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STOCK UPDATE Wipro
Cluster: Apple Green
Recommendation: Hold
Price target: Rs390
Current market price: Rs363 Hive off of non-core businesses to support valuations Result highlights -
Muted volume growth continues, pricing uptick salvages performance: Wipro continues to disappoint on the volume front. In Q2FY2013 the company's volume growth dropped sequentially to the lowest level in 12 quarters at 0.2% quarter on quarter (QoQ). The growth is lower than our expectation of a 1.5% sequential growth. However, a sequential pricing uptick (1.4% offshore and 1.9% onsite) saved the day on the revenue front, as the revenues of IT services business rose by 1.7% QoQ to $1,540.7 million (marginally lower than our estimate of $1,545 million), and met the mid level of the guidance range ($1,520-1,550 million). On a constant currency basis, the revenues of IT services business rose by 1.3% QoQ to $1,535 million. In rupee terms, revenues of IT services business grew 0.7% QoQ to Rs8,373.2 crore. -
Margin surprises positively helped by productivity improvement: The IT services business' earnings before interest and tax (EBIT) margin showed a marginal decline of 30 basis points QoQ to 20.7% (ahead of our expectations of 18.8%), driven largely by realisation improvement. -
Net other income jumped by 103.5% QoQ to Rs269.7 crore on account of a higher treasury income and lower marked-to-market (MTM) foreign exchange (forex) losses on the external currency borrowings (ECB). The treasury income rose by 20% QoQ to Rs323.4 crore and the forex loss was lower by 73% QoQ at Rs27.2 crore. -
The consolidated revenues for the quarter were up by 1.5% QoQ to Rs10,639.7 crore and the net profit was up by 1.9% QoQ to Rs1,610.6 crore (ahead of our expectations of Rs1,526 crore). -
Management sees deal pipeline improving but decision making remains uncertain: Wipro signed a few large deals towards the end of the quarter and expects to see a ramp-up in these deals in Q4FY2013. The management also foresees a decent deal pipeline but the decision making on the deals remains uncertain. The deals are coming in the traditional outsourcing business as well as the newer service lines of cloud and mobility. On client mining, the company has as of now made investments in the top 55 client accounts. Going ahead, the company plans to extend the investments to 134 client accounts. On the other hand, the company is moving out of the so-called tail accounts, which, it believes, are not strategic to the company's growth. The tail accounts have reduced from 87 to 45 and would go down to zero in the coming quarters. This strategy has led to loss of revenue to the tune of $8 million in the quarter. -
Outlook and valuation: Wipro's IT services business continues to struggle to catch up with the peers and has reported less than 1% sequential volume growth in the last three quarters. Worst still, we do not anticipate any dramatic improvement in the volume growth in the near future. Nevertheless, the company's move to hive off the non-core businesses provides opportunity to investors to earn a decent return by opting for the 7% redeemable preference shares in Wipro Enterprises (for details refer to the box). Thus, we believe the business demerger move would support the stock price in the medium term. However, we remain circumspect about any meaningful revival in Wipro's core IT services business in the medium term and continue to prefer Tata Consultancy Services (TCS) and HCL Technologies (HCL Tech). We increase our price target to Rs390 and maintain our Hold recommendation on the stock. Marico
Cluster: Apple Green
Recommendation: Hold
Price target: Rs217
Current market price: Rs204 Price target revised to Rs217 Result highlights -
Q2FY13 - moderation in organic volume growth: Marico posted a disappointing performance in Q2FY2013 with profit after tax (PAT) growing by 11% year on year (YoY), lower than our and the Street's expectation of close to 30% YoY growth for the quarter. The organic sales volume growth stood at 9% YoY in Q2FY2013, which is lower than the 16% volume growth in Q1FY2013.The lower canteen stores department (CSD) sales and deceleration in the rate of acquisition of new customer on its products led to moderation in volume growth during the quarter. The international business continues to disappoint with a constant currency growth of 3% YoY during the quarter. However, the highlight of the quarter was performance of Kaya Skin Care (Kaya) business, which registered a revenue growth of 38% YoY and achieved a profit before interest and tax of ~Rs6.0 crore -
Results snapshot: Marico's net sales grew by 19.4% YoY to Rs1,159.5 crore in Q2FY2013. The growth was driven by a 14% year-on-year (Y-o-Y) sales volume growth during the quarter. The organic volume growth (excluding contribution for Paras brand) stood at 9% YoY. The gross profit margin (GPM) improved significantly by 684 basis points YoY to 49.5% on account of a 33% Y-o-Y correction in the copra prices on a Y-o-Y basis and a low base of Q2FY2012. The large part of GPM savings were invested towards advertisement activities behind existing products and new products such as Saffola Oats, Saffola Muesli and Parachute Advansed Body Lotion. The advertisement spends as a percentage of its total sales increased by about 450 basis points YoY to 13.7% during the quarter. This along with 24% Y-o-Y growth in other expenses led to a 79-basis-point Y-o-Y improvement in the operating profit margin (OPM) to 13.0%. The operating profit grew by 27.2% YoY to Rs151.2 crore. However, the lower Y-o-Y other income and higher incidence of tax led to just 11.0% Y-o-Y growth in the PAT before minority interest to Rs88.9crore (lower than our expectation of Rs103.1crore). -
Outlook and valuation: We have fine-tuned our earning estimates to factor in the higher advertisement spends, higher interest expenses and incremental revenues from youth brands. We expect Marico's top line and bottom line to grow at a compounded annual growth rate (CAGR) of 19% and 29% over FY2012-14. However, any significant moderation in the sales volume growth of some of the key domestic segments and any substantial increase in the prices of the key inputs would act as a key risk to the earning estimates.
