ASTRAL POLY TECHNIK LTD : BUY

ASTRAL POLY TECHNIK LTD.

Revolutionising India’s Plumbing Industry!

Astral Poly Technik Ltd. (Astral) is a pioneer & market leader of CPVC  pipes & fittings in India. Astral is a licensee of Lubrizol, USA, (global specialty chemical behemoth; 70% of global CPVC market) to manufacture & market its world class plumbing products in India. Company has a techno-equity venture with Specialty Process LLC, USA (Global distributor of reengineered polymers) for providing technology required to manufacture CPVC products. 

Investment Rationale:  

Play on domestic housing & infrastructure growth story: Astral with a ~65:35 product mix (CPVC: PVC pipes and fittings & others) derives its demand from over Rs 17,000 Cr (G.I,PVC,CPVC&others) plumbing industry growing over 15% CAGR. According to the Ministry of Urban Development, India has a shortage of ~2.65 cr housing units - market of over Rs 34,450 cr (XIth five year plan).

Huge potential in unexploited replacement market: India has remained a Galvanized pipe dominated market (Rs 7,000 Cr). Consumer preference shifting towards CPVC due to cost advantage (25% cheaper than G.I & ~15% expensive than PVC), non-corrosive nature, resistant to high pressure & temperature etc. Huge replacement demand seen especially from housing & infrastructure sector. 

Astral’s products on high growth trajectory: Deep market penetration and brand recognition helped Astral tap 50%+ domestic market share of CPVC pipe industry (Capex 12x in 5 years signifies huge demand).

Efficient working capital management: Significant improvement - 75 days in FY  08  to  48  days  in  FY  11,  to  improve  further  as  strategically  located  new capacities (H.P & Gujarat) will reduce the lead distance. As a prudent policy Astral has been expanding its capacity in Q4 to avail taxation benefits.

High Entry Barrier: Technology to manufacture CPVC pipes is only with Noveon (Lubrizol) & Astral benefits from over a decade relationship with the global major; thus advantage of getting licenses of Lubrizol’s new products first in India. In addition, a CPVC pipe plant takes 3-4 years (set up & approvals) keeps competition at bay. 

New Products to boost profitability: Astral has an exclusive license to manufacture Lubrizol’s global top-seller Blazemaster FireSprinkler Systems, based on CPVC platform. The company has also picked up 85% stake in Advance Adhesives Pvt. Ltd. to produce Cement Solvent (solution for joining pipes) via technology developed by global Adhesives major, IPS, USA; could be a huge potential for Astral.

Valuations

We  expect  Astral  to  grow  at  37%  CAGR  for  next  2  years  &  maintain  itsleadership in CPVC pipes & fittings, moreover we feel the company is undervalued & deserves better valuations for key aspects : a) Robust business model  – market penetration & branding strategy; new facility being onequarter old only - 36% (17,565 MT) of total capacity (48,432 MT)   b) Quality return ratio profile  – ROCE>26% & ROE>25%,)  c) High entry barriers -  Raw material source, project time, technology. We have valued Astral at 9x FY13E EPS and arrived at a target price of  Rs 244 (potential upside 26%) with a horizon of 12-15 months.

South Indian Bank : BUY

Strong Business; Asset Quality Comforting

South Indian Bank’s (SIB) Q4FY11 PAT grew 112% YoY to Rs 818 mn, above our estimates, led by higher NII and lower-thanestimated provision expenses. Core income rose 181% YoY, which appears optically large because of higher interest expenses booked in 4QFY10 (due to a system error wherein SIB had to absorb full year impact of cost of a special deposit scheme). Margins impressed with ~35 bps QoQ improvement backed by strong low-cost deposit franchise. Asset quality improved with 9% QoQ decline in gross NPAs and 19% QoQ decline in net NPAs. Coverage ratio has increased to 74% (from 71% in Dec-10).

Key highlights

• Loan growth (up 29% YoY) was led by SME and Agri advances which increased 41% and 44% resp. Overall lowcost deposits (incl. NRI deposits) recorded robust 45% YoY growth and now stand at 34% of overall deposits (vs. ~30% in Mar-10).
• Yield on advances rose by 21 bps QoQ to 10.9% while cost of funds increased by 17 bps QoQ to 6.6%.
• Staff cost rose 129% YoY to Rs 758 mn as it includes Rs 251 mn for pension (2nd option) towards retired staff and Rs 270 mn for 1/5th pension (2nd option) towards existing staff.

Maintain BUY with TP of Rs 30

SIB’s overall biz momentum was maintained with advances & deposits growing in tandem at ~29% YoY each, along with improvement in asset quality. As expected, margins were well supported by adequate CASA and low-cost NRI deposits. SIB plans to start gold loan NBFC and to raise capital of Rs ~10 bn to fund future growth. At CMP of Rs 22, the stock is trading at 1.2x FY12E ABV of Rs 18 and 1.1x FY13E ABV of Rs 21. We have a BUY rating on the stock with a TP of Rs 30 (10x FY12E EPS and 1.7x FY12E ABV) – upside of 30% from CMP.

5th May, 2011

The markets opened on a weak note and though negative continued to trade sideways for most of the session. The markets temporarily edged up into the positive territory but could not sustain the gains and ended the day with marginal losses. Among the Sectoral indices Auto & IT ended in the red while Oil & Gas ended with gains of more than 1%. Among the Sensex stocks ONGC (4.78%) HDFC Bank (1.35%) & SBI (1.33%) were amongst the gainers while Bajaj Auto (4.82%), Hero Honda (3.63%) and HDFC (2.89%) were among the losers. The Sensex lost 65 points or 0.35% to close at 18,469 while Nifty lost 28 points or 0.50% to close at 5,537.

Total traded turnover stood at Rs 1,34,769 cr. In equities FIIs were net sellers of (Rs 992 cr) while DIIs were net buyers (Rs 914 cr). On the derivatives side, FIIs were net sellers in Index Futures (Rs 611 cr), Stock Futures (Rs 172 cr) while they were net buyers in Index Options (Rs 520 cr) and Stock Options (Rs 13 cr).

The US markets ended lower led by correction in energy and Industrial stocks and investors remained cautious on weak economic data. The Dow Jones lost 84 points or 0.66% to close at 12,724 while NASDAQ dropped 13 points or 0.47% to close at 2,828.

