Investor's Eye
[October 31, 2013] | | |
| Summary of Contents
STOCK UPDATE Bank of Baroda
Recommendation: Buy
Price target: Rs735
Current market price: Rs643 Earnings ahead of estimates; price target revised to Rs735 Result highlights -
Bank of Baroda (BoB)'s Q2FY2014 results were higher than our and the Street's estimates (-10.2% year on year [YoY] to Rs1,168.1 crore). The growth in the profit was mainly led by a healthy growth in the non-interest income and a lower tax rate (6.4% vs 17.7% in Q1FY2014). -
The net interest income (NII) growth was flattish YoY (up 1.1% YoY, in line with our estimate) mainly due to a decline in the net interest margin (NIM) on a year-on-year (Y-o-Y) basis (2.32% vs 2.41% in Q1FY2014). While the domestic NIM sustained, the dip in the overseas NIM (1.19% vs 1.32% in Q1FY2014) pulled down the overall NIM on a quarter on quarter (QoQ) basis. -
The advances growth improved in Q2FY2014 mainly led by the domestic advances. The deposit growth continued to outpace the credit growth (up 16.3% YoY) especially on the retail side (the proportion of the retail deposits increased to 53% from 43% in FY2013). -
As guided by the bank, the non-performing assets (NPAs) increased in Q2FY2014 led by slippages of Rs 2,017crore. However, the recoveries and upgradations also improved to Rs239crore and Rs185 crore respectively and there was a write-back of Rs379 crore. The bank restructured Rs1,637 crore of advances in Q2FY2014. -
The non-interest income increased by 17.6% YoY mainly contributed by the fee income (up 21.5% YoY). The bank reported a treasury profit of Rs118.2 crore. The bank has shifted about Rs6,800 crore of investments from the "available for sale" (AFS) to "hold-to-maturity" (HTM) portfolio resulting in a shifting loss of about Rs18 crore. Valuation and outlook
BoB's Q2FY2014 results were ahead of our estimates, though the variance was largely contributed by a lower tax rate. The bank continues to focus on qualitative improvement (de-bulking of assets and liabilities, provisioning, capacity building etc) which is likely to drive its performance in future. While the operating environment remains challenging, the management expects relatively lower slippages in the coming quarters. In view of the higher than expected numbers in Q2FY2014 and favourable guidance by the management we have fine-tuned our estimates for FY2014 and FY2015. We value the bank at 1x FY2015 adjusted book value leading to a price target of Rs735. We continue to prefer BoB among the public sector banks due to a higher tier-I capital adequacy ratio (CAR) of 9.25%, return on asset (RoA) of about 0.8% and reasonable valuation. We maintain our Buy rating on the stock. Any negative surprise on the asset quality front is a risk to our call. Cadila Healthcare
Recommendation: Buy
Price target: Rs886
Current market price: Rs663 Forex gains aid profit growth Result highlights -
Q2FY2014 performance broadly in line with expectations: For Q2FY2014 Cadila Healthcare (Cadila) reported a 13.6% year-on-year (Y-o-Y) rise in net sales to Rs1,756 crore, which is 5% higher than our expectation. The growth was mainly driven by formulation exports, which grew by 27.8% year on year (YoY) to Rs744 crore. However, the operating profit margin (OPM) slipped by 410 basis points YoY to 14.9% due to a lower contribution of high-margin branded formulation business in India and a fall in the revenues from the joint ventures. Nonetheless, the reported net profit jumped by 92.7% YoY to Rs183 crore, mainly due to a foreign exchange (forex) gain of Rs12 crore during the quarter as compared to a forex loss of Rs76 crore in Q2FY2013. Excluding the forex loss or gain the adjusted net profit remained flat at Rs171 crore, which is in line with our estimate of Rs173 crore. -
Strong performance in advanced market; better days ahead: During the quarter, the US market grew by 28.7% YoY to Rs473 crore, Europe jumped by 23.6% YoY to Rs94 crore on the new product launches while the Latin American market (Brazil and Mexico) rose by 34% YoY to Rs65 crore due to a low base effect. The management feels the worst is behind as it has seen new approvals in the US market and that will lead to a faster growth in the US market. -
New pricing policy affects domestic business; subsequent quarter may also see weaker sales: The domestic formulation business of the company increased moderately by 4.1% YoY to Rs626 crore due to the impact of the new pricing policy. As the trade-margin related issues remain to be solved, the subsequent quarter is unlikely to see a significant growth. The management assesses the full-year impact of the new pricing policy to be Rs75 crore annually (3% of the domestic business). -
