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| Summary of Contents | STOCK UPDATE CESC
Recommendation: Buy
Price target: Rs878
Current market price: Rs747 Ahead of estimates; remain positive Key points - During Q2FY2015, CESC reported a healthy earnings growth of 12% YoY, which was better than our estimate. Power volume was higher by 6% but due to a lower tariff (to adjust reduction in some of the cost items) the revenue was flat during this period. However, with a decline in employee and other expenses, its operating profit margin (OPM) expanded by 243BPS to 26% and the benefit percolates to the bottomline.
- Performance of its subsidiaries remained encouraging; the store-level EBITDA of Spencer's remained at 4.3% (same-store EBITDA exhibited gradual growth and touched Rs82 per square feet) in Q2FY2015. On the other hand, the management of Firstsource Solutions Ltd (FSL) is committed to improve its margin by 150-200BPS in FY2015 over FY2014 and the gross debt has declined from $145 million in Q1FY2015 to $132 million in Q2FY2015.
- The first phase (300MW) of Haldia based upcoming power plant is going on stream in the next few days and the second phase would be operational during Q4FY2015. However, pain at Chandrapur (600MW) plant remains for the time being, as after signing 100MW of PPA with TANGEDCO, the management is still looking for opportunities to sign a long-term power supply contract for the remaining capacities.
- We believe commissioning of Haldia power plant will enhance its existing base of cash-generating regulated power business. Largely, we are positive on the gradual progress of its subsidiaries to contribute value to the consolidated entity. The stock is trading at 1.2x its FY2016 BV currently. We retain our positive stance and continue to rate it as Buy with a price target of Rs878.
Cox & Kings
Recommendation: Buy
Price target: Rs395
Current market price: Rs307 Retained focus on strengthening balance sheet; maintained Buy Key points - Cox & Kings Ltd (CKL) registered a 12% revenue growth and an 8% growth in the operating profit on a like-to-like basis (excluding the hived-off camping business' financials). The Indian business' revenues and operating profit grew by 17% each while the education business revenues grew by 10% and profits grew by 19% on a Y-o-Y basis. The international leisure travel business was a drag on the profitability with its OPM declining by above 400BPS (due to higher promotional and technology expenses).
- With improving consumer sentiment, CKL's management expects the domestic outbound tourism segment (accounts for more than 50% of the Indian business) to grow by at least 25% in the near term. The capacity utilisation at the education and Meininger businesses is expected to improve in the coming years. This should help in expanding the OPM of CKL's consolidated business to 40% in the coming years.
- CKL's net debt has reduced by Rs730 crore from Rs4,205 crore in March 2014. The company will further reduce its debt by about Rs250 crore by the end of FY2015. Going ahead, the management targets to reduce the debt by Rs500 crore each in FY2016 and FY2017 through internal accruals (which would result in savings of Rs40 crore in interest cost each year).
- We have marginally reduced our earnings estimate for FY2015 to factor in the lower margins in the international leisure travel business. However, we have broadly maintained our earnings estimates for FY2016 and FY2017. The stock is currently trading at 11.4x its FY2016E earnings and EV/EBIDTA of 8x. We maintain our Buy recommendation on the stock with a price target of Rs395.
PTC India
Recommendation: Buy
Price target: Rs126
Current market price: Rs100 Growth momentum continued; revised price target to Rs126 Key points - The revenue of PTC India surged by 34% YoY in Q2FY2015, backed by an 18% growth in volume (12,724MU in Q2) and 14% growth in realisation. The blended margins (paisa/unit of power traded) was around 6 paise/unit. The operating profit of PTC India grew by 23% to Rs82 crore, largely influenced by the growth in power trading volume which percolated to the net level. However, reported earnings includes one-off gain (surcharge from Tamil Nadu SEB for delay in payment of funds) worth Rs18.9 crore, therefore adjusted PAT grew by 25% YoY to Rs77 crore in Q2FY2015, 11% better than our estimate.
- The long outstanding receivable from Tamil Nadu SEB worth Rs200 odd crore are under arbitration now and is likely to take some time to get clarity. In the meanwhile, there is a surge in receivables from Rs2,086 crore to Rs3,073 crore in the last six months, though the volume too witnessed a high growth during this period.
- We believe that PTC India is currently riding on a very healthy volume traction which would be supported by a recovery in the industrial demand cycle, growing market of cross border and domestic retail trades. Further, an uptick in the long-term power volume would inch up its overall margin. We have introduced our FY2017 earnings estimate in this note and rolling over multiple to FY2017 earnings. The financial subsidiary, PTC India Financial Services (PFS) is also expected to deliver earnings growth of about 40% CAGR, with a healthy RoE of 21% by FY2017. On this back drop, we roll-over our target multiple to FY2017 earnings base and value PTC India at 10x on its FY2017 earnings and PFS at 1.8x FY2017 BV. However, we have assigned 50% holding discount on the value of PFS to arrive at our revised price target of Rs126 and continue to rate the stock as Buy.
Indian Hotels Company
Recommendation: Book out
Current market price: Rs108 Recovery priced in, Book out Key points - In a seasonally weak quarter, Indian Hotels Company Ltd (IHCL) registered a muted operating performance with revenues (at the stand-alone) level growing by 6% and operating profit declining by 24% in Q2FY2015. For the same period the company posted a loss of around Rs4 crore at the adjusted level.
- Though we expect the occupancies to improve in the second half of FY2015 on the back of expectations of an increase in foreign tourist arrivals, but the average room rental is unlikely to increase in the near term due to increased competition from a rise in room supply in the domestic market. Hence, the operating profit margin of the stand-alone business is expected to remain flat year on year in the near term. On the other hand, any improvement in the profitability of the consolidated business would depend upon a substantial improvement in the business fundamentals of some of the foreign properties (including the ones in the USA and the UK).
- The IHCL stock has run up by 33% (in three months) since our last Stock Update on the company (on August 12, 2014) on the back of an expected recovery in the operational performance in the coming years due to an improved macro environment. We believe at Rs0.85 crore FY2016E enterprise value (EV)/room and 15.5x FY2016E EV/earnings before interest, depreciation, tax and amortisation, the IHCL stock is fairly valued. Hence we advise our investors to exit from the stock with some decent gains.
| | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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