ICICI Securities Limited, ICICI Centre, H.T. Parekh Marg, Churchgate, Mumbai – 400 020, India. Phone: +91 22 2288 2460/70 Fax: +91 22 2288 2448 ICICI Securities Inc, 461 Fifth Avenue, 16 th Floor, New York, NY 10017. Phone: +1 212 921 2344 / +1 212 453 6704 Fax: +1 212 453 6710 January 30, 2015 Market data as on Jan 29, 2015 INDICES % chg (DoD) BSE Sensex 29682 0.4 S&P CNX Nifty 8952 0.4 BSE 100 9019 0.3 BSE 200 3685 0.2 OVERSEAS MARKETS# % chg (DoD) Dow Jones 17417 1.3 Nasdaq Comp. 4683 1.0 S&P 500 2021 1.0 Hang Seng 24566 (0.1) Nikkei 17717 0.6 ADVANCES/DECLINES (BSE) Group A B S Advances 132 1001 271 Declines 164 1031 287 Unchanged 4 93 37 FII TURNOVER (BSE+NSE)* (Rs mn) Bought Sold Net 74,060 55,450 18,610 NEW HIGHS AND LOWS (BSE) Group A B S High 29 70 41 Lows 6 48 25 CURRENCY US$1 = Rs61.50 *FII turnover (BSE + NSE) as on Jan28, 2015 India Update Contents Page 2 HDFC (Rs1,316): Exactly as expected Add Page 4 Sesa Sterlite (Rs201): Aluminium production ramp up holds key Add Page 6 Dr Reddy’s (Rs3,363): EBITDA margin outlook impacted by Russia sales Hold Page 8 Pidilite Ind (Rs576): Results below estimates, RM benefit still to show up Hold Page 10 IDFC (Rs171): Preparations on in earnest Buy Page 12 Torrent Pharma (Rs1,138): Strong outlook for India business Buy Page 14 Havells (Rs263): Weak domestic sales, one-offs at Sylvania mar results Add Page 16 Shriram City Union Finance (Rs2,142): Growth returns in parts Reduce Page 18 OBC (Rs241): On a slippery wicket Reduce Page 20 GSFC (Rs101): Improving fundamental, correction warrants upgrade Add Page 22 Results date reckoner Page 23 Recent reports/updates Highlights Sector/event Impact FINANCIALS – HDFC: Q3FY15 results review and earnings revision HDFC’s Q3FY15 earnings print lived up to its billing as a ‘no-surprises’ company and were in-line with expectations (PAT grew 11.6% YoY). The broad business trends were also aligned with our predictions. The loan book (including off-balance sheet assets) grew at 15.6% YoY, with individual loans (17.8% growth YoY) remaining the primary growth driver. Non-individual loan portfolio only increased 1.1% QoQ. Reported NIM remained stable at 3.93%, a marginal 6bps drop from the corresponding quarter last year. Stripping out subsidiary valuation, the core mortgage business currently trades at 4.3x 1-yr fwd P/core BVPS (DTL deduction from special reserve added back). In our valuation methodology for housing finance stocks we accord P/B premium in proportion to excess sustainable RoE over a base CoE of 14%. Our target multiple for the core business is 4x 1-yr fwd P/core BVPS (increased from 3.5x to reflect the rate cycle having turned a corner). We roll over from FY16E to FY17E for subsidiary valuations and factor in a new valuation benchmark for the life insurance business based on the recent stake sale in HDFC Life. Life Insurance is valued at Rs117 per share and increases by almost 75% per share due to change in the valuation benchmark. We arrive at a SOTP based target of Rs1,380 (Rs1,150 earlier). With HDFC Bank yet to report numbers we use the target price of Rs968 set for it by I-Sec Research at the time of its Q2FY15 report. A Rs100 increase in HDFC Bank target price will increase our HDFC target price by Rs34. We maintain our ADD recommendation. Market movement over last fortnight Volumes in Rs mn (BSE and NSE) Advances & Declines ratio (BSE) 0 40,000 80,000 120,000 160,000 200,000 240,000 280,000 19/1 21/1 23/1 25/1 27/1 29/1 BSE NSE 8300 8400 8500 8600 8700 8800 8900 9000 28000 28500 29000 29500 30000 19/1 21/1 23/1 25/1 27/1 29/1 BSE (LHS) NSE (RHS) 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 19/1 21/1 23/1 25/1 27/1 29/1
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(DoD) Dow Jones 17417 1.3 Nasdaq Comp. 4683 1.0 S&P 500 2021 1.0 Hang Seng 24566 (0.1) Nikkei 17717 0.6 ADVANCES/DECLINES (BSE)
Group A B S Advances 132 1001 271 Declines 164 1031 287 Unchanged 4 93 37 FII TURNOVER (BSE+NSE)* (Rs mn)
Bought Sold Net 74,060 55,450 18,610
NEW HIGHS AND LOWS (BSE)
Group A B S High 29 70 41 Lows 6 48 25 CURRENCY
US$1 = Rs61.50 *FII turnover (BSE + NSE) as on Jan28, 2015
India Update
