| STOCK IDEA Triveni Turbines
Recommendation: Buy
Price target: Rs128
Current market price: Rs91 On a turbo-charged growth path Key points - Ahead of the pack: Triveni Turbines Ltd (TTL), the market leader (with over 65% market share domestically) in the up to 30MW steam turbine segment, is at an inflexion point with a strong ramp-up in the after-market (spares and refurbishment of the existing plants; contributes 26% of revenues) and export (contributes 32% of the revenues) businesses while the domestic market is showing distinct signs of a pick-up. Unlike most of its peers, TTL is already showing a distinct improvement in order booking and reported a 47% growth in its order inflows in the first half of this fiscal (it has an order backlog of Rs770 crore).
- JV with GE-an added boost to export business: TTL has established itself in the overseas markets with installations across 50 countries and export orders account for 60% of its current order book. A joint venture (JV) with global power equipment major General Electric (GE) to manufacture turbines (30MW to 100MW) is further boosting its export business with the revenues from the JV scheduled to grow multi-fold in the current and the next year (over a relatively small base of Rs20 crore in FY2014). The venture is also expected to turn profitable in FY2015.
- Industry beating margins sustainable: The shifting of the revenue mix towards a higher contribution from the fast growing and highly profitable businesses of exports and after-market is aiding margins. We expect the company to sustain its OPM at 22-24%, which is among the best in the industry and way ahead of competition.
- Healthy balance sheet and operating cash flows: TTL is virtually a debt-free company and has an efficient working capital cycle resulting in very healthy return ratios (both RoE and RoCE in the upwards of 50%). It has consistently been able to maintain a low working capital cycle by virtue of the advances received (up to 15-20% of the order value) from its customers and a short execution cycle (of less than one year). With a minimal investment of Rs40 crore to substantially increase its manufacturing capacities and healthy growth rates, we see the cash generated from operations increasing manifold to Rs147 crore in FY2017 from Rs37.5 crore in FY2014.
- Quality business at discounted valuations; Buy with price target of Rs128: Given its relatively better competitive positioning in the domestic as well as overseas markets, strong order backlog and a healthy balance sheet (it is debt-free and enjoys superior return ratios), TTL is set to report a 39% compounded annual growth in its earnings over the three-year period FY2014-2017. It is our preferred pick in the power equipment space and among the few Indian capital goods companies to have established a global footprint. However, in spite of a superior quality of business and return ratios, it trades at a close to 40% discount to its comparable peer like Thermax. Thus, we see significant scope for re-rating (narrowing of the valuation gap) and set our price target at Rs128 (23x FY2017 estimates which is a discount of 15% to the current multiple of Thermax and lower than TTL's average PE multiple of 25x over the past five years). We initiate coverage on TTL with a Buy rating.
- Key risks: (1) A less than expected pick-up in the capex cycle in both the domestic and overseas markets; (2) a delay in order execution; and (3) any unfavorable currency movement.
STOCK UPDATE Sun Pharmaceutical Industries
Recommendation: Buy
Price target: Rs1,018
Current market price: Rs909 Taro boosts Q2 results; price target revised up to Rs1,018 on rollover Key points - Sun Pharmaceutical Industries (Sun Pharma) reported a healthy performance in Q2FY2015, as reflected in a 13% growth in revenue, a 188-BPS expansion in operating profit margin and 15% growth in adjusted net profit, despite a higher base in Q2FY2014 caused by the launch of exclusivity (generic Prandin) and advantage on the launch of Doxil under limited competition last year.
- The growth during the quarter is mainly attributed to a stronger performance of its Israeli subsidiary, Taro Pharmaceutical Industries (Taro Pharma; up by 22% YoY), and domestic formulation business (up by 21% YoY). Excluding the revenue of Taro, Sun Pharma has witnessed a moderate 6% growth in exports of formulations.
- The management is confident to get Ranbaxy Laboratories (Ranbaxy) merged within a stipulated time period (ie by the end of December 2014), however a minor delay is not ruled out. The management broadly maintains guidance of 13-15% growth in FY2015.
- We introduce estimates for FY2017, while keeping intact our estimates for FY2015 and FY2016. We rollover our valuation to the earnings for FY2017E to set a new price target of Rs1,018. We maintain Buy rating on the stock.
