Indian stock market and companies daily report (January 20, 2014, Monday)
January 20, 2014, Monday, 05:54 GMT | 00:54 EST | 10:24 IST | 12:54 SGT
Indian Markets are expected to open flat with a negative bias tracking SGX Nifty which is trading marginally lower. Most of the Asian markets too are trading in the negative territory.
US markets ended mostly lower on Friday after fluctuating over the course of the trading session. The lackluster performance came on the back of release of a mixed batch of earnings and economic news. The Commerce Department said housing starts fell 9.8% to an annual rate of 999,000 in December (expected 985,000 from the 1.091mn originally reported for the previous month). Meanwhile, the Federal Reserve said industrial production increased by 0.3% in December after jumping by a revised 1.0% in November. The European markets bounced back from the weakness of the previous session and finished in positive territory Friday owing to stronger than expected rise in British retail sales.
On the domestic front, the Indian markets fell sharply on Friday, with financials and IT stocks pacing the declines amid mixed global cues as investors awaited a raft of U.S. and Chinese data for direction.
The trend deciding level for the day is 21,116 / 6,278 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 21,217 - 21,371 / 6,310 - 6,359 levels. However, if NIFTY trades below 21,116 / 6,278 levels for the first half-an-hour of trade then it may correct 20,963 - 20,862 / 6,230 - 6,198 levels.
Subsidized LPG cylinder quota likely to be raised from 9 to 12 per household
As per the Petroleum and Natural Gas Minister Veerappa Moily, subsidized LPG cylinders quota will be hiked from 9 to 12 per household per year. This is likely to increase under-recoveries by Rs.3,300cr-Rs.5,300cr per year on the exchequer in the form of subsidy. The total under-recoveries are likely to increase by 3-5% for FY2015, as per our estimates. We await final approval from the Cabinet before we incorporate increase in subsidy due to increased quota.
MM announces production cuts at its automotive plants
Mahindra & Mahindra (MM) has announced production cuts at its automotive plants for one to three days in January 2014 amidst slowdown in the industry demand. The company's subsidiary, Mahindra Vehicle Manufacturers would also observe production shutdown for up to three days at its Chakan plant. We believe that the production cuts announced by the company are in-line with the industry practice of aligning production levels with market demand which is extremely weak currently. This we believe will help the company curtail costs and prevent build-up of inventory. While the company is facing slowdown in sales across the automotive segments (domestic volumes down 10.3% yoy during 9MFY2014), the impact is severe in the utility vehicle space which has witnessed a volume decline of ~18% yoy during 9MFY2014. Nevertheless, we remain positive on MM given that the tractor sales have registered a strong growth of ~22% in 9MFY2014 backed by good monsoons. We expect growth in the tractor segment to remain healthy going ahead and thereby offset the weakness in the automotive segment to some extent. Post the recent decline in the stock price, the valuations appear attractive. We therefore maintain our Buy rating on the stock with a SOTP target price of Rs.1,050.
Aurobindo's European Subsidiary signs Binding Offer to acquire commercial operations in seven Western European Countries from Actavis
Aurobindo Pharma Limited announced the signing of a binding offer to acquire commercial operations in seven Western European countries from Actavis. Closing of the transaction is conditional on certain antitrust approvals and completion of employee consultation processes. Aurobindo expects to acquire personnel, commercial infrastructure, products, marketing authorizations and dossier license rights in seven European countries- notable being France, Italy, Spain, Portugal, Germany, Netherlands and Belgium. Actavis and Aurobindo will be entering into a long term commercial and supply arrangement in order to support the ongoing growth plans of these businesses. The acquisition expands Aurobindo's front-end operations into five segments (generics, prescription products, over-the-counter products, hospital products and generics tenders) with approximately 1200 products and an additional pipeline of over 200 products.
Management estimates the net sales for the acquired businesses would be around EUR 320mn in 2013 with a growth rate of over 10% year-on-year. With this the European sales of the company would reach EUR 400mn. Although these businesses are currently loss-making (not quantified by the company), Aurobindo expects them to return to profitability in combination with its vertically integrated platform and existing commercial infrastructure.
