Investor's Eye: Update - Reliance Industries, Wipro, ITC, HDFC Bank, Federal Bank, Bajaj Auto

 

Investor's Eye [January 17, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Reliance Industries Recommendation: Buy Price target: Rs1,010 Current market price: Rs885 Shale gas performance surprises positively Reliance Industries Ltd (RIL) reported a sales growth of 10.3% YoY and a flat Q-o-Q growth on expected lines for Q3FY2014. The refining business is also in line with our expectation with a gross refining margin (GRM) of $7.6/bbl (Singapore GRM about $4.3/bbl), however the petchem margin disappointed (down 8.4% from 10.1% in Q2).  On the positive side, the shale gas business witnessed a 18% Q-o-Q volume growth and lifted the profit of the upstream segment sequentially, despite a continued decline in gas production domestically (in the KG-D6 block). Further, the jump in the other income boosted PAT to Rs5,511 (6% higher than our estimate).  We believe, the weak rupee would continue to benefit from the downstream business, while a revision in the domestic gas price and the improving volume in the shale gas would be a positive for the upstream business. Hence, we maintain our Buy rating with a price target of Rs1,010.    Wipro Recommendation: Buy Price target: Rs685 Current market price: Rs552 Growth catching up, well poised for a re-rating Wipro's IT services reported a 2.9% Q-o-Q growth in revenues to $1,678.4 million in Q3FY2014, the highest sequential growth in the last eight preceding quarters and in line with the growth reported by its peers. With decent growth numbers in the second consecutive quarter, Wipro is scripting a revival in its growth trajectory (instead of a prolonged period of performance lagging behind its peers). It guided for a decent 2-4% Q-o-Q growth in revenues for Q4FY2014.  It has also delivered back-to-back quarters of margin improvement; the EBIT margin (IT services) improved by 54 basis points QoQ to 23%. The net income was up 4.3% QoQ to Rs2,014.7 crore.  The management sounds confident of sustaining the improved growth rates with stability in the margin. We believe that the valuation gap of Wipro with its peers should narrow down going ahead. We maintain our FY2015/FY2016 estimates and retain our Buy rating on the stock with a price target of Rs685 (the highest absolute gain among the large cap IT services stocks under our coverage).   ITC Recommendation: Buy Price target: Rs369 Current market price: Rs325 Cigarette sales volume improved sequentially Key points Despite the declining volume of its core cigarette business, ITC posted a better than expected growth in PAT in Q3FY2014 due to an improvement in the OPM and a higher other income.  The core business registered a realisation-led revenue growth of 13% (its volume declined by 2.5% YoY vs a 4% decline in Q2FY2014). Its PBIT margin improved by 152 basis points to 35%. The cigarette business' sales volume should gradually improve (in the absence of any substantial price increase) and grow in mid single digits in FY2015. On the other hand, as expected the non-cigarette FMCG business earned a profit of Rs10.5 crore. We maintain our earnings estimates for FY2014 and FY2015. ITC is currently trading at 25x FY2015E earnings, a discount of 18% to some of its peers. We maintain Buy on ITC, which remains our top pick in the front-line FMCG space, more for its discounted relative valuation than for the improving outlook for its volume growth in FY2015.    HDFC Bank Recommendation: Hold Price target: Rs712 Current market price: Rs668 Lower opex growth drives earnings growth The net profit growth of 25.1% YoY in Q3FY2014 was aided by a 16.4% growth in the net interest income and a decline in the employee expenses (down 3.1% YoY). The net interest margin declined by 10 basis points QoQ  to 4.2%. The advances and deposits growth (adjusted for FCNR flows) were healthy at 18.3% and 15.5% respectively. The gross NPAs declined sequentially and the management continues to guide for a favorable trend in the asset quality. We expect the bank to report an earnings of 25.6% CAGR (FY2013-16) and a superior RoAs of 1.9%. The current valuations are at 15% discount to the three year mean and seems reasonable considering the superior operating metrics. However, the pending FIPB approval over an increase in the foreign holding limits remains an overhang. We maintain our Hold rating with a price target of Rs712.   Federal Bank Recommendation: Buy Price target: Rs110 Current market price: Rs79 Earnings ahead of estimate, asset quality improves A sharp decline in provisions (led by the write-back of surplus provisions on restructured accounts) supported the growth in the profit of Federal Bank in Q3FY2014. The NII growth was slightly lower (up 9.7% YoY) due to a muted growth in the advances. The asset quality improved sequentially led by moderation in the slippages and the sale of NPAs to asset reconstruction companies (Rs186 crore). The provision coverage ratio at 83.3% remained comfortable. The core income growth slowed down due to the bank's focus on asset quality, though the same is likely to improve in FY2015. The key positive include a high Tier-I CAR, an improving liability base and the easing of asset quality pressure. The current valuation (0.8x FY2016 BV) is reasonable. We maintain Buy with a price target of Rs110.    Bajaj Auto Recommendation: Buy Price target: Rs2,275 Current market price: Rs1,934 Better outlook for FY2015; maintain Buy with a revised price target of Rs2,275 Key points Bajaj Auto Ltd (BAL) aims to regain market share in the domestic motorcycle segment by launching new products. The outlook for three-wheelers and exports has also improved.  The earnings of the company are expected to grow in strong double digits in FY2015 on the back of volume growth and increased realisation on exports. We maintain our Buy rating on the stock with a revised price target of Rs2,275. BAL remains our preferred pick in the two-wheeler segment of the automobile sector. 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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