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STOCK UPDATE Ipca Laboratories
Recommendation: Hold
Price target: Rs677
Current market price: Rs675 Q2FY2014 results: a first-ut analysis Result highlights -
Impressive improvement in operating performance: Ipca Laboratories reported a 10.1% year on year (Y-o-Y) growth in the revenues to Rs834.3 crore in Q2FY2014 on account of an 11.5% rise in the exports to Rs517.7 crore and an 8% rise in the domestic business to Rs316.7 crore. However, the company positively surprised the Street on the operating profit front, which recorded a 484-basis-point Y-o-Y rise in the margin to 26.6%. However, a mark-to-market foreign exchange (forex) loss of Rs39.90 crore (against forex gains of Rs6.4 crore in Q2FY2013) and a higher-than-expected tax payment impacted the reported net profit. The reported net profit grew moderately by 3.5% year on year (YoY) to Rs129.5 crore during the quarter. Excluding the impact of forex loss or gains, the adjusted net profit jumped by an impressive 48.5% YoY to Rs169 crore, which is 24% better than our estimate. The company has declared an interim dividend of Rs2.50 per share (125%) for the current fiscal (vs Rs4 per share in FY2013). -
Domestic market disappoints; stronger traction in API business helps: The revenues from the company's domestic formulation business rose moderately by 5% YoY to Rs276.2 crore due to a high base effect and impact of the new pricing policy. However, the revenues from the active pharmaceutical ingredients (API) business helped it to achieve a 25.6% Y-o-Y growth in revenues to Rs195.50 crore during the quarter. -
Valuation: The stock is currently trading at 14x earnings of FY2015E. We have Hold rating on the stock with a price target of Rs677.
We will revisit our estimate and recommendations after the teleconference call with the management, which is scheduled on October 25, 2013 at 12am. Raymond
Recommendation: Buy
Price target: Rs387
Current market price: Rs271 Good results; price target revised to Rs387 Result highlights -
Q2FY2014 performance exceeds expectation: Raymond's Q2FY2014 performance exceeded our expectation on all the three key variables, viz revenues, operating profit and net earnings. The top line, operating profit and net earnings grew by 10%, 19.2% and 83.5% year on year (YoY) respectively. The adjusted net profit (adjusting for the voluntary retirement scheme [VRS] and foreign exchange [forex] fluctuations) came at Rs97.7 crore vs our expectation of Rs56.7 crore. The net profit swing was on account of a good operational performance coupled with a low effective tax rate (16.8% vs 30%), which was due to the deferred tax asset set off against liability. -
Earnings upgraded: The management sounded confident and optimist on sustaining the growth and margin momentum witnessed in Q2FY2014. Going forward with a long wedding season awaiting (November-February 2014) coupled with Raymond's structural changes paying off (supply chain initiatives, new distribution strategy etc), we believe its performance is likely to remain good. In the wake of the strong earnings coupled with an enhanced confidence, we have upgraded our margin estimates for the textile and the branded apparel businesses. Consequently, our consolidated EBITDA gets upgraded by 2.8% and 3.1% respectively for FY2014 and FY2015 respectively. Further, in line with the tax guidance provided by the management for FY2014 (owing to the offset of tax liability with deferred tax asset created when the company was incurring losses), our earnings per share (EPS) estimates too gets enhanced. Our revised EPS for FY2014 and FY2015 are Rs14.8 and Rs23.2 respectively. -
Buy maintained with revised price target of Rs387: With the restructuring exercise largely being done, the benefits being visible and the inventory overhang out of the system, we expect the branded apparel business to revive its profitability track record. Thus, in the wake of improving business fundamentals, cleaner balance sheet and exhibition of a lean working capital execution, the management's enhanced focus towards the monetisation of its lucrative 120-acre land bank parcel (with its core team in place, the master plan on the real estate business is expected soon) and the stock's ruling at an attractive valuation at enterprise value (EV)/EBITDA of less than 4x FY2015, we continue to maintain our Buy rating on the stock with a revised price target of Rs387 (core business valued at 5x EV/EBITDA+ land valued at 50% market price). United Phosphorus
Recommendation: Buy
Price target: Rs180
Current market price: Rs155 Results exceed expectation aided by strong volume growth and forex gains Result highlights -
