Wednesday, August 7, 2013

Investor's Eye: Update - Lupin, Apollo Tyres, Capital First

 
Investor's Eye
[August 07, 2013] 
Summary of Contents
 

 

STOCK UPDATE

Lupin
Recommendation: Buy
Price target: Under review
Current market price: Rs828

Q1FY2014 results: a first-cut analysis

Result highlights 

  • Q1FY2014 revenues weaker than expected: Lupin reported a 9% year-on-year (Y-o-Y) rise in net sales to Rs24,207 crore mainly driven by the US and European businesses, which grew by 29% year on year (YoY) to Rs1,099.40 crore. However, a 5% Y-o-Y decline in revenues from the Indian formulation business and a 12% Y-o-Y decline in the Japanese business restricted the revenue growth during the quarter. However, at constant currency, the revenues from the Japanese market improved by 5% YoY. The net sales achieved during the quarter are 12% lower than our estimate.

  • Other income boosts profitability: The company achieved an improvement in operating profit margin (OPM) by 300 basis points YoY to 22.1% during the quarter, which is in line with our expectations. However, a sharp 169% Y-o-Y jump in other income (presumably due to foreign exchange [forex] gains) to Rs156.6 crore helped the profit before tax expand by 53.4% YoY to Rs622.6 crore. 

  • Net profit grew 43% YoY; despite higher tax rate: During the quarter, the effective tax rate jumped to 34.9% from 29.8% in Q1FY2013, which restricted the net profit growth at 43% YoY to Rs401 crore. The net profit was 4% lower than our estimate.
    The revenues and profits for Q1FY2014 were 21% and 25% of our annual estimates for FY2014 respectively.
    The stock is currently trading at 22.9x and 18.5x earnings for FY2014E and FY2015E respectively. 
    We will come out with a detailed note shortly after interacting with the management. 

 

Apollo Tyres
Recommendation: Hold
Price target: Rs77
Current market price: Rs60

Price target revised to Rs77

Key points 

Q1FY2014 results ahead of estimate on account of lower material costs
Apollo Tyres Ltd (ATL)'s Q1FY2014 revenues at Rs3,189.9 crore were marginally better than our estimate. However, the reduction in material costs due to lower rubber prices boosted the operating performance. ATL reported a margin of 12.3%, which is 310 basis points ahead of our estimate. A lower than expected depreciation further boosted the profit. ATL reported a profit after tax (PAT) of Rs165.9 crore, which is significantly ahead of our estimate of Rs 97.4 crore.

Demand to remain subdued
The demand in key geographies (India and Europe) is expected to remain sluggish. While the subdued original equipment manufacturer (OEM) demand is expected to put pressure on the domestic operations, an overall weak economic situation in the European market is expected to maintain demand pressure.

Raw material outlook stable, margin to remain at current levels
ATL expects the raw material prices to remain stable. We expect the margin to stabilise at the current levels with no further benefit on account of lower material prices.

Valuation
We have reduced our revenue assumptions given the sluggish demand scenario in both the domestic and the European operations. We have retained our margin assumptions given there are no expectations of further benefit from the raw material prices. We have marginally reduced our earnings per share (EPS) estimates by 1.3% and 1% for FY2014 and FY2015 respectively. Our revised estimates for FY2014 and FY2015 stand at Rs14.3 and Rs15.4 per share respectively. 
However, the acquisition of Cooper Tires would put considerable stress on the balance sheet and increase the earnings volatility. We have not incorporated Cooper Tires' numbers as the acquisition is still in process. However, given the uncertainty, we have reduced our target multiple to 5x (discount of 25% to the long-term target multiple of 6.5x) and arrive at a price target of Rs77/share. We maintain our "Hold" rating on the stock.

 

Capital First
Recommendation: Buy
Price target: Rs160
Current market price: Rs120

Price target revised to Rs160

Result highlights 

  • For Q1FY2014 Capital First reported a net profit of Rs5.5 crore at consolidated level (the stand-alone profit stood at Rs7.6 crore) which was lower than our estimate. Though the net interest income (NII) growth was steady, but a higher than expected growth in the operating expense (opex) affected the profit. However, the Q1FY2014 numbers are not comparable on a year-on-year (Y-o-Y) basis due to a change in the company's accounting practice from Q2FY2013.

  • The NII increased by 20.2% year on year (YoY) largely driven by a strong growth in loans (up 26.3% YoY). The net interest margin (NIM) declined by 8-10 basis points quarter on quarter (QoQ) to 5% levels due to a similar increase in the cost of borrowings.

  • The loan assets grew by 26.3% YoY (up 4.8% QoQ) largely driven by the retail segment. The total assets under management (AUMs) expanded by 23.9% with the retail loans constituting 76.2% of the AUM (vs 63.4% in Q1FY2013).

  • The non-interest income grew by 57.9% QoQ driven by the fee income (up 59.5% QoQ; growth not comparable on a Y-o-Y basis). The securitisation income turned positive in Q1FY2014 (Rs0.9 crore vs loss of Rs1.3 crore in Q4FY2013) and is expected to improve with vintage of the portfolio.

  • The opex increased by 24.7% YoY (up 10.2% QoQ) mainly due to investments in new businesses and manpower addition. The asset quality was healthy as the gross and net non-performing assets (NPAs) were healthy at 0.2% and 0.05% respectively.

Valuations: Business transformation taking longer than expected, price target revised downwards: Capital First's core income growth is trending well, but the volatility in its non-interest income (due to a change in the accounting practice) and a higher opex have affected the profit growth. Though the company expects to maintain the NIM at 5% levels, but we believe the cost of borrowing will go up led by the Reserve Bank of India (RBI)'s liquidity tightening measures. We, therefore, reduce our assumptions for NIM and credit growth, and raise our estimates for opex. This leads to a downward revision in our earnings estimates. In our view, the transformation of the business is positive from a long-term perspective but the same may affect the profitability of the company over the next 8-12 months. Therefore, we reduce the valuation multiple to 1x FY2015 book value which leads to a revised price target of Rs160. We maintain our Buy rating on the stock.


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.

 

 


       

       

Regards,
The Sharekhan Research Team
myaccount@sharekhan.com

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