Investor's Eye: Update - Kalpataru Power Transmission, Tata Global Beverages, Bank of India; Viewpoint - Hero MotoCorp, Titan Company

 

Investor's Eye [January 30, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Kalpataru Power Transmission Recommendation: Buy Price target: Rs115 Current market price: Rs76 A decent quarter plus some signs of improvement Key points KPTL reported a decent revenue growth but disappointed slightly on the margin front (OPM at 8.9% vs estimate of 9.8%) due to a loss in the infrastructure segment. On the positive side, the T&D segment's performance remained decent and the margin of JMC Projects (a subsidiary in construction business) continued to improve in Q3FY2014. Further, Shree Shubham Logistics (SSL; another subsidiary) reported a healthy financial performance.  On a consolidated basis, KPTL has a healthy order backlog (2x FY2013 sales) and the management has guided for revenue growth of 20% and 15% in FY2014 and FY2015 respectively. Also, a stable margin in the T&D business and a likely improvement in the margin of JMC Projects are expected to drive the earnings growth.  However, currently meaningful capital is locked in real estate and BOOT projects which could remain a drag on the balance sheet for some time. We expect a healthy earnings growth but would continue to watch the developments in its long-gestation BOOT and real estate projects.  Currently, the stock is trading at 7x its FY2014E earnings and 6x FY2015E earnings. It is also available at 0.5x FY2015E book value. Given the low valuation, we continue to rate it as a Buy with a price target of Rs115 (based on the SOTP method; stand-alone business valued at 7x FY2015E and the rest attributed to the value of JMC Projects and SSL). Tata Global Beverages Recommendation: Hold Price target: Rs160 Current market price: Rs141 Downgraded to Hold Key points Tata Global Beverages Ltd (TGBL) revenues grew by 8.9% to Rs2,080.7 crore, driven by strong 15% growth in the domestic business in Q3FY2014 (though the overseas business disappointed in this quarter). The reported PAT grew by 49.0% to Rs119.6 crore. However, excluding the one-time items, the adjusted PAT declined by 11.1% YoY to Rs89.8crore which is lower than expectation. The higher advertisement spends incurred to re-launch its coffee brand in certain overseas markets led to a decline of 120 basis points in the OPM and dented the growth in earnings. The tea business registered a better performance with 11% growth and 58BPS improvement in the PBIT margin, while the coffee business continues to disappoint with just 2% growth in the revenues and severe pressure on the margin. However, the management expects the recent initiatives to drive the growth in the coffee business going ahead.  Due to the diversity of its geographical footprint and product portfolio, the TGBL result tends to be inconsistent and the company has been unable to transform itself into a high margin or high return ratio FMCG company. Consequently, the valuations multiple would continue to lag despite its folio of strong global brands. Given the continued pressure on the margin and the overall correction in valuation multiples of FMCG companies, we do not see any scope for a re-rating of the stock in the near term. Hence, we are downgrading the stock to Hold with a revised price target of Rs160 (valuing the stock at 18x its FY2016E).  Bank of India Recommendation: Hold Price target: Rs220 Current market price: Rs186 Higher provisions dent earnings Key points Bank of India reported a net profit of Rs585.8 crore (down 27% YoY) due to a sharp increase in the provisions (up 53% YoY). A healthy growth in the net interest income (up 17.8% YoY) and a reversal of tax provisions (Rs203.9 crore) cushioned its earnings. The stressed loan formation remains high (Rs2,893 crore vs Rs2,325 crore in Q2FY2014), while the recoveries improve. Concerns persist on the asset quality front due to an exposure to the troubled sectors and a strong growth in the advances. Though the valuations have turned attractive (0.6x FY2015 adjusted book value), the sluggish recovery in the RoAs (at 0.6% levels) coupled with a weak capitalisation (tier-I CAR of 7.85%) limit the upside. We maintain our Hold rating with a revised price target of Rs220.    VIEWPOINT Hero MotoCorp  Well positioned to ride the demand recovery  Key points  HMCL's double-digit growth in revenues during Q3FY2014 was largely driven by a 7% growth in volumes and price hikes. The operating profits also improved on a Y-o-Y basis but the effective tax rate surged (the expiry of incentives at the Haridwar plant) and dented the growth in the earnings. The outlook is more encouraging with the expectations of a double-digit growth in the volumes for the next two fiscals in spite of the intensifying competition. The company also expects to gain from the technology indigenisation and the end of the agreed payments to Honda (for technological support) in June 2014, we expect a healthy double-digit growth in the earnings over the next two years. The stock can trade at 15x its one-year forward earnings (in line with its long term historical average multiple). We have a positive view on the stock.    Titan Company Performance dented by muted sentiments and stiff regulation Key points  Titan's Q3FY2014 was marked by a double-digit decline in its revenues for the first time in the last 20 quarters. The weakness was primarily led by a 15% decline in the jewellery revenues (a volume decline of 21%). The net profits declined by 18.7% due to a weak revenue growth, the margin pressure and a surge in the interest costs. However, the performance on the PAT is better adjusted for the marked-to-market loss of Rs17 crore from the jewellery business. The management mentioned that the consumer sentiment remains weak. Talking on the regulatory front, it mentioned that the transition of its inventory from the lease model to the cash buyout has taken place with an around 90% inventory now under the outright buy model. Thus, the overall debt and interest cost would inch up further in the future.  Though the stock has corrected significantly in the past few months and factors in most of the negatives, we do not see any material scope for a re-rating due to the soft demand environment and regulatory concerns. Moreover, the stock is not cheap at 25.6x and 22.3x its FY2014 and FY2015 consensus estimates respectively. However, any favourable changes in the policy environment and better than expected revival of the demand would turn us more constructive on the stock. 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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