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STOCK UPDATE Godrej Consumer Products
Recommendation: Hold
Price target: Rs875
Current market price: Rs852 Q2FY2014 results: a first-cut analysis Result highlights -
Domestic business-strong growth momentum sustained in HI and hair colour segments: In Q2FY2014 the revenues of Godrej Consumer Products Ltd (GCPL)'s domestic branded business grew by 17% year on year (YoY) driven by a sustained strong growth in categories such as household insecticide (HI; revenues increased by 25%) and hair colour (revenues up by 24%), while the soap category grew in low single digits during the quarter. The company attributes the strong growth to market share gains and new launches gaining good acceptance in the domestic market. The soap segment registered a value growth of 3% (a volume growth of 4%), which, we believe, is ahead of the category growth. The operating profit margin (OPM) of the domestic business improved by about 98 basis points YoY to 18.7% largely on account of a 310-basis-point improvement in the gross profit margin (GPM) to 52.9%. Hence, the operating profit of the domestic business grew by 20% YoY to Rs193.6 crore. -
International business-margin remains under pressure: The revenues of GCPL's international business grew by 33% YoY to Rs941 crore in Q2FY2014. The revenue growth in constant-currency terms stood at 14% during the quarter. The Indonesian (Megasari) business' revenues grew by 14% YoY (excluding the food distribution business whose revenues grew by 17%) while the Latin American business registered an improved revenue growth of 23% YoY (on account of continuous marketing investments and new product launches). The African business grew by 53% YoY in Q2FY2014, as it continues to scale up as per plans. The European business' revenues doubled on a year-on-year (Y-o-Y) basis to Rs138.0 crore on account of a good performance by the organic business as well as the Soft & Gentle acquisition. The earnings before interest, depreciation, tax and amortisation (EBIDTA) margin of the international business fell by 110 basis points YoY to 11.3% largely on account of a lag in price hikes to offset a 33% fuel price hike and a 58% wage hike in Indonesia. -
Consolidated performance-revenues and PAT grew by over 20%: GCPL's (consolidated) revenues grew by 22.6% YoY to Rs1,961.7 crore, which is in line with our expectation of Rs1,944.3 crore for Q2FY2014. The strong growth was largely driven by an organic growth of close to 14% YoY and a strong revenue growth of 33% on the international front. The consolidated GPM improved by 184 basis points YoY to 53.7%. However, higher employee cost (upped by 51.7% YoY) and advertisement spending led to a flat OPM of 15.3% during the quarter. However, the same is higher than our expectation by around 100 basis points due to a lower than expected advertisement spending during the quarter. Hence, the consolidated operating profit grew by 20% YoY to Rs299.8 crore and the reported PAT grew by 22.4% YoY (after minority interest) to Rs195.0 crore (ahead of our expectation of Rs172.8 crore). -
Valuation and view: Against the backdrop of inflationary pressures and weak consumer sentiments GCPL managed to post a strong operating performance in Q2FY2014 in comparison with some of the other fast moving consumer goods companies. Innovations in the product portfolio and presence in the low-penetrated categories were some of the key drivers of the strong growth seen during the quarter. We will review our earnings estimates for the company and come out with a detailed note after the company's conference call tomorrow. At the current market price the stock trades 33.9x and 26.3x its FY2014E and FY2015E earnings respectively. Currently, we have a Hold recommendation on the stock. Divi's Laboratories
Recommendation: Buy
Price target: Rs1,265
Current market price: Rs1,102 Price target upgraded to Rs1,265 Result highlights -
Q2FY2014 performance stronger than expected: Riding on favourable currency movement and an uptick in the contract research and manufacturing services (CRAMS) business, Divi's Laboratories (Divi's) has reported a 19.7% year-on-year (Y-o-Y) rise in net revenues to Rs566 crore in Q2FY2014. Its operating profit jumped by 470 basis points YoY to 43.8% in the same period. The adjusted net profit expanded by 25.2% year on year (YoY) to Rs174 crore. The company provided Rs31.2 crore for foreign exchange (forex) gains during the quarter as compared with a forex loss of Rs20.8 crore in Q2FY2013. This resulted in the reported net profit jumping by 73.7% YoY to Rs204.9 crore. The adjusted net profit is 27% higher than our estimate of Rs136 crore, primarily due to a better than expected operating profit margin (OPM). -
