Sunday, November 2, 2014

>RANBAXY LABORATORIES: Q2 – ahead of expectation driven by gDiovan (NOMURA)

Ranbaxy’s Q2 performance was better than our and consensus expectations on account of better-than-expected sales in its US business. In July 2014, the company launched generic Diovan in the US with six-month exclusivity, which was the key reason for the positive surprises on sales (~5%) and
EBITDA (~33%), in our view. We estimate Diovan sales at ~USD 110-120mn for Q2 vs our expectation of USD 76mn. Sandoz has also indicated generic Diovan sales at more than USD 100mn for the quarter, which holds similar market share as Ranbaxy. Also, we think that the EBITDA margin of Diovan came in significantly higher vs our estimates.

Sales in most of the other geographies ex India were below expectation, mostly on account of (a) API supply constraints from the Devas and Toansa facilities, and (b) lower tender (ARV) business.

With the announced merger with Sun Pharma (every shareholder of RBXY will receive 0.8 shares of SUNP), its share price is more linked to SUNP’s share price. Our target price of INR 694 is on based on 0.8x SUNP’s TP (based on the merger ratio) of INR 868.

Key highlights from Q2 results
 Consolidated revenue was ~5%/9% ahead of our/consensus expectations. This was on account of better-than-expected sales in the US driven by gDiovan.

 Material cost as a % of sales came in at 31.3%, lower than our expectation of 33.9% on account of higher sales of gDiovan having high gross margin. Other expense was ~4% below our expectation on account of cost control measures taken by company.

 EBITDA came in at INR 8.79bn, which was significantly above our estimate of INR 6.6bn and consensus expectation of INR 4.8bn on account of higher sales and lower other expense. Reported EBITDA implies margin of 27.3% vs our expectation of 21.5% and consensus of 16.1%.

 Reported PAT at INR 4.8bn was ~31% ahead of our expectation of INR 3.66bn and significantly ahead of consensus of INR 2.7bn.

 Regional performance –
o US business – US reported strong sales-driven launch of generic Diovan with six-month exclusivity in July 2014. US sales were ~24% ahead of our expectation. Q-Q, US sales were up USD 109mn, which we believe was largely driven by gDiovan. This corresponds to our estimate of USD 76mn.
We believe a significant part of the exclusivity sales is booked in the quarter.

o India business (including consumer healthcare) reported sales growth of 12% y-y, better than IPM growth. Company India sales were in line with our expectation. Though sales of consumer healthcare has declined y-y over last three quarters, management expects sales to pick up as excess inventory in the channel gets consumed.

o Eastern Europe and CIS - Sales in Q2 declined ~15% y-y and were ~15% below our expectation. This was on account of lower ARV sales in Russia and Romania. Geopolitical instability affected sales in Ukraine.

o Western Europe – Sales in this region grew ~15% y-y and was marginally below expectation. The company reported strong growth in UK, Germany, Spain and North Europe.

o APAC and Latin America reported sales declined ~18% y-y and were ~22% below our expectation. This was on account of (a) change in business model in Thailand, and (b) API supply constraints from the Toansa and Devas facilities, which affected sales in Malaysia and Brazil.

o Africa and ME reported sales declined ~4% y-y and sales were ~8% below expectation. As per management, this was on account of lower tender (ARV) business.

Key takeaways from the conference call
Nexium exclusivity – Company has reiterated it has six-month exclusivity in Nexium and will launch in the US market after approval.

Derivative position – Total outstanding derivative contracts stand at USD 373mn at end of Q2FY15 vs USD 470mn at end of Q1FY15. As per the company, currently contracts worth ~ USD 32mn mature every month, but this run rate will decline going forward.

Mohali facility – As per management, the Mohali facility will be the first facility to be remediated. The Mohali facility is currently under import alert from the US FDA.

Toansa and Devas facilities – As per management, API production at these two facilities have started after company voluntarily suspended supply to all markets in February 2014. These two facilities are under import alert from the US FDA.

 Net debt stood at USD 739mn at end of Q2FY15.


>YES BANK (HDFC Securities)

Granularity missing

YES reported better than estimated results with core/net earnings beat of 9/6%. Pick-up in loans (+30% YoY), 20bps NIM improvement (aided by recent fund raise) and continued traction in other income were key positives. On the other hand, the sluggish CASA progress (mere +18bps QoQ), sharp rise in wholesale deposits, decline in PCR with rise in slippage (1% ann.) and increasing timeframe for any visible improvement in granularity were the disappointments.