Max India
Recommendation: Buy
Price target: Rs485
Current market price: Rs403 Price target revised to Rs485, strong performance from life insurance segment Key points - Max India reported a strong growth of 26% YoY in PBT (consolidated) contributed by a strong uptick in operating revenues (up by 15% YoY). The life insurance subsidiary, Max Life reported a 21.3% Y-o-Y growth in shareholder profits and has given a dividend of Rs107 crore to parent company. In view of a strong earnings performance and healthy treasury corpus the Max India announced interim dividend of Rs4 per share.
- Healthcare business (Max Healthcare) continued to show traction in revenues and profits. The EBITDA margins improved to 10.34% while new hospitals have broke even at EBITDA levels. We have reviewed our valuations for the healthcare business to factor in the healthy growth and transaction with Life Healthcare.
- Max Life has outperformed the sector and it has the best operating metrics among the peer group. We have revised our SOTP-based price upwards to Rs485 (mainly due to rolling life insurance valuations to FY17 estimates). While the stock has appreciated sharply in the past few weeks (partly factoring in insurance reforms and premium positioning in insurance business), we believe the upside triggers will remain from value unlocking from insurance and healthcare business. We maintain our Buy rating on the stock.
Oil India
Recommendation: Buy
Price target: Rs720
Current market price: Rs580 Q2 dented by provisional subsidy; positive outlook for core business Key points - Oil India Ltd (OIL) reported a weak set of numbers for Q2FY2015; its earnings declined by 33% YoY and 29% QoQ, with a cascading effect on revenues, which dropped by 22% YoY and 17% QoQ, and were below our as well as the Street's estimates. The revenues of the oil segment were adversely affected by a lower net realisation (after accounting for subsidy) and a marginal drop in volume. Consequently, the EBIT of the oil segment declined sharply (down 47% YoY and 50% QoQ) and pulled down the overall PAT of OIL. Though the natural gas and other divisions grew handsomely, but their contribution to the overall revenues is relatively very low.
- While the gross realisation of crude oil (7% down on both Y-o-Y and Q-o-Q basis) remained low on weak global prices during the quarter, the provisional subsidy was unchanged at $56 per barrel; consequently, the net realisation was lower by 14% at $45 per barrel. Further, weak oil volume (down 7% YoY but up 3% QoQ) and dollar realisation against the rupee (down 3% YoY but up 1% QoQ) caused the revenues of the oil segment to fall. However, backed by better volume and realisation, the revenues of the natural gas segment grew by 7% YoY and 2% QoQ.
- We believe in the absence of any fixed formula for the sharing of the subsidy burden, the company provided for subsidy at the rate of $56 a barrel in this quarter which would be adjusted at the end of the year considering the falling crude oil prices. We don't rule out a declaration of a fixed formula for subsidy sharing by the end of the year, before the follow-on public offering of ONGC. We expect a net realisation of $50-55 per barrel per annum and see better days ahead for OIL, in view of the positive structural changes pertaining to diesel deregulation and gas price revision (which will reflect in the company's Q3FY2015 numbers as effective from November 2014). Therefore, we advise investors to use the current stock price correction on the event of the Q2FY2015 numbers as an opportunity to buy. We retain our price target of Rs720.
Cipla
Recommendation: Hold
Price target: Rs658
Current market price: Rs624 Moderate growth in Q2; downgrade to Hold Key points - Cipla reported a moderate 10% growth in revenue, 228-BPS decline in the operating profit margins and a 16.6% decline in the net profit in Q2FY2015. The subdued performance is mainly attributed to a decline in exports on lower institutional sales, market rationalisation in key countries and supply constrains in API segments.
- However, the company reported a 20.3% growth in Indian formulation business on the back of new product launches and improvement in market share in key segments. The exports of API declined by 34% YoY, while the exports of formulation business remained flat during the quarter.
- Despite a weaker performance in Q2FY2014, management maintains the revenue growth guidance (mid-teens) for FY2015, while OPM will remain flat.
- We broadly maintain our estimates and price target of Rs658, which includes Rs537 (20x FY2017 EPS) for base business and Rs122 for inhaler opportunities in Europe. However, owing to limited upside and lack of near-term catalyst, we downgrade our rating to Hold on the stock.