Volume-driven growth aided by favourable exchange rate: During the quarter, the consolidated revenues of United Phosphorus Ltd (UPL) grew by a robust 26% to Rs2,331.6 crore largely driven by a robust volume (12%) and a favourable exchange rate. In Q2FY2014, the reported profit after tax (PAT) grew by 29% to Rs155 crore. However, after adjusting for the one-time items of net foreign exchange (forex) loss of Rs5 crore and a one-time fee for prior period items of Rs20 crore, the adjusted PAT stood at Rs180 crore, which was way ahead of our and the consensus expectations. -
Margin aided by currency gains and better product mix: The operating profit margin (OPM) during Q2FY2014 improved marginally by 70 basis points year on year (YoY ) to 18.3%, thereby showing the company's focus of maintaining the margin at the current level for the past three quarters. The improvement witnessed in the margin was largely on account of a better product mix (in favour of the high margin products) and currency benefits. The gross debt in its book at the end of the quarter was around Rs4,200 crore, whereas the net debt stood at Rs2,800 crore, which includes revaluation due to the currency deprecation to the tune of Rs300 crore. The total capital expenditure (capex) for FY2014 will be around Rs450 crore. -
Demand outlook positive across geographies; management maintains guidance: The demand environment for agrochemicals remains positive across the world on account of favourable weather conditions projected by the different metrological departments. North American and the domestic markets are expected to play a key role in the revival of demand for the agrochemicals as both the markets were witnessing an uneven weather pattern. The management has maintained its guidance of 12-15% growth in FY2014, which is largely in line with our estimate. The effective tax rate for FY2014 will be in the range of 22-25%. -
Valuation-Buy retained: UPL's robust Q2 results, a positive commentary by the management on the demand outlook this fiscal and an attractive valuation leave scope for re-rating in the stock. Consequently, we maintain our positive stance on the company and retain Buy recommendation with a price target of Rs180. At the current price, the stock is trading at 7.4x its FY2014E earnings per share (EPS) of Rs20.9 and 7x its FY2015E EPS of Rs22.1. The Ramco Cements
Recommendation: Hold
Price target: Rs175
Current market price: Rs173 Price target revised to Rs175 Result highlights -
Performance disappoints; sharp contraction in realisation dents revenues: In Q2FY2014, the overall revenues of The Ramco Cements declined by 7.1% year on year (YoY) to Rs928.4 crore. The revenues from the cement division declined by 6% YoY as the volume growth of 8.3% was offset by a 13.2% year-on-year (Y-o-Y) contraction in the average blended cement realisation. The revenues from the wind power division declined by 36.5% YoY to Rs34.4 crore. The profit after tax (PAT) for the quarter stood at Rs18.3 crore (includes Rs10.4 crore of MAT credit), which restricted the fall to 86.2% YoY. The correction in the average blended realisation was mainly on account of a sharp decline in the cement prices in the southern region during July and August. The cement prices in the region recovered in the second week of September so the fuller impact of the same will be visible in the coming quarter. On the demand front, the cement offtake in Andhra Pradesh continued to remain sluggish and is unlikely to recover in the near term. The other southern states such as Tamil Nadu, Kerala and Karnataka witnessed a relatively better demand environment. -
Input cost pressure and weak realisation result in margin pressure: The operating profit margin (OPM) of The Ramco Cements has contracted sharply by over 1,700 basis points YoY to 14.4%, which is below our estimate. The margin contraction was on account of: (a) a decline in the average blended cement realisation by 13.2% YoY; (b) a higher input cost (higher usage of costly imported gypsum along with an increase in the cost of limestone and fly ash); and (c) the higher transportation and handling expenses (continuous increase in the price of diesel and an increase in freight cost by the railway). Hence, the overall cost of production has increased by 7.1% YoY on a per tonne basis. Consequently, the EBITDA per tonne for the quarter declined by 65.5% YoY to Rs449 per tonne. -
Hold maintained purely on valuation: Given the sluggish demand environment in the southern region, we believe the growth in volume sales could remain muted in the near term. Moreover, the cost pressure and a negative operating leverage would put pressure on the margin. Our Hold rating is based purely on the valuation, which is close to 0.6x replacement value (enterprise value [EV]/tonne of $80), and a lower than the distress valuation for the sale of cement assets by Jaiprakrash Associates. The Ramco Cements is a stock for value buyers with a long-term perspective.
