Investor's Eye: Pulse - Inflation drops to 6.87%; Update - Eros International Media, Indian Hotels Company, Gayatri Projects, Pratibha Industries, Piramal Healthcare

 

Investor's Eye [August 14, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK Inflation drops to 6.87% The Wholesale Price Index (WPI)-based inflation for July 2012 came in at 6.87% as against 7.25% in June 2012. The same was below the market's expectation. The inflation rate for May 2012 has been kept unchanged at 7.55%. Outlook The inflation rate for July surprised positively as it dropped below 7%, the lowest in seven months. Also, the inflation rate for May remained stable compared with the upward revision in the previous month's data. This shows moderation in inflation. However, the current inflation rate remains higher than the comfort level of the RBI and the upward risks to inflation persist (weak monsoon rains, a weak local currency, high fuel prices etc). The RBI firmed its stance at the Q1FY2013 policy review meeting and any reduction in the lending rates is likely to be followed by policy action from the government. STOCK UPDATE Eros International Media Cluster: Emerging Star Recommendation: Buy Price target: Rs267 Current market price: Rs174 Strong performance in a soft quarter Result highlights Strong revenue performance: For the quarter ended June 2012 Eros International Media Ltd (EIML) reported a strong consolidated revenue performance with its revenues surging by 67.1% year on year (YoY) to Rs257 crore, ahead of our expectation of Rs210.7 crore. The revenues were boosted by some strong releases in the quarter including "Housefull 2" and "Vicky Donor", and the satellite revenues from the films released in the quarter. The EBITDA margin improved by 70 basis points to 20.1%, which is marginally lower than our expectation of 20.5%. Despite a 73.7% drop in the other income to Rs2.2 crore and an increase in the effective tax rate to 40.9% from 31% in the corresponding quarter of the previous year, the net profit grew by 44.7% to Rs31.4 crore, which is ahead of our expectation of Rs28.3 crore. The other income was affected by a lower income from the treasury as compared with Q4FY2012. The effective tax rate was higher due to a prior period tax provision done in the quarter relating to directors' fees not provided earlier and the losses in the low-tax subsidiaries. On account of a soft performance from Ayngaran (the Tamil film business) and the curtailment of operations of EyeQube (the visual effects studio), the subsidiaries reported a loss of Rs5.6 crore at the net level.  Strong industry performance in a seasonally weak quarter: In stark contrast to the trend of the last three years, the June quarter saw some strong Hindi film releases even though the Indian Premier League (IPL) Season V was held in this period. The Hindi entertainment industry in general and EIML in particular saw at least three hits in the quarter, namely "Housefull 2" (released on April 5, 2012), "Vicky Donor" (released on April 20, 2012) and "Rowdy Rathore" (released on June 1, 2012). Alongwith this there were other films that did well, like "Ferrari Ki Sawaari" and "Gangs of Wasseypur". EIML released 23 films in the quarter: five Hindi films and 18 regional films. Of the five Hindi films released, two ("Housefull 2" and "Vicky Donor") were "super hit", two were "average" and one was a "flop". Though "Teri Meri Kahaani" had a below-par performance at the box office, but the company had already sold all the rights before the release. Hence the company would be able to show some profit on this too. Valuation: EIML has reported a strong revenue performance for the June 2012 quarter. Going ahead, with a strong slate of films and the television satellite deals that the company has signed for its upcoming releases, we believe the revenue performance would remain strong. In view of the current quarter's performance we have upgraded our revenue estimates but tweaked our margin expectation for FY2013 and FY2014. At the current market price of Rs174, the stock is attractively available at 8.7x and 7.1x FY2013 and FY2014 estimates. We maintain our Buy rating on the stock with a price target of Rs267.  Indian Hotels Company Cluster: Apple Green Recommendation: Buy Price target: Rs82 Current market price: Rs60 Operating performance in line with expectations Result highlights Operating performance in line: Indian Hotels Company Ltd (IHCL)'s stand-alone operating performance in Q1FY2013 is in line with our expectations with its revenues and operating profit exactly matching our estimates. This is the first quarter when the company reported its consolidated numbers. The consolidated revenues grew by 20.0% year on year (YoY) and the operating profit grew by 17.0% YoY. The losses at the adjusted profit after tax (PAT) level declined by almost 60% YoY at the consolidated level during the quarter. Stand-alone results snapshot: IHCL's net sales grew by 7.3% YoY to Rs396.5 crore (very much in line with our expectation of Rs395.9 crore). We believe the occupancies and the average room rate (ARR) were flat during the quarter due to it being a lean season and due to an uncertain macro environment. We had anticipated a flat occupancy ratio of 64% YoY and a 4% decline in the ARR during the quarter. The operating profit margin (OPM) declined by 170 basis points YoY to 16.7%. The operating profit declined by 2.7% YoY to Rs66.0 crore (again very much in line with our expectation of Rs66.4 crore). The lower than expected other income and the higher than expected interest cost led to a 51% year-on-year (Y-o-Y) decline in the adjusted PAT to Rs10.5 crore. The exceptional loss of Rs6.4 crore resulted in an 81.1% Y-o-Y decline in the PAT to Rs4.0 crore during the quarter. Consolidated results snapshot: IHCL's consolidated revenues grew by 19.8% YoY to Rs852.6 crore and the operating profit grew by 16.9% YoY to Rs101.5 crore. The strong revenue growth could be attributed to the marginal improvement in the performance of the domestic hotel portfolio and the benefits of consolidation of Piem Hotels. The OPM stood flat at 11.9% in Q1FY2013. The company's focus on reducing its debts helped it reduce the interest cost by 10.7% YoY to Rs43.8 crore. Hence, the losses at the adjusted PAT level declined by 57% YoY to Rs9.7 crore during the quarter. Outlook and valuation: The first quarter results of IHCL won't give us a clear indication of the current fiscal performance, as the first quarter of a fiscal is a lean period for the company's domestic business. Hence, we have not made in substantial change in our earnings estimates for FY2013 and FY2014. However, we have incorporated in our estimates the numbers announced in the company's annual report for FY2012. If the global macro environment improves considerably in the second half of the current fiscal year, we might see a much better operating performance from the company in H2FY2013. Hence, the trend of foreign tourist arrivals has to be keenly monitored in the coming months. At the current market price IHCL's stock trades at 23.4x its FY2014E earnings per share (EPS) of Rs2.6 and enterprise value/room of Rs0.65 crore. In view of the strong upside in the stock from the current level and the company's balance sheet, which is better than the balance sheet of its peers, we maintain our Buy recommendation on the stock with the price target of Rs82.  Gayatri Projects Cluster: Ugly Duckling Recommendation: Buy Price target: Rs300 Current market price: Rs99 Price target revised to Rs300 Result highlights Revenues disappoint; but margins expand: In Q1FY2013 the revenues of Gayatri Projects Ltd (GPL) were flat on a year-on-year (Y-o-Y) basis at Rs404 crore (lower than our expectation) on account of slower than expected execution of projects. The irrigation projects in Andhra Pradesh continue to move at a slow pace due to the uncertain political situation in the state while the road projects, mainly in Nagaland and Hyderabad, are adversely affected by heavy monsoon rains in the region. However, on the positive side, the operating profit margin (OPM) witnessed a huge expansion to 18.6% from 13.1% in Q1FY2012 and 18.1% in Q4FY2012 on the back of a lower construction cost. The construction cost was lower as a result of certain cost optimisation measures implemented by the company and the revenue booking from a few high-margin projects. The in-house power projects and the recently bagged road projects enjoy high margins which led to the margin expansion. Thus, the EBITDA grew by 43% year on year (YoY) in Q1FY2013. The management expects the margin to sustain at these levels. However, forex MTM provision hit reported PAT; adjusted PAT in line with expectation though: On a reported basis, GPL reported a profit after tax (PAT) of Rs8 crore, down 52% YoY (much below our expectation) due to (1) a foreign exchange (forex) translation loss of Rs19.4 crore on foreign currency convertible bonds (FCCBs) and (2) a 60% increase in the interest burden. However, the adjusted net profit grew by 26% YoY to Rs21 crore (in line with our expectation) led by a huge margin expansion. GPL raised additional debt of about Rs70 crore during the quarter to meet its working capital requirement.  Revenue estimates for FY2013 and FY2014 revised downwards: We have revised downwards our revenue estimates for FY2013 and FY2014 by 3% and 4% respectively to factor in the slowdown in the execution of the road projects. However, considering that in the past two quarters the OPM was maintained well above 18% and taking into account the management's guidance on the margin, we have improved our margin estimates for FY2013 and FY2014 by 150 basis points each. Conversely, an upward revision in the interest cost nullifies the strong margin expansion and leaves the bottom line unchanged. Maintain Buy with a price target of Rs300: The present order book of the company provides a strong revenue visibility. However, owing to a poor macro-economic environment, GPL's plan to dilute its stake in the road build-operate-transfer (BOT) asset holding company and the power asset holding company to private equity (PE) players is getting delayed due to unfair valuation of the businesses. Thus, GPL has dropped the plan to get a PE investor at the power holding company level and is instead looking to rope in a strategic investor for the NCC power project at the special purpose vehicle (SPV) level. Going ahead, the key thing to watch out will be the deferment of the FCCBs' redemption and the successful completion of the PE deal. We marginally reduce our price target from Rs310 to Rs300 to factor in the lower toll collection at its Western Uttar Pradesh BOT project and the slower execution of its Hyderabad-Karimnagar BOT project. At the current market price, the stock is trading at 2.3x and 1.8x its FY2013E and FY2014E diluted earnings respectively. In view of the dirt cheap valuation, we maintain our Buy recommendation on the stock. Pratibha Industries Cluster: Ugly Duckling Recommendation: Buy Price target: Rs65 Current market price: Rs48 Strong execution drives growth Result highlights Strong revenue growth of 55%: In Q1FY2013 the consolidated revenues of Pratibha