The acquisition will make Aurobindo one of the leading Indian pharmaceutical companies in Europe. Since 2006 Aurobindo has been steadily expanding its European footprint through an increasing presence in UK, Spain and Germany. The acquisition will enable Aurobindo to achieve critical mass in Western Europe with a top 10 position in several key markets, which it plans to leverage to supply or widen its product portfolio, through introduction of its own products especially high margin products like injectiables.
In terms of turning the unit profitable, might take time, as most of the products acquired are new to Aurobindo's portfolio and hence would take time to shift the raw material benefits, the same timeline could be 2-3 years. Thus the key factor to make the acquired unit profitable would be more new product introductions. Thus depending upon the new product introductions, the acquired unit might take 1-3 years to turn profitable. On the positive side, given the acquired unit is the formulation business; it will enhance the overall formulation sales of the company in its sales mix ~85% in FY2015.On profitability front, the company, our estimates suggest, that the net profit would dip by around 10-13% from our current estimates , on back of the acquisition in FY2015. Currently we are not changing our estimates on company and would revise after the concall scheduled today.
In terms, of value of the transaction, the company is likely to pay around EUR 30mn and will depend upon the Cash and Net Working Capital position at closing. The company plans to fund the said acquisition through internal accruals, thus is unlikely to strain the balance-sheet. The acquisition would, is completed, would reflect in FY2015 financials. We remain neutral on the stock.
Reliance Industries (CMP: Rs.885, TP: Under Review, Upside: -)
Reliance Industries (RIL) 3QFY2014 net profit came in line with our estimate. Its net sales increased 10.3% yoy to Rs.103,521cr (below our estimate of Rs.117,488cr) due to increase in Refining segment sales (+14.6% yoy) and Petrochemical segment sales (+10.1% yoy). Gross refining margins (GRMs) were in line with our estimate of US$7.5/bbl and stood at US$7.6/bbl in 3QFY2014 (US$7.7/bbl in 2QFY2014 and US$9.6/bbl in 3QFY2013) while the gas production from KG-D6 fields stood at 12.4mmscmd in 3QFY2014. RIL's EBITDA decreased by 9.0% yoy to Rs.7,622cr on account of decline in profit from Refining segment (EBIT down 13.1% yoy to Rs.3,141 cr) and Oil & Gas segment (EBIT down by 8.5% yoy to Rs.540cr), partially offset by increase in profits from Petrochemical segment (EBIT up by 9.7% yoy to Rs.2,124cr). Other income rose by 32.5% yoy to Rs.2,305cr; hence, net profit was flat yoy to Rs.5,511cr (in line our estimate of Rs.5,508cr). We maintain our Buy rating on the stock while we keep our target price under review.
ITC (CMP: Rs.325/TP: Rs.382/Upside: 18%)
For 3QFY2014 ITC's performance was in-line with estimates. The company's net sales rose by 13.1% yoy to Rs.8,623cr. Cigarettes business posted a 12.5% yoy growth in net sales to Rs.4,116cr aided by the price hikes taken by the company, even though volumes are estimated to have de-grown by 2-3%. Healthy realizations resulted in Cigarettes business posting a 18.8% yoy growth in its EBIT. Other FMCG business posted a 16.6% yoy growth in net sales to Rs.2,078cr aided by robust performance from the branded packaged foods business. Enhanced scale and improvement in leverage resulted in segmental EBIT of Rs.10cr vs. loss of Rs.24cr for 3QFY2013. Agri business posted a 9.5% yoy and 19% yoy growth in revenue and segmental EBIT respectively. Paperboards and packaging divisionsRs. revenue grew by 18.5% yoy. However, segmental EBIT remained flat on account of increase in input costs. Hotels business posted a flat performance on the top-line front reporting net revenue of Rs.315cr. However, segmental EBIT rose by 12.1% yoy to Rs.62cr driven by superior performance by ITC Grand Chola. Overall, company's OPM rose by 54bp yoy to 36.9%. Bottom-line rose by 16.3% yoy to Rs.2,385cr. We recommend a Buy on the stock with a Target Price of Rs.382.
