| Summary of Contents PULSE TRACK Inflation moderates to 6.62% in January 2013 -
The Wholesale Price Index (WPI)-based inflation for January 2013 declined to a three-year low at 6.62% (7.18% in December 2012). The month-on-month (M-o-M) decline in inflation was due to a softness in all three groups, viz primary articles, fuel group inflation and manufactured goods inflation. The core inflation declined to 4.1% vs 4.2% in December. Moreover, the inflation rate for November 2012 remained unchanged at 7.24%. -
The decline in inflation for January 2013 was primarily due to the softening of the manufacturing inflation, which forms 65.0% of the index. The manufacturing inflation softened to 4.81% compared with 5.04% in December 2012 while the fuel inflation declined to 7.06% compared with 9.38% in the previous month. Moreover, though the inflation in the primary articles segment remained high, it declined to 10.31% from 10.61% in December 2012. -
On an M-o-M basis, the WPI index increased marginally by 0.36% to 169.2, despite the hike in diesel price. The primary article index increased by 0.64% month on month (MoM) led by the mineral index (347.0 from 340.8 in December 2012). The fuel index and the manufacturing index increased marginally in January 2013 to 189.5 and 148.3 as compared with 188.9 and 148.0 in December 2012 respectively. -
The inflation declined consecutively in the past four months (October-January 2013) and dropped to the lowest level since December 2009. Further, the core inflation eased to 4.1%, which was significant. Going ahead, the Reserve bank of India (RBI) may continue to focus on rising the current account deficit and uptrend in crude oil. Since the RBI in its Q3FY2013 policy review highlighted that it has limited room to ease rates, the moderation in inflation could increase comfort of the Central Bank towards monetary easing.
STOCK UPDATE State Bank of India
Recommendation: Buy
Price target: Rs2,540
Current market price: Rs2,214 Earnings below estimate; asset quality continues to disappoint Result highlights -
State Bank of India (SBI)'s Q3FY2013 net profit growth was short of our estimate (4.1% year on year [YoY] to Rs3,396.1 crore) mainly due to a slower growth in the net interest income (NII) and increased provisions (up 10.8% YoY). However, the treasury profit of Rs417.8 crore (vs Rs230.2 crore in Q2FY2013) cushioned the profit. -
The NII declined by 3.2% YoY (up 1.6% quarter on quarter [QoQ]), which was largely in line with our estimate. This was on account of a year-on-year (Y-o-Y) decline in the net interest margin (NIM; 3.40% vs 3.45% in Q2FY2013) as the bank shifted pension corpus (~Rs20,000 crore) to a separate entity. On a quarter-on-quarter (Q-o-Q) basis, the overseas NIM declined by 6 basis point and domestic NIM declined by 5 basis points. -
The business growth remained healthy as advances increased by 15.6% YoY while the deposits grew by 15.6% YoY. The current account and savings account (CASA) remained largely stable at 45.5%. The bank expects a strong traction in advances in Q4FY2013. -
The asset quality deteriorated as slippages were higher to the tune of Rs8,165 crore (mainly from mid-corporate and small and medium enterprises [SME] segments), thereby pushing the gross non-performing asset (NPA) to 5.30%. Though the recoveries were lower at Rs2,797 crore in Q3FY2013, the bank expects to upgrade Rs2,000 crore of advances in Q4FY2013. The bank also restructured Rs2,838 crore of advances in Q2FY2013. -
The non-interest income improved by 76.0% YoY (9.0% QoQ) as there was a treasury profit to the tune of Rs417.8 crore as compared with a loss of Rs1,090.4 crore in Q3FY2012. However, the fee income growth was subdued as it declined by 3.1% YoY (up4.5% QoQ). Valuation and outlook: SBI's Q3FY2013 earnings were lower than our estimate as the NII growth was subdued. The bank expects a healthy growth in advances and plans to deploy a surplus liquidity of Rs50,000 crore, which could support the NIM. Currently, the stock is trading at reasonable valuation (1.4x FY2014 stand-alone book value). We maintain our sum-of-the-part (SOTP)-based price target of Rs2,540 and upgrade the recommendation to Buy. Kewal Kiran Clothing
Recommendation: Buy
Price target: Rs810
Current market price: Rs720 Upgrade to Buy; price target revised to Rs810 Result highlights -
