| Summary of Contents STOCK UPDATE Bank of Baroda
Recommendation: Buy
Price target: Rs1,062
Current market price: Rs866 Gaining traction Key points - In Q1FY2015 Bank of Baroda (BoB) posted a steady growth in the profit (up 16.6% YoY) aided by a reversal of investment provisions (Rs319 crore) and a healthy growth in net interest income (up 15% YoY). The domestic NIM expanded to 2.94% from 2.84% a year ago indicating an improvement in the core operations.
- During the quarter the asset quality showed a marginal deterioration (reported gross NPAs inched up by 15BPS QoQ) but remained better compared with the peer banks. The slippages were up QoQ (though the same was offset by improved recoveries/ugradations) while fresh restructuring declined to Rs986 crore from Rs1,157 crore in Q4FY2014. The provision coverage ratio improved to 67% from 65.5% QoQ.
- BoB continues to report a stable performance in terms of both the operating performance and the asset quality. Moreover, the bank is amongst the better capitalised public sector banks (its Basel-III tier-1 CAR stands at 9.06%) which will aid growth in the balance sheet. We have, therefore, valued it at a premium to the other public sector banks. We expect BoB to report an earnings growth of 11% CAGR and improvement in the return ratios (RoE of 15% and RoA of 0.8%). We maintain our Buy rating on the stock with a price target of Rs1,062.
- Key risk: A likely change in the management could result in volatility in BoB's performance in the near term.
Larsen & Toubro
Recommendation: Buy
Price target: Rs1,840
Current market price: Rs1,645 Performance weak due to hydrocarbon blues Key points - Larsen and Toubro (L&T) reported soft results for Q1FY2015; the adjusted earnings of the stand-alone entity grew by 9% YoY backed by a 3% revenue growth. The profitability of the infrastructure segment largely compensated for the decline in the profitability of the power, metallurgical and heavy engineering segments. At the consolidated level, the hydrocarbon business was a major disappointment with a loss of Rs942 crore at the PBIT level. Further, though the consolidated PAT was reported at Rs967 crore but that includes a gain of around Rs1,150 crore from the sale of assets (the Dhamra port) which is non-recurring.
- On the positive side, order inflow (on a consolidated basis) grew by 11% YoY to Rs33,408 crore, mainly driven by a significant jump in the overseas order inflow (overseas orders grew more than two times YoY). The order backlog grew by 13% YoY and stood at Rs195,392 crore (consolidated), with a book-to-bill ratio of 2.3x on the FY2014 sales. Though the domestic order inflow is weak now, but we believe with given the macro environment, some improvement could be witnessed in the next six months. The management also maintained its guidance (of a 15% revenue growth and a 20% order inflow growth).
- We believe that owing to a weak set of numbers (mainly because of a disappointing hydrocarbon business), the stock could react negatively. However, going forward the management expects an improvement in the hydrocarbon business and a positive change in the domestic macro environment would improve the overall domestic outlook for L&T. We believe the correction in the stock price could give a lower entry point to investors, as L&T would remain one of the most preferred cyclical companies to play the current economic recovery. We retain our Buy rating and price target of Rs1,840 on the stock.
Hindustan Unilever
Recommendation: Reduce
Price target: Rs560
Current market price: Rs687 Better operating performance, but valuations not in comfort zone Key points - Hindustan Unilever Ltd (HUL)'s revenues grew by 13.2% YoY to Rs7,570.8 crore in Q1FY2015 driven by a volume growth of 5% (vs a 3% volume growth in Q4FY2014). The GPM declined by 62BPS to 47.3. However, lower advertisement and promotional spending along with a lower employee cost helped the OPM to improve by 62BPS to 15.0%. Adjusting for a one-time credit of Rs32 crore generated on account of the unutilised pension corpus and an exceptional gain of Rs27.8 crore (adjusting for tax), the PAT grew by about 15% to Rs996.7 crore.
- The highlight of Q1 was a 13% growth in the highly competitive segment of soaps and detergents despite a slowdown in the category. The personal product segment saw a revival in its performance with the revenue growth returning to strong double digits on the back of a double-digit revenue growth in categories such as skin care and hair care (in a challenging enviornment). The personal product segment delivered a strong performance (partly due to the low base of Q1FY2014). The PBIT margin of the personal product segment improved by 277BPS to about 28%.
