Rs850 crore of capex would remain a drag on the company?s resources unless the company wins some major orders in the near term. The company had earlier indicated that the annual running cost of this plant could run as high as Rs100 crore. Marred by poor order inflow and tough business environment, the stock has languished in the last one and a half years. At the current market price, the stock trades at 14.6x and 14.0x its FY2013 and FY2014 estimated earnings respectively. On an improvement in the order inflow in this quarter, we are revising our target multiple to 14x (the past 12 months? average) from 13x earlier. Accordingly, we have revised our price target to Rs482. In view of the limited upside potential, we maintain our Hold rating on the stock. The key positive triggers in the stock remain the winning of big-ticket power equipment and export orders. Also, a pick-up in the capex activities would augur well for the company. 



Recommendation: Hold
Price target: Rs310
Current market price: Rs291
Price target revised to Rs310
Result highlights
  • Bank of India (BoI)?s Q1FY2013 results were ahead of our estimates as the earnings of the bank grew by 71.5% year on year (YoY; -6.9% quarter on quarter [QoQ]) to Rs888 crore led by a decline in the provision expenses and a higher recovery from written off accounts.
  • The net interest income (NII) growth came in below expectations as it grew by 11% YoY (-18.3% QoQ) to Rs2,044 crore led by a sharp decline in the net interest margin (NIM; 2.27% vs 2.86% in Q4FY2012). There was an interest reversal (Rs170 crore) and a reduction in the base rate which contributed to a dip in NIMs.
  • The advances grew 22.9% YoY and 6.2% QoQ led by a sharp growth in the overseas business and retail advances. The deposits grew by 15.7% YoY whereas the current account and savings account (CASA) ratio declined to 31.2% from 32.8% in Q4FY2012.
  • The non-interest income grew by 27.4% YoY (down 13.1% QoQ) aided by a sharp jump in the recovery from the written-off accounts (Rs236 crore vs Rs31 crore in Q1FY2012).
  • The asset quality deteriorated as slippages increased to Rs1,747 crore (2.8% annualised). The bank restructured Rs4,074 crore of advances during the quarter taking the total restructured book to Rs20,590 crore (7.8% of the total advances). 
  • Provision expenses declined by 16.7% YoY (32.7% QoQ) mainly due to reversal of investment provision of Rs136 crore. The provision coverage ratio (PCR) of the bank also declined marginally to 60.9% from 61.2% in Q4FY2012.
Valuation and outlookBoI has reported qualitatively weak results for Q1FY2012 as its NIM tanked and restructured loans increased sharply during the quarter. We therefore reduce our earnings estimates on an average by 3-5% for FY2013, and FY2014. We expect earnings to grow at a compounded annual growth rate (CAGR) of 14% which leads to a return on asset (RoA) of around 0.8%. We therefore revise the target price to Rs310 and maintain our Hold recommendation. 

