Investor's Eye
[October 29, 2012] | | |
| Summary of Contents
STOCK UPDATE Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Hold
Price target: Rs250
Current market price: Rs227 Dismal results, order position worsens Result highlights -
Results marginally below expectation, while subdued orders inflow majorly disappoints: The Q2FY2013 results of Bharat Heavy Electricals Ltd (BHEL) were marginally below our expectation mainly led by a fall in the other income. It may be noted here that our net profit estimate at Rs1,296 crore was sharply below the Street's expectation of Rs1,446 crore. The containment of the raw material costs and a change in the policy of computation of leave encashment (which has increased the profit before tax by Rs166 crore) aided better than expected operating profit margins (OPMs). The order inflow also continued to disappoint as the derived order inflow is coming at a mere Rs349 crore. During the quarter, the company has downwardly adjusted the order book to factor in the currency movement for the orders having import content. This resulted in a drastic fall of about 24% year on year (YoY) and 8% on a sequential basis in its order backlog, which is the worst in at least the past 14 quarters. -
Estimates downgraded marginally: In view of the dismal implied order inflow of Rs5,939 crore (down by 65% YoY) in H1FY2013, we have further downgraded our order inflow assumption to Rs35,000 crore for FY2013. Overall, we are downgrading our estimates by 3% for FY2014, while keeping the estimates for FY2013 unchanged. We are estimating a negative compounded annual growth rate of 7% in both the top line and adjusted earnings over FY2012-14. A poor ordering environment in the power sector remains a major worry for BHEL. The book-to-bill ratio has fallen down to 2.4x this quarter, which is the lowest in the past 28 quarters, aggravating future growth concerns. -
Price target cut to Rs250: Poor financial position of the state electricity board has further elongated the company's working capital cycle to 51 days, with cash balance falling to Rs5,308 crore from Rs6,672 crore at the end of Q4FY2012. We also feel that there is a growing risk of liquidation damages being slapped by some of its clients who are blaming BHEL for delaying the project execution. On the positive side, some breakthrough seen in the non-thermal power businesses, likes nuclear power, railways, logistics, and transmission and distribution, would help BHEL to diversify away from the thermal power equipment business. At the current market price, the stock trades at 9.1x FY2014E earnings. We have revised our price target to Rs250 (10x FY2014E). In view of the limited potential, we maintain Hold rating on the stock. Bank of India
Cluster: Apple Green
Recommendation: Hold
Price target: Rs290
Current market price: Rs280 Price target revised to Rs290 Result highlights -
Bank of India (BoI) declared disappointing set of numbers for Q2FY2013 as the net profit declined by 38.5% year on year (YoY; down by 66.0% quarter on quarter [QoQ]). This was on account of a sharp increase in provisions (up by 34.5% YoY and 228.7% QoQ) to Rs1,552.1 crore. However, the tax provisions were negligible at Rs10 lakhs due to higher provisioning, which restrained a further decline in the net profit. -
The net interest income (NII) growth was in line with our expectations as it grew by 15.3% YoY (up by 7.5% QoQ) to Rs2,196 crore led by a 15 basis points sequential increase in the margins to 2.42%. The interest reversal on the non-performing assets (NPAs) affected the growth in NII. -
The business growth was subdued on a quarter-on-quarter (QoQ) basis as the advances fell by 3.0%, mainly contributed by decline in the retail and overseas advances. The deposits fell by 1.9% on a Q-o-Q basis as the volatile current account deposits fell by 17.2% QoQ. -
Asset quality of the bank deteriorated significantly contributed by a sharp rise in slippages (Rs2,733 crore in Q2FY2013), which shored up the gross and net NPAs to 3.42% and 2.04% in Q2FY2013 from 2.58% and 1.69% in Q1FY2013 respectively. The bank restructured advances to the tune of Rs810 crore during the quarter, taking the total restructured book to ~Rs17,500 crore. -
The non-interest income grew by mere 6.2% YoY as the fee income fell by 5.10% (down 11.6% QoQ) to Rs287.6 crore. However, the foreign exchange income, which increased 24.1% YoY to Rs184 crore, aided the growth in the non-interest income. Valuation and outlook: BoI's earnings growth and other operational parameters continue to remain volatile. The continued weakness in the asset quality and below par net interest margins (NIMs) remain a concern for the bank. We believe that BOI's return ratios are unlikely to improve significantly (ROE of 13.6% and ROA of 0.7%) and the bank would continue to underperform its peers. We revise the price target to Rs290 (0.9x FY2014 adjusted book value) and maintain Hold recommendation. GAIL India
Cluster: Apple Green
Recommendation: Hold
Price target: Rs410
Current market price: Rs359 Subsidy burden, subdued volume and tariff revision affected earnings Result highlights -
Gas trading drives sales, but tariff revision in LPG transmission hurts: During Q2FY2013, the net sales of GAIL grew by 17% year on year (YoY) and 3% quarter on quarter (QoQ), in line with our expectation. The year-on-year (Y-o-Y) sales growth was largely driven by a higher realisation in the natural gas (NG) trading business (up 33% YoY and 9% QoQ), though the business registered about 3% slippage in volume on both on Y-o-Y and sequential bases. Sequentially, the sales were supported by better volume in the petrochemical business in addition to the better realisation in the NG trading business.