The Asian markets are trading marginally lower. Hang Seng is trading lower by 0.12% while Nikkei is shut for trading today.

The markets closed lower for the eighth consecutive session. FIIs continued to sell while DIIs supported by buying in the cash segment. The markets may open on a soft note tracking weak global cues. Maintain a stock specific approach.

The trend deciding level for the day is 5540,If NIFTY trades above this level then we may witness a further rally up to 5570‐5615‐5640 levels. However, if NIFTY spot trades below 5540 levels then we may see some profit booking to initiate in market, it may correct up to 5500‐ 5468‐5445.

Indian Metals & Ferro Alloys : HOLD

Q4FY11: Dismal set of numbers

IMFA posted a disappointing Q4FY11 results which were way below our expectations due to increase in Raw material cost mainly the increase in procurement of coal from e-auction/imports. IMFA posted a sales of Rs 289 Cr (Up by 68% (YoY)), an EBIDTA of Rs 60 Cr (YoY growth by 31%) and PAT of Rs 24 Cr (growth of 28% (YoY)). The EBIDTA margins corrected by 588 bps on annual basis.  

Charge Chrome Segment:  In this quarter, IMFA produced ~51500 tn (38435 tn for Q4FY10) of Charge chrome and sold ~51000 tn (35744 tn for Q4FY10). Realizations for the Charge chrome corrected by ~5% on sequential basis. Going forward, the realizations are expected to firm up as the S African Ferro Chrome producers (who are price setters in the Fe Cr industry) are expected to raise the price to pass on the incremental cost. It must be remembered that ESKOM- the public utility company in SA has a mandate to raise the power prices by 25% (approx.) every year starting CY2010 till CY2012. The Chinese spot prices are seen strengthening to 110 USc/lb against 95 USc/lb last year.

Power:  IMFA generated 20.5 Cr power units and consumed them captively. IMFA is adding up 30 MW of dual fired power plant which will be using captive flue gases and coal for generating power. The new power plant (30 MW) was expected to be commissioned by Q3FY11, but has been delayed further and is expected to be operational by Q1FY12. In addition, the company is erecting a 120 MW coal fired merchant power plant at a capex of Rs 595 Cr which is expectedto be commissioned by FY13.

Valuations & Outlook

Robust demand and expected rise in price of S African Fe Cr is expected to keep the European benchmark prices at current levels and upward bias in the Chinese spot prices. IMFA, which supplies to international players like POSCO and Glencore has its sales pegged to the benchmark prices but also linked to spot. Although, the realizations are expected to strengthen, the sharp rise in the cost of production (CoP) due to rise in coke and domestic coal prices is expected to affect the margins. We had already priced  in  rise  in  coke price but the further rise in domestic coal cost (due to drop in availability of linkage coal) has led to increase in power cost which for the last quarter has inflated to Rs 4.19/unit as against the  historical cost of generation of Rs 2.3/unit. IMFA is struggling to get supply of linkage coal as MCL has discontinued the coal supply citing the tapering linkage policy while the coal block alloted is yet to be operationalised and as per management, is expected to yield coal not before Q4FY12E.Despite the robust Fe Cr prices expected in the coming quarters, IMFA would not be in position to defend its margins due to inflating power bill. We have hence further toned down our topline and bottomline estimates by 4% and 37% respectively for FY12. 

Taking into account these developments, we recommend a Hold with reduced price target of Rs 589 (which is drop of 28% from our earlier target of Rs 822).

Marico Ltd : HOLD

Price Hikes & Lower RM Costs to Improve Margins

Marico Ltd reported consolidated net revenues of Rs 7.5 bn (up 24% YoY), EBITDA of Rs 0.8 bn (dn 7%  YoY)  and  Adj  PAT  of  Rs  276  mn (dn 51 % YoY) in Q4FY11. Results were below our expectations due to higher RM costs, depreciation & interest expense (related to the ICP acquisition).

Key highlights

• Healthy volume growth of 12% YoY in FY11, may not sustain: Parachute rigid pack up 10 % YoY, Saffola up16 % YoY and hair care up 24% YoY. Growth in Parachute was impacted by a cumulative price hike of 32%, which led to a modest 5% volume growth in H2FY11. Given the inflationary environment and price hikes effected, we expect volume growth in FY12E to lag FY11.
• Rising Copra prices (~40% of RM) impacted margins:  FY11 Gross profit margin contracted by 430 bps to 48.3% due to 82% YoY increase in copra prices. The full impact of the price hikes will only be seen in Q1FY12E. We believe given the impact of price hikes and likely softening of Copra prices in FY12E, margins will improve going ahead. We forecast operating margins of 13.6% and 13.9% for FY12E & FY13E respectively vs.13.4% in FY11.
• Kaya (India): Losses stood at Rs 141 mn (excl Derma) for FY11. However, business fundamentals are improving as same-clinic growth has increased to 8% in H2FY11 vs. a de-growth in H1FY11.  We expect Kaya India to break-even in FY12E.
• International business: Growth was 27% in constant currency terms which was led by 17% volume growth in FY11. Sales (of ~Rs 200 mn) in the MENA region were impacted by the political unrest during Q4. While the situation in Egypt is improving, the outlook in some parts of the region is still uncertain.  We have reduced our growth outlook (organic) to 19% vs. 24% earlier for FY12E, for the Int’l biz (ex-Vietnam) to account for the loss of sales due to political unrest in the region.
• Extraordinary expenses in Q4FY11: This qtr saw many exceptional items and one-offs. The three major items include: (1) sales proceeds from the divestment of Sweekar (Rs 500 mn); (2) reversal of provision for excise duty (Rs 293 mn) which is now accounted for in contingent liabilities (this reversal is as per accounting standards); & (3) Revenue recognition for Kaya (Rs 313 mn) for services not yet rendered. Other items relate to impairment of intangible assets (Kaya & International Biz), accelerated depreciation (Kaya) and amortization of intangible assets (Kaya & International Biz).

Valuation

We have downgraded our EPS by 2% for FY12E mainly due to higher interest costs. FY13E estimates are largely unchanged. The stock is trading at 25x 1-yr fwd EPS, higher than its 5-yr upper quartile range of 23.6x.  Our 1-yr target price of Rs 127 is based on 23x FY12E EPS. Maintain HOLD rating on the stock.

