Investor's Eye
[October 25, 2013] | | |
| Summary of Contents
STOCK UPDATE ITC
Recommendation: Buy
Price target: Rs379
Current market price: Rs340 Q2FY2014 results: a first-cut analysis Result highlights -
Mixed operating performance: ITC's Q2FY2014 performance was disappointing in terms of the revenue growth in some of the key businesses (cigarette and agri) moderating the overall top line growth to high single-digits during the quarter. However, the margin improvement in the core cigarette business and commoditised agri business along with a decline in the non-cigarette fast moving consumer goods (FMCG) business losses aided the company to post a decent operating performance with the operating profit margin (OPM) improving by above 100 basis points during the quarter. The key disappointment was the growth of ~11% in the gross revenues of the core cigarette business, which gives us an indication that the sales volume declined by around 5-6% year on year (YoY; our and the Street's expectation was close to 2%). However, on the positive note, the profit before interest and tax (PBIT) margin of the cigarette business improved by 34% (on account of the price increases) and the agri business improved to ~16% (on account of the higher tobacco exports and better revenue mix). -
Revenue growth moderated to single digits; margin expansion supported the adjusted PAT growth: The net sales grew by 8.8% YoY to Rs7,862.5 crore, which is lower than our expectation of Rs8350.0 crore for the quarter. The company has stated that adjusting for the higher level of wheat exports in Q2FY2013 due to a shortfall in global crop output, the growth in the net sales would have been 15.2% YoY, which is largely in line with our expectation. ITC's gross profit margin (GPM) improved by 176 basis points YoY to 62.1% and the operating profit margin (OPM) improved by 117 basis points YoY to 38.4% (adjusting for a one-time write-back amount of Rs157.91 crore from the other expenses). The OPM was ahead of our expectation of 37.4% for the quarter. Thus, the operating profit grew by 12.2% YoY to Rs3,017.9 crore. Adjusting for the one-time exceptional item (towards the write-back of liability not required) of Rs192.7 crore, the profit after tax (PAT) growth was 11.0% YoY to Rs2,037.9 crore, which is lower than our expectation of Rs2,134.3 crore for the quarter. The lower than anticipated bottom line growth can be attributed to the dismal sales performance during the quarter. The reported PAT grew by 21.5% YoY to Rs2,230.5 crore. -
Segmental performance-cigarette business' volume declines in mid-single digits: The core cigarette business disappointed with the gross revenue growth of 10.7% YoY to Rs7,103.1 crore, entirely a price-led growth with a volume decline of around 5-6% for the quarter. The PBIT margin of the business improved by 154 basis points to 34.0% in Q2FY2014. The non-cigarette FMCG business posted a decent performance with a revenue growth of 15.7% YoY to Rs1,968.0 crore, while the losses at the PBIT level declined by almost 60% YoY to Rs12.7 crore. The revenues from the agri business declined by 12.4% YoY to Rs1,772.5 crore. However, adjusting for the higher exports of wheat in Q2FY2013, the revenue growth of the agri business would have been 8.5% YoY. The agri business profitability improved by 322 basis points YoY to 16.1% largely on account of improved product mix and the higher tobacco exports during the quarter. The hotel business, and the paperboard, paper and packaging business posted a dull performance with the PBIT margin declining by 352 basis points YoY (3.5%) and 758 basis points YoY (17.6%) respectively during the quarter. -
Valuation and view: ITC's H1FY2014 was disappointing in terms of the revenue growth, but the profitability expansion aided the overall bottom line growth. We will revise our earning estimates for FY2014 and FY2015 after our interaction with the management of the company. At the current market price, the stock trades at 30.4x and 25.2x its FY2014 and FY2015 respective earnings. Currently, we have a Buy recommendation on the stock. ICICI Bank
Recommendation: Buy
Price target: Rs1,195
Current market price: Rs1,022 Strong operating performance Result highlights -
ICICI Bank's Q2FY2014 results came in higher than our and the Street's estimates as the net profit increased by a robust 20.2% year on year (YoY) to Rs2,352.1 crore. The strong growth in the net interest income (NII; up 19.9% YoY, in line with our estimate), a slower growth in the operating expense (opex) and a pick up in the fee income growth aided the growth in profit. The bank absorbed the mark-to-market (MTM) loss on investments of Rs278.84 crore in Q2FY2014 itself despite having an option to amortise it over FY2014. -
The net interest margin (NIM) surprisingly expanded by 4 basis points quarter on quarter (QoQ) to 3.31% in a tough macro-economic environment. The bank's deposit profile improved significantly and it expects to maintain a 3.3% NIM in FY2014. -
The advances growth picked up in Q2FY2014 (up 5.4% QoQ) mainly contributed by the retail segment (up 6.0% QoQ). The current and savings account (CASA) ratio was stable at 43.3%, whereas the average CASA ratio climbed to 40.3%. -
Overall, the non-interest income grew by 6.0% YoY due to a treasury loss of Rs79 crore. However, the fee income posted a strong growth of 16.7% YoY. -