Outlook remains strong-we fine-tune estimates and upgrade price target to Rs1,265: After witnessing a weak performance in the previous two quarters, the company seems to have bottomed out. Though the benefits arising out of the depreciation of the rupee against the major international currencies may not sustain, but we believe an improvement in the product mix (a higher proportion of revenues from the CRAMS segment) and the commercialisation of the additional production blocks (expected in FY2015) would help Divi's achieve a sustainable growth. Taking our cues from the H1FY2014 performance, we have revised our earnings estimates upwards by 7% and 2.8% for FY2014 and FY2015 respectively. Accordingly, our price target stands upgraded to Rs1,265, which implies 19x FY2015E earnings. We maintain our Buy rating on the stock. -
Growth picks up on higher utilisation of DSN SEZ; additional production blocks to supplement growth in FY2015: After witnessing a weak performance during the previous two quarters, the company recorded a 19.7% Y-o-Y growth in revenues to Rs566 crore in Q2FY2014. The growth was driven by higher capacity utilisation at the DSZ special economic zone (SEZ) facilities and the depreciation of the rupee against the major international currencies. The management expects the inspection of three additional blocks at DSN SEZ by the US Food and Drug Administration (USFDA) during Q4FY2014 which should open the door for approvals by the end of H2FY2015. The approvals for the additional production blocks, which have been pending for quite some time, would pave the way for the next spin of growth. Max India
Recommendation: Buy
Price target: Rs296
Current market price: Rs186 Strong performance in tough environment Result highlights -
In Q2FY2014 Max India's consolidated profit before tax (PBT) grew by 116.3% year on year (YoY) to Rs93 crore on account of a healthy growth in the operating revenues (up 11.8% YoY) and a strong performance at the earnings before interest, tax, depreciation and amortisation (EBITDA) level (up 52.0% YoY). From segmental perspective, Max Life Insurance (MLI) registered a healthy growth in the profits while EBITDA improved in healthcare business on increased occupancies. In view of strong performance Max India's board has approved an interim dividend of Rs1.8 per share. -
Life insurance-premium growth remains strong: MLI's APE saw a growth of 13.0% YoY compared with a 7% growth recorded by the other private insurance players in Q2FY2014. As a result, the gross written premium (GWP) grew by 7.8% YoY to Rs1,679 crore. The operating expense ratio also declined to 18.3% from 19.4% in Q2FY2013, contributing 19.3% year-on-year (Y-o-Y) growth to the shareholders' profit before tax (PBT; Rs136 crore). The conservation ratio improved to 79% from 77% in Q1FY2014. -
Healthcare business-a strong improvement in EBITDA: In Q2FY2014, Max Healthcare's revenues were up by 28.2% YoY to Rs351 crore due to an increase in the number of operational beds and a rise in the average occupancy. The EBITDA grew substantially to Rs31 crore as the EBITDA drag from the new hospitals declined significantly. Max Healthcare is implementing a decision to replace the low-margin institutional business with a retail business in key hospitals. -
Health insurance (Max Bupa): Max Bupa registered a GWP of Rs71 crore in Q2FY2014, which is a growth of 73% YoY. The conservation ratio improved to 83% from 80% in Q1FY2014. The company has tied up with Deutsche Bank for bank assurance and is looking forward to more such tie-ups to boost sales. -
Specialty films-profitability improves: Max Specialty Products' (MSP) revenues increased by 8.3% YoY while its PBT increased to Rs5.2 crore vs Rs1.1 crore in Q2FY2013. An increase in the prices contributed to the jump in the revenues and margins during the quarter. Valuations and outlook
MLI has grown its APE by 13% despite a challenging regulatory environment and the company expects to sustain the growth in FY2014.The new regulations will have an impact on its margin, but the effect will be partly offset by product diversification, cost rationalisation etc. In the healthcare business, the company has invested in expanding its facilities which will increase its profitability. The life insurance business is already profitable with a high solvency ratio and the company has a treasury corpus of Rs340 crore, which should be sufficient to fund the healthcare business, health insurance business and the other businesses. We maintain our sum-of-the-parts (SOTP)-based price target of Rs296 and Buy rating on the stock. Aurobindo Pharma
Recommendation: Buy
Price target: Rs314
Current market price: Rs268 Price target revised to Rs314 Result highlights -
Bumper Q2FY2014: Aurobindo Pharma (Aurobindo) reported a 27.6% year-on-year (Y-o-Y) rise in net sales to Rs1,914 crore in Q2FY2014 on the back of strong sales in the USA (up 72% year on year [YoY]) and healthy sales of active pharmaceutical ingredients (APIs) related to semi-synthetic penicillin (SSP) and anti-retroviral drugs (ARV), which grew by 32% YoY and 27% YoY respectively. Though a favourable currency did play a positive role, but the base business itself grew in the key markets like the USA, where the company witnessed expansion in market share of its key products. -