On the negative side, the company derecognised Rs123 crore on account of a revision in the liquefied petroleum gas (LPG) pipeline tariff (which eroded the entire revenue for the quarter, having a quarterly run rate of Rs100-120 crore). Also, a decline in the realisation in the LPG and liquid hydrocarbon (LHC) segments adversely affected this segment's sales by 22% YoY and 28% QoQ. -
Margin declined with tariff revision, higher subsidy and lower trading margin: The subsidy burden jumped sharply by 39% YoY and 12% QoQ to Rs786 crore in Q2FY2013. This figure is also 13% higher than our estimate. Moreover, the derecognition of Rs123 crore on account of the revision in the LPG pipeline tariff resulted in an operating loss for the segment. The NG trading margin (profit before interest and tax [PBIT] margin) witnessed a contraction of 126 basis points YoY and 284 basis points QoQ to 2.5% during the quarter. The management has guided that the margin would be in the 2.5-3.0% range normally.
Consequently, the operating profit of GAIL declined by 16% YoY and 27% QoQ to Rs1,412 crore. However, with a higher other income (of about Rs100 crore incremental dividend earned from its joint ventures and subsidiaries) and a lower tax rate, the profit after tax (PAT) declined by 10% YoY and 13% QoQ to Rs985 crore, which is 10% lower than our estimate. -
Valuation: We have marginally revised our earnings estimates to Rs31.5 and Rs34 for FY2013 and FY2014 respectively. Though we retain our price target of Rs410, but we downgrade our rating on the stock from Buy to Hold due to a lack of near-term triggers and a flattish earnings outlook because of gas availability constraint. Nevertheless, both gas and petrochemical segments should witness volume growth in FY2015. Ipca Laboratories
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs504
Current market price: Rs452 Price target revised to Rs504; change ratings to Hold Result highlights -
Q2FY2013 results better than expected; institutional business jacks up the growth: In Q2FY2013, the net sales of Ipca Laboratories (Ipca) jumped by 22.6% year on year (YoY) to Rs757.5 crore, mainly driven by the exports business, which surged by 31.5% YoY to Rs464.3 crore during the quarter. This is partly due to the currency benefits and increased offtake in the institutional business, which grew by 43% YoY to Rs129.5 crore during the quarter. The operating profit margin (OPM) declined by 290 basis points YoY (from a high base) to 21.8%. The net profit jumped by 61% YoY to Rs125.1 crore, mainly due to a 125% year-on-year (Y-o-Y) rise in the other income to Rs18.2 crore and foreign exchange (forex) gains of Rs6.4 crore (compared with forex loss of Rs27.2 crore) coupled with a extraordinary income of Rs4.69 crore. However, the adjusted net profit (adjusted for the forex gains and extraordinary income) increased moderately by 8.5% YoY to Rs114 crore, mainly due to a sharp rise in the effective tax rate by 473 basis points to 24.7%. The overall performance during the quarter has been ahead of our expectations. -
Growth momentum to continue but no fresh trigger: We expect the growth momentum to continue in the subsequent quarters at most front on account of the promotional branded business and institutional sales. The management has revised its revenues' guidance from Rs360 crore earlier to Rs370-380 crore for FY2013 from the institutional business. However, the management of the company does not expect new approval from its Indore facility before Q1FY2014, by U.S. Food and Drug Administration (USFDA). This will delay the ramp up in the US market. We believe the absence of trigger for the incremental growth and the poor performance of the active pharmaceutical ingredient (API) business would restrict the valuation of the stock in the mid-term. -
We revise up price target but change recommendation from Buy to Hold: Taking our cues from H1FY2013 results and interaction with the management, we fine-tune our estimates for FY2013 and FY2014. We revise our price target up by 5% to Rs504. However, due to a limited upside over the current market price of the stock, we change our recommendation from Buy to Hold. Torrent Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs760
Current market price: Rs664 Long-term growth elements remain intact Result highlights -
Weaker operating performance in Q2FY2013: Torrent Pharmaceuticals (Torrent) reported a moderate growth of 13.6% year on year (YoY) in its net sales to Rs747 crore in Q2FY2013, mainly due to temporary disruptions in sales in the Brazilian market and coupled with a slower offtake in the contract manufacturing business. The core operating profit margin (OPM) declined by 73 basis points YoY to 16.8%, mainly due to a provision of foreign exchange (forex) loss of Rs14 crore. However, the other operating income grew by 352% YoY to Rs30.1 crore, while the non-operating other income jumped by 190% YoY to Rs12 crore. As a result, the net profit jumped by 32% YoY to Rs107 crore, which is exactly in line with our expectations. -
Temporary disruptions affected Q2FY2013 performance; long-term outlook intact: The performance of Q2FY2013 was affected by three major factors: (1) strike at the state regulatory agency led to a halt in the new batch order and non-clearance from port in the Brazilian market during June 15 and August 15; (2) slowdown in some molecules in the Brazilian market; and (3) lower offtake in the contract manufacturing business, as client company lost some contracts. Although, the business has been normalised in the Brazilian market, the company expects only a part of lost sales to be recoverable in the subsequent quarters. However, as the company continues to focus on the new products filings and contract manufacturing is expected to see a better performance on resumption of supplies to the clients, we believe the long-term outlook will remain intact. -
We maintain our estimates and price target, and recommendations: The stock is currently trading at 10x FY2014E. We maintain our earning estimates and price target at Rs760, which implies 13x FY2014E earnings per share (EPS). We maintain Buy recommendation on the stock.
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