CCoonntteennttss Page 2 HDFC (Rs1,316): Exactly as expected AddPage 4 Sesa Sterlite (Rs201): Aluminium production ramp up holds key AddPage 6 Dr Reddy’s (Rs3,363): EBITDA margin outlook impacted by Russia sales HoldPage 8 Pidilite Ind (Rs576): Results below estimates, RM benefit still to show up HoldPage 10 IDFC (Rs171): Preparations on in earnest BuyPage 12 Torrent Pharma (Rs1,138): Strong outlook for India business BuyPage 14 Havells (Rs263): Weak domestic sales, one-offs at Sylvania mar results AddPage 16 Shriram City Union Finance (Rs2,142): Growth returns in parts ReducePage 18 OBC (Rs241): On a slippery wicket ReducePage 20 GSFC (Rs101): Improving fundamental, correction warrants upgrade AddPage 22 Results date reckoner Page 23 Recent reports/updates
HDFC’s Q3FY15 earnings print lived up to its billing as a ‘no-surprises’ company and were in-line with expectations (PAT grew 11.6% YoY). The broad business trends were also aligned with our predictions. The loan book (including off-balance sheet assets) grew at 15.6% YoY, with individual loans (17.8% growth YoY) remaining the primary growth driver. Non-individual loan portfolio only increased 1.1% QoQ. Reported NIM remained stable at 3.93%, a marginal 6bps drop from the corresponding quarter last year. Stripping out subsidiary valuation, the core mortgage business currently trades at 4.3x 1-yr fwd P/core BVPS (DTL deduction from special reserve added back). In our valuation methodology for housing finance stocks we accord P/B premium in proportion to excess sustainable RoE over a base CoE of 14%. Our target multiple for the core business is 4x 1-yr fwd P/core BVPS (increased from 3.5x to reflect the rate cycle having turned a corner). We roll over from FY16E to FY17E for subsidiary valuations and factor in a new valuation benchmark for the life insurance business based on the recent stake sale in HDFC Life. Life Insurance is valued at Rs117 per share and increases by almost 75% per share due to change in the valuation benchmark. We arrive at a SOTP based target of Rs1,380 (Rs1,150 earlier). With HDFC Bank yet to report numbers we use the target price of Rs968 set for it by I-Sec Research at the time of its Q2FY15 report. A Rs100 increase in HDFC Bank target price will increase our HDFC target price by Rs34. We maintain our ADD recommendation.
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India Update, January 30, 2015 ICICI Securities
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HDFC (Add) FINANCIALS Q3FY15 RESULT REVIEW AND EARNINGS REVISION
HDFC’s Q3FY15 earnings print lived up to its billing as a ‘no-surprises’ company and were in-line with expectations (PAT grew 11.6% YoY). The broad business trends were also aligned with our predictions. The loan book (including off-balance sheet assets) grew at 15.6% YoY, with individual loans (17.8% growth YoY) remaining the primary growth driver. Non-individual loan portfolio only increased 1.1% QoQ. Reported NIM remained stable at 3.93%, a marginal 6bps drop from the corresponding quarter last year. Stripping out subsidiary valuation, the core mortgage business currently trades at 4.3x 1-yr fwd P/core BVPS (DTL deduction from special reserve added back). In our valuation methodology for housing finance stocks we accord P/B premium in proportion to excess sustainable RoE over a base CoE of 14%. Our target multiple for the core business is 4x 1-yr fwd P/core BVPS (increased from 3.5x to reflect the rate cycle having turned a corner). We roll over from FY16E to FY17E for subsidiary valuations and factor in a new valuation benchmark for the life insurance business based on the recent stake sale in HDFC Life. Life Insurance is valued at Rs117 per share and increases by almost 75% per share due to change in the valuation benchmark. We arrive at a SOTP based target of Rs1,380 (Rs1,150 earlier). With HDFC Bank yet to report numbers we use the target price of Rs968 set for it by I-Sec Research at the time of its Q2FY15 report. A Rs100 increase in HDFC Bank target price will increase our HDFC target price by Rs34. We maintain our ADD recommendation.
• Growth continues to be led by individual loans. Individual loans grew at 4.3% QoQ, re-iterating the management confidence in the time tested principle that this segment has best defensive qualities on asset quality in an adverse economic environment. Despite attractive (yield wise) opportunities aplenty in the developer finance segment the company has remained cautious in the last few quarters and has not alluded to any major shift in business outlook in its current commentary.
