Wednesday, October 29, 2014

>HERO MOTO CORP LIMITED: Launching a new model in 3Q post recent launch of Splendor Racer, a variant of Xtreme & Production at Nemrana plant started

Core business earnings in line with estimates; exports all set to pick up

Hero MotoCorp (HMCL IN) adjusted operational earnings came broadly in line with our estimate of INR7bn, though reported earnings at INR7.6bn was higher led by a one-off other income to the tune of INR0.68bn. Blended realisation was flat QoQ and up 2% YoY with mix broadly remaining the same leading to a revenue growth of 21% YoY at INR69bn, broadly in line with estimates. EBITDA
margin at 13.5% too was in line with estimates and flat QoQ despite higher staff costs on account of commencement of production at Nemrana plant from July led by slight improvement in gross margin QoQ. We believe with the excise duty disparity in Hardwar plant impacting margin by ~130bps getting away from equation possibly from 4QFY15 onwards along with rising scale and rising impact
of internal cost cutting strategy, we expect margin to inch up a notch towards 14-14.5% in FY16e. With scooter capacity set to ramp up to 100k units by January 2015 and to 150k by mid-FY16 from 75k now, we believe attaining the short term target of 250k exports would get easier. First time motorcycle buyers have come back in the scheme of things after a long break in recent months boosting overall industry demand along with HMCL maintaining share around 54%. With couple of new launches in the scooter portfolio along with continuous launch of variants across the motor cycle portfolio on and above higher exports, we are confident of a 12% volume CAGR in FY14-16e resulting in a volume of 7.85mn in FY16e. We are maintaining our volume and margin estimates for FY16e resulting in a robust earnings CAGR of 32% in FY14-16e.

Conference call highlights
􀂄 Festive season demand going on pretty strong and HMCL is confident to close festive season with 10-11% growth this year. With inventory being pretty much in control amid high competitive intensity we believe HMCL has done a commendable job of maintaining market share despite a high base.

􀂄 Launched 2 new variants in Maestro, both have seen good response from the market. Have 75k unit scooter capacity currently and will take capacity to 100k by January 2015 and plan to increase to 150k by mid-FY16. Planning a couple of new scooter launches in the next one year with focus towards the 125cc segment.

􀂄 Target of exports at 250k unit in FY15 with higher scooter capacity helping to boost exports soon. Have vision to export to 50 countries by 2018 from 20 markets presently. Got a large order of 45k unit of scooters in export markets and will be executed by November only.

􀂄 Launching a new model in 3Q post recent launch of Splendor Racer, a variant of Xtreme.

􀂄 Production at Nemrana plant started July onwards and is expected to ramp up production this quarter itself with peak capacity of 1.2mn.

We maintain our Buy on HMCL with a price target of INR3,151 based on 18x FY16e core EPS of INR161 and INR255/share of cash and equivalents. We believe interim dividend of INR30/ share this quarter along with visibility of annualized payout of 55-60% signifying a FY16e DPS of ~INR100, implies HMCL is trading at an attractive dividend yield of ~3-4%.


>Market Outlook (MICROSEC)

Indian market is likely to remain volatile due to Global market volatility which is led by fears of Global Economic slowdown led by Europe and China. Election results slated to be announced on Oct 19 in two key states will further decide Governments strength in framing bold policies.

There are many low hanging fruits like insurance bill which need to be cleared in the winter session of parliament. Lower CPI and WPI may create conducive environment for RBI to cut interest rates by end of the CY14 or early next year. Geopolitical issues, China slowdown, weakness in global markets and US Fed may indicate hiking rates sooner will prompt some investors to remain cautious. Indian
PM visit to US was successful in many ways if one takes a macro view and specially strengthening the defense sector by inviting manufacturing in India to US INC. Earning season has started which would emphasize on stock specifics according to the performance. Markets in the past has performed on beaten down stock valuation but henceforth, earnings accretion would bring new run in markets in
few upcoming quarters rather than P/E expansion. Favorable outcome on assembly results towards Central ruling party would enthuse markets in its ability to clear key bills in upper house of parliament.

