Investor's Eye: Update - Apollo Tyres, Cipla, JB Chemicals & Pharmaceuticals, Indian Hotels Company, IL&FS Transportation Networks, India Cements, Zydus Wellness

 

Investor's Eye [February 12, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Apollo Tyres Recommendation: Buy Price target: Rs142 Current market price: Rs118 Better outlook for FY2015; maintain Buy with revised price target of Rs142 Key points ATL reported robust Q3FY2014 results driven by a strong demand in the European operations and the benefits of a softening in the material prices (mainly rubber). The performance was further boosted by a one-time gain of Rs84 crores (due to incentives received for the Chennai plant), which favourably impacted the margin by 200BPS. The management is expecting a strong demand traction in the European operations (particularly the summer tyre segment) and is gaining a market share in Europe. Further, the domestic operations would see a pick-up in the demand in H2FY2015. The management expects the margin to remain in the high trajectory on the back of stable raw material prices and an improved product mix. We maintain our Buy recommendation on the stock with a revised price target of Rs142.   Cipla Recommendation: Buy Price target: Rs528 Current market price: Rs413 Price target revised to Rs528 on roll-over Key points Due to the consolidation of newly acquired entities, Cipla reported a healthy growth in the top line (23% YoY) but the OPM slipped by 600 basis points to 17.2% in Q3FY2014. Though strictly not comparable, the fall in the margin is mainly attributed to the high base effects, unfavourable products mix, and a sharp jump in the employee costs and R&D expenses due to the consolidation. The decline in the margin led an adjusted net profit decline by 16.5% YoY to Rs284 crore The management indicated that the company is undergoing a major transformation including a change in the leadership hierarchy and a consolidation of the business operations in the international markets, which should see positive changes in subsequent years. We revise our earnings estimates downward by 7% and 11% for FY2014 and FY2015 to factor a weak performance in Q3. However, we roll-over our valuation to FY2016E and set a revised price target of Rs528 (implies 18x FY2016E EPS) from Rs490 (19x FY2015E EPS). We maintain our Buy rating on the stock.    JB Chemicals & Pharmaceuticals Recommendation: Buy Price target: Rs189 Current market price: Rs133 Healthy operating performance; EO item erode bottom line Key points JBCPL reported a healthy operating performance in Q3FY2014 with the net sales growing by 17.3% to Rs234.2 crore and the OPM expanded by 378 basis points to 17.53%. The adjusted net profit grew by 39% to Rs30.5 crore. However, an exceptional item (EO) of Rs46.7 crore (net) impacted the bottom line to book a loss of Rs6.5 crore. The growth in Q3FY2014 was mainly driven by the Indian formulation (20%) and the API (59%) businesses. However, the management expects the Russia-CIS business (that declined in Q3FY2014) to pick up as going ahead.  We keep our price target unchanged at Rs189, which includes Rs132 (10x FY2015E core earnings; excluding the interest income on free cash) for the base business and Rs57 for the cash value. We maintain our Buy rating on the stock.  Indian Hotels Company Recommendation: Hold Price target: Rs77 Current market price: Rs61 Domestic operations remain muted, consolidated performance surprised positively Key points Despite the peak season for hotel industry in India, IHCL posted a muted stand-alone performance in Q3FY2014, with occupancies remaining flat (assumed to be at 69%) and the ARRs marginally declining during the quarter. Despite a 4% Y-o-Y growth in the revenues (driven by a double-digit growth in the F&B sales), the company was able to maintain the OPM at about 28% through cost control measures. The key positive surprise of the quarter was an improvement in the performance of the consolidated entity, driven by an improvement in the business fundamentals (occupancies and ARRs) of some of the international properties. The three hotels in the USA are performing well and have seen an improvement in the profitability. Also, Ginger Hotels (which comes under Roots Corporation-IHCL's subsidiary) has also shown an improvement in the margin and expects to break-even by the end of the fiscal.  The macro economic environment remains challenging for the hotel industry in the immediate term. But we are enthused by IHCL's efforts to control costs and reduce debts (by around Rs4,000 crore) on its books. The valuations are attractive and IHCL is among the better placed hospitality companies to benefit from the economic revival and an increase in tourists. We maintain our Hold recommendation on the stock with a price target of Rs77.    