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STOCK UPDATE Glenmark Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs491
Current market price: Rs427 Price target revised to Rs491 Result highlights -
Better than expected operating performance; higher tax restricts the profit growth: In Q2FY2013 Glenmak Pharmaceuticals (Glenmark) reported a 19% year-on-year (Y-o-Y) increase in net sales to Rs1,255.6 crore, which is 9% higher than our estimate. The base business (excluding the out-licencing income) grew by 34% year on year (YoY) during the quarter. The core operating profit margin (OPM; excluding the out-licencing income) remained virtually flat at 20.4%. However, due to a higher base, the profit before tax (PBT) recorded a Y-o-Y fall of 16.6% to Rs207.4 crore. The effective tax outgo during the quarter stood at Rs47.7 crore as compared with credit of Rs23.8 crore in Q2FY2012; this restricted the profit growth. Adjusting for the out-licencing income, the extraordinary expenses and the marked-to-market (MTM) foreign exchange (forex) loss/gain, the core net profit declined marginally by 6% to Rs144.7 crore, which is in line with our estimate. However, the reported net profit of Rs156.8 crore is higher by 180.6% YoY, thanks to an extraordinary expense of Rs131.7 crore and a foreign exchange loss of Rs85 crore in Q2FY2012. -
Good performance all round; growth momentum to continue: The company has shown an impressive growth in most of the geographies and business verticals. Its branded formulation business (ie the specialty business) grew by 30.5% YoY to Rs670 crore, driven by India (up 35.5% YoY), Rest of the World (RoW, up 31.2% YoY) and Latin America (up 27% YoY). The generic formulation business recorded a 47.2% Y-o-Y rise in sales to Rs475 crore on the back of a 44% increase in the US market, a 110% expansion in Europe and a 30% jump in the Latin American business. We believe the growth momentum would continue through H2FY2013. -
We revise estimates and price target but maintain Buy recommendation: Taking our cues from the H1FY2013 results and interactions with the management, we have revised upwards our earnings estimates by 10% mainly to factor the expectations of margin expansion in FY2014. Our price target has been upgraded by 5% to Rs491, which includes Rs87 per share for the potential income from the research and development (R&D) pipeline. Mcleod Russel India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs356
Current market price: Rs302 Better outlook for H2FY2013; upgraded to Buy Result highlights -
Results in line with expectations: Mcleod Russel India Ltd (MRIL)'s Q2FY2013 stand-alone operating performance was in line with expectations. The performance was flattish on a year-on-year (Y-o-Y) basis due to a drop in tea production during the quarter. The income from operations (including the other operating income) grew by 5.4% year on year (YoY) to Rs449.5 crore (slightly better than our expectation of Rs437.6 crore). The sales volume was down by 5.0% YoY to about 25 million kg while the average realisation was up by 12.0% YoY to Rs176.4 per kg during the quarter. The operating profit margin (OPM) declined by 92 basis points to 54.3% largely on account of a drop in the sales volumes. The profit after tax (PAT) grew moderately by 2.7% YoY to Rs230.3 crore (in line with our expectation of Rs233.3 crore). -
Sales volume affected by crop loss: Excessive rainfall during the period of July to September 2012 affected the tea crop in north India. MRIL witnessed a crop loss of 8% YoY (or 3 million kg) to 33.8 million kg in Q2FY2013. This resulted in a 5% Y-o-Y decline in the sales volume to 24.9 million kg during the quarter. The domestic sales volume declined by 3.4% YoY to ~17 million kg while the export sales volume declined by 8.2% YoY to 7.8 million kg in Q2FY2013. The domestic realisation was up by 8.8% YoY to Rs167 per kg and the export realisation was up by 18.0% YoY to Rs197.4 per kg during the quarter. -
OPM affected by lower production: The stand-alone OPM was down 92 basis points YoY to 54.3% due to a drop in the sales volume and an increase in the operating cost (including a wage hike and an increase in the raw material consumption) during the quarter. However, the increase in the blended realisation (up 12.0% YoY) prevented any significant drop in the profitability. The wage hike (effective from January 1, 2012) resulted in an increase of Rs14 crore in the employee cost. On the other hand, the consumption of raw materials (bought leaf) increased by Rs26 crore YoY due to an increase in the purchase quantity and prices. -
Outlook and valuation: MRIL's tea production was affected by abnormal weather conditions in north India during key tea producing season (July-September). The weather has improved and the tea production was estimated to be better in October 2012. The management indicated in the conference call that the positive impact of the increase of ~Rs20 per kg in the blended realisation on the profitability would be seen in Q3 and Q4 of FY2013. Overall, we expect a flat bottom line at consolidated level in FY2013. In view of expectations of normal production in FY2014, we expect MRIL to post a strong bottom line growth in FY2014 on the back of an improvement in the OPM (due to higher blended realisation of the stand-alone entity and increased contribution from the African subsidiaries, which have much better margins than the consolidated entity).
