Investor's Eye
[November 08, 2012] | | |
| Summary of Contents
STOCK UPDATE Zydus Wellness
Cluster: Emerging Star
Recommendation: Hold
Price target: Rs509
Current market price: Rs460 Price target revised to Rs509 Result highlights -
Results ahead of expectation: Zydus Wellness' Q2FY2013 results have come ahead of our expectations largely on account of a better than expected operating performance during the quarter. The highlight of the quarter was the double-digit growth in the Sugarfree and Everyuth brands. The key initiatives undertaken by the company resulted in a strong improvement in the performance of some of its key brands. Nutralite continues to witness flat sales, as the company has shifted its focus from institutional business (close to 80% of Nutralite sales) to the branded business. The strong improvement in the profitability can be attributed to the improvement in the gross profit margin (GPM) and lower advertisement spending during the quarter. -
Results snapshot: In Q2FY2013 Zydus Wellness' net sales grew by 9% year on year (YoY; improved from 4% YoY in Q1FY2013) to Rs91.4 crore (largely in line with our expectation of Rs89.0 crore). The improvement in the growth can be attributed to the mid-teen growth in the Everyuth brand and a double-digit growth in the Sugarfree brand during the quarter. The GPM improved by 176 basis points YoY to 69.7% largely on account of an improved revenue mix and price increases undertaken in the portfolio. This along with a lower than anticipated advertisement spending led to a 491-basis-point year-on-year (Y-o-Y) increase in the operating margins (OPM) to 26.9% in Q2FY13. Thus, the operating profit grew by 33.3% YoY to Rs24.6 crore. This coupled with a higher other income and lower incidence of tax led to a 38.4% Y-o-Y increase in the reported profit after tax (PAT) to Rs24.1 crore. The incidence of tax was lower largely on account of a higher production from its tax-free facility in Sikkim. -
Performance of key brands: Sugarfree maintained its leadership in the healthy sugar substitute segment with a market share of 90%. The company's focus on enhancing the distribution reach and supporting brands with adequate brand building and promotional activites has helped the Sugarfree brand to grow in double digits (improved from the single-digit growth in Q1FY2013). The Everyuth brand (including peel off, scrub and face wash) grew in mid teens well supported by adequate media and promotional activities. On the Nutralite brand, the company has shifted its focus from the low-margin institutional business to the high-margin branding business. However, it will take some time for this shift to come through as a large chunk of the company's sales is coming from the institutional business. Actilife, which is being nationally launched, is performing as per the company's expectation. The company would focus on improving the distribution reach of the brand. -
Tax rate to stand around 22% in FY2013: In Q2FY2013, Zydus Wellness' tax rate stood at 12.3% largely on account of a higher production from the tax-free Sikkim facility (which produces the Everyuth and Sugarfree brands). However, the tax rate is expected to increase in Q3FY2013 and Q4FY2013 due to these being seasonally strong quarters for the Nutralite brand leading to a higher production from the Ahemdabad facility. Hence, overall the company expects the tax rate to stand around 22% at the end of the current fiscal. -
Cash on books improves: With negative working capital, Zydus Wellness has a strong cash generation ability. The cash on books in H1FY2013 stood at Rs169 crore as against Rs149 crore at the end of March 2012. The company can utilise this cash for organic or inorganic growth activites or reward investors with a decent dividend pay-out. -
Outlook and valuation: Zydus Wellness has seen an improvement in its revenue growth momentum on the back of the adequate measures undertaken in the past several quarters. However, the sustenance of the improved growth momentum has to be keenly monitored in the coming quarter. The benign key input prices would remove substantial pressure from the margins and help the company to focus more on improving the growth prospects of the existing brands. We expect Zydus Wellness' bottom line to grow at a compounded annual growth rate (CAGR) of 15% over FY2012-15.