After factoring better than estimated 2Q, we revise our net earnings estimates by 3% for FY15/16E. However, we largely retain our ABV estimate as we continue to factor high slippages given the large share of wholesale book & exposure towards stressed segments. Despite the bulky nature of B/S & expected decline in systemic interest rates, we believe scope for further NIM improvement in unlikely given the pricing pressure & relatively weak franchise. Further, current high contribution from bulky fees & lower provisioning looks unsustainable and might add volatility to earnings going ahead.

Further, the recent outperformance vs. peers and banking indices makes us maintain our NETURAL rating. Revise TP to Rs 650 (2x FY16 ABV).
 Favorable base and improved sentiment resulted in loan growth of 30/5% YoY/QoQ, driven by large corp segment (+25% YoY; 71% of loans). Improvement in CASA (%) further moderated to a mere +18bps QoQ (slowest in last 11 qtrs) to ~22%. Despite increasing its presence & adding retail products, granularity within B/S is yet to show any visible improvement.

 Combination of (a) rise in CD ratio (b) impact of capital raising (c) gradual decline in low yield credit substitute and (d) part effect of lower wholesale deposits share in previous qtr drove NIM (3.2%, +30/20bps YoY/QoQ). We have factored NIMs of 3.1% over FY14-16E.

 Slippages were higher QoQ at Rs 1.5bn (1% ann.), though NPA sale of Rs 400mn restricted rise in NPLs. G/NNPA increased 12/26% QoQ to 36/9bps of loans. We were negatively surprised with the 260bps decline in coverage ratio to 76%, despite strong earning cushion. Restructured book stood at Rs 1.2bn (19bps). We factor slippages/LLP of ~85/35bps over FY15/16E.


>CROMPTON GREAVES: Lower-than-expected EBITDA; board approves demerger

Consolidated 2QFY15 EBITDA at Rs1.7bn (up 4% YoY) was 12% below our estimates, as revenue at Rs34.3bn (up 7% YoY) and gross margin at 31.8% (up 30bps YoY) came 7% and 70bps below our estimate respectively. EBITDA margin at 4.9% (down 10bps YoY) was 30bps below our expectation. Higher tax rate at 46% (vs our estimate of 30%) led to PAT of Rs570mn, 28% below our estimate. We do not change our estimates for FY15, as we expect strong growth in the consumer business in 2HFY15 (led by strong festival demand) and pick-up in execution of high margin order backlog in the power business. The board approved the demerger of the consumer business, with Crompton
holding 25% in the proposed consumer company; balance by the existing shareholders. Whilst the demerger will unlock value, we believe the CMP already factors in this; our TP of Rs185/share values the consumer business at Rs102/share, implied FY16 P/E of 21.4x (6% discount to Havells). We remain concerned around the rising share of MNCs in domestic power, rising competitive intensity in fans, and a fragile recovery in Europe.

Results overview: Consolidated revenues at Rs34.3bn increased 7% YoY led by 13% YoY growth in consumer products. EBITDA increased by only 4% YoY due to a 21% YoY increase in other expenses. Consequently, EBITDA margin declined 10bps YoY to 4.9%. However, PBT increased by 16% YoY to Rs1.3bn due to a 39% YoY increase in other income. The higher share of profits in associates led to PAT increasing by 20% YoY to Rs696mn.

Within the segments, on a consolidated basis, the major revenue driver was the consumer products business which reported a YoY revenue growth of 13% led by strong growth of fans (up 13% YoY) given the extended summer. Pumps and Lighting grew by 7% YoY and 5% YoY. The Power and industrial segment’s revenue grew 5% YoY. A margin improvement was seen on a consolidated basis across segments. Whilst consumer business’ EBIT margin improved 30bps YoY to 12.0% led by
operating leverage, power and industrial systems’ margin improved 20bps YoY and 160bps Yoy to 2.2% and 9.2% led by improvement in the margin of the international power (up 80bps YoY) and industrial (up 690bps YoY) businesses.

On a standalone basis, revenues registered a meagre growth of 8% at Rs19bn led by a 13% YoY increase in the consumer durables business; revenues of power systems increased 6% YoY and industrial system increased 7% YoY. EBITDA increased by only 5% YoY to Rs1.7bn due to a 13% YoY increase in employee expenses. Consequently, EBITDA margin declined 20bps YoY to 8.7%. However, PBT declined by 1% YoY to Rs1.8bn due to a 10% increase in depreciation. Increase in tax rate from 24% in 2QFY14 to 28% led to a 7% decline in PAT to Rs1.3bn.

