| Summary of Contents STOCK UPDATE ITC
Recommendation: Buy
Price target: Rs387
Current market price: Rs359 A mixed performance, maintain Buy with revised price target of Rs387 Key points - In Q1FY2015 ITC's net revenues grew by 25% YoY, driven by a strong 19% price-led growth in the cigarette business (sales volume declined by 2.5% in line with our expectation of a 3% decline) and a 51% growth in the agriculture business (driven by strong trading of low-margin commodities). The non-cigarette FMCG revenues grew moderately by 11% (affected by a general slowdown in the industry) while the hotel business' revenues stood flat due to a silent business period.
- The GPM declined by 429BPS YoY largely on account of a change in the revenue mix and an increase in the prices of some key inputs. However, OPM declined by only 73BPS to 35.4%. The cigarette business' PBIT margin improved by 140BPS YoY to 64.5% on the back of a price hike undertaken in the cigarette portfolio. The non-cigarette FMCG business posted a loss of Rs16 crore while the agriculture business' margin dropped by almost 300BPS to 6.0%. Overall, the operating profit grew by 17.4% YoY to Rs3,277.6 crore and the PAT grew by 16% YoY to Rs2,186.4 crore largely on the back of a strong growth in the revenues.
- Q1FY2015 was largely a quarter of a mixed performance for ITC. Going ahead, we expect the cigarette sales volume to remain under pressure as the company plans to hike prices again to mitigate the impact of a sharp increase in the excise duty on cigarettes. However, we expect the cigarette business' revenues to remain in double digits while the PBIT margin is likely to sustain YoY. We believe revival in the other FMCG business would depend on an overall improvement in the prospects of some of the key FMCG categories.
- We have broadly maintained our earnings estimates for FY2015 and FY2016 and believe that the company is well-poised to achieve an earnings CAGR of 16% over the next two years. We continue to like ITC in view of its better earnings visibility and discounted valuation of 24x FY2016E earnings to some of the other large-cap FMCG stocks. We maintain our Buy recommendation on the stock with a revised price target of Rs387 (valuing the stock 26x the FY2016E earnings).
- Key risk: Any significant drop in the sales volume of the cigarette business and further drop in the revenues of the other FMCG businesses remain the key risks to our earning estimates.
Bharti Airtel
Recommendation: Hold
Price target: Rs400
Current market price: Rs373 Strong domestic performance, Africa still lags; price target revised to Rs400 Key points - In Q1FY2015 Bharti Airtel (Bharti)'s consolidated performance was marked by a strong improvement in the domestic mobile business which led to a top line growth of 3.3% QoQ (the top line growth was a result of volume as well as price led improvement). The operating profit grew by a strong 5.7% QoQ. Consequently, the margin expanded by 73BPS QoQ to 33.6%. The strong operational performance coupled with a lower interest cost resulted in a 15.3% sequential growth in the earnings. Adjusting for the exceptional loss for both the quarters, the adjusted earnings grew by 17.1% QoQ.
- Bharti's domestic wireless business was the star performer in its portfolio, with a 4% Q-o-Q revenue growth (led by a 2.5% Q-o-Q growth in voice realisation and a 2.3% Q-o-Q growth in traffic) and a staggering 200-BPS margin expansion. The wireless business' margin at 36.9% is the highest in several quarters (the last time the company had seen a margin of 36.4% was in Q4FY2010). On the other hand, the African business continued to disappoint on both the revenue (down 1.1% QoQ) and the margin front (a sequential contraction of 100BPS; at 24.2% it was a multi-quarter low margin).
- The management continued to place confidence in the improving competitive landscape of the domestic wireless industry. Hence going forward, it expects an improvement in the realised rates and consequently in the margins. Taking cognisance of the strong margin improvement witnessed in the wireless business in Q1FY2015 and the positive outlook for the Indian business, we have raised our EBITDA estimates for FY2015 and FY2016 by 2.7% and 3.8% respectively. Accordingly, we raise our price target from Rs370 to Rs400. We maintain our Hold rating on the stock though.
IRB Infrastructure Developers
Recommendation: Buy
Price target: Rs300
Current market price: Rs239 Robust BOT performance limits impact of leverage; price target revised to Rs300 Key points - IRB Infrastructure Developers (IRB) reported a net profit growth of 11.8% on account of a strong performance of the BOT segment (up 54% YoY, OPM up 387BPS). On the flip side, the construction business (down 23% YoY), and a surge in the interest expenses (after commissioning of the Jaipur-Deoli project) and depreciation (amortisation of premium deferment of two projects) limited the net profit growth.
- The company's order book stands at Rs11,348 crore (including projects worth Rs5,500 crore bagged recently) providing visibility of the revenues of the construction business over next three to four years. The tariff revision in some projects from April 1, 2014 and September 1, 2014 along with an improvement in the traffic is expected to drive the BOT revenues.
