Investor's Eye
[November 07, 2013] | | |
| Summary of Contents
STOCK UPDATE GlaxoSmithKline Consumer Healthcare
Recommendation: Hold
Price target: Rs4,886
Current market price: Rs4,677 Price target revised to Rs4,886 Result highlights -
Operating performance largely in line with expectations, bottom line grows in mid teens on higher non-core income: GlaxoSmithKline Consumer Health (GSK Consumer) posted a decent performance in Q3CY2013 with the revenues growing by 17.4% and the profit after tax (PAT) growing by 14% year on year (YoY; largely driven by higher business auxiliary income and other income during the quarter). The highlight of the quarter was a 12% growth YoY in the company's sales volume (domestic volume grew by 10%) which was ahead of our as well as the Street's expectations for the quarter. The same was also ahead of the 7% volume growth in Q2CY2013. Horlicks and Boost (the company's pillar brands) registered a value growth of 16% YoY (a volume growth of 9.7% YoY) and 19% YoY (volume growth of 11.6% YoY) respectively in Q3CY2013. The packaged foods segment delivered a stellar performance with a 24% year-on-year (Y-o-Y) value growth while Horlicks Oats improved its ranking to two from three earlier in the Indian market. The exports grew strong by 50% YoY (on back of strong demand from Middle East), while canteen stores department (CSD)'s sales grew by 30% YoY on account of a low base of Q3CY2012. The strategic sourcing of key raw materials and renewed focus on cost control helped the company to maintain the gross profit margin (GPM) at 62.9% despite an increase in the prices of the key agri-inputs. -
Performance snapshot: GSK Consumer's Q3CY2013 net sales grew by 17.4% YoY to Rs971.9 crore (which is largely in line with our expectation of Rs958.5 crore). The growth was driven by a mix of volume and value growth, with the volume growth standing at around 12% YoY during the quarter (the volume growth stood at 7% in Q2CY2013). The core malted food drinks (MFD) segment grew by about 16% while the packaged food segment (largely biscuits) increased by about 24% YoY during the quarter. The GPM stood flat at 62.9% in Q3CY2013. The operating profit margin (OPM; excluding the business auxiliary income) declined by 155 basis points to 15.4% in Q3CY2013. The OPM declined largely due to a spurt of 170 basis points YoY in the other expenditure (as a percentage of sales). The advertisement spending as a percentage of sales stood almost flat (on a Y-o-Y basis) at 16.8% during the quarter. Hence, the operating profit grew by just 6.7% YoY to Rs149.9 crore. However, a strong growth in the business auxiliary income (of around 39.7% YoY) and a high other income resulted in a 14.3% Y-o-Y growth in the reported PAT to Rs146.9 crore (which is in line with our expectation of Rs142.3 crore). -
Volume growth to sustain in high single digits, no spike in input prices: The management has guided that the volume growth in the MFD segment would sustain in the range of 7-8% in the coming years. The enhanced distribution reach (especially in the north and the west), a strong growth in rural India (which contributes around 26% to domestic MFD sales), a sharp increase in the low pack units (LPUs) sales and a healthy growth in some of the key variants of Horlicks would help the revenues to grow at a good rate (in mid high teens) in the coming quarters. The management does not foresee any significant increase in the prices of some of the key inputs. Hence, we don't expect the GPM to come under stress in the coming quarters. Overall, we expect GSK Consumer's top line and bottom line to grow at compounded annual growth rate (CAGR) of 20% each over the next two years. -
Maintained Hold due to premium valuation: The company has changed its financial year end from December 2013 to March 2014. Accordingly, we have incorporated 15 months' numbers for FY2014 and introduced our earnings estimate for FY2015 in this note. We now value the stock on FY2015 earnings estimate. As a result, our price target has also been revised to Rs4,886 (valued at 32x FY2015E EPS of Rs152.7). Due to limited upside from the current level we maintain our Hold recommendation on the stock. At the current market price the stock trades 30.6x its FY2015E EPS of Rs 152.7. Thermax
Recommendation: Reduce
Price target: Rs527
Current market price: Rs616 Caution in the air; retain Reduce on rich valuation Result highlights -
Operating performance remained soft; one-off tax provision pushed net down: During Q2FY2014, the sales of Thermax declined by 13% year on year (YoY) to Rs1,043 crore due to slower execution of orders. The sales were 7% lower than our estimate. The sales of the energy segment, which contributes 75% of the total revenues, recorded a decline of 10% YoY. Despite lower sales, the company managed well at the gross profit margin (GPM) level but fixed costs put pressure on the operating profit margin (OPM). The OPM of 9% reported for Q2FY2014 is 123 basis points lower YoY and lower than our estimate of 9.5%. There was a foreign exchange (forex) loss of around Rs10 crore at the profit before tax (PBT) level in Q2FY2014 and the company provided for a one-time tax liability of Rs29 crore as interpretations by the company and the tax department differ in some prior-period items. If we adjust these, the adjusted net profit shows a decline of 31% and turns out to be 8% lower than our estimate. -
Guidance echoes caution; we revise sales estimates downwards: Though the order backlog position till H1FY2014 looks better compared with the last year, but one should take note of the fact that one bulky order won recently by the company has a longer execution period (of 25 months) compared with the average execution period. Moreover, the order inflow declined over the last year. During H1FY2014, the sales declined by 12% and the management expressed its concern and guided for a year-on-year (Y-o-Y) decline in the top line in FY2014. Against this backdrop, we have revised down our sales estimates for FY2014 and FY2015 by 10-11% each. Additionally, we have learned that pricing pressure exists in the industry and some of the company's existing contracts are also witnessing a downward revision in price. Consequently, we have revised down our earnings estimates for FY2014 and FY2015 by around 8-10% each. -
