| STOCK UPDATE Relaxo Footwears
Recommendation: Buy
Price target: Rs575
Current market price: Rs519 Robust performance with margin improvement Key points - Relaxo Footwear's top line grew by a strong 25.7% YoY, driven by a volume growth and product mix improvement. Despite a higher raw material cost as a percentage of sales (43.8% in Q2FY2015 vs 42.9% in Q2FY2014) that resulted in a contraction of 80BPS in the GPM, higher sales led to better absorption of the fixed cost. This resulted in a strong 36.9% growth in the operating profit which coupled with a lower interest cost propelled the net earnings by 48.6% YoY.
- With its economical price points (averaging at Rs112-115) the company is well placed to cash in on the transition towards branded shoes from the unorganised segment. We, thus, expect the company to post a 22.1% revenue CAGR over FY2014-17. The initiatives to improve efficiency and rationalise costs along with stable raw material prices are likely to culminate in a strong 31.7% earnings growth (CAGR) over FY2014-17.
- It has a strong presence in the lucrative mid-priced footwear segment (through its top-of-the-mind-recall brands like Hawaii, Flite and Sparx) and an integrated manufacturing set-up. This along with the visibility of its earnings, prudent risk management practice, healthy balance sheet and transition towards a professionally managed entity keeps us positive on the stock. We maintain our Buy rating on the stock with a price target of Rs575.
Bank of India
Recommendation: Buy
Price target: Rs334
Current market price: Rs286 NII growth improves, asset quality deteriorates Key points - Bank of India (BOI)'s Q2FY2015 was a mixed bag as the net interest income growth picked up (19.9% YoY), while the asset quality deteriorated. The net interest margin improved by 15BPS QoQ to 2.31% contributed by an expansion in the yield on loans.
- Fresh NPA additions remained high in Q2FY2015 (Rs2,971 crore) and almost half of it was contributed by slippages from its restructured book. The bank also restructured Rs1,348 crore worth of loans in Q2FY2015 (outstanding restructured loans 3% of overall book).
- BOI's results were comforting at operating level as NII growth and margins showed improvement. While the management has guided for improved recoveries from NPAs, the asset quality will remain key moniterable. Currently, the stock trades at 0.6FY16 BV which is discount to peers like Punjab National Bank and Bank of Baroda, and partly factors in NPAs stress and lower RoAs. We therefore maintain Buy rating on the stock with a price target of Rs334.
Godrej Consumer Products
Recommendation: Hold
Price target: Rs1,030
Current market price: Rs954 Improving outlook; upgrading to Hold due to recent underperformance Key points - Godrej Consumer Products Ltd (GCPL)'s Q2FY2015 performance was affected by a lower growth in the domestic household insecticide (HI) business (owing to weak rainfall) and a lower revenue growth in the international business (affected by currency translation losses). The constant-currency sales growth for the international business stood at 12%.
- The management has guided for a better revenue growth in the domestic market in H2FY2015, as the improving urban sentiment would help GCPL to achieve a good growth in categories such as hair colour and HI as well as in some of the new launches in the premium segments. The international business is expected to see a better revenue performance and improved profitability in the coming years. The company will also benefit from the decline in the palm oil and crude oil prices. However, it might utilise a large part of the savings to improve the growth prospects of the brands in the highly competitive segments in view of a competitive environment.
- GCPL's stock price has corrected by 15% from its high in the last one month. The company is likely to reap the benefits of its strong brands (largely in under-penetrated categories) and a revival in demand in the urban areas. Thus, in view of the expectations of a better performance in the near to medium term, we upgrade our recommendation on the stock to Hold from Reduce and revised its price target to Rs1,030 (which values the stock at 27x the FY2017E EPS, giving it a 10% discount to Hindustan Unilever's target multiple).
- Key risk to rating: Any substantial drop in the revenues of the domestic business and increase in currency fluctuation in the key international geographies would act as a key risk to the earning estimates and rating on the stock.
