| Summary of Contents
STOCK UPDATE Reliance Industries
Recommendation: Buy
Price target: Rs1,010
Current market price: Rs908 Q1 earnings in line with estimates 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. The net sales of the company declined by 4.6% YoY to Rs87,645 crore. The revenues contracted on account of lower throughput in the refining division and the continued poor performance of the exploration and production (E&P) division on account of a falling output from the Krishna-Godavari (KG)-D6 basin. The revenues from the petchem division remained largely stable (up 0.5% YoY). -
Refining margin contracted QoQ but remained higher YoY: During the quarter the company refined 17.1 million tonne of crude oil as against 17.3 million tonne in Q1FY2013. The GRM for Q1FY2014 stood at $8.4 per barrel, which is lower compared with $10.1 per barrel in Q4FY2013 but higher YoY (as the GRM was $7.6 per barrel in Q1FY2013). The GRM was higher YoY on account of better gas oil and gasoline cracks. The refining segment's revenues declined by 4.6% YoY to Rs81,458 crore on account of a decline of 3.6% and 1% in the volume and the price respectively. However, on account of a higher GRM, the earnings before interest and tax (EBIT) from the division came at Rs2,951 crore as against Rs2,130 crore in the corresponding quarter of the previous year. -
Petchem margin failed to meet Street's expectation: The Street had expected the petchem margin to expand sequentially during the quarter but the same remained flat quarter on quarter (QoQ) and disappointed the market. The revenues from the division remained largely flat (grew by just 0.5% YoY) to Rs21,950 crore. The EBIT margin stood at 8.6%, which is flat QoQ but higher by 56 basis points YoY. The expansion in the margin on yoy basis is driven by depreciation of rupee against US $ and lower price of its feed stock like Ethylene, Propylene and Naphtha. -
Gas output at KG-D6 basin continues to fall; strong ramp up at US Shale gas: The gas production from the KG-D6 basin during Q1FY2014 dropped both YoY and quarter on quarter (QoQ). The average daily production rate during the quarter dropped to 16mmscmd from 33mmscmd in Q1FY2013 and 19mmscmd in Q4FY2013. In case of the Panna-Mukta-Tapti oilfield, the oil production declined by 20.8% YoY due to a natural decline in the reserve. On the positive front, the ramp-up in the shale gas business in the USA remains healthy with a sharp jump in the production of gas to 37.7bcf in Q1FY2014 (from 22.1bcf in Q1FY2013). The net volume of natural gas and condensate has increased by 78.6% YoY and by 5.1% QoQ to 32.7bcf. -
Upward revision in the gas price augurs well for the company: The Cabinet Committee of Economic Affairs (CCEA) has accepted the formula recommended by the Rangarajan committee to revise gas price for the domestic players. According to the new formula, the gas price could get revised to around $8.4 per mmbtu (as compared with the present price of $4.2 per mmbtu) with effect from April 2014. The move is positive for RIL and will lead to an earnings upgrade. However, we would like to wait for more clarity as the finance ministry has suggested that RIL should sell outstanding gas at the previous price. Hence, we maintain our earnings estimates for FY2014 and FY015. -
Maintain Buy with price target of Rs1,010: Though the petchem business has failed to witness any margin improvement and remained stable, but the better refining margin (even after the recent correction) and the healthy ramp-up in the US shale gas business remain the positives. Further, a revision in the price of gas from April 2014 and likely approvals for further development of the KG-D6 block could bode well for RIL and provide visibility of it earnings growth going ahead. Hence, we maintain our Buy recommendation on the stock with a price target of Rs1,010. Currently, the RIL stock is trading at price/earnings (PE) of 14x and 12.3x of FY2014 and FY2015 estimated earnings respectively. Bajaj Auto
Recommendation: Hold
Price target: Rs2,201
Current market price: Rs1,985 Price target revised to Rs2,201 Key points Domestic motorcycle sales to remain in mid-single digits in FY2014