At the current market price the stock trades at 11.1x its FY2013E (consolidated) earnings per share (EPS) of Rs27.1 and 8.5x its FY2014E EPS of Rs35.4. We have retained our price target of Rs356, valuing the stock at 10x its FY2014E earnings, which is in line with the last six years' average one-year forward multiple of 10x. In view of the expectations of a decent upside of 17% from the current level and of a better performance in FY2014, we have upgraded our recommendation on MRIL from Hold to Buy. Thermax
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs588
Current market price: Rs586 Price target revised to Rs588 Result highlights -
Results largely in line with expectations: Thermax' Q2FY2013 results were largely in line our expectations, where the company reported revenue sluggishness and margin pressure across the segments. The revenues have fallen by 9% year on year (YoY) led by a poor order inflow in the previous quarters, while the margins deteriorated owing to a negative operating leverage. While the group order inflow saw a marginal pick-up during the quarter, the order book fell by 24% YoY led by a poor order booking in the previous quarters. For the fourth quarter in a row, the company has continued to report losses (Rs3.7 crore) in its various subsidiaries. -
Group order book falls further while order inflow marginally improves: The company's order backlog at the group level stands muted at Rs4,984 crore (down 24% YoY) owing to a lack of orders in both the domestic and international markets. The order inflow witnessed a slight pick-up at Rs1,320 crore (up 3% YoY), led by a 49-MW engineering, procurement and construction (EPC) order and a couple of captive power orders. The stand-alone order inflow stands at Rs1,162 crore (down 2% YoY). The energy segment remained flat on a yearly basis at Rs841 crore, while the environment segment reported an inflow of Rs321 crore (down 7% YoY). Additionally, the company has orders worth ~Rs65 crore that are not moving as advances have not yet been received. While the management foresees opportunities in the below 15MW captive power segment in the coming quarters, the outlook for the big-ticket power orders remains muted. -
Estimates downgraded by 5%: In view of the poor order inflow outlook amid low industrial capital expenditure (capex) activities, we had downgraded our estimates for FY2013 and FY2014 by 5%. Overall, we are expecting the company to post a negative compounded annual growth rate of 2% in the profit over FY2012-14. In view of the persistent low ordering activity, the management indicated that they are open to aggressive bidding with single-digit margins in case of large orders, which may pose a threat on margin sustenance. The company hopes to match the H1FY2013 order inflow level in H2FY2013. But for that it will have to win one to two EPC order in each quarter. -
Price target revised to Rs588: The growth in the company's order book remains highly dependent on the momentum in the capex cycle of India, making the company highly susceptible to the swings in the investment sentiments. The investment in its power equipment venture has started to post losses (Rs24 crore in H1FY2013 at profit before tax [PBT] level) as the venture has so far failed to win any orders. This venture involving Rs850 crore of capex would remain a drag on the company's resources unless the company wins some major orders in the near term. The company is currently looking at few orders from NTPC for its power equipment business. Other loss-making subsidiaries, like the Chinese subsidiary, may also take longer time to make a positive turnaround than expected, putting pressure on the company's resources. At the current market price, the stock trades at 18.8x and 18x its FY2013 and FY2014 estimated earnings per share (EPS) respectively. We are revising our price target to Rs588 (18x on its FY2014 EPS). In view of the limited upside potential, we maintain our Hold rating on the stock. The key positive triggers in the stock remain the winning of big-ticket power equipment and export orders. Also, a pick-up in the capex activities would augur well for the company. IDBI Bank
Cluster: Cannonball
Recommendation: Hold
Price target: Rs120
Current market price: Rs93 Earnings growth in line but pressure on asset quality persists Result highlights -
IDBI Bank reported a profit of Rs483.5 crore for Q2FY2013 (down 6.3% year on year [YoY]) in line with our estimates. The sharp rise in provisions (up 54.3% YoY) and operating expenses (up 26.5% YoY) affected the growth in profits, though it was partially offset by a strong growth in the non-interest income (up 42.5% YoY). -