Demerger approved by board: CRG’s board approved the demerger of the consumer business to Crompton Consumer Products Ltd (CCPL) with effect from 1 April 2015. Upon the completion of the demerger process, CRG would hold a 25% stake in the proposed CCPL and the balance would be held by the existing shareholders of CRG. The shareholders of CRG would be allotted 3 shares of CCPL for every 4 shares held in CRG. CCPL would be listed on the BSE and NSE. Note that there is no change in the shareholding of the minority holders in the demerged entity, as no strategic shareholder has been brought in.

Where do we go from here? Despite revenue and EBITDA being 7% and 12% below our estimate, we are not changing our estimates for FY15, as we expect strong growth in the consumer business in 2HFY15 (on the back of strong festive demand) coupled with pick-up in execution of high margin order backlog in the power business. Note that CRG has bagged recent orders at higher margins, part of which are likely to be booked in 2HFY15 and this should help in margin improvement. For the full year, we model in revenue growth of 14% YoY (vs 8% YoY in 1HFY15) and EBITDA margin
expansion of 150bps YoY in FY15 (vs 20bps in 1HFY15).

However, we remain concerned about the following factors:

■ Europe recovery likely to be fragile: The GDP growth outlook for Europe has been deteriorating with the IMF doubling the probability of the Eurozone re-entering into a recession to 38% in October 2014 from 19% in April 2014. If Europe continues to disappoint, the turnaround of international subsidiaries may get delayed further and the international franchise’s losses may widen. Note that the European region contributed to ~35% of consolidated revenues in FY14.

■ Competition increasing in the consumer business: Within the domestic consumer segment in India, Crompton has a strong presence in the fans segment, which contributed to ~40% of consumer products’ revenues in FY14. However, competition intensified in FY14 with the entry of five new players (Polycab, Schneider, Luminous, Surya and RR Kabel). Competition has increased due to: (1) attractive margins (more than 13% in the premium decorative segment), (2) healthy 24% volume CAGR over FY09-12, (3) rising share of premium and decorative fans (now accounts for 50% of
the market as compared to a fifth five years ago), and (4) shortening replacement cycle (now five years as compared to 7-8 years five years back, as RPMs have increased to 380 from 200 earlier and share of pedestal, wall and table fans which have to be replaced after 2-3 years has increased to 40% as compared to 30% three years back). Given Crompton’s market leadership in this segment, any disruptive strategy adopted by these new players (like cutting prices) could hurt its fan margins.

■ Rising competition in Indian power business from foreign players: Rising competition from foreign players that are competing for Power Grid (PGCIL) tenders and the dismal balance sheets of SEBs have hurt CRG’s power franchise. Its EBITDA margins declined to 11% over FY12-14 vs 14% in FY06-10 and revenue CAGR slowed down to 3% in FY12-14 vs 10% over FY08-12. With foreign players now setting up manufacturing base in India (TBEA and Toshiba), competition should further intensify and this would hurt CRG.

■ Feeder separation, a negative catalyst for the power franchise
The Rs430bn and Rs326bn Union allocation for feeder separation and strengthening of the grid should help in restructuring the balance sheet of SEBs. However, this may not be a positive catalyst for Crompton as any improvement in the balance sheet of SEBs will invite competition from the foreign players. Thus, whilst we assume a pickup in revenue CAGR for Crompton to 16% over FY14-16 (vs 3% in FY12-14) as the balance sheet of the SEBs improve, we assume a margin improvement of only 40bps to 9.1% over FY14-17 vs FY12-14. This is far lower compared to the 13.3% margins reported during FY09-11 when Crompton did not face any competition.

■ Punchy valuations; impact of demerger already priced in: At CMP of Rs191/share, CRG is trading at 15.9x FY16 P/E, a 3% premium to its five-year oneyear forward P/E. Our SOTP value of Rs185/share implies an FY16 P/E of 15.4x. We value the consumer business at Rs102/share (implied FY16 P/E of 21.4x), the standalone power business at Rs31/share (implied FY16 P/E of 17.3x), the standalone industrial business at 20/share (implied FY16 P/E of 11.3x) and international subsidiaries at Rs18/share (15.7x FY16 P/E).

