Investor's Eye: Update - Glenmark Pharmaceuticals, Jaiprakash Associates, Allahabad Bank, Sintex Industries

 

Investor's Eye [May 07, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE Glenmark Pharmaceuticals Recommendation: Buy Price target: Rs600 Current market price: Rs521 Q4FY2013 results-First cut analysis Result highlights  Q4FY2013 results better than expected: Glenmark Pharmaceuticals (Glenmark Pharma) reported a 25.3% year-on-year (Y-o-Y) rise in its net sales to Rs1,335.5 crore (vs our estimate of Rs1,330 crore) in Q4FY2013. The core operating profit margin (OPM; ie excluding licencing income) jumped by 448 basis points year on year (YoY) to 19% on account of a sharp reduction in the raw material costs. This led the profit before tax to increase by 40% YoY to Rs31.8 crore. Moreover, a lower effective tax rate (2.6% in Q4FY2013 vs 5.8% in Q4FY2012) helped the company to report a 44.9% Y-o-Y rise in the adjusted net profit to Rs167.2 crore (adjusted for foreign exchange [forex] loss or gains) during the quarter. However, due to a forex loss during the quarter vs forex gains (Rs35 crore in Q4FY2012), the reported net profit jumped by 11.2% YoY to Rs167.2 crore. Domestic and European formulation business gave positive surprise: During the quarter, the specialty business (branded formulation) jumped by nearly 25% YoY to Rs741 crore, mainly driven by the Indian branded formulation business, which jumped by 32.4% YoY to Rs355 crore (vs our estimates of Rs328 crore). Moreover, the European specialty business witnessed signs of recovery while registering a growth of 25% YoY to Rs90 crore during the quarter. The European generic business also reported a 62% Y-o-Y rise in the revenues to Rs59.1 crore during the quarter (vs our estimate of Rs40 crore). Though the impressive rise in the domestic and European formulation business came as a positive surprise during the quarter, an absence of licencing income during the quarter mitigated the impact. Lower licencing income and sharp rise in tax impacted profit growth in FY2013: During FY2013, the net revenues jumped by 24.7% YoY to Rs5,012 crore, despite an 81% Y-o-Y fall in the licencing income. The core OPM remained nearly flat at 19.4% in FY2013 vs 19.8% in FY2012. However, the higher depreciation and a sharp jump in the effective tax rate (15.1% in FY2013 vs 3.1% in FY2012) impacted the core net profit (excluding the lincencing income) resulting in a moderate 11.5% Y-o-Y rise to Rs569.5 crore. The reported net profit jumped by 34% YoY to Rs614.8 crore, mainly due to an exceptional expenditure of Rs284 crore in FY2013. The revenues and adjusted profit during FY2013 were marginally better than our expectation. Valuation: The stock is currently trading near 22.7x and 16.9x core earnings for FY2014 and FY2015. We have Buy recommendations on the stock with a price target of Rs600. We will revisit our estimates after interactions with the management.     Jaiprakash Associates Recommendation: Buy Price target: Rs95 Current market price: Rs76 Price target revised to Rs95 Result highlights  Q4FY2013 earnings below estimate: In Q3FY2013, Jaiprakash Associates (JP Associates) posted a net profit of Rs123.5 crore (a decline of 56.5% year on year (YoY), which was below our estimate of Rs131 crore. The decline was on account of lower than expected revenues and profitability in its construction division. Further, the effective tax rate of 32.5% came higher compared with our estimate of 25%. Real estate division supports the revenues; cement and construction divisions offset the benefit: The revenues from its real estate division increased by 14.3% YoY to Rs641 crore (better than our estimate) supported by a volume growth in the sale of residential properties and land parcel. However, the cement division, which constitutes over 40% of the overall revenues, registered a revenue decline of 3% YoY (on account of a drop in the volume by 7.1% YoY). Further, the revenues from its construction division also declined by 13.4% YoY on account of a slower than expected execution of projects. Hence, the overall revenues of the company declined by 4% YoY to Rs3,864 crore. OPM contracted YoY and sequentially: On the margin font, the operating profit margin (OPM) for the quarter contracted by 241 basis points YoY and by 42 basis points quarter on quarter (QoQ) to 22%. The margin contraction was on account of a decrease in the profitability of its construction division (earnings before interest and tax [EBIT] margin of 19.1% as against 23.9% in Q4FY2012) due to a change in the revenue mix in favour of the less profitable projects. In addition to the construction division, the real estate division of the company also witnessed some margin pressure with a correction of 12 percentage points in its EBIT margin. However, the cement division displayed a 107-basis-point-improvement in its EBIT margin on account of an increase in the average blended realisation by 4.4% YoY. Consequently, the operating profit of the company declined by 13.5% YoY to Rs851 crore. Higher depreciation charges and tax