>GRASIM INDUSTRIES: Expansion projects on VSF, chemicals and cement are on track

Recommendation: Buy
Price target: Rs2,795
Current market price: Rs2,700
Price target revised to Rs2,795
Result highlights
  • Consolidated earnings ahead of estimates: Grasim Industries (Grasim) in its Q1FY2013 results posted a net profit of Rs718 crore (declined by 4.5% year on year [YoY]) on a consolidated basis which is ahead of our as well as the street?s estimates. This is largely on account of a lesser than expected fall in its VSF realisation and better than expected overall performance of its key subsidiary- Ultratech which reflects the performance of the cement business. 
  • Revenue growth driven by strong performance of cement and chemical division: The consolidated net sales of the company grew by 15.9% YoY to Rs6,793.4 crore which were supported by a strong revenue growth in the cement division (increased by 16.9%) and the chemicals division (increased by 52.8%). The revenue from its VSF division registered a revenue growth of 9.2% YoY as the average realisation has declined by 16%. The revenue growth in the cement division was largely supported by an around 13.7% growth in the average blended realisation whereas the volume grew by just 2.8%. In case of the chemical division the revenue growth was supported by a mix of realisation as well as volume. 
  • Margin contracted Y-o-Y; improved Q-o-Q: In spite of an improvement in the cement realisation and expansion in the profitability of the chemical division, the severe margin pressure in the VSF division offset the positive impact arising from the improvement in the profitability of the chemical division and increase in the cement realisation. Hence the overall operating profit margin (OPM) of the company has contracted by 344 basis points YoY to 23.5%. The profit before interest and tax (PBIT) margin of the VSF business has contracted by over 12 percentage points (due to a drop in the realisation). In case of the cement division, the margin contracted by 155 basis points (on account of an increase in the cost of production). The PBIT margin in the chemical division has improved sharply by 739 basis points YoY. Thus, the operating profit of the company grew by just 1.1% YoY to Rs1,593.2 crore (as compared to a 15.9% growth on the revenue front). However, on a sequential basis the OPM of the company has expanded by 227 basis points. 
  • Expansion on track, balance sheet is strong to fund the capex: The expansion projects on VSF, chemicals and cement are progressing well and are expected to come on stream as per schedule. The cement division is likely to add another 10.2 million tonnes per annum (MTPA) of capacity by Q1FY2014, the VSF capacity is likely to increase by 156,000 tonne by FY2013 and the chemical division is likely to add 182,000 tonne of capacity. Further the company plans to set up a greenfield VSF project in Turkey in joint venture (JV) with other group companies. The funding of the new capacity addition will be met through a mix of internal accruals and borrowings. The present debt-equity (D-E) ratio stands at 0.32 which reflects a strong balance sheet and comfortable scope for raising debt to fund the capital expenditure (capex).
  • CCI has imposed a penalty of Rs1,175 crore on Ultratech; company will appeal against the CCI order: The Competition Commission of India (CCI) has imposed a penalty on around 11 cement companies for operating a cartel and manipulating cement prices at higher level. As per the CCI order Ultratech will have to pay Rs1,175 crore as penalty. However, based on a legal opinion, the company will appeal against the order before the tribunal. Accordingly Ultratech has not made any provision on account of the CCI penalty. 
  • Maintain Buy with a revised price target of Rs2,795: We continue to prefer Grasim as our top pick among the large sized players due to its strong balance sheet, comfortable D:E ratio (0.32x Q1FY2013), attractive valuation and its diversified business. We estimate the consolidated earnings of the company to grow at a compounded annual growth rate (CAGR) of 9% over FY2012-2014. Hence we maintain our Buy recommendation on the stock. On the valuation front we continue to value Grasim using the sum of the parts (SOTP) valuation methodology and arrive at a revised price target of Rs2,795. At the current market price the stock trades at a price/earnings (PE) ratio of 8.6x, discounting its FY2014 estimated earnings per share (EPS). 

