| Summary of Contents STOCK UPDATE Aurobindo Pharma
Recommendation: Buy
Price target: Rs771
Current market price: Rs639 Bumper performance in Q4, growth to sustain in FY2015 Key points - Aurobindo Pharma reported a strong performance for Q4FY2014 with the adjusted net profit surging by 324% YoY to Rs466 crore on the back of a 130% increase in the US formulation business. The core OPM (excluding the dossier income) expanded by 1,775BPS to 31% in Q4 while the net sales jumped by 48.4% to Rs2,330 crore.
- The strong performance can be attributed to the launch of generic Cymbalta in December 2013 under shared exclusivity coupled with the other key launches during Q3 and Q4 of FY2014. Though the benefit of Cymbalta exclusivity will not extend beyond June 2014, but the management expects to maintain the growth in the top line and an OPM of 22-23% on the back of the integration of the newly acquired API business of Actavis and an improvement in the base business.
- We revise our earnings estimates up by 27% and 23% for FY2015 and FY2016 to factor in the improvement in the base business and the integration of the newly acquired API business of Actavis. Accordingly, our price target stands revised up by 23% to Rs771. We maintain Buy rating on the stock.
Kalpataru Power Transmission
Recommendation: Buy
Price target: Rs200
Current market price: Rs180 Re-rating sustainable on improving growth outlook Key points - In Q4FY2014 the revenues of Kalpataru Power & Transmission Ltd (KPTL) grew by 12% YoY to Rs1,152 crore with a healthy performance in the T&D segment. The OPM of KPTL remained flat at 9.5% in Q4FY2014 but due to higher depreciation and interest charges the adjusted PAT declined by 3% YoY to Rs47 crore. For FY2014 the PAT grew by 6% YoY, backed by a 22% growth in sales and a steady margin in the stand-alone entity.
- JMC Projects (its listed construction subsidiary) reported significant margin expansion for Q4FY2014 to 6.2% (up 147BPS) even though its sales declined by 8%, as efforts to improve the margin and streamline the balance sheet are bearing fruits now. Another subsidiary, Shree Shubham Logistics, reported a very strong net profit growth (up by 184% YoY) in Q4FY2014, backed by strong revenue traction (up by 93% YoY) with incremental capacity and better OPM of about 17.5%. In FY2014 also the PAT of SSL grew by 52% YoY.
- The management has maintained a top line guidance of 15% for KPTL (stand-alone), backed by a healthy order book of 1.6x FY2014 revenues with expectations of a stable margin. But the profitability in the subsidiaries (especially JMC Projects) is expected to look up. However, in case of JMC Projects, the development of its road BOOT projects should be the key monitorable as FY2015 and FY2016 would be the first two years of tolling revenue collection. We have fine-tuned our estimates and revised our price target primarily by revising upward the valuation multiple, given the overall better outlook. Hence, we retain Buy on the stock with a revised price target of Rs200 (based on SOTP method).
Indian Hotels Company
Recommendation: Hold
Price target: Rs98
Current market price: Rs91 Better days ahead; maintain Hold Key points - Indian Hotels Company Ltd (IHCL)'s Q4FY2014 and FY2014 stand-alone performance was affected by a bleak macro environment (that reduced the room demand) and incremental room supply in the key domestic markets. At the consolidated level the performance was little better with under 10% revenue growth and a marginal decline in the OPM. However, the management has hinted at a better operating performance (at stand-alone and consolidated levels) in the years to come driven by better room demand in the domestic markets (especially from corporate India) in a better macro environment. Also, increased room supply in the key markets will provide a breather.
- In FY2013 the company had taken a bold decision to impair the value of some of its overseas investments (including Oriental Express). The company made a provision of Rs715 crore at the stand-alone level and that of Rs526 crore at the consolidated level in FY2014 for the same. The management has indicated that there won't be any further impairment in the value of investments.
- IHCL has a stable balance sheet (a debt/equity ratio of 1.2x) and strong room inventory (of above 15,000 rooms). The company would be a key beneficiary of any improvement in the domestic tourism and hospitality business environment in the coming years. However, we will get more clarity on the same in the second half of the year (a peak season for hotel industry in India). In the last four months IHCL's stock price has already surged by 45%. We maintain our Hold recommendation on the stock with a revised price target of Rs98 (valuing the stock at Rs0.8 crore EV/room). The stock is currently trading at Rs0.73 crore FY2016E EV/room.