The net interest growth was also in line with our estimates as it grew 11.3% YoY. However, the net interest margins (NIMs) declined by 4 basis points quarter on quarter (QoQ) to 2.04%. -
The business growth remained muted as advances grew by 6.7% YoY and deposits grew by 3.2% YoY. The current account savings account (CASA) ratio improved sequentially (21.94% vs 18.07% in Q1FY2013), driven by increase in CASA deposits. -
The asset quality deteriorated as gross non-performing assets (NPAs) increased to 3.5% from 3.2% in Q1FY2013. The slippages were lower at Rs624 crore vs Rs1,043 crore in Q1FY2013, since the bank has not classified Deccan Chronicle exposure (~Rs200 crore) as a NPA in Q2FY2013. The bank also restructured Rs1,498 crore worth of advances taking the total restructured advances to 7.5% of the book. -
The non-interest income showed a jump of 42.5% YoY mainly contributed by a one-off fee income (~Rs125 crore) from the syndication activity. The cost to income inched up to 38.9% led by expenses on foreign exchange (forex) borrowings and increased pension, leave encashment outgo. Valuation
IDBI Bank's earnings growth was affected by a muted business growth and higher provisions. The asset quality is expected to remain under pressure due the bank's exposure to troubled segments (infrastructure, metals etc). The bank's tier I capital adequacy ratio (CAR) stands at 8.17% (including Q2FY2013 profits) and will require a capital infusion from the government. Going ahead, the relatively weaker deposit base and stress on asset quality are likely to restrict the business growth. We maintain Hold rating on the stock with a price target of Rs120. IRB Infrastructure Developers
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs175
Current market price: Rs122 Strong performance continues Result highlights -
Earnings above estimate, margins expand: For Q2FY2013, IRB Infrastructure Developers (IRB)'s consolidated revenues grew by 15% year on year (YoY) to Rs.845 crore (marginally below estimates) led by a strong execution in the construction segment and a consistent toll collection across projects. The operating profit margins (OPMs) have improved sharply to 45% as against 43.7% in Q2FY2012 (ahead of estimates). The improvement is mainly on account of margin expansion in the construction segment on account of a robust execution and stable raw material prices. Subsequently, EBITDA is up by 18% YoY. A strong margin expansion and a partial debt refinance (helps lower interest cost) have helped the company post a profit after tax (PAT) growth of 10% YoY to Rs121 crore (ahead of our estimate). The tax rate too came in lower than our estimate at 24% supporting profits. -
Strong performance by the construction segment: The construction vertical posted a growth of ~19% YoY in revenues to Rs598 crore led by a robust execution on Talegaon - Amravati, Jaipur - Deoli, Amritsar - Pathankot and Tumkur - Chitradurga projects. Further, the quarter also witnessed a stable/range bound movement in the input raw material prices as a result of which the margins expanded to 27.3% vis-a-vis 23% in Q2FY2012. -
BOT division continues its stable performance: The build operate transfer (BOT) division continues to put up a stable performance with revenues up 7% YoY to Rs248 crore. The growth was largely led by toll revision in Surat - Bharuch and Surat - Dahisar projects by 9% and 7.5% respectively during the quarter. However, at the operating level, the segment witnessed a marginal decline in the margins by about 40 basis points YoY to 87.8%. Overall, the traffic growth across the projects was satisfactory. -
Earnings estimates revised upwards: We have revised our earnings estimates upwards by 7.5% and 6% for FY2013 and FY2014 respectively to factor in an expansion in margins as witnessed in the past two quarters on account of a strong execution in the construction vertical and reduction in the interest cost due to partial refinance of debt. -
