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.