Investor's Eye
[November 01, 2012] | | |
| Summary of Contents
STOCK UPDATE Tata Global Beverages
Cluster: Apple Green
Recommendation: Hold
Price target: Rs169
Current market price: Rs160 Price target revised to Rs169 Result highlights -
Snapshot of consolidated results: In Q2FY2013 Tata Global Beverages Ltd (TGBL)'s consolidated revenues grew by 14.2% year on year (YoY) to Rs1,860.8 crore, largely in line with our expectation of Rs1,855.6 crore. Despite a surge in the raw tea prices, improved revenue mix and correction in the coffee prices aided the gross profit margin (GPM) to improve by 157 basis points YoY to 49.7%. But the company had enhanced advertisement spending in the key markets which led to just a 40-basis-point improvement in the operating profit margin (OPM) to 8.7% during the quarter. The advertisement spending as a percentage of sales increased by 140 basis points YoY to 17.9%. The operating profit grew by 19.2% YoY to Rs161.2 crore. This along with a lower interest cost (due to the restructuring of loans) and a lower incidence of tax led to a 56.3% year-on-year (Y-o-Y) growth in the adjusted profit after tax (PAT) before minority interest (MI) and share of profit from associates (SA) to Rs139.3 crore in Q2FY2013. -
Geographical performance: The Indian market registered a steady top line growth of 8% YoY driven by a mix of volume growth (of 4-5% YoY) and a price-led growth. However, the profitability of the business was affected by a surge in the raw tea prices. In UK the company maintained market leadership in Redbush/Decaff teas and number two position in the green tea market. The Australian business improved and turned profitable during the quarter. In Russia Grand Coffee registered a strong performance. TGBL increased its stake to 100% in Grand Coffee during the quarter. -
Earnings estimates fine-tuned: We have fine-tuned our earnings estimates to factor in the better than expected performance by Tata Coffee (consolidated) during the quarter. We expect TGBL's consolidated top line and bottom line to grow at compounded annual growth rate (CAGR) of 13.5% and 18% respectively over FY2012-14. -
Offers limited upside post-sharp re-rating; maintain Hold recommendation: The launch of Starbucks in India and TGBL's enhanced focus on transforming itself into a high-margin beverage player from a commoditised player have led to significant re-rating of its valuation multiples. TGBL trades at 20.8x FY2014 estimated earnings, which is close to 45% premium to its historic average multiple. Hence, in view of the limited upside from here, we maintain our Hold rating on the stock with a revised price target of Rs169. Orient Paper and Industries
Cluster: Vulture's Pick
Recommendation: Hold
Price target: Rs80
Current market price: Rs77 Margin pressure dent earnings; downgrading to Hold Result highlights -
Revenue in line with estimates, margin pressure dent earnings: In Q2FY2013, Orient Paper & Industries (Orient Paper) posted a net sale of Rs598.4 crore (up 18.1% year on year [YoY]), which is largely in line with our estimates. However, the company has disappointed on the margin front across all business division (cement, paper and electrical). The operating profit margin (OPM) contracted by 402 basis points to 7%, which declined the net profit by 20.3% YoY to Rs19.2 crore, which is below our and the Street's estimates. -
Strong volume growth in cement business drives overall revenues: The overall revenues of the company grew by 18.1% YoY to Rs598.4 crore, which is largely in line with our estimates. The top line growth was supported by the cement division, which posted a revenue growth of 21.3% YoY. The revenue growth of the cement division is driven by an increase in the volume by 19.4% YoY. The impressive volume growth of the company is supported by the stabilisation of its new capacity and better demand environment in the western market. The electrical division of the company has delivered a revenue growth of 20.8%, whereas revenues from the paper division remained muted. -
Margin pressure witnessed across all business division: The overall OPM of the company has contracted by 402 basis points YoY to 7%. The contraction in profitability is on account of a decrease in the earnings before interest and taxes (EBIT) margin of the cement and electrical divisions by over 260 basis points and 128 basis points YoY respectively. The sharp contraction in the cement division's margin is on account of lower than expected blended cement realisation (declined by 7.5% quarter on quarter [QoQ]) and purchase of imported coal at a higher price due to a shortage of coal in the domestic market. Further, the margin pressure in the electrical division is on account of a higher advertising spend on the newly launched home appliance products. In case of the paper division, the company has continued to post losses at the EBIT level to the tune of Rs25 crore. Consequently, the operating profit has decreased by 25.1% YoY to Rs41.7 crore (as compared with 18.1% growth witnessed in the revenue front). -
