Investor's Eye: Update - Finolex Cables, Union Bank of India, Bharat Electronics, Bajaj Electricals

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Investor's Eye [May 08, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE     Finolex Cables Recommendation: Buy Price target: Rs180 Current market price: Rs140   Impressive performance; price target revised to Rs180    Result highlights Finolex Cables Ltd (FCL) reported a very strong set of numbers in Q4FY2014 backed by a significant margin expansion (the OPM expanded by 231BPS YoY to 11.6%). Further, with the commencement of a captive solar power plant it availed a tax benefit; hence the reported PAT grew by 79% YoY to Rs 69 crore. With an adjustment of a forex gain and an investment diminution provision, the adjusted PAT grew by 51% YoY, significantly better than our estimates.  Apart from the 23% YoY earnings growth (ahead of our estimate) in FY2014, FCL generated a very hefty cash flow from the operations of above Rs200 crore (about 85% of the operating profit). Further, with a debt repayment of Rs54 crore it ended FY2014 with a stronger balance sheet.  Considering its margin expansion potential, we have revised upward our earnings estimates by 18% and 10% for FY2015 and FY2016 respectively. Based on this, we revise our SoTP-based price target to Rs180 (Rs152 per share at 10x FY2016 core earnings and an investment in Finolex Industries at Rs28 per share) and retain our Buy rating on the stock.       Union Bank of India Recommendation: Hold Price target: Rs158 Current market price: Rs135   Concerns remain on asset quality, weak capital position    Result highlights During Q4FY2014, Union Bank of India (Union Bank) reported a net profit of Rs579 crore which was largely contributed by a tax write-back of Rs180 crore. However, the operating profit declined 21.7% YoY led by a subdued growth in the NII (3.7% YoY) and a sharp increase in the opex (up 28.7% YoY).  The asset quality continued to weaken as the bank reported slippages of Rs1,199 crore (one telecommunication account contributed Rs324 crore) and a fresh restructuring of Rs1,425 crore in Q4FY2014. Since the restructured pipeline remains fairly high at Rs1,700 crore, we expect the NPA pressures to persist. Union Bank's operational performance has deteriorated led by subdued margins, a rise in the opex and an increase in the stressed loans. Despite the capital infusion of Rs500 crore, the bank's tier-1 CAR remains low (7.5%) which raises the dilution risks. The current valuations (0.5x FY2016 BV) largely reflect the asset quality concerns and sub-optimal return ratios (RoE of 11% and RoAs of 0.5%). We maintain our Hold rating on the stock with a price target of Rs158.     Bharat Electronics Recommendation: Reduce Price target: Rs1,180 Current market price: Rs1,208   Sharp appreciation offers opportunity to book profits; downgraded to Reduce    Key points Since we upgraded our recommendation on Bharat Electronics to Buy at Rs996 levels on March 21, 2014, the stock has appreciated by 21% in less than two months and moved higher than our price target of Rs1,180. We advise investors to book profits. Though the company has a healthy order book of Rs23,200 crore, but we believe that the fresh order inflows would slow down for the next couple of quarters due to a change in the government at the centre. This could also limit the upside in the near term. At the current market price the stock is trading at 11.2x and 11.7x the FY2014E and FY2015E earnings respectively and largely discounts the near-term positives of a high dividend pay-out (along with the audited results for the full year). Thus, we recommend Reduce on the stock and maintain our price target at Rs1,180.     Bajaj Electricals Recommendation: Hold Price target: Under review Current market price: Rs324   Price target hit in two months, book profits; would review post-results     Key points Since we initiated coverage on Bajaj Electricals Ltd (BEL) with a Buy recommendation on March 3, 2014 the stock has appreciated by over 30% and achieved our 6-12-month price target of Rs320 in a short period of two months. We believe an improving margin (a reduction in the losses of the project business) and the possibility of a pick-up in the demand for the consumer business augur well for the company in the long term. However, the recent run-up in the stock price has been too fast and the valuation multiple (15.5x FY2016E earnings) is discounting the near-term positives, thereby offering investors an opportunity to take home some profits. We will review our estimates and price target for BEL after the announcement of its quarterly results scheduled for May 29, 2014. For the time being, we revise our rating on the stock from Buy to Hold and put its price target under review.  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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