Investor's Eye: Stock Idea - Firstsource Solutions; Update - Lupin, Godrej Consumer Products, Grasim Industries, IDBI Bank, Automobiles

 

Investor's Eye [February 03, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK IDEA Firstsource Solutions Recommendation: Buy Price target: Rs37 Current market price: Rs24 A perfect turn-around story Key points  It's shaping up well: In 2012 Firstsource Solutions Ltd (FSL) was on the brink of a financial burn-out, with a dwindling OPM, market share losses and a huge debt burden. On top of that, its stakeholders were losing confidence fast. Against this backdrop, the company has scripted a perfect turn-around story with cost-rationalisation initiatives, improving client mining activity and a pruned debt profile (it has paid off FCCBs worth $237 million). Over the last two years, the turn-around story has shaped up well with the EBITDA margin improving from 8.2% in FY2012 to 11.6% currently, profit growing at a CAGR of 77% over FY2012-14E and cash flow generation improving enough to comfortably service its debts. Earnings booster from margin expansion and reducing interest burden: Its performance has improved driven by the improving visibility of the business from the existing key clients in the USA and the UK, and the numerous opportunities arising from Obamacare in the healthcare and insurance segments. FSL's management sees strong visibility of growth in FY2015 with a strong order pipeline and deal wins. Though we are forecasting a 10% CAGR in revenues (in dollar terms), but the earnings growth rate works out to a healthy 39% over FY2014-16 due to a continued margin expansion and reduction in interest charges resulting in balance sheet deleveraging.  Balance sheet health to improve further: At the end of December 2013, FSL had total long-term debt of $136 million (including a $20-million ECB). FSL is paying around $11 million per quarter for the principal repayment ($44 million per annum) and has an interest outgo of around $11 million per annum. With the potential for more improvement in the OPM and no major capital expenditure plan, the cash conversion ratio is expected to improve further. We feel FSL is comfortably placed to service its debt using its internal accruals and we expect its debt/equity ratio to improve to 0.1x in FY2016 from 0.5x currently. Also, with an improvement in the earnings profile, we expect the RoE to improve to 15.8% in FY2016 from 10.7% in FY2014. Valuation-a turn-around story at discounted valuation: Given the strength of the turn-around story and the improved visibility of its earnings growth, we see a strong case for further re-rating in its stock price. The key re-rating triggers in the stock are: (1) a strong margin improvement; (2) acceleration in cash flow generation; (3) timely repayment of debt; (4) and an improvement in the return ratios. Though in the last one year the stock has already been a strong outperformer and has risen by almost 122%, but we see further upside from here. Our 12-month price target is Rs37; we have valued FSL at 5x EV/EBITDA based on FY2016E earnings (a 30% discount to the average one-year forward EV/EBITDA of 7.4 of the past five years) to factor in the risk of execution, the debt repayment and the possibility of a one-time big dent from the charges related to the impaired assets (linked to the MedAssist acquisition; non-cash charges). At our price target the stock would be valued at 6.6x FY2016E EPS. We initiate coverage on FSL with a Buy rating and a 12-month price target of Rs37 (a 53% upside).   STOCK UPDATE Lupin Recommendation: Buy Price target: Rs1,075 Current market price: Rs922 Strong US performance boosts Q3 results  Key points Lupin's healthy Q3FY2014 performance results has shown its ability to sustain the growth momentum on a consistent basis. In Q3FY2014, the revenues grew by 21% and the OPM improved further by 150BPS on the back of a favourable revenues mix. The revenues growth was driven by a 30.4% surge in the US business and a strong traction in the revenues from Japan; API revenues surged by 27% surprising us positively. Along with the results, Lupin also announced the acquisition of Netherlands-based Nanomi B.V, to enter the complex injectible space (though financial details are not available we see this as a positive development strategically). Lupin continues to be among our preferred pick within pharmaceutical sector due to its consistently superior performance, a strong product pipeline and a healthy growth visibility. We maintain our Buy recommendations with a price target of Rs1,075, which implies 19x FY2016E EPS.  Godrej Consumer Products Recommendation: Hold Price target: Rs838 Current market price: Rs722  Revenues grew in high teens; margins disappoint  Key points GCPL's results are marked by some concerning takeaways; (1) the OPM pressure led by a raw material cost inflation; (2) a weak performance of the international business especially in Indonesia and Africa; (3) a moderation of growth in the household insecticide (HI) segment (down to 8% from a double-digit growth in the previous quarters). Though we expect the growth in the domestic operations to recover on the back of its strong product portfolio in the under-penetrated categories, the near-term earning growth remains under stress due to a slowing consumption in some of the international markets and the margin pressure due to commodity inflation.  GCPL's share price has corrected by close to 18% in the recent past and factors in at least a large part of the concerns. GCPL is a quality mid-cap FMCG player and the stock can be accumulated in the prevailing weakness. However, given the near-term concerns, we are maintaining our Hold rating on the stock with a revised price target of Rs838 (24x its FY2016E earnings). Key risks: any steep increase in the raw material prices; any slowdown in the key segments.  Grasim Industries Recommendation: Hold Price target: Rs2,640 Current market price: Rs2,511 Q3 weak as expected; price target revised to Rs2,640  Key points During Q3FY2014, Grasim reported a steep decline in the earnings of 40% on account of a decline in the OPM (a contraction of around 500BPS) across all divisions, higher interest (up 52% YoY), and depreciation (up 15% YoY).  The revenues for the quarter grew by 5% largely driven by the VSF division (revenues and volume up by 23% and 24% YoY respectively). The cement division posted flat revenues for the quarter. We have fine tuned our earnings estimates for FY2014 and FY2015 to account for an input cost pressure in the VSF division and a lower volume off-take for cement.  The near-term outlook of the cement sector (Grasim is a holding company for UltraTech) remains challenging though the VSF business could revive earlier on the back of the rupee's depreciation led by a recovery in the textile industry. However, the valuations at EV/EBITDA of close to 5x amply reflects the tough scenario. Thus, we retain our Hold rating on the stock with a price target of Rs2,640.  IDBI Bank Recommendation: Reduce Price target: Under review Current market price: Rs54 Disappointing performance  Key points IDBI reported a 75% Y-o-Y decline in the net profit contributed by a subdued growth in the net interest income (up 5.3% YoY), a sharp decline in the non-interest income (down 39% YoY) and higher provisions. The asset quality continued to deteriorate albeit at a slower pace. Given the bank's higher exposure to the troubled segments, a revival in the asset quality in the near term seems unlikely. The earnings growth is likely to remain subdued, while the other operating metrics are also likely to lag peer banks. Considering the bank's weak asset quality and low tier-I CAR, the stock should underperform as compared with the large PSU banks. We maintain our Reduce rating on the stock and keep the price target under review. SECTOR UPDATE Automobiles Auto January 2014 sales: downslide continues  Automotive volume sales remained muted in January 2014 with most companies reporting a decline in their volume sales. The key takeaways from the volume numbers reported by the automotive companies are as follows. The commercial vehicle (CV) segment has been the worst hit with a double-digit decline in the volume sales reported by Ashok Leyland Ltd (ALL), Tata Motors (TaMo) and Eicher Motors (Eicher; the worst hit among peers). Even the more resilient light commercial vehicle (LCV) segment is witnessing a significant slowdown in demand. Escorts, and Mahindra and Mahindra (M&M) benefited from a continued strong demand for tractors (though the sports utility vehicle [SUV] sales of M&M were pretty weak) in the first month of 2014. Weakness in the passenger vehicle segment was also visible in Maruti Suzuki (Maruti) with a 10.3% decline in the volume led by a 47% dip in the exports. In the two-wheeler segment, TVS Motor Company (TVS Motor) outperformed with a mid single-digit growth in sales on the back of strong traction in the scooter segment (due to heavy traction in the recently launched Jupiter) and three-wheelers. On the other hand, the volume growth in Bajaj Auto was negative due to its dependence on the motorcycle segment. With not much improvement in the economic scenario we expect the automotive sales to remain under pressure in the near term. We expect a recovery in the volumes in FY2015 on the back of an improvement in the economic growth, easing of interest rates and the low base created by the current slowdown phase.  Picks: We prefer M&M and Maruti among the automotive stocks under our coverage. We also have a positive view on Escorts and TVS Motor among the stocks under soft coverage. 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

