Tuesday, August 13, 2013

Investor's Eye: Update - Mahindra & Mahindra, Aurobindo Pharma, Speciality Restaurants; MF - Sharekhan's top equity mutual fund picks, Sharekhan's top SIP fund picks

 
Investor's Eye
[August 13, 2013] 
Summary of Contents
 

 

STOCK UPDATE

Mahindra & Mahindra
Recommendation: Buy
Price target: Rs1,010
Current market price: Rs871

Price target revised to Rs1,010

Key points

Q1FY2014 results: Operating performance in line with estimate; higher other income boosts profit
Mahindra & Mahindra (M&M)'s results were in line with our estimate on the operating front. The revenues at Rs10,022.5 crore were marginally below our estimate. The blended realisation at Rs514,076/vehicle was 4.8% below our estimate. The operating profit at Rs1,287.4 crore was in line with our estimate. M&M reported an operating profit margin (OPM) of 12.8% as against our estimate of 12.3%. However, the higher other income at Rs164.2 crore (which included Rs81 crore dividend from subsidiaries) boosted profitability. Consequently, M&M reported a profit of Rs937.9 crore, which was ahead of our estimate of Rs 817.4 crore.

Tractor growth strong; outlook raised
The tractor sales have grown in strong double digits in April-July 2013 on account of a normal monsoon and an increase in the farm realisations. The management has raised the tractor volume forecast from 6-8% at the beginning of the year to 10-12% for FY2014. 

Automotive demand to remain under pressure; to observe no production days to control inventory
M&M's key segments, the utility vehicle (UV) and the light commercial vehicle (LCV; which contribute about 85% of the overall volumes), have been facing pressure on account of a subdued economic environment and an increase in the diesel price. To avoid the excess inventory, M&M would be observing no production days across the automotive plants for a 0-6 days in August 2013. 

Margin to remain at higher levels due to benign commodity prices and improved tractor mix
The benign commodity prices would help M&M sustain a higher margin going forward. Further, with the improvement in the tractor mix (which is a high-margin business), we expect the margin to remain at elevated levels.

Valuation
Given the pressure on the automotive segment, we have lowered our revenue assumptions for FY2014 and FY2015. We have marginally raised our margin assumptions given the improved tractor mix. Our revised earnings per share (EPS) estimates for FY2014 and FY2015 stand at Rs 57.6/share and Rs61.6/share. We have revised our price target to Rs1,010. 
Though the automotive sector is facing challenges, the farm sector remains buoyant, with a strong double-digit growth expected. We believe M&M is better placed amongst the other automotive players to face the macro-economic challenges and remains our preferred pick in the space. We maintain our "Buy" recommendation on the stock. 

 

Aurobindo Pharma
Recommendation: Buy
Price target: Rs267
Current market price: Rs187

Strong performance ahead; high debts remain a drag

Result highlights 

  • Q1FY2014 performance better than expectations; forex loss erodes bottom line: Aurobindo Pharma (Aurobindo) reported an impressive 41.3% year-on-year (Y-o-Y) growth in net sales to Rs1,715.6 crore in Q1FY2014, which is 7% better than our estimate. The growth has been mainly driven by the US formulation business, which grew 90% YoY to Rs624.8 crore. The operating profit margin (OPM) jumped by 643 basis points year on year (YoY) to 17.9% on a better product mix. Despite a foreign exchange (forex) loss of Rs172.4 crore during the quarter (vs Rs206.5 crore in Q1FY2013), the net profit was around Rs18.6 crore. Excluding the forex loss, the adjusted net profit grew by 146% YoY to Rs191 crore, which is 30% better than our estimate.

  • Multiple growth drivers: The company recorded an impressive growth in the US market during the quarter, mainly driven by (1) the incremental revenues of $3 million from reintroduction of cephalosporin products; (2) nearly $7 million incremental revenues from AuroMedics on commercialisation of three injectible products; and (3) an expansion in market share of existing products and introduction of new generic products (got 10 abbreviated new drug application [ANDA] approvals in Q1FY2014). The company got its Unit-IV facility operational towards the end of the last quarter (after the US Food and Drug Administration [USFDA] clearance); hence, the full impact is yet to come. The management indicated a 30% Y-o-Y growth from the US business in dollar terms. Besides, it is also in process of getting key contracts for supply of anti-retroviral drugs under the President's Emergency Plan for AIDS Relief (PEPFAR) program for combination drugs.

  • High debts continue to be key concerns: The company recorded a 5.5% increase in the gross debt to Rs3,680 crore over March 2013 level mainly due to a sharp depreciation of the rupee against the dollar. The company repaid $20 million of debt during the quarter. At this level, the gross debt is 3x the EBIDTA and 1.1x estimated equity for FY2014. Given that there are a few acquisitions on cards and the rupee continues to remain volatile, the company's debt level is unlikely to recede materially in the immediate future. We expect free cash flows of Rs54 crore in FY2014, factoring in Rs280 crore of capital expenditure (capex) during the year.

  • Earnings estimates revised upwards but price target kept intact at Rs267; Buy maintained: We have revised our earnings estimates up by 6% each for FY2014 and FY2015 to factor an impressive Q1FY2014 performance and a better growth outlook. However, a sharp depreciation of the rupee against the dollar and the mounting level of debts keep us cautious. We have maintained Buy rating on the stock and kept the price target intact at Rs267, which implies 10x estimated earnings for FY2015.