OPM zooms by 622 basis points YoY: The operating profit margin (OPM) surprised us positively with an expansion of 622 basis points YoY to 22.9% during the quarter. A favourable currency, an improved product mix and higher capacity utilisation at the facilities that started supplying to the US market in the last year are the key factors that drove the margin during the quarter. The management expects the OPM to sustain at 20% in FY2014. -
Adjusted net profit jumped by 189% YoY: The net profit excluding the foreign exchange (forex) loss rose by 189.4% YoY to Rs303 crore during the quarter which is significantly better than our estimate. However, including the forex of loss of Rs68.3 crore (verses a forex gain of Rs117.7 crore in Q2FY2013) the reported net profit showed an expandsion of 5.6% YoY to Rs235 crore. -
We revise earnings estimates and price target to Rs314; maintain Buy: The management is confident of achieving a revenue growth of over 20% in the base business while the EBIDTA margin is likely to improve to 20% in FY2014 from 15% in FY2013 on the back of new product launches, higher capacity utilisation and least priority accorded to low-margin segments. Getting our cues from the H1FY2014 results and our interaction with the management, we revise our earnings estimates up by 28% and 18% for FY2014 and FY2015 respectively. Accordingly, our price target stands revised up by 18% to Rs314 (10x earnings per share [EPS] for FY2015). We maintain our Buy rating on the stock. Indian Hotels Company
Recommendation: Hold
Price target: Rs61
Current market price: Rs49 Better operating performance, exceptional impairment loss marred bottom line Result highlights -
Operating performance better than expected; impairment loss of Rs287 crore affected reported PAT: Indian Hotels Company Ltd (IHCL)'s Q2FY2014 operating performance was better than expected with revenues and operating profit staying ahead of our expectations. However, higher interest expenses and a lower other income resulted in an adjusted loss of Rs6.5 crore against our expectation of Rs3.5 crore for the quarter. The company undertook stringent cost-cutting initiatives during the quarter to improve its operating profit margin (OPM; saw an improvement of 119 basis points YoY in the OPM to 6.5%). Going ahead, the focus would be on improving its sales. During the quarter the company recognised an impairment loss of Rs287 crore at the stand-alone level (and of Rs365 crore at the consolidated level) with regard the diminishing value of its investment in Oriental Express Hotels Ltd (OEH; no more a strategic investment). -
Revenues grew in low single digits: In Q2FY2014, IHCL's stand-alone revenues grew by 3.1% YoY to Rs390.9 crore (slightly better than our expectation of Rs372.7 crore) in Q2FY2014. The second quarter of every fiscal is seasonally one of the weakest quarters for the hotel industry in India. This along with a bleak global macro-economic environment and an increase in room supply in the domestic market affected the occupancies and room rentals in the some of the key cities in India in Q2FY2014. Hence, the room sales stood almost flat during the quarter. We believe the low single-digit growth in the revenues was driven by higher sales of the foods and beverages segment during the quarter. -
OPM improved YoY: Several cost-saving initiatives undertaken at various levels helped the OPM to improve by 119 basis points to 6.5%. One of the key cost elements, the employee cost (accounts for about 30% of the total operating cost) was down by close to 10% on account of various interventions adopted by the company. Hence, the operating profit grew by 26% YoY to Rs78.8 crore. A lower other income and a higher interest cost led to an adjusted loss of Rs6.5 crore as against our expectation of Rs3.5 crore for the quarter. -
Recognised impairment loss of Rs287 crore on diminishing value of investment in OEH: IHCL had bought a 12% stake in OEH in 2007 to pursue opportunities in the overseas markets. However, in view of the current economic environment along with the other opportunities and priorities for the company, the board of IHCL decided not to get into any deal or transaction with the management of OEH at its board meeting on November 8, 2013. Accordingly, IHCL has considered it prudent to recognise a further diminution in its investment in OEH (down by about Rs287 crore at the stand-alone level and by Rs365 crore at the consolidated level). The company recognised an impairment loss of Rs305 crore at the stand-alone level on the investment in OEH in Q4FY2013. In view of the rupee's depreciation and a better financial performance of OEH in the recent quarters, the management of IHCL has indicated that the value of investment in OEH is unlikely to decrease significantly in the near future (the average cost of investment in OEH was Rs47 per dollar). Every one dollar increase in the share price of OEH provides a benefit of about Rs35 crore to IHCL. -
