Investor's Eye
[April 16, 2013] | | |
| Summary of Contents
STOCK UPDATE Reliance Industries
Recommendation: Buy
Price target: Rs1,010
Current market price: Rs805 Q4FY2013 results-First cut analysis Result highlights -
Earnings largely in line with estimates; petchem margin disappoints: In Q4FY2013, Reliance Industries Ltd (RIL) posted an adjusted net profit of Rs5,589 crore (increased by 31.9% year on year [YoY]), which is largely in line with our as well as the Street's estimates. The strong earnings growth is supported by a better than expected gross refining margin (GRM) of $10.1 per barrel (as against our expectation of $9.85/barrel) and strong other income of Rs2,243 crore. However, a contraction in the petrochemical (petchem) margin has negatively surprised and is against the expectation of an improvement in the margin sequentially. -
Net sales down by 1.2% YoY and 10.3% QoQ: The net sales of the company during the quarter declined by 1.2% YoY to Rs84,198 crore, which is lower than our as well as the Street's estimates on account of a lower than expected revenue growth of 2.2% from its refining division due to a decline in the throughput. The petchem division has posted a revenue growth of 3.5% YoY. However, the exploration and production (E&P) division continues to post a decline in revenues by 38.8% on account of falling output from its KG-D6 basin. -
Overall margin expanded due to an improvement in GRM: The operating profit margin (OPM) expanded by 159 basis points YoY to 9.3% during the quarter on account of an improvement in the GRM, which came at $ 10.1/barrel in Q4FY2013 (as compared with $ 7.6/barrel in Q4FY2012 and $ 9.6/barrel in Q3FY2013). The earnings before interest and tax (EBIT) margin in the refining division improved significantly from 2.2% in Q4FY2012 to 4.5% in Q4FY2013. However, the petchem margin disappointed with a sequential contraction of 23 basis points to 8.6% as against the market expectation of an improvement the margin. -
Other income continues to remain healthy: The other income during the quarter came at Rs2,243 crore, which is better than our estimate. The healthy other income was largely supported by the healthy cash balance of Rs82,975 crore. Further, the effective tax rate during the quarter came at 21.5% as against 22% in the corresponding quarter of the previous year, which further supported the earnings growth. Valuation
Though the operating performance is below expectation and the earnings are driven by other income and lower interest burden, we do not expect the Street to react in any material negative manner to the results. Currently, the RIL stock is trading at price earnings (PE) of 12.3x discounting its FY2014E earnings per share (EPS) and EV/EBITDA of 9.3x on FY2014. We currently have a Buy recommendation on the stock with price target of Rs1,010. We shall come out with a detailed note soon. CMC
Recommendation: Buy
Price target: Rs1,650
Current market price: Rs1,391 Price target revised to Rs1,650 Result highlights Revenues ahead of expectations, driven by CS business: For Q4FY2013 CMC has reported a revenue growth of 6.2% quarter on quarter (QoQ) to Rs523.6 crore (our expectation was Rs512.1 crore). The revenue outperformance was largely driven by significant jumps in the customer service (CS) segment whose revenues rose by 100% QoQ to Rs156.0 crore (on account of higher third-party hardware revenues). On the other hand, after a strong compounded quarterly growth rate of 9% in the previous six quarters, the revenues of the system integration (SI) and information technology enabled services (ITES) businesses dropped by 12.6% each QoQ on account of the completion of the large turnkey projects during the quarter. -
The services business was down 10.5% QoQ to Rs416 crore (79% of total revenues) whereas the revenues of the equipment business rose by 283% QoQ to Rs107.6 crore (21% of total revenues). -
The international revenues were down by 14% QoQ and up by 14.4 % year on year (YoY) to Rs289 crore (55 % of total revenues) whereas the domestic revenues were up by 50% QoQ to Rs234.6 crore (on account of higher hardware revenues). Margins declined QoQ, attributed to higher hardware revenues: The EBITDA margins declined by 130 basis points QoQ to 15.6% (lower than our estimate of 16.5%). The fall in the margins was attributed to a significant jump in the low-margin equipment business whose revenues grew by 283% QoQ (accounting for 20.6% of the total revenues as compared with 5.7% in Q3FY2013). On the other hand, a sharp fall in the subcontracting cost (down 22% QoQ) restricted the fall in the margins. For FY2014 the management remains confident about maintaining the margins at around 16-17%. Net income grew by 43% YoY but muted QoQ: In the same quarter, on the back of a soft margin performance the net income remained muted QoQ at Rs61.3 crore (our expectation was Rs64 crore). Valuation: CMC remains on a strong footing with excellent earnings visibility led by its "joint go to" market strategy with Tata Consultancy Services and successful traction in its products and solutions coupled with its proven expertise in the projects of the domestic government. In FY2014 the management remains confident of growing at a rate better than the Nasscom estimate. At the current market price of Rs1,391 the stocks trades at 14.5x and 11.7x, FY2014 and FY2015 earnings estimates. We maintain our positive stance on CMC in view of the strong visibility of its earnings among the mid-cap IT space with over 25% compounded annual growth rate in earnings over FY2013-15. We broadly maintain our earnings estimates and maintain our Buy rating on the stock with a revised price target of Rs1,650. Federal Bank
Recommendation: Buy
Price target: Rs575