Cholamandalam Investment : BUY

Robust Operating Performance

CIFC* reported robust 4QFY11 performance with strong operating profit growth (of 83%YoY). Biz gained traction with disbursement growth of 31% YoY while asset quality improved. CIFC reported PAT of Rs 135 mn in 4QFY11 (vs. 67 mn in 3QFY11) with strong NII & improving operating efficiency. PAT includes extraordinary expenses of Rs 268 mn arising from impairment prov on inv made in subs (Rs 240 mn) and prov for standard assets (Rs 28 mn). Asset quality improved with Gross NPA ratio improving to 2.61% from 5.5 % in FY10.

Key highlights

• Sanitization process over:  CIFC, which was till recently suffering from credit losses arising from the personal loan (PL) segment, has now completely cleaned up its PL book (now constitute 1% of AUM), while making 100% provisions. Going forward, we expect credit cost to reduce which will provide traction to profits. We expect credit cost of ~0.7% in FY12E improving from the current levels of ~1.5%.
• Strong biz growth: Disbursement growth was robust at 31% YoY and 14% QoQ to Rs 16.8 bn mainly supported by higher disbursement in vehicle finance (47% YoY growth). Total AUM grew  21%  YoY  to  Rs  104  bn  with  on-book  AUM  growing  62% YoY. Securitized portfolio contracted further to 19.8% in FY11 from 40% a year ago.
• Expect strong profits:  In FY11, CIFC has booked Rs 1.7 bn of loan losses towards the PL segment which will not be there in FY12. With lower credit costs and better spreads, we expect ROA to improve to ~1.9x in FY12E from current 0.7x.

BUY rating with a TP of Rs 214 (34% upside from CMP)

The co. is marching ahead towards robust profitability in ensuing years as it has clipped the entire risk arising from its PL portfolio. We believe the valuation differential from its peer group to narrow down as CIFC is witnessing reasonable growth and profit nos. We maintain our BUY rating with a TP of Rs 214 (2.2x FY12E ABV) – implying 34% upside.

Bank of India : HOLD

Higher Staff Costs Impact Profits

Bank of India (BOI) reported net profit of Rs 4.9 bn, which was below our expectations, led by higher staff cost provisions. Core interest income grew by 49% YoY, driven by 27% advances growth and 37 bps YoY increase in margins. Margins, however, declined on a sequential basis by 15 bps to 2.94% due to increased cost of deposits and decrease in CASA ratio. Core fee income growth impressed with a 46% YoY increase, while treasury gains posted a decline. Higher provisioning towards pension and enhanced gratuity led to increased staff costs. Asset quality marginally deteriorated with Gross NPAs rising by 6% QoQ.

YTD highlights (if applicable)

• Strong overseas lending:  Overall loan growth was driven primarily by overseas lending (up 44% YoY and contributes ~23% to total book), while domestic retail growth remained sluggish (up 6% YoY).
• Higher pension costs: During FY11, BOI charged Rs 7 bn for 100% pension liability (2nd option) towards retired staff and Rs 4.4 bn for 1/5^th pension liability (2nd option) towards existing staff. Further, Rs 1.2 bn and Rs 858 mn were charged towards 1/5^th of transitional liability (AS 15) and enhanced gratuity respectively.
• Gross NPAs rose due to higher slippages (slippage ratio at ~2% vs. ~1% in Q3FY11). Lower NPA provisioning, however, led to 26%  QoQ  rise  in  net  NPAs.  Coverage ratio declined by  2%  to ~72%.

Maintain HOLD with a revised TP of Rs 456

Overall business growth remained strong, with deposit growth (up 30% YoY) coming ahead of advances growth (up 26% YoY). However, the bottom-line remained muted due to increased staff expenses and higher delinquencies. At CMP of Rs 422, the stock is trading at 9x FY12E EPS of Rs 48 and 1.3x FY12E ABV of Rs 326. We have reduced our target P/ABV multiple to 1.4x (from 1.5x earlier) on the back of lower CASA, concerns arising out of higher slippages and return ratios being under pressure. We have a HOLD rating with a TP of Rs 456 (1.4x FY12E ABV and 10x FY12E earnings).

4th May, 2011

The markets opened on a soft note but managed to trade in tight range moving near the previous close till the announcement of monetary policy. The markets slipped into the red post the announcement of the policy and kept on making new intraday lows ending the day on a weak note. All the Sectoral indices ended in the red with Auto & Bankex losing more than 3% each. Among the Sensex stocks Jaiprakash Asso (8.05%), Tata Motors (5.30%) & Bajaj Auto (5.02%) were the major losers while BHEL (0.19%) was the lone marginal gainer. The Sensex lost 463 points or 2.44% to close at 18,535 while Nifty lost 136 points or 2.39 % to close at 5,565.

Total traded turnover stood at Rs 1,72,169 cr. In equities FIIs were net sellers of (Rs 1177 cr) while DIIs were net buyers (Rs 607 cr). On the derivatives side, FIIs were net sellers in Index Futures (Rs 1,638 cr), Stock Futures (Rs594 cr) and Stock Options (Rs 63 cr) while they were net buyers in Index Options (Rs 1,620 cr).

The US markets ended mixed amidst profit taking and diverse earnings reported by companies. The Dow Jones gained 0.15 points to close at 12,807 while NASDAQ lost 22 points or 0.8% to close at 2,815.

The Asian markets are trading mixed. Nikkei is shut for the day, while Hang Seng is trading lower by 1.21%.

The markets fell sharply yesterday after RBI hiked repo and reverse repo rates by 50 bps higher‐than‐expected. Market breadth remained extremely negative, with declines outpaced advances in the ratio of about 3:1. The markets may open on a soft note tracking mixed global cues. Adopt a cautious stock specific approach.

The trend deciding level for the day is 5610,If NIFTY trades above this level then we may  witness a further rally up to 5645-5678-5705 levels. However, if NIFTY spot trades below 5610 levels then we may see some profit booking to initiate in market, it may correct up to 5520- 5488-5450.

Oriental Bank of Commerce : BUY

Muted Growth; Asset Quality Showing No Respite

OBC reported subdued PAT growth of 5% YoY – much below our ests due to low core income growth. Total biz continued its moderate growth momentum (up 15% YoY). NII grew by just 2% YoY, due to ~29 bps YoY decline in NIMs. Cost-to-income ratio has improved to 36% (from 38.6% in Dec-10) due to decline in operating expenses. Asset quality disappointed with gross NPAs up 9% QoQ and slippage ratio at above 2.5% level.

