| Summary of Contents STOCK UPDATE Larsen & Toubro
Recommendation: Buy
Price target: Rs1,840
Current market price: Rs1,549 Elephant ready to dance; tune with it Key points - In Q4FY2014 the stand-alone revenues of Larsen and Toubro (L&T) grew by 11% YoY backed by a 10% growth in the infrastructure segment. The OPM expanded by 267BPS to 14.4% due to better margin in the power and infrastructure segments. After adjusting for a one-off item relating to a gain of Rs484 crore from divestment in a subsidiary, the adjusted PAT grew significantly (by 41% YoY), much ahead of our estimate. For FY2014, the adjusted PAT grew by 19% to Rs4,905 crore backed by a 9% sales growth and an 11.8% OPM.
- The order inflow grew by 15% YoY in FY2014 and the management has guided for a 20% growth in the order inflow in FY2015, considering the improved environment in the domestic economy, post-election. The order book grew by 13% YoY to Rs162,952 crore (3x FY2014 sales) despite the removal of the slow moving orders worth Rs15,000 crore. The management believes there are several projects which are stuck at several stages but which are expected to start rolling in the next six to nine months. Strategically, the company is taking a major push to enhance its focus in the Gulf region. Besides listing six of its road BOT projects in Singapore and selling stake in IDPL, it intends to hit the capital market for L&T Infotech.
- We have fine-tuned our estimates and we share the management's optimism that the domestic opportunity could grow with a pro-reform government at the center which could significantly benefit a company like L&T, as it is most suitably placed among its peers for such a task. Considering this, we have revised our price target to Rs1,840, primarily upgrading our valuation multiple for the stand-alone entity in an SOTP calculation, and retained Buy on the stock.
Sun Pharmaceutical Industries
Recommendation: Buy
Price target: Rs680
Current market price: Rs607 Strong performance continues in Q4; growth to moderate in FY2015 Key points - Sun Pharmaceutical Industries reported a 56.9% jump in the net profit in Q4FY2014 on the back of a 314-BPS expansion in the OPM during the last quarter of FY2014. The net sales jumped by 31.6% during the quarter mainly driven by the US business, which grew by 22% (in constant currency terms), and the Indian formulation business, which grew by 21% during the quarter.
- Though the integration process of Ranbaxy Laboratories may take longer than expected and the ban on the Karkhadi unit by the USFDA and the follow-up inspections at the other sites keep us cautious, but we maintain a positive stance on the company owing to multiple growth elements and the strong track record of its management in dealing with complex situations. The management has guided for a 13-15% revenue growth in FY2015 after a 42% growth in FY2014.
- We have broadly maintained our earnings estimates and price target of Rs680 (which implies 23x FY2016E EPS) along with our Buy recommendation on the stock.
Mahindra & Mahindra
Recommendation: Buy
Price target: Rs1,400
Current market price: Rs1,231 Results hit by merger of truck business; adjusted profit in line with expectation Key points - Mahindra and Mahindra (M&M) reported margin of 10.4% for Q4FY2014; the margin was affected due to the merger of the low-profitability truck business and hence is not comparable on Y-o-Y basis. Removing the impact of the merger, the EBITDA margin was at 14% as compared with 15% in the preceding quarter as the contribution of the higher-profitability tractor business was lower. Without the impact of the merger the company would have reported a net profit of Rs975 crore. Adjusting for the one-time gain on sale of investments the net profit stood at Rs922 crore as against our estimate of Rs939 crore.
- A stable government at the centre and a revival in the economy are expected to spur a growth in the auto division's volumes. However, the impact of El Nino on the monsoon remains a key overhang for the tractor division, which could witness a decline in the near term, though the long-term fundamentals remain strong.
- The merger of the loss-making truck business would have an impact on the margin estimates for FY2015-16 (40-50BPS). Even after the merger of the truck business we remain positive on the stock. We roll forward our estimates for the core business to FY2016 and value it at 13.5x earnings. We maintain a Buy recommendation on the stock with an SOTP based price target of Rs1,400.
Crompton Greaves
Recommendation: Buy
Price target: Rs225
Current market price: Rs182 Overseas pain to subside; domestic opportunity to rise Key points - For Q4FY2014 Crompton Greaves Ltd (CGL) reported a net profit of Rs64 crore, in line with our estimate as the overseas business is on the path of recovery and adding steady momentum to the domestic business. The stand-alone net profit grew by 17% in Q4FY2014 despite flat sales due to a better margin in the consumer durable and power system segments; however, the industrial segment remains sluggish. The performance of the overseas business (subsidiaries) was encouraging as it reported a marginal profit of Rs3 crore at the operating level against a loss of Rs64 crore in the same quarter of the previous year.
- The numbers reported by CGL for FY2014 are largely in line with our estimates and it is important to note that the overseas business is on recovery path. During the post-results analyst meet the management shared that the recovery process in Europe is satisfactory while the challenges in the Canadian business and in the power system business in the USA remain. We expect the European business to stabilise in FY2015 post-recovery and move from earning profit at the operating level in FY2015 to earning profit at the net level in FY2016.
