Monday, November 2, 2015

Ground Zero publication on Indian specialty chemicals sector

FII/DII Figures in "Cr"
Prev Day
Sensex (%)

 -L&T : Results significantly below Est, expect downgrades to consensus earnings on cut in Order Inflow/Revenue Guidence: For detailed report Click here
ü  Although margins missed estimate, management retained its guidance of 100bps yoy expansion as large projects are expected to reach margin recognition threshold in 2H.
ü  Management expects orders worth Rs 3.7tn in varied sectors to be awarded over the next few quarters.
û  L&T maintained a cautious outlook on execution due to slow capex recovery.
û  Management sounded less sanguine of recovery in heavy engineering margins due to execution of projects with cost overrun.
L&T acknowledged slowdown in capex in the Middle East due to correction in oil prices and did not rule out possibility of reduction in scope of work in few projects
Outlook and valuation:
*We cut our FY16E/17 estimates by 3%/5% respectively thus reflecting weak guidance from management. However, we maintain our Buy rating, as we believe L&T is well placed to capitalise on cyclical recovery despite near-term concerns on execution.
*We apply a 22x multiple (24x earlier) on our FY17 standalone EPS of Rs 57 (ex dividends) to which we add the value of the subsidiaries of Rs 407 to arrive at TP of Rs 1,662 (Rs 1,820 earlier). A pick up in domestic execution will be a re-rating trigger more than order inflows.

+ October sales numbers: TTMT, MM:
*Tata Motors: reported a 4% decline in overall CV numbers, despite 21% increase in M&HCV, on account of a 19% decline in LCV sales. Cars reported 15% growth because of good show of Zest, Bolt & Indigo.
*We have a BUY rating with TP of Rs 450.
M&M:  Tractor sales continued to decline, led by 11% fall in domestic volumes to 27280 units. However, automotive segment witnessed 21% domestic rise, led by 25% rise in PV, on the back of strong TUV300 sales (we understand ~4500 units). We have a BUY rating with TP of Rs1550.

-ICICI Bank: Performance in-line, asset quality deteriorates marginally :Maintain Neutral with TP 314~1.8x FY17 core Book : For detailed report Click here
Management comments / concall takeaways
ü  Credit growth to grow by 20%, driven by 25% growth in retail, corporate loans will see double-digit growth driven by working capital loan and loans to high-rated PSUs.
û  Stressed-asset addition in FY16 will be lower than FY15; however, stress in corporate segment remains high due to poor cash flow and high leverage.
ü  Sale of stake in insurance subsidiary to result in Rs 15bn pre-tax gains, which the bank will pass through the P&L
û  Refinanced four accounts under 5:25 amounting to Rs 20bn; these were completed projects and were standard accounts as of the last quarter.
Outlook and valuation:
*ICICI’s exposure to some of the leveraged entities may continue to remain an overhang for the stock.
*Although current valuations factor in some of the concerns, we believe that a delayed resolution of the exposure to stressed corporates may extend the underperformance of the stock.
*We expect the bank to deliver earnings CAGR of 12% over FY15-17. At CMP of Rs 277, the bank trades at 1.5x FY17 core adjusted BVPS of Rs 140 (net of investment in subsidiaries and valuing subsidiaries at Rs 60 per share).

-Apollo Tyres  BUY, TP Rs225: – Big miss as Domestic and European margins contractVery weak quarter as Chinese competition continued to haunt, Chinese truck bias tyres cost 30-40% lower than domestic players and they now dominate 30% share in this segment. Owing to this company had to cut prices of its products to remain competitive and hence the pressure on margins. We have a BUY rating on the stock as (1) TBR radialization continues at a rapid pace, (2) rubber prices are in no hurry to move up, (3) there is strong demand uptick in the domestic PV/CV OEM/replacement segment, and (4) demand is picking up and pricing environment in Europe is improving. However Chinese competition continues to pester.

-ITC: Cigarette segment facing major challenges, Volume degrowth of 14% -
Taxation and regulatory headwinds muted cigarettes growth, sequentially cigarettes business is seeing some improvement in demand but it will take time for
    recovery; We expect volumes to be in negative zone for next quarter too. Consumption shifting to lightly taxed or tax-evaded tobacco products like bidi,
    khaini, chewing tobacco, gutkha, and illegal cigarettes
*FMCG Others business grew only 7% because of sluggish demand environment and prolonged disruption in the noodles category. FMCG Others business
    saw gross margin expansion due to mix improvement and low input costs
* Hotels segment grew by 11% driven by higher room occupancy but the sector is impacted by weak pricing due to excessive room inventory.
We believe ITC is facing its most challenging times (especially for cigarettes), which are likely to persist.  We have a Sell with TP of Rs270.

+/-CLGT: Volume growth to remain sluggish, Cut estimates-
*Mgmt mentioned that demand in the oral care category is subdued & sees volume growth of 3-4% in Q3/Q4 FY16.
* As excise-duty benefits have ceased, sales growth will be impacted by 580/600bps in Q3/Q4 FY16 and gross margins will be impacted by 150bps.
* Ad spends were subdued due to competitive activity, especially in traditional media; going forward expect ad spends to be in the range of FY14-15 levels.
We have cut our estimates for FY16/17 incorporating slower volume growth for FY16. Stock trades at a rich multiple of 43x/36x FY16/17 earnings. Have a Neutral rating with TP of Rs945.