>IRB Infrastructure Developers

 Recommendation: Buy

Price target: Rs175
Current market price: Rs113
Strong execution drives growth
Result highlights
  • Earnings above estimates, margins expand: For Q1FY2013 IRB Infrastructure Developers (IRB)?s consolidated revenues grew by 22% year on year (YoY) and 15.5% quarter on quarter (QoQ) to Rs980 crore (marginally above estimates) led by a strong execution in the engineering, procurement and construction (EPC) segment and consistent toll collection across projects. Further the operating profit margin (OPM) improved sharply to 43.4% (better than estimates) as against 41.1% in Q1FY2012, but lower than Q4FY2012 margin of 44.9%. The improvement is mainly on account of margin expansion in the EPC segment. Subsequently the EBITDA is up 29% YoY. However, the profit after tax (PAT) growth was restricted to only 5.7% YoY to Rs142 crore (though much above our as well as the street?s estimates) due to ~80% surge in depreciation mainly on account of the Surat ? Dahisar project getting fully operational and increase in interest charges by 31%. The tax rate too came in higher than estimated at 29%, thus eroding profits.
  • Strong performance by the EPC segment: The EPC vertical posted a strong growth of 27% YoY and 21% quarter on quarter (QoQ) in revenues to Rs728 crore led by a robust execution in the Talegaon ? Amravati, Jaipur ? Deoli, Amritsar ? Pathankot and Tumkur ? Chitradurga projects. Further the quarter also witnessed stable / range bound movement in input (raw material) prices as a result of which the margins expanded to 27.9% vis a vis 22.8% in Q1FY2012 and 26.9% in Q4FY2012. Subsequently the EBITDA was up 55% YoY and 26% QoQ. However due to a surge in interest cost, the PAT was up 37% YoY and 20% QoQ.
  • Even BOT division continues its stable performance: Even the build operate transfer (BOT) division continued to put up a stable performance with revenues up 10.4% YoY and 2% QoQ to Rs252 crore. The growth was largely led by (i) toll revision by 6% since April 2012 at the Tumkur ? Chitradurg project and (ii) strong traffic growth witnessed across few projects on a Y-o-Y basis especially in the Surat ? Dahisar, Surat-Bharuch and Mumbai ? Pune projects. At the operating level as well, the segment witnessed a 110 basis point YoY margin expansion to 88.2% resulting in an 11.8% YoY growth in the EBITDA. However due to a sharp jump in depreciation on account of the Surat-Dahisar project, the PAT fell by 35% YoY but was up 13% QoQ (since the depreciation impact was there Q4FY2012 onwards).
  • Thus earnings estimates revised upwards: We have revised our earnings estimates upwards by 15% and 7% for FY2013 and FY2014 respectively to factor in an expansion in the EPC margins as witnessed in Q1FY2013.
  • Maintain Buy with price target of Rs175: We continue to like IRB given its vast portfolio, rich experience, strong financials and healthy cash flows from its operational toll-based projects, all of which provide comfort. With a strong pipeline of projects up for award from the National Highways Authority of India (NHAI) and the bidding process becoming less aggressive, the management is confident of securing projects at an equity IRR of 18%. Further, it is also looking at growing inorganically by acquiring operational projects. With a mature portfolio now, the management plans to reward shareholders with dividend upto 20% of net profit. Its dividend payout last year was 14%. Thus with this strategy, it has declared a 10% interim dividend of Rs1 per share (face value Rs10). We like the strategy of the management for future growth and hence maintain our Buy recommendation on the stock with a price target of Rs175. Further the stock has corrected sharply post its promoter getting tangled in a murder case and the recent Maharashtra Navnirman Sena (MNS) attack on its Mumbai-Pune Expressway. Notwithstanding the legal tangle of its promoter we believe the sharp correction offers a compelling buying opportunity. At the current market price, the stock is trading at 7.6x and 8.4x its FY2013E and FY2014E earnings respectively. 


Recommendation: Buy
Price target: Rs920
Current market price: Rs715
Price target revised to Rs920
Result highlights
  • Punjab National Bank (PNB)?s Q1FY2013 net earnings grew 12.7% year on year (YoY; Rs1,246 crore) against our estimate of Rs1,302 crore. While the growth in net interest income (NII) was better than expectation, the sharp rise in provisions contained the growth in profits.
  • Led by a 10 basis point quarter on quarter (QoQ) increase in net interest margin (NIM; 3.6% vs 3.5% in Q4FY2013) the NII increased by 18.6% YoY. The QoQ expansion in investment yields and advances yields boosted the NIM.
  • The business growth was steady as advances grew 21.2% YoY while deposits grew 18.9% YoY. However, the current account savings account (CASA) ratio declined to 34.6% from 35.3% in Q4FY2012. 
  • The non-interest income grew 7.6% YoY, though the core fee income grew by 18.6% YoY. The treasury profit was Rs88 crore vs Rs48 crore in Q4FY2012. The employee expenses increased 41% QoQ due to increased provision for employee benefits (switched to quarterly actuarial valuation from annually done earlier).
  • A sharp rise in slippages (Rs2,770 crore) overshadowed the pick-up in recoveries, hence leading to an increase in non-performing assets (NPAs; gross NPAs at 3.34% and net NPAs at 1.68%). The bank also restructured Rs1,239 crore of advances, thereby increasing the restructured book to 8.7% of the advances. 
PNB?s Q1FY2013 results reflect the mounting pressure on asset quality as the economy slows down. We therefore raise the provision estimates and revise the earnings estimates downwards by 5% for FY2013 and 3.5% for FY2014. Hence our target price gets revised to Rs920 (1x FY2014 adjusted book value [BV]). The bank is likely to maintain its return on equity (RoE) of 17% and return on asset (RoA) of 1% and is trading at 0.7x FY2014 adjusted BV. We retain our Buy rating on the stock.