- After continuous moderation in the volume growth during the previous two quarters, HUL posted a recovery in the volume growth in Q1FY2015 on the back of adequate advertisement and promotional spending along with a focus on improving the distribution reach. We don't expect the volume growth of the domestic business to decline from the current level, but we don't expect a speedy recovery either as the monsoon has yet to fully revive and inflationary pressures have not eased out.
- We have revised upwards our earnings estimates for FY2015 and FY2016 by 2% and 3% respectively to factor in the better than expected operating performance in all the segments. In line with the revision in the earnings estimates and the upgradation of the target multiple to 27x, our priced target stands revised at Rs560. However, in view of the stock's stretched valuation of 33x FY2016E earnings, we maintain our Reduce rating on the stock.
- Key risk: Any announcement of a potential buy-back by the promoter at a price higher than the stock's current market price remains a risk to our rating on the stock.
Ashok Leyland
Recommendation: Buy
Price target: Rs39
Current market price: Rs33 Profitability improves on higher GPM, maintain Buy Key points - In Q1FY2015 Ashok Leyland Ltd (ALL)'s OPM expanded by 370BPS YoY even as its sales in volume terms declined by 8% during the quarter. The operating performance improved largely due to an impressive 220-BPS improvement in the GPM and a tight control on the overhead cost. Consequently, the net loss for the quarter narrowed from Rs142 crore in Q1FY2014 to Rs48 crore and was broadly in line with our estimate.
- During the quarter the battered domestic CV industry showed the first signs of revival as the heavy truck volumes rose by 2.5% in June 2014 after 27 straight months of decline. The mix too was encouraging with multi-axle vehicles and tractor trailers showing a higher growth than the other segments. The central government's focus on manufacturing-led industrial growth, mining and infrastructure will be a big boost for the CV industry going forward.
- ALL has successfully managed to de-leverage its balance sheet through the sale of the non-core assets, a reduction in the working capital level and an equity issuance, lowering its debt/equity ratio to a more manageable level of 1x now. Additionally, with a leaner cost structure, ALL is well poised to reap the benefits of a revival in the CV industry. We have broadly maintained our earnings estimates and reiterate a Buy recommendation on the stock with a price target of Rs39 valuing the core business at 15x FY2016E earnings.
Persistent Systems
Recommendation: Hold
Price target: Rs1,400
Current market price: Rs1,313 Maintain Hold with a revised price target of Rs1,400 Key points - For Q1FY2015 Persistent Systems Ltd (PSL) reported a flattish sequential growth in revenues to $72.7 million because of a muted sequential growth in the software services business (on account of business transition). However, the IP business' revenues delivered a better than expected performance with a 1.8% sequential growth. The IT services business' volume declined by 2.3% QoQ whereas its realisation rose by 2.3% QoQ.
- For the quarter the EBITDA margin declined by 519BPS QoQ to 21.8% because of higher SG&A expenses coupled with the rupee's appreciation against the dollar. The other income for the quarter was up by 47.3% QoQ to Rs9.9 crore and the forex gain was at Rs13.3 crore against a forex loss of Rs8.7 crore in Q4FY2014. The net income rose by 2.4% QoQ and 20.5% YoY to Rs68.8 crore. PSL added 76 new clients during the quarter.
- Despite trading at a valuation (trading at 14.5x FY2016E earnings) that is closer to that of the large-cap IT companies after a steep re-rating in the last six months, PSL continues to attract investors' interest. The stock's re-rating was driven by a lack of investment opportunity in the quality mid-cap IT space and the distinctive advantage of PSL's SMAC oriented business model (a big growth area), strong balance sheet (cash and investments at Rs663 crore, at 41% of the balance sheet size) and good corporate governance. Though at the current juncture we do not see any significant scope for upgrades in the earnings estimates for FY2015 and FY2016, but given the huge potential in the SMAC space, we see PSL as a long-term value creator for investors. We maintain our Hold rating on the stock and revise its price target to Rs1,400.
LIC Housing Finance
Recommendation: Buy
Price target: Rs373
Current market price: Rs291 Concerns overdone; maintain Buy Key points - Despite a healthy growth in advances (up 16.8% YoY), LIC Housing Finance reported a muted growth of 3.8% earnings due to higher effective tax rate (deferred tax liability on special reserves; PBT grew by 15%) and a reversal of interest income from an increase in the NPLs (seasonally NPAs rise in Q1 but moderate subsequently).
