Investor's Eye
[May 17, 2013] | | If you do not wish to receive this research report in future, please click here |
| Summary of Contents
STOCK UPDATE ITC
Recommendation: Hold
Price target: Rs342
Current market price: Rs335 Downgraded to Hold with a revised price target of Rs342 Result highlights -
Maintained the growth momentum; non-cigarette FMCG breaks even in Q4FY2013: ITC posted a strong set of numbers in Q4FY2013 with the revenues and profit after tax (PAT) growing by close to 20% during the quarter. The highlight of the quarter was the break even of the non-cigarette fast moving consumer goods (FMCG) business. The cigarette business maintained its strong growth momentum with a price led growth of ~18% and the profit before interest and taxes (PBIT) margin standing at 31.5%. The sales volume growth of the cigarette business improved sequentially to above 2.5% in Q4FY2013. As anticipated, the performance of the hotel business was muted with a sharp decline in the profitability as the business continued to get impacted by a subdued macro environment. -
Quarterly performance snapshot: The income from operations (including the other operational income) grew strongly by 18.8% year on year (YoY) to Rs8,257.4 crore in Q4FY2013, which is slightly ahead of our expectation of Rs8,156.8 crore. The strong revenue growth is attributable to ~18% year-on-year (Y-o-Y) growth in the gross revenues of the cigarette business, ~26% Y-o-Y growth in the non-cigarette FMCG business, and a 31% Y-o-Y growth in the agri business during the quarter. The gross profit margin (GPM) declined by 261 basis points YoY to 57.0% in Q4FY2013. The operating profit margin (OPM) stood flat at 32.8% and the operating profit grew by 18.9% YoY to Rs2,706.3 crore. The strong operating performance along with a higher other income led to a 19.4% Y-o-Y growth in the reported profit after tax (PAT) to Rs1,928.0 crore. -
Segmental performance: The gross revenues of the cigarette business grew by ~18% to Rs6,698.7 crore (in line with our expectation of Rs6,689.1 crore) and the PBIT margin improved by 44 basis points YoY to 31.5%. The sales volume growth of the cigarette business was above 2.5% during the quarter. It was yet another quarter of strong performance by the non-cigarette FMCG business with a strong revenue growth of 25.9% YoY to Rs2,043.3crore. The non-cigarette FMCG business for the first time has posted a profit of ~Rs12 crore during the quarter. The revenues of the agri business grew by 31.1% YoY to Rs1,854.5 crore and the PBIT grew by 20.8% YoY to Rs127.5 crore. ITC's hotel business grew by 10.4% YoY to Rs315.6 crore and the PBIT margin was significantly down by above 1,600 basis points YoY to 12.9% in Q4FY2013. -
Outlook and valuation: We have marginally tweaked our earning estimates for FY2014 and FY2015 to factor in a little higher than expected revenue and other income in Q4FY2013. We expect the sales volume growth of the cigarette business to remain subdued in FY2014. However, the business is expected to clock a double-digit revenue growth and the PBIT margin is expected to be above 30% on account of a higher Y-o-Y realisation. On the other hand, the non-cigarette FMCG business is expected to maintain a strong growth momentum on account of the new product launches and an enhancement in the distribution reach. The agri business is expected to post a steady performance, with the margin likely to sustain in the high single digits. We believe the performance of the hotel business will improve, with an overall improvement in the global macro environment. Overall, we believe ITC is well poised to achieve top line and bottom line compounded annual growth rate (CAGR) growth of 17% and 20% over FY2013-15.
