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STOCK UPDATE Lupin
Recommendation: Hold
Price target: Under review
Current market price: Rs731 Q4FY2013 results-First cut analysis Result highlights -
Q4FY2013 results better than expected: Lupin reported an impressive 34.7% year-on-year (Y-o-Y) rise in the net sales to Rs2,537.4 crore (vs our estimate of Rs2,313 crore), mainly driven by an overall good performance in the key geographies. The company achieved an operating profit margin (OPM) of 24.1% during the quarter, which is 641-basis-point higher over Q4FY2012. Despite a sharp 83% Y-o-Y rise in depreciation, the profit before tax jumped by 76.6% YoY to Rs522.7 crore. However, on account of a lower effective tax rate (20.7% in Q4FY2013 vs 41% in Q4FY2012), the net profit jumped by 162% YoY to Rs408 crore, which is substantially higher than our as well as the Street's consensus estimates. -
All-round good performance: During the quarter, most of the key geographies reported a better than expected performance, partially due to better revenues from the launch of new products and currency benefits. The company reported a 48.9% Y-o-Y rise in revenues to Rs1,146 crore from the US market, while the Indian formulation business registered an impressive growth of 42.6% year on year (YoY) to Rs566 crore from a low base during the quarter. Other geographies like Europe (up 45% YoY), South Africa (up 28.5% YoY) and rest of the emerging markets (up 35% YoY) also impressed the Street. However, the revenues from the Japanese market witnessed a moderate growth of 2.2% to Rs275 crore during the quarter. -
FY2013 finishes on positive note; outlook remains robust: Lupin reported a 35.9% Y-o-Y rise in revenues to Rs9461.6 crore on account of nearly 48% Y-o-Y rise in advanced markets of the USA, Europe and Japan, while the emerging markets, including India, registered a 27% Y-o-Y growth in FY2013. The company managed to improve the OPM by 310 basis points to 22.1% in FY2013 on account of a better product mix. The adjusted net profit jumped by 51.5% YoY to Rs1,314.2 crore during the year . We believe the pace of growth would continue in the subsequent quarters as well, given the strong product pipeline in the USA and emerging markets. -
Valuation: The stock is currently trading at 22x and 18x FY2014 and FY2015 earnings estimates.
We will revisit our estimates and price target after interactions with the management. However, we maintain Hold rating on the stock. Housing Development Finance Corporation
Recommendation: Hold
Price target: Rs910
Current market price: Rs886 Price target revised to Rs910 Result highlights -
Housing Development Finance Corporation (HDFC)'s Q4FY2013 results were in line with our estimate as its net profit grew by 17.3% year on year (YoY; up 36.4% sequentially) to Rs1,555 crore driven by a healthy growth in the operating profit (up 14.6% YoY). -
The net interest income (NII) growth was largely in line with our estimate as it increased by 11.9% YoY (up 26.8% quarter on quarter [QoQ]) to Rs1,950.8 crore. A strong growth in the advances and stable spreads contributed to the NII growth. -
Overall, the loan book expanded strongly by 20.7% YoY (up 24% YoY, including the loans sold). The individual loans were up 25.4% YoY (up 31% YoY, including the loans sold), thereby leading to an increase in the proportion of individual loans to ~66.0%. -
The loan approvals saw a growth of 14.5% YoY whereas the disbursements grew by 15.9% during the quarter. The borrowings increased by 32.1% YoY. -
The asset quality improved as the gross non-performing asset (GNPA) was at 0.7% vs 0.75% in Q3FY2012. The outstanding provisions including the standard asset provisions on the balance sheet were higher by Rs286 crore as against the regulatory requirement of Rs1,506 crore. Valuations: HDFC's strategy of reaching out to newer geographies is bearing fruits as the loan book continues to expand at a healthy rate despite competition. The company's strong distribution network (both metro and non-metro regions) and competitive pricing of products are likely to contribute to a strong growth. We have marginally tweaked the estimates for FY2014 and FY2015, and revised the sum-of-the-parts (SOTP) based price target to Rs910. However, we maintain Hold rating on the stock due to premium valuation. Glenmark Pharmaceuticals
Recommendation: Buy
Price target: Rs600
Current market price: Rs525 An all-round impressive performance 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 businesses surprised positively: 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 estimate 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 businesses came as a positive surprise during the quarter, an absence of licencing income during the quarter mitigated the impact. -
We maintain estimate, price target and recommendation: The management has guided for a 20% Y-o-Y rise in revenues in FY2014, with the EBIDTA remaining flat at Rs1,225 crore, which is similar to our earlier estimate. We have broadly maintained our earnings estimates for FY2014 and FY2015. The stock is currently trading near 17.8x and 13.5x core earnings for FY2014 and FY2015. We maintain Buy recommendation on the stock with a price target of Rs600, which includes a base business value of Rs510 (15x average earnings for FY2014 and FY2015) and Rs90 for its research and development (R&D) pipeline. IL&FS Transportation Networks
Recommendation: Buy
Price target: Rs302
Current market price: Rs176 Price target revised to Rs302 Result highlights -