Key highlights

• Credit growth was driven by 41% YoY growth in SME portfolio, which now contributes ~18% to overall credit.
• OBC has provided pension liability pertaining to retired employees (for full liability) and existing employees (for 1/5th liability) of Rs 1.5 bn and Rs 1.7 bn respectively. The unrecognized pension liability stands at Rs 6.8 bn.
• The accelerated slippages were also contributed by the introduction of CBS based determination of NPAs. Advances under sub-Rs1mn category (non- CBS) would be ~Rs 30 bn and mgmt does not expect any major slippages from the same going forward.

Maintain BUY with revised TP of Rs 415

Biz momentum remained sluggish, with total biz growing by 15% YoY, much below industry growth rate. However, mgmt has guided for ~25% advances growth (we have factored in advances growth of 19% in FY12), ~18-20% Deposits growth, ~3% NIM and Gross NPA of less than ~2% in FY12E. At CMP of Rs 346, the stock is trading at 6x FY12E EPS of Rs 60 and 0.9x FY12E ABV of Rs 371. We have assigned a lower P/ABV of 1.1x (vs. 1.2x earlier) due to continued lackluster performance. However, the stock appears attractive based on valuation relative to peer group. We maintain BUY rating on the stock with a TP of  Rs  415(upside of 22% from CMP.

Gateway Distriparks : BUY

Rail Business Gains Significant Traction

Gateway Distriparks’ (GDL) Q4FY11 results were above expectations, with a 334 bps QoQ expansion in PBDIT margin to 32.5% (vs. 23.5% in Q4FY10), driven by:

a) Robust rail/ICD ops: Volume growth of 7% QoQ coupled with PBDIT margin expansion of 460 bps QoQ to 17.6%; and

b) Healthy CFS performance:  Realizations up 6% QoQ, resulting in 356 bps QoQ increase in PBDIT margin to 52.3%. The co. reported conso revenue of Rs 1.7 bn (up 7% QoQ & 21% YoY), PBDIT of Rs 556 mn (up 19% QoQ & 67% YoY) and PAT of Rs 350 mn (up 25% QoQ & 38% YoY).

Q4FY11 highlights

• Healthy CFS realizations aid profitability:  Mumbai vols fell  by 1.5% QoQ (up 22% YoY), partially impacted by labor issues  at one of the port terminals; however, Chennai throughput  grew by 4% QoQ (up 8% YoY), while Mundra saw 14% QoQ (22% YoY) vol. growth. Avg. realization rose by 6% QoQ (17% YoY) due to increased ground rent.
• The key CFS growth triggers going ahead are: a) commencement of Vallarpadam terminal (capacity of 50,000 TEUs p.a., expected to commence ops in Q4FY12); & b) Chennai CFS expansion (likely to take shape in FY13), as the facility is running at ~90% utz. levels.
• Robust Rail/ICD performance:  Healthy vol. growth of 7% QoQ & 16% YoY. With the steady decline in share of domestic segment to 16% in Q4FY11 (vs. 18% in Q3 and 20% for FY11), the PBDIT margins significantly improved to 17.6% (vs. 13% in Q3FY11).
• The mgmt indicated that the target is to increase the share of EXIM to ~85-90% (vs.  ~70% in Q4FY11), post the commencement of Faridabad ICD (in Q3FY12), which can yield healthy PBDIT margins of ~23%. We have factored in PBDIT margin of 15.8% for FY12E (vs. 14% in FY11E), which could tend upwards with rise in EXIM share.
• Cold chain biz in expansion phase:  Snowman’s revenues grew by 22% QoQ (up 48% YoY) to Rs 139 mn; while PBDIT margins stood at 22% (vs. 13% in Q4FY10, 28% in Q3FY11). The co. is currently operating ~17,000 pallets (vs. ~11,000 in FY10), and the mgmt has plans of increasing it to ~60,000 pallets in the next 2-3 years. Capex for this segment stood at Rs 230 mn in FY11.

Multiple volume and profitability drivers; Our revised TP stands at Rs 139 upside of 16% from CMP 120. Maintain BUY

Bharat Electronics : HOLD

Strong Q4, But Upside Capped  

Bharat Electronics’ (BEL) 4QFY11 PAT of Rs 4.5 bn (69% YoY rise), came well above our expectations of Rs 3.4 bn. Driven by strong revenue growth of 23% YoY (v/s expectation of 10% YoY), mgmt indicated that qtly seasonality in terms of delivery has helped numbers. Margins saw ~550 bps YoY rise to 24.6% (v/s expected 22.5%), backed by strong revenue growth. Despite strong order book of Rs 236 bn, mgmt expects revenue growth to remain tepid at ~13-14% to Rs 62 bn. This is reflective of longer gestation projects in the order book. We believe BEL’s margins will be under pressure, as its order book mix is changing to more turnkey nature projects v/s niche engineering.  While we have raised our FY12E-13E EPS ests by 2-5% to account for the robust 4Q FY11 numbers, we believe upside remains capped from current levels. We have a HOLD rating with a TP of Rs 1,650, valued at 15x PE FY12E. 

Key highlights

• Muted sales target for FY12E despite robust order book: BEL’s order book has doubled YoY to Rs 236 bn v/s Rs 114 bn in 4Q FY10. However, mgmt has guided for only ~13-14% revenue growth for FY12E, given longer gestation nature of projects.
• Margins to remain a dampener: While BEL’s margin for the qtr has been higher than expected, margins are likely to remain weak at 14-16% levels going forward. This reflects execution mix change to projects on a turnkey basis implying lower margins v/s higher niche engg. Project margins of 20%+levels for earlier years.

Valuation

We believe margin pressure will cap profitability upside from revenue growth, despite robust order book of ~Rs 236 bn. Accordingly, we have raised our FY12E–13E EPS estimates only by  2-5% to account for the robust 4Q FY11 numbers. We have a HOLD rating  on  the  stock  with  a TP  of  Rs  1,650,valued at 15x PE FY12E.

