| Summary of Contents STOCK IDEA PTC India Financial Services
Recommendation: Buy
Price target: Rs38
Current market price: Rs27 Power play Key points - Robust growth in loans led by renewable energy segment: Given its strong parentage (PTC India) and domain knowledge of the power sector, PTC India Financial Services (PFS) is among the specialised lenders in the energy value chain. Going ahead, an improving scenario for the power sector and an outstanding sanction of Rs5,300 crore will drive the growth in the advances (45% CAGR over FY2014-16). Expansion in the other areas within the energy value chain, viz development of coal mines, railway sidings, power transmission etc, shall boost the growth momentum.
- Asset quality-the best in class: PFS has a fairly diversified loan book with the renewable energy segment constituting about 35% followed by the thermal segment. The renewable sector projects have a lower gestation period, do not face risk of fuel and environmental clearances, and receive regulatory and fiscal support. As of FY2014, PFS' asset quality is robust (GNPA of 0.09% and nil net NPA) and we expect the quality to sustain going ahead.
- Moderation in funding costs and gains on equity investments to boost profitability: PFS has been able to earn healthy spreads due to a competitive cost of funds. This, in turn, has helped it to maintain superior return ratios. Going ahead, the cost of borrowing may moderate led by borrowings from bonds and ECBs. The company also plans to exit one of its equity investments in FY2015 which will boost the profit (it exited three to four investments in the past with an average return of 25%).
- Initiate coverage with price target of Rs38: With close to doubling of its advances book over the next two years, we expect PFS' earnings to grow at 44% CAGR over FY2014-16 (adjusting for a one-time gain of Rs82 crore in FY2014) and return ratios to improve. The company is well capitalised (CAR of 25%) to pursue a strong growth. At the current market price, the stock is trading at 0.9x FY2016E BV, which is a significant discount to the other IFCs despite the company's superior asset quality and earnings growth outlook. We foresee a genuine case for expansion of PFS' valuation multiple. We, therefore, initiate coverage on the stock with a Buy rating and a price target of Rs38 (1.25x FY2016E BV).
- Key risks: Delay in power sector reforms and tightening of monetary policy by the RBI.
STOCK UPDATE Max India
Recommendation: Buy
Price target: Rs296
Current market price: Rs243 Strong performance by life insurance business Key points - Max India's operating revenues grew at a healthy rate of 18.7% YoY mainly contributed by the life insurance (up 17.0% YoY) and the healthcare (up 19.7% YoY) segment. The profit before tax grew at a strong 121% YoY again led by an increase in the profit from the life insurance business and a better EBITDA performance of the healthcare business.
- Max Life Insurance's APE grew by a strong 21% YoY vs a 3% decline shown by the other private players which has strengthened its position among the top 4 players. The other operational parameters like conservation ratio and expense ratio improved and remained the best among the non-bank insurers.
- We are positive on Max India due to its strong positioning in the insurance business (Max Life) and a robust growth in the healthcare segment (Max Healthcare). Also, the worst seems to be over in the insurance segment and an improved performance from the other business should drive the stock's valuation. The stock is trading at valuation of ~1.4x FY2015E embedded value, which is reasonable. We maintain our Buy rating on it with a price target of Rs296.
Key risk
The DTC bill proposes high tax rates (though the same is likely to be reviewed by the new government); if implemented it may affect the profitability of the insurance business. Bharat Heavy Electricals
Recommendation: Hold
Price target: Rs270
Current market price: Rs243 Retain Hold; price target revised to Rs270 Key points - The Q4FY2014 results of Bharat Heavy Electricals Ltd (BHEL) were weak as the company is experiencing a tough demand environment and continued negative operating leverage. This was expected by the Street but on the positive side, BHEL managed its GPM well and its employee cost (its major fixed cost) dropped due to a net decline in the head counts. The PAT declined by 43% YoY in Q4FY2014.