At the current market price, the stock trades at 29.5x its FY2014E earnings per share (EPS) of Rs11.4 and 24.5x its FY2015E EPS of Rs13.7. Our price target stands revised to Rs342 with tweaking of the earning estimate. Due to a limited upside from the current level, we have downgraded our recommendation on the stock from Buy to Hold. However, we continue with ITC as our best pick in the FMCG space from the long-term perspective. Bajaj Auto
Recommendation: Hold
Price target: Rs2028
Current market price: Rs1,834 Price target revised to Rs2,028 Key points Domestic motorcycle industry to remain sluggish in the near term
The domestic motorcycle industry has been witnessing pressure since Q4FY2013, with the growth slipping in the negative territory. The industry ended FY2013 on a flat note. The motorcycle demand is expected to remain sluggish in the near term. We expect a recovery in the demand in H2FY2014 on account of an improved macro-economic scenario and further softening of the interest rates. We expect a mid-single-digit growth for the domestic motorcycle market in FY2014. Focus on the executive segment to gain market share
Bajaj Auto Ltd (BAL)'s market share in the domestic motorcycle declined by 1% to 24.5% in FY2013. BAL plans to focus on the executive segment (bikes priced above Rs40,000) to gain market share in FY2014. It plans to launch six models of the Discover family in FY2014 starting from June 2013. The executive segment comprises 64% of the market size. BAL has a market share of about 16% in the executive category as compared with the overall market share of 24%. Margin to witness uptick on favourable currency
BAL is likely to witness a margin uptick in FY2014 on account of favourable export realisations. The company has hedged about 70% of its FY2014 exports at a higher rate of Rs54/$ as against Rs49.5/$ realised in FY2013. It plans to pass on half of the export benefits to its overseas markets (in the form of price reduction, higher advertisement) in order to compete effectively. Export volumes to recover in FY2014
BAL's export volumes had declined in FY2013 on account of a slowdown in the key export markets such as Sri Lanka (due to a steep rise in the duty) and Latin America (due to a weak economic scenario). In FY2014, BAL expects the export volumes to grow by 10-12%. This is on account of stabilisation of demand in the above markets. Also, it expects a strong growth in Egypt going forward. Further, it would use Kawasaki Motors Corp (Kawasaki)'s network in Indonesia to enhance the exports. Three-wheeler growth to remain strong
BAL expects the domestic three-wheeler growth to remain strong on account of likely fresh permits in states such as Delhi. Further, it would revamp its entire product range by launching new products in Q2FY2014, which would trigger the replacement demand. Also, BAL expects a strong demand for the three-wheeler segment in the export markets such as Africa and Egypt. We expect the three-wheeler segment to record a double-digit growth in FY2014. Valuation
We are lowering our revenue estimates for FY2014 and FY2015 on account of a sluggish demand in the domestic market. Also, we have marginally reduced our margin assumption on account of an increased proportion of the executive motorcycles, which have relatively lower margin. We have reduced our earnings per share (EPS) estimates for FY2014 and FY2015 by 5.6% and 3.9% respectively. Our revised EPS estimates stand at Rs125.4 per share and Rs144.9 per share for FY2014 and FY2015 respectively. We maintain Hold recommendation with a revised price target of Rs2,028. Kalpataru Power Transmission
Recommendation: Buy
Price target: Rs115
Current market price: Rs78 Price target revised to Rs115 Result highlights -
Q4 performance was slightly lower than estimated: Kalpataru Power & Transmission Ltd (KPTL; the stand-alone entity) reported an adjusted net profit of Rs49 crore for Q4FY2013. The adjusted net profit is 11% lower than our estimate, reflecting the trend at the sales level (sales too are 12% lower than estimated). Nevertheless, the operating profit margin (OPM) of 9.7% earned by the company during the quarter is in line with our estimate. The adjusted net profit of the stand-alone business slipped by 14% year on year (YoY; while sales declined by 3% YoY) due to a lower margin. However, on a sequential basis, along with a stable margin and healthy sales growth of 16%, the adjusted profit after tax (PAT) grew by 23%. -
Margin woes continue in JMC Projects: The margin pressure of the construction subsidiary, JMC Projects, continued in Q4FY2013 which was expected. Further, the management guided that the margin is expected to remain in a similar range for the next two quarters and look up from Q3FY2014 onwards with an improving mix of projects. In Q4FY2013, JMC Projects reported an OPM of 4.7% against 7.3% in Q4FY2012. Hence, the PAT declined sharply on a year-on-year (Y-o-Y) basis to Rs87 crore. However, sequentially higher sales helped the PAT to jump by 160%. -
Fine-tuned estimate; retained Buy: We have revised down our sales estimates by 10% each for FY2014 and FY2015 to factor in the toned down guidance by the management. However, we have retained our margin estimate for FY2014 and FY2015. As a result of the same revision, the earnings were revised down. Consequently, we have cut our price target by 8% to Rs115. Currently; the stock is trading at 7x its FY2014 and 6x its FY2015 earnings. We believe the measures taken by the management to improve the margin and return on capital employed (RoCE) should augur well for the company. Hence, we retain Buy rating on the stock.
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