 

Speciality Restaurants
Recommendation: Buy
Price target: Rs200
Current market price: Rs122

Price target revised to Rs200

Result highlights 

  • Muted operating performance in Q1FY2014: Speciality Restaurants Ltd (SRL) posted a muted operating performance in Q1FY2014 with the operating profit margin (OPM) declining substantially to ~14% (as against our expectation of ~19%). The decline in the OPM was due to a subdued business environment on account of a bleak macro environment along with a higher front-end cost towards the operations of new restaurants. The new restaurants are taking a little longer period (around one year) to break-even compared with the six to eight months break-even period in a good business environment. This resulted in a 25% year-on-year (Y-o-Y) decline in the bottom line to Rs4.7 crore for the quarter. The company is planning to take a price hike in the range of 4-5% in its menu in August 2013. The revenue growth in the near term would be predominantly driven by the addition of new restaurants while the same-restaurant sales are reeling under a bleak macro environment. The company has reduced its restaurant addition numbers to 10-12 per annum from 14-15 earlier as it will focus on improving the business fundamentals of the recently added restaurants. The operating efficiencies and cost optimisation would remain the key focus areas for the company in the coming years.

  • Performance snapshot: SRL's Q1FY2014 total revenues (including other operational income) grew by 14.5% year on year (YoY) to Rs60.2 crore in Q1FY2014 (in line with our expectation of Rs60.7 crore). The revenue growth was largely driven by the addition of new restaurants in the past few months while the same-restaurant sales remained flat during the quarter. The cover turnaround ratio for Mainland China and Oh! Calcutta remained flat YoY at 1.44x and 1.00x respectively in Q1FY2014. The gross profit margin (GPM) declined by 193 basis points YoY to 72.5%, largely on account of a lower contribution from Mainland China and higher raw material cost inflation. The OPM declined by 744 basis points YoY to 13.8% in Q1FY2014 due an incremental cost towards new restaurant added in the past few months. Hence, the operating profit declined by 26.1% YoY to Rs7.8 crore and the reported profit after tax (PAT) declined by 24.4% YoY to Rs4.7 crore.

  • Outlook and valuation: SRL is bearing the brunt of a bleak macro environment, where the discretionary spends have slowed down significantly. We expect it will take sometime for the business environment to revive and the growth in the near term would be driven by the addition of new restaurants. However, an improvement in the macro environment and a drop in the inflation would help in improving the overall business environment for the restaurant industry in India. The fine-dinning space in India is expected to achieve a strong growth of above 20% per annum on account of an expected rise in the per capita income and more families getting habitual to dine out. 
    In view of the near-term macro head wind and the management's cautious stance towards the addition of new restaurants along with an increase in the operational cost for new restaurants, we have reduced our earning estimates for FY2014 and FY2015 by 4% and 10% respectively. However, we believe it's a short-term phenomenon and considering the growth prospects of the fine-dining space in India, we believe SRL would definitely witness better operational years going ahead. In line with reduction in our earnings estimates, we have reduced our price target to Rs200. However, considering the decent upside and the strong long-term growth prospects of the company, we maintain our Buy recommendation on the stock.


MUTUAL GAINS

Sharekhan's top equity mutual fund picks

Large-cap funds

Mid-cap funds

Multi-cap funds

ICICI Prudential Focused Bluechip Equity Fund - Ret

SBI Emerg Buss Fund

BNP Paribas Equity Fund

Birla Sun Life Top 100 Fund

Mirae Asset Emerging Bluechip Fund

Tata Ethical Fund - Plan A

UTI Top 100 Fund

IDFC Premier Equity Fund - Reg

Axis Equity Fund

Birla Sun Life Frontline Equity Fund - Plan A

Franklin India Prima Fund

Mirae Asset India Opportunities Fund - Reg

SBI Magnum Bluechip Fund

SBI Magnum Midcap Fund

IDFC Equity Fund - Reg

Indices

Indices

Indices

BSE Sensex

BSE MID CAP

BSE 500

Tax saving funds

Thematic funds

Balanced funds

Axis Long Term Equity Fund

Birla Sun Life India GenNext Fund

ICICI Prudential Balanced

BNP Paribas Tax Advantage Plan

ICICI Prudential Service Industries Fund

Tata Balanced Fund - Plan A

Franklin India Taxshield

UTI India Lifestyle Fund

Canara Robeco Balance

Tata Tax Saving Fund - Plan A

Reliance Media & Entet Fund

SBI Magnum Balanced Fund

IDFC Tax Advantage (ELSS) Fund - Reg

L&T India Special Situations Fund

Reliance RSF - Balanced

Indices

Indices

Indices

CNX500

S&P Nifty (CNX Nifty)

Crisil Balanced Fund Index

Fund focus

  • ICICI Prudential Focused Bluechip Equity Fund

Sharekhan's top SIP fund picks

 

Large-cap funds

Multi-cap funds

ICICI Prudential Focused Bluechip Equity Fund-Ret

Tata Ethical Fund - Plan A - Growth

SBI Magnum Bluechip Fund - Growth

BNP Paribas Equity Fund - Growth

Birla Sun Life Frontline Equity Fund - Plan A

UTI Opportunities Fund - Growth

Birla Sun Life Top 100 Fund - Growth

UTI Masterplus Unit Scheme 91 - Growth

UTI Top 100 Fund - Growth

IDFC Equity Fund - Reg - Growth

BSE Sensex

BSE 500

Mid-cap funds

Tax saving funds

SBI Emerg Buss Fund

BNP Paribas Tax Advantage Plan

Franklin India Prima Fund

Franklin India Taxshield

IDFC Premier Equity Fund - Reg

Tata Tax Saving Fund - Plan A

SBI Magnum Midcap Fund

DSP BlackRock Tax Saver Fund

HDFC Mid-Cap Opportunities Fund

HDFC Long Term  Advantage Fund

BSE Midcap

CNX Nifty

Fund focus

  • SBI Emerging Business Fund


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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
 
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