Sharp decline in input prices across industries like crude oil, rubber, cotton yarn, copper will improve fundamentals across OMC’s, Auto-ancilliaries, Textiles and Consumer durable. These sectors may continue to outperform in Oct 2014. Nifty EPS(E) for CY15 is currently at ~571, Bloomberg consensus. On that basis we believe Nifty is likely to trade 13.66-14.18x CY15(E) earnings which makes a range of ~7800-8100 for October 2014. Engineers India, Dredging Corp, Max India,
Finolex Cable, CCL Product, Crompton Gr, IDFC, Tide Water, IL&FS Transportation, Blue Star, UPL Ltd., Bharat Electronics, Archies Ltd, Exide Ind, Lloyds Electric, M&M, L&T, Tata Motors, TCS, INFY, RIL, SBI, ONGC may remain strong.


> Pennar Industries Ltd. (IndiaNivesh)

CMP Rs. 52 |P/E (FY15E) 9.7x | P/E (FY16E) 6.5x Target Rs. 81

Investment Rationale

 Moving from commodity to value added products: Pennar Industries is moving from pure commodity player to value added player with its range of engineering products. This transition is helping the company improve its consolidated margin as company has added many high margin segments in its portfolio.

 Direct Play on overall macro-economic recovery: As company caters to the large part of economy’s sectors like Automobile, Infrastructure, Railway etc, it is well placed to take the advantage of any economic uptick through its diversified business portfolio.

 High Operating leverage and Low Financial leverage provides high upside and limited downside potential: Muted economic environment has reduced capacity utilization for Pennar Industries in last couple of years. With likely economic cycle revival, increase in capacity utilization will act as major margin booster for the company. On the other hand delay in revival should not be major concern as company has low financial leverage and large part of its debt is working capital debt.

 Subsidiary PEBS is Key Growth Driver: Other major growth driver for the company will be PEBS, which is amongst top 5 players in India. As the concept of pre-engineered building products (PEBS) is catching up fast in India; anyone setting up an industry now would look for early commissioning of plants, PEBS is poised for abnormally strong growth. A corporate action by the company on getting this subsidiary (PEBS) separately listed on exchanges could be the additional trigger for the stock.

 At CMP of Rs.52, Pennar Industries is trading at P/E multiple of 9.7x FY15E and 6.5x FY16E earnings estimate, which is well below 14.3x – three year historical average. Average ROE for the company is past 3 year has been 12.9%. In FY15E and FY16E, the ROE of the company is likely to improve to 16.4% and 20.3% respectively on back of increased capacity utilization and margin expansion. We value this company at conservative PE multiple of 10x to FY16E EPS (Rs.8.1), which gives the target price of Rs 81. RISH TRADER

>Meghmani Organics Ltd. (IndiaNivesh)

CMP Rs.17 | EV/EBITDA (FY15E) 5.4x | (FY16E) 4.8x Target Rs.34 (5.9x FY16E P/E)

Investment Rationale
 Absence of incremental growth capex from here on could lead to higher free cash flow generation, repayment of debt (paid Rs.500 mn in Oct-2014) and better net profit margin.

 Investments in pollution control equipment and permissions in place from state level pollution control board. This could result in higher plant utilization and margin expansion.

 Given that all safety and environment certifications are in place, MOL could attract new order wins and also remain eligible for contract manufacturing order from MNCs .

 All newly commenced facilities both in Pigments & Agrochemical segments are stabilized and ready to deliver higher revenue growth going ahead. 

At CMP of Rs.17, the stock is trading at EV/EBITDA multiple of 5.4x FY15E and 4.8x FY16E estimates. In our view, the current valuations are significantly below 7.5x global peer average. On back of various triggers like: (1) debt reduction, (2) margin expansion, and (3) higher plant utilization the stock is poised for re-rating. We have assigned 5.9x EV/EBITDA multiple (21% discount to global peers) to arrive at FY16E based price target of Rs. 34/share with BUY rating.


>Ashiana Housing Ltd. : CMP Rs.155 |P/E (FY15E) 19.9x | P/E (FY15E) 7.8x Target Rs. 202 (IndiaNivesh)

Investment Rationale
 Developer with Unique Business Model: Ashiana Housing Ltd. (AHL) is a unique asset light developer, with strong focus on pursuing Real Estate business in Tier II and III cities. AHL has unique business model, (1) where land cost as % of construction cost is lesser (vs. their listed peers), (2) does not build huge land banks, (3) does in-house construction as well as sales, & (4) consistently explore the alternative of deploying lower capital across projects. This asset light strategy and focus on cash flow generation has helped AHL remain debt free and experience above industry level Internal Rate of Returns (IRRs) of >30% across most of the projects.

