| Summary of Contents STOCK UPDATE Reliance Industries
Recommendation: Buy
Price target: Rs1,010
Current market price: Rs920 Price target revised to Rs1,010 Result highlights -
Impressive performance; earnings much ahead of estimates: Reliance Industries Ltd (RIL) delivered an impressive performance in Q3FY2013 posting an adjusted net profit of Rs5,502 crore (a increase of 23.9% year on year [YoY]), which is much ahead of our as well as the Street's estimates. The impressive performance was supported by a better than expected gross refining margin (GRM) of $9.6 per barrel (as against the Street's expectation of $8.5-8.7 per barrel) and margin expansion of 90 basis points quarter on quarter (QoQ) in the petrochemical (petchem) business. Further, a lower than expected effective tax rate and a strong other income also added to the earnings growth. RIL reported a revenue growth of 10.3% YoY to Rs93,886 crore, which was equally contributed by a healthy revenue growth in the refining business (a revenue growth of 12.9% YoY) and the petchem business (a revenue growth of 11.5% YoY). However, the exploration and production (E&P) division continues to post a decline in revenues-in the third quarter the division's revenues fell by 32.2% on account of a falling output from the Krishna-Godavari (KG)-D6 basin. -
Refining margin came as positive surprise; supported by better product cracks: During the quarter the refining plant of the company achieved 112% of utilisation rate and refined 17.5 million tonne of crude oil against 17.2 million tonne in Q3FY2012. The GRM for Q3FY2013 improved to $9.6 per barrel (much better than estimated) as compared with $6.8/barrel in Q3FY2012 and $9.5 per barrel in Q2FY2013. The improvement in the GRM was largely on account of an expansion in the gas oil and gasoline cracks and the widening of the Arab light-heavy crude spread. The refining segment's revenues grew by 12.9% YoY to Rs86,641 crore. Further, on account of the expansion in the GRM, the earnings before interest and tax (EBIT) from the division came at Rs3,615 crore as against Rs1,685 crore in the corresponding quarter of the previous year. -
Petchem margin better than Street's expectation: During the quarter the revenues from the petchem division grew by 11.5% YoY but remained flat QoQ. On the margin front, the division displayed a sequential improvement of 90 basis points in the EBIT margin to 8.8%, which is better than the Street's estimate. However, on a year-on-year (Y-o-Y) basis the margin is still on the lower side, mainly on account of a reduction in the polyester deltas except for PX and MEG. Consequently, the EBIT from the division declined by 10.2% YoY to Rs1,740 crore. However, on a sequential basis the EBIT from the division improved by 11.3%. -
Gas output at KG-D6 basin continues to fall: During Q3FY2013 the gas production from the KG-D6 basin dropped both YoY and QoQ. The average daily production rate dropped to 28mmscmd as compared with 41mmscmd in Q3FY2012 and 29mmscmd in Q2FY2013. In case of Panna-Mukta-Tapti (PMT) oilfield, the oil production during the quarter declined by 18.5% due to a natural decline in the reserve. The average crude oil price realisation for M9FY2013 was $103 per barrel for the KG-D6 basin and $111 per barrel for the PMT oilfield. -
Marginally upgraded FY2013 and FY2014 earnings estimates; introduced FY2015 estimate: We have marginally upgraded our earnings estimates for FY2013 and FY2014 mainly to incorporate the better than expected GRM. Consequently, our revised earnings per share (EPS) estimates for FY2013 and Fy2014 now stand at Rs62.8 and Rs65.8 respectively. We have also introduced our earnings estimate for FY2015 in this note--Rs72.8. -
Maintain Buy with revised price target of Rs1,010: The operational matrices of both the key businesses of refining and petchems showing signs of improvement. This and the likely revision in the price of gas from March 2014 are providing visibility of future earnings growth. However, the overhang in terms of a falling output from the KG-D6 basin is a key risk to the company's performance. Going ahead, any development in terms of approvals to develop the KG-D6 block further could be positive for RIL. Hence, we maintain our Buy recommendation on the stock with a revised price target of Rs1,010 as we roll forward our multiple to FY2015 estimate. Currently, the RIL stock is trading at a price/earnings (PE) ratio of 14.6x and 14.1x FY2013 and FY2014 estimated earnings respectively. Housing Development Finance Corporation
Recommendation: Hold
Price target: Rs882
Current market price: Rs815 Traction in individual loans continues Result highlights -
In Q3FY2013, Housing Development Finance Corporation (HDFC)'s results were largely in line with our estimates as its net profit grew by 16.2% year on year (YoY; down 1.0% sequentially) to Rs1,140.1 crore driven by a strong growth in the operating profit (up 18% YoY). -