Demerger of its cement business: Orient Paper's cement business will be transferred to its newly formed subsidiary company Orient Cement. The demerger of its cement division will come into effect from April 2012. According to the management, the company is expected to get the order from the High Court for the proposed demerger of the cement division in a month's time. We believe the development is a positive move for company as it will unlock the value for the shareholder through direct exposure to a pure cement player. However, as per our interaction with the management of the company, the procedure will take around four months to get Orient Cement listed on bourses. -
Huge outstanding water tax, company applied for waiver as per agreement: As per the auditor's report, no provision against the water tax of Rs247.6 crore has been made by the company since its application for waiver thereof is under consideration by the state government of Madhya Pradesh. -
Downgrading earnings estimates for FY2013 and FY2014: We are downgrading our earnings estimates for FY2013 and FY2014 mainly to factor lower than expected cement realisation and higher than expected power and fuel cost. The company started procuring some proportion of coal through imports due to a shortage of coal in the domestic market. Consequently, our revised earnings per share (EPS) estimates now stand at Rs10 and Rs11.4 for FY2013 and FY2014 respectively. -
Downgrading to Hold due to limited upside: Given the surprising decline in the cement realisation in Q2FY2013, rising losses in the paper division and limited upside from the current level, we are downgrading our recommendation on the stock from Buy to Hold. On the valuation front, we maintain our price target of Rs80 based on the sum-of-the-parts (SOTP) valuation methodology. At the current market price (CMP), the stock trades at price/ earnings (PE) of 6.7x and enterprise value (EV)/EBIDTA of 4.2x discounting its FY2014 earnings estimates. Kalpataru Power Transmission
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs125
Current market price: Rs83 Sales growth momentum continued in Q2 Result highlights -
Sales growth momentum continued, in line with expectations: For Q2FY2013 Kalpataru Power & Transmission Ltd (KPTL; the stand-alone entity) has reported a net sales growth of 23% year on year (YoY) and 2% quarter on quarter (QoQ) to Rs715 crore, which is broadly in line with our estimate. Similarly, its subsidiary JMC Project has reported a sales growth of 42% YoY and 6.5% QoQ to Rs607 crore. The sales grew on the back of a healthy order book (above 2x FY2012 sales) of Rs11,300 crore (Rs6,100 crore for KPTL and Rs5,200 crore for JMC Project). -
Margin pressure remained in H1FY2013, but likely to ease in H2: KPTL (stand-alone) reported an operating profit margin (OPM) of 8.9% for Q2FY2013, that is a contraction of 326 basis points YoY and 191 basis points QoQ. Due to higher raw material and other expenses, the EBITDA declined by 10% YoY and 16% QoQ to Rs63.4 crore despite the sales growth. Further, higher interest, depreciation and tax charges jointly pushed the quarter's profit after tax (PAT) down by 23% YoY and 34% QoQ to Rs27 crore.
The management has shared that though the raw material prices have run up sharply but the same is not reflected fully in the benchmark index. Hence, the raw material cost pressure continued in H1FY2013. However, the management sees a better margin in H2FY2013 backed by better execution (execution usually picks up in the second half, after the monsoon season) ands meaningful order inflow. It hopes that the stand-alone entity would fetch an EBITDA margin of around 10% (9.8% in H1FY2013) in FY2013. -
JMC Project's margin to remain low, SSLL puts up a good show: JMC Project reported an OPM of 4.5% in Q2FY2013, in line with the Q1FY2013 OPM of ~5%. As shared by the management in the past, the company continues to face challenge to pass on the cost fully to the customer. The rising interest and depreciation costs have depressed the earnings and the management expects an EBITDA margin of 5-6% in FY2013. Going forward, the management expects the margin to improve with a better mix of order intake (it has been indicated that a large part of the fresh orders are on a variable cost basis).