At the current market price, the stock trades at 33.2x its FY2013E earnings per share (EPS) of Rs6.2 and 25.0x its FY2014E EPS of Rs8.2. In view of the limited upside from the current level, we maintain our Hold recommendation on the stock with the revised price target of Rs217 (rolling it over average earnings of FY2014-15). GlaxoSmithKline Consumer Healthcare
Cluster: Evergreen
Recommendation: Buy
Price target: Rs3,450
Current market price: Rs3,079 Upgrade to Buy, price target revised to Rs3,450 Result highlights -
Operating performance came in line with expectation: In Q3CY2012, GlaxoSmithKline Consumer Healthcare (GSK Consumer)'s operating performance was largely in line with our expectation, with a ~15% year-on-year (Y-o-y) growth in revenues and the operating profit margins (OPMs) standing at 17%. Despite a slowdown in canteen store department sales, the company was able to achieve a volume growth of 6% year on year (YoY; ahead of 3% volume growth in Q2CY2012). However, excluding the impact of lower canteen sales department (CSD) sales, the volume growth in the domestic market would have been 7.5% for the quarter. The export sales continue to disappoint with 3% sales growth. -
Performance snapshot: GSK Consumer's net sales grew by 14.9% YoY to Rs827.5 crore (our expectation was of Rs832 crore) driven by a 6% volume growth and an approximately 10% YoY price-led growth in Q3CY2012. The malted food drinks (MFD) segment grew by 16.2% YoY (volume growth of 6%) with Horlicks growing by 16% YoY (volume growth of 4.5% YoY) and Boost growing by 22% YoY (volume growth of 8.5% YoY). The gross profit margins (GPMs) improved by 39 basis points YoY to 62.5%. The steady GPMs are largely on judicious price increases in the portfolio. The OPM improved by 59 basis points YoY to 17.0% and the operating profit grew by 19.0% YoY to Rs140.5 crore. The business auxiliary income grew by 23% YoY to Rs30.2 crore and the other income grew by 19.5% YoY to Rs27.6 crore during the quarter. This led to a strong 24.8% Y-o-Y growth in the reported profit after tax (PAT) to Rs128.6crore (slightly ahead of our expectation of Rs122.6 crore) during the quarter. -
Outlook and valuation: In view of the portfolio of strong brands and a thrust on enhancing the distribution reach, we believe GSK Consumers is well poised to achieve a mid-to-high teens topline growth in the coming years (with volume growth standing in range of 6-9%). If the key inputs' prices continue to remain stable in the coming quarters, we expect the company to post better profitability in CY2013 and CY2014. Overall, we expect GSK Consumer's top line and bottom line to grow at a CAGR of 16% and 18% over CY2011-14.
