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| Summary of Contents STOCK UPDATE Bajaj FinServ
Recommendation: Buy
Price target: Rs968
Current market price: Rs837 Likely revival in life insurance to aid earnings; Buy maintained Result highlights - Bajaj Finserv's consolidated profits declined by 22.5% YoY in Q4FY2014 owing to a weak performance from the life insurance business (a change in regulations for the traditional products causing an industry-wide slowdown). However, the worst seems to be over and the life insurance business is expected to report a better performance in FY2015.
- The general insurance and lending businesses (Bajaj Finance) continued to report a healthy growth with the profits rising by 63% and 11% respectively. The outlook for both of these businesses remains reasonably strong in FY2015 and FY2016.
- We have rolled our valuations to our FY2016 estimate leading to a revision in our SoTP-based price target to Rs968 (assuming a 51% economic interest in the insurance business). The company has announced a dividend of Rs1.75 per share for FY2014. Going ahead, a strong sustained performance by the lending business, general insurance business and a revival in the life insurance business will drive the earnings.
- Key risk: The passage of the insurance bill (a hike in the foreign direct insurance [FDI] to 49%) and a change in the regulations by the IRDA.
IL&FS Transportation Networks
Recommendation: Buy
Price target: Rs201
Current market price: Rs155 Lower construction and fee incomes dent earnings Result highlights - IL&FS Transport Networks Ltd (ITNL)'s consolidated adjusted earnings declined 47% on account a weak revenue booking (lower construction and fee incomes) coupled with a rising interest and depreciation charges.
- The road construction companies have suffered owing to a slowdown in fresh orders from the NHAI and a rising interest cost in the system. However, the macro environment is turning supportive now. The NHAI has set a target of 6000km worth Rs55,000 crore to be awarded during FY2015. On the other hand, the competitive intensity has eased out considerably with many players reeling under financial stress. We expect ITNL to gain both in terms of a better order booking and a relatively higher internal rate of return (IRR) in the new projects.
- Consequently, notwithstanding the near-term pain (which is more than fully reflected in the current valuations), we remain positive on ITNL owing to an improving medium-term outlook. We believe a surge in the BOT income and a better execution will improve its balance sheet gradually. We maintain our Buy rating with a SoTP-based price target of Rs201.
VIEWPOINT Tata Communications
Current market price: Rs290
View: Positive Strong operational performance; Neotel stake sale key catalyst Key points - Tata Communications posted a good operational performance for Q4FY2014, with a revenue growth at 18.6% YoY and an operating profit growth of 61.1% YoY (after adjusting for the Canadian pension liability, the operating profit grew by 54% YoY). The impairment on account of Neotel's goodwill of Rs150 crore weighted down on the reported performance and resulted in a loss of Rs123 crore for the quarter.
- The company's thrust on growing the data business continues to be strong with it reiterating its revenue growth and margin guidance of 20% for the data business. On the voice business, it expects a pricing pressure and hence continues to guide for a 7.5-8% margin. On the new business, like data centre and ATM management, the company sounded very positive and expects the growth in the former to be strong, while the ATM management business is at the cusp of break-even with significant headroom for the revenue growth.
- We expect Tata Communications' EBITDA to grow at a CAGR of 15% over FY2014-16. This coupled with its deleveraging exercise (through a measured capex) is likely to improve its net debt-to-EBITDA levels from the current 3.7x to around 3x by FY2016. The steadily improving core performance coupled with the management's initiative towards sharpening its focus and deleveraging its balance sheet via the Neotel stake sale and the non-core asset monetisation keeps us positive on the stock. We expect the stock to provide 20-22% returns from the current levels.
IFGL Refractories
Current market price: Rs91
View: Positive Building momentum; demands a re-rating Key points - IFGL Refractories posted a robust growth in Q4FY2014 and full year FY2014. Going ahead, the management is confident of building on the momentum and is expanding its manufacturing capacities at Kandla, Gujarat, and the US operations substantially.
- Given the improving growth outlook, a healthy free cash flow (Rs30 crore in FY2014) and expectations of an improvement in the return ratios, the stock is attractively valued at 4.5x its FY2015 estimate (rough estimate). The wide valuation gap with its peers also leaves scope for a significant re-rating of its valuation multiples. We are positive on the stock and expect a 20-25% upside over the next six to eight months.
- Key risk: The refractory market is highly dependent on the steel industry and its demand outlook, which is cyclical in nature. Hence, it will remain exposed to the commodity cycle. Also, having a higher share of the export revenues (80% of the total revenues), the volatility of the currency could have some impact on its earnings.
| | | 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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