Investor's Eye
[November 01, 2013] | | |
| Summary of Contents
STOCK UPDATE Glenmark Pharmaceuticals
Recommendation: Hold
Price target: Rs600
Current market price: Rs540 Performance meets expectations Result highlights -
Q2FY2014 performance broadly in line with estimates: Glenmark Pharmaceuticals (Glenmark) reported a 16.5% year-on-year (Y-o-Y) rise in the revenues during Q2FY2014 on the back of a 28.3% Y-o-Y rise in the revenues from the generic business in the USA and Europe, and a licencing income of Rs11.8 crore. The core operating profit improved marginally by 49 basis points to 20.9% despite a weaker show by the branded formulation business. However, a steep rise in depreciation and effective tax rate caused the net profit from the core business to remain flat year on year (YoY) at Rs155 crore, which was in line with our estimate of Rs153 crore for the quarter. -
Growth in branded formulation business moderates: The company's specialty formulation business, which includes the branded formulation businesses in India, Latin America and the Rest of the World (RoW) countries, witnessed relatively a slower growth of 10.6% YoY to Rs740.5 crore. The growth was the slowest in ten quarters. The growth slowed down primarily due to the Brazilian business, which is facing regulatory issues as well as stiff competition in key products and select emerging markets where the pricing environment is not conducive. -
Management maintains its revenue guidance; higher depreciation and tax rate to affect earnings: Though the management has maintained its revenue guidance of 20% for FY2014 (a 17.6% growth achieved in H1FY2014) on the hope of a strong revival in the businesses in India, the USA and the emerging markets in H2FY2014, but it indicated a higher research and development (R&D) expenditure, depreciation and tax rate which will weaken the profitability. -
We revise earnings estimates downward; but maintain Hold rating with price target of Rs600: Taking our cues from the H1FY2014 results and our interaction with the company's management, we have reduced our earnings estimates by 12% and 7% for FY2014 and FY2015 respectively. The revised earnings estimates factor in (1) the higher R&D cost (9% vs 8% earlier); (2) higher depreciation (higher amortisation of the intangibles) and (3) the higher tax rate (23% vs 18% earlier). However, considering the expansion in the peer valuations and the liquidity in the market, we have maintained our price target of Rs600, which implies 15.5 x base business value (15x earlier) for FY2015 and includes Rs94 per share for its R&D pipeline. We maintain our Hold rating on the stock. Union Bank of India
Recommendation: Hold
Price target: Rs150
Current market price: Rs134 Loan impairment remains high Result highlights -
In Q2FY2014 Union Bank of India (UBI)'s net profit declined by 62.5% year on year (YoY) to Rs208.1 crore, which was significantly lower than our estimate. The subdued growth in the net interest income (NII) and higher than estimated growth in provisions led to a substantial decline in the profit during the quarter. -
The NII growth was in line with our estimate as it grew by 5.6% YoY to Rs1,954.5 crore. Though the growth in the advances was robust during the quarter but a 9-basis-point sequential dip in the net interest margin (NIM; to 2.54% vs 2.63% in Q1FY2014) limited the NII growth. -
The advances grew by 25.7% YoY (up 9.4% quarter on quarter [QoQ]) driven by an equitable contribution from across the portfolio especially the small and medium enterprise (SME) and retail segments. Given the company's higher reliance on term deposits during the quarter (up 31.1% YoY; 7.0% QoQ), the current account and savings account (CASA) ratio dipped by about 90 basis points sequentially to 28.2%. -
The growth in the non-interest income was subdued at 12.0% YoY (down 19.2% QoQ) as the fee income grew by merely 5.7% YoY. The bank incurred a marked-to-market (MTM) loss of Rs234.34 crore but amortised Rs33.5 crore in Q2FY2014 (in accordance with the Reserve Bank of India [RBI]'s dispensation). Also, the bank booked a transfer loss of Rs82.4 crore on shifting statutory liquidity ratio (SLR) securities worth Rs7,668.7 crore from the "available for sale" (AFS) category to "held to maturity" (HTM) category. -
The asset quality delivered a negative surprise in Q2FY2014 as the slippages rose to Rs1,657 crore (Rs1,468 crore in Q1FY2014). The fresh restructuring of loans worth Rs1,534 crore was high, even though the restructuring of two state electricity boards got pushed to Q3FY2013. Valuation
UBI has disappointed on the asset quality front which affected its profitability. The operating performance may remain subdued due to the deterioration in the NIM and the rising proportion of corporate advances. Though improved recoveries partly compensated for the slippages, but we expect the asset quality trend to remain volatile. The valuation is attractive and reflects the subdued earnings growth and non-performing asset (NPA) risks. The bank's tier-I capital adequacy ratio (CAR) is 7.11% and capital infusion by the government could further dilute the book value and return ratios. We maintain our price target of Rs150 (0.75x FY2015 adjusted book value) and Hold rating on the stock. Allahabad Bank
Recommendation: Hold
Price target: Rs109
Current market price: Rs94 Non-interest income boosts earnings Result highlights -
Allahabad Bank reported a net profit of Rs275.8 crore for Q2FY2014. The same was higher than our estimate largely due to higher recoveries from the written-off accounts (Rs468 crore vs Rs127 crore in Q2FY2013) leading to a 130.4% year-on-year (Y-o-Y) growth in the non-interest income. -