- The net interest margin contracted to 2.19% from 2.4% in the previous quarter, partly contributed by a higher borrowing cost. The loan growth remained healthy (up 16.8% YoY) mainly on the back of the retail segment (loans to retail segment up 17.2% YoY). Given the improved outlook for developer loans, the scope for expansion in the LAP book and moderation in the borrowings cost (declining bond yields), the margins are likely to improve going ahead.
- LIC Housing has corrected by nearly 20% from the recent peak due to concerns over higher competition from banks and uncertainly on taxation of debt mutual funds that invest in its bonds. We do not expect the recent regulatory measures to result in any material changes in LIC Housing Finance's financial performance. The street seems to be worried about further regulatory actions by the RBI to narrow the advantage HFCs have over banks. We do not anticipate such drastic measures and believe that LIC Housing Finance can withstand competitive pressure given its dominant position in mortgage lending business. Thus, we expect its earnings and return ratios to remain healthy (RoA of 1.6% and RoE of 20%). We maintain our Buy rating with a price target of Rs373 (1.8x FY2016E book value).
Raymond
Recommendation: Hold
Price target: Rs430
Current market price: Rs410 Positives largely priced in; downgraded to Hold Key points - In Q1FY2015, aided by a strong growth in the core textile and the garment segment, the consolidated revenues of Raymond grew by 25.5% YoY. A higher raw material cost (as a result of the consolidation of the shirting business) coupled with a margin decline in the tools and the auto parts segment negated the positive impact of the margin expansion in the textile and the garmenting business. This resulted in a flat OPM. The adjusted loss declined from Rs36.1 crore in Q1FY2014 to Rs30.8 crore in Q1FY2015. (Seasonally Q1 is the softest quarter for Raymond.)
- In line with its earlier stance, the management continued to guide for a robust double-digit revenue growth for FY2015 (as explained by the lead indicators, viz a strong Autumn Winter 2014 season order bookings for branded apparels, a double-digit growth in the volume offtake in the garmenting export business and a 6-8% growth in the textile suiting business). It further stated its intent to increase the advertisement spending on the power brands to spur growth. We have already factored a higher advertisement cost in our projections. Hence, despite there venue growth and the consolidation benefit we do not expect any material margin improvement from the FY2014 levels. Thus, we have kept our estimates for FY2015 and FY2016 intact and expect a 12.2% EBITDA CAGR over FY2014-16.
- Over the last three months, the stock has appreciated by 39% and risen 14% in the last one month (since our last update on the company on June 20, 2014 in which we had enhanced our price target from Rs350 to Rs430). We believe that the current price fairly captures the positives, leaving a limited upside to our price target. Hence, we downgrade our rating on the stock from Buy to Hold. Our price target on the stock remains unchanged at Rs430 (valued based on SOTP; with 5.2x EV/EBITDA to the core business + 50% value for the land parcel).
- Key risk: Any development on the value unlocking front through divestment of the non-core assets (monetisation of land parcel, stake sale in the engineering and automotive subsidiaries) would be the key upside risk to our rating.
The Ramco Cements
Recommendation: Buy
Price target: Rs310
Current market price: Rs278 Weak operating performance with lower demand dents earnings Key points - For Q1FY2015 The Ramco Cements reported an earnings decline of 47% YoY led by a fall in volume (down 3.8% YoY) and a rise in the cost of production (up 7.1% YoY). Consequently, the EBITDA per tonne declined to Rs517 per tonne (down 28% YoY) during the quarter.
- A tough demand environment coupled with a higher cost of production (higher input and freight costs) in an overcapacity region has been putting pressure on the company's OPM. We believe the southern region may remain under pressure (in terms of both demand and realisation) for the next two to three quarters.
- We have revised downward our estimates for FY2015 to factor in a lower volume growth during the fiscal, considering a weak demand environment in the south in H1FY2015.
- Despite the recent run-up in the stock price and unfavourable demand-supply dynamics in the cement markets in the southern region, we maintain our Buy rating on the stock and re-iterate the company is our preferred pick in the southern region (due to a relatively better balance sheet, good quality of the management and attractive valuation). We maintain our price target of Rs310.
| | | 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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