Performance snap-shot: Kewal Kiran Clothing Ltd (KKCL) reported a decent performance for Q3FY2013, with the top line growing by 19.9% year on year (YoY) to Rs77.5 crore. The top line growth was on account a mix of a volume led growth (up 14.42% YoY) and a minor price led growth (up 5.89% YoY). Stable cotton prices led the company to report a flattish gross profit margin of 53.9% in Q3FY2013 as against 54.1% in Q3FY2012. However, lower selling and administrative expenses (a reduction of 182 basis points as a percentage of sales YoY) coupled with a reduction in the manufacturing and operating expenses (a reduction of 132 basis points as a percentage of sales YoY) boosted the operating performance. As a result, the operating profit margin (OPM) increased by 310 basis points to 21.7%. The operating profit surged by 39.8% YoY to Rs16.8 crore. The interest and depreciation expenses were largely stable YoY. Consequently, the adjusted profit after tax (PAT) increased by 37.1% YoY to Rs12 crore. -
The company continues to deliver strong operating cash flows (in M9FY2013 cash from operations stood at Rs47 crore) and reward its shareholders with regular dividends (for FY2013 it has paid dividend of Rs13.5 per share), and has strong urge and vision for brand development. -
We continue to like KKCL's business strategy of developing and growing its fashion brand as well as its financial acumen for selling on an outright basis, keeping the balance sheet clean with a lean working capital management. Thus, we continue to hold a positive view on the company. The improving macro-economic environment provides a fillip to our demand thesis. We roll forward our valuation multiple of 14x to FY2015E EPS of Rs 57.9 to arrive at a fair value of Rs 810 per share, thus upgrading our rating from Hold to Buy. India Cements
Recommendation: Hold
Price target: Rs95
Current market price: Rs80 Price target revised to Rs95 Result highlights -
Net profit declined by 53.6% YoY; but better than estimate: In Q3FY2013, India Cements posted a net profit of Rs26 crore (a decrease of 53.6% year on year [YoY]), which is ahead of our estimate on account of a higher than expected revenue growth (supported by the strong growth in volume and realisation). However, the margin pressure coupled with an increase in the interest outgo and higher effective tax rate dented the earnings by 53.6% YoY to Rs26 crore. The higher than expected interest outgo was primarily on account of a foreign exchange (forex) loss to the tune of Rs11 crore. -
Revenue growth supported by cement volume and realisation: The net sales of the company grew by 15% YoY to Rs1,082.4 crore, which also includes the revenues from the Indian Premier League (IPL), wind power and shipping businesses. The revenues from the cement division (cement is its core business) improved by 13.9% YoY to Rs1,056.1 crore largely driven by a 10.7% growth in its overall volume and a 3% growth in the average blended cement realisation. The demand environment in Tamil Nadu and Karnataka improved in the recent times. Hence, we expect the company to deliver a better volume in the coming quarter. -
Cost pressure offset benefit of improvement in cement realisation; margin came under pressure: On the margin front, in spite of an improvement in the cement realisation by 3% YoY, the continued cost pressure-in terms of (a) higher freight charges (up 27.9% YoY), and (b) increase in the employee cost (up 16.6% YoY to Rs82.7 crore)-offset the benefit of an increase in the realisation and result in margin pressure. Hence, the operating profit margin (OPM) contracted by 286 basis points YoY to 17.8%. The overall cost of production on per-tonne basis increased by 5.9% YoY and the EBITDA per tonne lowered by 8.3% YoY to Rs791. Consequently, the operating profit of the company decreased by 0.9% YoY to Rs192.7 crore as compared with 15% growth registered at the revenue front. -
Surge in interest cost due to forex loss: The interest cost during the quarter increased by 9.7% YoY to Rs82.2 crore, which is higher compared with our estimate of Rs70 crore. However, the higher than expected interest outgo was on account of a forex loss to the tune of Rs11 crore. Hence, adjusting for the same, the net interest cost works out to Rs71 crore, which is in line with our estimate. The total borrowings of the company currently stood at Rs3,065 crore as compared with Rs2,700 crore at the end of FY2012. The total outstanding debt of the company is expected to come down gradually in the coming two years. -
Downgrading earnings estimates for FY2013 and FY2014; introducing FY2015 estimate: We are downgrading our earnings estimates for FY2013 and FY2014 mainly to incorporate an increase in the power tariff in Andhra Pradesh and also increasing our tax rate assumption. Consequently, the revised earnings per share (EPS) estimates for FY2013 and FY2014 now stand at Rs7.5 and Rs9.1 respectively. Further, we are also introducing our FY2015 earnings estimate with an EPS at Rs10.4. -