• History suggests most margin gains beyond threshold likely to be passed on. Margins remained healthy recording a calculated NIM of 3.43%, a marginal 2bps drop YoY. Yields at 11.84% were down only 9bps YoY reflecting pricing discipline, especially as non individual business proportion receded, while borrowing costs reduced 4bps YoY to 9.27%, thanks to nimble liability management. As policy rates ease further, the company has much legroom to cut lending rates to boost growth without compromising on profitability.
• Healthy cushion of capital to leverage into any economic recovery. Tier 1 stood at 16.5% and leverage at 7.6x. If and when confidence improves the company will have the option to leverage further/ raise payouts to boost RoE. Typically, leveraging can happen if non-individual loans pick up from an economic recovery. Even adjusting for likely ~200bps reduction in tier-1 capital, due to Basel 3 norms requiring risk capital deduction on account of its stake in HDFC Bank, its position is quite comfortable even if NBFC guidelines of 10% Tier-1 is adopted for HFCs by NHB.
Source: Company data, I-Sec research Details In our report ‘Exactly as expected’ dated January 29, 2015.
India Update, January 30, 2015 ICICI Securities
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Sesa Sterlite (Add) METALS Q3FY15 RESULT REVIEW
Aluminium production ramp up holds key Rs201 Abhijit Mitra (+91 22 6637 7289) [email protected] Ansuman Deb (+91 22 6637 7312) [email protected]
Sesa Sterlite (SSLT) reported consolidated EBITDA beat of 7.5% (Consensus 5%). Given that Cairn and Hind Zinc numbers have already been disseminated, the beat was driven by Aluminum operations (Jharsuguda), Zinc international and Copper operations. Jharsuguda Aluminum EBITDA surprised on account of continued high premiums over LME that the business continue to gather. Cost of Alumina and Aluminum have shown meaningful moderation in VAL, apparently driven by lower e-auction coal prices and lower imported coal prices. Copper TcRc surprised on the upside with guidance pointing to USc25/lb. Zinc international has mainly surprised on account of lower than expected CoP. One of the key pointers made in the call is the ability of the management to use the IPP (Jharsuguda 2400MW) as CPP ex the obligation to GRIDCO. However, there is no clarity on the process of transfer, on the future state of linkages and/or the strategy they are going to adopt in the upcoming coal auctions. We would like to highlight that this conversion would allow the Jharsuguda smelter to achieve full utilisation and would be one of the value accretive options available to the company. Maintain ADD.
• The conundrum of IPP to CPP. While the management has always maintained that they need State government approval to use power generated from IPP for captive usage in Jharsuguda smelter, Q3FY15 concall witnessed an unexpected change of stance. Emphasis was laid on the ability for using 1800MW of 2400MW power plant for captive usage. No clarity was however provided on the i) status of linkage post the conversion and ii) strategy to be followed in the upcoming coal auction process (for competitive reasons). One must take notice, that the ability to fully utilise the CWIP in Jharsuguda Aluminium smelter is dependent on this arrangement and can unlock value. We currently maintain our valuation framework of valuing IPP separately with 15% being directed from the IPP to the smelter.
• Ramp up of Aluminum assets will be keenly watched. The company is waiting for the EC to ramp up Alumina refinery in Lanjigarh to 2mnte, which can support SSLT’s plans to ramp up Jharsuguda Aluminum smelter to 1-1.1mnte by FY16. This will also be helped by the arrangement of using power from the current IPP. The BALCO 1200MW power plant has obtained the consent to operate (with 600MW as IPP). BALCO has ramped up 84 pots and will ramp up all the pots by mid FY16.
• Impact of the arrangement in the upcoming coal blocks bidding? As we have mentioned in our note titled “Mapping the coal jigsaw-scenarios and winners” dated December 10, 2014, if SSLT bids for 2400MW as CPP, it will present toughest competition to Gare Palma IV/1 coal block of JSPL. Lack of clarity in the current status would create bidding uncertainty for SSLT’s competitors as well.
Target price Rs233
India Update, January 30, 2015 ICICI Securities
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Table 2: SSLT’s consolidated Q3FY15 result review (Rs mn, year ending March 31)
Other Income 675 7,736 10,245 Profit before dep and taxes 6,665 8,090 13,286
Depreciation 4,071 4,039 4,024 Profit before ex items 2,594 4,052 9,262
Ex items - - 24 Taxes - (4,513) -
Profit after taxes 2,594 8,565 9,238 Source: Company data, I-Sec research Details In our report ‘Aluminium production ramp up holds key’ dated January 29, 2015.