HDFC Bank (CMP: Rs.668 / TP: Rs.752 / Upside: 12.6%)
HDFC Bank reported healthy earnings performance for the quarter, which was inline with revised expectations of 25%+ yoy growth, while asset quality performance too remained healthy. Absolute gross and net NPA levels for the bank increased by 3-4% qoq each, which was quite moderate increase in the context of current macro challenges and low base for the bank.
FCNR (B) deposits aid Balance sheet growth; Asset quality remains healthy: During 3QFY2014, the bank's business (both advances and deposits) grew at a healthy pace of 22.9% yoy, largely aided by FCNR (B) deposit flow. Adjusting for the same, the bank's advances grew at 18.3% yoy, while deposits grew by 15.5% yoy. Within the retail loan portfolio, a healthy buildup was witnessed in Personal loans and Credit cards segments, which grew by 19.5% and 17.0% yoy respectively. Savings deposits grew at a healthy pace at 15.6% yoy. CASA ratio, adjusted for FCNR (B) deposits declined 130bp qoq to 43.7%. Reported NIMs declined by around 10bp sequentially to 4.2%, primarily as negligible overseas spreads were realized when overseas borrowings were lent to NRIs for purpose of being remitted as FCNR (B) deposits which were then swapped with RBI at a concessional rate. The bank's non-interest income (excl. treasury) grew at a healthy pace of 17.0% yoy, aided by robust forex income performance, which grew at 29.1% yoy. Fees and commission income grew at a moderate pace of 12.3% yoy, largely dragged by a 26% yoy decline in fee income from distribution of third party investment products (both insurance and mutual funds). On the asset quality front, the impeccable track record continued as the Gross NPA ratio declined 9bp qoq to 1.0%, while the Net NPA ratio remained flat qoq at 0.3%. PCR (excl. write-offs) too remained stable qoq at 73.6%. Restructured advances remained flat at 0.2% of gross advances.
Outlook and valuation: With minimal NPA issues over the past couple of years, unlike other banks, the bank has had substantial management bandwidth to continue laying the building blocks for organic growth and market share gains. The bank's branch network has grown by more than 50% over the last ten quarters. Though the current earnings trajectory at 25%+ yoy is lower than its illustrious track record of 30%+ earnings growth, still in light of the current macro environment, it is impressive and much better than other large private peers, which in our view, justifies a premium valuation multiple. At CMP, the bank is trading at a one-year forward P/ABV of 3.2x (3.1x FY2015E ABV). We recommend an Accumulate rating on the stock, with a target price of Rs.752.
Wipro (CMP: Rs.552/ TP: Under review/ Upside: -)
For 3QFY2014, Wipro results were broadly inline with our estimates on all the broader fronts. The IT services revenue came in at US$1,678.4mn, up 2.9% qoq vs. expectation of ~2.8% qoq growth. Revenue growth during the quarter was broad based. At the consolidated level, Wipro's revenue came in at Rs.11,332cr, up 3% qoq. During 3QFY2014, Wipro's IT services EBIT margin grew by ~50bp qoq (after growth of ~250bp qoq in 2QFY2014) to 23.0%. On the consolidated level, EBIT margin grew by ~27bp qoq to 20.7%. PAT came in at 2,027 (estimate -Rs.2,022cr), up 4% qoq.
The company added 42 new clients during the quarter and the active clients increased to 966 from 942 in 2QFY2014. Also, utilizations remained almost flat sequentially at 66.0%. For 4QFY2014, the management has given a USD revenue guidance of US$1,712mn-1,745mn, which translates into a qoq growth of ~2-4% which is higher than our estimate of 1.5-3% and shows a sign on stability as well as consistency in terms of revenues. We believe that the initial signs of gains from restructuring initiatives have started showing and expect Wipro to do well in the quarters ahead. We currently maintain our positive view on the stock and wait for management commentary on discretionary spending and large deal wins.