The net interest income (NII) growth was ahead of our estimate as it increased by 24.5% YoY (up 11.0% quarter on quarter [QoQ]) to Rs1,538.9 crore. This was led by a strong growth in the loans and a marginal increase in interest spreads (2.28% vs 2.27% in Q2FY2013). -
During Q3FY2013, the overall loans expanded by a strong 21.7% YoY (by 26%, excluding the loans sold). The individual loans were up 25% YoY (up 31%, excluding the loans sold), thereby leading to an increase in the proportion of individual loans to 65.4%. -
The loan approvals saw a growth of 18 % YoY whereas the disbursements grew by 19% (21% YoY in Q2FY13) during the quarter. The borrowings increased marginally (1.5% YoY) as the company redeemed part of zero coupon bonds from warrant proceeds. -
The asset quality improved as gross non-performing asset (GNPA) was at 0.75% vs 0.82% in Q2FY2012. The outstanding provisions including the standard asset provisions on the balance sheet stood at Rs1, 783 crore as against the regulatory requirement of Rs1,492crore. Valuation: HDFC continues to grow its advances at a healthy rate despite a rising competition (in mortgages) and weak credit demand. The proportion of retail loans continued to expand over the past three quarters. Going ahead, though the reduction in rates by the bank will ease funding costs, the rising competition could impact the spreads. We maintain our sum-of-the-parts (SOTP)-based price target of Rs882 and hold rating on the stock. UltraTech Cement
Recommendation: Hold
Price target: Rs2,100
Current market price: Rs1,925 Earnings ahead of estimates Result highlights -
Revenues in line with estimate; lower power & fuel cost and better realisation boost earnings: In Q3FY2013 UltraTech Cement (UltraTech) posted a net profit of Rs600.8 crore (down 2.6% year on year [YoY]), which is ahead of our as well as the Street's estimate on account of a better than expected operating profit margin (OPM; supported by a lower power and fuel [P&F] cost and better realisation) and a higher than expected other income. On the top line front, the revenues were in line with our estimate at Rs4,857.4 crore (up 6.4% YoY). -
Volume offtake flat; higher blended realisation drives revenue growth: The net revenues of the company grew by 6.4% YoY mainly supported by a 5.9% year-on-year (Y-o-Y) increase in the average blended realisation to Rs4,761 per tonne. On the volume front, the overall volume (including cement, clinker and white cement) sales grew by just 0.4% YoY to 10.2 million tonne. In FY2013 cement volume is expected to grow by around 3.3% and the average cement realisation is likely to be higher by around 10% compared with FY2012. -
Margin expanded despite cost pressure: On the cost front, the key cost elements continued their upward trend, eg freight charges increased by 11.8% on per tonne basis and other expenditure increased by 13.2% on per tonne basis which resulted in an increase in the overall cost of production by 5.8% YoY to Rs3,757 per tonne. However, a 5.9% Y-o-Y increase in the realisation and a 4.1% decline in the P&F cost on per tonne basis offset the impact of cost escalation. Hence, the overall OPM expanded by 14 basis points YoY to 21.1% (better than our estimated). On per tonne basis, the EBITDA improved to Rs1,004 in Q3FY2013 as compared with Rs941 per tonne in the corresponding quarter of the previous year. -
Maintain Hold with price target of Rs2,100: In the large-cap space we like UltraTech due to its diversified and pan-India presence as well as strong balance sheet. Further, the likely addition of 9.2-mtpa cement capacity by Q1FY2014 will provide volume growth in FY2014 and FY2015. However, the key risk remains a higher than expected pressure on cement prices and an increase in the freight cost due to the partial deregulation of diesel prices. Hence, we maintain our Hold recommendation on stock with a price target of Rs2,100. At the current market price the stock trades at a price/earnings (PE) ratio of 18.4x and 17.1x discounting its FY2013E and FY2014E earnings respectively. On EV/EBITDA basis, it trades at 10.5x FY2013E and 9.3x on FY2014E. IDBI Bank
Recommendation: Reduce
Price target: Rs105
Current market price: Rs112 Price target revised to Rs105 Result highlights -
IDBI Bank's Q3FY2013 results were below our estimate as net profit grew by 1.7% year on year (YoY; down 13.8% quarter on quarter [QoQ]) to Rs416.8 crore. The strong growth in the net interest income (NII) and fee income was offseted by a sharp rise in the provisions (up 136.9% YoY), leading to a marginal growth in profits. -
The net interest growth was above our estimate as it grew by 33.4% YoY (up 13.1% QoQ), as the net interest margin (NIM) expanded by 25 basis points sequentially (2.30% vs 2.05% in Q2FY2013). The surge in NIM was contributed by a 45-basis-point increase in the yield on assets (YoA; 10.82% in Q3FY2013) and a decline in the cost of funds (CoF). -
The business growth remained muted as advances grew by 9.4% YoY and deposits grew by 5.4% YoY. The current account savings account (CASA) ratio improved sequentially (22.3% vs 21.9% in Q2FY2013), driven by an increase in the current account balances. -