IL&FS Transportation Networks Recommendation: Buy Price target: Rs201 Current market price: Rs108 Debt drawdown of new projects dents PBT; tax reversal mitigates impact Key points ITNL's consolidated adjusted earnings declined 41% YoY on account of a rise in the interest expense (up 46% YoY) and depreciation (up 98% YoY). A tax reversal of the earlier period led to a reported net profit growth of 6% YoY. The consolidated revenues were boosted by a surge in the BOT income (up 31% YoY) and fee income (up 51%YoY). Despite the drawdown of debt for the ongoing projects, the consolidated debt-equity ratio has come down to 3.57x, largely due to an increase in the net worth from the generated profit, preferential issue and equity grants of Rs178.4 crore. We remain positive on ITNL despite a near-term impact on the earnings (the execution of new projects leading to a higher interest and depreciation charges). We believe a surge in the BOT income and better execution will improve its balance sheet gradually. We maintain our Buy rating with a SoTP-based price target of Rs201.   India Cements Recommendation: Book out Current market price: Rs51 Tough business environment and key overhangs; book out Key points India Cements' performance in Q3FY2014 was marred by a weak demand (volume down 5%) and rising cost inflation, which severely dented the margin. The situation is unlikely to improve materially in the near term. The upcoming additional cement capacities from competitors in the southern region (Orient Cement and Dalmiya Cement) are likely to keep the realisation under pressure. We have been looking for value unlocking triggers like hive-off of its non-core business (Indian Premier League [IPL] team Chennai Super King) and the sale of a few land parcels to pare the debts (but there is no clarity on the timelines). Moreover, the controversy surrounding IPL remains the key overhang and continues to hurt investor sentiment.  Though the stock is available at cheap valuation (EV/tonne of $50), but we do not see any re-rating trigger over the next few quarters. The commissioning of new capacities and the turmoil in Andhra Pradesh (the key southern market) would keep the volume growth and the realisation under check. Consequently, we book out the stock from our active coverage. We believe that The Ramco Cements (erstwhile Madras Cements) is relatively a better option to play on the revival in the demand for cement in south India due to a stronger balance sheet, an efficient management and superior return ratios.    Zydus Wellness Recommendation: Reduce Price target: Rs464 Current market price: Rs486 Muted discretionary spending dents growth outlook; downgraded to Reduce rating Key points Zydus Wellness posted a dismal sales performance in Q3FY2014 with the revenue growth moderating to a low single digit (the third consecutive quarter of moderation in the revenue growth). The dismal performance can be attributed to: (1) the discretionary nature of the portfolio, which caters to niche premium categories; and (2) increased competition in categories such as face wash and scrub due to the multinationals (such as Hindustan Unilever and Johnson & Johnson) and new entrants (which has affected Zydus Wellness' market share in the category). Everyuth (a personal care brand) and Nutralite (a margarine brand) posted a decline in revenues while Sugarfree grew in mid to high teens during the quarter.  Though the GPM improved by almost 230BPS to 68.5%, but the company's OPM stood flat at 27.5% largely on account of a significant increase in the other expenses (includes one-off items for setting up a new distribution system). We believe, going ahead the OPM will remain more or less in the range of 23-24%, as Zydus Wellness is likely to support its brand with incremental advertisements and promotional spending along with a new distribution system.  Zydus Wellness is bearing the brunt of a limited product portfolio of three brands that cater to a niche category. Though the new distribution system is expected to bring a better revenue performance from H2FY2015, we do not expect the revenue growth rates to improve significantly due to the limited product portfolio and competitive pressures. We have revised downwards our earnings estimates for FY2014 and FY2015 by 6% and 15% respectively to factor in a lower revenue growth in the near term. Hence, in view of the underperformance expected in the near term due to competitive pressures and a limited portfolio, we recommend a Reduce rating on the stock with a revised price target of Rs464 (downgrade our valuation multiple to 15x and value it at FY2016E earnings). 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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