| Summary of Contents STOCK UPDATE Zee Entertainment Enterprises
Recommendation: Buy
Price target: Rs367
Current market price: Rs322 Margins surprise continues, retain Buy Key points - On a Y-o-Y basis, the numbers of Zee Entertainment Enterprises Ltd (ZEEL) were not strictly comparable as accounting changes on the account of TRAI content aggregator regulation and change in the arrangement with various international territories has affected the reported subscription revenues. For Q2FY2015, the consolidated revenues were higher by 1.5% YoY and 6% QoQ to Rs1,117.9 crore. The advertisement revenues were up by 7.3% YoY to Rs625.9 crore, whereas the subscription revenues were down by 7.3% on reported basis (the like to like growth is in single high digit), other sales and services revenues were up by 13% YoY to Rs67.4 crore, driven by increase in the revenues from movie distributions (distributed five movies during the quarter). Sports revenues were down by 24% YoY to Rs118 crore (no big sporting event during the quarter).
- ZEEL has managed to maintain healthy margins of 28.7% for the quarter, increased by 50BPS YoY (higher than our estimates). The content cost on a reported basis has been down by 6.7% YoY on account of the change of accounting treatment after the discontinuation of MediaPro. Excluding sports, EBITDA margins for the quarter stood at 34.6%. The net income for the quarter was down by 3.7% YoY to Rs227.6 crore.
- We have tweaked our earnings estimates to incorporate lower depreciation cost and lower subscription revenues, assuming that the delay in digitalisation process by one year and also increased our tax rate assumptions as benefits of DMCL merger will not pass through the profit and loss accounts, but through the cashflows. With strong bouquets of channels, the company will be among the prime beneficiary of overall macro recovery and acceleration in the digitalisation theme. Also the lack of investment opportunities in the broadcasting space will continue to drive premium valuation for ZEEL. We maintain our Buy rating on the stock with a price target of Rs367.
Axis Bank
Recommendation: Buy
Price target: Rs476
Current market price: Rs402 Strong operating performance Key points - Axis Bank continues to report strong earnings performance (up by 18.3% YoY) aided by 20% growth in the net interest income. Apart from pick-up in advances (up by 20.3% YoY), the expansion of net interest margin (3.97% in Q2FY2015) fuelled growth in NII. The non-interest income grew by 10% YoY due to a high base of Q2FY2014 (one off income from repatriation of profits from overseas operations).
- Asset quality was largely stable on sequential basis as stressed loans (restructured loans + slippages) were within the guided levels (Rs1,541 crore). The provisions increased by 5.5% YoY contributed by higher loan-loss provisions. The provision coverage ratio improved QoQ to 78%.
- Axis Bank's core income growth has strengthened due to a strong improvement in the liability franchise. This will result in stable margins and support asset growth going ahead. We expect the bank's earnings to grow at a CAGR of 16% over FY2014-16 resulting in superior ROAs of 1.7-1.8%. We continue to maintain Buy rating on Axis Bank with a price target of Rs476 (2.2x FY2016 book value).
HCL Technologies
Recommendation: Buy
Price target: Rs1,780
Current market price: Rs1,506 Misses expectations, earnings story remain intact Key points - HCL Technologies (HCL Tech) has delivered a steady performance for Q1FY2015, though it has missed the expectations on the topline and margins front, led by lower than expected growth in IMS and BPO. Further, the reported dollar revenues were affected by cross-currency headwinds to the tune of 1.3%. The consolidated revenues were up by 1.9% QoQ to $1,433.5 million and 3.2% on a constant-currency basis. The IT services revenues were higher by 2.1% (3.2% on CC), while IMS grew by 1.9% QoQ (3.6% on CC) and BPO was down by 0.1% QoQ (1.1% on CC). The IMS revenue growth has not picked up as per expectations, but the management is confident of growth returning as large deals start ramping up and expects pick-up in growth by Q3FY2015.
- For the quarter, the EBIT margins declined by 30BPS QoQ to 23.9% attributed staggered wage hikes and lower utilisation, fell by 180BPS QoQ. However, the lower depreciation cost, rationalisation of the SG&A expenses and favourable INR supported the margin. The other income was up by 70% QoQ. The net income was up by 2.1% QoQ to Rs1,873 crore. Deal wins remained healthy as the company signed 15 transformational deals worth $1 billion in TCV for the quarter (cumulative TCV of $4 billion in the last four quarters).