outgo dent earnings: The depreciation charges increased by 16.5% YoY to Rs191 crore. Further, though the interest cost declined by 5.3% YoY to Rs549 crore, it came higher than our estimate. During the quarter, the effective tax rate surged to 32.5% (higher than estimate) as compared with just 9.3% in the corresponding quarter of the previous year. Hence, on the net profit level, the company posted a decline of 55.7% YoY to Rs123.5 crore. Earnings estimates downgraded for FY2014 and FY2015: We are downgrading our earnings estimates for FY2014 and FY2015 mainly to factor in the lower than expected revenue growth and profitability in the construction division. Also, we have lowered our volume growth estimate in the cement division. Consequently, our revised earnings per share (EPS) for FY2014 now stands at Rs3.4 per share and that for FY2015 works out to Rs4.3 per share. Maintain Buy with revised price target of Rs95: We continue to like JP Associates due to its diversified business model and an aggressive expansion plan. The near-term trigger in the stock will be the likely sale of its stake in the Jaypee Cement Corporation as it will de-leverage the balance sheet of JP Associates to some extent. In terms of valuation, we continue to value the stock using the sum-of-the parts (SOTP) valuation methodology and arrive at a revised price target of Rs95 per share. We maintain our Buy recommendation on the stock.     Allahabad Bank Recommendation: Hold Price target: Rs155 Current market price: Rs127 Dismal performance, downgraded to Hold Result highlights  Allahabad Bank's Q4FY2013 results disappointed on all fronts as the net profit plummeted to Rs126.2 crore (down 68.5% year on year [YoY]). The operating profit also declined by 14.8% YoY led by a decline in the net interest income (down 18.0% YoY). The net interest margin (NIM) declined by 72 basis points sequentially to 2.3% in Q4FY2013. This was largely contributed by a reduction in the base rate and interest income reversal (Rs194 crore). The advances grew by 16.5% YoY, mainly contributed by the corporate and retail segments, which grew by 30.5% YoY and 16.8% YoY respectively. The current account and savings account (CASA) ratio improved on a sequential basis to 30.7% on account a 10.6% quarter-on-quarter (Q-o-Q) growth in the current account deposits. The asset quality deteriorated sharply as slippages jumped to Rs2,586 crore. About half of the slippages came in from the restructured account. In addition, the bank restructured Rs1,385 crore of advances, taking the total restructured loans to 11.5% of book. The non-interest income grew by 47.7% YoY (54.0% quarter on quarter [QoQ]) on account of the higher recoveries from the written off accounts (Rs1,162.5 crore in Q4FY2013) and the treasury profit to the tune of Rs98.0 crore (Rs59.0 crore in Q4FY2012). The bank provided Rs60 crore in Q4FY2013 towards wage revision (Rs100 crore in FY2013). Valuation Allahabad Bank's Q4FY2013 results disappointed on all fronts as the margin declined sharply and the slippages shot up significantly. Though the management expects a strong recovery, the sustained rise in the slippages and restructured advances will increase the provision burden. This coupled with the higher tax rates and a slower growth in fee income will impact the profitability. We have revised our earnings estimates for FY2014 and FY2015 downwards, which led to a decline in our price target to Rs155. We believe the decline in return ratios (return on equity [RoE] ~15% and return on assets [ROA] ~0.8%) and asset quality concerns will weigh high on the valuation, thereby, we downgrade our rating on the bank to Hold.     Sintex Industries Recommendation: Buy Price target: Rs89 Current market price: Rs54 Mixed performance; prefab and custom moulding drive growth Sintex Industries (Sintex)' Q4FY2013 performance was a mixed bag with a robust top line performance (+36.9% year on year [YoY]) led by a strong growth in the prefabricated (prefab) structures and custom moulding. A poor execution at the monolithic business dragged the operating profit margin (OPM), which came 225 basis points lower than expectation (at 13.5% vs 15.8% expectation). The high other income coupled with a tax write-back propelled the net profit for the quarter. Adjusting for the tax write-back, the adjusted profit came in at Rs100 crore, which is ahead of our estimate. In line with its last conference call commentary, the management sounded upbeat on the prefab and custom moulding segments, and guided for a 25-30% growth in these segments. The management also maintained its stance of conserving cash in the monolithic business. Thus, we have largely maintained our FY2014 and FY2015 estimates for the company. Our earnings per share (EPS) for FY2014 and FY2015 stands at Rs13 and Rs15.1 respectively. We maintain our Buy recommendation on the stock with a price target of Rs89. At the current price, the stock is trading at 3.5x its FY2015 earnings. Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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