Outlook remains strong; we maintain our price target and recommendation: The growth of the company would be mainly driven by (1) new product launches in the US and European markets including some of the niche products (a higher number of product approvals are expected from the US market); (2) the Hospira joint venture (JV) is likely to add one more product in FY2015; and (3) the domestic branded business, which is likely to normalise towards the end of this year (including better traction in the newly launched new chemical entity, Lipaglyn). We maintain our estimates for FY2014 and FY2015, and our price target of Rs886, which implies 15x FY2015E earning per share. We maintain our Buy recommendation on the stock. Bank of India
Recommendation: Hold
Price target: Rs230
Current market price: Rs210 Price target revised to Rs230 Result highlights -
Bank of India (BoI)'s Q2FY2014 results were ahead of our estimates as the net profit grew by 106.0% year on year (YoY) to Rs 621.8 crore. The net interest income (NII) growth was in line with our estimate (up 15.1% YoY); a higher than expected growth in the non-interest income (up 23.1% YoY) contributed to the variance. -
The net interest margin (NIM; global) declined by 11 basis points to 2.39% due to a decline in the domestic NIM. However, the overseas NIM remained stable at 1.03%. -
During the quarter the growth in the advances picked up (up 29.7% YoY) driven by advances to large corporates (up 27.5% YoY). On the other hand, the deposits grew by 29.9% YoY contributed by a strong uptick in term deposits (up 36.2% YoY). -
The asset quality delivered a positive surprise as slippages were relatively lower (Rs1,469 crore) in Q2FY2014 while recoveries and upgradations increased. The bank restructured Rs 855 crore worth of accounts, taking the total restructured loans to 5.3% of the advances. -
The non-interest income increased by 23.1% YoY and the variance (vs estimate) was largely due to a sharp increase in the recovery from the accounts written off (Rs346 crore vs Rs167 crore in Q2FY2013). The bank also reported a treasury profit of Rs61 crore for the quarter. -
The bank reported marked-to-market (MTM) loss on the investment book of Rs647.9 crore against which the bank held provisions of Rs466.16 crore. The bank also shifted about Rs5,400 crore of investments from the "held-till-maturity" (HTM) portfolio to the "available-for-sale" (AFS) portfolio resulting in a shifting loss of Rs7.8 crore. Valuations and outlook
BoI delivered a better than expected performance in Q2FY2014 with improved asset quality. However, the margin continues to be under pressure and the sustainability of the performance would be keenly watched. We have maintained our non-performing asset (NPA) estimate due to a weak economic growth and volatility in the bank's slippages/recoveries. We have revised our estimates upwards to factor in the higher non-interest income growth and lower investment provisions. This leads to a revision in our price target to Rs230 (0.8x FY2015 adjusted book value). Given the sharp run-up in the prices coupled with subdued return ratios (return on asset [RoA] of 0.6% and return on equity [RoE] of 12%) and a lower tier-I capital adequacy ratio (CAR; 8.13%), the upside seems limited. We maintain our Hold rating on the stock. Torrent Pharmaceuticals
Recommendation: Hold
Price target: Rs486
Current market price: Rs448 A strong performance Result highlights -
Operating performance better than expected, forex loss affects earnings growth: For Q2FY2014 Torrent Pharmaceuticals (Torrent Pharma) reported a 25.8% year-on-year (Y-o-Y) rise in net sales to Rs940 crore on the back of a 31.3% Y-o-Y rise in the revenues from the international business partially contributed by currency benefits. The operating profit margin (OPM) rose by 169 basis points year on year (YoY) to 19.1% on a higher rupee realisation from international trade and a better product mix. As a result, the adjusted net profit grew by 32.7% YoY to Rs149 crore in Q2FY2014, despite the finance cost going up by 88% YoY to Rs15 crore. However, due to a foreign exchange (forex) loss of Rs36 crore (vs a forex loss of Rs5 crore in Q2FY2013), the reported net profit could rise moderately by 5.4% YoY to Rs113 crore. The net sales during the quarter was 5.8% lower than our estimate mainly due to weaker than expected sales in the domestic market while the adjusted net profit was 13% higher than estimated on the back of an improvement in the OPM. -