Maintain Buy with price target of Rs175: We continue to like IRB given its vast portfolio, rich experience, strong financials and the healthy cash flows from its operational toll-based projects, all of which provide comfort. However, given the recent string of news in connection to the investments related to Purti Group or service tax notice or the earlier case of one of the promoters being suspected in a murder case, the stock could underperform the broader market in the near term. However, from a long-term perspective, the company holds potential to deliver returns to the investors. Hence, we maintain our Buy recommendation on the stock with a price target of Rs175. At the current market price, the stock is trading at 7.6x and 8.5x its FY2013E and FY2014E earnings respectively. AGC Networks
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs470
Current market price: Rs397 Price target revised to Rs470 Result highlights Soft quarter, board recommends 1:1 bonus: The first half is usually a soft period for AGC Networks (AGC) with close to 40% of annual revenue recorded during the period and second half accounts for 60% of the annual revenues. -
For Q2FY2013, the net sales were up by 9.8% year on year (YoY) to Rs281.3 crore. The revenues growth could have been much better but procedural delays have affected the revenues billing and pushed it to the next quarter. The product/services revenue mix has improved in favour of services with the services contribution increasing to 38% from 28% in Q2FY2012 and 30% in Q1FY2013, in line with the company's target of increasing the share of services to about 60% in the coming years. -
The operating profit margin (OPM) remained stable on a quarter-on-quarter (Q-o-Q) basis at 6.6%, but it fell by 350 basis points YoY on account of the one-time cost related to the USA. The margins were adversely affected to the tune of 270 basis points on account of the costs to set up operations in the USA. The company commenced its USA operations in the quarter by making high-profile recruitments and building employee strength of 100 people by the end of the quarter. Going ahead, as the company achieves steady state operations in the newer geographies, like the USA and, Middle East and Africa, the margins are expected to improve gradually in the coming quarters. -
The interest cost increased significantly to Rs10.6 crore as against Rs1.71 crore in Q2FY2012, on account of an increase in the working capital debts to Rs344 crore up from Rs128.8 crore as of March 2012. The net profit fell by 28.5% YoY to Rs13.6 crore. Adjusting for the set-up costs (Rs7.43 crore), write-back of taxes (Rs4.74 crore), the adjusted net profit was down by 22.6% to Rs16.3 crore. -
The board of directors have recommended a bonus issue of equity shares in the ratio of 1:1 subject to approval of shareholders. Valuation: The performance for the quarter was lacklustre owing to seasonal weakness coupled with one-off expenses. However, we expect the company to report strong numbers in the second half. Going forward, the management's focused approach to increase the addressable markets' penetration and strong deal execution would lead to strong earnings momentum in the coming years. In the last three months, the stock has run-up substantially by almost 75% from our initiation price of Rs265. However an improved revenue mix, 35% earnings compounded annual growth rate (CAGR) over FY2012-14E and probable one-time large dividend payout favour a re-rating of the current valuation multiple. We have increased our price target to Rs470 and maintain our Buy rating on the stock. Bharat Electronics
Cluster: Apple Green
Recommendation: Hold
Price target: Rs1,349
Current market price: Rs1,230 Downgraded to Hold Result highlights -
Subdued performance continues; margin worry remains: Bharat Electronics Ltd (BEL) continues to report a year-on-year (Y-o-Y) fall in revenues and profits. However, on a quarter-on-quarter (Q-o-Q) basis, the performance showed some signs of improvement. For the quarter under review, the operating revenues fell by 2% year on year (YoY) against a 15.4% Y-o-Y drop reported in Q1FY2013. The company continued to report a loss at EBITDA level, though the loss dropped by 72.7% quarter on quarter (QoQ). Benefited by a high other income and lower effective tax rate, the Y-o-Y fall in net profit was restricted to 35.8%. -
Revenue performance subdued: The first quarter of FY2013 had seen a delay in the booking of revenues, as could be seen by an increase in the inventory pile-up at the end of the quarter. However, the same seems to have been arrested somewhat with the inventory levels dropping. For the quarter under review, the company reported a 2% fall in the operating revenues to Rs1,039.9 crore against a 15.4% Y-o-Y fall in Q1FY2013. The first half is generally lean for BEL as bulk of the booking is seen at the end of the third and fourth quarters. Though the contribution to the first half is lower at about 29% of the targeted revenues this time round against about 34-35% historically, achieving the targeted revenues of the company cannot be ruled out at the moment. -
