| STOCK UPDATE Bharti Airtel
Recommendation: Hold
Price target: Rs450
Current market price: Rs398 Data growth leads India performance; Africa disappoints again Key points - Bharti Airtel's Q2FY2015 performance was marked by a robust growth in the India's data business, while the voice performance was muted, given the seasonality element of the quarter, and the Africa performance continued to be subpar. The consolidated net revenue declined by 0.6% QoQ (up by 7.1% YoY), while the operating profit remained stable with 15BPS Q-o-Q margin expansion (up by 331BPS on a Y-o-Y basis), and the net earnings grew by 24.8% on a sequential basis (up by 170% on a Y-o-Y basis). Adjusted for the forex and exceptionals, the net earnings grew by 88.3% YoY and 12% on a Q-o-Q basis.
- Despite the seasonally weak quarter, and a muted performance in Africa (wherein African margins were at a multi-quarter low at 23.6%), led by improving opex productivity and stiff cost rationalisation efforts, the consolidated margins expanded by 15 basis point (BPS) on a sequential basis, consequently the operating profit remained flat on a Q-o-Q basis. while the margins expanded by 330BPS on a Y-o-Y basis, resulting in a strong 18.8% growth on a Y-o-Y basis.
- The management has reiterated its stance that barring seasonal blips, the long-term trend on the voice realised rates is on a growth trajectory, while the data volume and usage would continue to clock the current run rate of 20-22% sequential growth rate. On Africa, despite the subpar performance, the management continues to remain committed and guided for a directionally positive momentum, led by data growth.
- We believe that India's mobile business is well placed for a growth on both voice as well as data front led by improving competitive dynamics and structural progression towards data. This would benefit the incumbent players like Bharti Airtel. While Bharti's Africa business is a drag, we believe that the current valuations adequately factors the same, and the business is turning into a self-funding mode, and hence we maintain our estimates on the stock with a Hold recommendation and a price target of Rs450. (valued at 6.8x FY16 EV/EBITDA).
ITC
Recommendation: Buy
Price target: Rs415
Current market price: Rs355 Decent operating performance; maintain Buy with revised price target of Rs415 Key points - In Q2FY2015 ITC's revenues grew by 15% YoY to Rs9,023.7 crore, largely driven by a 14% growth in the core cigarette business and a 16% growth in the agri income. The cigarette sales volume declined by 4% in Q2FY2015 (against our expectation of a 3% decline). During the quarter the hotel business showed the first signs of a revival with the revenues growing by 6% entirely driven by an improvement in the occupancies. The OPM stood almost flat at 38.7% well supported by a strong improvement of 305BPS in the cigarette business' margin to 68% (largely driven by price hikes undertaken in the past few months).
- The cigarette sales volumes will remain under pressure while the price increases undertaken so far would help the profit of the cigarette business to grow by 15% in the coming quarters. With inflationary pressures receding and consumer sentiment improving in the urban areas, we expect H2FY2015 to be better for ITC's non-cigarette business in comparison to H1FY2015. Also, the hotel business is expected to post a better operating performance in H1FY2015, which is seasonally strong for the business.
- We have broadly maintained our estimates for FY2015 and FY2016 (and introduced our FY2017 estimates) in this note. ITC is currently trading at 24x the FY2016E EPS of Rs14.8, which is at a discount to some of the large-cap and mid-cap FMCG stocks. In view of the discounted valuations and better earnings visibility, ITC remains one of our better picks in the FMCG space. We maintain our Buy recommendation on the stock with a rolled-over price target of Rs415 (valuing the stock at 24x FY2017E earnings).
- Key risk to our rating: The new government at the centre has become aggressive about curbing cigarette consumption in India. Hence, implementation of any stringent measures to curb cigarette consumption will be a key risk to our earnings estimates and rating on the stock.
Mahindra & Mahindra
Recommendation: Buy
Price target: Rs1,440
Current market price: Rs1,303 Margin disappointment; new launches to revive growth - Maintain Buy Key points - After a positive surprise on margins in Q1FY2015, Mahindra & Mahindra (M&M) reported a disappointing operating performance in Q2FY2015. A sharp increase in overheads led to a 233BPS sequential margin contraction to 12.0% and below our estimate. However, the fall in the operating profit was compensated by a 36% rise in other income leading to a net profit of Rs974 crore in-line with our expectation.
