| STOCK UPDATE Maruti Suzuki India
Recommendation: Buy
Price target: Rs2,130
Current market price: Rs1,956 Weak operating performance; upside still visible, maintain Buy Result highlights - Maruti Suzuki (Maruti) reported a weak operating performance for Q4FY2014 as higher input cost, dealer compensation for excise duty reduction (Rs143 crore) and employee benefit provisioning (Rs93 crore) affected the margins during the quarter. The net profit declined by 35.5% YoY to Rs800 crore, which was lower than our estimate.
- The volumes were weak in FY2014, given poor customer sentiment, and the Indian automobile industry reported a 6.8% decline in volumes for the fiscal. Discounts in the system remain at elevated levels and manufacturers are hesitant to take price hikes. Despite the excise duty cut, the volumes for Maruti are expected to remain weak as potential buyers defer purchases. The sentiment is expected to improve post-general election as economic activity picks up. A deficient monsoon remains an overhang as Maruti has substantially increased presence in rural India.
- The stock is trading at 14.5x FY2016E earnings and offers a 10% upside from the current levels. We maintain a Buy recommendation on the stock with an unchanged price target of Rs2,130.
ICICI Bank
Recommendation: Buy
Price target: Rs1,425
Current market price: Rs1,269 Positive signs on asset quality; price target revised to Rs1,425 Result highlights - ICICI Bank's Q4FY2014 earnings grew by 15.1% YoY. This was boosted by forex gains of Rs222 crore related to a repatriation of retained earnings from the overseas branches and net treasury profits of Rs245 crore. The core performance was also healthy with the net interest income growing by 14.5% while the margin improved sequentially to 3.35%.
- The asset quality was largely stable since fresh additions to the NPAs were largely similar to the previous quarters and the fresh restructuring was lower than the guided levels. More importantly, it expects the incremental stress loan formation in FY2015 to be lower than the FY2014 levels.
- With an improved liability base, increased visibility on the advances growth and relatively stable trends in the asset quality, we expect the stock to trade at a premium to its five-year mean valuations. We expect the earnings growth to remain steady (a CAGR of 15% over FY2014-16) and drive an improvement in the return ratios. We maintain our Buy rating with a revised SoTP-based price target of Rs1,425.
Axis Bank
Recommendation: Buy
Price target: Rs1,780
Current market price: Rs1,534 Strong operating performance Result highlights - Axis Bank's net profit growth of 18.5% was driven by a strong growth in the NII (up 18.8%) and contribution from the non-interest income (a forex gain from the repatriation of profits of the overseas branches of Rs143 crore and a treasury gain of Rs217 crore). Meanwhile, the margin improved on a Q-o-Q basis to 3.89% on the improving liability profile.
- The asset quality was stable and was in line with the management's guidance as the fresh NPA addition was lower than the preceding quarters. Given the stress in the economy, the bank is cautious on the asset quality and has guided for a stressed loan formation of Rs6,500 crore for FY2015 (vs the actual stressed loan formation of Rs5,691 crore in FY2014).
- The bank has improved its liability profile and the retail diversification strategy is panning well (retail loans account for about 32% of the book). In addition, the bank is well capitalised to lever the growth opportunities with a revival in the economy. We expect the earnings to grow at a CAGR of about 10% over FY2014-16, even after factoring for a higher provisioning (a credit cost of about 100BPS). We have valued the stock at 1.7x FY2016 book value, which is at a 10% discount to its long-term average resulting in a price target of Rs1,780. We maintain our Buy rating on the stock.
UltraTech Cement
Recommendation: Reduce
Price target: Rs2,052
Current market price: Rs2,083 Best bet in the cement sector but over priced Result highlights - The revenues of UltraTech Cement (UltraTech) improved by 8.9% YoY supported by a volume growth (up 9.4% YoY, 27% QoQ) in Q4FY2014. However, the realisation remained flat (down 0.5% YoY and 1.9% QoQ). The OPM contracted by 210 basis points to 21.3% due to higher input and freight costs. However, the reported net profit during the quarter stood at Rs838.0 crore (up 15% YoY), which included the reversal of a tax provision of Rs96 crore for the earlier years along with a lower interest charge (a reduction in the short-term debt). Adjusting for the same, the net profit stood at Rs742.4 crore (up 2.3% YoY).