- During the post-results conference call, the management hinted at an opportunity of around 15-16GW, which could translate into orders in FY2015, and BHEL expects to have a lion's share. Out of the total order book of roughly Rs110,000 crore in hand around Rs14,000 crore of orders are moving at a slow pace. While the outlook for the power sector remains challenging, the management sees opportunities in the transportation and solar businesses in the coming days, considering the development plans of the new government.
- The pain from negative operating leverage remained in FY2014; it is expected to remain in FY2015 too due to stagnation in the power sector's capex cycle in the past. However, with the winds of positive developments in the political system, we expect policy and reform driven actions in the days ahead which could benefit BHEL significantly. Therefore, we have fine-tuned our estimates and continue to recommend investors to Hold the stock with a revised price target of Rs270, based on 12x its FY16E EBITDA.
Cipla
Recommendation: Buy
Price target: Rs470
Current market price: Rs373 Operating performance weakens in Q4; growth prospects remain strong Key points - Cipla reported a 2.7% decline in the adjusted net profit in Q4FY2014 despite a 27% rise in the net sales and a sharp jump in the other operating income. The fall in the profit can mainly be attributed to a high base effect (caused by exclusive supply of escitalopram API to Teva) and an unfavourable product mix (a higher proportion of low-margin ARV business) affecting the OPM during the quarter. The net sales grew by 27.4% to Rs2429.3 crore during the quarter though.
- The management has indicated a revenue growth in mid teens and an OPM of nearly 21% for FY2015. The growth is likely to be driven by new product launches in the USA and Europe, and focus on the branded formulation business in the emerging markets.
- We have fine-tuned our estimates but maintain a price target of Rs470 (which implies 19x FY2016E EPS).
Bajaj Electricals
Recommendation: Hold
Price target: Rs350
Current market price: Rs320 Negative margin surprise; retain Hold with revised price target of Rs350 Key points - For Q4FY2014 Bajaj Electricals Ltd (BEL) reported revenues in line with our estimate but a lower margin which surprised negatively. The margin contracted on account of higher selling and distribution cost especially to boost business in the consumer durables and lighting segments. The PBIT margin of both the segments slipped to 3.0-3.5% in Q4, a significant contraction over the recent quarters from around 8-9% in the consumer durables and 6-7% in the lighting segment. The loss in the project business continued as expected but what is important is that the loss declined over the same quarter of the last year. Consequently, BEL reported a loss of Rs11 crore in Q4FY2014 against a profit of Rs1 crore in Q4FY2013.
- In the post-result conference call, the management shared that the higher expenses for the consumer durables and lighting businesses were largely one-off in nature and that the PBIT margin for the consumer durables and lighting businesses would improve to 9% and 6% in FY2015 from 7.7% and 5.1% in FY2014 respectively. Further, the management retained its previous guidance that the project business would turn around in FY2015.
- We have fine-tuned our estimates mainly in the consumer durables and lighting segments, given the margin surprises. However, the key trigger for a potential turnaround of the loss-making project business in FY2015 is still intact. We retain our Hold rating with a revised price target of Rs350 (18x FY2016E earnings).
Speciality Restaurants
Recommendation: Hold
Price target: Rs160
Current market price: Rs150 Operating efficiencies to drive profitability in FY2015, maintain Hold Key points - In Q4FY2014 Speciality Restaurants Ltd (SRL)'s revenues grew by 15.5% YoY to Rs67.5 crore, largely driven by new restaurant addition. Inflation in raw material prices caused the gross profit margin to contract by 338BPS YoY to 70.3% and the OPM fell by 453BPS YoY to 9.9%.
- The company had taken an average hike of 5% in its menu prices at the end of Q3FY2014. It is also focusing on reducing the import of inputs to 15-20% of the overall raw material cost from 30-40% earlier. This along with an increase in the footfalls and improving operating efficiencies in the existing restaurants would help the company to post a better OPM in the coming years. The management also hinted that SRL is focusing on improving the operating efficiencies of the existing restaurants to achieve better profitability in the coming years.