Divi's Laboratories
Recommendation: Hold
Price target: Rs1,860
Current market price: Rs1,805 OPM slips in Q2; maintain Hold with a revised price target of Rs1,860 Key points - Divi's Laboratories reported strong sales in Q2FY2015, as reflected in a 46.6% growth in its revenues to Rs833 crore. However, the adjusted net profit recorded a 28.6% jump YoY to Rs222 crore, on a weaker operating profit margin (OPM) during the quarter.\
- The OPM dropped by 705BPS to 36.8%, mainly due to a change in the product mix (a higher proportion of the generic API business, which generates lower margins). The ratio of the contribution of the generic API business to contribution of the CRAMS business stood at 54: 46 (vs 52:48 in Q2FY2014).
- As quarterly lumpiness is an inherent trait of the CRAMS and generic API businesses, a similar performance may not sustain in the subsequent quarters. The management has maintained its guidance of a 20% revenue growth in FY2015 (against a 36% growth achieved in H1FY2015), thereby indicating that H2FY2015 may be weaker. Also, the OPM is unlikely to see any significant expansion in H2FY2015.
- We have toned down our earnings estimates for FY2015 and FY2016 in view of the weaker OPM achieved in H1FY2015. However, we roll forward our valuation to the estimates of FY2017 to set a price target of Rs1,860 (19x FY2017E EPS). We maintain our Hold rating on the stock.
IDBI Bank
Recommendation: Hold
Price target: Rs95
Current market price: Rs72 Price target revised to Rs95, asset quality stress persists Key points - IDBI Bank's Q2FY2015 results were subdued as net profits declined by 39.5% YoY due to a higher NPA provisions and decline in the net interest income (down by 5.4% YoY). Net interest margins however improved on a Q-o-Q basis to 1.93% mainly aided by a dip in the cost of funds.
- The asset quality continued to weaken led by a slippage of Rs1093 crore (mainly contributed by one large account). The bank has also restructured Rs1230 crore worth loans in Q2FY2015 and has a pipeline of ~ Rs1,000 crore per quarter for the next two quarters, which could get restructured.
- IDBI Bank's operating performance is likely to remain muted due to slower business growth and subdued margins. Given its higher exposure to the corporate sector and sluggish recovery in economy the asset quality may remain under stress. We have revised the estimates downwards for FY2015, F16 to factor muted earnings performance. This results in a downward revision with a price target of Rs95. We maintain Hold rating.
Andhra Bank
Recommendation: Hold
Price target: Rs104
Current market price: Rs88 Asset quality concern remains Key points - Andhra Bank has reported a net profit of Rs144.5 crore (up by 104.5%, partly helped by low base of Q2FY2014). The net interest income (NII) showed recovery (up by 37.5% QoQ as interest reversals were significantly lower vs Q1FY2015) and the net interest margins bounced back QoQ to 2.93%.
- The reported NPAs remained high (gross NPAs of 5.99%) due to fresh NPA addition of Rs980.5 crore. The bank also restructured Rs1454 crore worth of advances in Q2FY2015. According to the bank, the settlement of farm loans (Andhra and Telangana) will result in higher recoveries and reversal of provisions over the next couple of quarters.
- While the bank's recoveries from agriculture book could improve going ahead, its higher exposure to troubled sectors (especially infrastructure) remains a cause of concern. This should keep provisioning elevated and affect the profit growth. We expect earnings growth and return ratios (RoA of 0.5% by FY2016) to remain subdued over the next few quarters. We therefore maintain Hold rating with a price target of Rs104.
SECTOR UPDATE Automobiles Automobile sales in October 2014: High base dilutes growth figures; Heavy trucks impress The domestic automobile industry had a reasonable festive season with most of the leading manufacturers reporting a 10-12% growth in retail volumes over similar period last year. However, an early festive season this year compared with the last year has distorted the growth figures for the months of September and October. With Dussehra in the first week of October, a major portion of the dispatches to dealers from manufacturers took place in September, thus inflating September sales and deflating volumes for the month of October. Manufacturers also faced capacity constraints considering lower working days due to holidays and state assembly elections (Maharashtra and Haryana). For example, Maruti Suzuki India (Maruti) had 19 working days in October 2014 as compared with 24 in the last year. TVS Motor Company was the standout performer with an overall growth of 21.8% during the month. Also, the medium and heavy commercial vehicle (MHCV) segment had another excellent month, although on a low base, with leading manufacturers like Tata Motors (TAMO) and Ashok Leyland (ALL) posting a growth in excess of 30%. In the tractor segment, both Mahindra & Mahindra (M&M) and Escorts reported a decline, given the seasonality and a lacklustre demand environment post weak monsoon rains. The key takeaways from the month's performance are given below: - Adjusted for the seasonality, the two-wheeler companies reported healthy growth in dispatches for the month of October 2014. TVS Motor Company was the standout performer with a volume growth of 21.8%, as a bunch of new launches helped the company to sustain the high growth rate. The market leader Hero MotoCorp reported a fall in dispatches largely due to an elevated base and lower number of production days during the month. While, overall dispatches were flat year on year (YoY) for Bajaj Auto, the domestic three-wheeler volumes and exports continue to grow at a brisk pace.