The bank's asset quality continued to disappoint as gross non-performing asset (NPA) climbed to 3.67% from 3.45% in Q2FY2013. The slippages were higher at Rs714 crore vs Rs624 crore in Q2FY2013, since the bank classified Deccan Chronicle exposure (~Rs270 crore) as a NPA in Q3FY2013. The bank also restructured Rs3,370 crore worth of advances (including Suzlon Rs1,146 crore), taking the total restructured advances to 9.3% of the advances book. -
The non-interest income showed a jump of 101.4% YoY led by a strong growth in the fee income and treasury profits (partial stake sale in CARE). The fee income was bloated due to an one-off income from syndication activity. Valuation
Though IDBI Bank's operating performance was relatively better, it was driven by a sharp improvement in NIM and the one-off fee income, which is unlikely to sustain. We believe the bank's return on equity (RoE) is unlikely to improve significantly due to a rise in provisions (driven by a weak asset quality), lower NIM and slower business growth. Therefore, we downgrade our recommendation to reduce and revise the price target to Rs105 based on sum-of-the-parts (SOTP) valuation. Mahindra Lifespace Developers
Recommendation: Buy
Price target: Rs460
Current market price: Rs415 Results below expectations Result highlights -
Revenues, OPM and net profit below estimates: For Mahindra Lifespace Developers (MLD), Q3FY2013 stand-alone revenues were down 60.1% year on year (YoY) to Rs61.4 crore (declined by 26.7% quarter on quarter [QoQ]) on account of a subdued execution during the quarter. During the quarter, none of the new projects entered into the revenue recognition mode and only one project got completed, unlike the corresponding quarter of the previous year. The operating profit margin (OPM) of the company took a huge hit and declined by 1,531 basis points YoY to 14.7% on account of an increase in employee costs (up 724 basis points) and other expenditure (up 1,034 basis points) but marginally offseted by the lower cost of projects (down 227 basis points). However, on account of a high other income comprising of dividend income from subsidiaries, mutual funds and interest income, the poor operating performance was boosted to result in a profit after tax (PAT) of Rs13.6 crore (a decline of 65.7% YoY). -
Sales booking witnessed some traction; signed eight new MoUs: The sales booking witnessed some upward momentum sequentially in Q3FY2013, with MLD recording sales of Rs154.8 crore (0.39 million square feet [mn sq ft]) vs sales of Rs86.3 crore (0.21mn sq ft) in Q2FY2013 and Rs302 crore (0.61mn sq ft) in Q3FY2012. The sales primarily took place in its new Hyderabad project, Ashvita, and a subsequent phase of Iris Court, Chennai project. A positive development during the quarter was that the company signed eight memoranda of understanding (MoUs) for new lands, of which two MoUs are in final transaction preparation, one MoU in final stages of due diligence and five MoUs under due diligence. If all the eight MoUs go through, the company is expected to generate Rs5,000 crore revenues with 25% average land cost. -
Signs of traction in integrated cities: At Mahindra World City (MWC), the integrated business city promoted by the company, the total number of operational facilities grew by six (as compared with the previous quarter) to 46 vs 61 in Chennai. On the other hand, in Jaipur, one client was added to the operational list taking the count to 13. -
Downward revision in our estimates: We have revised our revenue estimates downwards by 15% and 26% for FY2013 and FY2014 respectively. The downward revision is mainly to factor in the delays in execution of a few projects (especially GE Garden and Aura). Consequently, we have revised our earnings estimates downward for FY2013 by 22% and by 29% for FY2014 factoring lower revenues and lower OPM on account of an increase in other expenditure. -
Maintain Buy with a price target of Rs460: We continue to like MLD due to the quality of its management and its strong balance sheet that can be leveraged for acquiring new land parcels in the distressed markets and for a better execution of the existing land bank. Our long-drawn concern on approvals seems to be fading as the company saw some traction on that front, with approvals coming in faster in Q3FY2013. Going ahead, we expect the momentum to continue, which would augur well for the company as it will get more room to launch new projects and thereby support growth. The execution issues witnessed (labour and water supply) by the company during the previous quarter were an exceptional case and the matters now stand resolved. Hence, we maintain our Buy recommendation on the stock with a price target of Rs460. At the current market price, the stock trades at 0.9x its net asset value and 17.7x FY2013 earnings estimate.
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