- We have broadly maintained our earnings estimates for FY2015 and FY2016. The long-term secular growth prospects for the discretionary segments are intact. SRL with strong restaurant brands under its belt is better placed in the fine-dinning space and will be a key beneficiary of an improving discretionary environment in India. The company's stock has seen a strong run-up (of about 30%) in the past four months and does not provide much upside from the current level. We maintain our Hold recommendation on the stock with an unchanged price target of Rs160.
- Risk: A prolonged economic slowdown would continue to dampen consumer sentiment and affect SRL's earnings growth.
Pratibha Industries
Recommendation: Reduce
Price target: Rs33
Current market price: Rs39 Rising working capital cycle and debt concerns remain; maintain Reduce Key points - In Q4FY2014 Pratibha Industries Ltd (PIL)'s revenues were led by higher execution of projects during the quarter and supported by better margins. However, high interest and depreciation charges almost equal to the EBITDA led to a 67% decline in the earnings for the quarter.
- On the positive side, PIL has reported a healthy inflow of new orders to tune of Rs3,332 crore. The company's current order book stands at about Rs8,000 crore (3.7x its FY2014 revenues) and provides comfort with regard project execution over the next two years. But concerns over the working capital cycle (inventory days over 190 days, debtor days over 80 days) remain a cause for concern for us.
- We are worried about the elongated working capital cycle and the alarming rise in the debt/equity ratio. Though we believe the revenues and operating profit will grow at a 15% CAGR over FY2014-16, but the earnings are likely to depend on whether the company manages to reduce the interest outgo. Consequently, we maintain our Reduce rating on the stock with a revised price target of Rs33.
Dishman Pharmaceuticals & Chemicals
Recommendation: Buy
Price target: Rs112
Current market price: Rs89 Business improves sequentially; maintain Buy Key points - Dishman Pharma (Dishman) reported a 16% rise in net sales to Rs401 crore in Q4FY2014. However, an unfavourable product mix caused a decline of 653BPS in the OPM while a steep hike in the effective tax rate further weakened the profit. The company reported a 52.6% decline in the adjusted net profit. However, sequentially the company reported a 27.8% jump in the net sales and a 4.3% rise in the net profit.
- The revenue growth during the quarter was mainly led by a 36% jump in the revenue from the Swiss subsidiary, Carbogen Amcis, and a 24% growth in the vitamin D business from the Netherlands based subsidiary.
- While the annual performance meets the management's guidance for FY2014, the management indicates a healthy product pipeline and order book at Carbogen Amcis which will drive the growth going forward.
- We maintain our price target of Rs112 (which implies 6x FY2015E EPS) and Buy rating on the stock.
VIEWPOINT Hero MotoCorp
Current market price: Rs2,344
View: Positive Results in line with estimates; positive outlook on volumes and margins Key points - Two-wheeler market leader, Hero MotoCorp Ltd (HMCL) reported a 6% Y-o-Y revenue growth in Q4FY2014 on the back of a 4.1% increase in volumes. The OPM expanded by 67BPS sequentially as the raw material cost as a percentage of sales declined. While the operating profit was higher compared with the last year, a higher tax rate due to lower income tax benefits for the Haridwar facility led to a 3.4% Y-o-Y decline in the PAT to Rs554 crore.
- The management has guided for a 10-11% industry growth for the two-wheeler industry on the back of an expected improvement in the economy in the second half of the fiscal. Additionally, a strong presence in the fast growing scooter segment and reach in the rural markets will boost volumes. The margin transformation project undertaken by HMCL has begun to deliver returns and its additional impact on the profitability margin would be visible in FY2015-16.
- The end of fixed royalty payments to Honda Motor Co., Japan in Q1FY2015 will provide a big boost to the earnings in FY2015. We expect the company to post earnings CAGR of 27.6% over FY2014-16. Valuing the stock at 15.5x FY2016E earnings of Rs172, we expect a 14% upside from the current levels and maintain our positive view on the stock.
| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
No comments:
Post a Comment