- We have revised our earnings estimate for FY2015 marginally downwards (after factoring in the lower realisation growth) and introduced the estimates for FY2016 in this note.
- UltraTech is our preferred stock in the cement space due to its strong balance sheet and pan-India presence. However, the stock is trading at a historically high EV/EBITDA multiple and pricing in all the positives at an enterprise value of close to 11x FY2016E operating profit (EBITDA). Consequently, we downgrade the rating on the stock to Reduce with a price target of Rs2,052 and advise waiting for a better entry point.
VIEWPOINT Bharti Infratel
Current market price: Rs211
View: Positive Despite run-up strong operational performance and robust outlook keep us positive Key points - Strong operational performance: Bharti Infratel's Q4FY2014 consolidated revenues grew by 2.2% QoQ, led by an improved tenancy level (up from 1.96x in Q3FY2014 to 1.99x in Q4FY2014). In line with the revenue growth, the operating profit also grew by 2.2% sequentially while the margin remained stable at 41.3% (for two quarters in a row now). A strong 57% Q-o-Q growth in the other income coupled with a mild 2.3% Q-o-Q decline in the depreciation charge resulted in a strong 15.1% Q-o-Q growth in the net earnings.
- Robust outlook ahead; potential tie-up of Reliance Jio with Indus to provide additional room for growth: The company's management sounded very positive on the prospects for the telecom operators and is hopeful that the positives would percolate through to the tower players as well and disproportionately benefit Bharti Infratel (which along with Indus Towers covers 38% of the aggregate tower footprint in India). It also mentioned that apart from the existing agreement of Reliance Jio Infocom (Reliance Jio) with Bharti Infratel to provide towers, Reliance Jio is in advanced stages of discussion with Indus Towers for a tower sharing deal and the master service agreement is expected to be signed soon. Though the market has already factored in the Bharti Infratel and Reliance Jio transaction, but we believe the Indus Towers tie-up would provide additional growth momentum to Bharti Infratel.
- Strong fundamentals; improving outlook and potential upside from tie-up with Reliance Jio make us positive on the stock: In FY2014 the company generated Rs2,600 crore of operating free cash and had a robust asset base. Taking comfort from the solid asset base, clear dividend policy and cash utilisation strategy, the potential upside to growth via data uptick and the potential tie-up of Indus Towers with Reliance Jio, we hold a positive view on the stock. Since our bullish Viewpoint note dated January 24, 2014, the stock has appreciated by 23% in three months and is currently trading at 6.6x FY2016E EV/EBITDA. On a rough-cut basis, we expect the company to deliver 12-15% returns over the next three to six months from the current levels. We thus advise investors to buy the stock on every dip and sign of weakness.
MUTUAL GAINS | Debt Mutual Fund Picks Bond / Debt market round up - Bond yields fell during the month on the back of strong foreign fund inflows into the Indian capital markets ahead of general elections. Initially, bond yields rose as investors were concerned over persisting geopolitical tensions in Ukraine, which continued to weigh on investor sentiments. However, sentiments improved to some extent on indications that the crisis in Ukraine was easing. The Russian President assured that there was no plan of sending troops to Ukraine, which provided relief to investors. Bond yields got further support after the Current Account Deficit fell sharply for the third quarter on a yearly basis. The Current Account Deficit fell to $4.2 billion, or 0.9% of the Gross Domestic Product (GDP), from $31.9 billion or 6.5% of GDP a year ago.
- After moving in the range of 8.68% to 8.92%, the 10-year benchmark bond yield closed 9 basis points (bps) higher at 8.86% compared to the previous month's close of 8.77%.
Bond / Debt Outlook - Bond market may remain volatile due to uncertainty over political direction and stability of the new Government after the upcoming general elections. Moreover, liquidity in the banking system is expected to remain tighten due to excise, service and advance tax outflows at the end of the financial year. To address this, the RBI will conduct term repo auctions of appropriate amount and tenure during March 2014 to address the possible liquidity crunch, which may provide some relief to the bond market. Any positive macroeconomic data will continue to be positive for the bond market. The movement of the rupee and the activities of foreign investors will also remain in focus.
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