| Summary of Contents STOCK UPDATE State Bank of India
Recommendation: Buy
Price target: Rs3,100
Current market price: Rs2,755 Asset quality improves; Buy maintained Key points - In Q4FY2014, State Bank of India (SBI) reported net profits of Rs3,041 crore (up 36% QoQ), led by a strong growth in the non-interest income (up 19% YoY) and a reversal of employee related provisions (Rs475 crore, based on actuarial assessment of casual or sick leave). However, the core profitability improved led by a strong growth in the NII (up 16.5% YoY) and the fee income.
- The asset quality surprised us positively as slippages were lower (Rs7,947 crore vs Rs11,438crore in Q3FY2014) leading to a decline in the NPAs. The recoveries were also better partly led by a sale of the loans to ARCs. The bank has utilised Rs750 crore of the counter cyclical provisions towards the NPA provisioning though an increase in the provision coverage (62.86% from 58.32%) was a positive development.
- We believe SBI being the largest bank having a strong liability franchise and healthy capital (tier-1 CAR of 9.72%) is better placed to benefit from a revival in the economy. While the NPAs has been a cause of concern, the pick-up in the economy may improve the asset quality position. We revise our SoTP based price target to Rs3,100 (1.7x FY2016 stand-alone book value) and maintain our Buy rating on the stock.
ITC
Recommendation: Hold
Price target: Rs369
Current market price: Rs342 Mixed performance; Hold maintained Key points - ITC's Q4FY2014 revenues grew by about 12% YoY to Rs9,238.5 crore. The core cigarette business' gross revenues grew by about 11% (a volume decline in the range of 3-3.5%), while the non-cigarette FMCG business revenue growth moderated to 14% (from a high teen growth in Q3FY2014).
- The OPM improved by 190BPS YoY to 34.7%. The cigarette business EBIT margins stood at 34% during the quarter. As anticipated the non-cigarette FMCG business registered a profit of Rs43.9 crore. The highlight of the quarter of a 47% Y-o-Y growth in the PBIT of the hotel business (despite a weak business environment).
- We have broadly maintained our earnings estimates for FY2015 and FY2016. ITC is a quality FMCG stock and a better pick in the large-cap FMCG space in view of a double-digit earnings growth visibility and strong cash generation ability. Though we have a positive stance on the stock from the long-term perspective, we do not see any upside in the near term and hence maintain our Hold recommendation on the stock with the price target of Rs369. The stock is currently trading at 26.7x its FY2015E EPS of Rs12.8 and 21.5x its FY2016E EPS of Rs15.2.
- Key risk: Any significant increase in the excise duty on cigarettes in the upcoming union budget would further dent the cigarette sales volume.
Sun TV Network
Recommendation: Buy
Price target: Rs515
Current market price: Rs424 Good show; Buy maintained Key points - For Q4FY2014, the revenues stood at Rs520 crore, up by 10% YoY. The EBITDA margins stood at 76.9% (improved by 315BPS YoY), led by a lower programming cost (down 8% YoY, owing to a completion of high cost fiction show) and also led by a 19% Y-o-Y drop in the other expenditure (owing to a lower provision for bad debts). The net profit was up by 11% YoY to Rs197.6 crore.
- The advertisement revenues grew by 4.7% YoY, as against a 7.2% fall in Q3FY2014. The rebound was led by rate hikes coupled with an increase in the advertising inventory from the content producers (currently at 3 minutes per hour). The subscription revenues were up by 23.8% YoY, led by a strong growth in the DTH (21% YoY), domestic cables (34% YoY) and international pay (19% YoY).
- The management has indicated at a better growth outlook for the advertisement revenues for FY2015, led by the moving out of the transitions phase of the TRAI advertising caps and a greater acceptance of rate hikes, though the company still faces the risk of a court verdict pertaining to advertising caps (currently the company is using 12+2 minute per hour against TRAI regulation of 10+2 minutes per hour).
- Sun TV is among the prime beneficiary of the ongoing digitalisation theme in the next two years. We have tweaked our earnings estimates for FY2015E and FY2016E to incorporate the lower advertising growth for FY2015, given the risk of revision of advertisement minutes per hour. We maintain our Buy rating on the stock with a price target of Rs515. Risk: A significant delay in the digitalisation process in the key markets could pose an earnings risk for the company.
