| Summary of Contents STOCK UPDATE Maruti Suzuki India
Recommendation: Buy
Price target: Rs2,740
Current market price: Rs2,525 Operating performance in line with estimate; outlook positive, maintain Buy Key points - Maruti Suzuki (Maruti) reported a 12.6% growth in volumes and a healthy operating performance for Q1FY2015 with a stable GPM and a 30-BPS Y-o-Y expansion in the OPM on the back of a higher operating leverage. Additionally, aided by a 45% increase in the treasury income, the net profit rose by 20.7% YoY to Rs762 crore.
- As stated by the Maruti management, there has been a perceptible change in consumer sentiment after the general election results with higher enquiries and footfalls. The impact was visible in June 2014 when retail volumes in the urban markets rose by 12.7% after being on a declining trend for two years. Discounts in the system remain at elevated levels because there are only early signs of a demand revival. The discounts are expected come down once a proper trend is established. There has been no let-down yet in rural demand, given the deficient monsoon rains.
- We have broadly maintained our earnings estimates and the stock is currently trading at 16.5x our FY2016 earnings estimate. We believe the high multiple is justified in view of the strong 26% earnings growth (CAGR) expected over FY2014-17, the positive outlook on the domestic passenger vehicle segment and the company's aggressive depreciation policy which depresses earnings. We maintain our Buy recommendation on the stock with an unchanged price target of Rs2,740. The growth in the domestic PV industry can surprise on the positive side offering further upside to our price target.
HCL Technologies
Recommendation: Buy
Price target: Rs1,780
Current market price: Rs1,555 Steady quarter, maintain Buy with a revised price target of Rs1,780 Key points - HCL Technologies (HCL Tech) has delivered a steady performance for Q4FY2014, with the revenues and EBIT margin broadly in line with expectations. However, a lower tax provisioning and a higher other income led the net income growth to beat the estimates for the quarter. The revenues were up by 3.4% QoQ to $1,406.9 million (in constant-currency terms, the revenues grew at 2.8% QoQ). The IT service business' revenues rose by 2.2% QoQ and the BPO business reported a strong 17% Q-o-Q growth in revenues. The IMS division's revenue growth tapered off to 3.7% QoQ, but the management is confident of the growth returning to historical levels as deals start ramping up.
- For the quarter, the EBIT margin declined by 46BPS QoQ to 24.2% because of staggered wage hikes and the rupee's appreciation against the dollar. The rationalisation of the SG&A expenses supported the margin. The other income was up by 56.3% QoQ and the effective tax rate was 16.5% against 20.9% in Q3FY2014. The net income was up by 13.1% QoQ to Rs1,836 crore. Deal wins remained healthy as the company signed 14 transformational deals (total 50 deals in FY2014) worth more than $1 billion in TCV for the quarter (cumulative TCV of more than $5 billion in the last four quarters).
- HCL Tech continues to show consistency in its earnings performance. In the June 2014 quarter the revenue growth was reported at the top of the quadrant among the top-tier IT companies and the company also delivered a steady margin performance. We have marginally tweaked our estimates for FY2015 and FY2016 to factor in the higher other income. Given the relatively better growth visibility among the large-caps apart from TCS, we have increased our target multiple to 15x and consequently increased our price target to Rs1,780. We maintain our Buy rating on the stock.
ICICI Bank
Recommendation: Buy
Price target: Rs1,728
Current market price: Rs1,473 Strong operating performance Key points - ICICI Bank reported a strong set of numbers for Q1FY2015, as its net interest income grew by 17.6% YoY leading to a 16.8% Y-o-Y growth in the net profit. The non-interest income grew by 14.7% YoY supported by a higher dividend from the life insurance subsidiary and a forex gain from the repatriation of the profits from the overseas branches.
- The growth in the retail loans remained strong (up 26.7% YoY) while the deposit franchise strengthened (an average CASA balances of 39.5%). The margin expanded further to 3.4% led by an uptick in the domestic margin. The asset quality remained stable as the reported gross and net NPAs were similar to that seen in Q4FY2014.
- ICICI Bank continues to deliver a strong operating performance led by an improving liability base, focus on retail loans and control on slippages. We expect the bank's earnings to grow at a healthy pace leading to an expansion of the return ratios (return on asset [RoA] of 1.8% and return on equit [RoE] of 15.7%). We maintain our Buy rating on ICICI Bank with a price target of Rs1,728.
Lupin
Recommendation: Buy
Price target: Rs1,300
Current market price: Rs1,182 Price target revised to Rs1,300 Key points - Lupin reported a strong performance for Q1FY2015 as reflected in a 35.7% growth in the net sales, a 1,015-BPS surge in the OPM and a 55.8% jump in the net profit during the quarter. The strong growth seen in Q1 can mainly be attributed to the continued benefits of the Cymbalta exclusivity and better traction in the base business.
