| STOCK UPDATE Larsen & Toubro
Recommendation: Buy
Price target: Rs1,840
Current market price: Rs1,653 Hydrocarbon losses subsided; retain Buy Key points - Despite flat revenue, Larsen & Toubro (L&T; stand-alone) managed to show an earnings growth of 20% YoY in Q2FY2015 with better margin coupled with higher other income and lower effective tax rate. However, profitability and earnings growth of the consolidated entity suppressed (despite 10% revenue traction) due to poor performance of some segments on margin front. While the power, metallurgical and heavy engineering segments witnessed margin pressure with under utilisation of capacities, cost overrun and project closure related cost continued to keep hydrocarbon business in losses. Nevertheless there is a remarkable improvement in hydrocarbon business sequentially, as loss slipped to Rs54 crore in Q2FY2015 against a loss of Rs942 crore in Q1FY2015.
- Order inflow continued to be robust ( grew by 17% YoY at Rs39,797 crore) during Q2FY2015, which was mainly contributed from buildings and factories, transportation, infrastructure and power sectors. Key point to note that in this quarter there was a significant jump in the domestic orders inflow which could be the early indicator of the revival of domestic order environment. L&T is currently having an order backlog of Rs214,429 crore (up by 14% YoY), translated into a very healthy book-to-bill ratio of 2.5x (on the FY2014 consolidated sales), which ensures a healthy revenue visibility.
- The management marginally stepped down its revenue growth guidance from above 15% to a little below 15% range for FY2015, considering the half yearly performance. Accordingly, we have fine-tuned our earnings but retain our positive stance on the stock. We believe a sharp drop in losses in the hydrocarbon segment during Q2 could ease investors concern as the same was the major cause of disappointment in Q1. Further, with potential recovery in the economy some of its businesses like power, ship building, shipyards and defence are likely to turn around sharply. Hence, we retain our Buy rating on L&T with a price target of Rs1,840.
Bank of Baroda
Recommendation: Buy
Price target: Rs1,062
Current market price: Rs961 Operational performance intact, maintain Buy Key points - In Q2FY2015 Bank of Baroda's net profit declined by 5.5% YoY to Rs1,104.5 crore, mainly due to a higher tax rate (27.1% vs 6.4% in Q2FY2014). However, the operating performance was intact as the net interest income grew by 17.5% YoY and the net interest margin expanded by 5BPS QoQ to 2.4%.
- In line with the industry trend the asset quality deteriorated but fresh NPA additions were lower on a Q-o-Q basis (Rs1,758 crore vs Rs1,881 crore in Q1FY2015). The bank restructured Rs1,175 crore worth of loans in Q2FY2015 and has a restructuring pipeline of Rs1,100 crore worth of advances.
- BoB's operating performance was steady while the asset quality even after the deterioration seen in Q2FY2015 remains better as compared with the peer banks. Also, the bank's capital position (tier-1 CAR of 9.3%) is relatively better compared with the other PSBs. We expect BoB's earnings to grow at a CAGR of 17% over FY2014-16 resulting in an RoA of 0.8% by FY2016. We maintain our Buy rating on the bank with a price target of Rs1,062.
Ashok Leyland
Recommendation: Buy
Price target: Rs58
Current market price: Rs47 Margins outperform; maintain Buy with a revised price target of Rs58 Key points - After seven consecutive quarters of volume decline, Ashok Leyland Ltd (ALL) showed first signs of recovery with a volume growth of 9.8% and a revenue growth of 26.2% in Q2FY2015. There was a continued improvement in operating performance as OPM expanded by 260BPS sequentially (510BPS YoY) to 7.3%, ahead of our estimates. An exceptional gain of Rs109 crore (~ Rs82 crore post tax) enabled ALL to report a PAT of Rs121 crore.
- The domestic commercial vehicle (CV) industry is on a recovery path and has reported positive growth over the past four months. The heavy truck segment has been leading the recovery while the intermediate and light truck segments are yet to turn positive. The central government's initiatives on manufacturing-led industrial growth and kick-starting the capital expenditure cycle will be the drivers for the CV industry going forward.
- With a leaner cost structure, minimal capex going forward and de-leveraging of balance sheet, ALL is well poised to reap the benefits of a revival in the CV industry. We have raised our earnings estimates for FY2016 and FY2017 by 7.8% and 5.7% factoring in higher realisations and improved margins. We continue to remain positive on the stock and reiterate a Buy recommendation with a revised price target of Rs58, valuing the core business at 14x FY2017E earnings.
Aurobindo Pharma
Recommendation: Buy
Price target: Rs1,272
Current market price: Rs1,031 The US business continues to see a strong traction; price target revised up to Rs1,272 Key points - Aurobindo Pharma reported healthy results in Q2FY2015 as reflected in a 50.5% growth in net sales and a 36.5% growth in the adjusted net profits. The revenue growth during the quarter has been aided by the integration of newly acquired European business of Actavis.
