| Summary of Contents STOCK UPDATE Crompton Greaves
Recommendation: Buy
Price target: Rs225
Current market price: Rs195 Consumer durables drove Q1 profit; demerger in the offing Key points - In Q1FY2015 Crompton Greaves Ltd (CGL) reported a revenue growth of 8% YoY at the consolidated level to Rs3,442 crore, driven by a steady growth in the consumer durable (domestic) business and a recovery in the power system (overseas) business. The profitability was also mainly contributed by the consumer durable business whose margin expanded by 94BPS YoY to 12.4%. The consolidated operating profit grew by 19% to Rs173 crore in Q1FY2015 but due to higher interest and depreciation charges the net profit grew by 6% YoY to Rs64 crore, which was in line with our estimate.
- During the post-results conference call, the management shared that the problem areas (the Belgian and Canadian businesses and the power system business in the USA) have stabilised and are about to break even at the operating level. Moreover, there are clear signs of an improvement in the overseas business (as evident from the strong order inflow in Q1FY2015) and the management hinted that new orders have a better margin profile. Hence, the margin should improve in the overseas business.
- We believe the overseas business is on a recovery path; we expect it to largely break even at the operating level in FY2015 but add value at the net level only from FY2016. Further, a revival in the domestic demand environment could benefit CGL. In the meanwhile, the management is looking to demerge the consumer durable business which could unlock value. In view of these positives we remain bullish on the stock and retain our Buy recommendation on CGL with an unchanged price target of Rs225 (20x the FY2016E earnings).
Andhra Bank
Recommendation: Hold
Price target: Rs104
Current market price: Rs83 Earnings hit by sharp increase in slippages Key points - Andhra Bank reported subdued numbers for Q1FY2015 as the net profit dipped by 53.7% YoY led by a decline in the net interest income and non-interest income (the latter was down by 15.6% YoY). An interest income reversal of Rs303.9 crore from slippages in the agriculture loan book (due to anticipation of a debt waiver by Andhra Pradesh government) affected the operating profit and the net interest margin (the margin contracted by 56BPS QoQ to 2.14%).
- The asset quality disappointed as Rs2,160 crore of fresh NPAs were added in Q1FY2015 (Rs1,076 crore came in from the agriculture loan book) leading to a rise in the reported NPAs. In addition, about Rs600 crore worth of loans were restructured in Q1FY2015, taking the total of gross NPAs and restructured loans to 15.5% of the total loan book.
- A weakening core income, a higher proportion of stressed loans and increased concentration of loan book in the home state remain causes for concern. While the stock's valuation of Rs0.5x FY2016E book value appears reasonable, we expect the return ratios to remain subdued for an extended period. We, therefore, maintain our Hold rating on the stock with an unchanged price target of Rs104.
Kalpataru Power Transmission
Recommendation: Buy
Price target: Rs200
Current market price: Rs170 Strong Q1 results, remain positive Key points - In Q1FY2015 the revenues of Kalpataru Power & Transmission Ltd (KPTL) grew by 20% YoY to Rs1,063 crore with a strong performance in the T&D segment but the operating profit grew by 16% on account of higher losses in the infrastructure EPC business. Due to a lower finance cost, the PAT grew by 21% YoY to Rs42 crore, which is 12% better than our estimate. Though the order inflow (stand-alone) was weak in Q1, but the management expects healthy inflow in future; currently the order book stands at 1.4x the FY2014 sales.
- The stand-alone performance of JMC Projects (a 67% subsidiary) was very healthy with an earnings growth of 29% YoY despite an 11% Y-o-Y decline in the revenues, thanks to margin recovery (OPM rose by 100BPS YoY to 5.7%) and lower depreciation cost. The operating performance of Shree Shubham Logistics (SSL) remained satisfactory, but higher depreciation as a result of capitalisation of the new capacity dragged down the net profit (down 46% YoY) to Rs3.6 crore in Q1FY2015.
- The opportunities in the T&D space are likely to get impetus while the focus of the new government on the railways and water could open large opportunities in the infrastructure EPC business. In response to the contraction of opportunities in the T&D space in some parts of the globe, the management is looking for opportunities in new regions (especially SAARC). While JMC Projects is likely to witness a margin expansion, we need to monitor how its road BOOT projects shape up. SSL is likely to witness a strong traction and continue to add meaningfully to the company's bottom line too. The management maintains its annual guidance; we expect a strong earnings trajectory in the next two years. Hence, we remain positive on the stock and retain our Buy recommendation with a price target of Rs200 (based on SOTP method).