- IRB is well funded to meet the Rs2,041 crore equity requirement over the next three years with internal accruals. The improving macro environment (better visibility of tendering, potential easing of interest rates etc) and a potential upside from a better than expected growth in traffic on the back of an economic revival are the key re-rating triggers for the stock. Thus, we continue to like IRB, which could offer handsome gains over the next 12-18 months. We maintain our Buy rating on the stock with a revised price target of Rs300.
V-Guard Industries
Recommendation: Buy
Price target: Rs855
Current market price: Rs753 Positives galore, re-rating to continue; revised price target to Rs855 Key points - V-Guard Industries (V-Guard) reported a very healthy earnings growth of 26% YoY for Q1FY2015 backed by a 17% growth in the revenues and a margin expansion of 89BPS to 8.5%. The revenue growth was mainly driven by a strong growth in stabilisers, digital UPS systems and house wiring cables.
- The two key positives of the results are: one, the company continued to ramp up its non-south business, which grew at 31% and made the highest contribution ever to the total sales at 35% in Q1FY2015; and two, improving working capital efficiencies led to free cash generation of Rs33 crore from operations and helped reduce the borrowings by Rs26 crore.
- The management sounded positive on the growth outlook and maintained its guidance for FY2015 (a 20% revenue growth and an EBITDA margin of 8-9% for FY2015). Given the traction in the non-south markets and improving cash flows (resulting in better return ratios), we see continued scope for the re-rating of V-Guard's valuation multiples. Consequently, we roll over our price target to the average of FY2016 and FY2017 earnings estimates. Our revised price target stands at Rs855.
Godrej Consumer Products
Recommendation: Reduce
Price target: Rs810
Current market price: Rs847 Valuation stretched, downgraded to Reduce with revised price target of Rs810 Key points - Godrej Consumer Products Ltd (GCPL) registered a moderate revenue growth of about 10% in Q1FY2015 largely on account of a 2% revenue growth in the domestic soap business and a 9% revenue growth (vs a 17% growth in Q4FY2014) in the domestic household insecticide (HI) business. The international business' revenues grew by 14% during the quarter. The key Indonesian and African businesses grew at 10% and 17% respectively during the quarter.
- The domestic business' OPM declined by 90BPS YoY to 15.0% while the international business' OPM improved by 52BPS to 10.5%. Thus, the overall OPM declined by 26BPS to 12.8% during the quarter. The operating profit grew by 7.3% YoY and the adjusted PAT grew by 12.1% YoY during the quarter.
- GCPL's management has hinted that some of the benefits of a reduction in the customs duty on some of key inputs into soaps may be passed on to the consumers which would lead to a better performance of the domestic soap segment in the coming quarter. The company is hoping to see a better performance from the HI segment in the coming quarters as the penetration level is still low for the category. It has taken many cost-saving initiatives and expects to reap the benefits of the same from H2FY2015.
- We believe it will take two to three quarters for GCPL's revenue growth to return to high teens. We have downgraded our earnings estimates for FY2015 and FY2016 by 3% and 5% respectively to factor in the lower growth in the domestic soap and HI business. Accordingly, we have revised our price target to Rs810 (valuing the stock at 25x FY2016E earnings). In view of the stock's stretched valuations and the growth head winds GCPL is facing in the near term, we downgrade our rating on the stock from Hold to Reduce.
- Key risk: Any significant improvement in the revenue growth of the domestic business or margin of the international business is a key risk to our rating.
Bank of India
Recommendation: Buy
Price target: Rs334
Current market price: Rs281 Asset quality pressure persists Key points - For Q1FY2015 Bank of India reported weakness in its core operations as its net interest income growth slowed to about 6% YoY due to a decline in the margin (down 18BPS QoQ to 2.16%). Consequently, the bank's net profit declined by 16% YoY to Rs805.7 crore.
- Fresh NPA additions remained elevated during the quarter (at Rs3,777 crore) which was partly offset by improved recoveries and upgradations. Though the management expects NPAs worth Rs900 crore to get resolved in Q2FY2015, but the higher slippages remain a concern.
- The bank's earnings growth was better in Q1FY2015, though higher slippages and restructuring, and a lower capital adequacy ratio were a cause for concern. However, the stock trades at 0.6x FY2016E book value (at about a 30% discount to peers like Bank of Baroda and Punjab National Bank) and partly factors in the negatives. We have revised our valuation multiple to 0.7x FY2016E which has resulted in a new price target of Rs334. We maintain our Buy rating on the stock.