 

This e-mail message may contain information, which is confidential, proprietary, legally privileged or subject to copyright. It is intended for use only by the individual or entity to which it is addressed. If you are not the intended recipient or it appears that this mail has been forwarded to you without proper authority, you are not authorized to access, read, disclose, copy, use or otherwise deal with it and any such actions are prohibited and may be unlawful. The recipient acknowledges that Sharekhan Limited or its subsidiaries, (collectively "Sharekhan "), are unable to exercise control or ensure or guarantee the integrity of/over the contents of the information contained in e-mail transmissions and further acknowledges that any views expressed in this message are those of the individual sender and no binding nature of the message shall be implied or assumed unless the sender does so expressly with due authority of Sharekhan . Sharekhan does not accept liability for any errors, omissions, viruses or computer problems experienced as a result of this email. Before opening any attachments please check them for viruses and defects. If you have received this e-mail in error, please notify us immediately at mail to: mailadmin@sharekhan.com and delete this mail from your records.

This e-mail message may contain information, which is confidential,  proprietary, legally privileged or subject to copyright. It is intended  for use only by the individual or entity to which it is addressed. If you  are not the intended recipient or it appears that this mail has been  forwarded to you without proper authority, you are not authorized to  access, read, disclose, copy, use or otherwise deal with it and any such  actions are prohibited and may be unlawful. The recipient acknowledges  that Sharekhan Limited  or its subsidiaries, (collectively "Sharekhan "),  are unable to exercise control or ensure or guarantee the integrity  of/over the contents of the information contained in e-mail transmissions  and further acknowledges that any views expressed in this message are  those of the individual sender and no binding nature of the message shall  be implied or assumed unless the sender does so expressly with due  authority of Sharekhan . Sharekhan does not accept liability for any  errors, omissions, viruses or computer problems experienced as a result  of this email. Before opening any attachments please check them for  viruses and defects. If you have received this e-mail in error, please  notify us immediately at mail to: mailadmin@sharekhan.com and delete this  mail from your records.