Strong pick-up in Europe and contract manufacturing business: Torrent Pharma reported a strong set of numbers for the international business including the European business, which reported a rise of 54% YoY (up 31% YoY on constant-currency basis) to Rs235 crore and the US business, which rose by 24% YoY (up 10% YoY rise on constant-currency basis) to Rs115 crore. Also, the contract manufacturing business (insulin manufacturing for Novo-Nordisk) rose by 49% YoY to Rs100 crore during the quarter. Though the growth would not be sustainable in the subsequent quarters, but we believe the international business would continue to jack up the overall growth for the company. -
Outlook remains strong; we maintain price target: The growth of the company in the subsequent quarters would be supported by (1) normalisation of trade-related issues in the domestic market, (2) new product launches in the USA and Europe, and (3) improvement in the OPM on the normalisation of business in the domestic market and focus on branded business in the emerging markets. The company is in the process of expanding its formulation and active pharmaceutical ingredient (API) capacity at Dahez with an investment of Rs1,100 crore which will help ramp up the product basket for the international markets. We maintain our earnings estimates for FY2014 and FY2015, and the price target of Rs486 (implies 12x FY2015E earnings). Owing to limited upside to the stock price from the current level, we maintain our Hold rating on the stock. Mcleod Russel India
Recommendation: Buy
Price target: Rs330
Current market price: Rs272 Price target revised to Rs330 Result highlights -
Volume growth momentum sustained: For Q2FY2014 Mcleod Russel India Ltd (MRIL) posted a double-digit volume growth on account of better tea production in the backdrop of favourable weather conditions in H1FY2014. MRIL's domestic sales volume grew by 13.3% year on year (YoY) to 28.2 million kg in Q2FY2014 on the back of a 16.0% increase in tea production during the quarter to 39.2 million kg. For H1FY2014, MRIL's sales volume grew by 16.2% YoY to 38.1 million kg (production grew by 15% YoY to 63.2 million kg). The domestic sales volume grew by 23.3% YoY to 20.1 million kg (on the back of strong domestic consumption) while the export volume declined by 6% YoY to 8.1 million kg on account of an improvement in tea production in one of the highest black tea exporting countries, ie Kenya. -
Average sales realisation declined by about 2%: The strong improvement in production of tea in Kenya and better tea production in India weakened tea prices in international and domestic markets. However, MRIL fetched a good price for its production in the domestic market and saw a drop of just Rs2.7 per kg in the average sales realisation during the quarter. The average sales realisation in Q2FY2014 stood at about Rs173.7 per kg in Q2FY2014 (as against Rs176.4 per kg in Q2FY2013). The domestic sales realisation was down by about 5% YoY to Rs160.7 per kg while the export realisation grew by 9% YoY to Rs206 per kg during the quarter. -
Operating profit grew in double digits: MRIL's total revenues (including income from operations) grew by 11.6% YoY to Rs501.5 crore. The revenue growth was largely volume led with the realisation remaining almost flat during the quarter. Most of the operating cost remained benign during the quarter. The other expenditures included a foreign exchange (forex) loss of around Rs10 crore and an expense of Rs2.5 crore towards the installation of Enterprise Resource Planning mechanism. If we exclude the forex impact from the other expenses the operating profit margin (OPM) improved by almost 200 basis points YoY to 55.6% during the quarter. The operating profit grew by 15.9% YoY to Rs272.8 crore and the adjusted profit after tax (PAT) grew by 16.2% YoY to Rs257.6 crore. -
Management guided for domestic tea production of 90 million kg in FY2014: With favourable weather conditions and better monsoon, the management of MRIL has indicated the company's domestic production may reach close to 90 million kg in FY2014. This will help the company to post a strong 15% year-on-year (Y-o-Y) growth in the sales volume to around 89 million kg. On other hand, the sales realisation is expected to remain almost flat on a Y-o-Y basis due to benign tea prices globally. -
Price target revised to Rs330, maintain Buy: We have marginally tweaked our estimates for FY2014 and FY2015 to factor in the lower sales realisation. Better tea production in the domestic and international markets would help MRIL to post a double-digit revenue growth and better profitability at the operating level in the coming years.