Margin worry remains: The Q2FY2013 is the second quarter in a row when the company has reported a loss at EBITDA level. The loss was at Rs33.8 crore as against the loss Rs124 crore reported in Q1FY2013. The loss can be attributable to the higher raw material costs and the related higher other expenses. The raw material costs as a % of revenues were up at 66.5% from 58.3% in Q2FY2012 and the other expenses were up by 230 basis points to 10.6% as a % of revenues. The higher costs can be attributable to the higher share of the civilian orders and the costs related to the orders to be billed. The other income was stable at Rs168.1 crore (up 3.4%). The effective tax rate reduced to 22.4% against 28% in the corresponding quarter of the previous year. The resultant net profit was down by 35.8% YoY to Rs80.2 crore. -
Valuation and view: BEL has reported another quarter of subdued performance with the margin performance worrisome. However, looking at the order book and pipeline of deals on the anvil, we maintain our preference for BEL as proxy play on the defense spends is expected going ahead. We believe BEL would be the front runner in the defense capital expenditure spends to be done by the government of India. The order book at 4.5x FY2012 sales gives BEL a strong revenue visibility for at least the next two to three years. However, the timely delivery of orders and the margin performance remain the key risks, which have been deteriorating. In view of the Q2FY2013 performance, we have revised our margin expectation for FY2013 and FY2014. We have downgraded our earnings estimates for FY2013 and FY2014 by 15.7% and 8.3% respectively. Accordingly, we have revised our price target downwards to Rs1,349 and downgraded our rating to Hold due to limited upside. Pratibha Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs65
Current market price: Rs49 Earnings boosted by other income Result highlights -
Healthy revenue growth of 31% supported by better project execution: Consolidated revenues of Pratibha Industries Ltd (PIL) grew by an impressive 31.5% year on year (YoY) to Rs442 crore (in line with our expectation), largely supported by a robust growth of 71% in the infrastructure and construction divisions. The growth was led by a strong execution across the projects and the start of revenue recognition from some of the large orders bagged in FY2012. The manufacturing division on the other hand continued to disappoint (no surprise) with its performance, which witnessed an 88% year-on-year (Y-o-Y) fall in the revenues during the quarter. -
Margins expand by 20 basis points: The operating profit margin (OPM) expanded by 20 basis points YoY to 13.2% vs 13.0% in Q2FY12 (30 basis points lower than expectation). A lower construction cost on account of the start of revenue recognition in case of a few projects led to the margin expansion. However, a part of it was nullified on account of increased personnel and other expenses cost. Thus, the EBITDA grew by 34% YoY (in line with our expectation). -
Strong earnings growth supported by revenue growth and surge in other income: The reported net profit during the quarter stood at Rs21.3 crore (above our expectation), registering a growth of 31% on account of a revenue growth of 31% and an exceptionally high other income to the tune of Rs12.2 crore on account of foreign exchange gains during the quarter. The interest and depreciation costs have increased sharply during the quarter, which have restricted the profit after tax (PAT) growth to its full extent. -
Maintain Buy with a price target of Rs65: We have maintained our estimates for now. However, going ahead, we will be keenly watching for three essential things: (1) bagging of large orders; (2) keeping a check on the working capital and debt levels; and (3) progress on divestment of H-saw pipe division. We continue to like PIL given its presence in the high-margin water segment, well-diversified order book and better than industry OPM. Under 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 5.6x and 4.1x its FY2013E and FY2014E earnings respectively. Hence we maintain our Buy recommendation on the stock with a price target of Rs65.
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