Industries Ltd (PIL) grew by an impressive 55% year on year (YoY) and 8.2% quarter on quarter (QoQ) to Rs560 crore. The revenue growth was ahead of our expectation and largely supported by a robust growth of 66% in the revenues of the construction division for which the order inflow had been robust in FY2012. The construction division recorded a good growth led by strong execution across projects and the start of revenue recognition from some of the large orders bagged in FY2012. On the other hand, the manufacturing division, as expected, continued to disappoint with a 57% year-on-year (Y-o-Y) and quarter-on-quarter (Q-o-Q) decline in the revenues. Margins expand: The operating profit margin (OPM) expanded by 110 basis points YoY to 14.3%, which was above our estimate. A lower construction cost on account of the start of revenue recognition for a few projects led to the margin expansion. Thus, the EBITDA grew by 68% YoY. Segment-wise, the PBIT margin of the construction division increased to 12.3% from 11.7% in Q1FY2012 and 10% in Q4FY2012. The manufacturing segment too witnessed a margin expansion to 12.5% as against 9.3% in Q1FY2012 and a mere 4.5% in Q4FY2012.  But PAT growth arrested by forex loss, though higher than expected: The reported net profit for the quarter stood at Rs22.8 crore (above our expectation) showing a growth of 22%. In spite of the strong revenue growth and margin expansion the growth at the profit after tax (PAT) level was restricted for two reasons: (1) a foreign exchange (forex) loss of Rs12 crore during the quarter on the company's foreign loans; and (2) escalating interest and depreciation expenses, which rose by 62% and 50% YoY respectively. However, adjusting for the forex loss the adjusted PAT stood at Rs31.2 crore, showing a growth of 67% YoY. Revise estimates upward: Factoring in the robust order inflow of Q1FY2013 and the strong execution across projects, we have revised our revenue estimates upwards by 4% and 6% for FY2013 and FY2014 respectively. However, we have kept our OPM estimates unchanged and would take a call on the same post-H1FY2013. We have factored in the higher interest cost which gets nullified by the lower depreciation, which was down sequentially. Hence, the earnings estimates now stand revised upwards by 4% and 3% for FY2013 and FY2014 respectively.  Maintain Buy with a price target of Rs65: Going ahead, the key things to watch out will be the company's ability to: (1) bag large orders as it is bidding for more Delhi Metro Rail Corporation (DMRC) contracts; (2) keep a check on the debt levels as its debt/equity (D/E) ratio currently stands at 1.7x; and (3) form a structural manufacturing subsidiary.  We continue to like PIL given its presence in the high-margin water segment, well diversified order book and OPM, which is better than the industry's. In the current gloomy industry scenario, the strong order wins by PIL with a better margin reinforce our confidence in the company. The stock currently trades at 5.5x and 4.0x its FY2013E and FY2014E earnings respectively. Hence, we maintain our Buy recommendation on the stock with a price target of Rs65.   Piramal Healthcare Cluster: Apple Green Recommendation: Buy Price target: Rs600 Current market price: Rs529 Price target revised to Rs600 Result highlights Better than expected revenue; profit succumbs to higher fixed costs: During Q1FY2013, the net sales of Piramal Healthcare (now Piramal Enterprises, Piramal) grew by 69.4% year on year (YoY) to Rs747.2 crore, which is 5% better than our expectation of Rs713 crore. However, the operating profit margin (OPM) jumped to 14.9% during the quarter as compared with 1.6% in Q1FY2012 and was in line with our estimate. The net profit dropped sharply by 95.4% to Rs4.10 crore, mainly due to a sharp rise in the interest cost (up 719% YoY) and the depreciation cost (up 52.3% YoY). The profit before tax (PBT) dropped by 37% YoY to Rs77.3 crore. Moreover, there was an exceptional expenditure of Rs34.26 crore (including an additional expenditure of Rs33 crore on research and development [R&D]) during the quarter. This when adjusted with the marked-to-market (MTM) foreign exchange (forex) gain of Rs57.5 crore resulted in an adjusted net loss of Rs192 crore during the quarter. In Q1FY2013, the accounts of the newly acquired DRG were consolidated. Therefore, the quarter's results are not strictly comparable with the results of the corresponding quarter of the previous years. Better traction in pharma business: During the quarter, the pharmaceutical (pharma) solution business grew by 32.2% YoY to Rs385 crore on the back of the addition of new clients and an increased demand from the existing customers. The critical care business reported a 61.3% year-on-year (Y-o-Y) rise to Rs147 crore. The consumer care bushiness witnessed an impressive growth of 29% YoY to Rs72 crore during the quarter. We expect the pace of growth to continue in the subsequent quarters as well. Long-term outlook remains positive; price target upped by 16% and Buy maintained: The higher fixed costs arising out of the acquisition of DRG and the additional R&D expenses on the merger of the new chemical entity (NCE) unit of Piramal Life Science were the main culprits that pulled down the bottom line during the quarter. However, the long-term outlook remains intact, given better traction in the base business. We fine-tune our estimates and revise our price target upward by 16% to Rs600. We maintain our Buy rating on the stock.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

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