| Summary of Contents STOCK UPDATE PTC India Financial Services
Recommendation: Buy
Price target: Rs44
Current market price: Rs36 Strong performance, maintain Buy Key points - PTC India Financial Services (PFS) reported a strong set of numbers for Q1FY2015 as its net profit increased by 113% YoY to Rs52.1 crore during the quarter. The profit growth was led by a strong growth in the net interest income (up 83.5% YoY). The interest income from a higher disbursement in Q4FY2014 was fully reflected in Q1FY2015 and it boosted the core income for the quarter under review. The reported spreads declined marginally on QoQ basis to 4.36% during the quarter.
- The loan book remained flat on a sequential basis, though it was up by 84.4% YoY to Rs4,956 crore. Renewable energy projects constituted 35% of the total loan book. Going ahead, the company expects to expand it loan book to about Rs8,000 crore in the next 12-15 months. With gross NPAs of 0.09% and nil net NPA, the asset quality remains among the best in system.
- We expect PFS' earnings to grow at a CAGR of 44% CAGR over FY2014-16 (adjusting for a one-time gain of Rs82 crore in FY2014). This should lead to an improvement in the return ratios (RoE of 18.5% and RoA of 3.2%). The recent guidelines by Reserve Bank of India on issue of long-term bonds by banks are in general negative for IFCs, though PFS, which operates in niche areas (small and mid-sized projects), should sustain high growth. Currently, the stock trades at 1.2x FY2016E book value and we maintain our Buy rating on the stock with an unchanged price target of Rs44.
Marico
Recommendation: Hold
Price target: Rs270
Current market price: Rs256 Operating performance much better, maintain Hold with revised price target of Rs270 Key points - In contrast to the muted sales performance of some the large FMCG players, Marico's performance in Q1FY2015 was positively surprising with a comparable revenue growth of 25% driven by a 28% growth in the domestic business (a 6.5% volume growth) and an 18% growth in the international business. Though the GPM declined by 382BPS to about 45% due to a surge in copra prices, but the cost savings at the other operating cost level and a lower advertisement spending led to a decline of just 62BPS in the OPM to 16.4%. The operating profit grew by 20.7% and the adjusted PAT grew by about 20% during the quarter.
- Going ahead, the management is focusing on improving the sales volume growth in both the domestic and the international markets. We believe the domestic business' revenues will grow at a CAGR of about 20% over the next two years (with the volume growth standing at 6-7%). The international business is expected to grow in mid teens driven by a sustained double-digit growth in the Middle-East and Bangladesh. In FY2015 the consolidated OPM is expected to remain under pressure due to inflated copra prices, but we expect the OPM to recover to 16% in FY2016.
- We have revised upwards our earnings estimates for FY2015 and FY2016 by 5% and 6% respectively to factor in the better than expected revenue growth in the value-added hair oil segment and the higher than expected GPM at the consolidated level. Accordingly, we have revised our price target to Rs270 (valuing the stock at 25x the FY2016E earnings). We shall keenly monitor the movement in copra prices and the company's volume growth in the key categories of the domestic business in the coming quarters before upgrading our rating on the stock. For now we maintain our Hold rating on the stock. The stock is trading at 29.3x FY2015E EPS of Rs8.7 and 23.8x FY2016E EPS of Rs10.7.
Bajaj Corp
Recommendation: Reduce
Price target: Rs205
Current market price: Rs228 Sales volume yet to revive, maintain Reduce with revised price target of Rs205 Key points - Bajaj Corp continues to disappoint with its quarterly results. The sales volume of its key brands remained under pressure in Q1FY2015-the sales volume of ADHO and KPCO declined by 1% and 27% respectively during the quarter, as expected. The double-digit growth in the revenues was mainly on account of a higher sales realisation in the flagship brand, ADHO, (due to a 5% price increase at the end of March 2014) and a contribution of Rs14 crore by the Nomarks brand.
- An increase of around 17% in the LLP prices and lower sales volume led to an 81-BPS decline in the GPM to 59.2% in Q1FY2015. However, a lower advertisement and promotional spending helped sustain the OPM at 28.5%. The operating profit grew by 13.2% YoY to Rs54.6 crore while the adjusted PAT grew by just 6% YoY because of a lower other income.
- The sales volume in the light hair category is expected to revive in H2FY2015. However, the sales volume is expected to improve significantly from FY2016 on the back of a stable macro environment. Also, in view of the increasing competition in the light hair oil and premium hair oil segments, Bajaj Corp must add more products to improve its growth prospects in future.
- We have broadly maintained our earnings estimates for FY2015 and FY2016. In view of the muted growth expected in the near term, we maintain our Reduce rating on the stock. But we revise upwards our price target to Rs205, raising the valuation multiple to 15x the FY2016E earnings, in expectation of an improved performance in H2FY2015. We shall keenly monitor the sales volume of Bajaj Corp and upgrade our rating on the stock if its sales volume improves consistently in the coming quarters.
Greaves Cotton
Recommendation: Hold
Price target: Rs115
Current market price: Rs110 Gradual recovery in H2FY2015; upgraded to Hold Key points - Greaves Cotton Ltd (GCL) reported a moderate growth in revenues (up 2.5% YoY) for Q1FY2015. Its OPM contracted by 90BPS YoY during the quarter, leading to a decline of 5.4% YoY in the operating profit. The adjusted net profit (post-exceptional item) declined by 7.5% YoY to Rs29.4 crore during the quarter.
- The engine business has been reporting a low single-digit growth for the past few quarters and the growth is expected to pick up in H2FY2015, though any meaningful recovery in the construction and infrastructure equipment division is likely to be visible only in FY2016. However, the company is focusing on reducing the loss in the infrastructure equipment division by having a tight control on costs in the interim period.