Punj Lloyd
Recommendation: Reduce
Price target: Rs30
Current market price: Rs41 Lower execution, profit reversals and write-offs dent earnings; maintain Reduce Key points - Punj Lloyd has reported the financials of the stand-alone business for Q1FY2015. It posted a net loss of Rs364 crore in the quarter. The stand-alone revenues were affected by lower order booking in a few projects (a shortfall of approximately Rs900 crore) while the operating performance was marred by profit reversals (in two projects) and write-offs (across small projects). The leverage remained high during the quarter which further dented the earnings.
- The uncertainty in Libya (the Libyan order accounts for Rs7,800 crore out of the total order book of Rs21,164 crore) persists. The management expects to its plan to sell assets and reimburse projects to materialise from September 2014 onwards.
- We had highlighted in our Stock Update report dated May 21, 2014 that the immediate outlook for the company remains uncertain with expectations of a weak financial performance. Punj Lloyd is in a difficult situation where the management is restructuring the business with a stretched working capital cycle and high debt-equity ratio. The efforts are expected to yield results from FY2016 onwards. We have revised our estimate for FY2015 downwards after factoring in the expectations of lower execution and OPM in the same period. We maintain our Reduce rating on the stock with a price target of Rs30.
VIEWPOINT Hero MotoCorp
Current market price: Rs2,584 Disappointment at operating level; margin expansion expectations scaled down Key points - Hero MotoCorp Ltd (HMCL) reported a 14.2% Y-o-Y revenue growth in Q1FY2015 on the back of an impressive 10% increase in volumes for the quarter. However, the operating performance was below expectation on account of a contraction in the GPM and a larger than expected rise in the overheads. As a result, the growth in the net profit was restricted to 2.6% at Rs563 crore.
- The management has maintained a positive outlook on volumes with an expectation of a low double-digit growth for the industry. The contribution of the scooter segment, wherein HMCL has a market share of about 18%, too is expected increase going forward. However, our expectations of a margin expansion have been toned down due to the fall in the GPM and increase in the other overheads, such as conversion costs and running royalty payments.
- We have reduced our earnings estimates for FY2015 and FY2016 by 4.3% and 1.8% respectively. The stock has appreciated by 10% from the date of our last report on the company (May 29, 2014) with a positive view. Valuing the stock at 15.5x FY2016E earnings of Rs169, we expect a limited upside to the stock price from the current levels. Hence, we change our stance on the stock from Positive to Neutral.
Tata Communications
Current market price: Rs369
View: Positive Strong growth in data business; positive view maintained Key points - In Q1FY2015 Tata Communications' consolidated revenues grew by 13.6% YoY, aided by a strong 17% Y-o-Y growth in the data revenues and an 8.5% Y-o-Y growth in the voice business. With the first quarter of a fiscal being seasonally soft and the company's employee expenses rising by 17.7% YoY, the operating profit growth was softer at 9.2% YoY. Consequently, the OPM contracted by 54BPS YoY from 14.5% in Q1FY2014 to 13.9% in Q1FY2015. Higher depreciation and interest charges resulted in a loss of Rs21 crore for the quarter, though the same was much lower than the adjusted loss of Rs122 crore in Q1FY2014.
- The company's thrust on growing the data business remains strong, with it re-iterating its revenue growth and margin guidance of 20% each for the data business. On the voice business, it expects pricing pressure and hence continues to guide for a 7.5-8% margin. On the new businesses, like data centre and ATM management, the company maintains its positive stance. It expects the growth in the data centre business to be strong. The ATM management business is on the cusp of breaking even at the EBITDA level in the next two to three quarters, with significant headroom for revenue growth.
- We expect Tata Communications' EBITDA to grow at a CAGR of 14.4% over FY2014-16. This coupled with its deleveraging exercise (through measured capex, the company continues to guide for an annual capex in the range of $250-300 million) is likely to improve the net debt/EBITDA level from 3.7x currently to around 3x by FY2016. The steadily improving core performance coupled with the management's initiative to sharpen its focus and deleverage its balance sheet via a Neotel stake sale and monetisation of the non-core assets keeps us positive on the stock. Since our last Viewpoint report on the stock (dated May 14, 2014), the stock has appreciated by 27%. Given the improving business fundamentals and strengthening balance sheet of the company, we continue to hold a positive view on the stock. We expect another 12-15% upside to the stock price from the current levels. We expect Tata Communications to reach Rs 430-435 levels in another six to nine months.
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