India Update, January 30, 2015 ICICI Securities
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Dr Reddy’s Lab (Downgrade to Hold) PHARMA Q3FY15 RESULT REVIEW AND EARNINGS REVISION
EBITDA margin outlook impacted by Russia sales Rs3,363 Kartik Mehta (+91 22 6637 7230) [email protected] Gagan Borana (+91 22 6637 7480) [email protected]
Dr Reddy’s Laboratories (Dr Reddy’s) posted a mixed set of numbers for Q3FY15. Net sales grew 8.8% YoY to Rs38.4bn – higher than our estimate of Rs36.4bn – mainly on account of 20.7% YoY and 82.3% YoY growth in PSAI and RoW formulation sales, respectively. Russia sales declined 9% YoY hurt by depreciation in Rouble. Gross margin dipped 230bps YoY to 58.2% due to adverse currency movement and high base of Q3FY14 which included sales of limited competition products. EBITDA margin dipped 400bps YoY to 24.1% – lower than our estimate of 24.4% – primarily due to higher R&D expenses that moved up to 11.2% of net sales in Q3FY15 from 8.4% in Q3FY14. As a result, adjusted PAT declined 11.2% YoY to Rs5.1bn, which is lower than our estimate of Rs5.6bn.
• We downgrade the stock to HOLD rating (from ADD) with a target price of Rs3,343/share (unchanged) based on a target PER of 18x (unchanged) our FY17 EPS estimate. The downgrade factors near to medium term concerns on the profitability of its Russian business due to weak Rouble. We forecast total sales and earnings for FY14-FY17 to grow at a CAGR of 13.4% and 14.2%, respectively. We have raised our sales estimate for FY15, FY16 and FY17 by 3.3%, 5.9% and 6%, respectively, to factor in increase in US generic business.
• Key downside risks: Lower-than-expected sales in the domestic market, delay in key product launches and lower-than-expected market share gain in the developed markets.
• Key upside risks: Improved business outlook on its Russian business on the back of strengthening currency and approval of key products in the US markets.
Table 2: Q3FY15 result review (Rs mn, year ending March 31)
Q3FY15 Q3FY14 % Ch YoY Q2FY15 % Ch QoQTotal revenues 38,431 35,338 8.8 35,879 7.1 Gross profit 22,352 21,391 4.5 20,986 6.5 S G & A 10,572 9,858 7.2 10,125 4.4 R&D exp. 4,316 2,979 44.9 4,113 4.9 Amortization exp. 579 585 (1.0) 548 5.7 Other operating (Inc.)/exp. (341) (177) (265) Operating Inc. / (Loss) 7,226 8,146 (11.3) 6,465 11.8 Equity in loss of affiliates 47 46 51 Other (exp.)/ Inc. (net) 347 48 178 PBT and minority interests 7,620 8,240 (7.5) 6,694 13.8 Income tax benefit / (exp.) (2,541) (2,521) (1,196) Adjusted PAT 5,079 5,719 (11.2) 5,498 (7.6)Extra ordinary income/ (exp.) 666 464 243 Reported PAT 5,745 6,183 (7.1) 5,741 0.1 Gross margins (%) 58.2 60.5 58.5 EBITDA (%) 24.1 28.1 23.5
Source: Company data, I-Sec research Details In our report ‘EBITDA margin outlook impacted by Russia sales’ dated January 29, 2015.
India Update, January 30, 2015 ICICI Securities
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Pidilite Industries (Downgrade to Hold) MID-CAP Q3FY15 RESULT REVIEW AND RECOMMENDATION CHANGE
Results below estimates, RM benefit still to show up Rs576 Nimit Shah (+91 22 6637 7588) [email protected] Anand Mour (+91 22 6637 7209) [email protected] Jeetendra Khatri (+91 22 6637 7416) [email protected]
Pidilite Industries’ (Pidilite) consolidated revenues in Q3FY15 increased 12.6% YoY to Rs11.9bn and adjusted PAT grew 17.6% YoY to Rs1.26bn (I-Sec estimate: Rs1.4bn). Gross margins declined 90bps YoY at 43.9% due to consumption of high cost inventory. The management commentary suggested a 5% decline in 50% of the raw material (RM) index in Q3FY15. VAM prices (accounting for around 15% of raw material costs) declined from US$1500 to US$1350 and, are currently hovering around US$1200.
The impact of lower raw material cost will be partly visible in Q4FY15 while the full impact will be visible in subsequent quarters. Depreciation cost was higher 40% YoY at Rs307mn.
We have reduced our earnings estimate for FY15 by 2.1% incorporating lower topline growth and higher depreciation expenses, but have marginally raised FY16 earnings by 1.8% to factor in the benefit of lower raw material cost. However, we downgrade the stock to HOLD rating (earlier ADD) with a revised target price of Rs555 (earlier Rs426), valuing it at 33x FY17E earnings (earlier 28x average FY16 and FY17 earnings). We have increased the target multiple to reflect the higher earnings growth trajectory. We now expect earnings CAGR of 24.2% over FY14-FY17.