- Key risk: Any significant drop in the occupancy rate or the average room rental would act as a key risk to our earnings estimates.
Bharat Electronics
Recommendation: Hold
Price target: Rs1,850
Current market price: Rs1,672 Price target revised to Rs1,850 Key points - In Q4FY2014, Bharat Electronics Ltd (BEL)'s revenues stood at Rs3,131 crore, an increase of 18% largely on account of aggressive execution of orders. The total order book stood at Rs23,200 crore (close to 4x its revenues) at the end of Q4FY2014. The company declared a total dividend of Rs23.3 per share in FY2014 including an interim dividend of Rs6 per share (a yield of 1.4%).
- The operating profit margin during the quarter improved by 320 basis points year on year (YoY) to 24.5% on account of a favourable currency impact and a better product mix (higher sales from the defence segment). Consequently, the earnings for the quarter improved by 12% to Rs663.2 crore (lower than the revenue growth on account of a lower other income and a higher tax rate). Currently, there is positive news flow on the defence sector: as per a Department of Industrial Policy & Promotion draft note, the department has proposed to allow up to 100% foreign direct investment in the defence sector to boost domestic manufacturing.
- A niche public sector player like BEL has already been significantly re-rated. Though we would not recommend buying the stock at the current levels due to a limited upside to our price target from these levels, but we believe that dips should be used to accumulate the stock with a two-year perspective. We have marginally revised our earnings estimate upward. Consequently, our revised price target works out to Rs1,850. We maintain our Hold rating on the stock.
Gayatri Projects
Recommendation: Buy
Price target: Rs180
Current market price: Rs131 Regional stability to improve business outlook; price target revised to Rs180 Key points - In Q4FY2014 the earnings of Gayatri Projects were affected by Telangana related issues that resulted in weak execution of infrastructure projects in the two newly formed states (especially irrigation projects worth about Rs3,000 crore out of Rs7,250 crore of projects in bag). However, the company posted an improvement in margins limiting the impact of slow execution on the earnings. The management expects the execution of irrigation projects to start from Q2FY2015 contributing meaningfully to the revenues of FY2015.
- With political stability returning in Seemandhra and Telangana, project execution is expected to pick up along with the opportunity of increasing the order book for future growth. The other power project with Sembcorp Industries is on track with the first phase (660MW) slated to get commissioned in Q2FY2015. The company completed the Hyderabad-Karimnagar road project during the quarter. A positive development in its power project in joint venture with NCC in the form of Sembcorp Industries buying a strategic stake would ease concerns related to its power generation business.
- The improving visibility of all its three businesses (construction, road and power) and positive developments in terms of the commissioning of the first phase of the power plant are resulting in the re-rating of the stock. Our revised price target price of Rs180 factors in the bulk of these positives. We maintain Buy on the stock.
SECTOR UPDATE Q4FY2014 Auto earnings review Key points - The automobile sector reported a flat revenue growth in Q4FY2014 given a volume decline in the passenger vehicle and commercial vehicle (CV) segments. The auto companies continued to improve their contribution margins as commodity prices remained subdued. Ashok Leyland was the stand-out performer during the quarter with a Rs280-crore sequential swing in its operating profit.
- A reformist government at the centre has further raised the expectations of an economic turnaround. The new government is expected to focus on manufacturing and infrastructure for economic development which will also give a fillip to job creation. The beleaguered automobile industry especially the ailing CV segment is expected to reap the benefits of an economic turnaround.
- In the two-wheeler space our preferred pick is TVS Motor Company (because of a strong product portfolio in the fast growing scooter segment). In the passenger vehicle space we are positive on Mahindra and Mahindra (a leadership position in utility vehicle and tractor segments, strong OPM) and Maruti Suzuki (a market leader in passenger vehicles and a strong product pipeline). In the CV segment we like Ashok Leyland and in the ancillary space we prefer Apollo Tyres and Gabriel India. However, we are downgrading Greaves Cotton to a Reduce rating (pain in near term and valuations stretched).
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