- The continued strong growth in the US business (up by 61% YoY), a 400BPS expansion in gross margins, improved balance sheet (repayment of $85 million during H1FY2015) and smooth integration of the European business of Actavis are some of the key positives visible in this quarter.
- The management is confident to achieve more than 20% growth in the US market over the next couple of years and an operating margin of over 22% on a sustainable basis. However, the API business will continue to see seasonal variations quarter on quarter.
- We have fine-tuned our estimates and introduced the estimates for FY2017 and roll over our valuation to the estimated earnings for FY2017. Accordingly, the price target stands revised to Rs1,272 (16x FY2017E EPS). We maintain Buy recommendation on the stock.
Cadila Healthcare
Recommendation: Hold
Price target: Rs1,640
Current market price: Rs1,490 The US business drives Q2 results; price target revised to Rs1,640; maintain Hold Key points - Cadila Healthcare reported a strong result in Q2FY2015, as reflected in 20% growth in revenues to Rs2,110 crore, a 511BPS expansion in operating profit margin and a 63% growth in the adjusted net profit to Rs279 crore.
- The revenue growth during the quarter was mainly boosted by the US business, which grew by 70% to Rs802 crore. However, the domestic business witnessed a moderate growth of 10.5%, while other businesses remained muted during the quarter. Going forward, while the US business is likely to maintain a strong traction on healthy products pipeline, the non-US business is unlikely to see a significant headways in near term.
- The management has guided for near 440BPS expansion in operating profit margins for FY2015 on a better product mix. We have fine-tuned our estimates for FY2015 and FY2016, and introduce the estimates for FY2017. We roll-over our valuation to estimates of FY2017 to set a price target of Rs1,640 (17x FY2017E EPS). However, we maintain Hold rating on the stock.
Marico
Recommendation: Buy
Price target: Rs340
Current market price: Rs309 Better operating performance in inflated cost environment; price target revised to Rs340 Key points - In Q2FY2015, Marico registered a price-led revenue growth of 28% to Rs1,431.2 crore (volume growth stood at 7%). The domestic business revenues grew by 34% (volume growth of 8%), while the international business revenues grew by 12% (volume growth of 5%). As anticipated, the higher copra affected the OPM, which was down by 142BPS YoY to 13.6%. The operating profit grew by 16%YoY, while higher incidence of tax led to a 12% growth in the reported PAT to Rs118.3 crore.
- The copra prices have decline by 7-8% and remained stabled in the past two months. The same are not going to increase significantly from the current levels till the new season starts (February 2015). Also, some of the other key input prices, such as Kardi oil and rice bran oil are lower on a Y-o-Y basis. This along with expected savings at packaging cost level would result in better profitability in FY2016. Thus, we have revised our earnings estimates for FY2016 and FY2017 by 5% each by factoring in a little higher growth in the domestic consumer business and higher than earlier expected OPM.
- Marico's strong pricing power aided it to post a strong volume growth in the branded coconut oil, edible oil and value added hair oil market in India. With improving consumer environment, we expect the strong revenue growth momentum to sustain in domestic and international market. Marico's consolidated revenues and earnings are expected to grow at a CAGR of 19% and 22% respectively over FY2014-17. Hence, we maintain Marico as one of our best pick in the mid-cap FMCG space and maintain our Buy rating on the stock with a revised price target of Rs340 (valuing stock at 25x its FY2017E EPS).
- Key risk to rating: Any significant increase in the copra prices would act as a key risk to our earnings and rating on the stock.
GlaxoSmithKline Consumer Healthcare
Recommendation: Hold
Price target: Rs5,730
Current market price: Rs5,694 Volume growth to remain in mid-single digit; price target revised to Rs5,730 Key points - GlaxoSmithKline Consumer Healthcare (GSK Consumer) posted yet another quarter of mute volume growth of 2% (adjusting for inventory pipeline in exports business volume growth stood at 3-3.5%) in Q2FY2015. The slowdown in the domestic market continues to affect the HFD category (decline by 4% in Q2). The biscuit segment registered a growth of 6% due to a high base of 2FY2015 and discontinuance of some of the SKU's of digestive and diabetic variants.
- GSK Consumer's management expects the volume growth to come back to 4-5% by Q4FY2015 and expect the stable volume growth trajectory of 5-6% in HFD segment (contributes above 90% of revenues) in the next two years. The key growth drivers in near term would be improvement in penetration in north and west region and strong growth in some of the premium variants. The biscuit segment is expected to grow by 10-12% in the near term. In view of decline in the prices of some of the key inputs, such as milk powder (corrected by 7-8%) and packaging cost, the management has indicated of improvement in gross margins from H2FY2015.