- The automotive segment has been a laggard for M&M over the past six quarters given the weak consumer sentiment and its absence in the fast growing compact UV segment. While the launch of the new Scorpio should stabilise volume at current levels, any meaningful growth will only be visible post the new launches in CY2015. Meanwhile, the strong growth momentum in the tractor segment has been affected by the subpar monsoon rains. However, M&M has maintained its leadership position in the segment while actually gaining market share.
- Given the weak demand in the tractor segment we have further cut our volume estimates. Additionally, prompted by the management commentary on pressure on the margins due to higher discounts, wage increases and new launch expenses, we have cut our earnings estimates for FY2015 and FY2016 by 5.8% and 4.7% respectively. However, we remain positive on the stock given its leadership position in the domestic tractor and utility vehicle segments as well as value derived from subsidiaries across business segments. We maintain a Buy recommendation on the stock with a sum-of-the-parts (SOTP)-based price target unchanged at Rs1,440.
Gateway Distriparks
Recommendation: Buy
Price target: Rs340
Current market price: Rs286 Rail division's robust performance boosts earnings, price target revised to Rs340 Key points - Gateway Distriparks Ltd (GDL)'s Q2FY2015 operating performance was boosted by the rail division, which continued to show a robust performance (EBITDA up by 78% YoY and net profit up by 2.8x). On the other hand, the CFS division posted a weak operating performance (EBITDA margin down by 59BPS YoY and net profit down by 3% YoY). Consequently, the consolidated operating profit grew by 29.8% YoY. A strong operating performance of rail division led to the consolidated net profit after minority interest and associate income to grow at a 42% YoY.
- Snowman Logistics reported a healthy growth in the revenues (up by 39.5%) due to capacity additions. The margin of the cold chain business declined by 619BPS while higher interest and depreciation costs dented the growth in the earnings (down by 71%). The company has consolidated Snowman financials line-by-line for July and August, however with effect from September it is represented as income from associates.
- GDL continues to struggle to sustain its margins, though the demand has recovered in its CFS business (especially at JNPT). However, the uptick in Kochi and the commissioning of the Faridabad ICD facility would aid the recovery in the stand-alone operations. The management also expects the improving trend in the rail freight and cold chain subsidiaries to sustain. GDL is our preferred pick in the logistics sector (owing to a range of services, leadership position in the CFS and rail businesses, and a healthy balance sheet). Thus, we maintain our Buy rating with a revised price target of Rs340.
Union Bank of India
Recommendation: Hold
Price target: Rs250
Current market price: Rs226 Asset quality weakens, maintain Hold rating Key points - Union Bank of India (Union Bank) reported a subdued performance on the earnings front as slower growth in NII and higher provisions affected profitability. Advances growth was muted and net interest margins also declined by 7BPS QoQ to 2.53% which affected growth in NII.
- Asset quality disappointed again as reported gross and net NPAs increased to 4.69% and 2.71% respectively. This was contributed by slippages of Rs1,968 crore (Rs1,274 crore in Q1FY2015). The bank also restructured Rs931 crore worth of loans in Q2FY2015. The provision coverage declined to 57.97% vs 58.92% in Q1FY2015.
- Union Bank's earnings are expected to remain sluggish (expect RoAs of 0.5% in FY2016) due to higher NPA stress and slower advances growth. The bank has relatively higher proportion of stressed loans (restructured loans + gross NPA) which remains a concern. We therefore maintain Hold rating with a price target of Rs250.
Glenmark Pharmaceuticals
Recommendation: Hold
Price target: Rs805
Current market price: Rs719 Weaker sales in US slows growth in Q2; Hold maintained Key points - Glenmark Pharma reported a moderate performance in Q2FY2015, as reflected in a 14.9% growth in the net sales, a nearly 100-BPD decline in the core OPM to 19.9% (the lowest in five quarters) and a 6.7% growth in the adjusted net profit.
- Though a 139% jump in the Latin American business, a 25% growth in the European operations and a 57.8% jump in the API business were a positive surprise, the disappointment came mainly from a 9% decline in the US business and a stagnant business in the RoW markets. The Indian formulation business witnessed a 14.5% growth during the quarter. Its novel molecule GRC 17536 has shown positive data in Phase-II clinical trials which provides an out-licencing opportunity.
- While the management maintained a guidance of a 16-18% growth and nearly Rs1,500 crore of operating profit for FY2015, it indicated a stronger performance in FY2016 and FY2017 on strong traction in the US business. We have fine-tuned our estimates but maintained our price target of Rs805 and Hold rating on the stock.
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