Investor's Eye: Pulse - RBI Q3FY2014 policy review: repo rate hiked by 25 basis points; but further rate hikes unlikely; Update - Maruti Suzuki India, Ipca Laboratories, Jyothy Laboratories, Shree Cement; Viewpoint - Idea Cellular

Investor's Eye [January 28, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   PULSE TRACK RBI Q3FY2014 policy review: repo rate hiked by 25 basis points; but further rate hikes unlikely Key points The Reserve Bank of India (RBI) has developed a knack for surprising the market and acting contrary to consensus expectations. This time again, the RBI raised the repo rates by 25BPS to 8% (MSF rate gets adjusted to 9%) when the majority of economists expected the central bank to maintain the status quo. Consequently, the bond yield and equity market showed a sharp negative reaction today.  The action shows that the RBI is inclined to implement the recommendations of the Dr Urjit Patel Committee, which proposes CPI be made the anchor for the monetary policy and targets to bring the index down to 8% by January 2015. However, the RBI's commentary on its future actions suggests that further rate hikes may not be required if the disinflationary trend continues. While further rate hikes seem unlikely, banks may find it difficult to pass on the existing rate hikes due to a slower credit demand. This, in turn, could have some impact on their net interest margin.  STOCK UPDATE Maruti Suzuki India Recommendation: Buy Price target: Rs1,990 Current market price: Rs1,563 Strong operating performance; retain Buy with a downgrade in the price target Key points Despite pressure on the revenues (due to a volume decline), MSIL posted a double-digit growth in Q3FY2014 earnings driven by an improvement in the operating performance on the back of currency benefits and efficiency gains (increased localisation and cost control efforts). We expect MSIL to post a double-digit earnings growth over the next two years on the back of new product launches and a recovery in the domestic demand. The margin is expected to remain high given the increased localisation and improvement in the product mix. The proposed contract manufacturing by its parent, Suzuki Motor Corporation, for MSIL in Gujarat would commence only after three years and is unlikely to have an impact on the financial performance in the interim period (FY2014-FY2016). Moreover, the management indicated that the proposed structure would be margin neutral (and save investments of close to Rs3,000 crore from the books of MSIL); thus the pessimism is overdone. Please refer to the detailed analysis inside. We maintain our Buy recommendation on the stock with a revised price target of Rs1,990 (after revising the target multiple to account for the proposed contract manufacturing deal, which is unique but could bring in a certain degree of opaqueness). Key risks: an unfavourable movement of the yen against the dollar; a delay in the expected revival of demand for passenger cars.    Ipca Laboratories Recommendation: Buy Price target: Rs919 Current market price: Rs798 Upgraded to 'Buy' with revised price target of Rs919 Key points Ipca Laboratories reported a healthy growth of 17.7% in the net sales to Rs815 crore and a 24.5% rise in the adjusted PAT to Rs133 crore on the back of a 285-basis-point Y-o-Y rise in the OPM in Q3FY2014. The management sounds confident to sustain the EBIDTA margin in the range of 25% in FY2014 as compared to 22.6% in FY2013 on the back of an improvement in the product mix and the use of latest technologies to rationalise manufacturing costs.  We expect the valuation discounts to narrow with the large-cap peers on the grounds of accelerated growth in the international business, sustainable expansion in the margin and improvement in the return ratios. We expand our valuation multiple from 15x to 16x and roll-over our valuation to FY2016E earnings to get a revised price target of Rs919. We upgrade our recommendation from Hold to Buy on the stock.    Jyothy Laboratories Recommendation: Buy Price target: Rs271 Current market price: Rs193 Revenue growth sustains; margins disappoint Key points JLL posted a strong revenue growth of about 27% to Rs297.4 crore in Q3FY2014, largely driven by a strong volume growth of 22%. The GPM and the OPM declined by 150BPS and 125BPS respectively, which surprised us negatively. The strong revenue growth along with a lower interest cost resulted in the reported PAT to grow by 63.1% to Rs27.4crore. We have revised downwards our FY2015 and FY2016 earnings by about 3% and about 13% respectively to factor in the lower than earlier expected OPM and the incorporation of a marginal tax expense (for FY2016). We believe that the company's strong portfolio of brands in low penetrated categories along with a focus on improving the product penetration nationally would help it in achieving an above 20% revenue growth and maintain the OPM in the range of 14-15% in the coming years. Thus, in view of a strong earning visibility and decent valuations (17x FY2015E earnings) we maintain our Buy recommendation on the stock with the revised price target of Rs271. JLL remains one of our top pick in the mid- to small-cap FMCG space.   Shree Cement Recommendation: Hold Price target: Rs4,440 Current market price: Rs4,375 Retain Hold with revised price target of Rs4,440 Key points Shree Cement reported a net profit decline of 44% for Q2FY2014 due to a deteriorating operating performance in the cement and power divisions along with a lower other income and a higher depreciation. The operating performance remains under pressure due to sustained cost pressures in the cement division (EBITDA/tonne at Rs719, down 29.2% YoY) and the power division (EBITDA/unit at Rs0.57, down 21.9% YoY).  The net revenues declined by 6% on account of a lower contribution from the power division (volume and realisation down 48% and 15% YoY respectively). This was partially offset by higher cement revenues (volume and realisation up 15% and down 6% YoY respectively). This essentially shows that the company is facing pressure in both businesses. What's more, the outlook in the near term remains challenging for both.  We have downgraded our earnings estimates for FY2014 and FY2015. Though Shree Cement is among the better managed cement companies, we do not recommend buying the stock due to our cautious view on the sector. Investors with a long-term view can continue to Hold on to the stock with a price target of Rs4,440.   VIEWPOINT Idea Cellular Despite volume growth, robust expansion restricted operating leverage in Q3 Key points  Idea Cellular's consolidated Q3FY2014 revenues grew by 4.6% QoQ led by a strong 4.1% sequential growth in the voice traffic, a steady improvement in tariffs (up 0.4% QoQ) and data growth. Despite the volume led revenue growth, operating leverage was missing (as a result of increased advertisement and promotional spending). This led to an almost flat OPM (down only 9BPS). A lower than expected operating profit and higher depreciation (owing to a change in the life of certain assets) negated the benefits of the lower interest cost, limiting the PAT growth to 4.4% sequentially.  The management sounded confident about the incremental voice growth and the huge data opportunity in the Indian telecom space and hinted that operational leverage is likely to follow. On the upcoming auctions it guided that Idea Cellular would not succumb to auction frenzies (if at all the auction turns competitive) as it believes that the government has sufficient spectrum supply. The stock has fallen by 20% over the last three months (it currently trades at 5.9x FY2015E EV/EBITDA) on increased competition in the form of Reliance Jio and uncertainty surrounding spectrum auction. We continue to believe the voice market is likely to improve and Idea Cellular would emerge stronger. Hence, we hold a positive view on the stock. Any negative outcome of the spectrum auction would be the key risk to our view. Click here to read report: Investor's Eye   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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