Investor's Eye: Update - Zee Entertainment Enterprises, Larsen & Toubro, Housing Development Finance Corporation, Torrent Pharmaceuticals, Supreme Industries, Ashok Leyland, Thermax

Investor's Eye [January 22, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Zee Entertainment Enterprises Recommendation: Buy Price target: Rs335 Current market price: Rs284 Strong show continues   Key points The strong revenue growth of 26.6% was driven by an unexpected uptick in the advertisement revenues by 34.3% to Rs684.3 crore. On the other hand, the subscription revenues delivered a soft performance at a 11.4% Y-o-Y growth to Rs456.5 crore while the sports business revenues were up by 77.6% YoY to Rs191.5 crore. The concerning part is the jump in the losses of the sports business to Rs104.1 crore against Rs8.6 crore in Q3FY2013. The EBITDA margin ex sports business improved by 710 basis points YoY to 39.6% (the blended margin at 24.5%). We have broadly maintained our estimate for FY2015 and FY2016.  ZEEL is well placed to benefit from the ongoing digitisation theme. Given its growth predictability, strong balance-sheet and high return ratios, we maintain our Buy rating on the stock with a price target of Rs335. Risk: a significant increase in investments in the new channels would be a key risk to our current margin assumptions and earnings estimates.   Larsen & Toubro Recommendation: Buy Price target: Rs1,165 Current market price: Rs1,005 Healthy Q3; retain Buy  Key points L&T reported a very healthy set of numbers in Q3FY2014, registering a net profit (adjusted) growth of 22% YoY to Rs1,241 crore, backed by a 12% sales growth and an improvement of 186 basis points in the OPM. The results are adjusted for hiving off of its hydrocarbon business to a separate subsidiary with effect from April 1, 2013 (base figures are also restated accordingly).  But the negative takeaway is the lowering of its guidance on the order inflows. The management expects to show a growth of 15% in the fresh order intake in FY2014 (over FY2013) now as compared to the targeted 20% level earlier. The order inflows in the first nine month has grown by 23%; thus the lowering of guidance seems to be driven by the higher base effect (a surge in Q4 last year) and the possible spill over of some large tenders into the next fiscal.  We have fine tuned our estimate to factor in the transfer of the hydrocarbon business and consequently valued it as part of the SOTP valuation now. It does not make any material change to our price target of Rs1,165. We maintain our Buy rating on the stock.    Housing Development Finance Corporation Recommendation: Hold Price target: Rs900 Current market price: Rs842 Spread rebounds on a sequential basis  Key points In Q3FY2014 HDFC's net profit of Rs1,278 crore (up 12.1% YoY) was driven by a steady growth in the net interest income (up 14.5% YoY). The non-interest income declined by 1% YoY, which pulled down the earnings growth. The spread improved by 6 basis points QoQ to 2.25%. The loan growth remained healthy at 19.5% YoY especially in the individual segment (up 24.4% YoY). The asset quality remains stable though the rising competition in the mortgage segment poses a challenge to the spread. We revise the price target to Rs900 (after shifting the stock's valuation to our FY2015 estimates). Though the performance remains healthy, but we maintain our Hold rating on the stock due to its premium valuation (3.5x FY2015 book value).    Torrent Pharmaceuticals Recommendation: Buy Price target: Rs602 Current market price: Rs508 Strong Q3 performance, price target revised to Rs602  Key points Torrent Pharmaceuticals reported a strong performance for Q3FY2014. Its net sales jumped by 29% YoY to Rs990 crore and adjusted PAT jumped by an impressive 97% YoY to Rs178 crore on the back of a 543-basis-point Y-o-Y rise in the OPM.  The results of the Indian business (a Y-o-Y growth of 14.7% vs an industry growth of 5%) and the Brazilian business (up 26% YoY) surprised us positively, as these had witnessed a muted growth in the recent past. The US and European businesses flourished on key product launches, viz generic Cymbalta in the USA. We increase our price target by 24% to Rs602 due to the roll-over of the valuation to the FY2016 estimates. Though we expect the acquisition of Elder Pharma's business (not factored in our estimates) to be earnings destructive in FY2015, but strong traction in the base business and the long-term synergy from the acquisition would trigger a re-rating of the stock. We upgrade the stock to Buy.   Supreme Industries Recommendation: Buy Price target: Rs570 Current market price: Rs449 Healthy Q2; growth to pick up further in H2  Key points Supreme Industries reported a strong revenue growth of 19.6% YoY, due to the higher price realisation while the sales volume remained flat. The OPM improved by 50 basis points YoY on the back of lower raw material costs and other expenditure. The net profit (before adjusting for share of profit/loss from associates) increased by 14.4% YoY.  The management has guided a volume growth of 9-10% and revenue growth of 20-22% for FY2014 (commissioning two new projects in H2FY2014). The OPM remains in the 15-16% range. The management expects to get an approval for the composite gas cylinder in the next few months.  Given the better than expected results of Q2FY2014, we are marginally revising upwards our FY2014 and FY2015 earnings estimates and believe that the growth would pick up in the second half of the current year (June ended fiscal). We maintain our Buy rating with a price target of Rs570.   Ashok Leyland Recommendation: Hold Price target: Rs18 Current market price: Rs17 Recovery some time away; maintain Hold  Key points A double-digit decline in the sales volumes in the MHCV as well as the LCV space severely dented the operational performance of Ashok Leyland in Q3FY2014. The situation was further aggravated by higher price discounts in the MHCV space and an unfavourable product mix leading to a loss at the operating level. Given the low base of FY2014, new product launches and economic cyclical upswing, the volume sales are expected to recover in FY2015. The margins are also expected to move to the positive territory on the back of volume growth, reduction in discounts and cost-control initiatives. Though the valuation on EV/EBITDA basis is close to the levels seen at the time of the previous economic slowdowns and the recovery in FY2015 could result in an expansion of the valuation multiples, but we remain cautious due to the continued pressure on the margins and the expectation of a weak financial performance for another six months. We retain Hold recommendation and maintain price target of Rs18 for the stock.   Thermax Recommendation: Hold Price target: Rs675 Current market price: Rs654 Price target revised to Rs675; upgraded to Hold  Key points For Q3FY2014, Thermax reported a 3% (YoY) decline in sales to Rs1,014 crore and with a lower OPM (declined by 171 basis points to 9%) and operating profit declined by 19%. However, due to a better other income, adjusted PAT declined by only 12% YoY while it grew by 6% sequentially.  There are two silver linings in the Q3 result: (1) order book grew by 23%; (2) amidst the weak margin in the environment business (loss in the water business which could turn positive next year), Thermax managed to sustain a 9% OPM. Moreover, there is some optimism reflected in the tone of the management from the previous few quarters.  With a healthy growth in the order book and likely improvement in the margin of the water business in the next year, the earnings could grow after two consecutive years of decline. We introduced our FY2016 estimate and rolled over our valuations to the revise price target of Rs675 (21x FY2016); consequently we upgrade our rating from Reduce to Hold.  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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