Investor's Eye: Update - Apollo Tyres, Gabriel India, Bank of India; Viewpoint - Arvind

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Investor's Eye [May 15, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE     Apollo Tyres Recommendation: Buy Price target: Rs210 Current market price: Rs177   Benefit of soft rubber price continues; lower tax rate further boosts profits    Result highlights In Q4FY2014, Apollo Tyres (Apollo) reported a strong operational performance both in the domestic and European operations, riding on the benefit of lower natural rubber prices. A lower tax rate, especially on the domestic operations, added to the bottom line, aiding in more than doubling the consolidated net profit to Rs271 crore. Despite a weak market condition, Apollo has managed to gain market share in the domestic replacement market. Additionally, the European operations continue to do well and the large greenfield capacity expansion in Eastern Europe will cater to the long-term growth in Europe (FY2018 onwards). The benefit of the weak natural rubber prices is expected to persist in H1FY2015 too. The demand prospects are expected to improve in H2FY2015 with the economy picking up. We have raised the earnings estimates for FY2015 (9%) and FY2016 (11%). We continue to like the stock and reiterate our Buy recommendation with a revised price target of Rs210 (earlier Rs189).      Gabriel India Recommendation: Buy Price target: Rs46 Current market price: Rs32   Strong operating performance; return ratios to improve further    Result highlights Gabriel India (Gabriel) reported a revenue growth of 8% YoY in Q4FY2014. The company reported a strong operating performance with a margin expansion of 190BPS YoY (150BPS QoQ), resulting in a 40% Y-o-Y growth in the operating income. Consequently, the adjusted net profit improved by 36% YoY to Rs14.7 crore. The management is focusing on increasing the revenue share from the after-sales (high margin segment) and export segments. Additionally, the revenue share with HMSI's two-wheeler business (the fastest growing two-wheeler company) is expected to increase as it starts to ramp-up production at its new Karnataka facility. There is no major capex going forward and a subsequent reduction in the debt burden are expected to boost the return ratios.  We have maintained our earnings estimates for FY2015 and FY2016. We believe the leadership position in the shock-absorber market, strong diversified clientele as well as a healthy balance-sheet will help the company to report a better financial performance going ahead. In addition, a debt reduction along with a better operational efficiency would lead to a higher earnings growth of 25% CAGR in FY2014-16. Therefore, we maintain our Buy rating with a price target of Rs46.     Bank of India Recommendation: Hold Price target: Rs290 Current market price: Rs264   Earnings aided by one-offs; asset quality deteriorates    Result highlights In Q4FY2014, Bank of India's core profitability was weak though the one-off's, such as an interest on the income tax refund (Rs382 crore), tax reversal of Rs142.58 crore and a reversal of the NPA provisions (Rs248.71 crore owing to a reduction in the provision on substandard loans to 15% from 20%) cushioned the profits. The bank also utilised Rs179.49 crore of the floating provisions (as permitted by the RBI). The asset quality deteriorated sharply as the bank reported fresh NPA additions of about Rs3,600 crore and a restructuring of Rs2,394 crore. This led to a sharp rise in the provisions and impacted the profits. According to the management, about half of the slippages in Q4FY2014 were technical in nature and may be upgraded in Q1FY2015. We had upgraded the stock to Buy in our "results preview note" due to lower valuations (a 14% appreciation since then). However, the Q4FY2014 results have largely disappointed on the earnings and given a weak asset quality outlook, low return ratios (RoAs of 0.5%) and lower tier-I CAR (7.2%) we revise the rating to Hold with a price target of Rs290.      VIEWPOINT     Arvind Current market price: Rs190 View: Positive   Megamart plays spoilsport; trend remains intact    Key points Q4FY2014 performance snapshot: Arvind's top line grew strong by 33.6% year on year (YoY) led by a volume growth in the textile business and a stupendous 31% year-on-year (Y-o-Y) growth in the brands and retail (B&R) segment. A sharp margin contraction in the Megamart business (led by a deleveraging impact of a 7.8% decline in the same-store sales growth), resulted in a 96-basis-point margin contraction, thus the operating profit grew by 24.8% on a Y-o-Y basis. A lower depreciation for the quarter propelled the net earnings to grow by 32.4% on a Y-o-Y basis.  Business snapshot: The textile business growth of 28.1% YoY was led by all the three sub-segments, viz Denim (29.8% YoY), woven (13.7% YoY) as well as garments (53% YoY) segments with a marked improvement in the volume growth. The B&R segment grew at 31% despite a steep 7.8% same-store sales decline in its retail venture-Megamart. The company has revamped its Megamart format and is in an investment mode for the same. It has planned for 2.5 lakh net space addition for Megamart and expects it to witness a revenue rebound from Q2FY2015 onwards.  Way ahead: Going ahead, the management sounded positive and confident for both its textile as well as branded apparel businesses, and guided for over 22-24% revenue growth for FY2015. Further, on the margin front, it expects to maintain the current margins for FY2015 with a significant scope for a margin expansion in FY2016, as the B&R segment is expected to double its contribution from FY2016 onwards. Despite run-up, stock offers 20% upside from the current levels: Taking cognisance of the changing business model for Arvind (from the cyclical and commodity-led denim business towards a lifestyle player with an enviable portfolio of brands), the stock has witnessed a re-rating and has appreciated by over 33% in the two-month time frame (since our View Point note on March 14, 2014). Despite this run-up, we believe there still appears a potential upside to the stock, as the metamorphosis is yet not getting entirely reflected in its valuations. Thus, we expect another 20% upside from the current levels over the next 9-12 month horizon. 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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