| Summary of Contents STOCK UPDATE PTC India
Recommendation: Buy
Price target: Rs107
Current market price: Rs84 Strong volume growth drives earnings growth; retain Buy rating Key points - The revenues of PTC India surged by 33% YoY in Q1FY2015, backed by a 22% growth in the volume and a 9% growth in the realisation. The blended margin was around 6.6 paise/unit of power traded. Apart from the benefit of the surge in volume, lower other expenses helped the operating profit to grow by 69% and resulted in a 48% jump in the net profit to Rs43.4 crore despite a higher effective tax rate in the quarter.
- During the post-results conference call, the management of PTC India reiterated its confidence of touching trading volume of 40BU for FY2015 (our estimate was about 39.3BU). Going forward, it sees opportunities to expand the volume in cross-border trades (in Bangladesh and Bhutan) while domestically the retail (direct to business) segment has huge growth potential. The management sees volume potential of 10BU alone from the direct to business segment over the next three to four years. Further, as per schedule around 8,000MW of capacities are expected to come on stream in the next three years and the company has long-term contracts (with higher margins) to sell power produced from these plants.
- The improving outlook in volume and earnings growth over the next couple of years and the receding concerns related to receivables (delayed payments) from the SEBs are the key re-rating factors for the stock. Further, its financial subsidiary, PTC India Financial Services (PFS), is also performing well. PFS expects to expand its loan book to about Rs8,000 crore in the next 12-15 months from Rs5,000 crore in Q1FY2015. Moreover, with gross NPA of 0.09% and nil net NPA, the asset quality of PFS remains among the best in the system. In view of this, we retain our Buy recommendation on PTC India with a price target of Rs107 (SOTP based). PTC India is among our preferred picks to play the policy reforms in the power sector.
Aditya Birla Nuvo
Recommendation: Buy
Price target: Rs1,550
Current market price: Rs1,430 Good operational performance; maintain Buy Key points - Aditya Birla Nuvo Ltd (ABNL)'s Q1FY2015 results are not directly comparable on a Y-o-Y basis, as the last year's performance included the ITES business, which was sold off in May this year. Excluding the impact of the sale and on a like-to-like basis, the overall performance was good, with a revenue growth at 16% YoY. Led by efficiencies in the business verticals (barring the fertiliser and insulator businesses owing to plant shutdowns), the overall operating profit grew by 11% YoY, with a 52-BPS margin expansion. The reported net earnings included a loss on the sale of the ITES business while the last year's performance had included a profit on the sale of the carbon black business. Adjusting for the one-offs and excluding the ITES business' impact, the like-to-like earnings grew by 26.6% YoY from Rs237 crore in Q1FY2014 to Rs300 crore in Q1FY2015.
- The company sounded confident about its non-banking finance business and continues to nurture plans to grow the loan book size. On the life insurance vertical, it sounded positive on the product portfolio front and expects a revival in the business with a revival in the macro economy. The acquired Pantaloons business would be in an investment mode in FY2015 as well.
- ABNL's strong positioning in each business vertical its operates in (life insurance, telecom, lifestyle, asset management) along with its quest for a profitable growth and the attractive valuation of its stock makes us maintain our Buy rating on the stock with a price target of Rs1,550 (arrived at using SOTP approach, valuing each business vertical separately).
Divi's Laboratories
Recommendation: Hold
Price target: Rs1,530
Current market price: Rs1,473 Margin slips in Q1; price target upped to Rs1,530 but downgraded to Hold Key points - Divi's Laboratories reported a weaker operating performance in Q1FY2015, as reflected in a 167-BPS decline in the OPM to 36.3%, though the net sales grew by a healthy 24% YoY. However, the adjusted net profit witnessed a 26.5% growth during the quarter on lower taxation.
- The decline in the OPM can mainly be attributed to a change in the product mix (a weaker growth in the CRAMS business) during the quarter. However, the management has maintained it revenue growth guidance of 20% and EOP guidance of 40% for FY2015 on expectation of a better performance in the coming quarters.
- We have marginally tweaked our estimates for the stock mainly to factor in the expectation of lower taxation in FY2015 and FY2016. This has increased the FY2016 EPS estimate by 2%. Therefore, our price target too stands revised up to Rs1,530. However, owing to a limited upside to the stock price from the current levels, we downgrade our rating on it to Hold.
