Investor's Eye
[October 30, 2012] | | |
| Summary of Contents
PULSE TRACK RBI Q2FY2013, Monetary policy review CRR slashed by 25 basis points; higher provisions for restructured loans to hurt banks
At the second quarter review of the FY2013 monetary policy the Reserve Bank of India (RBI) reduced the cash reserve ratio (CRR) by 25 basis points to 4.25% but kept the policy rates unchanged. Though the move is largely in line with the street's expectations, the commentary was quite cautious and the increase in provisioning requirements on standard restructured advances unnerved the equity markets.
Due to the sticky inflation and uncertainty in the commodity prices driven by global liquidity the central bank continues to hold the policy rates firm. According to the RBI, the inflation rate could moderate towards the beginning of Q4FY2013 which could trigger monetary easing. The apex bank also revised the FY2013 gross domestic product (GDP) growth estimate downwards to 5.8% and the inflation estimate upwards to 7.5% during the meet. In terms of outlook, we expect the RBI to reduce the CRR rate by another 50 basis points and also cut the key policy rates by the same measure in the remaining part of the fiscal.
STOCK UPDATE Maruti Suzuki India
Cluster: Apple Green
Recommendation: Hold
Price target: Rs1,401
Current market price: Rs1,395 Price target revised to Rs1,401 Result highlights -
Maruti Suzuki (Maruti)'s Q2FY2013 results saw the currency benefit of Rs81 crore on account of a royalty reversal worth Rs38 crore and a mark-to-market (MTM) commodity gain of Rs43 crore. -
After adjusting for currency benefits post-tax, the Q2FY2013 profit after tax (PAT) came 8.6% lower than our expectations. -
After adjusting for royalty reversal, the margins came in line. Outlook and valuation
In light of the management's commentary on demand and costs, the currency remains the single most important risk for the company. Adjusting Rs38 crore reflected in other expenses and pertaining to royalty reversals, normalised margins would have been 5.7% (10 basis points lower than our estimates). Overall, the company made a post-tax gain of ~Rs66 crore on account of the MTM reversals due to the appreciating rupee.
We are assuming 0.68 levels of yen-rupee for H2FY2013 and FY2014. We also see a favourable operating leverage for the company and see its margin expanding from 6.1% in Q2FY2013 to 7.6% in H2FY2013. The next major change in the margin trajectory is expected in H2FY2014 when the additional 2 lakh diesel engine line gets commissioned and would coincide with the launch of the compact sports utility vehicle, XA Alpha. Our H2FY2014 margin expectations are ~9.4% for the company. We are adjusting FY2014 EPS marginally lower for higher than expected staff costs. Our FY2013 EPS estimates are Rs59.6/share and Rs93.4/share respectively. We maintain Hold on the stock at the current levels. Grasim Industries
Cluster: Apple Green
Recommendation: Hold
Price target: Rs3,500
Current market price: Rs3,290 Price target revised to Rs3,500 Result highlights -
Consolidated earnings below estimates: In Q2FY2013, Grasim Industries (Grasim) posted a net profit of Rs619.6 crore on a consolidated basis, which is higher by 48.2% year on year (YoY) on account of an impressive revenue growth and margin expansion in its cement and chemical divisions. However, the net profit came lower than our estimates of Rs665 crore, mainly on account of the lower than expected other income (declined by 29.6% YoY) and higher than expected interest cost. -
Revenue growth driven by strong performance of cement and chemical divisions: The consolidated net sales of the company grew by 15.8% YoY to Rs6551.9 crore which, were supported by a strong revenue growth in the cement division (increased by 18.1%) and the chemicals division (increased by 17.6%). The revenues from its viscose staple fibre (VSF) division registered a revenue growth of just 3.4% YoY. The revenue growth in the cement division was largely supported by around 20% growth in the average blended realisation whereas, the volume (cement and clinker sales) has declined by 1.5%. In case of the chemical division, the revenue growth was supported by a higher realisation. -
Better realisation results in margin expansion: On the margin front, a better cement realisation and an expansion in the profitability in its chemical division have been able to offset the severe margin pressure in the company's VSF division. Hence, the overall operating profit margin (OPM) of the company has expanded by 440 basis points YoY to 20.7%. The profit before interest and tax (PBIT) margin of the cement division expanded by 660 basis points YoY (on account of an increase in the blended realisation by around 20% YoY). Further, the PBIT margin in the chemical division has also improved by 615 basis points YoY (due to an increase in the realisation by 14% YoY). In case of the VSF business, the PBIT margin has contracted by over 650 basis points YoY (due to an increase in the cost of production). Consequently, the overall operating profit of the company grew by 47% YoY to Rs1,355.1 crore (as compared with a 15.8% growth on the revenue front). However, on a sequential basis, the OPM of the company has contracted by 277 basis points. -