Revenues lower than expectation due to slower execution: In Q4FY2013, the consolidated revenues of IL&FS Transportation Networks Ltd (ITNL) declined by 3% year on year (YoY) to Rs1,931 crore (lower than our estimate) led by a lower than expected construction revenues and fee income. The construction revenues declined by 4% YoY to Rs1,388 crore and the company booked a low fee income during the quarter at Rs75 crore (a decline of 54% YoY). However, the revenues from the operational build-operate-transfer (BOT) assets grew at a healthy rate of 27% to Rs230 crore led by a consistent traffic in its operational projects and also the inclusion of Hazaribaugh Ranchi Expressway and Jharkhand road projects during the quarter. -
Increase in margin due to higher contribution from BOT segment: However, the operating profit margin (OPM) improved by 145 basis points YoY to 24.4%, which was in line with our estimate. The expansion in the margin was mainly on account a lower contribution of revenues from the low margin construction income, vis-a-vis the BOT income. However, the company reported a lower contribution of revenues from the fee income (Rs75 crore as against Rs161 crore during Q4FY2012). Consequently, the EBITDA grew by 3% YoY to Rs472 crore. -
Decline in PBT on account of surge in the interest, depreciation and lower other income: Though the company reported a marginal increase in the OPM, the huge surge in interest charges (up 31% YoY) and depreciation (up 10% YoY) coupled with a decrease in the other income (down 29% YoY) led to a decline in the profit before tax (PBT) by 30% YoY to Rs 171 crore. However, the reversal of the deferred tax liability in a couple of special purpose vehicles (SPVs) led to a 0.6% year-on-year (Y-o-Y) growth in the consolidated net profit to Rs178 crore. -
Strengthening of bid pipeline: At the end of Q4FY2013, ITNL witnessed a robust increase in the request for proposal (RFP) stage (post-qualification) and the request for qualification (RFQ) stage (pre-qualification) bid pipeline. The post-qualification order pipeline grew by 1.1x to Rs9,677 crore while the pre-qualification order pipeline grew by 1.6x to Rs65,942 crore. We believe the sharp rise in the bid pipeline promises a better order intake leading to a strong revenue visibility for ITNL. -
Maintain Buy with a revised price target of Rs302: Considering the strong order backlog, an expected pick-up in the execution and a healthy new project award pipeline of National Highway Authority of India (NHAI), we remain positive on ITNL's financial performance going ahead. Moreover, we expect ITNL to be among the key gainers from the easing of competitive pressure in the large NHAI projects. On account of an increase in the project costs of a few projects and a reduction in margin, we have revised our sum-of-the-parts based price target to Rs302 and have maintained our Buy rating on the stock. However, we have not factored valuation of the four toll projects under implementation awaiting financial closure. At the current market price, the stock trades at 6.0x and 5.5x its FY2014E and FY2015E earnings respectively. Corporation Bank
Recommendation: Buy
Price target: Rs500
Current market price: Rs403 Positive surprise on asset quality Result highlights -
Corporation Bank's Q4FY2013 performance was better than expected as the net profit grew by 1.2% year on year (YoY; 17.3% quarter on quarter [QoQ]) to Rs355.5 crore. The better than expected growth in the net profit was due to a strong growth in the non-interest income (up 34.0% YoY). -
The net interest income (NII) grew by 11.6% YoY to Rs930.8 crore, which was marginally lower than our estimate. The net interest margin (NIM) in Q4FY2013 declined slightly by 2.31% as compared with 2.35% in Q3FY2013 as the decline in yield on fund (23 basis points) was almost similar to the decline in cost of fund at 18 basis points QoQ. -
The business growth picked up in Q4FY2013 as the advances grew by 18.2% YoY (13.7% QoQ) led by a robust growth in the corporate loans (33.1% QoQ) and small and medium enterprises (SME) advances (up 10.7%). Moreover, the deposits grew by 21.9% YoY (18.3% QoQ) driven by a growth of 19.5% YoY (25.3% QoQ) in the current account and savings account (CASA) deposits. Consequently, the bank's CASA ratio improved marginally to 21.7% from 20.5% in Q3FY2013. -
In Q4FY2013, the bank's asset quality improved considerably on a sequential basis as there was a reduction in the levels of the absolute gross (down by 10.3%) and net non-performing assets (NPAs; down by 16.9%). The bank restructured loans to the tune of Rs1,255 crore (including Rs700 crore of Tamil Nadu state electricity board [SEB]) in Q4FY2013. -
The non-interest income grew by 34.1% YoY (46.6% QoQ) on account of higher recoveries from the written off accounts (Rs63.0 crore), treasury profit to the tune of Rs124.4 crore and a strong growth of 27.9% YoY in the fee income. The cost to income ratio of the bank improved to 38.4%. Valuation
Corporation Bank's performance was better than our expectation at the net profit level, mainly led by the non-interest income growth. Contrary to the industry trend, the asset quality showed an improvement as the slippages were Negligible. Though the margin is likely to remain subdued, the sustenance of the asset quality trend will be significant. We have maintained our earnings estimate and expect the return on assets to be at 0.8% and return on equity to be around ~16%. Currently, the stock trades at an attractive valuation of 0.5x FY2015 book value (BV). We maintain Buy recommendation on the stock with a price target of Rs500.