- Apart from the strong sales in the US market (up 56.5% YoY), the company registered a healthy 29.2% growth in the Indian formulation business despite the new pricing policy affecting part of the business.
- A sharp improvement in the base business' margin due to cost rationalisation measures and the management's guidance to sustain the OPM at 27% to 28% in FY2015 (vs 25% in FY2014) especially impress us.
- We revise our earnings estimates for FY2015 and FY2016 by 14% and 14.5% respectively, mainly to factor in a 430-BPS improvement in the margin estimates for both FY2015 and FY2016. Accordingly, our price target stands revised up by 18% to Rs1,300. We maintain our Buy rating on the stock.
Torrent Pharmaceuticals
Recommendation: Buy
Price target: Rs887
Current market price: Rs744 Price target revised to Rs887 Key points - Torrent Pharmaceuticals (Torrent) has reported a strong performance for Q1FY2015, as reflected in a 21% growth in the revenues, a 1,275-BPS surge in the OPM and an 85% growth in the adjusted net profit.
- Though the growth was strong during the quarter mainly because of the launch of the generic Cymbalta under shared exclusivity in the US market, but the base business also saw a remarkable improvement in the OPM, thanks to cost rationalisation and improved realisation.
- The subsequent quarter will see the full impact of the integration of the newly acquired branded business of Elder Pharma and that will materially make for the loss of revenues due to the expiry of the exclusivity on Cymbalta.
- We revise our earnings estimates for FY2015 and FY2016 upwards by 3% and 9% respectively to mainly factor in the improvement in the OPM. We also revise our price target up by 16% to Rs887 (16x FY2016E EPS) and maintain our Buy rating on the stock.
Bajaj Electricals
Recommendation: Book profit
Current market price: Rs287 Deterioration in margin outlook; Book profit Key points - Contrary to expectations, not only was the performance of Bajaj Electricals Ltd (BEL) weak in Q1FY2015 but the near-term outlook for its business has also deteriorated considerably. First, the turnaround in the project business could take longer than expected. Second, the lighting business is facing severe margin pressure with CFL manufacturers losing out to LED lighting products. The third business segment, though doing better compared with the other two segments, is also not likely to see any meaningful growth in the next few quarters.
- Despite a healthy growth of 13.3% in the revenues, the company posted a lower than expected OPM of 4.2% in Q1FY2015 due to continued losses in the project business and a sharp decline in the margins of the lighting business (the PBIT margin contracted by 340BPS YoY to 1.5% in Q1FY2015). Further, the management has cut the margin guidance for both the consumer product and lighting businesses, though it has retained the overall revenue growth guidance of around 20% for FY2015.
- Given the muted outlook, we see scope for a 10-15% cut in the earnings estimates for FY2015 and FY2016 and a de-rating of the valuation multiples. At the current market price, BEL's valuations are not cheap either. Thus, we believe it would be better for investors to take profits home (Stock Idea on BEL initiated at Rs245 on March 3, 2014). On May 8, 2014 we had advised investors to book partial profits at a price of Rs325 and downgraded the rating on BEL to Hold.
Tata Global Beverages
Recommendation: Reduce
Price target: Rs135
Current market price: Rs154 Subdued operating performance, Reduce maintained Key points - Tata Global Beverages Ltd (TGBL)'s consolidated revenues saw a muted growth of 6% in Q1FY2015. The growth was lower mainly on account of a 7% revenue growth in the stand-alone business and an 11% decline in the Tata Coffee (consolidated) business during the quarter. Our rough-cut calculation suggests that the Tata Tetley revenues must have grown in double digits which could be considered as the only positive in TGBL's Q1FY2015 performance.
- The GPM stood flat while the OPM declined by 90BPS YoY due to higher other expenses during the quarter. The subdued operating performance resulted in just a 3% growth at the adjusted PAT (before minority interest and share of profit from associates) level to Rs100 crore.
- The first quarter of FY2015 was yet another quarter of a dismal sales performance for TGBL. Going ahead, we expect the profitability to remain under pressure as international tea and coffee prices are expected to remain firm due to an increasing gap between the demand and the supply. We don't expect the revenues to grow substantially as Tata Coffee is expected to post flat revenues. The stand-alone revenues are likely to grow in high single digits due to pressure on the sales volume of branded tea.
- We believe it will take some time for TGBL to post a strong improvement in the OPM and return ratios but whenever it happens it will be a key re-rating trigger for the stock. We have broadly maintained our earnings estimates for FY2016 and FY2017. In view of the growth head winds in the near term, we maintain our Reduce rating on the stock with a price target of Rs135. The stock is currently trading at 23x FY2015E EPS of Rs6.7 and 19.1x FY2016E EPS of Rs8.1.
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