• Revenues up 12.6% YoY: Consolidated revenues grew 12.6% YoY to Rs11.9bn mainly on the back of a 3% YoY growth in the consumer and bazaar products segment. Industrial products segment reported a lower 5.2% YoY growth to Rs2.03bn. Standalone revenues were up 12.2% YoY to Rs10.75bn. Volumes grew around 8% in both the consumer & product segment and the industrial products segment. This implies some price reduction in the industrial products segment. In the white glue business (around 25% of the consolidated revenues), the company has however affected a 2% to 3% price increase during the quarter.
• Full benefit of raw material cost decline to be visible in subsequent quarters: Gross margins shrank 90bps YoY to 43.9% due to consumption of high cost inventory during the quarter. The management commentary suggested a 5% decline in 50% of the raw material index in Q3FY15. The impact of the lower raw material cost will be visible partly in Q4FY15, with the full impact visible in the subsequent quarters. Depreciation cost was higher by 40% YoY at Rs307mn.
• Downgrade to HOLD; revise estimates marginally: We have cut our earnings estimate for FY15 by 2.1% incorporating a lower topline growth and higher depreciation expenses; however, we have marginally raised our FY16 earnings by 1.8%, as we factor in the benefit of lower raw material cost. We however downgrade the stock to HOLD (earlier ADD) with a revised target price of Rs555 (earlier Rs426), valuing it at 33x FY17E earnings (earlier 28x average FY16 and FY17 earnings). We
IDFC’s Q3FY15 earnings was in-line with consensus estimates but significantly below ours on the back of lower than expected other income and higher than expected provisioning. The key features of the result that stand out are:
• The company continues to provide heavily (31bps of assets provided towards loans in the quarter) and provisioning has now reached 3.9% of loan assets while GNPA levels stand stable at 0.68% (6bps QoQ increase in the quarter). Restructured loans also remained stable at 6.1% of total loans.
• Treasury investments increased 42% QoQ on a high base and stand at Rs254.6bn (29.5% of balance sheet assets). This should suffice as its entire SLR portfolio in IDFC bank! Clearly, this is an interest rate view that the company has taken, as the SLR build need not have been this fast and early.
• Growth remains elusive with loan assets declining 1.9% QoQ. The fact that this happened while telecom sector loans increased 8.2% QoQ shows that but for such short term low yield loans, book run-off is even higher. Energy and transportation sector loan book declined 4.4% and 4.2% respectively. With loan growth no longer an impediment to bank conversion (given zero regulatory cost of incremental project loan growth in a post-infra bond regulation dispensation) – the decline clearly points to a lack of suitable opportunities rather than management willingness.
• Operating costs remain high as expected with other (non-salary) operating costs at 17bps of assets vs earlier run-rate of 9-12bps per quarter. The company is obviously investing into bank-ready systems and processes.
• We feel there is a strong case for the bank eventually trading north of 2x 1-yr fwd P/BVPS given its RoE profile (steady state ~22%) and roll over our TP to Rs225 from Rs220 (maintaining a target multiple of 1.9x 1-yr fwd P/ core BVPS, 10% holding company discount). Under the de-merger scheme, IDFC shareholders will get one share of the bank for every share held, residual ownership of the bank with NOFHC will be 53% (the share count of the bank will therefore be ~2.13x that of IDFC, the 3% buffer likely being kept for ESOP related dilutions). We maintain our BUY recommendation.
• New regulations enhance return profile and the freedom to grow. As we tried to quantify the impact of the infra bond regulation on the return profile of IDFC post bank conversion, we built in significant conservatism by assuming i) limited usage of the 7yr+ debt raising ceiling (as defined by the current document) ii) maintained RIDF deployment at levels that are frankly still ridiculously high (the deployment is a 350bps negative carry trade) and iii) nearly zero benefit of doubt in CASA sourcing, asset diversification and PSL asset origination. Despite all this the FY21E RoE is ~22% in our calculation. The actual return profile is likely to surprise on the upside in
Target price Rs225 Earnings revision
(%) FY15E FY16E NII ↑ 1.3 ↓ 22.0 PPoP ↓ 6.6 ↑ 3.1 PAT ↓10.6 ↑ 2.0
Source: I-Sec research Target price revision Rs225 from Rs220
India Update, January 30, 2015 ICICI Securities
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the absence of any large scale regulatory intervention or massive over-investment into retail diversification.
