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| Summary of Contents STOCK IDEA TVS Motor Company
Recommendation: Buy
Price target: Rs123
Current market price: Rs92 Riding scooter demand Key points - Riding the shift towards scooters within two-wheeler segment: TVS Motor Company Ltd (TVSL) is the fourth largest two-wheeler manufacturer in the country but has a strong presence in the scooter market as two of its largest peers (namely, Bajaj Auto and Hero MotoCorp) are mainly focused on the motorcycle segment. With a better growth in the two-wheeler segment (a 7.3% volume growth in two-wheelers against declining volumes in passenger vehicles and commercial vehicles), a better growth in scooters within the two-wheeler segment (a 23.2% volume growth in FY2014) and efforts to boost its scooter product folio (by launching Jupiter), the company is set to defend its market share in spite of the growing competition from Honda Motor Company's Indian operations.
- Margin improvement ahead: TVSL's historic margins have significantly lagged its peers', given its high dependence on entry-level motorcycles and mopeds. However, with an improvement in the product mix on the back of new launches and export push, we expect a margin improvement of 40-50BPS over FY2014-16. Our margin expectations are modest and the company could well surprise on the profitability front.
- Debt reduction to improve return ratios: In the past few years, TVSL invested substantially in its Indonesian subsidiary and other group companies which delayed the process of reducing the debt. However, with no significant investment outside the core business expected in the near future, we believe TVSL will focus more on reducing the debt level substantially (D/E ratio to drop drastically from 0.7x in FY2011 to 0.1x by FY2016) which will boost the earnings and improve the health of the balance sheet. Consequently, we also expect the company to post RoE and RoCE in excess of 20% in FY2015-16.
- Risk: Competition in the scooter segment is intense currently, making product development and marketing more important. An inability to expand volumes in this segment would affect the revenues and profitability. Additionally, the performance of the Indonesian subsidiary remains an overhang on the consolidated financials.
- Valuations-strong earnings and improving return ratios to support re-rating: TVSL is expected to post earnings CAGR of 22% over FY2014-16. Our margin expectations are modest and the company could positively surprise on the margin front. Further, an improvement in the balance sheet, return ratios in excess of 20% and lower investments in group companies are expected to support the valuations. Consequently, we initiate coverage on the stock with a Buy rating and a price target of Rs123, giving a 15x P/E multiple to the FY2016E earnings.
STOCK UPDATE Bharti Airtel
Recommendation: Buy
Price target: Rs370
Current market price: Rs328 Price target revised to Rs370 Result highlights - For Q4FY2014, Bharti Airtel's consolidated top line grew by 1.4% QoQ, led by a strong performance in the Indian wireless business (a voice-volume growth of 3.8% QoQ, with a steady realisation), while the OPM expanded 60BPS on a sequential basis, resulting in a 3% Q-o-Q growth in the operating profit. The strong operating performance coupled with lower interest and tax charges resulted in a 20% sequential growth in the adjusted earnings for the quarter.
- The African business continued to disappoint both on the revenue as well as margin front. The dollar revenues were down 1.7% QoQ, while in rupee terms it remained flat. The soft revenues resulted in an operating deleverage leading to a margin compression of 60BPS on a Q-o-Q basis. The African business margins stood at 25.2% vs 25.8% in Q3FY2014.
- The management sounded confident on the Indian mobile business and mentioned that the realised rates are likely to inch higher, likewise the operating leverage would result in higher margins. We believe there still exists a 30-40% gap between the realised rate and the headline tariff, which it would continue to narrow by clamping down on the discounts and the freebies, and also by increasing the headline tariffs going forward. The improving revenue performance is likely to result in an operating leverage and thereby an improvement in the consolidated margins.
- Taking cognisance of the strong performance in the Indian business, we modeled a slight increase in the tariffs ahead, with an operational efficiency that has resulted in raising our EBITDA estimates for FY2015 and FY2016. We also incorporated the spectrum payouts, interest and amotorisation into our model, resulting in decline in our net earnings. Our revised FY2015 and FY2016 EPS are Rs13.6 and Rs15.8 respectively. The improving business environment, receding regulatory overhangs and an attractive valuation (at 5.6x its FY2016 EV/EBITDA), makes us positive on the stock. We maintain our Buy rating with a revised price target of Rs370 (valued at 6.5x its FY2016 EV/EBITDA). A potential destructive and predatory pricing strategy of Reliance Jio's entry would be the key risk to our estimate and recommendation.
