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.

Elgi Equipments : BUY

Elgi equipment’s Q4FY11 performance

Elgi Equipments reported net revenue of Rs. 243 cr. (20% YoY, 2% QoQ), EBITDA of Rs. 29 cr. (3% YoY, 20% QoQ) and adj. PAT of Rs. 18 cr. (2% YoY, 30% QoQ). EBITDA margin stood at 12% (195 bps YoY, 330 bps QoQ). 

Key Highlights 

• Revenue growth and margin under pressure in compressors: The compressor segment revenue stood at Rs. 202 crores, growing by 14% YoY and was flat QoQ. EBIT margin dropped by 225 bps YoY and 335 bps QoQ to 11.5% due to product mix issues and higher other costs. Slowdown in demand in the water well business has hampered the growth in the compressor segment.
• Steady growth in automotive equipment segment: Automotive equipment segment’s revenue grew by impressive 30% YoY to Rs. 31 crores. The margin declined by 65 bps YoY to 9.9%.
• EBITDA margin squeezed: EBITDA margin deteriorated by 195 bps YoY and 330 bps QoQ to 12% largely on account of increase in employee cost, product mix issues and debtor write off. Also, certain capital expenditure has been expensed under revenue expenditure in Q4.

Valuation

We are reducing our revenue estimate by 10% on account of lower guidance by the company vis-à-vis our estimates. We have also reduced our EPS est. by 15.5% to Rs. 6.3 for FY12E. We maintain BUY on the stock with target price of Rs. 100 (based on 16x FY12E EPS), implying 16% upside.

Bank of Baroda : BUY

Asset Quality Disappoints

Bank of Baroda (BoB) reported PAT of Rs 12.9 bn (up 57% YoY), above our expectations, led by strong core income and lower taxes. Net interest income rose 50% YoY led by advances growth of 31% YoY and margin expansion of 48 bps YoY. Margins also impressed sequentially (up 25 bps), driven by improvement in domestic margins. Core fee income impressed with 24% YoY growth. Tax expenses were lower (down 82% YoY), due to higher provisioning made in earlier quarters and income tax refund (~Rs 480 mn adjusted in Q4FY11). Slippages for the year were at ~1.1%. Gross and Net NPAs were up by 31% YoY during the quarter, however, provisioning coverage improved marginally to 75%. 

Key highlights

• Credit growth (31% YoY) was led by overseas credit (up 37% YoY) and domestic retail loan growth (up 34% YoY). Domestic CASA ratio came-off a bit to 34.4% (from 35% in Dec-10), as a result of higher growth in term deposits during the quarter.  
• During FY11, BoB has provided Rs 3.65 bn on a/c of pension liability of existing employees & 100% of such liability of Rs 5.5 bn towards retired employees. The remaining pension liability for existing employees (of Rs 14.6 bn) is to be provided equally over next 4 yrs.
• C/I  ratio  increased  to  44%  (38%  in  Dec-10)  led  by  higher  staff expenses (up 86% YoY), which rose due to additional burden of pension and gratuity liabilities.

Maintain BUY with revised TP of Rs 1,065  

BOB maintained strong growth momentum (total business up 28% YoY), with advances and deposits growing equitably. Despite higher slippages, mgmt seemed confident of maintaining strong asset quality going forward. We have revised our EPS estimates upwards by 9% for FY12E. On the back of healthy growth rates, strong margins and higher return ratios, we reiterate our BUY rating with a TP of Rs 1,065 (1.8x FY12E ABV and 8x FY12E EPS) – upside of 17% from CMP of Rs 916.

Biocon Ltd : BUY

Q4 In-Line; Margins to Improve Post AXICORP

Biocon’s Q4FY11 result was largely in-line with expectations. Sales grew 7% YoY to Rs 7.0 bn and net profit was up 25% YoY to Rs 1.0 bn. Biocon has announced that it would be divesting its 78% stake in its German subsidiary, AxiCorp for ~EUR 40 mn. 

The company had acquired AxiCorp stake in 2008 with a view to monetize its insulin portfolio in Germany/ Europe. Post the deal with Pfizer in Oct’10, it plans to use Pfizer’s platform and is hence exiting the low-margin AxiCorp business. We believe this will lead to margin expansion.  