- To factor in the expectations of a strong recovery in FY2016, we have revised our FY2016 earnings estimate by 12% to Rs7.3 share. We believe that the Street is focusing more on the strong recovery expected in FY2016 and built up on it in FY2017. Thus, we are revising our stance on the stock to Hold from Reduce after rolling over the target multiple to the average of the FY2016 and FY2017 earnings estimates. We accordingly revise our price target to Rs115.
UPL
Recommendation: Buy
Price target: Rs370
Current market price: Rs335 Price target revised upwards to Rs370 Key points - In Q1FY2015, the revenues of United Phosphorus Ltd (UPL) stood at Rs2,757 crore, up 12% YoY largely driven by a volume growth of 3%, a 6% higher realisation and a favourable foreign exchange impact of 4%. The OPM for the quarter improved by 37BPS YoY to 19%. Consequently the operating profit for the quarter stood at Rs523 crore, up 14.5% YoY. The reported net profit improved by 36% YoY to Rs289 crore but after adjusting for a non-recurring one-time income (proceeds from the sale of the entire 50% stake in Sipcam UPL, Brazil), the net profit remained flat YoY at Rs253 crore.
- The working capital cycle stood at 94 days as against 95 days in Q1FY2014. The company is focusing on managing the working capital cycle at around 95 days in FY2015 and in the next fiscal as well. On the positive side, in the coming years the company will reduce its debts from the current level, improve its return ratios and reward its shareholders (by paying a higher divided, buying back shares etc). The total capex for FY2015 will be around Rs550 crore.
- The UPL management has maintained a revenue growth of 12-15% and a margin improvement of 100BPS YoY in FY2015. The government's focus on big agricultural reforms coupled with a strong demand environment across geographies will improve the company's prospects and help it to easily achieve the higher end of the guided growth range. In view of the company's focus on improving its balance sheet and maintaining a high growth trajectory, we maintain our Buy rating on the stock with a revised price target of Rs370 (12x FY2016 earnings estimate).
Bharat Electronics
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs1,770 Good performance in a seasonally weak quarter Key points - Generally the first quarter of a fiscal is seasonally weak for Bharat Electronics Ltd (BEL). For Q1FY2015 the company reported a revenue growth of 13% YoY to Rs1,012.2 crore. Execution of high-margin orders and firm control on cost helped the company to reduce its operating loss, which declined by 19% YoY to Rs45.5 crore during the quarter. Though the company reported a loss at the operating level, but a higher other income aided the company to post a net profit of Rs25.6 crore (an increase of almost 50% YoY). The total order book stood roughly at Rs23,200 crore (close to 4x its revenues) at the end of Q1FY2015.
- There has been an increase in infiltration from China and Pakistan over the Line of Control recently. This and the Indian government's aggressive stance to control infiltration are bound to increase the government's defence spending over the next three to five years on modernisation and upgradation of defence equipment along with the purchase of the latest and advanced defence equipment. The government's aim to expedite decisions and clearance of orders will also provide a boost to the defence sector (the order inflow will increase due to fast and timely clearance of orders).
- We continue to prefer BEL as a niche public sector play in the fast growing defence sector. We reiterate our Buy rating on the stock, considering the positive news flow in the sector, improvement in sector dynamics in the coming years and the recent correction in the stock price (which provides a good entry level to the long-term investors). In view of the significant improvement expected in order flow and execution in the next two to three years, we see material room for further upgrades in BEL's earnings estimates over FY2015-17. We maintain our Buy rating on the stock with an unchanged price target of Rs2,650.
Grasim Industries
Recommendation: Buy
Price target: Rs3,850
Current market price: Rs3,213 Cost pressure across verticals dents earnings; valuation remains attractive Key points - For Q1FY2015 Grasim Industries (Grasim) reported a decline of 20.2% in its earnings on account of a decline in the OPM (down 475BPS YoY) across divisions and a higher interest charge (up 33.3% YoY).
- The revenues for the quarter grew by 15.7% largely driven by a volume growth across divisions: the cement division's volume rose by 14%, the VSF division's volume rose by 11% and the chemical division's volume rose by 33% YoY. We have fine-tuned our earnings estimate for FY2015 to account for an input cost pressure in the VSF division.
- In the near term the demand outlook for the cement sector (Grasim is the holding company for UltraTech Cement) remains positive, though the VSF business faces margin pressure owing to overcapacity in the Chinese market. The recent correction in the stock price provides an opportunity for investors to buy the stock while the valuation at EV/EBITDA of 4.7x provides a limited downside risk. Thus, we maintain our Buy rating on the stock with a revised price target of Rs3,850.
SECTOR UPDATE Automobiles Automobile sales in July 2014: growth sustained but demand still required a discount push The domestic automobile companies reported a growth in July 2014, making it the third consecutive month of growth in the automobile sector. The growth was aided by a positive change in consumer sentiment, new launches from manufacturers and elevated levels of discounting on products. Market leader Maruti Suzuki India Ltd (MSIL) has given a positive commentary on consumer sentiment, indicating a sharp increase in enquiries and footfalls, jump in the proportion of first-time buyers and growth in urban markets after declining sales of the past two years. However, despite the growth over the last three months there has been no reduction in the level of discounts which, in effect, indicates that it is still early stages of a trend reversal and a support from discounts is required to push volumes. Picks
We continue to prefer TVS, MSIL and M&M among the stocks under our active coverage. Amongst the stocks under our soft coverage, we prefer Hero.
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