| STOCK UPDATE Apollo Tyres
Recommendation: Buy
Price target: Rs265
Current market price: Rs233 Maintain Buy with a revised price target of Rs265 Key points - With the benefit of an extended fall in the raw material prices accruing to the company, Apollo Tyres (Apollo) reported a strong performance in Q2FY2015. The gross margin expansion led to an increase in the operating profit margin (OPM), which resulted in an impressive 41.7% Y-o-Y growth in stand-alone net profit after tax (PAT). The growth in consolidated PAT was lower at 3.4% due to a higher tax rate in overseas operations.
- The growth in the domestic replacement demand continues to remain muted in low single digits. However, an anticipated revival in the economy is expected to spur the replacement as well as original equipment manufacturer (OEM) demand. Apollo's European operations continue to have a positive growth trajectory. While the benefit of lower raw material prices on operating margins is expected to continue in H2FY2015 and FY2016; we continue to expect a margin contraction in FY2016 over FY2015 levels.
- The current period of high profitability has enabled Apollo to undertake a major capital expenditure plan without a stress on the balance sheet. We have raised our earnings estimates for FY2016 by 5.3% to Rs25 to factor in higher OPM. We have also introduced FY2017 earnings estimate of Rs26.5. We roll forward our target multiple to FY2017 and reiterate a Buy recommendation on the stock with a revised price target of Rs265 (earlier Rs237) discounting FY2017E earnings 10x.
Gabriel India
Recommendation: Buy
Price target: Rs110
Current market price: Rs94 Operating leverage to the fore; price target revised of Rs110 Key points - Driven by a strong growth in the key business segment, ie two-wheelers, and a pick-up in growth in the passenger vehicle (PV) and commercial vehicle (CV) segments, Gabriel India (Gabriel)'s revenues grew by an impressive 21.2% YoY in Q2FY2015. The resultant operating leverage led to a 170-BPS Y-o-Y expansion in the OPM to 8.0% and a 54% growth in the operating income. Consequently, the adjusted net profit improved by 65% YoY to Rs19 crore and was above our expectation.
- Gabriel is expected to keep up the pace of strong top line growth by virtue of its high revenue share with Honda Motorcycle and Scooter India (HMSI) and TVS Motor Company, which are growing at a rate higher than industry rate in the two-wheeler segment. The company has received orders to service HMSI's upcoming facility in Gujarat which would further boost its share. The CV segment, wherein Gabriel is the market leader, has showed early signs of revival and an uptick is expected driven by an improvement in the economy. Also, the recent tie-up with Koni (a leading name in the shock absorber segment globally) will help the company expand its offerings in the CV segment. Thus, we expect the margin to improve further on the back of the benefits of operating leverage.
- Based on a positive outlook for margins and a lower interest cost, we revise upward our earnings estimates for FY2016 and FY2017 by 12.5% and 8% respectively. In view of the positive outlook for the auto industry, debt-free status of the company and the boost to return rations (RoE expected to improve from 17.3% in FY2014 to 27.5% in FY2017), we increase the target multiple from 10x to 12x. We maintain our Buy rating on the stock with a revised price target of Rs110 (vs Rs85 earlier).
Kalpataru Power Transmission
Recommendation: Buy
Price target: Rs200
Current market price: Rs169 Domestic opportunities on inflection point; retain Buy Key points - For Q2FY2015, the revenue of Kalpataru Power Transmission Ltd (KPTL) grew by 19% YoY to Rs1,140 crore, driven by T&D segment, which is much ahead of our estimate. The company managed to notch OPM of 9.1%, slightly lower than our estimate on account of continued losses in infrastructure EPC business; consequently operating profit grew by 14% YoY. Further, added by lower interest cost, PAT beat our estimates and reported a growth of 38%, however adjusting forex gain in Q2FY2014, the adjusted earnings was flat YoY. With order inflow (stand-alone) of Rs900 crore, current order backlog stands at Rs5,000 crore (1.4x its FY2014 sales).
- The construction subsidiary, JMC Projects exhibited a very strong earnings growth despite 5% lower revenue YoY, backed by 132BPS margin expansions to 6.2% in Q2FY2015. Going ahead, the management expects further margin expansion by 50BPS in H2FY2015. However, the performance of another subsidiary, Shree Shubham Logistics (SSL), was affected by lower revenue (down by 16%) as the company is going through rationalising exercise of its revenue mix; moving towards primary processing agri-commodities; hence the quarterly decline was temporary and the business is poised to catch up soon. During this quarter, KPTL managed to lease 15% area of its commercial real estate asset in Thane and expects the balance to be sold or leased by the end of FY2015.
- The key highlight during the conference call was that, while the management of KPTL maintained their revenue guidance for KPTL (stand-alone) at around 10-15% for FY2015, they raised the guidance to above 15% in FY2016. The management sees re-emergence of opportunities in domestic T&D space, which was on a slow trajectory in the last two years. Apart from impetus from the new government to invest in transmission and distribution infrastructure, the initiatives to build transmission corridor with neighbouring countries and planned green corridor to link renewable energy to national grid are key triggers for expansion of domestic opportunities. We have fine-tuned our estimates and based on improving outlook on T&D space coupled with a better performance from subsidiaries, we retain our positive stance on the stock; hence, we continue to recommend Buy with a price target of Rs200 (based on SoTP method).
Capital First
Recommendation: Hold
Price target: Rs380
Current market price: Rs367 Price target revised to Rs380, strong performance priced in Key points - Capital First reported a strong set of numbers for Q2FY2015 as its net profit grew by 276% YoY to Rs27 crore. The net interest income clocked a growth of 57.7% YoY which contributed to a strong growth in the profit. The net interest margin also expanded by about 20BPS QoQ on account of moderation in the cost of funds.