Indian Hotels Company
Recommendation: Hold
Price target: Rs98
Current market price: Rs81 Dismal performance in a seasonally weak quarter, maintain Hold Key points - Indian Hotels Company Ltd (IHCL) posted a dismal operating performance for Q1FY2015 which was in line with the disappointing performance of some of the other hotel companies (including Hotel Leela and ITC's hotel business). In a seasonally weak quarter, IHCL's stand-alone revenues (accounting for about 20% of the total revenues for the fiscal) stood flat at Rs397.8 crore while inflated raw material prices and higher fixed costs led to a 34% decline in the operating profit.
- The company's international properties are showing a revival in the operating performance for the past few quarters. In Q1FY2015 the international properties must have seen some improvement in revenues as the consolidated revenues of IHCL grew in low single digits vs a flat growth in the stand-alone sales. During the quarter the company sold one of its less focus international properties, Blue Sydney, a Taj Hotel, at about Rs180 crore to Australia Hotels & Properties. The proceeds will be utilised for completion of some of the ongoing projects on the book.
- The Q1FY2015 performance will not give us an indication of the performance of the entire fiscal. In the backdrop of an improvement in the macro environment the hoteliers and tour operators in India are banking on a revival in corporate travel and improvement in the foreign tourist arrivals to boost the performance in the second half of the year. Also, with the induction of Rakesh Sarna (an industry veteran with over three decades of experience with Hyatt hotels) as the managing director and CEO of IHCL, we expect new strategies in place to improve the growth prospects of the company in the near future. We maintain our Hold recommendation on the stock with an unchanged price target of Rs98.
Bharat Heavy Electricals
Recommendation: Hold
Price target: Under review
Current market price: Rs224 Poor Q1 numbers; negative operating leverage continues Key points - BHEL reported very poor numbers for Q1FY2015 as its earnings declined by 58% YoY and were significantly lower than our as well as the Street's estimate. During the quarter the revenues of BHEL declined by 20% YoY on weak order inflow in the past and sluggish order execution due to client-side issues. On a revenue de-growth, a resilient fixed cost (especially employee cost) weighed high on the margin. The OPM slipped to 2.6%, showing a contraction of 188BPS YoY. Further, with higher interest and depreciation charges, the net profit declined by 58% to Rs194 crore.
- The order inflow remained low, declined by 23% YoY in Q1FY2015, due to poor order announcement in the power sector. The order backlog also declined by 10% YoY to Rs97,400 crore, reflecting a book-to-bill ratio of 2.5x at the end of Q1FY2015. The management shared in the post-results conference call that currently around Rs12,000 crore of orders are slow moving; however, it expects a positive movement in some of those projects. Further, the management expects 8,000-9,000MW of order inflow for the whole year as the company is favourably placed in 4,000MW of orders which are yet to be finalised and expects tendering of another 8,000MW of orders in the rest of the year.
- The company is facing severe pressure on its margin as negative operating leverage is playing out in a declining order inflow environment. We believe the order inflow outlook is most crucial for the stock, which has a resilient fixed cost as a negative. In view of the poor Q1 results, the stock could correct in the short term. The stock is currently trading at around 14x FY2016 estimated earnings and at an EBITDA of 10x. Given the poor performance in Q1 and weak outlook, we retain our Hold rating on the stock and put its price target under review.
Speciality Restaurants
Recommendation: Hold
Price target: Rs160
Current market price: Rs134 Inflated RM cost hit profitability, near-term outlook remains challenging Key points - In Q1FY2015 Speciality Restaurants' revenues grew by about 17% to Rs70.3 crore with the same-restaurant-sales remaining flat (as against a decline 2.5% in the same-store sales of Jubilant FoodWorks and a 2% decline in the same-restaurant sales of Yum Restaurants). The double-digit revenue growth was driven by new restaurant additions in the past three quarters.
- Its profitability was affected by inflated raw material prices in Q1FY2015 (GPM down by 507BPS YoY) and the management's reluctance to take price hikes. We believe that the management has been too cautious in terms of price hikes and is willing to sacrifice margins in order to sustain the same-store sales.
- The pressure on the margin could be mitigated by improved demand in the forthcoming festive season and the price hikes indicated in October this year. However, the company's financial performance could continue to languish unless there is a distinct improvement in the discretionary spending in the economy but the same, we think, could be a couple of quarters away. In the meantime, we retain our assumption of a better demand environment in FY2016 and its positive rub-off on the margin. However, we retain our Hold rating with a price target of Rs160, given the near-term uncertainties.