International properties' business fundamentals improve: The Pierre, New York saw an improvement of around 600 basis points in the occupancy ratio to 77% in H1FY2014. Also, Taj Boston saw an improvement in the occupancy rate to 81% in H1FY2014. Maintain Hold with price target of Rs61
The operating performance of IHCL in the first half of FY2014 can be reckoned as better against the backdrop of the current bleak global macro environment. IHCL's focus area would be improving sales of most of its key properties in the coming quarters. Also, the focus would be on improving the balance sheet by improving cash flows and reducing the debt on the consolidated books. We believe with a strong room inventory of above 15,000 rooms IHCL would be one of the key beneficiaries of a reversal in the business cycle. The key breather for the company is some of its key international properties have started witnessing an improvement in the key business parameters. The sustenance of the same would improve the consolidated financial performance of IHCL in the near to medium term. We have broadly maintained our earnings estimates as the second half of a fiscal is strong for the business and would give us a clear indication of the business performance of the company in FY2014. At the current market price the stock is trading at 39.2x its FY2015E consolidated EPS of Rs1.2 and enterprise value/room of Rs0.5 crore. Crompton Greaves
Recommendation: Hold
Price target: Rs110
Current market price: Rs105 Price target revised to Rs110 Result highlights -
Reported numbers largely in line with estimates; gradual recovery in international operation continues: For Q2FY2014 Crompton Greaves Ltd (CGL) reported slightly better numbers at the operating level compared with our estimate, with a tad higher margin of 5% (against our estimate of 4.7%). Though a higher other income supported the operating performance, but due to higher than estimated depreciation (higher depreciation includes the currency impact of around Rs9 crore) and tax outgo, the consolidated profit after tax (PAT) was 7% lower than our estimate. The stand-alone operating profit was in line with our estimate but the international subsidiaries reported Rs2 crore of operating profit against our estimate of a Rs7-crore loss. Consequently, the consolidated operating profit was 3% better than our estimate. We would like to highlight that the international subsidiaries reported a profit at the operating level after four quarters, as the operation in Hungary is stable now; the same has been a major drag on the performance of the company in the past. However, the recovery in the subsidiaries is likely to be slower than expected by the Street as the Canada- and US-based subsidiaries are still in red and could take some time to turn black. -
Power and consumer segments driving profitability; industrial segment remains laggard: At the consolidated level, the profit before interest and tax (PBIT) margin of the power system is showing signs of a gradual improvement reflecting the recovery in the international operations (post-restructuring of the European subsidiary). The PBIT margin of the segment was 2% in Q2FY2014 against negative or around 1% in the previous four to five quarters. Further, the consumer products business' margin remained at a healthy level of 12% in Q2FY2014 which is also higher by 213 basis points year on year (YoY). The consumer segment's PBIT contribution was around 50% while the power system contributed around 26% to the total revenues in Q2FY2014. However, the industrial segment's contribution slipped to around 22%, led by margin contraction. The PBIT margin of the industrial segment slipped to 7.6% (a 695-basis-point contraction YoY and 89-basis-point contraction sequentially). The PBIT margin reported by the industrial segment was at a multi-year low and reflected a weak demand environment in the domestic market. -
View-turnaround of subsidiaries at net level remains critical; retain Hold: The management retained its top line guidance of a double-digit growth in FY2014 and sounded optimistic regarding an improving market condition in Europe leading to an improvement in the profitability of the international subsidiaries by the end of the year. In our view, though the international subsidiaries moving to the profit zone at the operating level after four quarters is a positive signal, but the likely continuation of the losses of the US and Canadian subsidiaries remains a concern among investors. We believe the subsidiaries could take longer than the Street's expectation to turn positive at net level. Further, the stock has moved up by 15% in the last one month and by 21% in the last three months. Currently it is trading at 22x FY2014E and 12x its FY2015E earnings, pricing in the positive developments. Thus, it is advisable to take advantage of the recent run-up in the stock price and book partial profits. However, we retain our Hold rating (with a price target of Rs110) purely based on the potential upside from the roll-over of the valuation to the FY2016 earnings estimate over the next few months.
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