At the current market price, the stock is trading at 29.7x its CY2012E EPS of Rs103.5 and 25.7x its CY2013E EPS of Rs119.7. Our revised price target stands at Rs3,450, rolling it over to CY2014 earnings of Rs138.2. In view of a strong market positioning in the MFD segment and a robust cash pile of above Rs1,350 crore (could be utilised for growth initiatives or to reward investors with good dividend), we upgrade our rating on the stock from Hold to Buy. Union Bank of India
Cluster: Ugly Duckling
Recommendation: Reduce
Price target: Rs206
Current market price: Rs223 Price target revised to Rs206, downgrade to reduce Result highlights -
In Q2FY2013, Union Bank of India (Union Bank)'s net profit was marginally lower than our estimates as it grew by 57.2% year on year (YoY; 8.4% quarter on quarter [QoQ]) to Rs554.6 crore. The growth in profit was on account of lower provisions, which declined by 21.8% YoY (down 6.1% QoQ). -
The net interest income (NII) grew by 11.4% YoY (1.6% QoQ) in line with our estimates. However, the net interest margins (NIMs) were stable at 3.02% in Q2FY2013 as the drop in yield was offset by a similar decline in the cost of funds. -
The business growth was steady as advances grew by 19.4% YoY (- 0.6% QoQ), while the deposits grew 15.6% YoY. The current account savings account (CASA) stood at 30.5% as against 30.9% in the previous quarter. -
During Q2FY2013, the asset quality improved as gross and net non-performing assets (NPAs) declined led by lower slippages and improved recoveries. However, the bank restructured Rs839 crore of advances in Q2FY2013 taking the restructured advances book to 8.3% of total advances. -
The non-interest income grew by a healthy at 11.1% QoQ on account of a strong growth in the fee income, which grew by 19% QoQ. The treasury profits also grew 36% QoQ but foreign (forex) income declined significantly on a quarter-on-quarter (Q-o-Q) basis. -
Valuation and outlook: In Q2FY2013, Union Bank's results were stable with some improvement in asset quality on a sequential basis. Further, the asset quality is likely to be under pressure with rise in restructured loans and exposure to troubled sectors. We expect the return ratios to lag as compared with its peers, though the valuations seem unreasonable in view of the asset quality concerns. We have revised our target price to Rs206 (0.85x FY14 adjusted book value). We downgrade the recommendation to reduce. V-Guard Industries
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs451
Current market price: Rs430 Growth on track, price target revised to Rs451 Result highlights -
Top line growth led by non-south region and products like digital UPS, pumps and fans: In Q2FY2013, V-Guard Industries (V-Guard) continued to a post stellar performance with revenues growing by 49% year on year (YoY) to Rs312 crore (10% above expectations). This was driven by a robust growth in the sales of digital uninterrupted power supply (UPS; up 255% YoY), fans (up 55% YoY) and pumps (54% YoY). Further, the non-south region, which accounts for 23% of the company's sales, demonstrated a robust growth of 67% in Q2FY2013. -
Margin under slight pressure: The operating profit margin (OPM) for the quarter came in at 9.6%, slightly lower than our expectation of 10%, on account of input cost pressure. The raw material cost as a percentage of sales increased to 73.8% from ~71% it maintained earlier, mainly led by an increase in the purchase of traded goods. However, the margins are not comparable with a 7.1% margin recorded in Q2FY2012 as it was abnormally low on account of discounts and incentives offered to increase the then subdued demand. The selling and distribution expenses came much lower at 4.2% of sales this quarter (vs 7-9% in the previous year). Overall, the operating profit nearly doubled to Rs30 crore from Rs15 crore reported in Q2FY2012. -
Net profit rose by 163% YoY: A lower increase in the interest and depreciation expenses coupled with a higher other income contributed towards the profit after tax (PAT) of Rs18 crore (up 163% YoY), which is 15% higher than our expectation. The tax rate remained low during the quarter at 24.8% because of the increased contribution from the company's new Kachipuram plant, which enjoys tax benefits. -
Estimates fine-tuned: The company has upgraded its revenue growth target for FY2013 to 35-40% YoY (from 30% growth guidance given earlier) and indicated an OPM of 9.5-10% for the same period. We have fine-tuned our earnings estimates for FY2013 and FY2014 after incorporating better revenue offtake in digital UPS segment. We are now expecting a compounded annual growth rate (CAGR) of 31% in the company's revenues and 38% in its earnings over FY2012-14. -
Maintain Hold: The company has continued to deliver results in line or ahead of its growth guidance. Hence, V-Guard remains our preferred pick on the Indian consumption boom theme. The company's foray into product segments like induction cookers and switchgears also holds promise. Amid tough competition, the company has been able to register a good growth in its distribution network, while the working capital cycle also improved. At the current level, the stock is trading at 17.1x and 13.4x its FY2013 and FY2014 expected earnings, which looks a bit stretched, and offer limited upside from the current level. Hence, we maintain our Hold rating on the stock with a price target of Rs451 (14x target multiple on its FY2014 earnings per share [EPS]). Eros International Media