View: caution in the air; retain Reduce on rich valuation: Despite challenges, the ability of the company to contain its variable costs to a large extent and maintain its target of notching an OPM of 10% is commendable. A strong balance sheet, prudent working capital management and healthy returns ratios remain the major positives for the company. However, we remain cautious about the stock due to its rich valuation (it is trading at 25x FY2014E earnings and 22x FY2015E earnings), especially when the earnings are likely to decline by 15% in FY2014 and remain flat at best over a two-year period till FY2015. Hence, we retain our Reduce rating on the stock with a price target of Rs527. Ashok Leyland
Recommendation: Hold
Price target: Rs18
Current market price: Rs17 Recovery still not in sight; maintain Hold Key points -
Core business posts a higher than expected loss; exceptional gains help in containing the overall loss: Ashok Leyland Ltd (ALL)'s Q2FY2014 results were below our expectations as a weaker operating performance led to a higher than expected loss during the quarter. The numbers were, however, in line with the Street's estimates. While the revenues at Rs2,549.6 crore were in line with our estimates, the operating profit margin (OPM) at 2.2% was below our estimate of 4.5%. Continued higher discounting in the medium and heavy commercial vehicle (MHCV) segment coupled with a higher other expenditure (due to operating deleverage) affected the margin. A higher interest cost further dragged the profit. The adjusted loss of Rs68.8 crore (against a loss of Rs135.2 crore in Q1FY2014 and a profit of Rs142.6 crore in Q2FY2013) was higher than our estimate of a loss of Rs58.8 crore. During the quarter, ALL reported an exceptional gain of Rs43.8 crore on the sale of long-term investments, thereby reporting a reduced loss of Rs25.1 crore for the quarter. -
MHCV sales to decline in FY2014 on continued macro-economic challenges: The sales of MHCVs are expected to witness a drop in volumes in FY2014 on account of a continued subdued economic scenario and an increase in diesel prices which is putting pressure on fleet operators' profitability. We expect the volumes to recover only in FY2015. -
Losses to intensify in FY2014 on continued margin pressure: With subdued volumes and continued higher discounting, we expect the losses to intensify for ALL. We expect the margins to decline to 4% in FY2014 from 7% reported in FY2013. The losses in FY2014 are expected to intensify to Rs201 crore as against Rs58 crore estimated earlier. -
LCV growth to remain strong on new product launches: ALL recently launched Stile multi-purpose vehicle (MPV) in the light passenger vehicle segment. Further, ALL plans to launch Partner and the passenger variant of Dost which would boost volumes in the light commercial vehicle (LCV) space. -
Valuation: The MHCV volumes are expected to remain under pressure in H2FY2014. Further, higher discounting and operating deleverage would maintain pressure on the margin. Given the disappointing Q2FY2014 results and continued pressure on the margin, we expect the losses to intensify to Rs201 crore in FY2014 from Rs58 crore estimated earlier. However, we expect a recovery in the MHCV cycle in FY2015 and a margin uptick on the back of the company's cost-control initiatives. Further, the launch of new products would boost the volume in the LCV space. We have maintained our FY2015 earnings per share (EPS) estimate at Rs1.7. We also maintain our Hold recommendation on the stock with a price target of Rs18. India Cements
Recommendation: Hold
Price target: Rs65
Current market price: Rs53 Price target revised to Rs65 Result highlights -
Unfavourable demand environment affects revenues: In Q2FY2014 the net sales of India Cements declined by 3.3% year on year (YoY) to Rs1,086 crore. The quarter's revenues also include the revenues from the Indian Premier League (IPL) and shipping businesses. The revenues from the cement division declined by 8% YoY to Rs1,010.2 crore largely on account of a decline in the volume (down 2.8%) and a lower blended cement realisation (down 5%) during the quarter. The realisation declined on account of a sharp correction in cement prices in the southern market in July 2013 due to poor offtake of cement. However, the same has recovered since mid September on account of supply control which could benefit the company in the quarters ahead. -
Lower realisation along with higher other expenses dents margin: On the margin front, an 8% correction in the average cement realisation coupled with a 9% increase in the cost of production YoY to Rs3,928 per tonne resulted in a 651-basis-point contraction in the operating profit margin (OPM) to 11.7%. The other expenditure rose by 34.9% YoY on account of higher IPL expenses (Rs38 crore against Rs9 crore in Q2FY2013) and shipping expenses (Rs15 crore against Rs7 crore in Q2FY2013). The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne fell by 72.4% YoY to Rs212 per tonne in the quarter. Consequently, the operating profit of the company decreased by 37.8% YoY to Rs127.6 crore. -
Forex loss also affects profitability: The company posted a loss of Rs23 crore for the quarter which includes foreign exchange (forex) translation charges to the tune of Rs23.6 crore (against a forex gain of Rs10 crore during Q2FY2013). Adjusting for the same, the net profit stands at Rs1.1 crore (down 98.2% YoY), which is much lower than our as well as the Street's expectations. -
Hold maintained with revised price target of Rs65: We are downgrading our earnings estimates for FY2014 and FY2015 mainly to incorporate the impact of the sluggish demand environment in the southern market and the increased cost of production. Consequently, the revised earnings per share (EPS) estimates for FY2014 and FY2015 are now Rs3.7 and Rs6.9 respectively. Further, a likely increase in the supply from the upcoming capacity could put downward pressure on cement prices. Therefore, we have revised our price target downwards to Rs65 and maintained our Hold recommendation on the stock. At the current market price the stock trades at enterprise value (EV)/EBITDA of 4.8x FY2014E earnings and 4x FY2015E earnings respectively .
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Regards,
The Sharekhan Research Team | |
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