At the current market price the stock trades at 8.9x its FY2014E earnings per share (EPS) of Rs30.7 and 7.4x its FY2015E EPS of Rs36.7 We maintain our Buy recommendation on the stock with a revised price target of Rs330 (valuing the stock at 9x its FY2015E earnings). Dishman Pharmaceuticals & Chemicals
Recommendation: Buy
Price target: Rs130
Current market price: Rs69 Impressive show from Carbogen Amcis Result highlights -
Q2FY2014 results better than expected: Dishman Pharma (Dishman) reported a 22% year-on-year (Y-o-Y) rise in net sales to Rs352.9 crore on the back of a strong growth in the Switzerland-based subsidiary, Carbogen Amcis, and marketable molecule segments. The operating profit margin (OPM) jumped by 869 basis points year on year (YoY) to 26.4% during the quarter due to the high-margin business of Carbogen Amcis. However, due to a foreign exchange (forex) gain of Rs13.3 crore in Q2FY2013 vs a forex loss of Rs22 lakh during the current quarter, the reported net profit jumped by 59% YoY to Rs42.3 crore. Adjusting for the impact of the forex gain, the net profit zoomed by 219% YoY to Rs12.3 crore as compared with our estimate of Rs31 crore. -
Strong growth to continue in CRAMS segment: During the quarter, Carbogen Amcis reported a 49.5% Y-o-Y growth to Rs167 crore while the marketable molecule business saw a 40% Y-o-Y growth to Rs68.2 crore. However, the Indian contract research and manufacturing services (CRAMS) business reported a 9.9% Y-o-Y decline in the revenues to Rs69 crore while the vitamin D3 business recorded a marginal decline of 6.5% YoY to Rs48.8 crore. The management expects the strong growth in Carbogen Amcis to continue in the subsequent quarters and the India CRAMS business to do better in H2FY2014. Moreover, the vitamin D business would be boosted by vertical integration by the end of the current fiscal. -
High margin may not sustain in subsequent quarters: During the quarter, the earnings before interest, depreciation, tax and amortisation (EBIDTA) margin in the Carbogen Amcis business expanded by a whopping 1,390 basis points to 31.9% while Dishman Netherlands witnessed a contraction of 1,500 basis points YoY in the EBIDTA margin to 17.0%. However, the management indicated that the margin in Carbogen Amcis may not sustain at the current level despite a stronger revenue growth in future. -
We maintain estimates, price target and Buy recommendation on the stock: We believe the company is back in the high-growth phase and we can see a better performance ahead. However, we prefer to maintain our earnings estimates for FY2014 and FY2015 to factor in the high volatility in the CRAMS business. We maintain our Buy recommendation on the stock with a price target of Rs130 (implies 6x FY2015E earnings per share).
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Regards,
The Sharekhan Research Team | |
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