| Summary of Contents STOCK UPDATE UltraTech Cement
Recommendation: Buy
Price target: Rs2,935
Current market price: Rs2,451 Better demand environment propels earnings growth, price target revised to Rs2,935 Key points - For Q2FY2015 the company reported a revenue growth of 19.5% YoY to Rs5,381.8 crore largely driven by a higher volume (up 12% YoY) and an increased realisation (up 7% YoY). A higher input cost (increase in pet coke price and high freight cost) limited the growth in the OPM, which improved by 76BPS to 15.4%. Additionally, a higher other income (up 112% YoY) led to a 55% Y-o-Y growth in the reported PAT for the quarter at Rs410.1 crore, which included a lower depreciation charge (adjusting for the same the earnings for the quarter grew by 37% YoY to Rs361.9 crore).
- During the quarter the company commissioned a 1.4MMT cement mill at Rajashree Cement, Karnataka and with this the total capacity of the company increased to 60.2MMT (4.8MMT of capacity added from two plants of Jaypee Cement). The company also commissioned a 25-MW thermal power plant at Tadipatri, Andhra Pradesh, taking its total capacity of power to 733MW (ie 80% of the total requirement).
- UltraTech Cement is our preferred stock in the cement space due to its strong balance sheet and pan-India presence. However, as per media reports, the company's plan to acquire the Holcim-Lafarge assets in the developed markets can increase its leverage and hamper Ultratech's valuation, considering lower growth potential in the developed markets. We have revised our earnings estimate for FY2015 downwards after factoring in the increase in leverage. We have rolled forward our valuation to the FY2016 estimate and arrived at a revised price target of Rs2,935. We maintain our Buy rating on the stock.
Oil India
Recommendation: Buy
Price target: Rs720
Current market price: Rs584 Gas price revision to boost the earnings; price target revised to Rs720 Key points - As a major reform process, the new government has revised the natural gas price from $4.2 per mmbtu to $5.6 per mmbtu, effective from November 1, 2014, which would be reviewed every six months. ONGC and Oil India Ltd (OIL) would be the key beneficiaries. However, it will not be applicable for RIL's D1 and D3 fields in the Krishna Godavari basin, till its dispute with the government related to its production shortfall is settled.
- Apart from the gas price revision to $5.6 per mmbtu, in the new formula the benchmark calorific value has been reduced by 10% from the earlier benchmark. Consequently, on the net calorific value basis, the revised net realisation would be $6.2 per mmbtu. We believe while the effective price hike for ONGC and OIL would be around 48% and RIL would also benefit to an extent of 10%. The impact of the revised gas price on earnings of ONGC and OIL would be around 13%-15% for FY2016; consequently we have revised upward our earnings estimate for OIL.
- The government also tried to touch some of the key issues smartly which would encourage further investments in the sector and boost confidence by bringing clarity on the policy. The government would consider differential gas pricing for gas from deep water or ultra deep water wells and by deregulating diesel, it improves visibility and boost investors' confidence in the sector. As expected, a significantly lower (almost half in FY2016 over FY2014) oil subsidy would reflect favourably in the earnings of ONGC, OIL and all the three government-owned oil marketing companies (OMCs). We remain positive on OIL and retain our Buy recommendation with a revised price target of Rs720.
LIC Housing Finance
Recommendation: Buy
Price target: Rs373
Current market price: Rs324 Loan growth picking up, margins to improve Key points - For Q2FY2015 LIC Housing Finance reported a healthy set of numbers at the operating level (net interest income up 17.3% YoY). The net profit growth was relatively slower at 10% YoY (due to a lower non-interest income and a higher tax rate), though it was helped by a reversal of Rs19-crore provision (mainly due to a recovery from a developer account).
- The loan growth improved (up 17.4% YoY) led by a 21% Y-o-Y growth in disbursements, largely in the individual category. The approvals in the developer category increased significantly which should result in higher disbursements from the developer segment. The NPAs declined sequentially mainly led by the recovery from a developer account (of Rs132 crore) and this also had a positive impact on the margin (which stood at 2.23% in Q2FY2015).
- The pick-up seen in loan growth during Q2FY2015 is a positive sign which together with the easing of borrowings cost and focus on high-yielding products will improve the margins and the earnings performance. A likely revival in the economy and increasing in mortgage finance will be positive for the company. We expect the company to report a healthy earnings growth of 19.5% CAGR over FY2014-16. We maintain our Buy rating on the stock with a price target of Rs373.
