Investor's Eye: Update - Punjab National Bank, Marico, Union Bank of India, IRB Infrastructure Developers; Viewpoint - Arvind

 

Investor's Eye [January 31, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Punjab National Bank Recommendation: Buy Price target: Rs670 Current market price: Rs549 Asset quality pressure moderate, upgrade to Buy  Key points The net interest income grew by 13.1% and the NIM has improved by to 3.57% in Q3FY2014 as against 3.47% in Q2FY2014. However, the surge in provisions (led by a spike in the marked-to-market provisions on the investment book as a result of a jump in bond yields and NPA provisions) dented the growth in earnings (net profit down by 42%). But the highlight of the results is the significant moderation in the addition to NPAs (lower slippages) as compared with the past two quarters. Moreover, the recoveries from the non-performing accounts were also healthy resulting in a decline of NPAs at the gross level. The bank restructured Rs2,115 crore worth of advances in Q3FY2014 which were offset by around a similar quantum of upgrades. With increased confidence on the asset quality, we expect the bank to improve its advances growth (which was trailing the industry averages) that would drive the growth in the core business going ahead. Given the encouraging asset quality trend, better advances growth outlook and significant correction in the stock price (trades at 0.5x FY2015 book value), we are upgrading the rating from Hold to Buy. We had cautioned investors and downgraded the stock at Rs635 in our update on December 27, 2013. Key risk: an unexpected deterioration in the asset quality and a slower than expected revival in the economy are key risks to our call.  Marico Recommendation: Buy Price target: Rs240 Current market price: Rs215 Volume growth in coconut oil remains weak; margins hold up Key points Marico's revenues grew by 10.3% to Rs1,200.7 crore in Q3FY2014 which was boosted by a 15% improvement in the international business (aided largely by forex gains). On the other hand, the domestic business grew by 9% (the volume growth tapered down to 3%). The volume growth was mainly dented in the coconut hair oil segment, while the company posted considerable improvement in volumes of Saffola (edible oil up 9%) and the light hair oil segment (volume up by 8%).  The gross margin was down due to a high raw material cost (mainly copra prices) but the operating margin showed an uptick of 221BPS due to the lower advertisement spends (which we believe is not sustainable in an environment when the consumer demand is moderating). However, the management is hopeful of a recovery in the demand environment and has guided the operating margin to remain in a narrow range.  In spite of the pressure on its flagship brand, Parachute coconut oil, Marico has managed a relatively decent growth due to the better traction in its other brands/categories and boost from the international business. Thus, it is well placed to report a high double-digit earnings growth over the next two years. We maintain our Buy recommendation on the stock with a price target of Rs240 (24x FY2016E earnings). Key risks: a further increase in the copra prices (key raw material for coconut hair oil); an unexpected continued moderation in the consumer demand.  Union Bank of India Recommendation: Hold Price target: Rs130 Current market price: Rs108 Weak capital position and decline in NIMs remain a concern Key points Union Bank of India posted a subdued profit of Rs348.6 crore mainly due to a weak operating performance (the pre-provision profits declined by 7.1% YoY). The NIMs continue to slide since the past six quarters (2.5% in Q3FY2014). The asset quality deteriorated as the bank reported gross additions to the NPAs of Rs1,154crore and a fresh restructuring of Rs1,004 crore (mainly state discoms). The bank has also guided for Rs1,800 crore of restructuring pipeline for Q4FY2014. The consistent decline in the NIMs has weakened the operating performance while the higher provisions (due to a rise in the NPAs) has impacted earnings. While the valuations are low (0.5x FY2015 adjusted book value), the rising NPAs, subdued return ratios and weak capital position remain a concern. We maintain our Hold rating with a revised price target of Rs130. IRB Infrastructure Developers Recommendation: Buy Price target: Rs99 Current market price: Rs77 Subdued construction revenues; BOT business picks up Key points IRB reported a net profit decline of 24% on account of a weak performance of the construction business (-12% YoY) and a surge in the higher interest expenses (after commissioning of the Jaipur-Deoli project) in Q3FY2014. On the positive side, the revenues from the BOT road segment improved considerably (up 14% sequentially) resulting in a 134BPS improvement in the margin. We have revised our FY2014 and FY2015 estimates to account for the expectations of a slower growth in the construction business despite the execution of two large road projects (Goa-Kundapur and Solapur Yedeshi) and the Sindhudurg airport project. However, it does not have any material impact on the SoTP-based price target.  Apart from the performance of its business, IRB's valuations are influenced by other issues, like the legal case against its promoter and the recurring disruption in the toll collections at some of its projects (especially Kolhapur). Consequently, we are assigning a 10% discount to its fair value and revising our price target down to Rs99. We retain our Buy rating on the stock.    VIEWPOINT Arvind Strong all around performance, transiting towards brand play  Key points  Arvind's consolidated revenue growth of 26.3% was driven by a growth across all verticals, along with a 33% growth in the brands and retail portfolio in Q3FY2014. A robust top line and efficiency gains resulted in a 38.6% growth in the operating profit and a 36% growth in adjusted net profits.  Going forward, the management expects the momentum in the brands and retail portfolio to be sustained in FY2015 which is reflected in its guidance of approximately 25-27% growth in revenues. The margin is also expected to improve in the brands and retail business with efficiency playing out due to a higher contribution of the power brands. In case of the textile business, the expected double-digit growth is likely to be driven by the garmenting and woven market, while the denim market faces challenges. With an increasing thrust towards the brands and retail portfolio, we believe that the Arvind business model is witnessing a transition from a commodity led cyclical play towards a brand and retail play. The strong operational performance and transiting branded play makes Arvind a candidate for re-rating. At the current price of Rs148, the stock trades at 4.4x its FY2015 EV/EBITDA consensus estimate which is not reflective of the growing contribution of its revenues and operating profits from the brands and retail business. We Hold a positive view on the stock.  Key risks: the textile and denim business continue to be a cyclical business with profitability dependent on the variations in the cotton prices; a higher than expected moderation in the demand for branded apparels. 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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