Titan Industries : BUY

OVER 40% UPSIDE IN 2-YEARS

Titan Industries Ltd (TIL) reported net sales of Rs 65.2 bn (up 40%YoY), EBITDA of Rs 5.8 bn (up 47% YoY) & adj. profit of Rs 4.3 bn (up 70% YoY) for FY11. Reported earnings for Q4FY11 at Rs 838 mn was lower than our estimate due to higher provisioning made (~Rs 250 mn) for employee welfare scheme. Revenue during FY11 was driven by healthy improvement in same-store volume growth across formats, new store rollouts and rise in gold price (up 25%). Greater thrust on large format store and improvement in sales mix towards studded jewellery will remain the key focus area going ahead. We have upgraded our volume growth outlook and consequently our earnings by 7% in FY13E.   The stock trades at 28x 1-yr fw  P/E,  close  to  the  upper  quartile range. While there is little scope for further P/E improvement, we believe the upside will be driven by earnings momentum. At exit multiple of 32x FY13E, we believe the stock can deliver over 40% return in the next 2 years. Thus BUY with 1-year target price of Rs 4750 (upside of 18%).          

Key Highlights: FY11 

• Negative working capital business: By virtue of gold lease from banks (for over 90% of  jewellery inventory) & rising customer advances (6480 mn) under Gold Harvest Scheme (12% of jewellery sales) in FY11 , the jewellery division is now a negative WC biz. Thus overall WC-to sales now at -3% vs. 50% a decade back.  
• Continued improvement in margin profile:  PBIT margin (8.5% in FY11 v/s 7.2% in FY10) for the jewellery segment has improved due  to increase in contribution from (a) higher-margin diamond studded jewellery (40% of jewellery sales in FY11) & (b) improvement in  making charges which is linked to gold prices. Segmental margin (14.5%) of watches also improved by 400 bps in FY11, led by higher production from low cost zone in Uttaranchal & better sales mix (premium brands). As the company drives premiumization through design innovations and a 6% gold price inflation, we estimate overall EBIT margin to improve from 8.4% in FY11E to 8.9% in FY13E.
• Focus on large format stores: The company currently operates 665+ stores (v/s 543 in FY10) & 0.81mn sqft (v/s 0.69mn sqft) of retail space. Jewellery retail space (~ 40% of total) stood at 0.34 mn sqft. 6 Tanishq stores (total 120) were added this fiscal. Tanishq has recenly opened the largest jewllery store  (20,000 sq ft) in Mumbai. This is the 3^rd large format store and  the company intends to further explore larger formats across key tier I cities. We believe this would not only improve execution capability, but also has the potential to increase customer conversion and inventory turns.    
• Break even in eyewear & precison engg on the horizon: At PBIT level, losses have reduced from 400 mn in FY10 to 180 mn in FY11
• Debt retirement: The Company will retire 520 mn of debt in FY12 reducing gross debt to 150 mn (ECB’s) 

Strong same-store sales growth across formats

Jewellery segment (76% revenue) grew by  44% YoY in FY11, led by 18% growth volume and 25% rise in gold price. Same store sales growth in Tanishq stood at 44% in value terms for 9mFY11. We have forecasted 22% CAGR in jewellery volume over the next 2 years, based on 16% increase in retail space. Value growth is estimated at 32% CAGR considering 6% gold price inflation and 4% improvement in sales mix.

Watch segment (20% of revenue) grew by 25% YoY in FY11, which was largely led by volume growth in Titan brand and high end swiss brands.  World of titan stores witnessed a 21% rev growth in 9mFY11, while Helios & Fastrack also grew rapidly. We expect 14% CAGR in watches volume over the next two years, driven by 10% increase in sq ft and 4% same-store sales. Alongside 8% improvement in sales mix, the value growth in time products is estimated at 22% CAGR over FY11E-FY13E.  

Other biz (eyewear & precision engg): 75% YoY value growth. Titan eye+ recorded an  impessive 67% YoY growth.

Sintex Industries Ltd : BUY

FY11: An all round performance with robust outlook 

The company posted revenue of Rs 1,464 cr (34% YoY) driven by all round segmental performance. EBITDA stood at Rs. 310 cr (60% YoY), EBITDA margin increased by 350 bps YoY to 21.2% due to execution of higher margin orders + stiff cost control measures by mgmt. Company has posted an adj. PAT of Rs 168 cr (21% YoY).

• FY11 show:  company posted record revenue of  Rs 4,475 cr (36%); EBITDA stood at Rs. 816 cr  (53%), EBITDA margin increased by 193 bps to 18.2%; Adj. PAT of Rs 460 cr (40%) on YoY basis.
• Building Product : increased profitability driven by prefab + monolithic
• Revenues from the building product division stood Rs. 2,180 cr (55% YoY) with an EBITDA margin of 18.6%. 
• Monolithic construction grew by impressive 86% YoY at Rs. 1,337 cr on account of fast execution of orders with EBITDA margins of 18.7%. Order book stood at Rs 2,900 cr exec. over 22-24 mths. 
• Prefab records sharp growth of 21% YoY at Rs. 645 cr on account of new geographies and strong traction across products; EBITDA stood at Rs 131 cr with over 20% EBITDA margins.
• Water tank business also grew by 30% at Rs. 198 cr with EBITDA of Rs 24 cr Custom molding : changing orbit to high margin led profitability
• Revenues from this division increased by 21% YoY at Rs. 1,860 cr EBITDA for the year stood at Rs 279 cr with over 15% EBITDA margin. Overall margins to improve going forward as more production shifts to India from overseas.  Textile: keeping up the momentum 
• Revenues from textile division increased by 27% YoY at Rs. 436 cr while EBITDA stood at Rs. 128 cr with over 28% margin. 

Valuations & Outlook

Sintex is the only company globally having such diversified usage of plastics (from water tanks-custom molding-prefabs-monolithic const.). Although mgmt. has indicated a similar performance over the next 2 years but we consider that Sintex is poised to grow over 20% CAGR (FY11-13) conservatively, backed by huge government spending on social infrastructure. Improving return ratio profile +strong operating margins + better working capital management places the company in a sweet spot. 

We believe that the concerns of FCCB is overshadowed by strong balance sheet as company is having cash & equivalents over Rs 1300 cr and expected to generate FCF in excess of Rs 400 cr till FY 13.  We have raised our FY 12 earning estimates by 6% and continue to believe that Sintex offers a unique mix of visible growth, stable margins and strong balance sheet at a very attractive price. We maintain high conviction BUY recommendation with a target price of Rs 230 (PE–12x FY12E EPS).