Table 2: Q3FY15 result review and variance analysis (Rs mn, year ending March 31)
Q3FY14 Q2FY15 Q3FY15 % YoY % QoQIncome statement Interest income 19,320 20,331 21,452 11.0 5.5 Interest expense 12,680 13,851 14,842 17.0 7.2 Net Interest Income 6,640 6,480 6,610 (0.5) 2.0 Other income 1,908 4,544 3,169 66.1 (30.3) Net income 8,548 11,024 9,779 14.4 (11.3) Staff cost 775 964 975 25.9 1.2 Other op expenses 540 1020 969 79.5 (5.0) Operating expenses 1,315 1,984 1,945 47.9 (2.0) PPoP 7,233 9,040 7,834 8.3 (13.3) Provisions & Writeoffs 365 2,812 1,532 319.4 (45.5) PBT 6,868 6,229 6,303 (8.2) 1.2 Tax 1,811 1,833 2,018 11.5 10.1 Tax Rate 26.4 29.4 32.0 21.5 8.8 PAT before minority int 5,057 4,395 4,284 (15.3) (2.5) Share of Associate company 7 (136) (31) na na Minority interest 58 45 38 (34.4) (16.8) Profit after tax 5,007 4,214 4,216 (15.8) 0.0 EPS (Rs) 3.3 2.6 2.6 (19.8) 0.0
Source: Company data, I-Sec research Details In our report ‘Preparations on in earnest’ dated January 29, 2015.
India Update, January 30, 2015 ICICI Securities
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Torrent Pharma (Buy) PHARMA Q3FY15 RESULT REVIEW AND EARNINGS REVISION
Strong outlook for India business Rs1,138 Kartik Mehta (+91 22 6637 7230) [email protected] Gagan Borana (+91 22 6637 7480) [email protected]
Torrent Pharmaceuticals (Torrent)’s Q3FY15 numbers are in line with our expectations. Net sales grew 16.8% YoY to Rs11.6bn versus our expectation of Rs11.8bn. Constant currency sales growth in the US and Brazil was 16% YoY and 19% YoY, respectively, while India formulation sales (adjusted for Elder Pharmaceuticals’ sales) grew 15% YoY. EBITDA margin improved 50bps YoY to 19.7%, lower than our estimate of 20.7%. EBITDA margin was hurt by adverse currency movement which led to lower realisations. YoY increase in depreciation and interest cost on account of acquisition of Elder Pharmaceuticals restricted adjusted PAT growth to 6% at Rs1.67bn, which was in line with our estimate of Rs1.62bn.
Secondary sales (monthly) of acquired Elder portfolio
• We maintain BUY rating on the stock with a revised target price of Rs1,317/share (earlier Rs1,102/share) based on a target PER of 17x (earlier 15x) our FY17 EPS estimate. We have increased our PE multiple mainly on account of improved outlook on India business arising from synergies from Elder’s brands. We expect sales and earnings CAGR of 13.5% and 25.5%, respectively, over FY14-FY17. We have marginally cut our sales estimate for FY15, FY16 and FY17 by 0.4%, 1% and 1.4%, respectively, while raising our EPS estimate for FY15, FY16 and FY17 by 5.6%, 4.8% and 5.5%, respectively, to factor the improvement in EBITDA margin.
• Key risks: 1) Higher-than-expected pricing pressure in the generics markets of Brazil, Russia and Germany, 2) lower product launches in the US, and 3) delay in realising synergies with the acquired brands of Elder Pharma and lower-than-expected domestic sales growth, which will negatively impact the EBITDA margin.
Havells India’s (Havells) reported weak numbers with a 5.3%YoY domestic revenue growth albeit in line with pre-result management commentary on slowdown in the overall market. Standalone EBITDA margin increased by 20bps YoY to 14.5% driven by strong cost control and revenue mix enabling better contribution margins from the lighting and cables division. Major disappointment came from Sylvania owing to various one-time costs (below EBITDA) which led to EUR10.7mn loss (I-Sec: PAT of EUR0.7mn). Consumer sentiment on the ground remains weak as evident by similar comments from companies like TTK Prestige and V-Guard. The Havells management continues to guide for a similar growth in Q4FY15 but remains hopeful of recovery going forward. We cut our standalone sales forecasts for Havells on continued weak consumer sentiment and have reduced our Sylvania estimates to factor increased pension costs, forex-related losses, other one-offs as well as lower exchange rate (EUR/INR at 72 vs 80 earlier) post-FY16. We raise our DCF-based target price for the stock to Rs295, as we roll forward to FY16E which offsets the earnings cut. We maintain our ADD rating on Havells and recommend buying on dips.
• Standalone India business grew 5.3% YoY as growth slowed across all segments. EBITDA was marginally ahead of our estimate at Rs1.81bn (I-Sec: Rs1.73bn) mainly on better contribution due to improved mix (higher sales from domestic cable and high-margin fixtures). Electric Cons. durables was the only segment that posted double-digit growth, while the Lighting and Fixtures business was flat YoY as growth in LED offset decline in traditional luminaries. We have cut our sales growth forecast to 12.3%, 14.6% and 14.6% for FY15, FY16 and FY17 (earlier 18.4%, 17.4% and 16.5%) respectively.