- The business growth remained strong as AUMs (assets under management) grew by 34% YoY while the loan book grew by about 42% YoY. The proportion of retail and SME AUMs expanded to 84%. Despite a strong loan growth, the asset quality was stable (gross NPAs at 0.56% vs 0.54% in Q1FY2015).
- Capital First's earnings profile has improved and therefore we have revised our earnings estimates upwards, (we now expect an earnings CAGR of 53% over FY2014-17). This has resulted in a revision in our price target to Rs380. However, we believe the RoE will take longer to catch up with the peers (due to a higher capital base). Currently, the stock is trading at 2.0x FY2017E book value, which is closer to the valuation of the bigger NBFCs like Bajaj Finance and Shri Ram City Union that have better return ratios. This leaves little room for an upside. We maintain our Hold rating on the stock.
IL&FS Transportation Networks
Recommendation: Buy
Price target: Rs284
Current market price: Rs196 Strong BOT performance and EPC execution boosts earnings Key points - In Q2FY2015 IL&FS Transportation Networks Ltd (ITNL)'s consolidated adjusted earnings grew by 32% post adjusting Rs48 crore reversal of tax for earlier period. An increase in the operational projects drove the BOT income (up by 18% YoY) and resulted in a better EBITDA margin (up by 378BPS) for the quarter. However, higher interest (increase in debt at both stand-alone and consolidated level) and depreciation charges led to a 10.5% Y-o-Y growth at the PBT level.
- The trigger for the road construction sector is the actual order awards from NHAI going ahead as the government has been addressing key issues over the past six months. Additionally, improving macro environment and a benign interest regime is likely to improve the growth prospects of the sector. On the other hand, the competitive intensity has eased considerably with many players reeling under financial stress. We expect ITNL to gain in terms of both a better order booking and a relatively higher IRR in the new projects.
- We remain positive on ITNL owing to an improving medium-term outlook. We believe a surge in the BOT income and a better execution will improve its balance sheet gradually. We maintain our Buy rating with an SOTP-based price target of Rs284.
Ipca Laboratories
Recommendation: Hold
Price target: Rs785
Current market price: Rs669 Q2 slides on USFDA concerns; price target reduced to Rs785: maintain Hold Key points - Ipca Laboratories reported a weaker result in Q2FY2015, as reflected in a 7% Y-o-Y decline in the revenue, 1000BPS contraction in the operating profit margin (OPM) and a 58% drop in the adjusted net profit. The exports of formulation and API dropped by 15.6% and 37.9% during the quarter, respectively. However, the domestic business remained strong to record an 18.7% growth in formulations and 10% growth in API business.
- The Q2 performance of Ipca Laboratories was affected by multiple factors including the stoppage of the US supplies from its key facilities following USFDA's adverse observations on its quality systems, delay in shipments related to institutional business and adverse political scenario in key developing countries. While the hangover related to USFDA issues continues, the management expects a better performance in H2FY2015 on the back of stabilising of non-USA business
- We believe the performance of the company will remain under pressure in near term despite a partial recovery in some segments during H2FY2015 (we assume the US business to get restored by H2FY2016). We have fine-tuned our estimates for FY2015 and FY2016, and reduced the price target to Rs785 (15x FY2016E EPS). We maintain Hold rating on the stock. However, an early resolution of the USFDA issues will be an upside risk to our valuation.
Shree Cement
Recommendation: Hold
Price target: Rs9,500
Current market price: Rs9,092 Maintain Hold with revised price target of Rs9,500 Key points - Shree Cement reported a net profit decline of 33.3% for Q2FY2015 on account of a lower other income (down 62.1% YoY) and a higher depreciation charge (up 95.5% YoY). The operating performance of the power segment remained under pressure due to cost pressure but the performance of the cement segment improved YoY, with the EBIDTA per tonne of the segment improving by 25.4% YoY to Rs841.
- The revenues for the quarter rose by 28.9% on account of higher cement revenues (volume and realisation up 16.5% and 11.9% YoY respectively). The power division also reported a strong revenue growth of 19.1% (volume and realisation up 17.0% and 1.8% YoY respectively).
- We have marginally revised our earnings estimates for FY2015 and FY2016 upwards to factor in the higher cement volume growth, strong realisation and increased deprecation charge. Considering the above factors and in view a limited upside from the current level and an unfavourable risk/return ratio, we have revised our price target upwards to Rs9,500 and maintained our Hold rating on the stock. At the current market price the stock is trading at 12.5x EV/EBIDTA and P/E of 22.8x FY2016 estimate.
JB Chemicals & Pharmaceuticals
Recommendation: Hold
Price target: Rs251
Current market price: Rs218 Moderate exports in Q2; downgraded to Hold Key points - JB Chemicals and Pharmaceuticals Ltd (JBCPL) reported a healthy performance in Q2FY2015 as reflected in a 10.7% rise in net sales, 362BPS expansions in operating profit margin and 19.8% jump in the adjusted net profit.
- The revenue growth was mainly led by a 17% expansion in the domestic business. However, exports of formulation and API moderated to record a 7% and 5% growth during the quarter. The exports were affected by the political instability in Russia and CIS countries.
- Although, the Q2FY2015 results are not strictly comparable due to commencement of sales and distribution in Russia and CIS region by a Dubai based wholly owned subsidiary w.e.f. Q1FY2015, but on a like-to-like basis, the company registered a healthy growth in the operating profit.
- We broadly maintain our estimates and price target of Rs251 including Rs191 for base business (11x FY2016E EPS) and Rs60 for cash value per share. However, owing to limited upside over current market price, we downgrade our rating to Hold on the stock.
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