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| Summary of Contents STOCK UPDATE Reliance Industries
Recommendation: Buy
Price target: Rs1,190
Current market price: Rs961 Beats estimates with better margins; retain Buy Key points - In Q2FY2015, the stand-alone net profit of Reliance Industries Ltd (RIL) grew by 5% YoY and 2% QoQ to Rs5,742 crore, which was ahead of our as well as the Street's estimate. The Y-o-Y earnings growth was driven by a better GRM ($8.3/bbl vs $7.7/bbl in Q2FY2014) earned by its refining business while a sequentially softer GRM (at $8.7 vs $8.3 in Q1FY2015) partially offset the gain from the improvement in the petchem margin. The consolidated earnings grew by 2% YoY to Rs5,972 crore but remained flat QoQ.
- The key take away from the Q2FY2015 results was that despite a softer GRM sequentially, the spread (premium) between RIL's GRM and the Singapore GRM expanded to $3.5/bbl (the highest in four years). Further, the petchem margin improved sequentially led by strength in the polymer and aromatic margins. The profitability of the retail business continued to improve (margin improved with scale) along with a 20% revenue growth on a low base. On the negative side, despite significant traction in the shale gas volume, the profitability of the E&P business dropped due to declining domestic production and higher depreciation.
- RIL managed to improve its GRM spread over the regional benchmark and reported better earnings than expected by the Street. Further, we believe the ongoing expansion of its downstream business (a new gasification plant and a refinery off-gas cracker) would be the next earnings driver in the next two to three years. While the progress of the new business (telecom) and the ability of the retail business to a gain critical mass would be monitorables, a continued lack of clarity on the gas price revision remains a hangover for the stock. Currently, the stock is available at 13x and 12x FY2015E and FY2016E earnings respectively and the valuations are lower than its historical average. Therefore, we retain our Buy recommendation on the stock with a price target of Rs1,190 (SOTP based).
Bajaj Finance
Recommendation: Buy
Price target: Rs3,060
Current market price: Rs2,730 Price target revised to Rs3,060, maintain Buy Key points - Bajaj Finance reported a healthy set of numbers for Q2FY2015 as the net profit grew by 18% YoY to Rs197 crore. The core net interest income growth was even better (up 27% YoY) led by a strong growth in the AUM (up 41% YoY). The provisions increased by 52% partly contributed by loan book expansion.
- The asset quality deteriorated quarter on quarter due to the slippage of an infrastructure account into NPA. On a proactive basis, the company has already paused infrastructure and construction equipment lending while in the other segments it does not foresee any meaningful stress. The strong risk management practices and conservative provisioning enhance comfort on the asset quality.
- Bajaj Finance has deepened its presence in the consumer segment and investment in the new business is beginning to yield returns. We expect the company to maintain a healthy asset quality and strong return ratios (RoA of 3.2% and RoE of 21%) till FY2017. While the stock has appreciated by 52% since our initiation on May 2014, we maintain a positive view on the stock with a revised price target of Rs3,060 from a medium-term perspective.
Bajaj FinServ
Recommendation: Hold
Price target: Rs1,160
Current market price: Rs1,108 Price target revised to Rs 1,160, downgrade to Hold Key points - Bajaj Finserv reported steady numbers for Q2FY2015 as the consolidated PAT increased by 14.2% YoY to Rs315.9 crore. The lending business (Bajaj Finance) and the general insurance business both reported a strong performance showing growth of 18% and 28% respectively in the earnings. The operating profit margin (consolidated) has also increased by a 25% YoY.
- The life insurance business continues to witness slowdown due to impact of new regulations on margins, and decline in premiums (down 7.4% YoY) The profits (shareholder surplus +policyholders surplus declined by 3.6% YoY
- We have revised our SOTP based price target for Bajaj Finserv to Rs1,160 (largely to factor the price target revision for Bajaj Finance and assuming 51% economic interest in insurance business). However, we revise our rating to Hold due to a slowdown in the life insurance business which is likely to increase in the insurance FDI to 49% which is perceived as a negative for Bajaj Finserv due to its agreement with JV partner on transfer of stake.
| | | 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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