• Sylvania – one-offs impact results: Sylvania’s revenues at EUR111mn were marginally weaker than expected. Europe growth slowed to 2.6% YoY after a good Q2FY15 and Americas growth of 7% YoY was impacted by the weaker euro. However, adjusted EBITDA margin of 5.0% (I-Sec: 5.1%) was in line with expectation. EBITDA includes a one-off charge of EUR2.9mn owing to sales return and rebate in Thailand. Below EBITDA, there were other one-offs: pensions costs (EUR6.1mn), fixed asset impairment (EUR1.3mn) and retrospective tax assessment in Italy (EUR2mn). Considering the one-offs and lower EUR/INR, we have reduced our sales, reported EBITDA and PAT estimates by 11%, 22% and 30% for FY16 and 11%, 17% and 21% for FY17 respectively.
• Raise target price to Rs295, maintain ADD: We increase our target price for Havells to Rs295/share (earlier Rs278/share) on the back of rollover of DCF to FY16E, which offset the lower earnings estimates. We value Havells’ standalone at Rs290, implying a P/E of 24.4x FY17E. We attribute Rs5/share for Sylvania and maintain our ADD rating. We recommend adding the stock on dips.
Shriram City Union Finance (SCUF) reported a PAT growth of 10.7%YoY in Q3FY15. AUM growth, which turned positive in Q1FY15 after five quarters of decline, picked up some momentum clocking 4% sequential growth, the highest in last nine quarters. But for auto and gold loans, most other segments contributed strongly. Margin remains high at 14.3% NIM (up 195bps YoY and 95bps QoQ) thanks to i) a loan mix shift in favour of higher yield products, ii) de-leveraging through the ~Rs7.9bn equity raise from Piramal Enterprises (10% of post money capital) and iii) some benefit of wholesale easing and rating upgrade to borrowing costs (11.5%, down 29bps YoY and 12bps QoQ). Operating cost inflation (op cost to AUM 1.5% for the quarter, up 26bps YoY) has sneaked up on the company, thanks to muted asset growth in last two years. We continue to build in acceleration of asset growth from here on as political tensions in erstwhile Andhra Pradesh subside and base effect kicks in. However, capitalization levels (25.5% Tier-1) are a huge drag on RoE (14.5% in the quarter, down a whopping 456bps YoY). Valuations at 2.6xFY16E P/BVPS appear quiet rich to us for a business with ~15-16% FY16-17E RoE (steady state ~22-23%) and almost zero possibility of enough growth in FY15-17 to allow the company to lever up. Our 12-month target price increases to Rs1850 from Rs1340 (target multiple increased to 2x 1-yr fwd P/BVPS from 1.5x due to improving growth momentum and margin traction). We maintain our REDUCE recommendation.
• Asset growth gaining momentum…The core SME lending business grew 5.5% QoQ in the quarter and there seems to be increasing evidence that moving back to longer duration products is helping asset growth. Two-wheeler loans also clocked a healthy 6% growth QoQ. Auto loans continue to be a laggard and declined 4.2% QoQ (fourth consecutive quarter of decline). The company has merged the two gold loan categories into one in this quarter’s disclosure and on a combined basis they grew only 1.4% QoQ. The overall benign asset growth situation last year had been created by i) reduced lending enthusiasm in asset classes that company considers as non-core ii) impact of political uncertainties on key erstwhile Andhra Pradesh (AP) geography disbursements and iii) tightened credit policies on account of macroeconomic uncertainties. As issue ii) gets addressed now, growth should rebound but cascading effects of a weak rural economy remain a risk, despite the company being primarily present in trading hubs and urban peripheries.
• … but unlikely to deliver adequate leveraging. We are building in ~23% growth in both FY16E & FY17E, which is by no means immune to disappointment. Return to steady state capital productivity (23% RoE, 600-700bps improvement over current) as well as operating cost rationalization can only be delivered by an asset growth spurt. Approximately 35% annual asset growth is required for financial leverage to be optimal in two years, the likelihood of which appears to be low even if we see an economic recovery.
Oriental Bank of Commerce (OBC)’s Q3FY15 performance was marred by continued stress on asset quality and income reversals on earlier sale of NPAs to ARC. Bad assets accretion is at all-time high and the outlook continues to remain dim especially given the rising loan exposure to risky segments. NIM improved sequentially despite higher slippages, sharp decline in CD ratio and decline in proportion of CASA deposits, and was aided by higher decline in cost of deposits. Operating performance was further aided by significantly higher trading gains and lower other expenses, but this is unlikely to remain a trend. We do not estimate significant pressure on core spreads, partially aided by the management’s strategy to focus on the same over business growth. However, improvement in asset quality could take longer time than was earlier estimated, leading to higher gross slippages and provisioning estimates for FY16E. We maintain REDUCE rating on the stock due to rising slippages and low RoE at 9.1%/12% in FY15/FY16. Our target price of Rs266 discounts FY17E P/AdjBV by 0.6x.