Corporation Bank : BUY

Strong Recoveries Spur PAT

Buoyed by robust recoveries of Rs 928 mn in 4QFY11, Corporation Bank’s (CRPBK) PAT grew 11% YoY. Net interest income declined 8% QoQ mainly due to 68 bps QoQ increase in cost of funds. The bank has relied heavily on short-term borrowings in 4QFY11, to provide short-term loans to some AAA rated corporates (albeit at lower spreads). Non-interest income grew 74% QoQ mainly on higher recoveries. Operating expenses rose 19% QoQ led by rise in staff cost which grew 25% QoQ. Staff expenses include Rs 740 mn of pension liability for retired employees.

Key highlights

• Asset quality impressive: Asset quality for the bank remained impressive in FY11 with slippage ratio of 0.9% which is amongst the best in PSU banks. In 4QFY11, the bank recognized income of Rs 928 mn (19% of other income) from recovery of bad debts which provided traction to PAT. Gross NPAs fell 13.4% QoQ whereas Net NPAs declined 3.8% QoQ.
• Provision coverage ratio stood at 74.7%.
• Strong biz growth: Deposits grew 26% YoY, lagging behind credit growth of 37.4% YoY.  However, on an avg. basis, advances grew at 28% YoY while deposits grew by 21.2% YoY. Due to skewed business growth, C-D ratio was at 74% and the mgmt intends to bring it down to 70% going forward.
• Margins decline:  NIMs declined by  19  bps  QoQ  to  2.52% mainly due to 68 bps QoQ rise in cost of deposits.
• Management expects NIMs to improve going forward as they will focus more on improving share of high-yielding advances such as retail (up 12% QoQ), SME (up 40% QoQ) and midcorporate segments.

Valuation

Strong recoveries and robust business growth are the key highlights of 4Q results. Though NIM contracted by 19 bps QoQ, going forward it is likely to be maintained as the bank will focus on high-yielding segments. CRPBK is focusing on increasing its branches (add 200 branches in FY12) which would help in augmenting its CASA ratio (26%). We have a Buy rating on the stock with a TP of Rs 720 (1.3x FY12E ABV)

Crompton Greaves : BUY

Correction in Stock, An Oppurtunity to Add

Crompton Greaves’ (CG) Q4 operational results were below estimates due to lower-than-expected margins in int’l subs & lower growth in dom. T&D biz. The mgmt expects standalone sales growth of ~12-15% in FY12 (vs. 16-18% earlier). For int’l subs., the mgmt expects 12-13% constant currency growth in FY12. While standalone margins could dip ~50 bps, expansion in int’l subs margins would compensate for the same.

FY11 highlights and key conference call takeaways

• Int’l subs orders make-up for muted domestic orders: Int’l biz order intake grew at ~38% (constant currency) compensating for flat intake in dom biz. Driven by execution of large EPC projects, FY11 sales growth surprised positively at ~16%. The mgmt foresees significant headroom for margin expansion in the international division, which can off-set margin dip in India T&D biz.
• Domestic T&D biz to be muted in FY12E; likely pick-up in FY13E: Given 20% decline in order inflow, the mgmt expects 6-8% growth in FY12. However, they expect significant pickup in domestic T&D orders from H2FY12 driving 20%+ growth for FY13E, which is corroborated with our checks with PGCIL. Post a 40 bps dip in FY11 margins, the mgmt expects further pressure of 50bps+ in FY12.
• Industrial & Consumer Biz grew by 19% and 25% respectively, which the management expects to sustain in FY12 .
• Acquisitions: CG expects to close a couple of acquisitions in the Industrial (drives & automation) & Power (substation automation) segments in Q1FY12. This would narrow CG’s technology & product gap vis-à-vis global majors such as ABB, Alstom, Siemens, etc.

Maintain Buy with a TP of 298 (18% upside)

To factor in the results & mgmt guidance, we have cut our FY12-13 EPS by 3-4%. While, FY12 would be a year of consolidation, the mgmt expects growth to accelerate from FY13 onwards.

Through organic as well as inorganic routes, the mgmt is targeting sales of USD 8 bn in 5 yrs which implies CAGR of ~30%. Post a 10% correction, we believe that the risk-reward is favorable at CMP (Rs 253) – P/E of 16x FY12E and 13x FY13E, for a co. that can grow its earnings by 15-20% with RoE of 25-30%.

Hindustan Construction’s : HOLD

Results Disappoint, LAVASA – The Only Trigger

Hindustan Construction’s (HCC) Q4FY11 Adj. PAT was significantly below expectations at Rs 168 mn (v/s Rs 409 mn expected). While EBITDA margin surprised positively (13.8% v/s  12.9% expected), muted sales growth led to EBITDA disappointment (Rs 1.66 bn v/s 1.75 bn expected). Higher than expected interest costs (Rs 903 mn v/s Rs 765 mn expected) further impacted profitability. Mgmt anticipates FY12E project execution to pick-up, as some respite should come through on delayed govt. payments and as projects reach revenue recognition threshold. Additionally, confidence was exhibited at maintaining margins. While we have accounted for higher interest costs in FY12E, impact of the same has been offset by our assumptions of better margins and revenues. Hence, we are maintaining our FY12E EPS estimate and our Hold rating with TP of Rs 35.

Q4FY11 Analyst Meet Highlights

• EBITDA margins surprise positively, but revenue disappoints: HCC’s EBITDA margin surprised positively at 13.8% v/s 12.9% expected (up ~250 bps YoY). However, revenue was below estimates  (Rs 12 bn v/s Rs 13.6 bn expected), leading to EBITDA coming lower than expected (Rs 1.66 bn v/s 1.75 bn expected). However, reflective of mgmt’s confidence of maintaining higher margins, and revenue growth picking up in FY12E as projects touch revenue recognition levels, we have raised our EBITDA estimates by ~15-16% for FY12E.
• Interest costs surprise negatively: HCC’s interest costs have doubled YoY to Rs 903 mn (Rs 443 mn in 4QFY10), driven by higher working capital debt. Rise in debt and interest cost assumptions in FY12E, has offset the positive impact of rise in EBITDA estimates. Effectively, we are maintaining our FY12E EPS estimate (of Rs 1.0) for the core construction business.
• Lavasa upside capped in near-term: Mgmt is hopeful of Lavasa getting a clean chit on environmental clearances for all the 3 phases spread over 12,500 acres. However, given that the current market environment is not conducive for an IPO at valuations the mgmt may be comfortable with, we believe near-term upside remains capped from  this  event.  