- The restructuring pain is behind us and now the market is looking ahead to positive developments in the domestic environment where the power and industrial sectors could pick up. CGL is favourably placed to capitalise on the emerging opportunities. We have fine-tuned our estimates but retained the subdued estimates for its industrial segment, which could surprise positively if the industrial outlook improves earlier than expected. Given the improved domestic outlook, we retain our Buy recommendation on CGL with a revised price target of Rs225, based on 20x its FY2016E earnings. It is our preferred pick in the capital goods space.
Ipca Laboratories
Recommendation: Buy
Price target: Rs919
Current market price: Rs788 Gross margin improves in Q4; outlook remains positive Key points - Ipca Laboratories reported a 76% rise in the adjusted net profit during Q4FY2014 on the back of a 370-basis point jump in the operating profit margin and a lower effective tax rate (due to a high base effect). However, the net sales grew moderately by 12.3% to Rs740 crore on the back of a 16% growth in the formulation business while the bulk drug business inched up by 1.7%.
- Though the management sounds optimistic about a better revenue growth in FY2015 (an improvement in the domestic and US businesses on five to six new product launches) and about sustaining the gross profit margin (near 64.5% levels), but the renewal of a key tender (due on June 10, 2014) is crucial for the company.
- We have fine-tuned our estimates for FY2015 but maintained the numbers for FY2016. We maintain our Buy rating on the stock with a price target of Rs919.
CESC
Recommendation: Buy
Price target: Rs645
Current market price: Rs577 In line performance; price target revised to Rs645 Key points - For Q4FY2014, CESC reported a net profit of Rs243 crore, which includes a tariff adjustment of around Rs120 crore in the bottom line for a prior period. The profit was on expected lines. The power generation volume was 1,937MU and 1,806MU of power was sold in the quarter. Due to a one-off item, it would be fair to compare the financial performance on a yearly basis. In FY2014, the net profit grew on expected lines by 6% YoY to Rs652 crore backed by a 4% sales growth.
- The performance of the subsidiaries was satisfactory; the store-level EBITDA of Spencer's remained around 4.5% in FY2014 against 4% in FY2013. However, the same-store sales growth of Spencer's dropped to below 10%, which is lower than our estimate. FirstSource Solutions, on the other hand, is on a strong traction (its FY2014 earnings grew by 32% YoY) with a healthy operational performance, having comfortably addressed the scheduled debt repayment. While the execution of the Haldia power plant is on schedule, the remaining untied capacity of 400-MW Chandrapur plant remains a concern in the medium term.
- We retain our estimates for FY2015 and FY2016, and closely watch its progress in breaking even at the operating level in FY2015. We expect positive policy actions in the power sector from the new government which could reduce the risk of its untied power capacity. However, initial indications suggest that the new government is not in favour of foreign direct investment in multi-brand retailing which could be dishearting for CESC's troubled retail business. We revise our price target to Rs645 by marginally tweaking the valuation multiple for its existing power business to 0.9x FY2016E book value and retain Buy on it.
Tata Global Beverages
Recommendation: Reduce
Price target: Rs135
Current market price: Rs149 Dismal performance continues; downgraded to Reduce Key points - Q4FY2014 was yet another quarter of a dismal operating performance by Tata Global Beverages Ltd (TGBL) whose revenues grew by 3% and OPM contracted by 209BPS YoY to 10.1% leading to a 27% decline in the adjusted PAT. The revenues of the tea segment (accounts for 70% of the overall business) grew by 5% while that of the coffee segment declined by 2.5% during the quarter. Barring India (it maintained its leadership position in the domestic branded tea segment), the other key international markets (including the USA and Europe) delivered a mute performance despite several pro-growth initiatives undertaken in the past three years (due to a slowdown in the economy and enhanced competition).
- We have revised downwards our earnings estimates for FY2015 and FY2016 by 10% and 13% respectively to factor in the lower than expected revenues of Tata Coffee (consolidated) and the other key geographies. We have also trimmed our margin expectation in view of the persistently high advertisement and promotional spending in the near term.
- We like TGBL's global strategy to transform itself from a commodities (tea and coffee) business into a high-margin beverage business. In the past three to four years the company has taken several initiatives in this regard (a strategic tie-up with PepsiCo, launch of specialty tea products and introduction of premium variants of tea in various markets). But these initiatives are not yielding the desired results of better profitability and improved return ratios. Hence, in view of the near-term growth concerns we downgrade our rating on its stock from Hold to Reduce with a revised price target of Rs135 (17x FY2016E earnings). Any improvement in the OPM or the trending of the return ratios to high teens would be a key re-rating factor for the company.