- In the passenger vehicle (PV) category, the market leader Maruti Suzuki Indi a Ltd (MSIL) reported a modest 2% growth in domestic dispatches. The dispatches were hampered due to 20% lower number of working days during the current month. Retail sales for the company were higher by 10% YoY. Despite new launches, Zest and Scorpio, TAMO and M&M reported a decline in volumes as remainder of the product portfolio remains outdated. The PV industry continues to be supported by elevated levels of discounting by manufacturers.
- The MHCV segment on low base, reported an impressive performance with TAMO and ALL reporting a growth of 30% and 43% respectively. Hampered by high delinquency and poor demand, the light commercial vehicle (LCV) segment (especially below 2mt) continues to decline. We expect the declining trend in the LCV segment to persist till Q4FY2015.
- Tractor manufacturers, M&M and Escorts, reported a volume decline of 18% and 9% respectively for the month of October 2014 and were in-line with our estimates. The consumer sentiment in the tractor segment continues to remain weak given the deficient monsoon rains in the country.
Picks: We continue to prefer Hero MotoCorp, MSIL and ALL among the auto stocks under our coverage.
VIEWPOINT Tata Communications
Current market price: Rs412
View: Positive Strong data growth with deleveraging; positive view maintained Key points - Tata Communications' consolidated revenue grew by 2.4% on a Y-o-Y basis, aided 8.3% Y-o-Y growth in the data revenues, while the voice revenue declined by 4% on a Y-o-Y basis. A soft revenue growth, coupled with decline in the voice margins (down by 410 basis points [BPS] yoy from 10.6% in Q2FY2014 to 6.5% in Q2FY2015), resulted in 9.3% decline in the overall consolidated operating profit. Aided by a strong other income (on account of interest on income tax refund of Rs127.5 crore) resulted in a strong 15% Y-o-Y growth in the net earnings. Adjusting the same the net earnings for the quarter came at Rs6.9 crore, a 91% decline on a Y-o-Y basis.
- The company's thrust on growing the data business continues to be strong, with it reiterating its revenue growth and margin guidance of 20% for the data business. On the voice business, it expects pricing pressure and hence guided for 6.5-8% margin. On the new business like data centre and ATM management, the company continued its positive stance and expects the growth in the former to be strong, while the ATM management business is at the cusp of EBITDA break-even, and the management expects to exit FY2015 on an EBITDA break-even mode for the ATM business, and further significant headroom for revenue growth. On the non-core asset monetisation front, the management mentioned that some development is likely to fructify in the next two quarters.
- We expect Tata communications' EBITDA to grow at a CAGR of 10.8% over FY2014-16. This coupled with its deleveraging exercise (through measured capex - the company continued to guide for an annual capex in the range of $250-$300 million) is likely to improve its net debt/EBITDA levels from current 3.7x to around 3x by FY2016. The steadily improving core performance coupled with the management's initiative towards sharpening its focus and deleveraging its balance sheet via Neotel stake sale and non-core asset monetisation keeps us positive on the stock. Since our last view-point note on the stock (dated August 5, 2014), the stock has appreciated by 12% in less than three months' time frame, while it has appreciated by 39% in the last six months' time frame. Given the improving business fundamentals and strengthening balance sheet we continue to hold a positive view on the stock expecting another 12-15% upside from the current levels. We expect Tata communications to reach Rs475-480 in another siz to nine months' time frame.
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