Current market price: Rs439 Concerns on Saudi issue and decline in gold prices overplayed, maintain Buy Federal Bank's stock has reacted negatively to the recent employment restrictions in Saudi Arabia (contributes to 13% of its deposits) and the sharp decline in the gold loan prices. The management allayed these fears at the bank's conference call clarifying that the scope for any delinquencies/slippages is minimal in the gold loan portfolio as the loan-to-value ratio was at a comfortable level of 78% after adjusted for the recent correction in the gold prices. Moreover, the management also stated that it is not witnessing any pressure on NRI deposits from Saudi Arabia and has limited advances book of Rs100 crore to customers in the region. However, we believe the gold loan portfolio may face stress if the downtrend in the gold prices continues. Conservatively, we have trimmed our estimates by 7-8% for FY2014 and FY2015 to factor in these concerns. We are positive on the stock in view of the structural improvement in the bank's balance sheet and attractive valuation. We maintain our Buy recommendation on Federal Bank with a revised target price of Rs575. Gold loan book stable as of now: The management clarified that of its ~Rs6,200 crore of gold loan book around Rs50 crore of loans have LTV of over 85% and the overall book has LTV of about 78% (accounting for the gold price correction that took place on April 15, 2013). Generally the bank offers loans with LTV of 65% which has increased due to a sharp fall in gold prices. The bank offers gold loan products with tenure of 2, 6 and 12 months (bullet payment) and average interest rate of 15.5%. According to the management, the situation is not alarming and in few cases where the LTV has gone up, the bank is reaching out to customers for top up margins. Fallout of Saudi Arabia's employment restriction yet to take place: Recently Saudi Arabia brought in regulations that stipulated reservation of 10% of jobs for citizens. This led to fears of a decline in remittances from the region. Federal Bank gets 12-13% of its deposits in form of remittances (~Rs 6,300 crore) from Saudi Arabia and about Rs100 crore of advances (0.25% of its loan book) to the related clientele. The management stated that restrictions will mainly affect the illegal migrants and not essentially the bank's customers, and that there hasn't been any significant impact of that so far. We believe while the decline in the remittances will have some impact on the margins (as the cost of NRI deposit is slightly lower than domestic deposit), it should not have any major impact on the asset quality. Revise our estimates and price target to factor the concerns: We do not expect any significant hit on the margins or the asset quality on account of these events (the recent fall in gold prices, the Saudi Arabian issue). We have conservatively revised our earnings estimates for FY2014-15 by 7-8%. This leads to a revision in our price target to Rs575. We expect the bank's earnings to grow at a compounded annual growth of 13% (over FY2012-15) which should lead to a return on equity (RoE) of ~15% by FY2015. The stock is attractively valued at 1.1x FY2014 book value. We maintain our Buy recommendation on the stock.
SECTOR UPDATE Telecommunications Consolidation continues; regulatory uncertainty looms The Cellular Operators' Association of India (COAI) has released its subscriber base figures for March 2013. In March, the telecommunications (telecom) sector continued to witness strong subscriber additions by the incumbents. The numbers clearly indicate that the top three operators are gaining on account of a reduction in the competitive intensity as the smaller operators, such as Uninor, wound up operations operations in select circles. Overall, the top three players, ie Bharti Airtel (Bharti), Idea Cellular (Idea) and Vodafone India (Vodafone), now account for almost 70% of the subscriber market and we expect the market share of these operators to slowly inch upwards as these operators gradually consolidate their position. -
The overall GSM subscriber base increased by 0.82% on a month-on-month (M-o-M) basis to 660.94 million subscribers in March this year. The increase in subscribers was mainly on account of a strong showing by the top three operators, ie Bharti, Idea and Vodafone, which cumulatively added 6.39 million subscribers during the month. -
Vodafone added the highest number of subscribers at 2.47 million users in March 2013. Its subscriber base touched 152.35 million users translating into an M-o-M growth of 1.65%. The company's subscriber market share improved to 23.05% in March 2013 as against 22.86% in February 2013. -
Idea exhibited the greatest improvement in subscriber market share during the month. The company's subscriber market share increased by around 20 basis points on an M-o-M basis to 18.40 for March 2013. The company added 2.35 million subscribers during March 2013, translating into an M-o-M growth of 1.97%. -
Bharti lagged among the incumbents, adding 1.57 million subscribers. Bharti's subscriber market share remained more or less steady at 28.47% for March 2013. -
Aircel was the highest loser shedding almost 0.80 million subscribers during the month. The company's overall subscriber base stood at 60.07 million subscribers, down 1.32% on an M-o-M basis. Outlook and valuation -
The incumbents continued to gain market share in the current month. The top three operators cumulatively now account for a just a shade less than 70% of the total subscriber market share. We believe that the Indian mobile telephony space is definitely consolidating in favour of these three operators and that the next leg of growth will come from the relatively under penetrated Class B and Class C circles and from data subscribers. We shall be watching out for these numbers going forward. -
On the regulatory front, the Supreme Court has banned telecom operators from adding new 3G customers in circles where they do not have 3G spectrum under the 3G ICR pacts. We believe that the immediate financial impact of any negative development pertaining to the issue apart from the penalty is not likely to be material. However, in case the ruling goes against the operators it would be detrimental in the sense that it would lead to a loss of competitive advantage for the operators in the respective circles. -
Despite an improving operational environment, taking into account the prevailing regulatory uncertainties in the sector, we maintain our cautious stance on the sector. We prefer Bharti owing to its leadership position in the Indian mobile telephony space. We have a Hold rating on the stock with a price target of Rs340.
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