The Ramco Cements
Recommendation: Hold
Price target: Rs300
Current market price: Rs278 Weak operating performance with debt leverage dent earnings Key points - The Ramco Cements (Ramco Cements) reported an earnings decline of 84% YoY led by a decline in the realisations (down 2.4% YoY) and increased cost of production (up 6.9% YoY). Consequently, the EBITDA per tonne declined to Rs279 per tonne (down 55%YoY).
- A tough demand environment coupled with a higher cost of production (higher input and power costs) in an overcapacity region has been putting pressure on the OPM. We believe the southern region may remain under pressure (both demand and realisation) for the next two to three quarters.
- We have revised our estimate marginally upward for FY2015 to factor in a slightly higher realisation (supply discipline and likely improvement in the demand from Andhra Pradesh) and a higher volume (demand environment likely to improve from H2). We have also introduced FY2016 estimate in this note.
- Despite the recent run-up and the unfavourable demand-supply dynamics in the south region, we maintain our Hold rating on the stock and reiterate our preference for Ramco Cements as a preferred pick in the southern region (owing to a relatively better balance sheet, quality of management and valuations). Our revised price target is Rs300.
Jyothy Laboratories
Recommendation: Buy
Price target: Rs250
Current market price: Rs206 Growth momentum to sustain, maintain Buy with revised price target of Rs250 Key points - Jyothy Laboratories Ltd (JLL) maintained its strong revenue growth in Q4FY2014 by clocking a revenue growth of 21.2% (driven by a 15% volume growth) despite a sustained slowdown in the domestic FMCG market. All the focus segments managed to post a strong growth (fabric care 27%, dish-wash 32% and mosquito repellant 23%) during the quarter. The OPM declined by 246BPS YoY to 10.1%, which was affected by higher advertisement spends. The lower interest cost aided the PAT to almost double to Rs29.2 crore.
- The management has guided for a 20-25% revenue growth (the volume growth to sustain at 15%) and the OPM standing at about 14% (the consolidated OPM will be close to 14% as the laundry business is expected to deliver some profits at the operating level).
- The steps undertaken by the revamped management in FY2013 aided JLL to post a strong revenue growth and better margins in FY2014. The renovations under the existing brand, new product launches, and higher brand building and promotional spends would help JLL to maintain the growth momentum in the coming years. We expect JLL's revenues to grow at a CAGR of about 20% and the OPM to be sustained at around 14%. The stock is currently trading at 17.5x its FY2016E earnings. In view of better growth prospects and discounted valuations in comparison with mid-cap peers, we maintain our Buy recommendation on the stock with a revised price target of Rs250.
- Key risk: Any significant slowdown in the revenue growth of key segments owing to intensified competition or a lower monsoon rainfall (leading to an increase in the inflation).
Ashok Leyland
Recommendation: Buy
Price target: Rs39
Current market price: Rs33 Realisations led margin expansion; visibility of turnaround improves Key points - Ashok Leyland Ltd (ALL)'s Q4FY2014 results beat our estimate as an improvement in the realisations, which was higher than our expectation, helped the company post an OPM of 6% as against a loss at the operating level in the preceding quarter. ALL had an exceptional gain of Rs376 crore which consisted of the selling of IndusInd Bank shares (Rs220 crore) and immovable property (Rs159 crore). After adjusting for the same, the net loss was at Rs12.7 crore as against our estimate of a loss of Rs117 crore.
- The domestic commercial vehicle (CV) industry has been witnessing a severe downturn over the past two years. The discounting in the system had reached unsustainable levels wherein the two largest players, Tata Motors and Ashok Leyland (a combined market share of 85%), were making operating losses. A reformist government at the centre with a strong mandate has further raised the already prevalent expectations of an economic recovery post the general election and the CV industry would be a prime beneficiary of the turnaround.
- The manufacturing-led industrial growth and infrastructure push will be a big boost for the CV industry. Additionally, ALL's focus on profitability and a de-leveraging of the balance sheet are expected to be the key drivers for the earnings expansion. We upgrade the stock to Buy with a twelve-month price target of Rs39, largely factoring in a steep upgrade in the earnings estimates.