Key Highlights

• Sales – Up 7% YoY to Rs 7.0 bn. Biopharma grew 14% to Rs 3.8 bn led by robust growth in domestic branded formulations, immunosuppressants, insulin (steady growth in ROW) and statins (Atorvastatin and Rosuvastatin). Licensing income at Rs 320 mn was up 56% YoY from Rs 205 mn in Q4FY10, largely driven by income under Pfizer deal. Ex-licensing income, Biopharma sales rose 11% to Rs 3.5 bn during the qtr. CRAMS grew 20% to Rs 887 mn. However, AxiCorp continued to decline– fell 6% to Rs 2.3 bn.   
• EBITDA  – Margin rose slightly by 61 bps YoY to 20.5% led by: (a) higher licensing income; (b) drop in other expenses (as some expenses are reimbursed by co-developers); and (c) lower contribution from low-margin AxiCorp, despite 27% rise in staff cost.
• PAT – Up 25% YoY to Rs 1.0 bn owing to higher EBITDA and other income and lower tax (9.8% vs. 14.5% in Q4FY10).
• Margins to improve post Axicorp divestiture – Axicorp reported 6% YoY decline in revenues to Rs 2.3 bn led by 16% rebate imposed by German Government. Margins continued to be under pressure with EBITDA margin of 6% and net margin of 3%. We thus believe that divestment of AxiCorp would significantly improve Biocon’s margins going ahead. However, field force expansion in domestic market (to hire 1,000 MRs over FY12) and higher R&D cost (to go up by 20-25% in FY12E) will continue to put pressure on EBITDA margin.
• Expects Pfizer sales to begin in Q2FY12 – Biocon expects that Pfizer would begin comarketing insulin in India from Q2FY12. Further, it expects to complete the clinical trials of Recombinant Human Insulin (RHI) in Europe by 2011 and file by mid-2012. 
• Tax rate – The Company has guided for +20% tax rate for FY12E (vs. 16.1% in FY11).

Lower EPS estimates; Maintain BUY

We reduce our FY12E EPS by 21% to Rs 16.0 to factor in divestment of AxiCorp and higher staff and R&D costs. Further, we introduce FY13E EPS at Rs 21.0. We maintain BUY rating on the stock with a lower TP of Rs 413, valuing the base biz at Rs 378/share (18xFY13E EPS, to capture the upside potential from the Pfizer deal), and ~Rs 35/share for the USD 200 mn payment received from Pfizer.

Dabur India : HOLD

Steady Performance

Dabur India Ltd (DIL) reported consol net revenue of Rs 11.1 bn (up 31% YoY), EBITDA of Rs 2.1 bn (up 27% YoY) & adj. PAT of Rs 1.5 bn (up 9% YoY) in Q4FY11, marginally below our expectations. Revenue growth in Q4 was driven by 9% volume growth, 5% price hike & 16% due to Hobi & Namaste acquisitions. 

Key Highlights  

• Sales growth outlook:  The mgmt has guided for ~10% vol growth & 5% pricing led growth in FY12E for the dom. biz. We expect the dom. business to grow at a similar rate but consolidated sales growth will be higher due to the Hobi & Namaste acquisitions. Consol growth expected at 31% in FY12E & 15% in FY13E. 
• Consumer Care Division (~67% of sales)  grew 15% YoY in FY11 led by health supplements (23% YoY), foods seg (28% YoY) & home care (32% YoY). Mkting initiatives in Hair care has led to improved growth (11% in Q4 vs. 5% for 9mFY11). Shampoo category is suffering due to increased competition. DIL improved the value proposition in Shampoos by offering 40% more vols (effected in Jan ‘11). We expect this division to grow at 15% over the next 2 yrs.
• EBITDA margins have remained flat (at 18.8% in FY11) for the standalone business despite rising RM cost pressures, mainly due to reduced ASP spends. On a consol basis, gross margins have declined by 100 bps YoY (to 53.3%) in FY11E while EBITDA margins have remained flat at 18.5%. For FY12E, we expect both rising RM costs & increased ASP spends to result in subdued margins.  We forecast a 60 bps decline in gross margins in FY12E to 53.1% due torise in RM costs. EBITDA margins expected at 18.2% in FY12E & 18.5% in FY13E.
• Int’l biz (17% of Rev, excl. Hobi & Namaste) grew 18% YoY in FY11: Growth was 22% in constant currency terms. N. Africa, Levant & Nigeria have been the fastest growing regions. The political turmoil in the MENA region did impact growth in Q4FY11 & management expects some near-term pressures (impacts ~7%-15% of int’l biz revenues). We have reduced our growth rate assumptions for the int’l biz to 19% for FY12E (vs. 23% earlier) & 18% for FY13E (vs. 20% earlier).
• Inorganic growth: Hobi & Namaste contributed ~4% to DIL’s consolidated sales in FY11. With consolidation for the full year in FY12E, this will go up to 13%.  Namaste witnessed an improvement in operating margins during the quarter (16% vs. prior avg ~13%), due to top-line driven operating leverage. Management hopes to maintain these margin levels, by rationalizing manufacturing & distributions costs.

We are not making any significant change to our EPS estimates – 1% reduction for both FY12E & FY13E. The stock currently trades at 25x 1-yr fwd EPS, close to its 5-yr median. We value the stock at 24x FY12E EPS with a 1-yr target price of Rs 96. HOLD rating