Persistent Systems
Recommendation: Hold
Price target: Rs1,400
Current market price: Rs1,268 Margin performance falters further, maintain Hold Key points - For Q1FY2015 Persistent Systems Ltd (PSL) reported a 5% Q-o-Q growth in revenues to $76.3 million. The growth was led by a 5.6% Q-o-Q growth in the IT services business to $61.4 million, the highest growth in the 12 quarters. The volume of the IT services business rose by 3% QoQ and its realisation grew by 2.6% QoQ whereas the IP business-led revenues grew by 2.9% QoQ to $14.9 million. In rupee terms, the revenues were up by 6.7% QoQ to Rs464 crore.
- For the quarter the EBITDA margin declined by 120BPS QoQ to 20.6%, the lowest in 11 quarters. In the last four quarters, the margins have declined by around 710BPS from a high of 27.7% in Q3FY2014. The fall in the OPM was led by annual wage hikes coupled with an increase in the SG&A cost, which rose by 14.4% QoQ. Both forex and other incomes contributed positively and grew by 16.6% and 19.4% QoQ respectively. The net income for the quarter was up by 3.6% QoQ and 17.3% YoY to Rs71.3 crore.
- In the last 20 days, PSL has corrected by close to 15% from its high of Rs1,480. At the current market price of Rs1,268 the stock trades at 16x and 14x FY2015 and FY2016 earnings estimates. The Q2FY2015 earnings do not have positive surprises to trigger earnings upgrades or re-rating from the current levels, Thus, we maintain our Hold rating on the stock with an unchanged price target of Rs1,400. However, PSL's SMAC oriented business model (SMAC is a strong growth area), strong balance sheet (cash of Rs693 crore, at 42% of the balance sheet size) and good corporate governance make it a good investment bet for the long-term investors.
Kewal Kiran Clothing
Recommendation: Hold
Price target: Rs1,800
Current market price: Rs1,736 Weak Q2 performance; with limited upside make us maintain Hold rating Key points - Q2FY2015 net earnings grew by 3% YoY; missed expectation: Kewal Kiran's Q2FY2015 earnings performance was weak and despite a 11.5% growth in the net sales a higher cost of sales (up 339BPS YoY) and high overheads including higher advertisement and sales costs led the company to report a flat operating performance. Aided by lower depreciation and a higher other income, the net earnings grew at merely 3% YoY. The net earnings stood at Rs24.3 crore as against the expectation of Rs26.2 crore for the quarter.
- Management sounded cautious, e-commerce players cannibalising sales: The management mentioned that an increasing clout of the e-commerce players and the gradual shift of customers from brick-and-mortar shopping to online shopping have hurt companies like Kewal Kiran, which has been cautious in offering its brands through the online route because of (a) the threat of brand dilution due to deep around-the-clock discounts; and (b) lower profitability of online sales. It expects intervention and the right pricing strategy by the online players to resolve the conflict, thereby resulting in a balance between online and offline modes of distribution.
- We lower our estimates: After factoring the weak performance of H1FY2015 (wherein the net earnings declined by 3.7% YoY), an unenthusiastic management commentary on the festive demand and a deferral of the other income from FY2015 to FY2017 (as per the new Companies Act, the income and interest earned on fixed maturity plans need to be recognised only on a receipt basis as against the earlier practice of recognition on an accrual basis). We lower our revenue and earnings estimates for FY2015 and FY2016 in this note. Our revised EPS estimates for FY2015 and FY2016 are Rs56.3 and Rs70.2 respectively. We introduce our FY2017 estimate too at Rs90.1.
- Good business but challenging times and stretched valuations make us maintain our Hold rating: A promising business model coupled with a vigilant management and a lean balance sheet (strong net cash of Rs210 crore; around 10% of the market capitalisation, with a lean working capital cycle) makes us positive on the company. But its recent financial underperformance and the increase in competitive intensity in its market coupled with the stretched valuations make us wary of committing fresh investment to the stock. Hence, we maintain our Hold rating on the stock with a price target of Rs1,800 (valued at 20x FY2017E EPS of Rs90). We advise our investors to enter the stock after a 10-15% decline from the current levels.
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