Bharat Electronics
Recommendation: Hold
Price target: Rs1,800
Current market price: Rs1,642 PSU re-rating playing out; upgraded to Hold Key points - In our last update on Bharat Electronics, we had advised investors to take home some profits after the stock had gained close to 21% within five weeks of our upgrading the recommendation on it to a Buy. At that point, the stock's valuation was close to the average valuation of the previous five years, though the same was still below the valuations enjoyed during previous bull markets valuations.
- But the situation has changed now. After the results of the general election the entire basket of public sector undertaking (PSU) companies is getting re-rated (as predicted in our strategy note, India elections special, published post-election results on May 16, 2014). Moreover, the focus is also more on the PSUs in select segments of infrastructure development, capital goods and defence equipment, which are part of the key areas of attention for the NDA government.
- A niche PSU player like Bharat Electronics has already got significantly re-rated. Though we would not recommend buying the stock at the current levels, but we are upgrading our recommendation on it to Hold and believe that dips should be used to accumulate the stock with a two-year perspective. We have revised the estimates and increased the target multiple to 12x (a 40% discount to the peak multiple and a 10% premium to the average price/earnings multiple of the last six years) on FY2016 estimate. The revised price target works out to Rs1,800.
VIEWPOINT Ashoka Buildcon
Current market price: Rs145
View: Positive Road to riches Key points - Ashoka Buildcon Ltd (ABL) is one of the largest BOT road developers with a portfolio of 19 road projects (13 operational and six under construction projects) aggregating 4,840 lane kilometer with a total cost of Rs10,221 crore. With a commissioning of two large BOT projects, the BOT (toll) revenues are expected to double over FY2014-16.
- ABL's has managed to secure Rs700 crore of investment in its subsidiary from SBI-Macquarie (one of the largest infrastructure focused funds) at reasonably good valuations of 1.3x book value (most listed road companies trade below their book value). Thus, despite the debt-equity ratio of 2.5x (relatively lower than 3x for some of its peers) it is well placed to get a fair share of the business in the expected flurry of activity in the EPC as well as BOT road space by the new government at the centre.
- The commissioning of two large projects in FY2014-15 is expected to drive a 15% growth in consolidated revenues with an improvement in the margins owing to a higher contribution of the BOT income. We see scope for a further upside of close to 20-22% (based on a rough fair value of Rs185 per share; the BOT business valued at Rs140 per share and EPC valued at Rs45 per share) over the next 6-12 months and thus have a positive stance on the stock.
- Risks to our call: Any further firming-up of interest rates or liquidity squeeze could severely impact the cash flows and valuations. Plus, any delay in the execution or aggressive bidding in new NHAI orders is also a risk.
JK Lakshmi Cement
Current market price: Rs178 Significant re-rating, positives priced in Key points - JK Lakshmi Cement (JKL) reported an earnings growth of 45% year on year (YoY) for Q4FY2014 led by a higher sales volume (up 20% YoY) due to capacity additions during Q4FY2014. However, an almost flat realisation led to a marginal growth in the EBITDA per tonne to Rs3,478. A lower depreciation charge led to an earnings growth of 45% adjusting for an exceptional item of Rs19 crore.
- JKL completed the Kiln-I clinker capacity (0.33mtpa), grinding unit at Jhajjar (0.66mtpa) and debottlenecking at Sirohi (0.6mtpa) during the quarter, increasing its total capacity to 6.65mtpa. JKL's 2.7mtpa Durg capacity expansion is likely to be completed by Q3FY2014, while the 0.65mtpa grinding unit at Surat is on track. After the completion of these projects, the company's cement capacity will rise to 10mtpa. The large expansion exercise in an unfavourable demand-supply environment could put pressure on its margins in the near term.
- The stock has appreciated by 84% since our Viewpoint report on it two months back and its financial performance could remain under pressure in the near term (at least for the next two quarters). Thus, we advise investors to take home some profits and look at re-entering the stock only after a 10-12% correction (which would leave scope for a decent appreciation from our roughly calculated fair value of Rs200).
| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
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