Expansion on track, balance sheet is strong to fund the capex: The expansion projects on VSF, chemicals and cement divisions are progressing well and are expected to come on stream as per schedule. The cement division is likely to add another 10.2 million tonne per annum (MTPA) of capacity by Q1FY2014, the VSF capacity is likely to be increased by 156,000 tonne by FY2013 and the chemical division is likely to increase another 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 0.33, which ensures a strong balance sheet and a comfortable scope for raising debt to fund the capital expenditure (capex). -
Earnings estimates upgraded for FY2013 and FY2014: We are upgrading our earnings estimates for FY2013 and FY2014 as we have already upgraded the earnings estimates of UltraTech Cement (UltraTech; which reflects the performance of the cement business). Consequently, the revised consolidated earnings per share (EPS) now stands at Rs312 and Rs343 for FY2013 and FY2014 respectively. -
Maintained Hold with a revised price target of Rs3,500: We continue to prefer Grasim as one of our top pick due to its diversified business model, strong balance sheet, comfortable D:E ratio (0.33x H1FY2013) and attractive valuation. We estimate the consolidated earnings of the company to grow at a compounded annual growth rate (CAGR) of 9% during FY2012-14. On the valuation front, we continue to value stock using sum-of-the-parts (SOTP) valuation methodology and arrive at a revised price target of Rs3,500. However, due to a limited upside from the current level, we maintain our Hold recommendation on the stock. At the current market price, the stock trades at a price/earnings (P/E) ratio of 9.7x discounting its FY2014 estimated EPS. Orbit Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs75
Current market price: Rs55 Better times ahead Result highlights -
Revenues in line with estimate; sharp margin improvement surprises positively: For Q2FY2013, Orbit Corporation (Orbit) has reported consolidated revenues of Rs101 crore in line with expectations. The revenues, down about 3% year on year (YoY), showed a 19% growth quarter on quarter (QoQ) mainly due to strong execution and pick-up in pre-sales in the previous quarters. The revenue bookings were largely from Orbit Terraces with a 67% share followed by Orbit Residency Park and Villa Orbit Annexe with a 14% share each. The operating profit margin (OPM) expanded significantly from 33.6% in Q2FY2012 and 40% in Q1FY2013 to about 50%, which was ahead of our estimate. The margin expanded because of a higher share of revenues coming from the high-margin Lower Parel and Napean Sea Road projects. -
Pick-up in pre-sales and demand environment: Continuing to gain momentum for three quarters, the pre-sales stood at Rs70.7 crore in Q2FY2013 (for an area of 36,041 square feet), which appears far better against the Q2FY2012 performance of Rs24.1 crore of pre-sales (for an area of 9,034 square feet) and the Q1FY2013 performance of Rs52.7 crore of pre-sales (for an area of 33,571 square feet). Going ahead, the pre-sales pipeline looks strong given that the regulatory environment is stabilising and approvals are coming in faster. The management has also indicated that sentiments are improving and Orbit has witnessed an uptick in enquiries for various projects. The management has reiterated its focus on faster monetisation of assets and improvement of execution capabilities. -
Exit from slow-moving projects to improve balance sheet health: Orbit is looking to exit two of its slow-moving projects, namely Orbit Grandeur, Santa Cruz (an SRA project) and Orbit Midtown, Lalbaugh. The management is hopeful of closing the deals sooner than later. This will help the company to execute the other projects without raising additional debt. Orbit currently has Rs878 crore of debt on the books. The company is expecting to garner about Rs350-400 crore from the two deals. -
Launch of Mandwa township and Napean Sea Road projects to improve growth outlook: Orbit has received most of the clearance for its mega township project at Mandwa (around 24.85 lakh square feet of saleable area) and is expected to launch the project formally by Q4FY2013. The company will also apply for the Special Township Act for the floor space index (FSI) of 1x, which if received would change the total saleable area drastically. Currently, the FSI on the project is ~0.5x. In addition, the company has a robust portfolio of high-margin ultra-premium projects around Napean Sea Road and is on schedule to launch the Kemps Corner project (spanning an area of 70,000 square feet) by Diwali this year. Orbit will also execute a project on behalf of the JSW group's promoter. It will operate the project on a cost plus model. -
Maintain Buy with a price target of Rs75: We have maintained our estimates for now but will closely follow the progress of approvals and new launches. With improvement in regulatory environment we expect faster clearances that would lead to better execution and launch of new projects. The company's exit from some of the slow-moving projects and improved cash collection are some of the other re-rating triggers for the stock. We maintain our Buy rating on Orbit with a price target of Rs75. At the current market price, the stock trades at 14.4x and 6.9x its FY2013E and FY2014E earnings respectively .
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| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | |
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