Maintains Hold with revised price target of Rs95: The demand for cement in Tamil Nadu and Karnataka has recovered partially and will support the volume growth of India Cements. However, the demand and pricing environment in Andhra Pradesh continues to remain weak. Also, a recent increase in the power tariff by the state electricity board (SEB) of Andhra Pradesh is likely to keep the margin under pressure. Hence, we maintain our Hold recommendation on stock with a revised price target of Rs95. At the current market price, the stock trades at price earnings (PE) of 8.8x discounting its EPS for FY2014 and EV/EBITDA of 4.2x its FY2014 earnings estimate. Madras Cements
Recommendation: Hold
Price target: Rs260
Current market price: Rs242 Price target revised to Rs260 Result highlights -
PAT grew by 9.4% YoY, in line with estimate: In Q3FY2013 Madras Cements delivered a net profit of Rs84.1 crore (an increase of 9.4% year on year [YoY]), which is largely in line with our estimate. The earnings growth during the quarter was supported by a healthy growth in the volume and average realisation. Further, a sharp increase in the other income also supported the earnings growth of the company. -
Strong volume growth and healthy realisation drive revenue growth: The overall revenues of the company increased by 17.7% YoY to Rs872.5 crore, which includes revenues of Rs8.7 crore from the windmill division. During the quarter the revenue growth was driven by a strong cement volume growth of 10.5% YoY (on account of the stabilisation of its new capacity and partial revival in demand in Tamil Nadu and Karnataka). Further, the average cement realisation increased by 6.6% YoY to Rs4,546 per tonne. The demand environment in Andhra Pradesh remained sluggish. There was also a strike of cement dealers in Kerala for 16 days in November 2012, which limited the volume growth of the company. In terms of realisation, the average realisation for FY2013 remained higher by around 3% compared with the average realisation of FY2012. -
Margin contracted YoY, lower than estimated: In spite of a 6.6% year-on-year (Y-o-Y) increase in the average blended cement realisation, the operating profit margin (OPM) contracted by 483 basis points YoY to 23.2%, which is also lower than our estimate. The margin contracted YoY on account of an increase in the cost of production. During the quarter the freight cost increased by 24.5% on per tonne basis and the other expenses increased by 19.1% to Rs123.6 crore. Hence, the overall cost of production increased by 13.7% YoY on per tonne basis. Consequently, the EBITDA per tonne for the quarter decreased by 12.4% YoY to Rs1,018. -
Plans to add 1mtpa cement capacity in Andhra Pradesh: During the quarter the management of the company finalised a plan to set up a 0.95-million-tonne-per-annum (mtpa) cement grinding unit in Andhra Pradesh. The cost of setting up the unit is estimated at Rs350 crore and the work on the project will start once the statutory clearances are in place. Hence, the overall cement capacity of the company will enhance to 13.5mtpa after the commissioning of the new grinding capacity in Andhra Pradesh. The funding of the project will be met through internal accruals and debt, if required. -
Marginally upgrading earnings estimates for FY2013 and FY2014, introducing estimate for FY2015: We are marginally upgrading our earnings estimates for FY2013 and FY2014 mainly on account of a higher than expected cement realisation. We have also marginally upgraded our volume estimate. Consequently, the revised earnings per share (EPS) estimates for FY2013 and FY2014 now stand at Rs17.3 and Rs18.6 respectively. We are also introducing our earnings estimate for FY2015 at Rs21.2. -
Maintain Hold with revised price target of Rs260: In view of the stabilisation of the new capacity and a relatively better demand environment in Tamil Nadu and Karnataka as compared with Andhra Pradesh, we except the volume growth to support the revenues of the company in FY2014. However, a likely increase in supply in the southern region is a key risk on the cement price. Cost pressure in terms of a higher freight cost is expected to pressurise the margin. Hence, we maintain our Hold recommendation on the stock with a revised price target of Rs260 (valued at EV/tonne of $110 on capacity of 12.5mtpa). At the current market price the stock trades at a price/earnings (PE) of 12.9x and an enterprise value (EV)/earning before interest, tax, depreciation and amortisation (EBITDA) of 7x its FY2014 earnings estimate.
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