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| Summary of Contents | SECTOR UPDATE Q1FY2015 Banking earnings preview Key points - Given that the first quarter of a fiscal is usually a slack period, the earnings growth of our coverage universe is likely to remain muted (at 1.5% on an aggregate basis) in Q1FY2015, though it might be slightly better on a Q-o-Q basis (up 2.2%). A slower credit offtake, lower treasury gains (since the bond yields had declined significantly in Q1FY2014) and higher provisioning during the quarter could affect the earnings of the PSBs.
- The operating performance is expected to remain stable as the lending rates remained largely at Q4FY2014 levels during the quarter. On asset quality front, though the stress has come off in the past two quarters, but it may continue for another two to three quarters unless helped by a pick-up in economic growth.
- From the results perspective, the private banks are likely to deliver better numbers though the PSBs (like State Bank of India) may see an improvement at the operating profit levels. Within our coverage universe, we are positive on banks that are fundamentally sound and are likely to benefit from a revival in the economy (ICICI Bank, State Bank of India, Bank of Baroda). We also prefer stocks like Federal Bank (which is experiencing traction in its earnings and easing of NPA pressures) and NBFCs like LIC Housing Finance.
Q1FY2015 Capital Goods & Engineering earnings preview Key points - Aggregate performance largely unchanged but sentiment improved dramatically: In Q1FY2015 the aggregate performance of the capital goods companies under our coverage is not likely to be materially different than that seen in the previous quarters. However, the sentiment has improved dramatically, after the strong mandate in the general election which is reflected in the price of most stocks. Having said that, we believe signs of improvement in both order inflow and earnings will start reflecting from Q3FY2015 only. We expect the book/bill ratio of our coverage companies (currently at 2.2x) to pick up in future.
- Select companies continued to show improvement: The aggregate earnings growth is expected to be dented by a weaker performance from Bharat Heavy Electricals Ltd (BHEL) while the numbers of Larsen & Toubro (L&T) shall not be truly comparable YoY as its hydrocarbon business was hived off in the last year. Adjusted earnings of L&T should be healthy. On the other hand, Crompton Greaves Ltd (CGL), Thermax and Kalpataru Power Transmission Ltd (KPTL) are expected to exhibit moderate mid-single-digit earnings growth. Due to a lower loss in the engineering & projects segment, we expect a hefty rise in the earnings of Bajaj Electricals. V-Guard Industries (V-Guard) and Finolex Cables Ltd (FCL) are expected to report a healthy earnings growth.
- Amidst a wave of re-ratings; awaiting policy action led earnings improvement: Expectations of an economic revival led by a boost to the investment cycle are in the air. We believe the optimism has largely taken the shape of valuation expansion in most stocks recently. However, the market will wait for clarity on constructive policies and signs of earnings improvement for the next leg of re-rating. Within our coverage universe, we prefer L&T, CGL, V-Guard, FCL and KPTL.
VIEWPOINT Zee Learn
Current market price: Rs36
View: Positive All set for a turn-around Key points - In a recent interaction with analysts, Zee Learn Ltd (ZLL)'s management discussed the business potential of the Indian education sector and also chalked out the current position of ZLL in the sector and its future outlook. Going forward, we see a strong potential in ZLL's business and the financial outlook for the business appears positive for the next three years.
- The management remains confident of the company achieving a turn-around (PAT positive) in FY2015 (it already turned EBITDA positive in FY2014) and delivering a significant growth in FY2016 and FY2017. The turn-around would be driven by four factors: (1) its investment in pre-school segment is reaping benefits (accounting for 70% of its total revenues, current margin at 26%, expected to improve to 40% in next five years); (2) a significant number of K-12 school properties are maturing (accounting for 18% of revenues, margin at 9%, expected to touch 23-25% in the next five years); (3) cost rationalisation in the loss-making vocational training segment (ZICA and ZIMA) as well as lower emphasis on Brain Cafe (a strategic joint venture with Gakken Education Co.) will see the minimisation of the losses in FY2016 and FY2017; (4) no significant capital expenditure requirement and it will continue to follow the asset light model in the pre-school and K-12 segments.
- Sensing a turn-around in the financials and a strong business opportunity in the education sector, the ZLL stock has already appreciated by close to 50% in the last three months. However, we believe the journey towards a better tomorrow has started and the ZLL stock has significant scope for appreciation in the next few years. As per our quick and conservative estimates, ZLL's operating profit could multiply by 8x in the next three years. Consequently, we have a positive view on the stock and expect a 20-25% appreciation in the next three to six months. ZLL could turn out to be a potential multi-bagger over the next three years.
| | 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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