- After consistently delivering earnings performance at the top of the quadrant among the top-tier IT companies, HCL Tech has fell short of expectations for Q1FY2015, led by lower than expected growth in IMS and significant cross-currency headwinds. However, we believe the long-term earnings trajectory has remained intact for the company and expect the earnings to bounce back. We have tweaked our estimates to incorporate lower depreciation and broadly maintain our estimates for FY2015-16E. We retain our Buy rating on the stock with unchanged price target of Rs1,780.
Bajaj Holdings & Investment
Recommendation: Buy
Price target: Rs1,636
Current market price: Rs1,368 Maintain Buy with a revised price target of Rs1,636 Key points - Bajaj Holdings and Investments Ltd (BHIL) holds the Bajaj group's investments in two flagship companies, Bajaj Auto (a 31.49% stake) and Bajaj Finserv (a 39.16% stake). In addition, BHIL also has an investment portfolio with a market value of close to Rs3,111 crore in cash and liquid assets (fixed income and fixed deposits).
- Bajaj Auto saw its domestic motorcycle market share fall to an all-time low of 16.3% during the quarter. Its executive segment brand, Discover, is facing stiff competition which is the prime reason for the slide. The launch of the Discover 150 has been the first step to arrest the fall in volumes and will be followed by another couple of launches in H2FY2015. The other parts of the business, such as premium motorcycles, three-wheelers and more importantly, exports, continue to do well. As for Bajaj Finserv, a sustained performance by the lending and general insurance businesses is driving the growth. However, the life insurance business continues to slow down due to the impact of new regulations.
- Given the strategic nature of BHIL's investments (namely Bajaj Auto and Bajaj Finserv), we have given a holding company discount of 50% to BHIL's equity investments. The liquid investments have been valued at cost. We have revised our price target largely to reflect the increase in our price target for Bajaj Auto and Bajaj Finserv. Our price target of Rs1,636 for BHIL implies a 20% upside to the stock price and hence we maintain our Buy recommendation.
- Key concerns: In Union Budget 2014-15 the government approved a 49% composite FDI in the insurance sector which is negative for Bajaj Finserv due to the call option given to its joint venture partner; though the company derives comfort from an RBI circular that suggests the transfer of stake will take place at market value.
Bajaj Corp
Recommendation: Book out
Current market price: Rs291 Recovery priced in, Book out Key points - Sustained inflationary pressures coupled with an inventory correction at the retailer and distributor levels had caused the sales volume of Bajaj Corp's flagship hair oil brand, Bajaj Almond Drop Hair Oil (ADHO; contributes over 90% of total turnover), to drop from Q3FY2014. ADHO's sales volume had declined by 6.5% in H2FY2014. This had affected the overall operating performance of the company, which had registered a decline in the profit in H2FY2014.
- The second quarter of FY2015 marked the revival in the sales volumes of ADHO (volumes grew by 4%) with the primary and secondary sales coming back on track and giving indications of a likely improvement in the consumer offtake of light hair oil in the coming quarters. However, we believe the expected revival in the sales volume of ADHO and improved operating performance in the coming quarters are already factored in the stock's current valuation of 22x FY2016E earnings (it is at a 22% premium to its historical average multiple of 18x).
- Additionally, Bajaj Corp is a single-brand company and a rise in competition in the light hair oil category from the existing competitors and new entrants shall pose a risk to our earnings estimates for the company in the near future. Hence, we recommend our investors to exit from the stock taking advantage of close to 35% appreciation in a short time. We drop active coverage on the stock.
Supreme Industries
Recommendation: Hold
Price target: Rs620
Current market price: Rs589 Dull Q1 performance but encouraging growth guidance Key points - Though in Q1FY2015 the revenues from Supreme Industries' core business (of plastics) were marginally lower than expected, but the company fell short of expectations at the operating profit and earnings levels largely due to inventory losses (polymer prices declined in line with softness in crude oil prices resulting in a marked-to-market loss on the inventory). This led to one of the lowest OPMs (10.7%) in the past ten quarters. The performance at the earnings level also suffered because the company did not book real estate sales in Q1 (the sales would spill over to Q2, ie October-December 2014).
