Investor's Eye
[July 19, 2013] | | |
| Summary of Contents
STOCK UPDATE Reliance Industries
Recommendation: Buy
Price target: Rs1,010
Current market price: Rs923 Q1FY2014 results-First cut analysis Result highlights -
Earnings in line with estimates; petchem margin disappoints: For Q1FY2014 Reliance Industries Ltd (RIL) posted a net profit of Rs5,352 crore (an increase of 18.9% year on year [YoY]), which is much in line with our estimate. The earnings growth was largely supported by the refining business and a strong other income. The gross refining margin (GRM) stood at $8.4 per barrel (in line with our expectation of $8.5 per barrel), which is lower on a quarer-on-quarter (Q-o-Q) basis but higher compared with $7.6 per barrel in Q1FY2013. However, the petrochemical (petchem) margin disappointed as it remained flat on a Q-o-Q basis at 8.6% as against the expectation of an expansion sequentially. -
Net sales down 4.6% YoY: The net sales of the company declined by 4.6% YoY to Rs87,645 crore. The contraction in the revenue was on account of a lower throughput in the refining division and the continued poor performance of its exploration and production (E&P) division (after the decline of 42% in the revenues) on account of a falling output from the Krishna-Godavari (KG)-D6 basin. The revenues from the petchem division remained largely stable (it grew by 0.5% YoY). -
Overall margin expanded YoY but contracted QoQ: The operating profit margin (OPM) expanded by 66 basis points YoY to 8.1% during the quarter on account of a better GRM, which stood at $8.4 per barrel in Q1FY2014 (as compared with $7.6 per barrel in Q1FY2013). The earnings before interest and tax (EBIT) margin in the refining division improved from 2.5% in Q1FY2013 to 3.6% in Q1FY2014. Further, the petchem margin of 8.6% even though remained flat on a Q-o-Q basis but was higher YoY compared with 8% in the corresponding quarter of the previous year. However, on account of sequential weakness in the GRM, the overall margin of the company contracted by 122 basis points quarter on quarter (QoQ). -
Other income remained healthy and supported earnings growth: The other income came at Rs2,535 crore, which is better than our as well as the Street's estimates. The healthy other income was largely supported by a healthy cash balance of Rs93,000 crore. The effective tax rate during the quarter came at 19.7% as against 17.6% in the corresponding quarter of the previous year. Valuation
Though RIL's earnings came in line with estimates, the company's failure to improve the margin in the petchem business (sequentially) came as a disappointment. However, a healthy ramp-up in the shale gas business and a refining margin in line with expectations augur well for the company. Currently, the RIL stock is trading at a price/earnings ratio of 14.3x, discounting its FY2014 estimated earnings and enterprise value/earnings before interest, tax, depreciation and amortisation of 10.9x on FY2014 estimate. We currently have a Buy recommendation on the stock with a price target of Rs1,010. We shall come out with detailed note on the RIL soon. Bajaj Auto
Recommendation: Hold
Price target: Rs2,028
Current market price: Rs1,967 Q1FY2014 results-First cut analysis BAL's Q1FY2014 operating performance ahead of estimate; PAT hit by MTM forex loss
Bajaj Auto Ltd (BAL)'s Q1FY2014 operating performance (adjusted for mark-to-market [MTM] loss) was ahead of our as well as the Street's estimates. BAL reported an operating profit margin (OPM) of 20.4%, which is way above our estimate of 18.7%. The operating profit at Rs 1,003 crore was 10.6% above our estimate. The company's margin was boosted by better export realisations and lower material costs. However, BAL realised MTM loss of Rs96 crore on export hedges. The lower other income further impacted profits. Consequently, BAL reported a profit after tax (PAT) of Rs737.7 crore as against our estimate of Rs782 crore.