Our implied multiple for the consumer business is at a 6% discount to Havells. We believe the discount is justified given Havells strong consumer franchise, superior range of products with higher revenue CAGR of 18% (vs CRG’s 12%) over FY11-14, and higher average EBIT margin (adjusted for unallocable expenses) at 11.4% (vs CRG’s 9.7%) over FY11-14. We value the standalone power business at a 56% discount based on FY16 P/E to its capital goods peers such as BHEL, Siemens, ABB and Alstom T&D and the standalone industrial business at a 45% discount to capital goods peers such as Cummins, Kirloskar Oil Engines and KSB Pumps. We believe such a steep discount is justified given CRG’s weak power franchise and inferior management quality. Also, we believe CRG’s standalone industrial should trade at a discount to peers given the commoditised nature of CRG’s portfolio.



Conference call takeaways

Bajaj Auto continued to record strong growth in 2QFY15 across most of its business segments, namely export markets (management expectations of 20% volume growth for FY15 driven by healthy growth across most of the export countries) and domestic three-wheelers (on the back of new permit
issuances from Hyderabad, and Delhi). Within domestic motorcycles, whilst Pulsar and Platina continue to do well, there are early signs of recovery in Discover sales (helped by launch of Discover 150). We retain our positive view on Bajaj Auto on the back of its strong and growing exports franchise, opportunity to regain market share in domestic motorcycles (market share perked up to 18.8% in September 2014 vs 16.6% in April-August 2014) and its diversified business model. We marginally upgrade our estimates (FY15 and FY16 net earnings by 3%/2%) and valuation to Rs2,600 (vs Rs2,500 earlier), implying 15.0x one-year forward net earnings.

Key takeaways from the earnings call
■ Domestic motorcycle industry: The management expects domestic motorcycle industry to witness 10-12% YoY growth in 2HFY15. The industry volume growth has been around 12% for Navratri. Furthermore, Diwali is also expected to witness a similar volume growth. Whilst Pulsar and Platina continue to clock healthy volume growth, the management is hopeful of recovering market share in Discover. The recently launched Discover 150 has seen a good opening and currently it retails around 25k units/month. Furthermore, the company plans to launch new variants of Platina and Pulsar by end-FY15.

■ Domestic 3W volumes: The domestic 3W volumes witnessed a strong growth of 39% YoY in 2QFY15. This was mainly driven by new permits as well market share gains for Bajaj in the diesel 3W segment (32% currently vs 25% last year). On the back of new permit issuances in Delhi and Hyderabad, the management expects to sustain a monthly run rate of 26k-27k units in the domestic 3W space for 2HFY15 (vs 22k units/month in 1HFY15 and 15k units/month in 2HFY14). Quadricycle RE60 is slated for launch in 4QFY15 in the domestic market (followed by launch in the export markets).

■ Exports: The company is witnessing strong growth across most of the export geographies. Whilst big existing geographies are clocking in healthy volume (exports to Nigeria increased by 30% YoY in 1HFY15), volume growth in newer geographies such as Mexico has also been strong. The export volumes in 1HFY15 contained an order of 40k units of Discover from Sri Lanka which has been completed. Overall, the company expects export volumes to grow around 20% YoY for FY15. Over the next 4-5 years, export volumes are likely to witness a CAGR of 15%.

■ Realisation: The strong improvement in average realisation (6% QoQ and 5% YoY) was on account of: (a) higher share of 3Ws and better mix within motorcycle and (b) INR depreciation; average export currency realisation was Rs61.5/USD in 2QFY15 vs Rs59.9/USD in 1QFY15. Going forward, the management expects export currency realisation to improve further to Rs61.9/USD in 3QFY15 and Rs62.5/USD in 4QFY15.

■ Margin: The company’s raw material costs as a percentage of sales declined from 69.5% in 1QFY15 to 68.6% in 2QFY15. Whilst commodity prices are likely to remain stable, conversion costs (such as labour) may increase at the vendor level. As a result, material costs may inch up marginally in 2HFY15. The increase in ‘other expenses’ (15% YoY) after adjusting the MTM loss and contribution towards Corporate Social Responsibility (CSR) was due to: (a) increase in packing, forwarding and freight expenses (by Rs370mn) due to higher export volumes; and (b) higher advertisement spends during the quarter (Rs220mn) attributable to the launch of Discover 150. Going forward, the management expects advertising and marketing spends to continue given the launch of new variants of Platina and Pulsar by 4QFY15.

■ Where do we go from here?
We retain our positive view on Bajaj Auto on the back of its: (a) strong and growing export franchise (45% of 2QFY15 revenues); (b) opportunity to regain market share in domestic motorcycles (already the company has witnessed an uptick in market share to 18.8% in September vs 16.6% in April-August 2014); and (c) its diversified product portfolio.

