Investor's Eye: Update - Divi's Laboratories, CanFin Homes, Gateway Distriparks, Capital First; Viewpoint - Jubilant FoodWorks

 

Investor's Eye [February 04, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Divi's Laboratories Recommendation: Buy Price target: Rs1,500 Current market price: Rs1,344 Price target upgraded to Rs1,500   Key points Divi's Laboratories reported a healthy 75% surge in the net profit on a 29% Y-o-Y rise in the net sales and an 838BPS rise in the OPM (from a low base and aided by currency benefits) during Q3FY2014. The healthy performance during the quarter is mainly attributed to a ramp up at the DSN SEZ facility, which brought incremental revenues of Rs130 crore (which accounts for 19% of revenues) on the base business and also helped profits. As the capacity utilisation remains low (15-16%) at this level from the DSN SEZ facility, we see a scope of a faster ramp up in the regulated market going forward. An unique business model, excellent execution capability in custom synthesis and strong brand equity in the global pharmaceutical industry are the key attributes of growth for Divi's Laboratories. We maintain our Buy rating on the stock with a revised price target of Rs1,500 (19x FY2016E EPS).    CanFin Homes Recommendation: Buy Price target: Rs220 Current market price: Rs175 Robust loan growth drives earnings  Key points In Q3FY2014, CanFin Homes reported yet another quarter of strong performance as the net profit grew by 60.9% YoY, driven by a strong growth the net interest income (up 36.4% YoY). The loan book continued to grow at a robust rate with an increased traction from the new branches.  The net interest margins (NIMs) declined on a sequential basis due to a rise in the cost of funds. Going ahead, the company will focus on the spreads of 1.7% and the NIMs of about 3%.  Led by a strong growth in the loans, we expect the earnings to grow at a CAGR of 28.2% over FY2013-16. In view of the strong return ratios (a RoA of 1.6% and a RoE of about 18%) the valuation of 0.7x FY2015 seems attractive. We maintain our Buy rating with a price target of Rs220.   Gateway Distriparks Recommendation: Buy Price target: Rs178 Current market price: Rs130 Rail division offsets pressure in CFS business  Key points GDL has managed to offset a slowdown in its core CFS business (which is dented by a 10% Y-o-Y decline in the blended realisation) on the back of a strong performance of its rail freight business. The moving out of the non-profitable short distance routes resulted in a 580BPS improvement in the margin (a 47% surge in the operating profits) of the rail business. Consequently, the consolidated net profit grew by 13% in spite of the tough business conditions. Snowman, its cold chain subsidiary, reported a healthy growth in the revenues (up 26%) due to the capacity additions. The margin of the cold chain business also improved by 145BPS, but the higher interest and depreciation costs dented the growth in the earnings (down 43%). The company has filed a prospectus for the initial public offering of Snowman which is a positive trigger in terms of unlocking the value in the subsidiaries of GDL. GDL continues to struggle due to a slowdown in the demand and the intense competition in its CFS business (especially at JNPT). However, the expected uptick in Kochi and the commissioning of the Faridabad ICD (inland container depot) facility would aid in the recovery of the stand-alone operations. The management also expects the improving trend in the rail freight and cold chain subsidiaries to sustain on account the recent efforts to cost control and improve the utilisation. GDL is our preferred pick in the logistics sector (due to a range of services, leadership position in the CFS and rail businesses and a healthy balance sheet). Thus, we maintain our Buy rating with a price target of Rs178. Key risks: a delay in the economic recovery in India and globally resulting in muted demand conditions, and throughput in its CFS and rail businesses.   Capital First Recommendation: Hold Price target: Rs152 Current market price: Rs131 Operating performance strong, earnings growth slips on higher provisions  Key points Capital First reported a healthy operating performance with a 39.3% growth in its net interest income in Q3FY2014. However, the non-interest income (due to a lower securitisation income while the fee income showed a growth) declined by 21% and provisions were elevated (partly due to standard provisions on retail advances) which resulted in a 5.6% decline in the earnings.  The loan growth remains strong (up 35%) driven by the retail and SME segments which constitute around 80% of the company's advance book. The NPAs increased slightly on a Q-o-Q basis though the same remained healthy YoY (at 0.49% of loans). Since the company is investing to be scaleable in the retail business and the macro economic conditions are not favourable, the earnings growth has moderated more than expected. This has delayed the improvement in the return ratios and the expected re-rating of the valuation multiples. Thus, we maintain our Hold rating on the stock and revise the price target to Rs152 (1x FY2015 book value). We believe that Capital First is one of the most promising emerging companies in the NBFC space, given its strong parentage (Warburg Pincus) and the quality of its management team.    VIEWPOINT Jubilant FoodWorks Steep valuation and weak demand Key points Jubilant's total income from its operations grew by 18.5% YoY, driven by new store additions (it added 47 new stores during the quarter). The same-store sales growth for the quarter declined by 2.6% on a Y-o-Y basis. The inflationary trend in the key raw material prices (cheese), the deleveraging impact of new store additions and the decline in the same-store sales growth resulted in a 268 basis point Y-o-Y decline in the OPM. The operating profit stood flat on a Y-o-Y basis. A flat operating level performance and increased depreciation on account of a robust expansion resulted in a 10.8% Y-o-Y decline in the net earnings. In the conference call, the management remained positive on the long-term levers for the business and hence remained committed to the expansion. It has raised its Domino's store expansion target from 135 to 145 in FY2014. The management refrained from guiding for FY2015 store openings or the same-store sales growth. For the 9MFY2014, Jubilant has posted a 24% Y-o-Y top line growth and a 1.5% decline in the net profits. In the light of a muted consumer demand and uncertainty looming in the immediate future, we believe that the current valuations at 44.5x one-year forward is steep and hence we hold a cautious 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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