While the gross non-performing asset (NPA; as a% in advances) declined, the loan impairments were higher at Rs2,076 crore (slippages Rs1,000 crore + restructured loans of Rs1,076 crore). The provision coverage declined to 73.1% vs 75.4%. Valuations
ICICI Bank's Q2FY2014 numbers suggest buoyancy in the operating performance, which has been driving the earnings growth. In our view, the improvement in the deposit profile is structurally positive for the NIM's outlook. We continue to believe that the asset quality challenges for the bank will be within the manageable limits and the recovery in the operating performance will help in dealing with the provisioning requirements. In addition, a healthy provision coverage ratio and a higher tier I capital (11.3%) will increase comfort. Despite better Q2FY2014 numbers, we have maintained our earnings estimates (compounded annual growth rate [CAGR] of 12.7%) and expect the bank to maintain the return on asset (RoA) of 1.6%. We maintain our Buy rating with a sum-of-the-part (SOTP)-based price target of Rs1,195. Ipca Laboratories
Recommendation: Hold
Price target: Rs732
Current market price: Rs689 Price target revised up to Rs732; Hold maintained 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 (MTM) foreign exchange (forex) loss of Rs39.90 crore (against forex gains of Rs6.4 crore in Q2FY2013) 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. -
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 the impact of the new pricing policy. The revenues from the exports of formulation business grew by 7% YoY to Rs362.7 crore. The weaker growth in exports of formulation business was mainly attributed to a decline in the tender business by 21.7% YoY to Rs101.40 crore during the quarter. 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. -
Outlook remains strong; price target revised to Rs732; Hold maintained: The management expects a better operating performance in H2FY2014 both in terms of revenue growth and improvement in the margin if the currency stays at the current level. The key growth drivers include (1) the ramp-up of its Indore special economic zone (SEZ) facility (the US supplies to start from Q4FY2014); (2) a better traction in the tender-based business (anti-malarial business); and (3) normalisation of the domestic business after issues related to the new pricing policy gets settled. We have broadly maintained our earnings estimates for FY2014 and FY2015 but have revised the price target upward to Rs732 (15x FY2015E earnings per share [EPS]) from Rs675 (14x FY2015E EPS).
VIEWPOINT Idea Cellular Seasonally soft quarter; but steady performance ahead Key points -
Q2FY2014 results marginally below estimate: Idea Cellular (Idea)'s Q2FY2014 results missed our estimate marginally. The revenues, operating profit and net earnings showed a decline of -3.3%, -5% and -3.2% on a sequential basis. The net profit stood at Rs448 crore for the quarter as against our expectation of Rs479 crore. A pronounced seasonality, a fall in the non-data value added services and low revenues from the 3G inter-circle regions impacted the traffic (traffic was down by 5.8% quarter on quarter [QoQ] vs our expectation of a 3.2% quarter-on-quarter [Q-o-Q] decline). Consequently, the revenues missed our estimate and the same got reflected on the net earnings front as well. -
Management elucidates confidence: The management sounded confident on the incremental voice growth and the huge data opportunity in the Indian telecommunications (telecom) space. Further, it opined that the prices both in the voice and data categories are low and need to get adjusted upward. The management appeared confident of sustaining the margin at the current level and also guided for increased investment in the new circles to further gain market share. -
Eye on filling the spectrum, coverage and network gaps: The management mentioned that it is slowly and steadily filling up the coverage gaps in the market with new site additions. Further, it mentioned that at an opportune time, it would acquire a 3G spectrum to gear itself for the strong data growth ahead. Also, the funding via another round of qualified institutional placement (QIP) is not ruled out. -
Positive view: We believe that Idea with its strong brand equity, superior execution capability and by virtue of being a pure wireless player is likely to witness disproportionate benefits in the improving business matrix. Hence, we continue with our positive view on the same. Outlook and valuation -
The Indian telecom environment is turning favourable with a reduction in the competitive intensity and the benefits of consolidation flowing to the incumbent players, which is visible in the improving performance indicators of the leading players for the past two consecutive quarters. -
We believe that Idea with its strong brand equity, superior execution capability and by virtue of being a pure wireless player is likely to witness disproportionate benefits in the improving business matrix. Hence, we continue with our positive view on the same. -
At the current market price of Rs172, the stock is trading at an enterprise value (EV)/EBITDA multiple of 7.6x ad 5.9x its FY2014 and FY2015 rough cut estimates respectively. Currently, we do not have any active rating on the stock.
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Regards,
The Sharekhan Research Team | |
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