• Asset quality under scanner again: Total bad assets (gross slippages + incremental restructuring) spiked to Rs34bn, 10.2% (annualized) of loans, compared to Rs17bn in Q2FY15. Slippages stood at 3.8% (annualized) of loans, with restructured loans contributing 54%. Despite higher slippages from the restructuring book, the outstanding restructured loans came in higher at 9.0%, with incremental restructuring at 6.2% (annualized) of loans. The asset quality headwinds are unlikely to abate in near future as – a) improvement in economy is coming with lag, b) management raising its gross slippage guidance for Q4FY15E to 0.7% of loans, and c) indicative pipeline for incremental restructuring in Q4FY15E to be at 1.4% of loans. We therefore raise our gross slippage estimates to 2.7% for FY15E and 1.4% for FY16E.
• Margins driven by cost control; profit on sale to ARC reversals drive earnings lower: Despite higher slippages, decline in the CASA proportion to 23.7% and a sharp decline of 400bps in CD ratio, the NIMs at 2.69% improved by 6bps QoQ, aided by a 12bps QoQ improvement in core spreads (reported) led by a 15bps decline in cost of deposits. The NIMs were also impacted by booking of higher treasury gains, which stood at 0.3% of average investments annualized. The management’s strategy to focus on maintaining spreads over higher loan growth will augur well with margins and, we estimate them to improve to 2.5% and 2.6% in FY16E and FY17E, respectively. OBC has reversed Rs1.37bn of profits booked on issue of security receipts for sell down of NPAs to ARC, leading to a sharp rise in provisions to 0.7% of loans. It also has to reverse Rs2.8bn of similar adjustment and management indicates that it is in consultation with RBI to account for these in FY16E. We see elevated provisioning for FY15E and FY16E at 1.8% and 1.1% of total loans, respectively.
• Loan growth muted, with incremental net disbursals to high risk sectors: Loan growth slipped further to 5.5% YoY, compared to 10.9% YoY for system. Though we view this slowdown in loans as a positive move especially given the limited Tier I at 8.54%, we are worried on the incremental loan composition. The incremental loans to relatively higher delinquent Infrastructure and commercial real estate sectors stood significantly higher at 66% of incremental loans with their respective share at 18% and 6% of total loans. In case of a slower pick-up in economy, the asset stress could remain elevated and is a key risk to our estimates.
Table 1: Q3FY15 result review (Rs mn, year ending March 31)
We upgrade Gujarat State Fertilizers (GSFC) to ADD rating and revise the target price up to Rs113/share (earlier Rs107/share) valuing the core business at 7x FY17E EPS (from average FY16E-17E EPS earlier) and 50% discount to investment book mainly due to:
• Possible improvement in Caprolactum segment margin, going forward, with steep fall in Benzene prices. While, we believe Caprolactum prices should also fall with overall commodity slowdown, the margin spread will improve from the current level
• Increased P&K capacity and improving macros for NPK business due to improving fiscal health of the government on account of sharp fall in crude prices and decline in system NPK inventory
• Recent correction in the stock price (around 17% in one week) and the stock underperforming the broader markets
• PAT came in at Rs1.04bn (up 2.2% YoY), lower than our estimate of ~Rs1.2bn, mainly due to lower EBIT margins for Caprolactum segment at 8.4% (vs. I-Sec estimate: 14%). Fertilizer segment reported EBIT margins of 12.4% mainly due to accounting of subsidy receipt worth Rs472mn, which pertains to escalation in input cost of urea in earlier period. Adjusting for the same, fertilizer segment's EBIT margins came lower at 7.2% (vs. I-Sec estimate: 12.5%).
Key highlights
• GSFC has taken a price hike of around 11.5% for non-urea fertilizers on account of increase in gas price from November 2014. Impact on account of gas price increase on urea production was about Rs170mn for November-December 2014 (i.e. ~Rs1bn annually) which will be pass-through but will be accounted once notfied.
• After the limit on Neem coated urea production was lifted, GSFC is entirely producing Neem coated urea and upped urea price by Rs268/te (contributed Rs41.7mn during Q3FY15).
• Caprolactam-Benzene spread during the quarter was USD984/te (vs. USD920/te in Q2FY15), which has now improved to US$1100/te.
• Caprolactam and Melamine plant was shut down for one month during Q3FY15, but is back to normal now.
• Total receivables as of Q3FY15 end stands at Rs17.1bn (vs. Rs17.7bn at Q3FY14-end) of which subsidy outstanding accounts for Rs13bn
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India Update, January 30, 2015 ICICI Securities
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New I-Sec investment ratings (all ratings based on absolute return) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return
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