Eros International Media
Recommendation: Buy
Price target: Rs210
Current market price: Rs171 Impressive show Key points - Eros International Media's revenues for Q4FY2014 grew by 48.2% YoY to Rs314.6 crore driven by a couple of big releases like "Jai Ho" and "One Nenokkadine" (Telugu). It had 28 releases during the quarter as against 17 films released in Q4FY2013. The revenue performance of the company was driven by the stand-alone entity, which reported an 83% increase in the revenues to Rs281 crore. The company's subsidiary, Ayngaran International, reported a 43% Y-o-Y decline in revenues as there was no significant movie release during the quarter.
- The EBIT margin for the quarter improved by 409BPS YoY to 23% driven by the high-margin television syndication business and catalogue sales during the quarter. The net income of the quarter grew by 30% YoY to Rs41.4 crore.
- The earnings visibility for FY2015 looks promising, led by an impressive movie slate. The company will continue to pick up 5 to 7 "A" star movies each year with a slightly higher focus on the mid-budget high-content movies. We maintain our positive stance on the stock and retain our Buy rating with a price target of Rs210.
SECTOR UPDATE Cement Re-rating begins on the cusp of cyclical uptick expectations Key points - Improving business dynamics: The domestic cement industry has suffered due to the commissioning of huge new capacities in a demand environment weakened by the economic slowdown of the past two years. The rising cost pressures added to the margin pressure resulting in severe erosion of earnings. However, the situation is changing for better now. The cement prices are stabilising (in fact, prices are firming up in certain regions) and the demand outlook is also improving, given the cyclical upturn in the economy and the expected policy push to drive investments in the infrastructure sector by the new pro-development government at the centre. Quantitatively, cement volume sales growth was only at 0.75x of the gross domestic product (GDP) growth (average of three years) as against 1.1-1.2x historically; this indicates a huge pent-up demand that could manifest itself once the macro environment turns favourable.
- Better demand = uptick in realisations: Even in the weak demand environment the cement industry has shown a fair amount of pricing discipline, at least in some of the regions. Thus, the blended realisations could look up once the demand environment improves and the volume growth picks up, resulting in a better capacity utilisation level (75% currently).
- Cost pressures could sustain but better realisation to support margins: Given the possibility of an increase in diesel prices (monthly revisions to start again now that general election is over), the freight cost pressure would sustain (though the potential appreciation of the rupee against the dollar could cushion part of the adverse impact). However, the margins would be boosted by better realisations and benefits of operating leverage due to improving utilisation.
- South region could surprise positively: Southern players like The Ramco Cements and India Cements have suffered due to Telangana issue severely affecting the demand from Andhra Pradesh (a key cement user market in south India) with over-capacity looming large. The political stability in Andhra Pradesh (following the creation of two new states of Seemandhra and Telangana) is expected to revive some of the large infrastructure projects in the two new states and significantly improve the demand environment, thereby pushing up the capacity utilisation levels from 60-65% currently and boost the realisations. The Ramco Cements is best placed to gain from a demand revival in south India.
- Re-rating triggers in place; factoring in early cycle multiples: The current valuation of the cement stocks under our coverage is 50% below their peak valuations in the last two business cycles. We believe that this leaves scope for a re-rating and have accordingly assigned target multiples of 35-40% below peak valuations (in line with the early cycle multiples seen historically). Consequently, we upgrade our recommendation to Buy on UltraTech Cement, Shree Cement and The Ramco Cement; we retain our Buy recommendation on Grasim Industries. We also have a positive view on JK Lakshmi (which we advise accumulating on declines).
VIEWPOINT TV 18 Broadcast
Current market price: Rs35 Betting on the change Key points - Putting an apt end to the swirls of events in the last two years, the Network 18 group is finally being acquired by Reliance Industries with the conversion of its zero coupon optionally convertible debentures issued in 2012. If the consequent open offer in both Network18 Media and Investments (at Rs41) and TV18 Broadcast (at Rs30.2) goes through successfully, which seems very unlikely at the current offer price, Reliance Industries' stake will be 95% and 81% in the two companies respectively.
- Despite having a rich presence and a strong boutique of offerings across broadcasting, news, portal and film production businesses among others the Network 18 group was unable to create any meaningful value for its stakeholders over the years. In this short note, we are trying to highlight the big picture that could unfold in the coming years at Network18 Media and Investments and TV18 Broadcast, which are now completely under the fold of the undisputed leader of Indian corporates, Reliance Industries.
- We are not in a rush to provide any concrete rationales and earnings projections for Network18 Media and Investments, and TV18 Broadcast in view of the change in the management. But having said that, the new management being Reliance Industries does raise hope of a much better future and of growth in the stakeholders' wealth in the coming years.
- In this context, one thought that comes to investors' mind is: Can Reliance Industries change the fortune of TV18 Broadcast? Can "TV18 Broadcast become the next ZEE Entertainment" in the next three to four years? The answer is not simple, but given the offerings of TV18 Broadcast, and the deep pockets and bandwidth of Reliance industries, there is a good possibility of a change in its fortune in the coming years. We recommend investors to take a long-term investment bet on TV18 Broadcast, which, we believe, will have the potential to generate 3-4x returns in the next two years.
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