 Highest Return Ratios in the Industry: AHL is the only listed developer, which has consistently maintained >25% RoE as well as RoCE for last few years (with exception of FY13 & FY14). Sudden drop in FY13-14 return ratios is owing to company’s strategy to shift its accounting methodology. With most of the ongoing projects reaching completion, we expect AHL to report FY16E RoE and RoCE of 35.0%, each.

 FY15-16E to see strong earnings growth: AHL is likely to report ~149% top-line CAGR during FY14-16E (to ~ Rs 6.9 bn), on the back of 3 projects entirely getting completed (Tree House, Utsav and Anantara) and some phases of remaining 7 projects getting completed (Ashiana Town, Rangoli Gardens, Aangan, Gulmohar Gardens, Navrang, Vrinda Gardens, Dwarka and Umang). We expect AHL to report ~192% PAT CAGR during FY14-16E (to ~Rs 1.8 bn; PAT margins would expand from 19.8% in FY14 to 27.1% in FY16E). 

With substantial chunk of ~6.8 mn sq. ft. of ongoing projects reaching revenue recognition threshold, we expect revenue visibility to sharply improve from here-on. With debt free balance sheet, at CMP of Rs 155, AHL is trading at FY15E and FY16E, EV/ EBITDA multiple of 17.6x and 5.7x, respectively. We have valued AHL using Sum-of-the-parts (SoTP) basis to arrive at FY16E based price target of Rs 202.


>LUPIN: Out performing due to good growth of Kyowa (CENTRUM)

Consistent all round growth

We maintain Buy rating on Lupin with a price target of Rs1,680 (earlier1,670) due to its good performance in Q2FY15. Lupin reported 19%YoY growth in revenues, 150bps improvement in margin to 26.2% and 55% growth in net profit. Major growth of 23%YoY came from US formulations and domestic formulations grew by 20%YoY. The company’s RoW formulation business also had good growth of 16%. Our target price is based on 23x September’16E EPS of Rs73.0. Key risks to our estimates are regulatory issues for its manufacturing facilities and slowdown in the domestic market.

Strong sales growth of 19%YoY: Lupin reported 19%YoY growth in revenues due to good growth of 23%YoY in US and European formulation business (44% of revenues). This business grew to Rs13.59bn from Rs11.09bn. Its domestic formulation business (26% of revenues) grew by 20%YoY to Rs7.99bn from Rs6.64bn despite price reduction by NPPA. The company’s Japanese business (11% of revenues) grew by 12%YoY to Rs3.46bn from Rs3.09bn due to good growth of Kyowa. Its API business (10% of revenues) grew by 11% to Rs3.18bn from Rs2.86bn.

► Margin improves by 150bps: Lupin’s EBIDTA margin grew by 150bps YoY to 26.2% from 24.7% due to reduction in other expenses. The company’s material cost grew by 220bps to 33.7% from 31.5% due to the change in product mix with higher growth in regulated markets. Personnel cost was maintained at 13.8%. Other expenses declined by 370bps to 26.2% from 29.9% due to yield improvement and cost rationalisation initiatives. There was a forex gain of Rs170mn at net profit level of which Rs847mn is included in other income and the balance under other line items. The management has guided EBIDTA margin of 28-30% for FY15.

 US business to drive growth: Lupin is the market leader in 31 out of 75 products in the US generic market. The company’s 54 products are among the top three in the US generic market. It has a basket of oral contraceptive (OC) products for the US market. Lupin launched 3 new products in the US during the quarter and has plans to launch 10 products during H2FY15. The management has indicated they were looking for brand acquisitions in the US, Europe and Japan. We expect the US
market to drive future growth of the company.

►  Consistent performance: We expect Lupin to report consistent performance due to strong growth in the US, India, Japan and RoW markets. We have enhanced our EPS estimates for FY15 and FY16 by 4% and 1% respectively. We have valued the stock at 23xSeptember’16E EPS of Rs73.0 and arrived at a target price of Rs1,680 with a 23.7% upside from CMP. Lupin continues to be our top pick in the pharma sector. Key risks to our estimates would be regulatory issues for its manufacturing
facilities and slowdown in the domestic market.