SECTOR UPDATE Q1FY2015 IT earnings review Key points - The June 2014 quarter for the Indian IT sector was on expected lines in terms of both top line and margins. The revenues of the top 4 IT companies grew by 3.4% sequentially in the quarter versus a 1.9% sequential growth in the previous quarter. TCS continued to lead the pack with a 5.5% Q-o-Q growth while HCL Tech and Tech Mahindra delivered a Q-o-Q growth of 3.4% and 3.7% respectively. The margin weakness seen during the quarter was largely expected because of the impact of wage hikes, visa cost and the rupee's appreciation against the dollar.
- Management commentary remains positive and FY2015 is expected to be better compared with FY2014. The overall demand indicators remain healthy with a fair chance of an improvement in H2FY2015 (as indicated by the ISG in its Q2CY2014 call). We see three key triggers for a healthy improvement in demand in FY2015 and FY2016: (1) a revival in the US economy (discretionary spends coming back; still languishing); (2) outsourcing opening up in a big way especially in continental Europe (see details below); and (3) the opportunity from digital technologies as these continue to get into mainstream budgets of clients.
- The stability in the rupee against the dollar at 60-61 levels (which was a major overhang three months ago) and the continued strength in the demand environment have again brought the sector back in the favour of investors. The IT sector indices have outperformed the broader market indices in the last three months with a 14% return (against a 10% return from the broader market). Driven by a healthy demand environment and stability in the local currency, our core thesis on the Indian IT sector remains unchanged, as we maintain our positive stance. On the preferred picks, we continue to like TCS, HCL Tech and Tech Mahindra (under soft coverage) in the large-cap space and Persistent Systems and FSL in the mid-cap space.
VIEWPOINT VA Tech Wabag
Current market price: Rs1,338
View: Positive Unique business; a suitable portfolio pick Key points - Earnings doubled in a traditionally weak quarter; annual guidance maintained: For Q1FY2014 Va Tech Wabag (VTW) reported a significant rise in its earnings. The first quarter is traditionally weak for VTW due to the nature of its business and payment cycle. However, the adjusted earnings doubled YoY to Rs6 crore in Q1FY2015, supported by a 40% revenue growth and an OPM expansion of around 70BPS YoY. Cost rationalisation in the overseas operations helped the company to improve its margin. Q1FY2015 being a weak quarter, the margin remained at around 5%; however, the management has retained its guidance of a 9-10% margin in FY2015. It has also maintained its revenue guidance of Rs2,600-2,900 crore and order inflow guidance of Rs3,200-3,400 crore for FY2015.
- Huge investment to flow; opportunities galore for VTW: Globally, fresh water supplies are relatively static and the potential scarcity of fresh water will drive significant investments in areas like water recycling, treatment, conditioning and desalination. The global water market is estimated at $425-500 billion and expected to grow at a 6% CAGR till 2030, indicating an annual opportunity of $25-30 billion; out of this a large chunk is expected to be in the developing world, Asia, Africa and the MENA region. We believe players like VTW are favourably placed having niche technical expertise, impressive track record and global presence. Domestically also, the government has already turned its focus to water space and a potential investment of around Rs8 lakh crore is expected in the next 20 years. We expect a large sustainable opportunity to also emerge in the operation & maintenance space for VTW with an abnormal growth of the water-intensive energy sector in the recent past.
- Poised to deliver a sustainable 20% earnings growth ahead: The company has a strong order book (2.8x FY2014 revenues) of around Rs6,350 crore which gives it a very healthy revenue visibility of around 16-17% revenue growth for the next two to three years. On the margin front, due to a favourable mix of orders (an increasing share of the O&M business) and efforts by the management to rationalise cost in the international operations (subsidiaries), the margins of the subsidiaries are expected to improve gradually. We believe the benefit of the growth at the operating level would percolate largely to the bottom line as the company operates on an asset light model (nominal capital expenditure [capex] and depreciation cost) and is virtually debt-free. Consequently, the earnings of VTW are poised to grow at a compounded annual growth rate of 20% in the next two to three years. We believe the return on equity is likely to step up to near 20% in the next two to three years too.
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