The domestic motorcycle industry ended FY2013 on a flat note. With not much improvement in the economic scenario, FY2014 is likely to witness sluggish sales with an expectation of a mid-single digit growth for the industry. The industry is expecting sales to remain in the negative territory in H1FY2014 as the Q1FY2014 volumes registered a marginal decline and sluggish volumes are expected in Q2. The festive season and an economic recovery in the second half are expected to lead recovery in the industry volumes. BAL to focus on executive segment to gain market share
With the increasing fuel price scenario, the sales of premium motorcycles (150cc segment) have been under pressure. Bajaj Auto Ltd (BAL) has leadership position in the premium segment, commanding share of about 45%. BAL expects the premium segment to remain under pressure and plans to focus on the executive segment to boost market share. BAL has relatively lower market share in the executive space (share of about 17%). It plans to launch six new bikes under the "Discover" brand in the current fiscal to boost sales. Export growth forecast lowered
BAL has lowered the growth forecast for exports given the slowdown in the overseas markets and geopolitical situation in Egypt. While it expects growth in the African and the Sri Lankan markets, the sales in other markets are expected to remain under pressure. In Q1FY2014, the export volumes declined by 21% year on year (YoY) due to problems in the Nigerian and the Egyptian markets. Given the weak outlook, BAL has lowered the FY2014 export volume growth from 10% earlier to 5%. Margins to sustain higher levels due to rupee's depreciation
BAL reported higher than expected margins in Q1FY2014. The higher margins were on account of a favourable export realisation with BAL realising a rate of Rs57.4/$ as against a rate of Rs50.7/$ realised in Q1FY2013. The realisation for Q2FY2014 and Q3FY2014 is guided at higher levels of Rs59/$. BAL has stated that it would pass on half of the export benefits (in the form of price reductions, higher advertisements) to boost volumes. We expect BAL to report an operating profit margin (OPM) of 20.5% in FY2014 on account of strong export realisations. Valuation
We are reducing our revenue assumptions for FY2014 and FY2015 given the weakness in the domestic motorcycle industry and a pressure on the export volumes. However, we have raised our margin assumptions given the strong export realisations expected in FY2014 and FY2015. We have increased our FY2014 and FY2015 earnings per share (EPS) estimates by 4.8% and 8.5% respectively. Our revised EPS estimates stand at Rs131.4/share and Rs157.2/share respectively. We maintain Hold recommendation on the stock with a revised price target of Rs2,201. Larsen & Toubro
Recommendation: Buy
Price target: Rs1,075
Current market price: Rs901 Margin pressure visible; price target revised to Rs1,075 Result highlights -
Muted sales growth at just 5% against annual guidance of 15%: The net sales of Larsen and Toubro (L&T) in Q1FY2014 grew by just 5% year on year (YoY) to Rs12,555 crore, which is 7% lower than our estimate. The revenues from infrastructure (infra), hydrocarbon and heavy engineering segments grew at a healthy pace (above 20%) but a decline in the revenues in the power and metallurgical segments restricted the overall sales growth to just 5% YoY. During the conference call, the management reiterated that they are hopeful of meeting their annual sales growth guidance of around 15% in FY2014. To meet the annual sales growth guidance of 15% in FY2014, L&T has to notch sales of around Rs57,500 crore in the remaining nine months, recording a growth of 17% YoY. Given the kind of impressive order backlog, we believe they could largely meet their revenue guidance. -
Margin pressure across the segments; pricing pressure apparent: The operating profit of L&T declined by 1% in Q1FY2014 (YoY) on a sales growth of 5% during the same period as the operating profit margin (OPM) contracted by 56 basis points. The segments like hydrocarbon, heavy engineering and power were having a significant margin contraction. During Q1FY2014, the OPM was 8.5% against our estimate of 9.3%. Due to visible pricing pressure in several segments, we have trimmed down our OPM estimate by ~70 basis points for FY2014E and FY2015E. -