Federal Bank
Recommendation: Buy
Price target: Rs110
Current market price: Rs90 Steady performance, robust outlook Result highlights - Federal Bank delivered a stable operating performance for Q4FY2014, though a one-off income (of about Rs100 crore from the interest on an income tax refund) boosted the earnings (up 24.9% YoY). The margin adjusted to the one-off income was largely stable at about 3.3%.
- The asset quality improved on a sequential basis driven by improved recoveries (including sales of Rs158 crore of loans to ARCs) and control on slippages. The restructured loans increased largely because of a debt recast of a state distribution company. The provision coverage ratio of 84% has increased our comfort with regards the asset quality.
- The financial year 2013-14 marked the consolidation of the bank's balance sheet and the bank is poised to grow stronger, with its advances estimated to grow at a CAGR of 20% over FY2014-16, driving its earnings growth at 18.5% CAGR over the same period. The asset quality remains stable and the bank is well capitalised (with tier-I CAR of 14.6%) to grow which will enhance the return ratios. We maintain our Buy rating on the stock with a price target of Rs110. Key risk: any change in the top management (as reported in the media but denied by the management) at this stage could affect the performance of the bank.
Bajaj Corp
Recommendation: Reduce
Price target: Rs180
Current market price: Rs210 Disappointment continues in Q4, maintain Reduce Result highlights - Bajaj Corp posted yet another quarter of a disappointing sales performance with the sales volume declining by about 6% resulting in flat sales of Rs184 crore in Q4FY2014. The sales volume of its flagship brand, Almond Drops Hair Oil (ADHO), declined by almost 10% (vs a volume decline of nearly 2% in Q3FY2014) mainly due to an inventory correction at the retailer and distributor levels. The inventory correction would continue if the light oil industry continues to witness moderation in offtake and affects the company's sales in the coming quarters.
- The price of liquid paraffin oil (one of the key inputs for Bajaj Corp) has spiked by 15% to Rs87 per kilogram in recent times. Towards the end of March this year the company took a price hike of 5% in ADHO to mitigate the impact of the higher raw material prices. However, lower sales and higher advertisement spending will take its toll on the OPM, which is expected to contract by 180BPS and stay at around 26% in FY2015.
- Being a single brand company and catering to the premium light hair oil segment, Bajaj Corp is not expected to see any substantial improvement in its sales over the next two to three quarters. Further, a below-normal monsoon would adversely affect the company's sales, which are already under stress. We have revised downwards our earnings estimates for FY2015 and FY2016 by about 10% each to factor in the lower than expected sales volume. We maintain our Reduce rating on the stock with an unchanged price target of Rs180.
Greaves Cotton
Recommendation: Hold
Price target: Rs85
Current market price: Rs83 Q4 disappoints; near-term pain but expect significant improvement ahead Result highlights - Greaves Cotton Ltd (GCL) reported another sluggish performance in Q4FY2014 both in terms of the revenues (a 12% Y-o-Y decline) and the margins. The OPM declined 210BPS YoY and the adjusted net profit (post exceptional gain) declined by 26.8% YoY to Rs28.2 crore during the quarter.
- After a subdued performance in Q4FY2014 and for the full year FY2014, we expect a gradual recovery in the automobile volumes (particularly OEM) in FY2015. In addition, a continued effort to bring down the costs along with new launches to improve the product mix would help to expand the margins at a gradual pace. Further, any sign of a recovery in the industrial cycle would help to improve the revenue and margin performance in late of FY2015.
- Though the near term performance could remain weak, the expectations of a considerable improvement in the earnings (a CAGR of 15% in FY2014-16E) on the back of a revival in the automobile and industrial engine segments. Moreover, an unlevered balance-sheet and margin expansion would lead to higher return ratios. Consequently, we retain our Hold rating on the stock with the price target of Rs85.
| | | 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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