We have revised our price target to Rs509 (valuing the stock at 21x its average FY2014-15). At the current the market price the stock trades 23.7x its FY2013E earnings per share (EPS) of Rs19.5 and 21x its FY2014E EPS of Rs22.1. We would be closely monitoring the performance of the company for a few quarters before changing our recommendation on the stock. Currently, we have a Hold recommendation on the stock. PTC India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs82
Current market price: Rs70 Results ahead of expectations on healthy tolling margin Result highlights -
Tolling projects propels volumes as well as margins: In Q2FY2013, PTC India (PTC)'s results were above our expectations led by better trading margins and higher volumes from the tolling agreements. The management indicated that receivable from Tamil Nadu's state electricity board (SEB) has started rolling. The company expects to recover the remaining outstanding receivable (Rs450 crore) completely by the end of FY2013. Also, the receivable cycle remains in a comfortable zone in case of various SEBs, except Uttar Pradesh (current outstanding Rs1,300 crore). However, post recent tariff hike, the management expects recovery from Uttar Pradesh's SEB to flow. Going forward, the higher tolling volume, and improved working capital position and debt-free status would enhance the earning quality. -
Top line witnessed growth and Better OPMs backed by tolling: The top line of the company registered a growth of 17% year on year (YoY) to Rs2,792.8 crore, which is marginally better than our estimate. The operating profit of PTC was reported at Rs57.1 crore (up 29% YoY), including above Rs30 crore from the tolling agreement. We learned from the management that the volume traded through tolling arrangement managed to notch the operating profit of Rs1.2/unit during Q2FY2013. The superior operating level performance percolated to the bottom line, which grew by 25% YoY to Rs44.6 crore in Q2FY2013. -
Receivables remains around Rs2,500 crore but payment recovery on track: We learned from the management that the current receivable stands at Rs2,500 crore, of which around Rs1,300 crore is recoverable from the Uttar Pradesh's SEB and Rs450 crore from the Tamil Nadu's SEB. While the payment from Tamil Nadu's SEB has regularised (expected to be fully recovered by FY2013 end), a recent power tariff hike taken in the state of Uttar Pradesh provides some visibility of recovery from Uttar Pradesh's SEB as well. The management also shared that payment from other states is regular. -
Maintain Buy and price target: The recent developments in power sector, especially steps towards SEB restructuring, coupled with a tariff revision taken by most of the states should ease out the receivable-related overhang on the company in the past. We foresee good volume traction from the tolling arrangement, ie 800MU from the Simhapuri power plant during H2FY2013 and further incremental volume from the upcoming 150MW (Meenakshi) project in Q2FY2014. On this back drop, we continue to remain positive on the stock and retain our earnings estimates for FY2013 and FY2014. We continue to rate the stock as Buy with a price target of Rs82, based on our sum-of-the-parts (SOTP) valuation. Kewal Kiran Clothing
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs737
Current market price: Rs699 Price target revised to Rs737 Result highlights -
Results snapshot: Kewal Kiran Clothing Ltd (KKCL)'s Q2FY2013 results are ahead of expectations largely on account of a better than expected operating performance during the quarter. However, the revenues declined by 9.4% year on year (YoY) to Rs91.0 crore and the profit after tax (PAT) declined by 4.2% YoY to Rs17.6 crore. The revenues declined largely on account of an 11.73% year-on-year (Y-o-Y) decline in the sales volume of the apparel segment during the quarter. The 6.32% Y-o-Y improvement in the sales realisation and the correction in the cotton prices led to a 391-basis-point Y-o-Y improvement in the gross profit margin (GPM) to 60.6% in Q2FY2013. However, the improvement in operating profit margins (OPMs) were restricted to 169 basis points on account of increased staff cost and selling and administrative expenses. The staff cost as a percentage of sales increased by 230 basis points YoY to 10.7% and the selling and administrative expenses as a percentage of sales increased by 260 basis points YoY to 13.5% largely on account of inflation. The reported PAT reduced by 4.2% YoY to Rs17.6 crore (ahead of our expectation of Rs11.4 crore). -
Upward revision in earnings estimates: We have revised upwards our earnings estimates for FY2013 and FY2014 by 11.2% and 2.0% respectively to factor in better than expected performance during the quarter. -
Outlook and valuation: We expect KKCL's performance to improve in H2FY2013 on account of the upcoming festive season. This will lead to the company reporting flat earnings in FY2013. However, the likely improvement in macro environment and the consequential improvement in consumer sentiments should help the company to post a strong performance in FY2014, as its brands enjoy good recognition in most of the markets.
At the current market price the stock trades 16.3x FY2013E earnings per share (EPS) of Rs42.8 and 13.8x FY2014E EPS of Rs50.8. We have revised our price target to Rs737 (valuing the stock at 14.5x FY2014E EPS of Rs50.8). In view of the strong balance sheet, strong cash generation ability and portfolio of strong brands, we maintain our positive bias for KKCL in the retail space. However, due to the limited upside from the current level, we maintain our Hold recommendation on the stock.
VIEWPOINT Tata Motors Product launches to drive growth Result highlights Domestic environment continues to be challenging
The stand-alone operations continued to witness demand pressures due to a sluggish macro environment. The situation was particularly severe in the medium and heavy commercial vehicle segment, which saw a double-digit volume decline. The passenger vehicle segment managed to grow, possibly due to a strike at car major Maruti Suzuki's Manesar plant. The capacity utilisation at 70% for the commercial vehicles and 50% for the passenger vehicles was at sub-optimal levels. Also, the increased competitive intensity both in the commercial and the passenger vehicle segments led to higher marketing expenses affecting the margins. Product upgrades to boost JLR volumes in the long term
JLR would focus on launching product refreshes and variants to strengthen the product portfolio. The company has been facing near-term challenges as it refreshes the product portfolio, affecting the sales of the respective models. The launch of the new Range Rover and Jaguar XF and XJ in new variants is affecting the volumes of the existing models. With the announcement of new launches, the volumes would pick-up. The recently launched new Range Rover has been well received and is expected to boost the volumes. Further, the launch of Jaguar XF and XJ in all-wheel drive and smaller powertrain variants is expected to bolster sales. Valuation
In our rough-cut estimates, we are factoring in a volume growth of close to 4% in the stand-alone operations and around 13% in JLR for the year, which would lead to an approximately 14% growth in the consolidated revenues. However, we estimate an approximately 100-basis-point drop in the OPMs due to higher staff cost and other expenses as the company increases investments. The lower margins accompanied by higher interest cost and depreciation charges are likely to lead to a 21% decline in PAT. The stock trades at 8.1x FY2013 earnings estimates. We do not have active coverage on the stock but have a positive view on the company due to its reasonable valuations and a potential revival in the volume growth in the next fiscal.
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