Speciality Restaurants
Recommendation: Hold
Price target: Rs222
Current market price: Rs207 Focus on improving operating efficiencies; price target revised to Rs222 Key points - In Q2FY2015, Speciality Restaurants Ltd (SRL) revenues grew by 17% to Rs75 crore largely driven by the addition of new restaurants in the past three quarters. The same-restaurant-sales continued to remain flat for the company, which is much better in comparison with Jubilant Foods' same-store-sales decline of 5% and McDonald's India's same-store-sales decline of 7%. As anticipated, profitability continues to get hit by higher raw material cost and higher operating cost for some of the newly opened restaurants (declined by 412BPS YoY).
- The company continues to get better footfalls on weekends; the focus is on improving the weekday footfalls (largely corporate clients). If cover turnaround ratio improves by 5-6% and raw material prices further reduces from the current level, we might see operating margins improving and getting back to double digits. Also the company is banking on initiatives, such as reducing dependence on imported raw materials and better space management at the restaurant level to add-on to the profitability in the long run.
- We retain our assumption of better demand environment and its positive impact on margins in FY2016. We maintain our Hold recommendation on the stock with a rolled over price target of Rs222 (valuing the stock at 23x of its FY2017E earnings, which is at 25% discount to Jubilant Foodworks' target multiple).
Gayatri Projects
Recommendation: Hold
Price target: Rs180
Current market price: Rs157 Troubled FY2015; Hold for reversal in FY2016 Key points - In Q2FY2015, the stand-alone revenues of Gayatri Projects Ltd (GPL) declined by 31.6% YoY to Rs306 crore on account of execution delays in the projects located in Andhra Pradesh after the bifurcation of the state and of uncertainty related to the sharing of the cost of the irrigation projects. Thus, the EPC business of the stand-alone entity would continue to suffer over the next couple of quarters but it may improve afterwards, given a slew of tenders (in road and other infrastructure projects) that may lead to a better outlook for FY2016.
- The company's road assets are profitable and generating enough free cash to service its debts. In its power generation business, it has completed the construction of the first phase (660MW) of the 1,320MW Krishnapatnam power plant which would get synchronised with the grid in the next few months and is expected to start generating revenues (and profits) from Q1FY2016 onwards. The construction of the second unit is on schedule. NCC Power Project has been delayed due to pending regulatory approvals for the sale of the NCC stake to SembCorp. However, the positive side is that GPL would not have to make any more equity investments in the power business and would have a 35% stake on an aggregate basis (49% in one of the 1,320MW plants and close to a 24-25% stake in the NCC plant).
- The management sees an improving business environment for the EPC business with a bid pipeline of Rs8,000-10,000 crore worth of projects. We believe the order inflow in its stand-alone business should pick up while the issues related to irrigation orders should get sorted over the next six months, thereby improving the profitability of the stand-alone business.
- We have revised our estimates for FY2015 and FY2016 downwards after factoring in the lower project execution on account of the issues mentioned above. We would like to see the actual order inflow and execution of irrigation projects before upwardly revising our valuation for the company. Consequently, in the absence of any near-term trigger and in view of a limited upside to our price target from the current levels, we downgrade our recommendation on the stock from Buy to Hold and maintain our price target of Rs180.
VIEWPOINT TCPL Packaging
Current market price: Rs425 Positives are priced in; book profit (70% gains in six weeks) Key points - As anticipated, TCPL Packaging Ltd (TCPL) has posted a strong operating performance in H1FY2015 with revenues growing upwards by 20% (largely driven by a strong double-digit volume growth) and PAT growing by about four times on a Y-o-Y basis. Being one of the largest packaging player (with expertise in carton packaging largely used in FMCG space), we believe the strong volume-led operating performance to sustain in the near- to medium-term.
- In addition to cost optimisation, the debt reduction and improving the working capital remains the key focus area of the company in the coming years. With no major capex ahead, TCPL would see improvement in cash flows and strong return ratios would sustain in the coming years.
- However, the recent sharp run up in TCPL's stock price (by about 70% since our initiation of viewpoint on September 24, 2014) have priced in all the positives. We believe the current valuations of TCPL packaging at 10-12x of its FY2016E are fairly valued, capping the significant upside from the current level. Hence, we recommend our investors to take home handsome gains within short span and wait for a better point to re-enter into the stock.
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