Shree Subham Logistic Ltd (SSLL) showed a PAT growth of 30% YoY, a sales growth of 22% YoY and maintained its EBITDA margin at about 14%. The management expects to record a healthy growth in this business backed by incremental capacity. It expects an OPM of about 14% in the business. Moreover, the management shared that the company is looking for external equity funding in the venture which is a positive. -
Estimates fine-tuned, Buy retained: We have fine-tuned our earnings estimates by 5-7% for FY2013 and FY2014 to factor in the margin environment; consequently, we have revised downwards our price target marginally to Rs125 from Rs130. The stock is currently trading at 6x its FY2014E earnings and about 5x its FY2014E EBITDA. In view of the expectation of a margin improvement in H2FY2013 and the management's renewed focus on improving the return on equity (RoE), we retain our Buy rating with a revised price target of Rs125.
SECTOR UPDATE Automobiles Festive crackers on Volume uptick due to low base of corresponding period last year
The automotive volumes are not strictly comparable year on year (YoY) because October 2011 did not have the benefit of the festive season. The sales have picked up in October 2012 as the onset of festive season has spurred the demand. Automobile companies witnessed an uptick in the demand during the Navratri and Dusheera festivals, which boosted the volumes. Festive season to maintain demand in the near term
After increased growth in October 2012, the companies are banking on the festive season in November 2012 to maintain the volume growth. We expect sales to maintain momentum in the coming month due to the festival of Diwali. The month of November 2012 would have the benefit of a low base of the last year as the volumes had dropped after increased sales in the festive season. Maruti Suzuki and M&M can outperform
With the Manesar plant back to full production and a huge order backlog of diesel cars, Maruti Suzuki (Maruti)'s volumes would receive a boost. Also with the encouraging response to the new Alto 800, which has garnered 30,000 bookings, the petrol car sales would also revive. On the other hand, Mahindra and Mahindra (M&M) is most likely to capture the shift in consumer preference towards utility vehicles (UVs) from sedans and premium hatchbacks. With the launch of Quanto and the Rexton, M&M has captured the entire spectrum of the UVs. Also, the tractor sales would see an increase due to improved rabi crop prospects, thereby increasing volumes.
VIEWPOINT Bharat Forge External pressures testing forging strength Key points Automotive segment facing medium-term challenges
After moderation in the first quarter, the automotive segment reported a negative growth during Q2FY2013. Apart from the subdued domestic market, overseas sales were also affected. The European automobile industry continues to remain sluggish on a weak economic outlook. Apart from Europe, the USA and Chinese markets have also witnessed decline, with the truck market declining over 40% in both the countries. With the original equipment manufactures reducing production to clear inventory, the automotive segment is expected to remain subdued for the next two to three quarters. However recovery in the domestic market and the automotive emission norms slated for 2014 in Europe and the USA should trigger the demand going forward. Non-automotive growth moderates, likely to remain subdued over next two to three quarters
During the quarter, the non-automotive growth moderated to 3% from double digits earlier. In the domestic market, the limited government action on the policy front has lead to a decline in key industries such as power and mining. The domestic non-automotive business declined double digits in the quarter. While the non-automotive exports maintained strong momentum with a 30% growth in Q2FY2013, they are expected to moderate on account of a weaker economic outlook in the key markets of the USA and China. New product and customer additions to boost revenues in long term
BFL is targeting new product and customer additions to boost the growth. In the automotive segment, the company is targeting customers in the utility vehicle category to mitigate the slowdown in the medium and heavy commercial vehicle market. Also, in the non-automotive segment, the company is targeting new products in the marine, oil exploration and rig solutions to boost revenues. With the new business, the company aims to mitigate the slowdown and maintain the growth momentum. Valuation
We estimate the stand-alone earnings per share (EPS) for FY2013 and FY2014 at Rs19.4 and Rs24.2 per share respectively. With marginal capital expenditure guidance for FY2013, we expect significant strengthening of the balance sheet and subsequent improvement in the return ratios. BFL can trade at 13x FY2014 earnings and the valuations could also incorporate the book value of its investments in subsidiaries and joint ventures estimated at Rs22 a share. We have a positive view on the stock.
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