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs267
Current market price: Rs168 Performance above expectation Result highlights Performance above expectation: For the second quarter of FY2013, Eros International Media Ltd (EIML) reported a strong performance in a seasonally weak quarter, which is much ahead of our and the Street's expectations. The outperformance was led by a higher catalogue revenues and partial pre-booking of film revenues from the next quarter. The revenues were up by 31.2% year on year (YoY) to Rs229.3 crore ahead of our expectation of Rs192.3 crore. The EBITDA margin was down by 530 basis points YoY to 18.4%, which is ahead of our expectation of 14.5%. The net profit was down by 4.8% YoY to Rs26.1 crore, which is much ahead of our expectation of Rs17.1 crore. -
The consolidated revenues grew by 31.2% YoY to Rs229.3 crore. The revenues of the Hindi film business (stand-alone) grew by 50.2% to Rs227.2 crore. The company released three Hindi films and 16 regional films, including Tamil. The Hindi film revenues were boosted by revenues from the films released in the quarter like "Cocktail" and "Shirin Farhad Ki Toh Nikal Padi" as well booking of television syndication revenues of deals signed in the quarter. The outperformance was mainly driven by booking of partial revenues of music rights and minimum guarantee for theatrical release from "English Vinglish" and "Maatraan" released in October 2012. -
The EBITDA margins were down 530 basis points YoY to 18.4% affected by the higher film acquisition/production costs coupled with loss in subsidiary (Ayngaran International) to the tune of Rs 6.9 crore -
The effective tax rate increased to 38.4% from 28.6% in the corresponding quarter of the previous year, mainly due to the timing differences of tax incidence. The management expects the tax rate to normalise in the coming quarters. -
On the account of lower margins and higher tax rate, the net profit fell by 4.8% to Rs26.1 crore. However, it is still much ahead of our and the Street's expectations. -
Valuation: EIML continues to see strong revenues visibility (notwithstanding quarterly volatility) owing to impressive slate of films and healthier monetisation capabilities through the satellite rights, which lend support to improve the margins in the coming years. On the other hand, compulsory digitalisation by the end of 2014 would act as a further catalyst for demand of films amongst the broadcasters, which would help in getting better prices for the satellite rights in the coming years. EIML, with a films catalogue of more than 1,100 films, will be a key beneficiary. We continue to maintain our preference for EIML as the best player in the entertainment space. At the current market price of Rs168, the stock is attractively available at 8.8x and 7.2x FY2013 and FY2014 earnings estimates. We maintain our Buy rating on the stock with a price target of Rs267. Dishman Pharmaceuticals & Chemicals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs135
Current market price: Rs96 Strong traction continues Result highlights -
Unsold stock influences operating results; expect stronger traction ahead: In Q2FY2013, Dishman Pharmaceuticals &Chemicals (Dishman) reported a moderate 7.4% year-on-year (Y-o-Y) rise in the net sales to Rs289.3 crore, which is 11% lower than our estimates. However, if we consider the unsold stock (increase in stock-in-trade by Rs59.9 crore in), the revenues would have been much higher. Such increase in the stock in trade also helped operating profit margin (OPM) to surge by 963 basis points year on year (YoY) to 20.1%. However, OPM was also benefited from the cost optimisation at Carbogen Amcis and Dishman Netherlands. This led the net profit turning around to Rs26.6 crore as compared with a net loss of Rs6.3 crore in Q2FY2012. However, adjusted for foreign exchange gains of Rs11.2 crore, adjusted net profit is worked out at Rs15.4 crore. We expect stronger traction in H2FY2013, as the unsold stock would be realised by Carbogen Amcis and the newly started facilities would give better contribution. -
Focus on de-risking the business: Although the products pipeline for the contract research and manufacturing services (CRAMs) business is pretty strong, the revenues have not been consistent due to irregular offtake by client companies. To de-risk this scenario, the company is focusing on new revenue streams from the commercialisation of generic active pharmaceutical ingredient (API). This will give a consistency in the revenue stream for the company. The company is currently working on 20 APIs, part of which will be filed as drug master files with US Food and Drug Administration. The sizeable revenues are expected from this business in FY2014 and FY2015, which will supplement the growth from the CRAMs business. -
We maintain our estimates, price target and recommendation: Although H1FY2013 profits constitute nearly 62% of our annual estimates for FY2013, we prefer to maintain our estimates intact given time uncertainty in CRAMs business. The stock is currently trading at 5.6x FY2014E earnings per share (EPS). We maintain our Buy rating on the stock with a price target of Rs135 (8x FY2014E earnings). Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs179