VIEWPOINT Firstsource Solutions Its steady progress bodes well for CESC Performance highlight -
Steady growth in top line: For Q2FY2014 Firstsource Solutions Ltd (FSL) reported a top line of Rs798 crore, which is a growth of 10% both year on year (YoY) and quarter on quarter (QoQ). The telecommunications (telecom) and media segments were the prime contributor to the sales (a 45% joint contribution) and together grew by 12% YoY and 9% QoQ, followed by the healthcare segment (a 32% contribution) which grew by 14% YoY and 13% sequentially, banking, financial services and insurance (BFSI; a 22% contribution) and others (a 1% contribution). Geography-wise, North America remains a dominant contributor (with 46% contribution) ahead of the UK (a 36% contribution) and the rest of the world including India (an 18% contribution). -
Margins expect to show steady improvement: The operating profit grew by 31.6% YoY and 11.7% QoQ to Rs90 crore in Q2FY2014 backed by margin expansion and a healthy sales growth. The operating profit margin (OPM) expanded by 184 basis points YoY and 14 basis points QoQ to 11.2% in Q2FY2014. The management reiterated that it could achieve margin expansion of around 200 basis points YoY in FY2014. During H1FY2014, it successfully managed to notch an OPM of above 11%. However, going forward it expects the margin to spike in Q4FY2014 due to the seasonal nature of collection and improved efficiency. FSL aims to earn an OPM of around 13% in Q4FY2014, though in Q3FY2014 the OPM should remain at the current level. The company expects the OPM to expand in FY2015 too. -
Net profit jumped by 25% YoY: The other income declined sharply both YoY and QoQ while the interest cost grew by 21% YoY and 7% QoQ in Q2FY2014. However, the better operational performance percolated to the profit before tax (PBT), which grew by 14% YoY and 10% QoQ to Rs47 crore in Q2FY2014. With the benefit of tax shield, the profit after tax (PAT) grew by 25% YoY and 9% QoQ to Rs45 crore in Q2FY2014. The PAT margin stood at 5.6%, 66 basis points higher YoY and 6 basis points lower sequentially. The earnings per share (EPS) stood at Rs0.7, that is a growth of 25% YoY and 9% QoQ in Q2FY2014. -
Operational highlights: The revenue contribution from the top five customers remained near 45% during Q2FY2014 while the telecom and media industries together constituted 45% of the total revenues. Region-wise, the UK witnessed a healthy margin improvement. The number of total employees remained at 30,390 at the end of Q2FY2014 which is a net reduction over Q1FY2014. The seat-fill factor hovered around 81% and the attrition rate spiked, especially in the onshore business, to 47%. -
Balance sheet position improving: As per the plan, the company made a principal repayment of $11.25 million on September 30, 2013. The cash and cash equivalents stood at Rs150 crore at the end of Q2FY2014 compared with Rs153 crore in Q1FY2014. The management reiterated its plan to repay the principal of $11.25 million on a quarterly basis going forward. Moreover, it highlighted that cash generation from the business was healthy and supportive of the repayment. -
Impressive performance in the first half: During H1FY2014, the PAT of FSL grew by 32% YoY to Rs86 crore. Its sales grew by 8% and margin expanded by 239 basis points YoY to 11.2% in the first half of the year. Hence, the operating profit grew by 37% to Rs170 crore. The operating performance percolated to the net level with the net profit growing by 32% YoY. View-steady progress of FSL will augur well for CESC
With the new management and a leaner balance sheet, FSL is looking forward to consolidate in FY2014 while maintaining a healthy revenue growth and expanding its margin. Though Q3FY2014 is expected to remain tepid (traditionally a soft quarter), the company expects significant uptick in Q4FY2014 with a bulky margin performance. Going forward, the management sounded confident of growth visibility in FY2015. We believe the above mentioned positive development would be positive for CESC (which holds a 56.86% stake in FSL). Currently, we retain our Hold rating on CESC with a price target of Rs385 and continue to follow the developments of FSL .
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