Hindustan Zinc (CMP: Rs.129/ TP: Under Review/ Upside: -)
Hindustan Zinc's (HZL) 3QFY2014 net profit was slightly below our expectations. HZL's net revenue increased by 8.6% yoy to Rs.3,410cr (in line with our estimate of Rs.3,446cr) mainly due to increased sales volumes, partially offset by decline in prices. Average zinc, lead and silver prices declined by 2%, 4% and 36%, yoy, respectively, which was partially offset by 15% INR depreciation against the USD. Nevertheless, refined zinc production (integrated) volumes increased 17.0% yoy to 196kt due to higher production from Rampura Agucha and Zawar mines; refined silver production (integrated) volumes also grew 35.0% yoy to 72kt. Despite cost of zinc production rising by 16.0% yoy to Rs.52,014, EBITDA increased by 22.1% yoy to Rs.1,824cr due to higher volumes and lower mining and royalty expenses. However, other income decreased by 16.3% yoy to Rs.424cr. Hence, net profit grew by 6.8% yoy to Rs.1,723cr (slightly below our estimate of Rs.1,795cr). The company has lowered its FY2014 zinc production guidance from 950,000 tonnes to 900,000 tonnes due to slower-than-expected ramp up in production from underground mine. We maintain our Buy rating on the stock while we keep our target price under review.
Federal Bank- (CMP: Rs.79/ TP: Rs.87/ Upside: 9.4%)
Federal Bank reported in line operating performance, while asset quality surprised positively. On the operating front, Net Interest Income for the bank increased by 10% yoy, while non-interest income de-grew by 23% yoy, leading to a flattish operating income yoy which was in-line with our estimates. Operating expenses grew 13% yoy, leading to in-line pre-provisioning profit de-growth of 10%. On the asset quality front, the bank reported improvement, as its absolute Gross NPA decreased by 18% sequentially (aided by healthy recoveries on back of sale of assets to ARCs). While the Net NPA decreased by 13% qoq. Provision expenses for bank came in much lower at Rs.7cr (on back of writeback of provisions for restructured assets) as compared to Rs.74cr in 3QFY2013, which enabled bank to clock earnings growth of 9% yoy. At the CMP, the stock is trading at 0.9x FY201 5E ABV. We recommend Accumulate rating on the stock.
Tata Sponge Iron (CMP - Rs.297, TP - Rs.406, Upside: 36%)
For 3QFY2014, TSIL reported good set of numbers. The revenue were flat yoy at Rs.198cr, a 3.1% higher than our expectation of Rs.192cr. The EBITDA margin surprised positively with an improvement of 664bp on a yoy basis to 20.3% on account of lower raw material costs (as a percentage of net sales from 76.1% in 3QFY13 to 66.4% in current quarter) as compared to same quarter last year. Consequently, net profit increased by 18.1% yoy from Rs.21cr to Rs.24cr in 3QFY2014, marginally 5.3% lower than our expectation of Rs.26cr due to higher than expected higher than expected finance cost which rose to Rs.8.8cr as compare to Rs.1.1cr in same quarter previous year. We maintain our Buy recommendation on the stock with a target price of Rs.405 based on a target P/B of 0.8x for FY2015.
Asian Paints (CMP: Rs.492/TP:-/Upside :-)
Asian Paints is expected to declare its 3QFY2014 results today. We expect the topline to grow by 12.9% yoy to Rs.3,430cr aided by both higher volumes and better realizations. OPM is expected to increase by 64bp yoy to 16.9%. Bottom-line is expected to increase by 9.8% yoy Rs.368cr. We maintain our Neutral recommendation on the stock.
Ultratech (CMP: Rs.1,716/TP:-/Upside :-)
Ultratech is expected to announce its 3QFY2014 results today. We expect the topline to grow by 3.2% yoy to Rs.5,015cr. OPM is expected to decline by 509bp yoy to 16.5% due to lower realization and higher costs. Bottom-line is expected to decline by 33.9% yoy to Rs.397cr. We maintain our Neutral recommendation on the stock.
Economic and Political News
- FCI to transport grains through sea route for first time
- India's used goods market to cross Rs.1,15,000cr by 201 5: Assocham
- Iron ore exports up 253% in Oct-Dec quarter
- SAIL to invest Rs.7,000cr in value addition
- OHPC surpasses annual power generation target
- Honda to unveil crossover study model at Auto Expo
- After UB Holdings, Court admits petition to wind up Kingfisher Airlines
- NTPC board clears Rs.12,532cr investment for Orissa plant
- ONGC in talks to buy 26% stake in IOC's Ennore LNG terminal