- GSK Consumer would stop getting tax benefits from its Baddi facility from May 2015, which would result in an impact of 300BPS on the margins. However, the lower input cost and savings at other operating cost would help in mitigate the impact of same. We have revised downwards our estimates for FY2016 earnings by 4% to factor in lower than earlier estimated volume growth and lower net sales due to increase in excise duty. We have also introduced FY2017 financials in this note.
- GSK Consumer is a strong player in the domestic HFD segment with a strong portfolio of brands in base and premium segments. We expect the company to benefit from the improving consumer sentiments in urban India and lowering of input cost. Also, with strong cash flows, it is one of the cheery dividend payers in the FMCG space. We maintain our Hold recommendation on the stock with a revised price target of Rs5,730 (rolling it over to FY2017 earnings).
Torrent Pharmaceuticals
Recommendation: Buy
Price target: Rs1,083
Current market price: Rs942 Elder's brands aided growth in Q2; price target revised to Rs1,083; maintain Buy Key points - Torrent Pharmaceuticals (Torrent Pharma) reported a strong result in Q2FY2015 as reflected in a 28.5% jump in net sales to Rs1,203 crore, a 238BPS expansion in operating margin to 21.5% and a 75% jump in the reported net profit to Rs198 crore.
- The net sales was boosted by incremental revenues from the newly acquired branded business of Elder Pharmaceuticals (contributed near Rs95 crore of revenue in Q2FY2015) and stronger traction in Brazilian (up 28% YoY) and the US business (up 45% YoY). Excluding the newly acquired business, the growth from base business stood at 15.5%.
- However, excluding the impact of (a) forex gains (b) one-offs related to shelf stock adjustment (c) employees social security related spend in Q2FY2015 and (d) other operating income on account of licensing income from CRAMS contracts in Q2FY2014, the adjusted net profit grew by 52% during the quarter.
- Taking cues from the H1FY2015 results and interaction with the management, we have fine-tuned our estimates for FY2015 and FY2016. We also introduce estimates for FY2017 and roll-over our valuation to earnings of FY2017 to set a new price target of Rs1,083 (16x FY2017E EPS). We maintain Buy recommendation on the stock.
Sun TV Network
Recommendation: Hold
Price target: Rs425
Current market price: Rs325 Weak quarter, maintain Hold Key points - For Q2FY2015, Sun TV Network (Sun TV)'s revenues grew by 9.2% YoY to Rs509.3 crore. Advertisement revenues were up by 11.4% YoY to Rs260 crore, while the total subscriptions revenues grew by 12.2% YoY to Rs213 crore. EBITDA margins improved by 537BPS YoY to 77.8%, however EBIT margins were down by 575BPS YoY to 41.4% attributed to a steep increase in the amortisation cost to Rs165 crore, up by 74% YoY. The net income excluding for EO in Q2FY14 was up by 3.8% YoY to Rs154.8 crore.
- Given the delay in the implementation of DAS regime (extended by one year) and gradual improvement in the advertisement spends, the earnings numbers of Sun TV is expected to remain soft over the next two years. We expect a CAGR of 11% over FY2014-16E. We have marginally tweaked our earnings estimates to factors; 1) softness in subscriptions revenues; will see material improvement only on implementation of Phase III and IV digitalisation 2) higher amortisation cost 3) and positive side, significant improvement in earnings of radio business subsidiaries.
- In the last three months, stock has corrected close to 24% owing to CBI case on the promoters and weak earnings, however we believe at 14x FY16E (45% discount to ZEEL) and strong cash and cash equivalents of Rs1,018 crore (strong cash addition in the last two quarters), we believe most of the negative has been priced in the stock. The material outperformance may not be there in the near term owing to the absence of strong earnings and overhang of CBI case on the promoters. Thus, we maintain our Hold rating on the stock with a price target of Rs425.
The Ramco Cements
Recommendation: Buy
Price target: Rs420
Current market price: Rs355 Strong operating performance boosts earnings; price target revised to Rs420 Key points - The Ramco Cements' earnings grew by 4.9x led by an improvement in realisation (up 14% YoY), muted growth in the cost of production (up 5.8% YoY) and lower depreciation (down 19% YoY). However, the company has witnessed a decline in volume (down 11.7% YoY). Consequently, EBITDA per tonne improved to Rs777 per tonne (up 87%YoY).
- Although tough demand environment persists in southern region, price hikes taken by regional cement players have helped the company in expanding its operating margins. We believe the southern region may remain under pressure with respect to its demand, although the company can reap benefit of operating leverage with an improvement in realisation.
- We have revised our estimates upwards for FY2015 to factor in improvement in margins backed by better realisation for FY2015 considering the price hikes taken by cement players during H1FY2015.
- We maintain Buy rating on the stock and reiterate our preference for The Ramco Cements as preferred pick in the southern region (due to a relatively better balance sheet, quality of management and valuations). We have revised our price target to Rs420.
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