In view of a much better-than-expected realisation in 2QFY15, we revise upwards our average realisation estimates for FY15 (by 1%) and FY16 (by 2%). This also results in a 30bps upgrade to our EBITDA margin estimates for FY15 and FY16. Our absolute EBITDA estimates are upgraded by 3% each for FY15 and FY16. Overall, we upgrade our net earnings estimates for FY15 and FY16 by 3% and 2%, respectively.


>TATA MOTORS : Land Rover registers 7.8% decline, Jaguar declines by 11.2% YoY (MOTILAL OSWAL)

Land Rover registers 7.8% decline, Jaguar declines by 11.2% YoY

 JLR Sep-14 sales declined by 8.4% YoY (+3.8% MoM) to 32,858 units (est. 38,256 units), driven by decline in both Land Rover and Jaguar.
 Our interaction with management indicates healthy demand environment. Decline in sales have been primarily due to production constraints on account of transition to upcoming launches of Jaguar XE, Discovery Sport and start of China JV in 4QFY15.

 Land Rover declined by 7.8% YoY to 27,143 units (est. 31,497 units), while Jaguar declined by 11.2% YoY to 5,715 units (est. 6,760 units).

 As per the regional retail sales performance data released, China grew at the highest rate of 25.3% YoY. The UK and Europe grew by 9.3% and 21.1% YoY respectively, while the AsiaPacific grew by 24.5%. All major markets registered growth, except US and RoW which declined by 12.3% and 2.5% respectively.

 Commenting on the September performance Andy Goss, Jaguar Land Rover Group Sales Operations Director said: "Jaguar Land Rover has delivered continued solid growth in September. Our investment in new products continues with the debut of the Land Rover Discovery Sport and the Jaguar XE this month, giving us a very strong, desirable range of products appealing to more customers than ever before - and many more new models in the pipeline."

Valuation and view
 We believe JLR is on the strategic path and is investing in the right areas, resulting in its evolution as a much stronger and balanced player in the luxury vehicle market.

 Domestic business is expected to bounce back strongly along with an economic recovery and favorable product lifecycle in the PV division.

 The stock trades at 7.7x/5.7x FY15E/FY16E consolidated EPS.

 Maintain Buy with a target price of INR620 (FY16E SOTP-based) for ordinary shares and INR372 for DVR (~40% discount to the target price for ordinary shares).


> Grasim Industries: RESULTS REVIEW 2QFY15 (HDFC Securities)

Softer pulp drives VSF margins

Grasim Industries’ standalone numbers were inline (EBITDA Rs 2.1n vs. est 2.2bn). New capacities continue to drive volume growth (101kt, +9% YoY). Standalone margins improved in 2Q, led by weakening RM costs on account of cheaper pulp (VSF PBIDT/kg : Rs 15/kg). Realisations held on at roughly same levels QoQ (Rs 125/kg), despite softening in global VSF pricing. Chinese cotton unwinding, which has driven cotton pricing downwards, has not effected VSF globally and the prices are at par with cotton for 1st time since FY13.

Trial runs for the remaining VSF capacity at Vilayat (43 ktpa specialty fibre) are underway and the new capacity should further boost volumes in FY16 (FY15 end capacity 490 ktpa). Thus Grasim is well set to reap the benefits of any demand revival in VSF globally, whenever that happens. We have a BUY on the stock with a revised TP of Rs 3,850 (UltraTech stake at 20% holding company discount, standalone business at 5.0x FY16E EV/EBITDA).

 2QFY15 highlights : Consolidated EBITDA was ahead of estimates driven by UltraTech surprise (EBITDA at Rs 8.3 bn vs Est 7.3 bn). Despite robust revenue growth (16.0% YoY), EBITDA growth was restrained due to weakness in VSF (Stlone. EBITDA down 22.8% YoY). JPA acquisition by UltraTech and higher debt led to 44% YoY higher interest cost. Combined with higher depreciation on account of new commissioning, APAT was down ~12%. In Parent entity, chemicals business continues to do well despite realisation decline (EBITDA margins at 23%) due to higher imports. This is driven by ramp-ups at Vilayat caustic plant and the epoxy facility.

 Outlook and view : We have tweaked our estimates marginally (EBITDA -6.2%/-2.2% for FY15/16), mainly on account of revision in UltraTech nos. Despite correction recently, UltraTech continues to trade at rich valuations (12.0x FY16 EV/EBITDA) with an added overhang of a likely acquisition overseas. Grasim remains undervalued, even on our target valuation for UltraTech (Rs 1,960/sh), and is preferable for an exposure to the cement business. Holding company discount should reduce as VSF prospects improve.