Slow revenue growth and weak margin pushed net profit down: Below the operating line, the other income declined by 22% YoY (due to lower dividends and interest earnings) in Q1FY2014. Further, the interest expenses moved up (owing to higher borrowing cost) and along with higher depreciation (YoY), the net profit was reported at Rs756 crore, 12.5% down YoY. However, in Q1FY2014, there is around Rs200 crore of foreign exchange (forex) loss; hence, the adjusted profit after tax (PAT) would be Rs900 crore, a growth of 6%. We have marginally fine-tuned our cost estimate for below operating line items, apart from the revision of OPM. Consequently, we have cut down our earnings estimates for FY2014E and FY2015E by 9-10%. -
Sturdy backlog and healthy order inflow trend continue in Q1FY2014: L&T showed a healthy order inflow growth trend of 28% YoY to Rs25,159 crore. The infra segment contributed almost 70% (the highest) to the order inflows due to some big ticket orders bagged in Q1FY2104. However, the power and metallurgical process segments showed a declining trend in Q1FY2014. During the quarter, due to the slow-moving nature of some of the orders, L&T had to cancel orders worth Rs600 crore in the shipbuilding segment. In spite of the cancellations of orders, the company ended the quarter with an order backlog of Rs165,393 crore, which is a growth of 8% on both YoY and QoQ bases. This sturdy order backlog reflects a book-to-bill ratio of 2.7x on sales of FY2013. We believe the order inflow has been very healthy in case of L&T given the macro environment. -
Fine-tuned earnings estimate and revised price target downwards; but retain Buy: We have revised our earnings estimate downwards by 9-10% for FY2014E and FY2015E due to visible margin pressure. We believe given the macro environment, it would be a challenge for the company to maintain the margin. Hence, we expect the company to notch an OPM of ~9.5% for FY2014 as the second half should give a window for more operating leverage. In line with the earnings revision, we have cut down our price target by 10% to Rs1,075 adjusting the recent bonus issue (1:2 bonus issue), giving a upside potential of ~20% from the current level. Therefore, we retain Buy rating on the stock with a revised price target of Rs1,075. Federal Bank
Recommendation: Buy
Price target: Rs500
Current market price: Rs381 Price target revised to Rs500 Result highlights -
Federal Bank's Q1FY2014 profit after tax (PAT) declined by 44.5% year on year (YoY) to Rs105.7 crore, which was much lower than our and the Street's estimates. Though the operating profit grew by 15.6% YoY a sharp rise in the provisions (up 290.5% YoY) contributed to the slump in the profit. -
The net interest income (NII) growth was flattish (up 3.7% YoY), in line with the estimate. The net interest margin (NIM) increased by 6 basis points sequentially to 3.13% driven by a drop in the cost of funds. -
During the quarter the bank focused on de-bulking both advances and deposits, leading to a slower business growth. The growth in advances was muted (up 8.5% YoY) since the large corporate advances declined by 6.0% YoY. However, the retail, and small and medium enterprises (SME) advances grew by 21.0% and 19.8% respectively. -
The asset quality remained under stress as the slippages increased to Rs307 crore in Q1FY2014, largely contributed by the corporate segment. Also, the bank fully provided for one government account which shot up the provisions. -
The bank booked treasury profit of Rs89 crore (up 239.2% YoY) which fueled a growth in the non-interest income. The cost-to-income ratio remained high at 44.8%. Valuations
Federal Bank's earnings surprised negatively as a sharp rise in the provisions led to a slump in the profits. We, therefore, revise our estimates downwards to factor in the slower growth and the higher credit cost. We now value the bank at 1.1x FY2015E BV, leading to a price target of Rs500 and retain our Buy rating as the stock is trading at an attractive valuation of 0.9x FY2015E BV.
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. | | | |
| |
No comments:
Post a Comment