The net interest income (NII) increased by 11.5% year on year (YoY), in line with our estimate, though the net interest margin (NIM) faltered (2.75% vs 2.83% in Q1FY2014) on account of a dip in the yield on funds. The growth in advances remained strong at 19% YoY driven by the small and medium enterprises (SME) and agriculture segments. -
The slippages were elevated (3.7% annualised) though the same were lower than that in the past couple of quarters whereas the recoveries/upgradation improved quarter on quarter. The bank restructured Rs944 crore worth of advances in Q2FY2014 taking the total restructured book to 10.3% of the advances. -
The non-interest income came in higher than expected due to higher recoveries from the written-off accounts and a strong growth in the fee income (up 32% YoY). The bank also reported a treasury profit of Rs34 crore. -
The bank shifted Rs7,961.1 crore of investments from the "available for sale" (AFS) portfolio to "held to maturity" (HTM) portfolio resulting in a shifting loss of Rs61.35 crore. The bank had a marked-to-market (MTM) loss of Rs423.33 crore in the quarter against which it had a surplus provision of Rs335 crore (Rs118 crore provided in Q2FY2013). Valuation attractive though asset quality concerns remain
Allahabad Bank's results were better than expected though the concerns on the NIM and asset quality persist. In view of the higher non-interest income growth in Q2FY2014, we have revised our estimates and expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 18.1% YoY. We also revise the price target to Rs109 (0.75x FY2015 adjusted book value). Though the valuation seems attractive at 0.65x FY2015 book value, but the subdued return ratios (return on asset [RoA ]of 0.6%), the equity dilution due to the capital infusion by the government and the volatility in the asset quality remain concerns. We maintain our Hold rating on the stock. Kalpataru Power Transmission
Recommendation: Buy
Price target: Rs115s
Current market price: Rs79 Better execution on a seasonally weak quarter; confidence reinstated Result highlights -
Better execution pushed results ahead of our estimates: During Q2FY2014, Kalpataru Power & Transmission Ltd (KPTL) reported sales of Rs962 crore, which is 26% ahead of our estimate due to better execution of projects and reflects a growth of 35% year on year (YoY) and of 8% quarter on quarter (QoQ). The order book grew by 10% YoY to Rs12,000 crore at the end of Q2FY2014. The operating profit margin (OPM) expanded by 60 basis points YoY to 9.5% in Q2FY2014 (against our estimate of 9.7%); hence, the operating profit grew by 44% YoY to Rs91 crore. However, below the operating line, due to a higher interest cost (which included a marked-to-market (MTM) loss of Rs12 crore) the company's profit after tax (PAT) grew by 17% to Rs31 crore, which is 13% higher than our estimate. If we adjust the MTM losses, the adjusted PAT shows a growth of 76% YoY. -
Margin expansion visible in JMC Projects: Despite a flat sales growth, the operating profit of JMC Projects grew by 12% YoY as the operating profit margin (OPM) expanded by 46 basis points YoY to 4.9% in Q2FY2014. Consequently, the net profit clocked a growth of 26% YoY to Rs3.1 crore. During the conference call the management reiterated its expectation of a margin expansion of around 50-100 basis points in JMC Projects in FY2014 and expand it further to 7% in the next two years. They informed of the efforts taken by the company to achieve the targeted margin expansion by re-balancing the order mix, bidding for most of the projects at a variable cost and leveraging the presence of the parent company to expand the international market. -
SSL is on fast-growth trajectory: Shubham Logistics Ltd (SSL) reported a strong growth in the revenues (up 59% YoY) and the operating profit (up 43% YoY). However, the strong operational performance did not percolate to the bottom line due to the capitalisation of the new capacities during the quarter. The management expects SSL to notch revenues of around Rs350 crore in FY2014 and an OPM of above 14%. However, the capitalization cost of the incremental capacity would keep the earnings growth low in FY2014. Nevertheless, for SSL the management aims to achieve a sales growth of 25-30% and an OPM of around 14-15% over the next three years on the back of expansion. -
View and valuation: Given the healthy order book position (2x FY2013 sales) and better project execution, the company is expected to achieve a healthy earnings growth in FY2014 and FY2015. Moreover, a gradual margin improvement is expected in JMC Projects which could translate into a healthy earnings growth, despite the expectation of a single-digit sales growth. In case of SSL we expect the earnings growth to be softer with the capitalisation of the new facilities. But overall, the consolidated entity is likely to show a healthy earnings growth in FY2014 and FY2015. Moreover, the measures taken by the company to improve its return ratios, eg capital reduction in various projects, augur well. Currently, the stock is trading at 7x its FY2014E earnings and 6x FY2015E earnings. Also, it is available at 0.5x its book value. Hence, we remain positive on the company and continue to rate it as a Buy with a price target of Rs115 (based on the sum-of-the-parts [SOTP] method).
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Regards,
The Sharekhan Research Team | |
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