- In terms of guidance, the management sees signs of demand revival (low inventory with dealers) and has guided for a revenue growth of 18-20% and OPM of 13.5-14.0% in FY2015. However, we retain our revenue growth estimate of just over 12% (on volume growth assumption of close to 10% and realisation gains driven by an improving product mix). The company is witnessing traction in the composite cylinder and bathroom fitting businesses along with a gradual pick-up in pipes and other CPVC products.
- Supreme Industries is currently passing through a rough patch due to a muted demand environment and sharp fluctuation in raw material prices. However, we continue to believe in the company's ability, long-term business growth prospects and capability to generate healthy RoCE of close to 30% across business segments. At the current market price the stock is trading at 19x FY2016E earnings which leaves little upside to the stock price, given the weakness in the company's financial performance lately. Thus, we retain our Hold rating on the stock with a price target of Rs620 and wait for a better entry price for fresh investments.
CMC
Recommendation: Hold
Price target: NA
Current market price: Rs1,872 Approval of amalgamation with TCS, maintain Hold Key points - For Q2FY2015, CMC has delivered a revenue growth of 4.1% QoQ and 10% YoY to Rs616.7 crore, with its international revenues growing by 7% QoQ to Rs409.2 crore. In terms of verticals, the CS and ITES verticals were down by 3.2% and 1.5% QoQ while the SI vertical grew by 6.5% QoQ. The EBITDA margin performance surprised positively, with the margin improving by 150BPS QoQ led by a higher contribution of service revenues (accounting for 92.5% of total revenues), which rose by 6.6% QoQ. The margin growth was also supported by favourable INR-USD movement. Adjusting for the one-offs in Q1FY2015, the net income for the quarter rose by 30.1% QoQ to Rs76 crore.
- TCS and CMC's board of directors have approved the amalgamation of CMC into TCS. As per the amalgamation scheme, the shareholders of CMC would receive 79 equity shares of Re1 each of TCS for 79 equity shares of Rs10 each of CMC. The merger is expected to get completed in the next six months. CMC's management has stated that the amalgamation will be fruitful for both CMC and TCS, it will create strong market positioning globally and the combined entity will be much stronger in India and be able to tap the high growth opportunities in the coming year in the digital space as well as the other government and private sector projects.
- As per the scheme of amalgamation, CMC as an entity will cease to exist in the next six months as it will get fully integrated into TCS. Thus, by the record date of the swap ratio, the stock price of CMC will eventually trade at a discount of around 21% to that of TCS as per the swap ratio of 79 shares of TCS for every 100 shares of CMC. After the announcement, CMC's stock has corrected by close to 13% partially to account for the weakness in TCS (given the swap ratio) and also due to reduced investor interest in CMC. After the sharp correction, we retain our Hold rating on the stock for the existing shareholders in line with our positive view on TCS (on which we have a price target of Rs3,010). But for fresh investment it would be more prudent to buy into TCS rather than CMC, as the latter will cease to exist as an entity in the next few quarters.
VIEWPOINT Hero MotoCorp
Current market price: Rs2,877
View: Positive Positive outlook on the back of scooter demand and expectation of margin expansion Key points - Driven by a strong volume growth of 19.5% YoY during the quarter, Hero MotoCorp Ltd (HMCL) reported a 20.8% revenue growth for Q2FY2015. The OPM was flat sequentially and broadly in line with our estimate. However, a sharp rise in the other income and a lower than expected depreciation charge enabled the company to post a net profit of Rs763 crore as against our expectation of Rs731 crore.
- The festive season growth has been strong for HMCL with a growth of about 15% over the previous year and the management expects the momentum to continue with a double-digit growth for the industry in FY2015. The management is bullish on the scooter segment and expects the proportion of scooters in the industry to continue to increase over the next couple of years. The company will be launching a couple of scooters and doubling its scooter capacity over the medium term which will enable it to benefit from the structural shift in the two-wheeler industry. The outlook on the margin too is positive, given the recent price hike taken by the company across models, the expectation of no further increase in diesel prices and the benefit accruing from the margin expansion programme implemented by the company.
- We have raised our earnings estimates for FY2015 and FY2016 by 2.6% and 6% respectively. We have introduced our FY2017 earnings estimate of Rs213 in this note and rolled forward the valuation to the FY2017 estimate. Valuing the stock at 16x FY2017E earnings, we expect a 20% upside to the stock price from the current levels. Hence, we change our stance on the stock from Neutral to Positive.
| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
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