Investor's Eye: Update - Ipca Laboratories, Firstsource Solutions, Union Bank of India

 

Investor's Eye [August 01, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE     Ipca Laboratories Recommendation: Hold Price target: Rs820 Current market price: Rs725   Strong results in Q1; USFDA concerns remain a key deterrent; maintain Hold    Key points  Ipca Laboratories (Ipca) reported a healthy growth of 17% in sales and a 411-BPS expansion in the OPM on the back of a better product mix in Q1FY2015. However, the adjusted net profit saw a restricted growth of 19.6% due to a higher provision for depreciation and taxation. The company re-iterated its confidence of allaying the USFDA's concerns over the Ratlam API plant (which was served an adverse observation report by the USFDA inspectors in the last week) within a period of six months. The management has revised its revenue growth guidance to 12% from 14-15% earlier and EBIDTA guidance to 24% from 25% earlier for FY2015. We have fine-tuned our estimates for FY2015 and FY2016 considering the revised growth guidance of the management and the expectation that the US business would normalise by the last quarter of FY2015. However, we maintain our Hold rating on the stock with a price target of Rs820 (15x FY2016E EPS).     Firstsource Solutions Recommendation: Buy Price target: Rs51 Current market price: Rs37   Seasonality factors affect earnings, outlook healthy    Key points  The June quarter is seasonally weak for Firstsource Solutions Ltd (FSL), coming after a strong March quarter as it does. In Q1FY2015, the company's revenues were down by 3.5% QoQ on a constant-currency basis. In rupee terms, the revenues were down by 5.1% QoQ but up by 5.1% YoY to Rs755.6 crore. The EBITDA margin improved by 110BPS YoY and marginally slipped by 10BPS QoQ to 12.3%. The net income was lower by 9.5% QoQ but up by 30% YoY to Rs53.2 crore.  During the quarter, the company signed deals worth $36 million and indicated at a robust pipeline of deals across segments, though the management expects the revenue growth to pick up from Q3FY2015 onwards. On the margin front, the management maintained its commitment to improve the margins by 150-200BPS in FY2015 compared with FY2014.  FSL is well poised to see a strong earnings trajectory in the next two years, driven by a strong margin expansion and an improvement in the health of the balance sheet. We remain confident that FSL's turnaround story will sustain and its earnings growth will accelerate over the next three years. At the current market price of Rs37, the stock is trading at reasonable valuations of 6.7x and 5x EV/EBITDA and 9.4x and 7.5x PER based on FY2015 and FY2016 earnings estimates. We maintain our Buy rating on the stock with a price target of Rs51.      Union Bank of India Recommendation: Hold Price target: Rs250 Current market price: Rs197   Slippages remain elevated    Key points  For Q1FY2015 Union Bank of India (UBI) reported an 18.5% Y-o-Y growth in profit led by an 11% Y-o-Y growth in the net interest income and a 42% Y-o-Y decline in the provisions. The operating performance was better as the margin saw an uptick of 5BPS QoQ to 2.6% while the pre-provisioning profit (ex treasury income) grew by about 9% YoY.  The asset quality deteriorated as slippages remained high during the quarter (Rs1,274 crore) leading to an increase in the reported NPAs. However, fresh restructuring was lower at Rs457 crore vs Rs1,425 crore in Q4FY2014 and the management has guided to an outer limit of Rs1,200 crore for the restructuring pipeline.  The bank's operating performance was relatively better in this quarter as its margins have expanded in the past couple of quarters. On the asset quality front, though the slippages stabilised compared with the previous quarters but the same remain high compared with the size of the loan book. The stock trades at an attractive valuation (0.6x FY2016E book value) but we await more clarity on the asset quality and capitalisation issues. Therefore, we maintain our Hold rating on the stock with an unchanged price target Rs250. Click here to read report: Investor's Eye       Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

 

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