We  have  a  HOLD  rating  with  a  TP  of  Rs  35  –  valuing  the  core  EPC business at Rs 8/sh i.e. 8x FY12E PE [balance value from Lavasa (Rs 15), BOT (Rs 5) and properties in Vikhroli (Rs 7)].  

TVS Motor Co : HOLD

Margins Under Pressure on Rising Costs

TVS Motor’s (TVS) Q4FY11 operating performance was a tad below our expectations, with PBDIT margin of 6.2% (45bps QoQ, 127bps YoY)– due to rising raw material costs (up 397 bps YoY).

Key highlights

• Overall volumes for Q4 were at 0.52 mn up 25% YoY (flat QoQ), primarily driven by a  50% YoY increase in scooter volumes. TVS reported revenue of Rs 16 bn (up 35% YoY & flat QoQ), EBITDA of Rs 715 mn (up14% YoY, up 6% QoQ) and adj PAT of Rs 507 mn (22% YoY & 9% QoQ) in Q4FY11.
• During the qtr, TVS provided for: a) Rs 90 mn towards provisioning of additional tax in Uttaranchal; & b) higher tax outgo (by Rs 70 mn) due to tax credit for previous years. While we have adjusted the net sales upwards by Rs 90 mn, we retain the impact of higher tax. As a result, our adjusted PBDIT is higher at Rs 1 bn with a 6.2% margin (vs. 5.7% unadjusted).
• Additionally, due to bottlenecks at Chennai port, ~10,000 units (2% of volumes for the qtr) have not been cleared. As a result, these revenues have not been recognized in Q4.
• FY11 included Rs 635 mn towards amortization charges (expensed in our EBITDA calc) for moulds/dies and product launch expenses. We understand that ~Rs 400 mn will not recur in FY12E, resulting in a higher EBITDA margin.
• TVS is expected to launch a new scooter (>100cc) and one new motorcycle (Executive seg) in H2FY12. Additionally, the co. is expanding capacities from 2.2 mn units p.a. to 2.6 mn units p.a. in FY12E. A bulk of this expansion is expected in scooters.

Maintain estimates for FY12E. Retain HOLD rating

We expect TVS’ volumes to grow by 15% in FY12E on the back of strong demand for scooters and new launches. As a result, we expect PBDIT margins to improve to 7.3% (vs. 6.7% in FY11). We retain our FY12E EPS est of Rs 6 (standalone) and Rs 4.8 (conso). Maintain HOLD rating with a TP of Rs 63 (13x FY12E conso EPS of Rs 4.8)

Manappuram Gen Fin : BUY

The Impressive Show Continues

Manappuram (MGFL) continued its growth ride in 4QFY11 with an AUM growth of 191% YoY and 16% QoQ to Rs 75.5 bn. The co’s  PAT  grew  by  151%  YoY  to  over  Rs  1  bn. Strong business growth supported NII growth at 162% YoY and 25% QoQ to Rs 2.9 bn, despite a steep rise in cost of borrowings (up 87 bps QoQ to 10%). Asset quality improved with Net NPA ratio declining by 4 bps QoQ to 0.1%. The company has cut down on its share of assigned portfolio to 15% (from 22% in Dec-10) due to change in classification norms (priority  sector status) by RBI. Despite sequential de-growth in assigned loans, overall margins have been protected with the support  of capital infusion done in Q3FY11.

Key highlight

• Growing distribution network:  MGFL has opened 269 branches during Q4, taking its network to 2,064 branches catering to over a million customers (1.2 mn) across India. This significant expansion in its network supported the strong AUM growth.
• Well capitalized: MGFL is sufficiently capitalized (CAR at 30.3%) owing to recent capital raising and healthy internal accruals. With leverage of just 3.6x, it is well positioned to grow its AUM without any fresh capital requirement in the near-term.

Maintain BUY with Target Price of Rs 160

The management expects MGFL’s branch network to reach ~3,000 by Mar-13 and the average business per branch is likely to increase with seasoning of branches. Incrementally, securitizing the portfolio will become difficult with guidelines from RBI, which will increase on-book AUM share. This will put pressure on margins but management expects to compensate it by reducing opex wherein they have already spent heavily on expansion & advertisement. We expect RoEs to expand to 26% by FY13E with increase in leverage. We maintain our BUY rating on the stock with a Target price of Rs 160 (2.8x FY12E ABV and 13x FY12E EPS) – upside of 20% from CMP of Rs 133.

3rd May, 2011

The markets opened on a positive note and immediately slipped lower but managed to trade near the previous close till the afternoon session. The markets kept of moving lower throughout ending the day on a weak note. Among the Sectoral indices Realty was amongst the gainers while Bankex & Consumer Durables were among the losers. In the Sensex kitty Tata Power (2.43%), & Cipla (1.96%) were amongst the gainers while SBI (4.06%), Sterlite Inds (2.26%)and Maruti Suzuki (2.16%) were among the losers. The Sensex lost 138 points or 0.72% to close at 18,998 while Nifty lost 48 points or 0.84% to close at 5,701.

Total traded turnover stood at Rs 1,00,111 cr. In equities both FIIs & DIIs were net sellers of (Rs 261 cr) & (Rs 150 cr) respectively. On the derivatives side, FIIs were net sellers in Index Futures (Rs 918 cr), Index Options (Rs 31 cr) Stock Futures (Rs 252 cr) and Stock Options (Rs 8 cr).

The US markets ended marginally lower as investors remained cautious and lack of any key triggers. The Dow Jones lost 3 points or 0.02% to close at 12,807 while NASDAQ lost 9 points or 0.33% to close at 2,864.

The Asian markets are trading marginally higher. Hang Seng is trading higher by 0.16% while Nikkei is shut on account of holiday.

The markets ended with losses for a sixth consecutive day as investors turned cautious ahead of the RBI mid‐term policy meet. FIIs continued to remain net sellers in both the cash & futures segment. The markets may open on a weak note. Adopt a cautious approach.

The trend deciding level for the day is 5720,If NIFTY trades above this level then we may witness a further rally up to 5750‐5785‐5805 levels. However, if NIFTY spot trades below 5720 levels then we may see some profit booking to initiate in market, it may correct up to 5667‐5635‐5600.