VIEWPOINT Firstsource Solutions Improving outlook to augur well for CESC Result highlights -
Healthy growth in top line: Firstsource Solutions Ltd (FSL)'s top line was reported at Rs714 crore, which is a growth of 14% year on year (YoY) and a decline of 0.8% sequentially. The telecommunication and media segments were the prime contributor to the sales (contributing 45%), followed by healthcare (31%), banking, financial services and insurance (BFSI; 22%), and other (1%) segments. Geography-wise, North America continues to remain a dominant contributor (46%) pursued by the UK (34%) and the rest of the world (20%). -
Operating profit jumped on better margin: The operating profit jumped by 57.2% YoY and 14.1% quarter on quarter (QoQ) to Rs83 crore in Q4FY2013 backed by a significant margin expansion coupled with a healthy sales growth. The OPM expanded by 320 basis points YoY and 152 basis points QoQ to 11.6%. The margin expansion would be attributed to the cost rationalisation efforts made by the company previously. -
Net profit jumped by 74% YoY in Q4FY2013: Following the operating level trend, the profit before tax (PBT) jumped by 60% YoY to Rs40 crore but declined by 8% QoQ. For the quarter, the profit after tax (PAT) was reported at Rs40 crore, which is a growth of 74.3% YoY, as a result of margin expansion and sales growth. Though the margin expanded sequentially, the higher interest cost pushed the PAT lower by 8%. -
Annual net profit more than doubled: During FY2013, the PAT of FSL more than doubled over last year to Rs147 crore. As the sales grew by 25%, the margin expanded by 171 basis points to 9.9% in FY2013. Hence, the operating profit grew by 51% to Rs280 crore. The benefit percolates to the net level. The PAT reported a growth of 136% to Rs147 crore. View-positive developments to augur well for CESC: With the new management and leaner balance sheet, the company is looking forward to FY2014 and FY2015 to consolidate and come back on the track of profitable growth. We the believe these positive developments at FSL would augur well for CESC (holding majority stake in FSL) as the stock of CESC was derated due to its unrelated diversification. Currently, we retain Hold rating on CESC with a price target of Rs355; however, we would follow developments of FSL.
MARKET OUTLOOK Small could be better now
Widened valuation gap offers opportunity in the mid-cap space RBI delivers rate cut of 25 basis points but its commentary turns distinctly hawkish: The macro-economic variables have shown a mild recovery with moderation in inflation and narrowing of the trade deficit for March 2013. The softening of the commodity prices (especially crude oil and gold) is like manna from heaven for the import dependent Indian economy. Despite this, one cannot neglect the challenges facing the economy. For FY2014 the Reserve Bank of India (RBI) has projected a growth rate of about 5.7%, which is marginally higher than the FY2013 growth rate. The central bank has obliged by cutting policy rates by 25 basis points but expressed concerns related to the unsustainable level of current account deficit (CAD) and persistent inflationary pressures. The tone has distinctly turned hawkish and the pace of monetary easing is likely to turn subdued going ahead. Political crisis deepens, economic reforms in limbo: The ongoing political crisis over the leak of the coal scam report and a slew of other scams (railgate being the latest in the list of scams) leaves limited room for the government to push through important pending legislative bills (such as the land reforms bill, the insurance bill and the GST bill) that require parliamentary nod. The RBI in its recent policy statement articulated that governance issues were dragging the economy's growth rather than the monetary policy. Moreover, the decisive victory in Karnataka state election could increase the government's assertiveness on reforms and/or prompt the ruling party to call for early national election. Q4 earnings meet expectations; margin expansion is an encouraging sign: The corporate earnings growth for Q4FY2014 trended largely in line with the estimates though the estimates themselves were quite conservative. In terms of the Sensex companies, the earnings growth was largely in line with expectations (automobile and metal companies delivered a surprise) though the revenue growth fell short of estimates. In the near term, the corporate earnings growth will remain subdued and may pick up towards H2FY2014, led by improved macro-economic conditions and the accumulated effect of some of the measures announced earlier. Global economy-consolidation in progress: The US economy is showing firm signs of recovery as indicated by the falling unemployment numbers and the recovery in the housing sector. The fiscal stimulus announced by the US government and the other governments (of China, Japan etc) is likely to support the cyclical upturn in the global economy. However, the European economies remain in shambles and could continue to trigger bouts of risk aversion. Outlook-positive stance vindicated; expect outperformance in the mid-cap space: We had been constructive on equities in our last Market Outlook report ("Policy push" dated March 6, 2013) and had expected the budget hangover to recede and the global environment to be supportive. The benchmark indices have performed ahead of the consensus expectation and the crash in the commodity complex has provided the trigger for a sharp bounce. For the next two months, we see limited scope for re-rating and the benchmark indices would do well to consolidate in a range in the seasonally weak period of May and June. However, we expect quality stocks in the mid-cap space to outperform the broader market due to the widened valuation gap and the expected improvement in corporate earnings in the next few quarters .
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