Management outlook on business -
The domestic motorcycle sales are expected to remain sluggish; however, BAL plans to focus on the executive segment with six new "Discover" launches planned to gain market share. -
Export markets are expected to recover after normalisation of volumes in Sri Lanka and recovery in other markets. -
The three-wheeler sales are expected to remain strong on account of the launch of upgraded products and the issue of fresh auto rickshaw permits in Hyderabad, Maharashtra and Delhi. -
The export realisation for Q2FY2014 has been guided at higher levels implying further benefits on account of currency. -
BAL is witnessing increased production at the Chakan plant with 700 employees reporting to work. The production at the plant improved to 1,700 motorcycles/day against the capacity of 3,000 units/day before the strike. The company has already shifted partial production of Pulsar motorcycles to Waluj to minimise impact of the strike on the sales volumes. Valuation
We have a Hold rating on the stock with a price target of Rs2,028. We would review the same after the conference call with BAL's management. Housing Development Finance Corporation
Recommendation: Hold
Price target: Rs865
Current market price: Rs804 Price target revised to Rs865 Result highlights -
For Q1FY2014, Housing Development Finance Corporation (HDFC) reported a profit of Rs1,173 crore (up 17.1% year on year [YoY]), which is below our estimate. The lower than expected growth in the net interest income (NII; up 16.7% YoY) and absence of capital gain income contributed to the variance. The operating profit increased by 15.3% YoY. -
The interest spread was stable at 2.29% (vs 2.30% in Q4FY2013 and 2.27% in Q1FY2013) while the net interest margin increased to 3.9% from 3.45% in Q1FY2014. During the quarter, the spread on non-individual loans declined by 12 basis points quarter on quarter (QoQ) to 2.82%. -
Overall loan book expanded by 19.4% YoY (up 24% YoY, including the loans sold). However, the non-individual book expanded by 11% YoY. Consequently, the proportion of individual loans expanded to 67% of the book. -
The asset quality was largely stable as the gross non-performing asset (NPA) was at 0.7% vs 0.77% in Q4FY2012. The outstanding provisions including the standard asset provisions on the balance sheet were significantly higher than the regulatory requirement. -
The non-interest income increased by 12% YoY though there was no income from capital gains. The fee income declined by 12% YoY but dividend income increased by 36% YoY. Valuation: HDFC's Q1FY2014 results were slightly lower than our estimate. Therefore, we have revised our estimate to factor rising competition and pressure on spreads. We expect earnings to grow at a compounded annual growth rate (CAGR) of 18.2% leading to a return on equity (RoE) of ~18 % and return on asset (RoA) of 2.7%. We maintain Hold rating on the stock with a revised sum-of-the-parts (SOTP) based price target of Rs865. V-Guard Industries
Recommendation: Hold
Price target: Rs560
Current market price: Rs529 Price target revised to Rs560; retain Hold Result highlights Strong sales growth backed by growth in major products
During Q1FY2014, the net sales of V-Guard Industries (V-Guard) grew by 28% year on year (YoY) and 9% quarter on quarter (QoQ) to Rs408 crore, which is 6% better than our estimate. A steady growth in major products like digital uninterruptible power supply (UPS; 68% growth YoY), cables (33%), pumps (21%) and stabiliser (17%) supported the strong year-on-year (Y-o-Y) sales growth. These four products are contributing almost 77% to the total sales. An increase in demand in the peak summer season, frequent power cuts coupled with price hikes of 2-4% across the segments helped V-Guard's revenue growth. PAT declined by 15% YoY but remained ahead of our estimate
The operating profit margin (OPM) of V-Guard declined by 319 basis points YoY in Q1FY2014 due to a higher raw material cost and a surge in the advertisement cost. However, the OPM was better by 60 basis points QoQ adjusting for one-off items in Q4FY2013. The operating profit stood at Rs31 crore, which is 10% lower YoY but 55% higher QoQ (~10% higher than our estimate). Further, due to lower than estimated interest and depreciation costs, the profit after tax (PAT) was at Rs18 crore in Q1FY2014, which is 19% higher than our estimate. Key highlights of conference call -
The management expects to achieve a sales growth of around 25% and OPM of 9-9.5% in FY2014. -
The company has capital expenditure (capex) plans of Rs20-22 crore in FY2014, which include Rs8 crore for the second phase of expansion at its Kashipur cable facility. -
