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).