+JKCE: Q2 numbers better than peers, good realizations –
* JK Cement Q2 number are in-line with expectations. Grey cement realisations appear to be up by +4%qoq which is in-line. Grey volumes up by 3%yoy.
* Higher qoq realisation growth vis-a-vis all majors and suggests mid-caps have taken higher price hikes vs. majors.
* Blended EBITDA/ton up by 14%yoy & 20%qoq. Putty volumes are also up 21%yoy and white segment revenue up by 8%yoy.
* EBITDA Margin at 12.3% in-line with our estimate.
*We believe JKCE has the maximum competitive advantage vis-a-vis peers to drive volumes as all of its expansions are complete. We have a BUY with TP of
  Rs836. We are hosting a call with Management on tomo, 3rd Nov at 04:15pm. Dial ins: 02267468351 / 02239381073

 -KOEL Q2FY 16  highlights: Read across for Cummins India
Koel management indicated
*Overall power genset market declined 4% in 1HFY 16 despite inclusion of one off order from telecom order from Reliance for 4G rollout.
*Market has witnessed 4-5% price cut in HHP (12% of power gen sales)  and MHP segment(11% of power gen sales).
*Competition  in low kva (23% of sales)  continue to remain intense.
Our take: Although Cummins Inc has guided for 12% power gen growth for its India ,  we believe this growth might come at cost of margin. Cummins India will report its result on 5 th Nov.

+Hcl tech acquires PowerObjects, Relatively inexpensive acquisition, Maintain Buy with TP Rs 1000
Hcl acquired PowerObjects,  a CRM player for a consideration of US$ 46mn.
TTM Revenue for PowerObjects is US$ 37 mn. EV/sales of 1.25, relatively inexpensive.
Acquisition  of PowerObjects will strengthen HCLT's  Microsoft Dynamics practices in North America.

+ Coal India: Another month of strong production growth :
*Coal India production  and despatches at 44 nn tone were up 10% yoy and 7% yoy respectively.
*Production was 95% of target and despatches were 100% of target for month of October.Production growth was led by MCL (+11.5% yoy),SECL (12% yoy) and WCL (11% yoy) .
*Production in this fiscal was up 9% yoy to 273 mn tone and despatches were up 10% yoy to 296mn tone.  

+ DIVIS: Every parameter in-line, new facility to be the key for growth beyond FY17- Key pointsFor detailed report Click here
*Generics shows a strong growth despite high base.
*Margins surprise by 100bps to 39% primarily led strong USD
*We are optimistic about the global Pharma outsourcing opportunities and maintain Neutral with PT of Rs 1045 (22x FY17).

-IPCA: Financial  perfromance continue remain weak, facility clearnaces to be the trigger-
*Sales fell 4% to Rs 7.49bn, 11% below our estimates of Rs 8.38bn. Both lower domestic formulation (+1% yoy) and formulation exports (-26%) were key draggers.
*EBITDA margin at 11.9% was much lower than our estimate of 14.5% as there was no visible progress on its exports front and moderation in domestic sales. The resultant EBITDA deline by 34%  to Rs 892mn (vs our est of Rs 1.21bn).
*The core PAT (adjusted for forex loss of Rs 239mn) was much lower at Rs 328mn (-55% yoy) than estimated  Rs 587mn. Call is scheduled on Wednesday 4th Nov, post which we will update further.

-Titan: Q2 a big miss to expectations- Neutral: For detailed report Click here
*Sales was down 26% yoy with lower grammage; Negative surprise from significantly higher like-to-like (LTL) decline in Tanishq (40%), watches (-4%) and eyewear (1%).
*Jewellery margins were the lowest in six years due to negative operating leverage.
*Q2 was also impacted by premature redemption last year in Gold Harvest Scheme (GHS) and late kicking off of festival season this year.
*We expect the jewellery segment to struggle for the next few quarters because of regulatory issues in GHS and subdued gold prices and demand.
*Moreover, possibility of implementation of PAN card requirement for sales above Rs100,000 still remains.
*We have cut our estimates for FY16/17 to & value TTAN at Rs 340 (Rs 395 earlier) @ P/E of 30x FY17; maintain Neutral.

+Praj Industries Q2- Weak Qtr but Order book remains strong: Refer note (Click here)
*Execution remained weak in emerging business while strong order inflow & order backlog supports outlook. Q2 details available in the attached note.
*We still believe Praj is well placed to benefit from growth in the domestic market and is focusing on export opportunity in Hi-Purity and Critical Process Equipment business.
*Mgmt expect significant traction in execution during 2HFY16.
*We cut our FY16/17 estimates by 6% /3% & while maintaining valuation at 18x FY17 with a target price of Rs 115 (Previous Rs 125).

+Fiscal deficit:Fiscal deficit at 68%; impressive pace of capital spending: For detailed reportClick here
*Fiscal account looking good: #H1FY16 fiscal deficit at 68% of BE, lower than last 2-years. #Revenue receipts are higher than the trend rate (44% of BE vs. 36% avg of last 4-years) led by higher tax revenue growth (up 21.7% for H1 vs. 15.8% target for FY16) and dividend payments (75% of BE). # plan capital expenditure progressing extremely well (61% of BE vs. 46% avg in last 4-years). # Total expenditure at 51% of BE (slightly higher but manageable).
*We expect FY16 fiscal target of 3.9% of GDP to be comfortably achieved.
*Government has huge savings from LPG (due to DBT and lower prices) and fuel subsidy along with higher excise tax revenue (led by higher excise and customs duty on crude).
*That said, we will be watchful of some progress on disinvestment. We expect yields to respond positively to fiscal data.  

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