Currently, the average revenue per branch in the non-south region hovers around Rs20 crore (average revenues ~Rs150 crore per branch in south) and the management expects to take it to Rs50 crore in the next two to three years. -
During Q1FY2014, with a stringent receivable policy, the company managed to reduce the net working capital by 15 days; however, it would be difficult to maintain the same in Q2, being a traditionally soft quarter. -
V-Guard has spent around Rs21.5 crore (5.3% of the revenues) on advertisement in Q1FY2014; however, the management expects the advertisement cost to be around 4% of revenues in FY2014. View and valuation: We believe the company's attempt of enhancing its presence in the non-south region would yield fruits in terms of operating leverage in the long run. We retain our estimate and expect the earnings to record a compounded annual growth rate (CAGR) of ~28% during FY2013-15. Moreover, the company is expected to generate a return on equity (RoE) of 26-28% in FY2014 and FY2015. The stock is currently trading at 19x its FY2014 earnings and 15x its FY2015 earnings. Though we retain our Hold rating on the stock, we have revised our price target upwards to Rs560 (16x FY2015 earnings). IDBI Bank
Recommendation: Hold
Price target: Rs94
Current market price: Rs70 Earnings below estimates, asset quality disappoints Result highlights -
IDBI Bank's Q1FY2014 results were disappointing on the earnings and asset quality fronts. The net profit declined by 28% year on year (YoY) to Rs307 crore. A sharp rise in provision (up 62.7% YoY) affected the growth in the profit. -
The net interest income (NII) growth was in line with estimate as it grew by 16.1% YoY. The net interest margin (NIM) declined by 7 basis points quarter on quarter (QoQ) but was higher by 3 basis points YoY to 2.12%. This was despite the equity infusion in Q4FY2013. -
The growth in advances was flattish (up 6.6% YoY) largely contributed by the corporate advances. The deposit growth declined by 4.4% YoY due to a sharp decline in the current account deposits which also contributed to a decline in the current account and savings account (CASA) decline (20.6% from 25.1% Q4FY2013). -
The slippages increased sharply to Rs1,685 crore, which led to a sharp rise in the gross non-performing assets (NPAs) to 4.34%. In addition, the bank restructured Rs647 crore worth of advances in Q1FY2014 and another Rs500 crore of advances are in the pipeline. The provision coverage was at 68% compared to 70.8% in Q4FY13. -
The non-interest income increased by 38% YoY mainly contributed by a treasury profit of Rs143 crore and a strong growth in the foreign exchange (forex) income. Valuations: IDBI Bank's results continue to disappoint especially on the asset quality front. We, therefore, reduce our earnings estimates and revise the price target to Rs94 (0.6x FY2015 adjusted book value [ABV]). Though the stock is trading at an attractive valuation (0.5x FY2014 ABV), but low return ratios and asset quality pressures remain an overhang. We maintain our Hold rating on the stock.
MUTUAL GAINS Debt Mutual Fund Picks Bond / Debt market round up -
Bond yields fell initially during the month due to the RBI's continuation of debt purchases and after the Government allowed foreign investors to own more local bonds. Better-than-expected inflation numbers and CAD data also provided some relief to the market. However, bond yields increased thereafter on heavy selling from foreign investors during the month on the back of weakness in the rupee, which touched an all-time low against the dollar. Narrowing interest rate differentials with U.S. Treasury yields also triggered bond selling. Sentiments dampened further after the U.S. Federal Reserve signalled an end to its monetary stimulus. -
The 10-year benchmark bond (7.16% GS 2023) ended up 20 bps to close at 7.44% against the previous month's close of 7.24%. Bond / Debt Outlook -
The bond yields were supposed to remained range bound ahead of First Quarter Monetary Policy review and macroeconomic data points such as IIP, CPI and WPI would have acted as major triggers for the market participants. However, RBIs announcement on July 15, to increase the Bank Rate and Marginal Standing Rate to 10.25%, fixing a daily limit on banks' borrowing under the LAF window, and announcement to conduct open market sales of securities of Rs. 12,000 crore on July 18 impacted bond yields tremendously. The overnight rates are likely to go up from here and yields across the maturities will harden and a chance of a repo rate cut in near future is minimal.
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