CESC
Recommendation: Buy
Price target: Rs878
Current market price: Rs642 Q1 numbers in line with expectations; positive bias maintained Key points - For Q1FY2015 CESC reported a healthy earnings growth of 15% YoY, in line with our estimate. The revenues grew by 30% YoY as a result of a 24% revision in the tariff and a 5% improvement in the volume. However, due to a significant jump (of 25% YoY to 769MUs) in the power purchased from outside (where the margin spread is lower), the OPM contracted by 206BPS YoY to 20.3%.
- The performance of its subsidiaries remained encouraging; the store-level EBITDA of Spencer's remained at 4.6% (the same-store EBITDA at Rs74 per sq ft) in Q1FY2015, similar to the Q1FY2014 level. On the other hand, FirstSource Solutions is on a strong traction and addressing the scheduled debt repayment. The Quest mall is fully operational now and witnessing strong footfalls.
- The Haldia-based power plant of 600MW is expected to be commissioned by Q4FY2015; it would supply to CESC's existing Kolkata distribution business. Consequently, the regulated (cash generating) power generating business of CESC group would grow significantly. However, pain at the Chandrapur (600MW) plant continues for the time being, as after signing 100MW of PPA with TANGEDCO, the management is still looking for opportunities to sign long-term power supply contracts for the remaining capacities.
- We believe the commissioning of the Haldia power plant will enhance the existing base of the cash generating regulated power business. The focus of the new government on addressing the coal linkage issues of power plants that are ready should also turn positive for the Chandrapur power plant in future. Further, we are positive on the gradual progress of its other subsidiaries. The stock is trading at 1x FY2016E BV currently. We retain our positive stance and continue to rate CESC as a Buy with a price target of Rs878.
Cadila Healthcare
Recommendation: Hold
Price target: Rs1,300
Current market price: Rs1,165 US business boosts Q1 performance; price target revised to Rs1,300; put on Hold Key points - Cadila Healthcare reported a strong performance for Q1FY2015, as reflected in a 25% growth in the revenues, a 219-BPS expansion in the OPM and a 50% jump in the adjusted net profit. The growth during the quarter was mainly driven by the US business (up 85% YoY) and the emerging markets (up 28% YoY). However, the growth in the other geographies remained moderate.
- The management plans to file over 40 ANDAs and expects 10-15 approvals in the US market during FY2015, which should drive the growth in the subsequent quarters. Also, the growth will accelerate in the domestic market as the impact of the new pricing policy is getting settled.
- We have marginally curtailed the earnings estimate for FY2015 due to a moderate performance of the Indian business in Q1FY2015, but have revised our earnings estimate for FY2016 up by 8.5% in anticipation of a large chunk of US approvals in this year. Accordingly, our price target stands revised up by 8.5% to Rs1,300 (17x FY2016E EPS). However, owing to a limited upside to the stock price post-results rally, we downgrade our rating on the stock to Hold.
VIEWPOINT Arvind
Current market price: Rs241 Strong run-up, 62% returns in 6 months; time to take profits home Key points - Led by re-rating and latest run-up on account of a demerger the stock has delivered 62% returns in last six months: We had initiated our positive view on Arvind on January 31, 2014 at a price of Rs149 per share. We had further re-emphasised our preference for the stock in the subsequent Viewpoint note (dated March 14, 2014) and again in May after the announcement of the company's Q4FY2014 results. Our prime investment thesis was a strong growth in the textile business coupled with the company's metamorphosis into a branded play (with several marquee brands), which were not getting reflected in the stock's valuations. The same has played off very well. Since the time we initiated our positive view the stock has appreciated by 62%. It has risen by 27% since our last update on the stock in May this year in which we had expressed confidence about the company's business model and the stock's performance. At the current level of Rs241 the stock has surpassed all our targets.
- Margin pressure expected ahead: Going forward, we expect the stock's performance to be capped in the short term owing to: (a) margin pressure expected in the textile segment; and (b) Megamart's restructuring will be a positive in the long term but may affect the financials in the short term. The Megamart business (value retailing in nature) is currently bleeding and for Q1FY2015 the same has reported a 3.4 % decline in its same-store sales.
- Recent run-up, possible margin risk in short term and aggressive valuation leave little scope; advise profit booking with 62% overall gain: We continue to believe that Arvind is a proxy play on the robust brand and retail story unfolding on the Indian shores as well as the significant opportunity in the textile export space where India is rapidly growing its presence and taking share from Bangladesh, Vietnam and the other markets. But given the strong appreciation in the stock price (up 62% in six months and up 27% in last three months) and the likely margin risk in the short term, we believe that in the short term the upside to the stock is capped (more so, given the recent run-up on account of the demerger). At the current valuation of 11x its FY2016E earnings, the stock is no longer cheap and hence we advise our clients to take home profits with a 62% overall gain.
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