Investor's Eye: Update - UPL, Mcleod Russel India; Viewpoint - Bharti Infratel

 

Investor's Eye [January 24, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE UPL Recommendation: Buy Price target: Rs238 Current market price: Rs203 Price target revised to Rs238 Key points The revenues growth of 15% for Q3FY2014 was driven by a double-digit volume growth of 10%, higher realisations of 2% and a favourable exchange impact of 3%. The reported net profit grew by a healthy 28% largely due to the higher other income, lower growth in the interest cost and a lower effective tax rate. However, after adjusting for non-recurring one-time items (like restructuring costs of Rs39.7 crore and forex related MTM adjustments), the net profit spurted by 42% during the quarter.  The working capital cycle stood at 114 days as against 126 days in Q3FY2013; however it increased over the September end figure of 101 days, as the company built an inventory ahead of the season in Latin America and North America. On the positive side, the company has finally put the cash-on-books to good use by reducing the debt by Rs530 crore and through the ongoing buy-back of 1.4 crore shares (close to Rs300 crore will be utilised). We have fine tuned our estimate to reflect the expected decline in the interest outgo and the better than expected adjusted net profit growth in Q3. Consequently, we revise our price target upwards to Rs238 and maintain our Buy rating on the stock. The ongoing buy-back (75 lakh shares already bought out of 1.4 crore shares) would also provide a support on the downside. Key risk: cold wave in North America and Europe hurting the volume sales in the forthcoming season. Mcleod Russel India Recommendation: Hold Price target: Rs305 Current market price: Rs266 Hold for now  Key points In Q3FY2014, Mcleod Russel India's revenues grew by about 6% with the sales volume growing by 8% (but the blended realisation dropped by 1.7%). With the operating profit margin standing flat at 30.0%, the net profit grew by only 5%. In view of the early signs of production disruption in Africa (due to dry weather conditions) and a resulting spike of close to 25% in the tea prices in the country, the management expects the realisations to improve in India in the next tea season. We will be keenly monitoring the tea production in Kenya and India along with the prices in both the markets in the coming months. Accordingly, we will review our estimates in the first quarter of FY2015. Hence, we advise Hold on the stock with a revised price target of Rs305 (valuing the stock at 8x its FY2016E earnings).    VIEWPOINT Bharti Infratel Strong Q3 driven by tenancy improvement, stable business makes us positive Key points  Bharti Infratel's Q3FY2014 consolidated revenues grew by 1.8% QoQ, led by an improved tenancy level (from 1.92x in Q2FY2014 to 1.96x in Q3FY2014). Lower power and fuel cost and other expenses coupled with a one-time write-back of the bad debt that was provided for resulted in a strong 5.2% growth Q-o-Q in the operating profit. A higher other income, on account of the reversal of the marked-to-market losses on the bond portfolio, led to a strong 48% Q-o-Q increase in the earnings.  Led by a strong data growth, the management sounded positive on the network roll-out plans for the operators that define the demand for Bharti Infratel's tower assets. Hence it expects its tenancy levels to reach 2x levels. The company generates Rs2,500-2,800 crore of operating free cash annually and has a robust asset base. It has provided further clarity in distributing the cash to the shareholders by increasing the dividend pay-out ratio from 30-40% to 60-80%. Taking comfort from the solid asset base, clear dividend policy, potential upside to growth via data uptick and the tie-up with Reliance Jio Infocomm, we hold a positive view 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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