Current market price: Rs129 Higher input cost erodes margin Result highlights -
Revenue in line with expectation; margin disappoint: The revenues of Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) were up by 20.1% year on year (YoY), which was in line with our expectation. DFPCL reported total revenues of Q2FY2013 to Rs693.4 crore. The revenues were mainly driven by higher volume in the fertiliser segment. Growth in fertiliser segment was led by a higher volume (both production and traded) growth and an increase in realisation. The operating profit margin (OPM) stood at 11.6%, which was lower by 540 basis points on a year-on-year (Y-o-Y) basis (our estimate was 17.0%), on account of a higher input cost (ammonia, major raw material), unexpected plant shut down of isopropyl alcohol (IPA) for 20 days and zero production of methanol during the quarter due to higher gas price. -
Margin pressure along with high depreciation led to profit decline: During the Q2FY2013, the RPAT for the company declined by 24.2% YoY to Rs40.6 crore, which was much lower than ours and the Street's expectation. The margin pressure along with higher depreciation charges led to a decline of profit during the quarter as compared with the same period of last year. During the quarter, depreciation has increase by 25.6% to Rs25 crore due to the capitalisation of the new technical ammonium nitrate (TAN) plant. During the quarter, the tax rate stood at 25.5%, which was in line with our expectation. -
Favourable demand environment going ahead for chemical and fertiliser segments: The demand in the chemical segment will remain firm despite a slow down in the mining activities. In the chemical segment, the company has started to focus on export market, which will drive the incremental volumes in TAN (16% of the total revenue in Q2FY2013). In the fertiliser segment, the demand for the manufactured and traded fertiliser will remain robust because of a good start to the rabi season. The overall volumes in manufactured chemicals saw a decline of 24% during the quarter inspite of a robust demand, mainly on account of a lower production of IPA (unexpected IPA plant shut down for 20 days) and shut down of methanol plant due to high spot gas price. In the fertiliser segment, the volume has seen a sharp increase of 20% due to revival in the monsoon season in later part of the quarter. -
Outlook and valuation: Though the profits of DFPCL were marginally subdued on account of margin pressure due to increase in the price of ammonia and shut down of the IPA plant. We have marginally revised our revenue estimates upward, mainly to factor in better volume growth in the fertiliser and chemical segments. However, we have also factored in the high price of key inputs in the chemical segment (ammonia and propylene), thus lowering our margin expectation. We continue to prefer DFCL and maintain our "Buy" rating with a price target of Rs179. At the current market price of Rs129, the stock trades at a very attractive valuation of 5.3 and 3.9x its FY2013E and FY2014E earnings respectively.
SECTOR UPDATE Insurance APE growth continues to slow down -
The growth in the annual premium equivalent (APE) of the life insurance industry continues to slow down. It declined by 18.7% year on year (YoY) in September 2012, the third consecutive month of slowing growth. The slowdown was mainly contributed by Life Insurance Corporation of India (LIC), which showed a decline of 13.4%, 26.5% and 19.% in the months of July, August and September respectively. The private players posted a decline of 18.3% YoY in September. On a year-till-date (YTD) basis (April-September 2012), the private players fared better than LIC as these fell by merely 0.4% YoY as compared with the 10.9% year-on-year (Y-o-Y) decline seen by LIC. The industry's APE decline by 7.5% on a YTD basis. The YTD growth in the private industry was led by players like ICICI Prudential Life (ICICI Prudential; 14.4%) and Bajaj Allianz (15.1%). -
On a month-on-month (M-o-M) basis, the APE numbers for the industry declined by 14.1% led by a 22.4% fall in the APE of LIC. However, the private players posted a growth of 1.1% month on month (MoM). On an M-o-M basis, 16 out of 22 players posted an increase in the APE, with Max Life Insurance and Bajaj Allianz posting a growth of 28.2% and 14.7% respectively. -
The market share of the private players improved by about 250 basis points to 34.9% (LIC, 65.1%) in the April-September 2012 period compared with 32.4% in the corresponding period of the previous year. During the period under review, companies like Tata AIA Life Insurance (2.3 vs 4.4%), Max Life Insurance (7.6% vs 8.0%) and Reliance Life Insurance (5.9%vs 6.3%) showed a decline in their market share. Moreover, ICICI Prudential turned out to be a major gainer as its market share improved by about 260 basis points to 20.1%. -
The APE growth for the industry has been affected by the regulatory overhaul and the uncertainty with regard the new regulations. However, the government is likely to take several measures to boost the insurance sector, which includes faster approval of products, tax breaks, easing of investment norms, easier know-your-customer (KYC) norms etc. Therefore, the growth in the APE is likely to pick up in the second half of FY2013.
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