Sterlite Technologies : HOLD

Looking Forward To FY12E For a Fresh Uptick

Sterlite Technologies’ (STL) PAT came well below expectations at Rs 103 mn v/s Rs 226 mn expected, primarily on account of lower EBITDA margins in both the telecom and power segments. While FY11 should have seen bottoming out of STL’s margins in both segments, FY12E brings some ray of hope. This will be driven by stabilization of telecom expansion, and comfortable order book in Power, as Power Grid’s award process has seen an uptick.  Effectively, we are maintaining our estimates for FY12E-13E and our TP of Rs 55, based on PEof 12x FY12E. Considering the recent good run-up in the stock and as we are maintainingour TP, we have a Hold rating.

Q4FY11 conference call highlights

• Revenue growth aided by Power segment: STL’s revenue rose only by 3% YoY to Rs 6.8 bn. An 8% YoY revenue de-growth in the telecom segment was offset by the 7% YoY rise in Power revenues. Going forward in FY12E, we anticipate revenues to rise by 20% YoY, driven by 30%+ YoY rise in Telecom sales. This will be on account of the company’s capex plans (witnessedsome delays in FY11E), which will be stabilized in FY12E.
• Margins bottomed out: STL’s margins have dropped ~400 bps YoY to 11.7% in FY11, with Power segment margins halving to 7.1% from 13.4% YoY. As ordering activity from Power Grid  has seen a pick-up, downward margin pressure is expected to be stemmed. Additionally, as the telecom capex stabilizes, margins on a blended basis should see an improvement for the company in FY12E.

FY12E uptick to be gradual in nature

Management has indicated that  the next 1-2 quarters will be relatively weak, and growth will be more back-ended in nature for FY12E.  We are maintaining our estimates for FY12E-13E and our TP of Rs 55, based on PE of 12x FY12E. Considering the recent good run-up in the stock,and as we are maintaining our TP, we have a Hold rating.

Shriram Transport Finance : HOLD

Pressure on Margins Visible

Shriram Transport Finance (STFC) reported profit growth of 29% YoY to Rs 3.4 bn, marginally higher than our estimates. Net interest income increased 8% YoY which led to moderation in NIMs (down 85 bps QoQ). However, robust income growth from securitization (up 43% YoY) drove 23% YoY growth in operating profit.  AUM  rose  24%  YoY  to  Rs  360  bn  (up  7%  QoQ)  driven  by higher growth in New CV disbursements (up 111% YoY) & contributing 28% of the disbursements made in the quarter.

Key highlights

• Margins: NIM (on AUM) was at 8.06%, fell 85bps QoQ. Gross spreads at 10.7% declined by 62bps QoQ. Cost of funds rose ~100bps on securitized portfolio, post the implementation of Base rate.
• Asset Quality: STFC maintained healthy asset quality with absolute gross NPA declining to Rs 5.28 bn (down 3% QoQ). Provision coverage ratio improved by 600bps to 86% QoQ.
• New CV – the main driver: Disbursements rose 59% YoY driven mainly by the growth in new CV segment. New CV disbursements increased at a higher rate at 111% YoY & 14% QoQ. Pre-owned CV’s disbursement share declined to 72% from 79% a year ago.
• Off-book AUM is high at 45% of total AUM (38% in Q4FY10) as STFC has done securitization of Rs 60.9 bn in Q4. Deferred securitization  income  of  Rs  36  bn  will  be  recognized  over  the next few years.
• Management has guided for 15-20% growth in business with pressure on NIMs in FY12E and an AUM target of Rs 500 bn by FY13E with securitization ratio of 1/3rdin the long run.

HOLD rating with an unchanged TP of Rs 780

Changes in securitization rules proposed by RBI, if implemented, will definitely hurt STFC as incremental securitization will become challenging, putting pressure on margins. We believe concerns regarding slowing business growth & pressure on margins will remain an overhang on the stock. We maintain our TP of Rs 780 with a HOLD rating on the stock. (Target P/BV of 3x

FY12E Adj BV and 12.4x FY12E EPS).

Wipro : HOLD

Q1FY12 Guidance Low; Execution Holds Key

Muted Q4FY11 performance, tepid Q1FY12E guidance & ongoing mgmt restructuring (which we expect to take 2-4 qtrs to reflect in financials) lead us to lower our FY12E EPS est. by ~3% to ~Rs 24; we introduce FY13E EPS est. at ~Rs 28. We now assign a lower target FY12E PE of 18x (vs. 19x earlier) to account for lower organic revenue growth in FY12E (~19% YoY vs. 23% earlier). Our revised TP of Rs. 438 implies a 3% downside, resulting in a HOLD reco at these levels. 

Key Highlights

• Q1FY12E guidance is lower: Wipro’s Q1FY12E topline guidance at USD 1.39–1.42 bn implies a QoQ growth of -0.5% to +1.5%. This guidance is lower vs. Infosys’ guidance at ~2.6% to 3.6% QoQ for Q1FY12. Project completions in Q4FY11 (BPO in telecom vertical) and seasonally strong Q4 for India/ Middle East (~9% in Q4FY11) also account for muted Q1 guidance vs. peers, in addition to the ongoing mgmt restructuring.
• Earnings growth to remain under pressure over the next qtrs: H1FY12E is expected to be weak given: 1) muted topline growth in Q1 and 2) margin pressure from full quarter impact of salary hikes in Q2 (offshore: 12-15% and onsite: 3-4%). While SAIC acquisition (with annualrevenue run rate of ~USD 165 mn for 4/6 months in H1FY12) would add ~3% to topline, its lower NPMs of ~6% would imply just ~1% contribution to PAT.

A back-ended growth in FY12E; execution holds the key for EPS/ PE upgrade: Revenue visibility in H2FY12E is supported by:

1) traction in revenues from SAIC (~3% rev share),

2) the recent tie-up with Temenos in BFSI vertical for Europe,

3) a strong 68 client addns in Q4, and

4) client mining in existing clients. Higher fresher hiring in FY12E vs. FY11 (targeted at ~67–70% of the total gross hiring vs. ~50% in FY11) is a key margin lever in addition to utz. (Q4 utz. ex-trainees at 79.7%, ample headroom given peak levels of 84.5%).

However, a low Q1 implies pressure on remaining quarters of FY12E to deliver above industry/peer growth. Additionally, higher-than-peers wage hikes (eff. 1 June’11) and higher tax rates would imply a lower EPS growth QoQ even if topline growth is better. Thus, execution holds key for any EPS / PE upgrades.